We Need More Revenue

I came across in interesting sentence in the CBO analysis of Paul Ryan’s budget proposal: “The path for revenues as a percentage of GDP was specified by Chairman Ryan’s staff. The path rises steadily from about 15 percent of GDP in 2010 to 19 percent in 2028 and remains at that level thereafter. There were no specifications of particular revenue provisions that would generate that path.” (p11)

Here is a historical look at Federal Government revenues as a percentage of potential GDP:

The truth of the matter is the federal governments revenues are at historical lows. In fact, looking back as far as the FRED data source goes (1950s) we have never had such a long time where revenues have remained under 16% (excel data here). The truth of the matter is that in order to restore fiscal health, revenues (i.e. taxes) have to go up. Granted a lot of the drop in revenue has to do with the recession – less people working and earning less money means less income. You can clearly see the recessions and booms effecting receipts. While raising taxes in this economic climate may not be the soundest policy, long term even Paul Ryan agrees that we need more revenue. He and Romney just like keep it vague by saying that they will “broaden the base” instead of going out there and saying that taxes may actually need to return to the Reagan rates to restore fiscal health.

Olympic Medals Over Time – Post Olympics Update

I’ve updated the charts below to include the results from the just completely London 2012 games.

This was a very good Olympics for the USA. Ignoring the boycotted games of 1984, and the barely attended games of 1904, this was the most Olympic gold metals the United States had ever brought home. This is significant achievement in an era where the global economy is (happily) starting to catch up. In 1999, the US hit a post-1970 peak of 28.4% of world GDP and by 2011 this had fallen steadily to a post-1970 low of 25.5% (post 1970 because the easiest data source, USDA, only went back that far). FYI, those 46 gold medals only represent 15% of the total 302 gold medals awarded, so maybe we’re punching below our weight in terms of GDP.

While much has been made of the achievements of the British team (which I do not want to diminish), their leap from 2004 to 2008 was actually more significant. Team GB went from 9 gold medals in Athens to 19 in Beijing – more than double. They added another 10 this year, for 19 total, but that was just over a 50% increase – substantial, but not as dramatic as four years ago.

After a lot of early disappointment, Russia actually improved their gold medal haul over Beijing. After a slight improvement in Beijing, Germany hit a new post-boycott  low.

China dropped off significantly from when they hosted, showing more evidence of a home-field advantage effect. NPR had an interesting piece discussing how this effect comes into play (thanks to my brother-in-law for pointing me to that). Ignoring last year’s bump, China’s trend line shows a pretty steady climb. This sets up a pretty good battle for supremacy in Rio four years from now. However, regardless of who is expected to win, I think we all will be rooting for NBC to broadcast the games live this time!

Why Money in Politics Matters

I often hear a lot of people complain about politicians buying votes – outspending their opponents to win elections. This pisses me off. Not the fact that politicians spend this money. Not the amount that is spent (which is famously, less than we spend on potato chips). What bothers me is the naivete present in that phrase: “buying votes”. I do not think they are using that phrase to mean that a transfer of money to voters is happening conditional on a vote. This happens frequently in other countries, and it diminishes the global struggle for democracy to call what goes on here “buying votes”.

What money typically buys in US elections is eyes and ears. It pays for TV ads, campaign mailers, door-to-door campaigns. Money is used to disseminate positive information about the candidate, and negative information about the opponent. However, this information is only effective to uninformed voters. For those who have done their research, a flyer with a positive spin on a candidates record is not going to add much. For informed citizens, attacks reflect negatively on the candidate especially when they stretch the truth. The fact that spending money on campaigns is so effective is not an indictment of the political process, or politicians. It is a rebuke of an American public that is more interested in watching project runway than being informed citizens.

A representative democracy allows us the luxury of only having to cast a federal vote every two years. We do not have to know about every bill and every issue. But do the research, be informed, and vote according to what you believe. The only way to take money out of politics is to minimize its effectiveness.

Olympic Medals Over Time

I put this chart together because after reading this BBC article I was interested in seeing the visual. Apart from the well known and discussed rise in China, and the fall in both Russia and Germany, what strikes me is the truly remark consistency of the US gold medal count. Aside from the 1996 Atlanta Olympics (with the home field advantage boost), since 1988 the US has received either 36 or 37 medals. Going back further, in 76 and 72 Team US had 34 and 33 medals respectively (I skipped 1984 and 1980 due to the boycotts).

And here are the actual numbers:

Notes: Germany includes both East and West. Russia includes the unified team for 1992.

UPDATE: I took a look at the full historical medal counts for the US. This consistency is not new! While there are obvious outliers – 1896 first olympics, 1904 the US was the only team in half the events, 1980/1984 boycotts (which I excluded in the trend) – it is extraordinary how much in the world has changed over the 112 years, yet Team USA pulls in about 36 golds in the summer games. Also, the outliers balance themselves out: average including them 36.58, average excluding them 35.41.

The Private Sector

[DRAFT] Carpe Diem posted the following chart, which I’ve seen elsewhere. I find it interesting because of the strong rightward lean of that blog.

So, we can see the Obama administration instituted a massive increase in government spending which is crushing the private sector and holding back growth! Oh wait… that’s not the story at all. To be fair, Mark Perry was not trying to make that point but I do hear it often enough. Many fair, and strong arguments can be made against big government. Many fair, and strong arguments can be made against the Obama administration. The argument that Obama has ballooned the size of government and is killing growth just simply does not hold any water.

Uncertainty vs Uncertainty

[DRAFT] “Uncertainty” plays a major role in the debate about what ails the US economy. Conservative bloggers, columnists and economists tend to emphasize the role of uncertainty and blame the sluggish recovery on government actions which may increase uncertainty. Tax policy and health care reform are the two big ones. I definitely have doubts about some of their specific claims in regards to the degree of uncertainty present in these issues, and the degree to which current policy (and the current administration) is responsible for this uncertainty. But that is not the point of this post. What is missing from the discourse is a clear agreement about what are the important causes and drivers of uncertainty for both businesses and consumers. The idea that uncertainty can have negative economic effects is not a new or controversial idea, even for those on the left. Keynes himself talked about it (uncertainty-and-the-keynesians).

The real disagreement is about the causes and drivers. Investment and spending are driven by expectations of future income, sales for businesses and wages for consumers. I personally feel (without a lot of hard evidence to back this up) that uncertainty about whether you are going to have job 6 months from now is going to hold spending back much more than uncertainty about whether the tax rate on your income will be 22% or 27%. Likewise for businesses, I think uncertainty about the ability to move future products holds back investment and growth a lot more than the possibility of increasing health care costs.

I would really like to see this argued and discussed. Instead I see the left-leaning pundits yelling “DEMAND” while the right-leaning shout “UNCERTAINTY”, without much of an agreement about terms. It’s really both.

Another household-US Gov analogy

What would you do if someone offered you a loan at a negative (real) interest rate for 10 to 20 years? Would you take it? If so, how would you use the money? Hopefully, you’d invest it in something that would give a positive return – maybe buy a house, or some other large capital investment.

For the United States government this scenario is not hypothetical. Real interest rates are, and have been negative. This is not some artifact of high inflation expectations (which would show up in a large spread between real and nominal yields). This is not some monkeying with markets. This represents the fundamental problem that due to the continued slow worldwide  economy there is a scarcity of good investment opportunities – both businesses and at this point countries in Europe (supply) , and a glut of people who are looking to cut back and save more (demand).

Yield Curve

The fundamentals demand that the government undertake long-term investments – build schools, fix bridges, invest in human capital (make money by giving grad students interest-free loans). This makes sense even ignoring the Keynesian argument for stimulus. These things need to be done, and should be done while borrowing costs are so low. But alas, politically we’re not even going to talk about these facts or these options.

Housing

I have long been a proponent of something like this (http://www.slate.com/blogs/moneybox/2012/07/25/jeff_merkley_s_plan_for_underwater_homeowners.html). While I have not been following the housing market that closely, my one hesitation is that the time for this may have passed. The bubble began bursting almost five years ago.

What we want to happen is people stay in their homes, continue to pay something. Empty homes benefit no one, due to the lack of maintenance vacant homes can have serious spill over cost to neighbors as well. The difficulty is how to price the sale from the mortgage holder to the government in such a way that neither the banks nor the American people get screwed over (though the first one is negotiable). I am not sure a method could be worked out.

Rationality and Game Theory

People are very bad at “games”. What explains this? Well, they aren’t computers. But if people aren’t computers, what are they? How can they best be modeled? What is lost by modeling them as purely rational? Is this loss systematic? What could be gained by a more nuanced, realistic model of human behavior?

First, people work with imperfect information. A lot of work has been done on this, and methods have been created to deal with this. I do not feel like I need to say anything more in regards to this topic.

Second, people are not perfect at processing this information. They are bad at probability, and in general calculating expectations.

Third, people often have other goals that are not correctly being modeled (i.e. punishing low offers in the accept/reject both lose game).

Fourth, processing time is limited and exerting effort inflicts a cost on the economic agent.

I see people making choices in a kind of fog of imperfect information using their imperfect means of evaluation and taking into consideration what could be gained by spending more time on the problem and getting closer to the rational choice. That is why people spend more time deciding what house to purchase rather than which brand of cookies is the best. I feel like there is some analogue to probability theory and sample size, as in a larger purchase is similar to a larger sample size. I also think things we know such as risk aversion and prospect theory can fit right into this theory. I am not sure how exactly yet.

Though I have been discussing these difficulties in terms of individuals, it seems as if a similar thing could be applied to businesses and institutional actors. In fact, the processing time and cost might be more easily quantifiable and modelable.

To what extent are these imperfections in individual agents either smoothed out or amplified in the aggregate? Are the deviations from rationality systematic or random? Do these variations cancel each other out in some way, or magnified?

Health Care circa 1993

Before Obamacare was coined, and labeled as the source of all evils a very similar proposal was introduced in the Senate. This was a response to Clinton’s health care proposal. It was quite similar to what was passed by Congress in 2010.
In November, 1993, Sen. John Chafee, R-R.I., introduced what was considered to be one of the main Republican health overhaul proposals: “A bill to provide comprehensive reform of the health care system of the United States.
Two thoughts from this:
1. I am amazed how quickly the past is so forgetten. I am not so idealistic that I expect all everyday citizens to be able to make this connection, however, I feel like it is reasonable to expect that our news media would be able to do the background research and I expect that they should be calling out hypocrisy for what it is.
2. Strong partisanship leads to very strong cognitive dissonance. If an idea comes from your party is it right. If that same idea comes from the other guy, it’s the worse thing ever. I wish there was some way to make these proposals partisanly blind. No one would know who wrote them or who supports them until they decide them on their merits.