The House recently passed a party line vote to spend more money on education and Medicaid. The $10 billion dollars to the states comes with many strings attached, notably that they do not get the money if they decided to cut spending on education as a share of total revenues. I’ve touched on the irrelevance of medical spending past a certain level before, so let’s look at the effectiveness of education spending.

Source: “Does Spending More on Education Improve Academic Achievement?” by Dan Lips, Shanea Watkins and John Fleming

Of course, the chart is somewhat misleading.  Education scores are range bound while spending is not, but it is notable that they often seem to be going in opposite directions*. 

Using additional cross country data from NationMaster, we see that government spending on education beyond a certain point doesn’t seem help very much anywhere in the world:

Total education spending as a percent of GDP isn’t any more correlated with scientific literacy, but at least the correlation isn’t negative.

So the government may be wasting money here, which just gives us more evidence that  α is very high.

*At younger ages there is some evidence of improved math scores, but these improvements are negligible by age 17. Click through the article for more charts.

The CBO released their Long-Term Budget Outlook for 2010! This may be a weird thing to get excited about, but I was looking through their 2009 outlook and wishing that I could work with an updated version.

Key quote:

“Keeping deficits and debt from growing to unsustainable levels would require raising revenues as a percentage of GDP significantly above past levels, reducing outlays sharply relative to CBO’s projections, or some combination of those approaches. Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery. However, the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt. Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them.”

Key chart:

In order to make sense of the above chart, the difference between the extended-baseline scenario and the alternative fiscal scenario needs to be understood.  The extended base-line scenario assumes that taxes and revenue change as is expected in the current law.  The alternative fiscal scenario assumes things that are likely but are not scheduled under the current law, such as no Medicare physician payment cuts and the AMT tax relief (See Table 1-1 in the report for more details).

My main complaint about this approach is that the least likely aspect of alternative fiscal scenario is also one of the most important: that it assumes that the tax cuts from 2001 and 2003 are not going to be allowed to sunset. This can be partially corrected for by using the revenue from the extended baseline-scenario and spending from the alternative fiscal scenario.  We find that the primary deficit (Deficit before including interest payments) will be -1.4% in 2020 and -3.1% of GDP in 2035.  Incorporating in the interest payments from the alternative baseline scenario (The actual interest payments will be higher due to a larger debt build up), that means that the total deficit will be -4.5% in 2020 and -7% in 2035.

I’ll end with a CBO table that informs us that the sooner the deficit is brought under control, the better:

One interesting way of thinking about time periods in American history is by looking at the extent to which government control (measured in the below chart as spending as a percent of GDP) of the economy is going up or down.

Source: USGovernmentSpending.com

In bull markets, government is getting more important in people’s lives. In bear markets, concerns about government are pushed to the side and markets thrive. Considering the entitlement spending shift has yet to hit, it is unlikely that we will be going back to bear market anytime soon.

"The greatest shortcoming of the human race is our inability to understand the exponential function." 

-Albert A. Bartlett

Exponential growth is often widely underestimated. Here are a few issues where many people make mistakes because they don’t understand the simple math of exponential growth.

1. Economic Growth: When there are trade offs between efficiency and equality, many people today think that the taxes, regulation and redistribution are worth a slightly lower growth rate.  However, when this trade off is applied over a long time period, the results can be staggering. If the choice was made in 1870 to have more equality at a cost of 1 percentage point of growth a year, America in 1990 would be no richer than Mexico.
2. Entitlement Spending and National Debt: As I have pointed out previously, the United States is headed for very high debt levels if entitlement spending is not reformed.  One very simple way to fix this is to index entitlement benefits to inflation and not income. The growth of the economy would make it easy to pay for a safety net at today’s living standards. Unfortunately, this would only work for Social Security and not Medicare as the medical system is structured in a way that leads to health care inflation greater than that of the real economy.  Additionally, there is another problem when the net national debt reaches 100% of GDP. If the market perception of the debt turns negative and nominal interest rates remain higher than nominal GDP growth, then there is no way for the economy to grow itself out of debt.  This is the current situation with Greece, and Japan isn’t doing too much better.
3. Personal Finance and Pension Plans: If a prudent investor can make 10% real returns in a year, then they can turn 50 thousand dollars into over 1.6 million dollars after 35 years. This simple math explains how many of the rich people today consist of those who have saved and invested prudently. On the other hand, a supposedly fully funded pension fund planning on a world of 8% real returns that finds itself in a world of 4% real returns will find itself underfunded by over 75% 35 years later (In this case, the people making pension return assumptions are underestimating how much they matter, they just know that their books look better if they assume a higher return). Robin Hanson has been proposing that people don't give to the future because they don't care about it, but it may also be that they do not fully understand the impact of exponential growth*.
4. Overpopulation and increasing Resource Consumption: Overpopulation does not seem to be the exponential problem that we once thought it was. Once become rich enough, their population growth rate slows down. The UK’s Ministry of Defense 2008 Strategic Trends report expects the population to level out at around 9 billion people between 2050 and 2100 (page 25).  While overpopulation is itself not a problem, the exponential economic growth of these emerging economies are coincident with an exponential increase in demand for resources and these limited resources present constraints on growth.

Having established that exponential growth rates are important, here is a handy rule of thumb that will give an intuitive understanding of exponential growth. To calculate the doubling time of an exponentially growing series, take 70 (or 69.3 to be exact) and divide it by the growth rate. This means that a 10% growth rate leads to a doubling every 7 years, a 7% growth rate is a doubling every 10 years and a 3.5% growth rate is a doubling every 20 years.

*It is also possible that someone who both cares about the future and understands exponential growth might think that there were existential problems for the current society that are significant enough to reduce the probability of a far future donation from ever paying off.

Scott Sumner prefaces a very interesting overview of the German Crisis of 1931 with a political non sequitur:

First I’d like to make a few comments on this amusing video.  My favorite line is when Joe Biden prays to God.   I didn’t know that politicians talk to God in the same dishonest way they talk to voters.  Bloggers on the right and on the left who think the other party is a bunch of lying weasels are half right.  They are a bunch of lying weasels.  But so is their own party, which they somehow overlook.  Above the fray independents have the right attitude toward most politicians of both parties—contempt.  

BTW, in my view Bush was right and the Dems were wrong in 2005, and Obama is right and the GOP is wrong today.   The filibuster makes no sense.  Indeed I’d like to see a parliamentary system in this country, where something like the German Free Democrats was in the center, determining what got done.  Some people seem to believe the filibuster favors small government, but I find that unlikely.  Size of government is just as likely to shrink as to grow, otherwise government would head toward 100% of the economy in the long run.  So in the steady state there will be equal number of proposals to shrink government as to expand government. 

When 59 people disagree with 41, the 59 are more likely to be right.  If they were more likely to be wrong, we ought not have democracy at all.

OK, enough political nonsense.  On to 1931:

His first paragraph is actually spot on. Most partisan squabbles consist of pots calling kettles black. People fail to recognize this for various reasons, perhaps because politics is a mind killer. The second paragraph where he asserts that the size of government is just as likely to shrink as grow is where he goes wrong.  While federal government expenditures have remained at a pretty constant percent of GDP, there is a pretty clear upward trend when the outliers of the world wars are excluded.

The conservative revolution that started with Reagan in the 1980’s is interesting not because government shrank (Bill Clinton and his republican congress did see total government spending shrink by about 3% of GDP), but because throughout that time period government remained pretty constant as a percent of GDP.

While federal government spending as a percent of GDP might have been more constant than total government spending, their partial funding of joint programs with the states has encouraged the large increases in state level spending.  Furthermore, a steady state government wouldn’t be growing at the same rate as the general economy. Assuming zero efficient gains, it would grow with population and with wages.  If the government took care of the same tasks and had even slight productivity gains, its size relative to GDP would shrink as the rest of the economy grew so the mere fact that it is keeping track with GDP spending suggests that government has a tendency to grow instead of shrink.

Outside of pointing out the empirical trend of increases in government spending, there are very clear public choice reasons as to why new programs will generally lead to more spending. In this regard, Bryan Caplan asks a very interesting leading “extra credit” question that almost answers itself.

Suppose you had a billion dollars to spend in Washington to advance liberty.  What's the biggest libertarian policy reform your billion could buy?  How precisely should you spread your money around?

Remember: Many obvious strategies would lead to bad publicity and serious pushback.  Your answer should take account of this feedback.

Extra credit: Suppose you had a billion dollars to spend in Washington to advance statism.   How does the optimal strategy change?  If there's a big asymmetry, explain its source.

As for wondering why a straight up majoritarian approach isn’t always the best legislative approach, Will Wilkinson has a good post on how simple head counting systems excludes any measure of the intensity of the voter’s preferences.

Alex Tabarrok makes a very important point about some of Obama’s plans to help the middle class. 

From today's NYTimes  

The Obama administration is planning to use the government’s enormous buying power to prod private companies to improve wages and benefits for millions of workers, according to White House officials and several interest groups briefed on the plan....

Because nearly one in four workers is employed by companies that have contracts with the federal government, administration officials see the plan as a way to shape social policy and lift more families into the middle class.

At a time of 10% unemployment when real wages need to fall this is bad business cycle policy.  I am more worried, however, about the long term consequences of creating a dual labor market in which insiders with government or government-connected jobs are highly paid and secure while outsiders face high unemployment rates, low wages and part-time work without a career path.

Long-term unemployment is at shockingly high levels which in itself creates a dynamic of persistence because the longer a worker is unemployed the less employable they become (in part due to loss of human capital and signaling problems). Thus, getting these workers back to work is going to be hard enough as it is.  Labor regulations which raise wages and make hiring and firing workers even more costly will make re-employing the long-term unemployed even more difficult.

Moreover, once an economy is in the insider-outsider equilibrium it's very difficult to get out because insiders fear that they will lose their privileges with a deregulated labor market and outsiders focus their political energy not on deregulating the labor market but on becoming insiders--see Blanchard and Summers on hysteresis in unemployment and more recently Larry Ball here.  Many European economies found themselves stuck in the insider-outsider equilibrium and as a result unemployment levels in places like France and Italy hovered at 9% or more for decades.  

This is a neat explanation of the type of second order effects that people who are only trying to help usually tend to ignore.  Surprisingly, even Brad Delong agrees that creating an insider-outsider dynamic is bad.  The insider-outsider dynamic is even worse when it is the outsiders who are doing jobs that are the most productive.  Garett Jones points out that the effect of workers queuing for the higher paying insider jobs also exacerbates unemployment.

Michael Kinsley, commenting on disagreement in political discourse:

It's a free country, and people can believe whatever they want. If evidence or reason persuades them that some opinion they hold is wrong, they are free to change it. So at any given moment, we all believe that our own beliefs are correct and anyone who disagrees with us has some explaining to do. Furthermore, if I believe that evidence and reason support my own views, then I also must believe that they do not support the views of those who disagree with me.  

…

Three possible answers are that they are misinformed, they are thinking poorly, or they are blinded by self-interest.   

This completely misses the idea of differing values, which is among the most common reasons for political disagreement.  Jonathan Haidt has done some interesting work on this issue, which is highlighted in his 2008 TED talk.  He found five foundations of morality across cultures.

1. Harm/care
2. Fairness/reciprocity
3. Ingroup/loyalty
4. Authority/respect
5. Purity/sanctity

Liberals care much more about Harm and Fairness a lot more than Authority, Ingroup and Purity while conservatives care about all 5 channels equally.  These are fundamental differences and bipartisanship or even political discourse in general is very difficult as long as people pretend that everyone wants the same thing and the only disagreement is on how to get there.  Politicians playing to the median voter can pretend that they care equally about every moral value, but responsible commenters should be less biased.  At the very least, pretending that the only possible way their values differ from others is that they are less selfish is not constructive discourse. 

An example of another major value premise difference is time preference, where two parties can reasonably disagree on the proper discount rate.  For this premise, it can be a little bit funny watching the debate shift, because liberals discount the future benefits to economic growth but don’t discount the damage to the environment while conservatives do the opposite.  If pressed, liberals might say they don’t believe that their regulatory or redistributive policies will slow economic growth while conservatives against environmental policies believe that environmental protection done incorrectly hampers growth and as long as there is economic growth their descendents will be rich enough to deal with any issues that come up. 

Of course, it is also true that voters from both sides of the political spectrum are drastically misinformed.

Hat tip: Arnold Kling

The Census also has voter participation data broken down by age or race, but not both.

This chart shows us what everyone knows: Old people are more likely to vote. This chart also explains why social security reform is not likely to happen, as old people won’t vote to give away their benefits and they may even vote against other reforms that only affect the young out of paranoia. The same could be said about programs that might have knock-on effects to Medicare down the road.

A little bit more surprising is the contrast between turnout in presidential election years and congressional election years:

I repeated the study using age based voter turn out numbers from the last two years as a guide, also adjusting the Hispanic voting population down by one third to adjust for the illegal immigrants who are unable to vote.  One surprising effect was that the slightly lower age of the growing minorities was not enough to affect the general thrust of the voting pattern.

Next I looked at the race based voter turnout.

And again, I compared it presidential election turnout with turnout from the previous year:

The results were rather extreme, showing how off year elections had a much bigger impact when voting by race was taken into account than when voting by age was taken into account.  This is because more whites vote during off years, with their off year voting at 75% of presidential election voters while only 66% of minority voters in presidential elections decide to vote during off years.

No model is ever truly complete, and this model is still lacking in numerous ways.

1. The predilection for the youth to vote for democrats has not been taken into account. An older population might be more conservative in nature, which would be a boon to the republicans.
2. Secondly, the recent data on black voter turnout was driven upwards by Obama’s election and it remains to be seen whether or not this recent shift will revert to the mean. 
3. Gerrymandering and state based Electoral College make national projections of the total popular vote less important than close analysis of swing states.
4. Short term economic fluctuations and personality politics means that the above charts are at best vague projections to show the direction of things to come where the emergence of a larger minority population makes republicans fall behind by an average of 0.1% or 0.2% of the population each year.

Furthermore, this analysis assumes no large shifts in party politics that might change racial voting preferences.  It does suggest that any big move towards the center is likely to be made by the republicans and not the democrats, as the democrats are riding a trend towards more power and while they may occasionally get ahead of themselves as they have with the healthcare legislation, the voting population is drifting further left every year.