At first I was skeptical of this assertion by Paul Krugman:

What we observe is that private insurers spend a much larger fraction of their receipts on administration than Medicare does. . . . I know that some people find that answer unacceptable: they know that the private sector is always more efficient than the government, and no amount of evidence will shake their faith. But that’s what the evidence shows.

I admit it.  I was one of those people who thought Fedex and UPS were more efficient that the Postal Service.  I couldn’t believe that government bureaucrats could manage a giant health “insurance” company more efficiently than the private sector.  After reading this, however, I’ve become convinced that Krugman is right.  The Feds really do spend less on administration:

MIAMI (AP) — Federal authorities charged more than 100 doctors, nurses and physical therapists in nine cities with Medicare fraud Thursday, part of a massive nationwide bust that snared more suspects than any other in history.

More than 700 law enforcement agents fanned out to arrest 111 people accused of illegally billing Medicare more than $225 million. The arrests are the latest in a string of major busts in the past two years as authorities have struggled to pare the fraud that’s believed to cost the government between $60 billion and $90 billion each year.

It’s not easy to misplace $60 to $90 billion.  That kind of money doesn’t just slip behind the couch cushions.  You’ve got to seriously cut staff in cost control to achieve that sort of outcome.  Imagine what they could accomplish if we let that same Medicare administration manage 16% of GDP.  That’s more than Canada’s entire GDP.  I bet they’d achieve even further administrative savings.

Before all you Republicans start gloating, consider the following.  The raid took place under the Obama administration, not Bush.  The Republicans oppose cuts in Medicare and Social Security.  The Republicans oppose cuts in the military.  The Republicans oppose cuts in interest on the debt.  That leaves discretionary spending, stuff like federal farm subsidies, which are a small part of the federal government.  Fortunately, with food prices at record heights and farm income soaring, the GOP will finally start cutting crop subsidies.

Oh wait . . .

Attention Tea Party members; once again you’ve been suckered by the “small government” rhetoric of the GOP establishment.  If you sincerely want small government, and not just benefit cuts to people with brown faces, then here’s your man for 2012.

People sure are picky about terminology.  I didn’t realize that so many would be offended by calling politicians “corrupt,” if they voted for policies that hurt the country because it would help them get re-elected.  OK, so let’s re-label, and also drop terms like ‘idealistic’ and ‘dogmatic,’ which also caused confusion.  I’ll re-label the dogmatic libertarians as the ‘principled’ libertarians.  I think pragmatism is also principled, but I’ll let the other side have the prettier term:

                                                    Progressives

–

–

Special interest Democrats                                              Pragmatic Libertarians

–

–

Special interest Republicans                                            Principled libertarians

–

–

                                                Conservatives

Is everyone happy now?  In response to the six issues that I discussed in my previous post, Adam Ozimek made this observation: 

The missing piece of this puzzle is that the intellectual agreement on these issues isn’t just the opposite of real world politician’s, but the opposite of the rest of the real world. At the average dinner table in this country, anyone advocating what Sumner might call the intellectual consensus on any of these issues would face a lot of disagreement, and would frequently be greeted by surprise that a reasonable person would ever dream of advocating for, say, for more immigration or less occupational licensing.  The problem is that you can pretty much go right down this list and point out the biases from The Myth of the Rational Voter that will tilt public opinion towards bad policies. The median voter is as important of an obstacle on these issue as interest group influence on politicians, and unfortunately the median voter’s belief’s are a much more intractable problem.

 I’m not sure I agree with this.  I was under the impression that the public was far out in front of the politicians on some of these issues:

1.  Didn’t medical marijuana laws come from referenda, and weren’t even Democratic politicians like Clinton opposed?  Didn’t almost all major elected Democrats oppose the California initiative to legalize pot, which got a sizable number of votes?

2.  I’ve mentioned the idea of a flat tax at least 100 times in ordinary conversation, to all sorts of people.  That sort of tax would involve low rates and no deductions.  I don’t recall a single person who opposed the idea, if I amended it to allow some progressivity.  (Republicans like the flat tax with no deductions, Dems like the idea of a somewhat progressive system with no deductions.)  Try finding a politician who supports eliminating all deductions.

3.  Reduce occupational licensure?  Suppose I propose that interior designers and florists did not have to have a license.  Would the public be terrified of getting ugly bouquets?  How about hair braiders?  Funeral casket makers?  Do people fear the health risks of dangerous caskets?   

I do think Adam is partly right.  The public has mixed feelings about legal immigration, they oppose legalizing hard drugs, they oppose removing occupational licenses for doctors and other health and safety-oriented job categories.  They probably haven’t given much thought to zoning rules on density.  But I wouldn’t assume that the populist side always wins.  Rent control was removed in Massachusetts by referendum.  Washington state voters recently rejected an income tax that would only fall on the rich.  Both states are left-of-center.  When voters focus on an issue and hear arguments they can be swayed by reason.  I seem to recall that voters were against NAFTA until Gore debated Perot on national TV.  After hearing the debate the polls swung in favor of NAFTA, and the proposal was enacted.

Sometimes proponents of voter irrationality cite opposition to economic reforms that are painful in the short run but beneficial in the long run.  But things are often more complicated than they seem.  Voters may make a “meta-decision,” like joining the EU, knowing full well that EU rules will force many markets to open, and jobs to be lost.  Eastern European voters grumble about the specific policies, but vote to become a modern market-oriented economy, as they see the affluence of Western Europe.

Slightly off-topic, but I recall reading a bunch of posts that expressed amusement or exasperation that the public opposed Medicare cuts, etc, and yet wanted to balance the budget without tax increases. I don’t agree with any of the posts I read, as I think they are completely misconstruing what those polls show.   I recall about 20 years ago reading of a poll that asked the public how much the government should increase Medicare spending each year.  There were many choices, zero to two percent, two to four percent, all the way up to more than 10%. I seem to recall only a very small percentage of public wanted to increase spending by more than 8%.  At the time, President Bush (elder) was proposing something like an 8% increase.  So his proposal was more than almost anyone wanted to spend on Medicare, yet the news reporters were able to point to other polls showing wide opposition to “cuts” in Medicare, meaning the program might have gone up 10% or 12% without those cuts.  So which was true, did almost everyone think Bush was spending too much on Medicare, or did people overwhelmingly oppose his “cuts?”  As with the “true” rate of inflation, or the “true” rate of economic growth, there is no “fact of the matter.”  There is no such thing as “public opinion.”  The public isn’t well enough informed to offer an intelligent opinion on that issue.  People have strong views on abortion, gun control, the war in Iraq, etc.  They delegate to politicians the job of providing as many services as possible at the lowest tax rates possible.  Polls on the minutia of government are completely meaningless.  People say they want less spent on foreign aid.  But if you ask what percentage we should spend, it’s more than we spend.  Which is correct?

I’ve gotten far afield from Ozimek’s post, which is mostly correct.  But some intellectuals probably assume that the average voter is dumber and more populist than they actually are.  Well-designed political systems (Switzerland) will elicit more intelligent public opinion than poorly designed political systems (India.)  I’d guess that Indian voters who immigrate to Switzerland make very intelligent political decisions in their new country.

PS.  Robin Hanson wonders why philanthropists don’t make an effort to inform the public on these issues.  Didn’t Soros spend money on the drug legalization push?

Update:  Dilip just sent me a post by Steve Landsburg that also comments on this issue.

Cheap shot #1

I notice that Paul Krugman is now saying fiscal stimulus was never tried.  That’s right; America didn’t do any fiscal stimulus.  Funny, I seem to recall he argued that fiscal stimulus was responsible for the relatively fast RGDP growth of 2009:Q4.  (BTW, people really ought to look at NGDP when evaluating stimulus, although on a quarterly basis the two measures are fairly closely correlated.)

Cheap shot #2:

I notice that Krugman defends his “no stimulus” argument with a graph showing government expenditures.  I guess that’s OK, as in earlier posts he suggested that tax cuts weren’t very effective stimulus.  On the other hand, Mark Thoma recently made the following claim:

It’s particularly amusing to see people saying that QEII raised employment in January when we know good and well that there are substantial lags in the policy process and it would be very unusual for monetary policy to work that fast. It would be just as easy to point to the recent tax cuts that Congress (surprisingly) put into place and give those credit for recent employment gains.

Keynesians like to act like there is some sort of rigorously scientific model behind their calls for the government to waste hundreds of billions of dollars.  Now we find that two of the top Keynesian commentators don’t even agree on whether tax cuts count as stimulus.  If they don’t, Thoma’s point is flat out wrong.  If they do, Krugman’s post is completely inaccurate.

[BTW, Thoma is doubly wrong about monetary lags.  He confuses peak effect, often estimated at 6 to 18 months, with some effect, which occurs almost immediately after major monetary shocks.  He also fails to mention that the effects should begin when the policy was expected (September/October 2010), not when it was announced (November.)  And finally he ignores the fact that we know from TIPS market responses to rumors of QE2 that the policy does raise inflation expectations.]

Substantive criticism of Keynesianism:

In early 2009 Democrats had the sort of lopsided control of the federal government (House, Senate, and Presidency) that occurs only rarely (and that the GOP hasn’t seen since the 1920s.)  Alex Tabarrok points out that (according to Krugman) this aligning of the political stars produced no fiscal stimulus at all.   He suggests that Keynesian policies may not be politically feasible.  Of course you could do counterfactuals and talk about how it would have been even worse under the GOP.  I doubt it; I think the GOP would have done big tax cuts, which while not particularly effective, are (contra Krugman) slightly more effective than more spending.

But let’s put that issue aside.  The bigger problem is that Krugman’s new argument makes it extremely likely that the $1.3 billion trillion stimulus package that he preferred, that the Keynesian models suggested was needed, would also have been a giant flop.

Let’s start from the fact that if we had no stimulus after Congress passed an $800 billion dollar package, it suggests a $1.3 trillion package would have produced an extra $500 billion stimulus, at best.  But even this is an overstatement, as the federal government has trouble spending money quickly on shovel-ready projects.  In all probability, some of the extra $500 passed by a pro-Keynesian Congress would have been tax cuts.  And Krugman consistently argues that tax cuts aren’t very effective; indeed in the new post he implies they don’t count at all as stimulus.

But it’s even worse.  The somewhat bigger stimulus (probably only an extra $200b to $300b in actual spending) surely would not have had a major effect on the unemployment rate, which was 9.8% when QE2 was announced in November.  But Krugman has also argued that the effect of withdrawing stimulus is contractionary.  So if we assume the extra stimulus was piled on to the existing stimulus in 2009 and 2010, output would have showed the same pattern, rising during months where there was more stimulus, and falling as the stimulus slowed down.  The recovery would have been modestly stronger in 2009 (assuming fiscal stimulus works and isn’t neutralized by the Fed) but there would still have been a relapse in 2010 after the peak spending period, and thus it would have failed to make a major long term dent in unemployment.  By November 2010 we’d have been pretty much where we actually were, with perhaps slightly lower unemployment.

Krugman likes to point to the “50 Little Hoovers,” but what he is really doing is pointing to 50 little flaws in the Keynesian model.  If the cutbacks in state and local spending reflect declining revenues due to the recession, then the Keynesian model needs to treat them as endogenous, just as business investment falls endogenously due to weak sales and excess capacity.  In order to be exogenous, it would have had to be under the control of the (Federal) policymakers who make the decisions about the size of the fiscal package.  But Keynesians seemed to greet the news of huge S&L spending cutbacks with surprise and dismay.  And then they used it as an excuse for the federal stimulus not working.  That’s about as logical as blaming the failure of Federal stimulus on corporations cutting back on investment (something FDR did in the 1930s, showing that logic has never played much of a role in arguments over government stimulus.) 

Krugman says that Obama’s stimulus package failed.  He’s right.  He says it was too small.  Maybe.  But what he doesn’t say is that if the Keynesians had gotten the $1.3 trillion package they asked for, it too would have failed.  In the US it is politically difficult, maybe impossible, to enact the sort of fiscal stimulus that might have made a big difference.

My critics could point out that it is also politically difficult to get adequate monetary stimulus, after all, even Helicopter Ben wasn’t able to do very much.  That’s a good argument.  But there is one very important difference between monetary and fiscal stimulus.  Even the most clumsy monetary stimulus (QE) has a relatively low expected cost (a possible capital loss on Treasury securities purchased by the Fed.)  More effective types of stimulus such as lower IOR, higher inflation targets, level targeting, etc, don’t even have that cost.  Fiscal stimulus is quite expensive, in terms of the deadweight cost of future taxes.  From that perspective, monetary stimulus is the clear winner.

Are there any economists who still think doing more monetary stimulus in 2008, as NGDP was falling at the fastest rate since 1938, would have been a mistake?  Several respected Austrian economists that I have spoken with suggest that in late 2008 more monetary stimulus would have been appropriate.

Next time we slide into a steep downturn, should we try an even bigger fiscal stimulus, or do monetary “level targeting?”  I think the answer is obvious, now it’s all about convincing the profession as a whole.

PS.  I define “cheap shot” as argument for which I know a good rebuttal.

PPS.  The original version attributed a link to Tyler Cowen instead of Alex Tabarrok.  My apologies to Alex.

Here’s a recent report on the housing markets in responsible cities that didn’t get swept up in the sub-prime mania:

In the last year, home prices in Seattle had a bigger decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix.

The bubble markets, where builders, buyers and banks ran wild, began falling first, economists say, so they are close to the end of the cycle and in some cases on their way back up. Nearly everyone else still has another season of pain.

“When I go out and talk to people around town, they say, ‘Wow, I thought we were going to have a 12 percent correction and call it a day,’ “ said Stan Humphries, chief economist for the housing site Zillow, which is based in Seattle. “But this thing just keeps on going.”

Seattle is down about 31 percent from its mid-2007 peak and, according to Zillow’s calculations, still has as much as 10 percent to fall. . . .

The fact that even a fairly prosperous area like Seattle was ensnared in the downturn shows just how much of a national phenomenon the crash has been.

The slump began when the low-quality loans that drove the latter stage of the boom began to go bad, but the resulting recession greatly enlarged the crisis.  [emphasis added.]

This should be no surprise to readers who were following themoneyillusion back in 2009.

And speaking of being ahead of the curve, who was the one who argued back in 2009 that China was a powerful engine of recovery in the global economy?  And that the last thing we should be doing is pressing China into a highly deflationary policies such as immediately hiking the yuan by 25%?  China decided to take it slow, and raise the yuan gradually once its recession ended.  And here are the results of this pro-growth policy:

BEIJING (AP) — China’s exports surged in January in a sign of rebounding global demand and its politically sensitive trade surplus fell to a nine-month low, possibly easing pressure on Beijing to allow its currency to rise.

China’s global trade surplus fell 55 percent from a year earlier to $6.5 billion, customs data showed Monday. Exports soared 37.7 percent — more than double December’s rate — to $150.7 billion, while China’s strong domestic demand drove explosive import growth of 53.5 percent to $144.3 billion.

“Strength of exports, and even more so imports, points to solid demand — globally and domestically. The former bodes well for global recovery,” said Dariusz Kowalczyk, senior economist for Credit Agricole CIB in Hong Kong, in a report.  [emphasis added]

Remember all those xenophobic protectionists, the ones who insist China’s just a big mecantilist bully, which exports lots of stuff but closes its own markets to the rest of the world?  The ones who see the world as a giant zero-sum game?  I wonder how they’ll spin this trade number?

BTW, might we replace the word ‘sign’ in the first sentence with ’cause?’

PS:  It’s true that while US exports to China are soaring rapidly in percentage terms, they are still far smaller than imports.  We tend to export more to places like Latin America and Australia, where there is a boom in natural resources and the building of infrastructure to support resource development:

Owens adds about 65-percent of Caterpillar’s construction equipment sales last year were in emerging markets including China and Latin America.

But think about this:  Where do most of those natural resources go that are dug out of the ground in Chile and Peru and Brazil using Caterpillar equipment?

Matt Yglesias recently linked to a study by Cristobal Young and Charles Varner, which showed New Jersey’s “millionaire tax” (actually a half of millionaire tax) had little effect on migration.  Here’s the technique they used:

To further probe the impact of the new tax bracket, we develop a difference-in-difference estimator. For this, we exploit the fact that there is a plausible control group of high-income earners not subject to the new tax “” those earning $200,000 to $500,000 per year (Saez, Slemrod and Giertz, 2009). For this group, the new millionaire tax has no effect, and thus should have no impact on their migration patterns. In short, we use households in the 95th to 99th percentiles of the income distribution as a control group for households above the 99th percentile.

I don’t know how much effect the tax had, but I can’t have much confidence in the results of a paper that relies on assumption that 30-something doctors, lawyers, businessman, and entrepreneurs making $400,000/year would be indifferent to a tax increase on people making $500,000.  How many people do you know in that income bracket who don’t aspire to eventually earn even higher incomes?  Indeed, I’d expect the effect to be stronger for those making below $500,000, as they’d often be younger and not yet tied to a particular area (via kids in school, spouse with good job, etc.)

In my view taxes tend to have weak short run effects (as people are often settled in a particular area and don’t want to move), and stronger long run effects, as businesses deciding where to locate might choose areas with better fiscal regimes for their employees.  But many other factors also matter.

Places without many amenities cannot get away with high income taxes.  That’s one reason why lots more affluent people move to Texas than neighboring states with income taxes.  But state income taxes tend to be fairly low, and of course those lacking income taxes may have higher taxes in other areas.

In addition, some states have “captive” residents due to perceived amenities, such as California’s climate and NYC’s cultural attractions.  They can impose a 10% top rate and still hold on to many wealthy residents.  Indeed I plan to move to California in a few years, despite the fact that I much prefer Texas’s fiscal regime, and even more so its land use policies.

So the variations in state income taxes probably don’t have a major impact on population flows, but they may have a bigger impact than these studies suggest, especially in the long run.  My hunch is that states know this, and know that they can’t get aways with income taxes that are far outside the norm for other states with similar levels of amenities.  Indeed if tax regimes really didn’t matter, it would be pretty difficult to explain why New Hampshire’s population has grown much faster than any of the other New England states (even given the fact that it is slightly closer to Boston than the other New England states.)