Sunday, February 26, 2012

Why the current level of debt not mattering matters

Last post, I went to some lengths to deflate some of the distortions in the popular "If the U.S. budget was like a household budget" meme.  The point of that was to try to put the discussion into a more useful context, and to point out that none of the bad things we'd expect if our debt was actually too high are happening.  However, some friends pointed out that none of that is any reason not to reduce the debt.  Presumably some good stuff will happen if we do since being in debt is "bad".  That would be fine, except that deficit reduction is anathema to many important policies that can and should be implemented under the current circumstances.

When you look at the national debate, the competing visions are basically stimulus & infrastructure programs on the "liberal" side and severe spending cuts on the "conservative" side.  Ignoring for the moment the fact that "conservatives" are preaching spending cuts as essential for deficit reduction while simultaneously promising to increase the deficit even more by lowering taxes on the rich, let us simply consider these arguments as "economic stimulus" versus "deficit reduction".

If the key priority is deficit reduction, then certain policies suggest themselves very strongly: reducing investment in our most expensive programs, curtailing aid to state and local governments, raising taxes, freezing federal payrolls, and maybe even liquidating obsolete or unnecessary government assets.  If the key priority is stimulus, then increasing investment in infrastructure, expanding or maintaining social safety net programs, and providing additional aid to state and local governments all seem pretty important.

I pointed out last time that none of the bad things we'd expect based on high debt are happening.  By contrast, tons of bad things we'd expect from a bad economy are happening: high unemployment, wasted resources, stagnant wages, and slow growth.

All the stimulus priorities cost money, so "deficit-hawks" are likely to object to them, and if we have bought into the idea that the deficit is indeed at dangerously high levels, it is much harder to override those objections.  Even if we did see evidence that our debt was dangerously high, we might conceivably want to pursue stimulative policies, but that would be a debate worth having.  The current debate is not worth having, and it is completely distorting our national priorities away from a genuine need towards an imaginary one.

Saturday, February 18, 2012

Debunking the "US Budget is like a Family Budget" Nonsense

Because I'm fed up with hearing this crap from even my smart informed friends, I am doing you all the favor of collecting the relevant facts, figures, and context and systematically addressing the common objections.  Please don't make me do it again.

(Mini-Summary For Lazy Readers:
On its face, the Family Budget metaphor ignores assets and misrepresents the US debt situation to make it seem more severe than it already is.  Furthermore, countries that borrow in their own currencies (not the euro states, not most "3rd world" nations because no one trusts their money) need never default because they can print any amount of money they like to service their debt.   And, none of the things we might see if we were actually in "too much" debt are even close to happening.)

The annoying meme that is being passed around looks something like this if you use the CBOs numbers for 2011:

Family Budget
Annual Income:$23,025
Annual Spending:$35,981
New Credit Card Debt:$13,628
Total Credit Card Debt:$147,900

Looks pretty ugly, right? But then why are there all these articles and op-eds about the debt thing being overblown?  Well, probably the first thing to look at is the "Total Credit Card Debt" thing.  It turns out that that can be split into "Debt Held by the Public" (money the government owes other people) and "Debt Held by Agencies and Trusts" (money the government owes itself), so maybe the budget should look like this:

Family Budget
Annual Income:$23,025
Annual Spending:$35,981
New Credit Card Debt:$13,628
Total Credit Card Debt:$101,300
Money Dad Owes Mom:$46,580

That 46k doesn't seem to be a real issue so long as Mom and Dad are on good terms, and thankfully, our government agencies can't divorce the treasury.  Say Mom paid Dad's way through lawschool; but hes only a legal clerk now.  This kind of stuff happens all the time in families and few think of it as part of their debt burden.

Now, absent from the Family Budget is the rather important aspect of "assets".  This isn't by accident... the credit card debt framing makes it seem like all the money was spent frivolously, that the interest rates are high, and that nothing of value is retained by the Family.  Of course none of this accurately reflects reality, and in no place is this more egregious than in the case of foreign debt.  It turns out that one of the assets that are left out of this budget is the foreign stuff we own. We own almost as much foreign debt as we owe:

And we're actually making more money on our foreign investments than it costs us to service the money we owe them:

So where does that leave our family again?  Well according to FRED, we owe 4,660 billion dollars to foreign investors, or in the parlance of our family: $46,600.  Since our income from foreign investments exceeds our payments to foreign investors and our total foreign debt is similar in size to our total foreign holdings, I think it's fair to say that debt is a wash.  Let's look at our family now:

Family Budget
Annual Income:$23,025
Annual Spending:$35,981
New Credit Card Debt:$13,628
Total Credit Card Debt:$54,700 ( $101,300-$46,600 ) 
Money Dad Owes Mom:$46,580

Well, that looks like a tough year (all that new debt), but pretty manageable in the long run so long as we can get spending under control, and that's just what we can do playing by the silly rules of the metaphor.

And those rules are very very silly.  US Government debt isn't like household or business debt for a few very important reasons.  First and foremost, the government happens to own a device called a "printing press" which is miraculously capable of printing any sum of money at virtually no cost.  Secondly, the government is capable (at least in theory) of giving itself a raise through increased taxation, and its revenue stream is much more secure than a regular family on account of it is very difficult to be fire the government, and if you did its debt would disappear anyway.  Finally, all that remaining debt ($54,700) is borrowed from US tax payers and will be payed off by US tax payers, so there's no money actually being lost to the US (though of course the US government would be better off without the debt, but that's very different from the nation of the US).  It might be more appropriate to say that the entirety of the debt in this family budget is owed between members of the family.

If that's true, though, then why would any level of debt be bad, and what signs could we see that we've really gotten to the bad level of debt?  Well, if you borrow in a currency you can't print, and primarily from other countries (like Greece) then your situation IS actually like the family budget, and you might be in trouble.  But, what if you are like the U.S.? What bad things could a large debt do to us?
  1. It might increase borrowing costs or reduce access to credit by some other means (such as no one being willing to lend you money at any interest rate at all).
  2. In the government case, it might "crowd out" business investment (by soaking up all the loan-able funds or by driving up interest rates for businesses and private citizens
  3. It might transfer large amounts of wealth from our economy to some other nation's central bank.
  4. It might transfer large amounts of money from some American Taxpayers to other American Taxpayers in a systematically destabilizing way (like maybe we give all the poor people's money to very rich people and impose huge hardships)
  5. It might force us to engage in money printing at a scale which produces dramatic inflation
How does that stack up against our actual situation?
  1. It is currently cheaper in real terms to borrow money to pay for things than to pay for things out of current tax revenue. (because the real interest rate on government loans is negative... you can buy a bridge for 100 inflation adjusted dollars now and charge tax payers 100 dollars for it, or you can build it for 100 inflation adjusted dollars on credit and pay back your creditor with 99 inflation adjust dollars later)
  2. Banks have massive excess reserves available for loaning and borrowing costs are historically low... no crowding out
  3. Our government spends the vast majority of its money on buying things in america, and our net foreign debt is close to zero, so none of this money is leaving our economy.
  4. Hard to say on this one.  Our current tax code is mildly progressive (rich people pay a little more than poor people), and bonds are owned primarily by rich people, so it is likely that the wealth transfer caused by debt will be largely from rich people to rich people, but if the tax code got mixed up maybe something systematic and bad could happen.  Doesn't look like a big problem so far though.
  5. Inflation is. you know, average...
US Inflation Rates

Monday, February 13, 2012

What should a liberal arts education provide?

So my broad understanding is that there are two important components to education.  On the one hand, education is vocational: that is you learn skills relevant to a profession.  On the other hand, education is liberal: that is you learn skills relevant to life as a free person.  It seems to me that we've lost sight of the second goal, that the current liberal education is a historical artifact that has lost its most useful characteristics and kept its outdated ones, and that our educational institutions owe it to us to have a rethink along the lines I describe.

Wikipedia has some historical background on this that seems relevant to my rant.  For those of you who hate clicking links or fear Wikipedia, the liberal education (the education for free people, as opposed to for slaves), was basically verbal reasoning enshrined in the Trivium of Grammar, Logic, and Rhetoric, and (eventually, once we got to the middle ages) mathematical reasoning enshrined in the Quadrivium of Geometry, Mathematics, Music, and Astronomy.  It's worth mentioning that the Quadrivium is probably better understood as Statics, Number Theory, Ratios, and Mechanics, but they used useful proxies for the names instead.  Whatever.  It seems that between the Trivium and the Quadrivium we have basically all the tools necessary to explore the depth and breadth of human achievement.  That makes sense, since that's basically the point of having a liberal arts education - to give you the tools to understand and contribute to discourse in the free world.

Now, it seems to me that while the tools described in the Quadrivium enjoy broad support and advocacy in education, they are the least useful, and indeed increasingly antiquated, tools.  The Trivium, by contrast, seems to be all the more vital today as in the past, and is given considerably less attention.  We basically fail to explore these ideas in depth or with formal rigor at any point in the liberal education - saving perhaps brief flirtations in philosophy, theology, or literature.

The modern world is increasingly (to its great credit) a quantitative one, but those quantities are large and their relationships complex and stochastic, wherein the past what numbers we encountered were limited in scope and mechanically related.  To engage with these new kinds of numeric data, one needs a strong understanding of probability and statistics.  To reason at all, one needs Logic.  To speak precisely (a precondition for any useful debate) one needs Grammar.  To speak well, one needs Rhetoric.  Perhaps, along with Statistics, we should consider something like Aesthetics: a discipline dedicated to effectively and convincing displaying things (in this case quantitative data).

It seems very much to be the case that learning how to recognize and generate well reasoned arguments--precise in language, and effective in style--and to support or analyze such arguments with ready knowledge of the proper treatment and presentation of statistical/numerical data is a key skill to avoid being deceived and to defend one's beliefs in the modern world.  How is it that our institutions of liberal education have so uniformly failed to acknowledge these needs and address them?

Wednesday, February 8, 2012

And just one more thing (still contraceptives)

The key question about whether Catholics are harmed by the contraceptive mandate is whether they are being asked to do something immoral.  I don't think they are.  The key questions about whether religious freedom is harmed by the contraceptive mandate are:
1. Is the mandate objectionable to some on the grounds of faith?
2. Is there a legitimate federal interest in overriding these objections (as in prohibitions on human sacrifice or (perhaps less legitimately) polygamy)?

It's clear that the answer to 1 is yes, but it's not clear that the answer to 2 is no.  The federal government heavily subsidizes employer provided healthcare, so one might reasonably think that if you take the subsidies you have to take the strings that come with them.  Furthermore, it seems possible that there's a legitimate federal interest in reducing healthcare costs, and perhaps even a right to reproductive freedom to be protected.  More below the fold.

Saturday, February 4, 2012

Clarifications on contraception

The contraceptive arguments in the comments have been sort of muddied by terminology, and I think it's worth clearing some of it up in a new post.

Whose religious freedom is most validly conceived as being at risk?
The employer's.  If this impinged on the conscience of the employees, then Catholics would be obliged not to work for secular employers providing the objectionable coverage.  I have never heard anyone make that claim for the entirely natural reason that it is a crazy claim.  Furthermore, the mandate is upon employers, not employees.  It seems clear that that is the natural scope of the argument.

What sort of harm might be done to the employer?
Let's enumerate the ways in which the employer certainly will not be harmed (any of these harms would clearly be a severe violation of religious freedom):

  1. They will not be obligated to purchase contraceptives. (They are obligated to provide employees with compensation usable for the purchase of contraceptives, which is not the same thing.)
  2. They will not be obligated to provide contraceptives.
  3. They will not be obligated to use contraceptives. (for completeness sake. It's hard to imagine a Catholic institution with a systematic need to use contraceptives professionally)
Here is a sort of harm that would not be introduced by the mandate, but might conceivably be an existing harm:
  1. The funds of a Catholic institution might be used by a third party to purchase an objectionable service (true before and after the changes thanks to the broad utility of money and the inability of non-church Catholic institutions to to fire people for sinning)
I addressed the above in my last post and in the comments.  But since then I've had some conversations that brought up additional concerns.  Here are some conditions under which others have convinced me there might be potential for new harm:
  1. The Catholic institution might be forced to enter into a contract for an objectionable service 
  2. The Catholic institution might compensate a sinning employee more than his otherwise identical but non-sinning counterpart. This would be objectionable from both a direct standpoint, and also from the standpoint of systematically encouraging sinful acts.
I don't think either of these harms occur, but I do think it's worth considering the conditions that prevent these harms from occurring.

The first important clarification that needs to be made is the nature of the relationship between the employer, the health insurance, and the employee.  The employer provides the employee with a compensation package.  This compensation package includes direct monetary compensation, but also includes a variety of other things like access to a company car or other equipment, travel budgets, journal subscriptions, and health insurance.  Health insurance is a contract between an insurance company and the insured, in which the insured purchase access to a wide variety of services at the amortized cost of the likelihood of all service use over time over all people insured by the company.  The employer serves two important roles in this kind of compensation: as a negotiator, and as a source of funds.  The employer is in a much better negotiation position than an individual is, so it can get better prices, and it can make sure that the policy stays up to date by paying the cost of the service directly to the insurer instead of giving it to the employee as money and hoping that the employee remembers to pay the insurer.  

The point of all this is that the insurance company doesn't provide the employer with any services at all. The contract is between the insurer and the insured (quite explicitly, you have to sign a form and everything, it's your name on the policy &c).  This means that potential harm 1, about the Catholic institution being required to enter into a contract for objectionable services, is avoided. 

Potential harm 2 is a little trickier in this context, because it rests on some subtle distinctions.  The important one is the distinction between an item's value and cost.  The cost of the employer providing health insurance is the same for two equivalently risky people (and maybe for all people if the employer is a good enough negotiator).  That is the compensation provided by the employer.  The value of that compensation is subjective with respect to the employee.  A perfectly healthy employee might receive literally zero value from the employer health-insurance compensation, but that employee was none-the-less identically compensated.  A diabetic, a habitual drunk, a cancer patient, a recreational boxer or part-time thug might derive greater value from their health insurance compensation than the perfectly healthy employee, but they are likewise identically compensated.  If the value of compensation is the moral issue then Catholic employers already systematically over-compensated the habitually violent over the peaceful and healthy.  But it seems wrongheaded to claim that that's the case, so I think that we can safely put potential harm 2 aside.  The compensation of all employees remains the same, regardless of sinning status, but the value of the compensation varies systematically with respect to the sinfulness of the employee.  This is already the case (consider sexually transmitted diseases for instance) and so no new harm is done.  The already existing harm of the institution providing more value to more sinful employees seems to me to be of the same kind as the other pre-existing harm, and could only be remedied by the same mechanism (allowing Catholic institutions to fire people for sinning).

Incidentally, as I've mentioned before in comments, I think this whole issue is moot because the purchase of contraceptives is not in and of itself sinful.  The only sinful thing about contraceptives is using them to prevent pregnancy, an act for which culpability cannot be transferred.  More fundamentally, I don't think that it's possible to sin without doing something sinful.  Religious institutions are obligated to avoid doing sinful things, and to condemn sinful actions, and so long as they are allowed to do so no freedom is violated.