Lawrence Kotlikoff's Strange Ideas

Lawrence Kotlikoff is out with an angry column at Yahoo. The premise is that Paul Krugman and others are spreading "dangerous fiscal fables" and that the American debt situation is absolutely dire. At one point he claims that our policies amount to "fiscal child abuse plain and simple".

Kotlikoff's main argument is that the way we measure the debt is wrong, and that instead of just looking at what we owe on our government bonds, we should consider the entire "fiscal gap"--all of our future fiscal commitments based on current law--as the relevant measure. According to Kotlikoff, the U.S. fiscal gap is $222 trillion.

This strikes me as a silly way to think about policy. Kotlikoff says there is no difference between the short run and the long run in terms of budget policy, but this is clearly wrong. Budget projections are based on underlying assumptions about what the future will look like. When the CBO creates their fiscal projections they make a bunch of assumptions about things like economic growth, health care costs, etc. They also assume no relevant policy changes. These assumptions are less likely to be accurate the further into the future you project, for obvious reasons. A hypothetical 75 year CBO budget projection from 1800 would have missed the Louisiana Purchase, the War of 1812, The Civil War, the end of slavery, and the industrial revolution in America. The CBO projection from 1900 would have missed the Great Depression,two world wars, and the cold war. The CBO projection from 1960 would have missed the entrance of women into the workplace, the end of the cold war, globalization, and the great recession. As time passes, a bunch of important stuff happens that isn't foreseeable 50 years in advance.

Kotlikoff feels like we should aim to balance the budget on the infinite horizon. But the preceding paragraph should reveal the ridiculousness of this exercise. Things change. Maybe the coming cyber war with China will require us to divert most of resources to computer hacking. Maybe the singularity will arrive. Maybe economic growth will stop entirely. Maybe we will have cures for diseases and less people will be sick. Maybe we will reform our immigration policy to allow more young people to move here. Who knows? The point being that what really matters isn't how much money we say our government is going to transfer from working people to retired people in 2080, but whether the above things--or a bunch of things that we haven't even thought of--will happen.

The crazy thing is that from a certain perspective Krugman and Kotlikoff basically agree. Kotlikoff is essentially arguing that the current budget deficit is pretty trivial and what really matters is paying for health care for seniors in 2030. When you argue that the relevant fiscal number is $222 trillion, you are basically saying that the $845 billion deficit for fiscal year 2013 isn't really that important in the grand scheme of things. This is what Krugman thinks! Which is why he endorses a temporary fiscal stimulus to boost output and get us back to full employment.

The question of future health care costs is important, and is something we will need to address, but thinking of it purely in terms of budgets totally misses the issue. Raising the medicare age just moves the costs from the government to private citizens, and effectively raises them, because as Steve Brill's epic health-care piece in Time magazine demonstrated, health care is a lot cheaper when the government uses monopsony power to bargain it down. The health care challenge is to figure out how to reduce these costs even further. According to the CBO, health care inflation is slowing. What else can we do to reduce costs? Give visas to doctors from other countries who are willing to treat the elderly on the cheap? Increase the scope of practice authority for nurse practitioners? Death Panels?

The point is that health care policy, and budget policy generally, aren't about making CBO lines match up, but about economic growth, reducing costs, and moral questions about how we distribute resources within a society.

Kotlikoff also claims that hyperinflation is on the way. This is something he has been saying for a the last few years despite inflation continuing to come in at below the Fed's 2% target. But if he is really concerned about "fiscal child abuse" than he should favor inflation because it redistributes money from creditors/savers (mostly the elderly) to debtors (mostly young people). He doesn't seem to see it this way, though.

The Ryan Manifesto

Derek Thompson has one of the best takes on Paul Ryan's new budget. The whole thing is must-read but one part in particular caught my attention:

But this budget is as notable for what it cuts as for what it doesn't cut. Social Security, defense, and Medicare -- together making up about half of the federal budget -- would scarcely be cut at all. After all, it's hard to win a Republican election if you abandon old voters and the defense industry.

Anyone who has been following the budget debates of the last two years would recognize that there is only one place where a long-run deficitreducing "Grand Bargain" can be found: Social Security. Obama has supported the idea of using chained-CPI to reduce benefits and shore up the program's long term fiscal position. Whatever the merits of this proposal (I don't really like it), this is where the Grand Bargain is. Obama's in favor of it, he seems to think he can get some congressional Democrats on board, and conservatives have been yelling about reforming entitlements for years. Additionally, unlike Medicare-voucherization, this isn't a qualitative change to the program, it is basically a reduction in benefits that can be sold to the public as a wonky fix. As a result, we don't need to argue about whether or not it will save us money or how it will affect medical costs--our actuarial predictions will likely be pretty spot-on. If what you care about is reducing the government's long term fiscal obligations, chained-CPI is what you want to be talking about in this political environment.

That is why it's kind of crazy that Ryan doesn't include it (or any other social security reform) in his plan. I think this is pretty revealing. Besides wanting the (non-elderly) poor and middle class to shoulder the burden of deficit reduction, Ryan doesn't actually care about putting forward a plan that has any realistic chance of passing.

For what its worth, Paul Ryan's budget is a pretty honest statement of Republican political priorities. It should be read as a manifesto on government, not a real budget proposal.

Professors, Blogs, and the Iraq War

I enjoyed this back and forth between Dan Drezner and Justin Logan over the differences in prevailing opinion between IR academics and the Washington foreign policy community during the lead up to the Iraq War. Justin's contention is that the foreign policy community was (and still is) way more hawkish than their IR counterparts, and this was due to the perceived negative career implications of being a foreign policy dove at that time in Washington.

I was thinking about this when I read Ezra Klein's recent piece on the "Revenge of the sources". Ezra is responding the Nate Thayer-Atlantic incident and his contention is that the people turning out copy on the internet and not getting paid are primarily the same who used to be unpaid sources for journalists:

That, at least, was the situation until the Internet made the supply of “newsprint” virtually infinite. Now, the people who were once sources can write their own blogs, or they send op-ed submissions or even feature articles to editors looking for vastly more content. Think about Brad DeLong’s blog, Marginal Revolution, or the Monkey Cage. This work often doesn’t pay — at least not at first — but it offers a much more reliable, predictable and controllable form of exposure. It’s a direct relationship with an audience rather than one mediated by a professional journalist.

I think this is right. But I think the implications go beyond the structure of labor in journalism. Academics are now able to play a larger public role in policy discussion. Ten years ago a guy like Scott Sumner could have maybe gotten an op-ed published in a minor newspaper. Now it's probably fair to say he has had some influence on Federal Reserve policy-making. Similarly, everybody and their grandma knows who Nate Silver is, and I think he has changed the way a lot of people think about pundits and election forecasting.

If Logan is right and IR academics are more "realist" in orientation and less hawkish in general, than its interesting to think about how the debate over the Iraq war would have played out in the media environment of today. It is easy to imagine more IR academics playing a larger role in our public discussions. Looking back at some of the commentary in the run up to the Iraq war, it is hard to ignore how "political" its orientation is, and how nonacademic the arguments being made are. There was very little realistic assesment of how the war would turn out, or what the costs and benefits would be. I'd like to think that the widespread existence and mainstream recognition of blogs would have lead to a more healthy, intelligent, and balanced policy discussion. Matthew Yglesias said that one of the reasons he initially supported the war was the feeling that you had to be a supporter in order to be taken seriously in the media environment of the time. If someone like Stephen Walt had been regularly blogging at the time, maybe things would have been different.

Congressional Budgeting

This week the Senate Democrats and the House Republicans are each going to pass their irreconcilable budgets. The Senate is, presumably, going to include higher taxes on wealthier individuals. Paul Ryan's House budget will apparently include the repeal of Obamacare, except for the medicare savings that he supported in his last two budgets but ran against as vice president.

This is all being done to try to give the Republicans a political victory. The House has already passed two unpopular versions of the "Ryan plan" and they feel that the Senate Democrats have been getting an unfair pass by not passing a budget. That is why they used the debt ceiling to force the Senate to pass a budget. I think their assumption is that they will be able to attack the budget from two angles: 1) look how much it raises taxes! 2) look it does nothing about the deficit!

This is all silly, but my hope is that this will be a turning point in Washington. Now that the two respective budgets are on the table, maybe we can turn to something like immigration or climate change. The Republicans and Democrats fundamentally disagree as to the course of government fiscal policy, nothing is really going to change this.

Let's reveal our budgets, move on to something else, and see if anything changes after the midterms.

The House Republicans Won the Last Two Years

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I found this Up with Chris Hayes segment both interesting and incredibly frustrating. As Chris points out at the beginning, the GOP's "no revenue" stance is deeply unpopular and hurts the GOP's image. Most Americans will blame them for the sequester, regardless of the "Obamaquester" spin.

Chris quickly notes that the GOP is succeeding in setting the terms of the debate in Washington and in achieving their substantive goals. But then the conversation kind of switches over to Chris and the three liberal guests lamenting the fact that the GOP and centrist beltway media won't acknowledge how much spending has actually been cut.

This is fine, but I really wish they had spent more time dwelling on the fact that the House GOP's strategy of not compromising and taking the economy hostage over the debt ceiling has been a massive success. Discretionary spending has completely plateaued! And as Chris' conservative guest acknowledged, conservatives don't really care about the deficit--its all about the size of government. The GOP is nominally unpopular and Mitt Romney lost the election, but does that really matter if you are able to pursue your agenda through political obstructionism?

There has been a lot of discussion lately on the need for the GOP to change, in order to be competitive in future presidential elections. But if I were a conservative I would be totally satisfied with the last two years--Obama has been unable to undertake any additional progressive initiatives, while spending has been drastically cut. Would Mitt Romney really have stood a better chance if the GOP had cooperated with Obama? Would a Republican in the White House really have lowered the trajectory of federal government spending?

The GOP should avoid rape gaffes and maybe ease off gay marriage as an issue. But as long as they can hold the gerrymandered House, i'm not sure if being more reasonable and compromising is the correct strategy. Their intransigence has worked wonders in achieving many of their aims. The truth is that in the current American political system it is better to be the party that won't blink first than being the party with the more popular platform.

I wish Chris had spend more time discussing the Republican's substantive victory and what that means for our political system.

George Will's Ridiculous Monetary Policy

George Will visited the Richmond Federal Reserve and--as Jim Pethokoukis points out--learned all the wrong lessons. It is completely unclear what point Will is trying to make. At one point he discusses how enamored he is by a bar of gold in the lobby, and then he goes on to claim that Fed shouldn't fulfill its statutory mandate because it didn't see the Great Recession or Great Depression coming.

Anyway, Will doesn't really make a coherent argument about anything, but this struck me as particularly silly:

Fed policy, which has failed so far, can also fail by succeeding. If strong economic growth begins, interest rates will rise substantially, and the cost of debt service will cause the deficit to explode. 

Will is noting that if Fed policy succeeds in promoting strong economic growth, then interest rates will rise. This is correct. He is saying this would still represent a failure, which is ridiculous. Obviously higher interest rates will mean Congress will need to reduce the deficit--a policy Will supports, by the way--but the strong economic growth will make this easier. Lower unemployment means that there will be more tax revenue and few citizens requiring government benefits.

Furthermore, what is the alternative? Should we purposely prevent recovery in order to discourage investors from moving money from government bonds to the private sector. Surely, this isn't Will's preferred outcome. Should we raise interest rates now so that the government needs to reduce deficits and destroy the economy? The ECB did this in 2011 and it was a disaster.

Monetary policy is complicated, and Will isn't an economist. But conservatives like Pethokoukis are taking the subject seriously and making policy arguments based on actual data--instead of just admiring Gold bars.

At the end of WWII, the U.S. government faced a challenge: demobilization was probably going to cause a recession and it was going to be tough to reintegrate all of the soldiers into the workforce. But nobody was writing columns saying "well even if we beat the Nazis we will still lose because we face these other challenges".

The fact that we face challenges doesn't mean we should give up.

The Jennifer Rubin Problem

Conor Friedersdorf has a new takedown of Washington Post blogger Jennifer Rubin. Conor sifts through Rubin's coverage of the Hagel confirmation, demonstrating how consistently and unapologetically wrong she was throughout the entire affair. This is great stuff, but I think his conclusion isn't quite right:

I also think lots of journalists make occasional bad predictions; that the predictions I've documented in this piece go beyond that in frequency, implausibility, and effect on a semi-closed media ecosystem; and that if movement conservatives or neocons respond to critiques of bad journalism with the observation that they aren't the only offenders, they're correct, but missing the point. 

Conor's point seems to be that the conservative media is suffering from epistemic closure, and this is distorting their understanding of the facts on the groud. This is certainly happening, but in Rubin's case I think the problem is more fundamental.

Rubin is an avid supporter of Israel. It is pretty transparently the political issue that is most important to her. Because of this, she strongly opposed Chuck Hagel's nomination to SecDef. This is all fine, bloggers have opinions and issues they care about. Rubin should feel free to express her anti-Hagel views on her blog.

But Rubin isn't just an opinion writer, she also uses her blog to report on political events. She clearly has access to some insider sources in the Republican party that the rest of us don't have. There is nothing implicitly wrong with this either. There are lots of good reporters--Dave Weigel, Robert Costa--who utilize the blog format.

The problem with Rubin is the way she combines those two roles. Instead of giving her opinion about what should happen, and then reporting on what will happen, she uses her dual role to conflate the two and present what she wants to happen, as if it is going to happen. The problem isn't as simple as Rubin just having the wrong sources and making bad predictions, she actively tries to distort the truth in favor of her preferred outcome. Conor notes this at one point, but doesn't dwell on it:

During the election, Jennifer Rubin of the Washington Post was the the quintessential example of a conservative writer letting what she wanted to happen affect her take on what was happening.

I think a useful comparison is the Washinton Post's "left-wing" blogger Greg Sargent. Here is a sample of Sargent's coverage of the Scott Walker recall election:

Many Washington pundits have declared the battle to recall Scott Walker all but over, and at least one public poll has shown Walker with a five point lead. This has created a problem for labor and Dems, who worry that impressions that the race can't be won could depress enthusiasm among Dems in a battle that will likely be decided by who turns out to vote. 

But make no mistake: Dems and labor still think the race is a dead heat. They are supplying their own polling data to make the case, and to energize the base in the home stretch. 

A new poll taken by pollster Celinda Lake — who is a Democrat but is well respected by polling professionals — has found that the battle between Scott Walker and challenger Tom Barrett is now deadlocked, at 49 percent each.

Sargent is using his position at the Washington Post to give coverage to a poll that is favorable to his preferred outcome. But he makes sure to point out that Dems are worried that polling data will depress turnout, and that is why they released their own poll. He goes on to note:

Today’s poll — like polling released by the other side — should be evaluated as part of the ongoing spin war over the course of the recall campaign, which is designed to help influence the outcome, or at least to prevent public polling from creating premature impressions that the race is over.

Sargent isn't just giving us the Democratic polling numbers--he is using his knowledge of political races to explain the spin game going on. Now Sargent was covering the recall--in part--because he cares about the outcome and wanted Walker to be recalled. But he doesn't let this get in the way of his primary responsibility which is to inform liberals about what is going on. He even updated the post later  on with polls showing Walker was ahead. 

The Washington Post should have a conservative blogger. That blogger should have opinions but also do reporting. But not conflating the two is difficult, and its become apparent that it is beyond the capabilities of Rubin. She should be replaced.

UPDATE: Check out Greg Sargent's post on the Illinois special election. He is clearly enthusiastic about the potential for liberal groups to primary pro-gun right dems, but he makes sure to clarify that it is a work in progress and we will have to wait and see.