Archive for August, 2001

Never Never Land

Sunday, August 26th, 2001

It often seems that one should look over one’s shoulder in Washington, DC and search for Tinkerbell. Politicians seem to exist in Never Never Land, where little boys always play games and never grow up. At this moment, the economy is limping along at low growth levels while Democrats and Republicans argue about how to keep federal surpluses at historic highs. The total debt is rapidly decreasing, deflating the economy so much that successive cuts in the Federal Reserve rate have not yet restored robust economic growth.What few people realize is that even if the annual federal deficit is nominally zero and the total federal debt does not increase in a particular year, inflation and growth conspire to reduce real debt load. A zero deficit is deflationary and a modest deficit can be neutral.

During the late 1970s, inflation was so high that real debt was rapidly decreasing the debt load even while the country ran a nominally high yearly deficit. That explains how during the Carter-years we experienced a large nominal deficit with a sluggish economy suffering high unemployment. The lowest federal debt load in the post World War II era occurred in 1979, at a time when inflation was over 11 percent. Presently, total federal debt load is rapidly decreasing and we should take care in imposing substantially more deflationary pressure on the economy. Even we if had no growth, inflation would convert a surplus into a two to three percent decrease in the real debt load.

A Conservative wit once remarked that America has two parties the “stupid” party (Republicans) and the “evil’ party (Democrats). Apparently when both Republicans and Democrats agree on something, the policy is likely to be both stupid and evil. Thus in February of this year, Congress passed the Social Security and Medicare Lock-Box Act of 2001 by a bi-partisan vote of 407-2.

Of course the lock box is a fiction. Excess funds received from Social Security can do three possible things. They can fund more current spending, allow for tax reductions, or reduce the total federal debt. Republicans, for their part, hope that the budget discipline imposed by keeping the federal total surplus greater than or equal to the Social Security and Medicare surplus will prevent Democrats from increasing spending. Democrats, by contrast, expect to use the tool of the lock box to restrain Republicans from their congenital urges to return money back to taxpayers.

Unfortunately, the argument between Republicans and Democrats about the size of the surplus will mask the real issue: How do we restore the economy to economic growth? We should return from our trip to Never Never Land. Democrats should make their best case for more spending increases even if the lock box idea is jettisoned. Republicans should urge even larger tax reductions, perhaps even reductions in the Social Security and Medicare taxes, despite decreasing nominal surpluses.

Feeling Good About ANWR

Sunday, August 19th, 2001

Many arguments in politics revolve around more than the merits of the issue at hand. Some issues serve as symbols or metaphors for other, broader themes. When an issue grows into a metaphor, it often means that clear and dispassionate thought about it will forever be impossible, lost in ardent rhetoric. The question of oil and gas exploration and drilling in the Artic National Wildlife Reserve (ANWR) may be one such issue.The entire reserve extends over 20 million acres, roughly the land area of South Carolina. The area that is required for oil and gas development is about 2000 acres, roughly the size of Dulles Airport in the suburbs of Washington DC. This is far smaller than a ranch owned by left-wing billionaire Ted Turner.

The well-respected, left-of-center magazine, the New Republic has briefly come over from the Dark Side and recognized the disingenuousness of the fight against drilling in ANWR. In the words of the New Republic editors:

“From the wailing and rending of garments that has followed the House of Representatives vote last week to allow ANWR exploration, you’d think environmentalists had good evidence that drilling for oil and gas would ecologically devastate the…Arctic tundra. They don’t.”

Contrary to visions of dead caribou, decades of experience with oil development on the North Slope of Alaska shows only minor instances of environmental damage. The caribou population has actually increased since oil and gas development began.What the editors of the New Republic did not see was that the vision of the decimation of caribou herds now galloping across the tundra was an image that Democrats in Congress wanted to firmly attach to George Bush. Democrats want George Bush to be depicted at as a callous oil-and-gas-man who would be happy to cover Yellowstone Park in a forest of oil derricks if it would make money for his oil friends. Any correspondence of their charges about ANWR to the truth would only be a happy coincidence. Imagery and symbolism were paramount, careful analysis irrelevant.

The editors of the New Republic instead encouraged Democrats to concentrate on what they consider a far more important issue, the Corporate Average Fuel Economy (CAFE) standards, standard to increase the fuel efficiency of cars. Forget about a tiny area in Alaska, the editors argue. It is more important to apply much stricter fuel economy standards to the dreaded Sport Utility Vehicle (SUV). Presently, SUVs are considered trucks and are not subject to the fuel economy standards applicable to cars.

Now CAFE standards are one of those minor issues that make people feel virtuous about supporting. The feeling of virtuousness is a commodity that is in shorter supply than oil. The standards may on balance be salutary, but they do not reduce fuel consumption and pollution as much as people might wish to believe. As stricter CAFE standards are implemented, new cars become more expensive. This increased cost encourages people to hang onto to their older, more fuel-inefficient and polluting automobiles, with precisely the opposite effect that was intended. In addition, when people do eventually buy fuel-efficient cars, their costs of operation drop and people become more likely to drive farther. They choose, for example, to drive for a family vacation rather than fly. This again circumvents the original intention of the legislation.

Moreover, increased fuel economy is often achieved by reducing vehicle weight. A recent report by the National Academy of Sciences concludes that this weight reduction probably increases the number of injuries to and deaths of drivers and passengers. This puts supporters of increased CAFE standards in the same camp as manufacturers of Firestone tires. Listening to some environmentalists arguing that reducing car size does not impact safety, one gets the eerie, deja vu feeling that environmentalists employ the same spokes-people as tobacco companies.

If reducing fuel consumption and associated pollution is really the goal, then increase the price of gasoline through taxes. The pricing mechanism is the most efficient way to reduce consumption. Of course, this policy would not be popular. A substantial increase in taxes would make explicit the cost of doing with less oil. Taxpayers would be constantly reminded of this cost every time they fill up. Instead, Democrats would rather hide the costs (even at the expense of more fuel consumption) in the price of new cars.

But then again it is the symbolism that is important. CAFE standards can fail to meet their lofty objectives, but the real point is for Democrats to pat themselves on the back in moral self-congratulations about our concern for Mother Earth. God knows that Democrats have recently had far too little to feel morally superior about.

Is Bush Becoming an Artful Dodger?

Sunday, August 12th, 2001

“Wherein is shown how the Artful Dodger got into trouble.” — Charles Dickens, Oliver Twist, Chapter 43.

On May 18 of last year, then candidate George W. Bush stated that,

“I oppose federal funding for stem cell research that involves destroying living human embryos. I support innovative medical research on life-threatening and debilitating diseases, including promising research on stem cells from adult tissue.”

This promise led those in the Pro-Life movement, those who believe that an embryo is a person with all the rights accorded any person, to conclude that a President Bush would not permit federal funds to be spent on embryonic stem cell research. Embryonic stem cells are obtained by destroying embryos.After due deliberation, President Bush decided to permit federal funding of embryonic stem cell research under limited conditions. Private research has already produced a number (The President says 60, but there seems to be a question as to the exact value.) of stem cell lines that can be reproduced indefinitely. Although these lines arose from the destruction of embryos, the use of existing cell lines would not involve the destruction of any more embryos.

Does this recent decision square with Bush’s campaign promise? Technically it probably does. Bush proposes federal research that does not involve “destroying living human embryos,” but involved the destruction of embryos. The tense of the verb keeps Bush true to his campaign promise. However, Pro-Lifers have a legitimate complaint that Bush’s decision was inconsistent with his campaign promise.

Depending on the tense of the verb, “involves” vs “involved,” is so Clinton-like that we may ask the question whether Bush’s decision was an artful dodge or a sincere attempt to reconcile the conflicting interests of potential medical advances and respect for human life. Given Bush’s natural rhetorical clumsiness and unfamiliarity with the careful and conscious parsing of sentences in an effort to deceive, it unlikely that Bush deliberately sought to mislead the Pro-Life community. Indeed, the speech explaining his decision was so straightforward and balanced, giving a fair description of both sides of the embryonic stem cell research issue, it is reasonable to lay cynicism aside for the moment. Bush appears to have made a sincere effort to strike a reasonable balance.

Unfortunately for Bush, it is likely that such a compromise will not last long. The distinction of using previously destroyed embryos is very narrow and unlikely to stem the future destruction of embryos. If embryonic stem cell research succeeds, it is likely that more and more embryonic stem cells will be required not only for research, but therapy. The pressure will grow to generate more and a greater variety of embryonic stem cells. This pressure, perhaps at a time when Bush is no longer President, increases the possibility that more embryos will be destroyed. Bush should hope that the money he proposes to spend on research into alternative uncontroversial sources of stem cells, adults and umbilical cords, will make the use of embryonic stem cells unnecessary.

Although I personally support federal funding of embryonic stem cell research under somewhat broader constraints, for someone like Bush, who believes a person arises at conception, Bush’s decision comes dangerously close to encouraging future destruction of embryos.

On another issue, the Bush Administration seems to be hedging against the wishes of constituencies that elected him. The Bush Administration is preparing to defend preferential treatment based on ethnic heritage in federal contracting, taking the same side as the Clinton Administration.

In 1989, Adarand Construction Inc. lost its construction job, despite having the best bid, to Gonzalez Construction Company due to a Federal set aside. In the same year, the US Supreme Court issued the Croson ruling suggesting that preferential treatment could pass Constitutional muster only if narrowly tailored to remedy the effect of previous discrimination. There was no attempt by Department of Justice in this case to prove systematic previous discrimination in Federal contracts to Hispanic groups. The Clinton Administration has fought Adarand Construction Inc. for over a decade largely ignoring the Croson precedent.

It is generally considered good form to maintain the Justice Department’s position for pending cases as they pass from administration to administration. Nonetheless, the Adarand case is an important signature issue. The reticence of the Bush Administration to switch positions bespeaks of an Administration desperate to be viewed as “moderate” even in the face of principle.

The questions of embryonic stem cell research and the Adarand case are two very distinct and different issues. Each Bush decision can, perhaps, be argued on the merits. Bush’s constituency will be forgiving so long as the Bush Adminsitration appears to act of priniciple, even principle balance by necessary political compromise. However, if the Bush Administration is seen to split hairs on issue after issue and moves away from its core constituency as part of pure political calculation, they will please no one and insure a single term for the second George Bush.


The Day of Reckoning

Sunday, August 5th, 2001

“I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts.” — Abraham Lincoln.

There are two important dates that dominate the debate on the future of the Social Security System: 2016 and 2038. At present, Social Security receipts exceed the amount required to pay benefits to current retirees. The excess funds go to the Social Security Trust Fund, essentially government IOUs. In 2016, as more of the baby boom generation retires, Social Security receipts will be inadequate to cover the outflow of benefits. By 2032, the youngest cohort of the baby boomers will finally be retiring. Projections indicate that by 2038 the total paid out in excess of receipts will exceed the amount presumably accumulated in the Social Security Trust Fund. Those who choose to deliberately ignore inevitable Social Security short falls suggest that we have nothing to worry about since the day of reckoning is two generations away. The truth is otherwise.Essentially, the Social Security Trust Fund is a contrivance where one part of the government gives another part of the government an IOU without changing the net obligations of government. During the hearings held by the President’s Commission to Strengthen Social Security a useful analogy was drawn explaining this accounting chicanery.

Imagine a person attempting to save money towards his own retirement. Let us call him Joe. Assume that Joe has difficulty in maintaining the necessary discipline for retirement savings. Joe spends current income on current expenses and maybe even pays down his credit card debt a bit. To maintain his retirement fund, Joe writes himself IOUs. He, after all, has good credit. He trusts himself. When Joe retires he has a handful of IOUs to himself. However, the only way to redeem these IOUs is for Joe to generate current income. This is no different than if Joe had not bothered to conjure up the fiction of IOUs at all.

By analogy, the only way the government can pay future retirees once Social Security revenues exceed outlays is to reduce liability or increase income. Reducing benefits, increasing taxes, borrowing money, or all three can accomplish this. The year of reckoning is 2016, give or take a year or two, not 2038. For those who are 50 years old today, Social Security will begin to lack funds to meet benefit payments when they begin retirement. There is not much time for these people to make adjustments.

The longer we take to make adjustments to the system, the more wrenching the inevitable changes will be. Under the current Social Security structure, the average two-earner couple will have to pay an additional $860 per year to meet the Social Security shortfall in 2020. The amount grows to $2,100 by 2030. If the annual short fall is met by decreases in benefits alone, in 2020, a couple would have to receive $2,227 lower annual benefits. By 2030, the benefits would fall by $4605. (Draft report of the President’s Commission to Strengthen Social Security, July 23, 2001.)

To reduce the unfunded obligations of government there are number of relatively painless steps that can be taken now.

  1. The consumer cost of living index over estimates the true changes in cost of living for the retired. Former Senator Patrick Moynihan suggests that reducing the cost of living adjustment by 1% (e.g. a 2% inflation increase if the inflation rate is 3%) would decrease long-term Social Security costs while maintaining benefits at the real current level.
  2. When the Social Security System was created, life expectancy was considerably lower. In the age of retirement were tagged to life expectancy, the age of maximum Social Security benefit would be over 70 years. If we gradually adjust the retirement age upward, working people would have time to adjust their retirement plans while the long-term instability in Social Security would be alleviated.
  3. We should means test Social Security benefits. There is little social good achieved by subsidizing the retirement of the very affluent with income from young working families. Over the last few decades, the major transfer of wealth has been from the young to the elderly.
  4. We need to allow individuals to elect to invest a portion (say 2% of 12%) of the income going to fund Social Security into private retirement accounts roughly comparable to 401(k) or 403(b) accounts. Future Social Security benefits for those who make such a decision would be proportionately reduced. Others could elect to remain fully vested in the Social Security System. Any current short fall in revenues could be at least partially offset by increasing the income level at which Social Security taxes apply.

Demographic changes are inevitable. In this century, a time is rapidly approaching when there will be only two workers for every retiree. Many Republicans are afraid to explicitly mention the costs involved in reforming the Social Security System so that it becomes actuarially sound. Many Democrats eschew the reform of Social Security so that they can maintain a club with which to beat Republicans over the head during elections.As a Democrat with a large mountain of political capital and in the last years of his second term, former President Bill Clinton was in an excellent position to begin the necessary reforms. He declined. It now remains to his successor to exercise the necessary leadership.