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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Sunday, November 21, 2010

Barbara Crafton Quoted in Forbes Magazine

Our article below talks about government economic and spending policies. Sometime back, Mother Crafton talked about the politicians themselves. Someone at Forbes Magazine, perhaps Steve Forbes himself, saw this comment and found meaning in it for Forbes' readers. Indeed, there is for us too; see it yourself: This isn't her first appearance in this right-leaning business and investment magazine. That's intriguing, isn't it?


Voter Concerns and the Recent Election

The incoming 112th Congress includes the largest turnover from one political party to the other since 1948. The Republicans gain control of the House of Representatives in a show of voter dissatisfaction with the now-demoted Democratic leadership. Our reading of the associated media reports and opinion polls suggests there are three reasons:
(1) People perceive that the federal government didn't do enough for the economy and job creation.
(2) They believe that the budget deficits last year and this are way too large and that spending in particular is way out of control.
(3) Many people believe that the health-care bill constitutes wrong-headed policy. They also resent the behind-closed-doors way it was cobbled together and the "deals" that were made in order to get it passed.

We're not a political guru and hopefully not even a political talking-head. But we do have some thoughts on these issues. Being the long-experienced two-handed economist that we are ("on the one hand . . . but on the other hand . . . "), we have comments that speak firmly to both sides of these points – and also down the middle.

More Jobs in the Economy Requires Less Uncertainty
First of all, government doesn't create jobs. Businesses do. Government stimulus programs do help and the big one in 2009 no doubt provided considerable support to the economy and to employment. It didn't look that way in the unemployment rate, which continued to go right on up during the roll-out of the stimulus projects. But we'd argue that it would have been higher yet without all those spending projects, many of which are still in process.

At the same time [See: "on the other hand"] the best thing the government could do now may not involve more spending. The action that might be best is to set up a constructive environment for the private economy to operate in and to minimize the uncertainty that business leaders already face. In this regard, the outgoing Congress was plainly irresponsible in recessing for an election campaign without acting on the approaching expiration of the Bush tax cuts. As you might imagine, given the current state of the economy, we'd extend these for everyone. But even if the choice would be to let them expire, business leaders and consumers (that's us!) deserve to know that, so they can plan. Similarly, the uncertainty and confusion attached to the health care legislation aggravates this condition.

The Deficit
Number 2: What about the deficit? We've already started to see some proposals and actions on it. The Republicans and even the President seem to favor a suspension or ban on so-called earmarks. These are spending projects, actually not unlike those stimulus projects, that direct funds to the District or State of a specific Member of Congress or Senator. They are proposed only by that person and they are not subject to the standard budgetary appropriations process, so there is no examination of the project's worth, merit or cost. A classic example is a jet airport in Johnstown, PA, where a single commuter airline runs three flights a day from there to Dulles Airport near Washington. The construction cost $150 million and federal subsidies are required to maintain that amount of passenger service. It will probably be constructive to put some brakes on such scatter-shot government spending.

Some people think this is the key to reducing spending and the deficit; indeed 50% of participants in a recent survey by the Kaiser Foundation believe cutting "waste" will actually balance the budget. But it won't. An independent organization, Citizens Against Government Waste, keeps an accounting of earmarks, in particular. In fiscal year 2010, these totaled about $16.5 billion. This sounds like a good deal of money. But total spending in that fiscal period was $3.456 trillion, an average of $9.5 billion a day. So all the earmarks together are less than two days' worth of federal government outlays, in fact about 42 hours' worth. As long as no one thinks this is a genuine solution to runaway government spending, it can certainly serve as a strong symbol of Congress' intentions.

Even Elimination of Some Whole Departments Won't Do It
Some Republicans and others have suggested chopping so-called "discretionary" spending. These programs are also characterized by identifiable projects and activities; appropriations for them must be enacted specifically every year. Defense is the largest category; others include education, energy, EPA, State Department, national parks and so on. In fiscal 2010, these were estimated at a total of $1.306 trillion, about 38% of total spending. Since these have to be renewed every year, they might be seen as the easiest to restrain. One specific proposal calls for fixed dollar amounts to be cut; another proposal recommends a standard 5% cut across-the-board. We did a quick add of several departments that might be seen as the most discretionary: Energy, Education, Interior, EPA, NASA, National Science Foundation and Small Business Administration. Suppose we chopped those completely [just for the sake of this argument, not for real!]. Their 2010 expenditures came to $180 billion, just barely 5% of total federal government outlays. We suppose 5% is good, but it doesn't really get spending "under control". What would we do for an encore the next year?

Entitlement Reform
So you know by now where we're going. We're going to have to tackle entitlements: social security, Medicare, Medicaid, food stamps and civil service retirement. These are programs that have their own upward spending momentum. The laws governing the way the benefits of those programs are calculated need to be changed in order to rein them in. We've already described social security here (September 1, 2010), and we're impressed that the co-chairs of President Obama's deficit commission have proposed action on these specific issues. Working on this won't be easy; indeed, as of this past week, the required super-majority of the 18 total members of the commission had been unable to agree on a common approach. Again, as we said in the social security article, and also last spring in our discussions of the "sustainability" of government budgets and borrowing, this has nothing to do with anyone's politics. As these programs have matured, the populations for whom they were developed have grown well beyond the projections at the time, even before individual cost increases are considered. We have bemoaned here, too, the fact that the March 2010 health-care legislation did not address the "supply-side" of medicine, so that incentives toward cost reduction by practitioners and producers have not been put into place. That would have been a real contribution to long-term solutions to the problems of health care cost and access.

Health Care Reform: The Question Isn't Really Even Who Pays
Which brings us to point (3) above. The health care law was indeed passed in the dead of night. Many of you who read these articles hold it as a high priority that government should provide – or support the provision of – health care. What we are arguing right now is that whether the government does it and money goes to the providers through the tax system or whether the private sector bears most of it and funnels money through the private insurance system, the first "reform" that matters is encouraging the optimal mix of cost and quality in the production of medical services. The U.S. economy will be trapped in a health care cost spiral until that is achieved. This alone still deserves a Presidential or Congressional commission to hash it out before real "reform" can be possible.

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