Last week President Biden released his Fiscal Year 2023 budget proposal. The annual release of the budget proposal is always exciting for economists that study public finance. The president’s proposal is the first step in the federal budgeting process, which in some cases leads to the full passage of a federal budget by the start of the fiscal year in October (though perhaps surprisingly, the process rarely works as intended).
This year’s budget is especially interesting to look at because it gives us our first look at what post-pandemic federal budgeting might look like. And while the budget has a lot of detail on the administration’s priorities, I like to go right to the bottom line: does the budget balance? What are total spending and revenue levels?
The bottom line in the Biden budget this year is that permanently large deficits are here to stay. Keep in mind that a budget proposal is just a proposal, but it’s reasonable to interpret it as what the president wants to see happen with the budget over the next 10 years (even if Congress might want something different). Over the next 10 years, Biden has proposed that budget deficits remain consistently right around 4.5% of GDP, with no plan to balance the budget in the near future.
How does this compare to past budget proposals? For comparison, I looked at the final budget proposals of Biden plus his two predecessors. I start Obama’s in 2021 to match Trump’s first year, and all three overlap for 2023-2026. I put these as a percent of GDP so we don’t have to worry about inflation adjustments (though we might worry about optimistic GDP forecasts, see below).
The destruction of value is graphic and tragic, caused by Russia invading Ukraine this month. Of course violence is common, around the world and throughout history. Violence and repression lead to poverty. Only in rare circumstances have autocracy and despotism been escaped, so that commerce can flourish and wealth can be shared.
Last week I blogged about my nice experience at Disney World. I was happy to see them telling the story of technological growth at The Carousel of Progress ride. At Disney, people really commit to their stories. Adults don’t wear mouse ears or Jedi robes ironically, in the park. The Carousel of Progress message is 100% optimistic about our future, without any cynicism or hedging. There is no mention of government institutions or which legal arrangements will allow progress to continue.
Here is some political economy that is missing from the ride. I quote, without indenting, from the late P.J. O’Rourke’s book On the Wealth of Nations. O’Rourke explains, sometimes using Adam Smith’s words, how in rare circumstances humans managed to rise out of poverty and subjugation.
Beginning of Chapter 7: The first two books of The Wealth of Nations are Adam Smith’s creed of economic progress. Smith placed his faith… in the logic of common sense. We are required to care for ourselves. We act upon this requirement. Our actions are demonstrably beneficial to others. The economy progresses, QED. Or it would, Smith wrote, “if human institutions had never thwarted those natural inclinations.”
More from Chapter 7, on pre-Medieval history of Europe: Smith wrote that the “rapine and violence which the barbarians exercised” left Western Europe “sunk into the lowest state of poverty.” Commerce was destroyed, towns were deserted, fields were left uncultivated. But although the rule of law and the legal title to property that goes with it were destroyed, the result was not “Imagine no possessions/ I wonder if you can.”
End of Chapter 7, an explanation of how economic progress started in the Westwhen the merchants gained some freedom: Adam Smith argued that the inclination of the feudal overlords to be selfish was so strong that it overwhelmed their instinct for self-preservation:
All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with other persons. For a pair of diamond buckles… they exchanged… the price of the maintenance of a thousand men for a year, and with it the weight and authority which it could give them. The buckles, however, were to be all their own… whereas in the more ancient method of experience they must have shared with at least a thousand people… and thus, for the gratification of… vanities, they gradually bartered their whole power and authority.
Never complain that the people in power are stupid. It is their best trait.
Joy writing again: “Stupid” refers to the fact that the European lords could have maintained their own power if they had been willing to keep themselves and everyone else poor through continued violence. Consider who is currently being being crazy versus “stupid,” in Europe and elsewhere.
In Disney World’s Magic Kingdom, you can get off the Carousel of Progress and walk across the park, past the Main Street shops, to a dark scary ride called The Pirates of the Caribbean. Someone could teach a travel course where students do both rides and then discuss wealth creation. It would pair nicely with a Doug North reading. Then, everyone could ride “It’s Small World” ironically.
The saying that “The first casualty of war is the truth” has been credited to anti-war Senator Hiram Warren Johnson in 1918 and also to the ancient Greek dramatist Aeschylus. We have seen this played out dramatically with Russia’s invasion of Ukraine. From the Ukrainian side have come the predictable overinflated estimates of the enemy’s losses, and perhaps understated reporting of their own casualties. Also, on the first day or two of the war there was a raunchy defiant response of Ukrainian defenders to a “Russian ship” that was demanding their surrender; as far as I know that exchange was for real, but the initial report by Ukraine that all the heroic defenders were killed was not true. Maybe I am biased here, but these sorts of excesses are stretching some core truth, not trampling over it roughshod.
On the Russian side, perhaps because there is no even vaguely legitimate justification for their invasion, the lies have been simply ludicrous. Apparently, the Russian troops have been told that they are going there to rescue Ukrainians from the current regime which is a bunch of “neo-Nazis”. If Putin’s thugs had a sense of humor or perspective, they might have discerned the irony of characterizing the Ukrainian regime as “neo-Nazi” when the president (Zelenskyy) is a Jew, whose grandfather’s brothers died in Nazi concentration camps.
And the Russian lies go beyond ludicrous, to revolting and inhuman. Russian Foreign Minister Sergey Lavrov has dismissed concerns about civilian casualties as “pathetic shrieks” from Russia’s enemies, and denied Ukraine had even been invaded.
The Associated Press snapped a picture in the besieged city of Mariupol a few days ago which went viral, showing a pregnant woman with a bleeding abdomen being carried out on a stretcher from a maternity hospital which the Russians had bombed. The local surgeon tried to save her and her baby, but neither one survived. The Russian side put out a string of bizarre and contradictory stories, claiming that they had bombed the hospital because it was a militia base (a neo-Nazi militia, of course) but also that no, they didn’t bomb it, the hospital had been evacuated and the explosions were staged by the Ukrainians, and the bloody woman in the photos was a made-up model. Ugh. I find it chilling to observe a regime in operation where there is absolutely no respect for what the truth actually is; rather, lies are manufactured to serve whatever purpose will suit the regime.
I know that some of that goes on even with Western democracies, but we are still usually ashamed of outright lying, and stand discredited when exposed. But with hardcore authoritarian regimes, there does not seem to be even this minimal respect for integrity.
Freedom of speech becomes even more critical as cynicism about truth becomes more widespread in the world, even in our own political discourse. Putin is trying to suppress the truth within Russia, now with very harsh penalties (fifteen years in prison) for those disseminating information contrary to the party line. All he needs to do is deem such talk as “treasonous”, and into the clink you go.
I do worry about similar trends towards censorship within the West. In our case, it is not so much governments (so far) doing the censorship, but Big Tech. If Google [search engine and YouTube] / Facebook/Twitter disapprove of your content, they can label it “hate speech” or whatever, and your voice disappears from public discourse. But what gives the high priests of big tech the authority and the powers of moral discernment to rule on what discourse is permissible? Also, the algorithms of social media sites usually direct you towards other sites that reinforce your own point of view, so you rarely get exposed to why the other side believes what it does. However annoying it may be to see various forms of nonsense circulating on-line, the time-tested democratic response is to allow (nearly) all points of view to be fairly stated, and to trust in the people to figure out where the truth lies. Otherwise, the truth can become a casualty of culture wars, as it is in shooting wars.
Overall, I’ve been disappointed with the reporting on the US embargo against Russian oil. The AP reported that the US imports 8% of Russia’s crude oil exports. But then they and other outlets list a litany of other figures without any context for relative magnitudes. Let’s shine some more light on the crude oil data.*
First, the 8% figure is correct – or, at least it was correct as of December of 2021. The below figure charts the last 7 years of total Russian crude oil exports, US imports of Russian crude oil, and the proportion that US imports compose. That 8% figure is by no means representative of recent history. The average US proportion in 2015-2018 was 7.8%. But the US share as since risen in level and volatility. Since 2019, the US imports compose an average of 11.9% of all Russian crude oil exports.
As an exogenous shock, the import ban on Russian crude oil might have a substantial impact on Russian exports. However, many of the world’s oil importers were already refusing Russian crude. The US ban may not have a large independent effect on Russian sales and may be a case of congress endorsing a policy that’s already in place voluntarily.
The man of the hour is Volodymyr Zelenskyy. Russia underestimated the amount of resistance they would face in their invasion of Ukraine, and Zelensky is the heart and face of that resistance. The usual pattern in countries like Ukraine with a history of corrupt leadership is that when hostile armies close in on the capital, the leaders stuff money and jewels into suitcases and disappear to some safe haven (think: Afghanistan). Zelensky has chosen to stay and fight against Vladimir Putin, a man with a fearsome reputation for brutal military tactics (see: Chechnya and Syria) and for political assassinations.
Where did Zelenskyy come from? American politicians are nearly all lawyers or businessmen. Zelenskyy was a professional comedian. He did get a law degree, but then went into stage and film comedy. He starred in a number of lightweight films such as Love in the Big City, Office Romance, and the zany Rzhevsky Versus Napoleon:
In 2015 the actor created, produced and starred in a comedic television series, Servant of the People:
In this political satire, a young high school teacher happens to let loose with a rant about corruption in Ukraine. One of his students captures this rant on his phone and puts it out on the internet. That YouTube video goes viral, and (to his complete surprise) the teacher gets elected president of Ukraine. He then proceeds to govern honorably, amidst various comedic situations.
In a case of life-mimics-art, the real Zelenskyy ran for the presidency of the country in 2019. Fueled by the popularity of the TV series, Zelenskyy’s campaign was almost entirely virtual. It succeeded in unseating the incumbent candidate, with Zelenskyy receiving a landslide 73% of the vote.
Although his Ukrainian presidency began on a whimsical note, it has turned into a global epic. However, it is difficult to envisage an ending to this epic that is not tragic. Drawing on his acting skills, Zelenskyy has been a master of internet communications in the present crisis, but there is only so much that can be done in the face of hard military realities. While the images of Ukrainian resistance are inspiring, the Russians have far greater military might and have the will to employ it as needed. And as long as Europe continues to fund Russia by guzzling Russian natural gas, sanctions can only bite moderately hard.
My favorite two economists are Ludwig Von Mises and Milton Friedman. They might consider one another from very different schools of thought, though there is reason to think that they are not so different. As an undergraduate student, I liked them both, but I became more empirics-minded in graduate school and as a young assistant professor.
As I progressed through graduate school and conducted empirical research, my opinions and policy prescriptions changed and were refined from what they once were. In graduate school, I didn’t study Austrian Economics, though it was certainly in the water at George Mason University. Recently, as an assistant professor with a few years under my belt, I picked up Bureaucracy (1944) and read it as a matter of leisure.
While the United States does have its problems with democracy, one area where we shine is direct democracy. Rare at the federal level, at the state and local level direct democracy is quite common in the US, much more so than most other democracies (Switzerland also stands out). Almost half the states have some form of citizen initiative or referendum process, and it is used frequently in most of those states. But even more direct democracy takes place at the local level.
And much of that direct democracy at the local level takes place through what are called special elections. I’m not talking about elections to fill unexpected vacancies in office — though of course those do happen. I’m talking about actual voting on issues. Many of these issues revolve around questions of public finance: whether to raise a local sales tax, to approve a property tax millage, or to issue bonds for a capital project.
One very relevant example for me is an upcoming special election in my city of Conway, Arkansas. Citizens are being asked to approve the issuing of bonds to construct a community center, pool, soccer fields, and some other amenities. The bonds would be secured by a tax on restaurants. The tax already exists — city councils can put these in place without a public vote. But to issue bonds, the citizens must be asked. I wrote an op-ed about it in my local paper (if that is gated, try this blog post).
The key is that this is a special election. There are no other issues on the ballot. It takes place on February 8th, not a date that probably stands out in voters minds as an election date. What will this special election mean for voter turnout? A lot of academic research, including a paper that I wrote (currently under review, but summarized here), finds clear evidence that voter turnout will be much lower. Will the result be different? Again, a lot of evidence suggests yes. For example, property tax elections in Louisiana were less likely to pass with higher turnout, and less likely to pass in a general election (my research finds a similar result for sales tax elections in Arkansas).
But why are tax increases less likely to pass in special elections? On this question there are many theories, but they are hard to test. Is it because different kinds of voters show up at special elections, representing a different sample of the population? Possibly, but evidence is hard to find.
A new paper just published in the American Political Science Review sheds some light on these questions.
The South Carolina Senate just voted 35-6 to repeal its Certificate of Need laws, which required hospitals and many other health care providers to get the permission of a state board before opening or expanding. The bill still needs to make it through the house, and these sorts of legislative fights often turn into a years-long slog, but the vote count in the senate makes me wonder if it might simply pass this year. That would make South Carolina the first state in the Southeast to fully repeal their CON laws, although Florida dramatically shrunk their CON requirements in 2019.
This seems like good news; here at EWED we’re previouslywritten about some of the costs of CON. I’ve written several academic papers measuring the effects of CON, finding for instance that it leads to higher health care spending. I aimed to summarize the academic literature on CON in an accessible way in this article focused on CON in North Carolina.
CON makes for strange bedfellows. Generally the main supporter of CON is the state hospital association, while the laws are opposed by economists, libertarians, Federal antitrust regulators, doctors trying to grow their practices, and most normal people who actually know they exist. CON has persisted in most states because the hospitals are especially powerful in state politics and because CON is a bigger issue for them than for most groups that oppose it. But whenever the issue becomes salient, the widespread desire for change has a real chance to overcome one special interest group fighting for the status quo. Covid may have provided that spark, as people saw full hospitals and wondered why state governments were making it harder to add hospital beds.
A person’s optimal choice depends on what they know. To consume more ice cream? Or to consume more alcohol? It depends on what we know about the expected utility across time. If a person thinks that alcohol has few calories, then it is understandable that they would choose to drink rather than eat. The person might be totally wrong, but they are acting optimally contingent on their knowledge about the world. (FWIW, 4oz of ethanol has 262 calories and 4oz of typical ice cream has 228 calories.)
The case is analogous for good government policy. The best policy is contingent on accessing the distribution of knowledge that’s inside of multiple people’s heads. It’s not sensible to assert that a policy is suboptimal if the optimal policy requires knowledge that neither a single individual nor all people together have. Even if the sum of all knowledge does exist, it may not be possible to access it.
Economists like to tell their undergraduate classes that it doesn’t matter who you tax. But that’s contingent on 1) identical compliance costs among buyers and sellers and 2) identical relevant information. If a tax comes as a surprise to the buyer or the seller, then it absolutely matters who is taxed.
When I was in 1st grade in North Carolina, my class went on a field trip to a Christmas tree farm. We learned a bunch about maintaining the farm and we got to choose a pumpkin to take home. At the end of our visit we took turns perusing the gift shop. My mother had generously given me a dollar to spend and I was eager to spend it (I rarely had money to spend). Unfortunately, even in the early mid-90s, most of the things in the shop cost more than $1. So, I settled on purchasing some beef jerky that cost 99 cents.
While I was listening to The New Bazaar and enjoying an episode with Tim Harford, I was reminded that economists don’t just have the job of understanding the world. We have a responsibility to our fellow man of keeping fallacy and economic misunderstanding at bay (a Sisyphean task). That doesn’t mean that we just teach economic theory. We can and should advocate for good economic policy ideas and try to think up some policy alternatives that fit our political climate.
Here I was sitting, being grumpy at the US Federal deficit, when an idea came to me. I am full of ideas. Especially unpopular ones. So, I especially like ideas that make political sense to me given that the political parties care about their policy values and re-election. Asserting that people in congress actually care about policy apart from re-election is kind of a pie-in-the-sky assertion. But, here we go none the less.
Mancur Olson liked to emphasize the role of concentrated benefits and diffused costs in political decision making. Economists point to it and explain the billion-dollar federal subsidies that go to interest groups. A favorite example is Sugar subsidies. As of 2018 there were $4 billion in subsidies and sugar growers earned $200k on average. The typical family of four pays about $50 more in subsidies each year as a result. The additional tax burden of higher sugar prices is also relatively small. Therefore, says the economist, the few sugar beet and sugar cane farmers have a large incentive to ensure the subsidy’s survival while others pay a relatively small cost to maintain it. That small cost means that there is little money saved and little gain for any individual who might try to fight the applicable legislation.
That’s the standard story. But it’s so much worse than a story of concentrated benefits and diffused costs. The laity don’t know how the world works in two important ways. First, many people will simply say that they are happy to protect American producers for an additional $50 per year. That’s a small price to pay for ensuring the employment and production of our fellow Americans, they say. An economist might reply, in a manner that so automatic that it appears smug, that that $50 would instead go to producers of other goods and that our economy would be more productive if the sugar-producing resources were diverted elsewhere. This is Bastiat’s seen and unseen. Honestly, I suspect that neither economists nor non-economists can adopt the idea without a little bit of faith.
Secondly, people don’t know what causes a particular price to change. Hayek painted this characteristic as a feature of the price system. We are able to communicate information about value and scarcity without evaluating the values of others or the actual quantity of an available resource. However, lacking causal knowledge of prices makes for some bad policies. Say that the subsidies and protections subsided and the price of US sugar declined. The consumer would likely not know anything about the subsidies in the first place, much less that they were rescinded. Further, the world is a complicated place and people are apt to thank/blame irrelevant causes otherwise (corporate greed, anyone?).
When economists blame concentrated benefits and diffused costs, they often assume that there is perfect information. THERE ISN’T. People don’t know how the world works well enough to predict with confidence what will happen in an alternate version of reality without subsidies. Nor do they understand the particular determinants of prices in our current world. Half the battle is a lack of knowledge about the functioning of the world – not just that the costs and benefits fail to provide a strong enough incentive for legislative change.
Economist Writing Every Day 