Monday, October 21, 2013

Further Thoughts on the Shutdown

There has been a lot of news coverage of the terrible “costs” the government shutdown imposed on the US economy. The number I have been seeing the most is $24 billion. The ratings agencies have tossed out an estimate that the shutdown reduced 4th quarter growth from a 3% rate to a 2.4% rate. The subtext of all these reports is clear: “Evil Tea Party Republicans! Bad Republicans! Bad! Bad!”

 Let’s just do some back of the envelope calculations. The overall size of the US economy is around $16.6 trillion, or around $45 billion a day. Over the sixteen days of the shutdown, $24 billion works out to $1.5 billion a day. So whoever came up with the $24 billion number figured that a partial shutdown eliminated 3.3% of the American economy during that period.

 When you dig further into the numbers, the estimate for lost economic activity seems to boil down to two factors: reduced travel bookings, and the shutdown of the national parks. It does not include lost wages for Federal employees, because they were given back pay. Some contractors presumably had some lost time, but I have not seen those numbers broken out. The big enchilada is the reduction of business at the national parks. Now, the local communities undoubtedly suffered a loss of business during the shutdown period. But what the analysis ignores is the substitution effects caused by the park closures.

 The simplest way I can explain substitution effects is through an example. Have you ever gone to the multiplex to see a movie, only to find out that the movie you went to see is sold out? Every time this has ever happened to me, I pick another movie to see. I substitute one product for another. Notice, from the point of view of the hit movie producer, they have lost a sale. I didn’t go see the hit movie. But from the point of view of the producer of the plan B movie, they gained a sale. From the economic point of view of both myself and the movie theater, there was no change at all. The theater sold a ticket, and my wallet was lighter by the same amount.

 In this example, there were winners and losers, but the overall amount of economic activity was unchanged. Even if you don’t choose another movie, you’re already out of the house. You may go to a bar. You may go out to eat. You may go shopping. A rational person would conclude that consumers will substitute an alternative form of entertainment for the lost opportunity to see the hit movie.

Tourism, like all forms of entertainment, is a redistributive form of economic activity. No new wealth is created. Instead, wealth is transferred from those who have it (the tourists) to those who want it (the vendors). Change entertainment venues, and you have different winners and losers. But the net amount of wealth remains the same. Government statistics do not measure wealth; they measure activity. But even on the activity side, without an accurate measurement of the substitution effects, it is not possible to blithely announce that the economy suffered a significant loss because of the shutdown.

Thursday, October 17, 2013

Thoughts on the Shutdown


Well, the government shutdown is over and the debt ceiling has been raised.  This was an unmitigated defeat for the Republicans.  What the Democrats got was Obamacare is being funded, and the expansion of Medicare is going to be a reality.  What the Republicans got was a drubbing in the court of public opinion.

The conventional wisdom is now that the party that shuts down the government, or does not agree to raise the debt ceiling, will end up the loser in the fight.  The Democrats will now use this to expand the scope and scale of the Federal government.  It will work like a ratchet: whenever possible, the Democrats will create a new entitlement.  Then, to be fiscally responsible, taxes will have to increase to pay for it.  If you don’t want to be fiscally responsible, that’s okay, because the Chinese will be happy to loan us the money to pay for the goodies.  What could go wrong with that?

Since we are going to go through this again in three months, the Republicans are going to have to change their game plan.  One possible change is that they just go along with whatever the Democrats suggest.

But I think they could learn from their defeat.  On a tactical level, here are the things I think the Republicans could do the next time around:

1)    Hook together raising the debt ceiling with defunding entitlements.  Fiscally responsible people don’t default when they don’t have to.  The Republicans thought that threatening default increased their leverage.  Instead, it worked the other way around.  Next time, make the Democrats reject the extension of the debt ceiling, and precipitate the real crisis.  Remove the entitlements, and the debt will take care of itself.
2)    Redefine the National Park Service as an essential government service, just like the military and the air traffic controllers.  The primary means of inconveniencing the public during the shutdown was the closure of the parks.  Keeping them open makes it really hard for media stories about how bad the shutdown is to gain traction.  What is they gave a shutdown, and nobody outside of DC noticed?  After all, it was really only a partial shutdown.
3)    Resist the urge to retroactively pay furloughed workers.  That way, you can shape the narrative into how much you are saving the taxpayers every day.  The message is “We saved over $1 billion today.  Did you miss anything you really needed?”  

The philosophical divide between the two parties is deep and profound.  The Democrats want to increase the size of government, and increase taxes to pay for it.  The Republicans want to shrink the government, and use the money saved to cut tax rates.  We are going to dance this dance again.

Sunday, October 13, 2013

The Government Shutdown and Obamacare


The current Federal government shutdown is due to House Republicans unyielding opposition to Obamacare.  This desire to repeal the law is so strong tat they are willing to shut down the government to force the issue.

What the Republicans have not done is present a clear case for why their opposition is so strong.  Lacking that clear communication, the story that has emerged is presented as mere partisan bickering.  The Republicans just say no reflexively to everything the administration proposes; that’s the way the story runs.

But maybe “just say no” isn’t the whole story.  Maybe there is a reason to think that Obamacare should be opposed, and that the implementation should not go forward.

Let’s try this: Obamacare is going to create a gigantic new entitlement program, and massively increase the size of the Federal deficit.

We all know that the Federal government spends vastly more than it takes in (hence the upcoming fight over the debt limit).  Most of us know that funding demands on existing entitlement programs like Social Security and Medicare are going to grow, as the baby boomers age out of the workforce.  Solving these problems of sustainably funding entitlements is a huge political mess, largely because there are big segments of the electorate who are feeding at those troughs.  Among the list of sure fire ways to get elected, you will not find cutting benefits for the people who cast votes.

Knowing that the government is already overcommitted with unfunded mandates makes it a colossally bad idea to add on another unfunded mandate.  When you have dug yourself into a hole, the first step toward getting out of the hole is to stop digging.

Obamacare requires everyone to buy health insurance.  However, for people with lower incomes, there will be subsidies from the government.  Those subsidies were originally supposed to be funded through a series of revenue raising functions and cost saving changes in the health care system.  This article from Real Clear Politics details how many of the revenue enhancements and cost savings are already falling apart.

The bottom line is that it is increasingly apparent that full implementation of Obamacare is going to accelerate the growth of the Federal deficit.

Obamacare.  ‘Cause when a shovel is too slow, try digging with dynamite.