In reading Hendrik Hertzberg’s piece in the New Yorker this week, I’m surprised that there wasn’t more talk about the Fourteenth Amendment option in dealing with the debt ceiling fiasco. The relevant provision is Section Four, which, in pertinent part, reads:
“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
I feel like this not only makes having a debt ceiling unconstitutional, but even makes debate over raising the debt ceiling unconstitutional. “Shall not be questioned” are some pretty strong words, and to say that this is what Congress has been doing all summer would be euphemistic.
This is all, admittedly, Monday morning quarterbacking, but I would have supported President Obama had he raised the debt ceiling on his own, as the head of that branch of government that executes America’s laws. I might not be the most liberal person fiscally, but this wasn’t a debate over spending; this was a debate about paying our bills. And with such clear and on-point constitutional language to rely on, I would have respected such a bold move from our President.
David Frum laments that national security emerges as the debt deal’s biggest loser:
The economist Herb Stein used to advocate a simple model of federal budgeting:
a) Decide how much it costs to defend the country.
b) Pay for it.
c) Then see what else you can afford.
Adam Smith phrased the same idea more elegantly by saying that “defense is superior to opulence.” The point is that the defense of the nation is not just another line item. It’s the first obligation of government, more important than any other form of spending, and way more important than minimizing taxes.
For today’s Republican Party, the defense of the nation is at best a secondary priority.
Yet this budget deal treats defense as just another special interest. Worst is the enforcement mechanism for the deal: If spending targets are not met, the deal subjects Medicare and Medicaid to automatic cuts (presumably to punish Democrats) and subjects defense to cuts (presumably to punish Republicans). The enforcement mechanism could have included new taxes, but defense was substituted to clinch the deal. That way Republicans get to tell their Tea Party base that the deal contains no tax increases. But the substitution also reveals that for today’s Republican Party, the defense of the nation is at best a secondary priority.
David Frum is wrong, even by his own Herb Steinean/Adam Smithean standard. If our defense spending reflected the true price of defending the country, we could afford (or simply save) a lot. This is old news, but we have the most bloated defense budget on the planet by a long shot:
This chart, and other versions of it, continue to fascinate me. If we halved our defense budget, we’d still spend three times more than our closest rival, China. Perhaps I’m assuming that dollar amounts accurately reflect the extent to which we are defending our country, but am I wrong to do so?
We see this type of thinking in other contexts, too. Simply cutting spending on particular elements of our societal structure doesn’t necessarily mean those elements suffer. So long as the fundamental purpose of defense spending remains “defending our country,” we can make significant cuts in defense without jeopardizing this purpose.
Poor man’s blog post…
- David Frum on what he would do to fix unemployment [Frum Forum]
- Proud to be a Google Chrome user…or just not an IE user [Freakonomics]
- Kevin Drum suspects that public opinion leans right [Mother Jones]
- Eugene Robinson on the “Hold Your Nose Deal” [Washington Post]
- Maybe that Colonial African Art History degree is actually a good idea [Carpe Diem]
A recent study by the Kaufman institute shows a fascinating account of how new jobs are created by using recent census data. The study basically concludes that most net new jobs are created by firms that are between 1-5 years old, and this got me thinking about how this relates to the aggregate demand issues that are discussed constantly as a cure to unemployment. If we look at these new companies that are growing fast and creating lots of jobs, are these firms really affected by outside aggregate demand issues with the economy as a whole? I am not convinced they are to a significant degree. Some thoughts.
First, what is the demand for a new product that either makes your life much easier or does something cheaper, better, or faster than a current product? I would argue that, regardless of the state of the overall economy, your demand for this new product will still exist. As an example, let’s think about two new companies that have been growing fast recently.
The first one is Groupon, which is exploding in sales and employment. Businesses love Groupon because it drastically lowers the cost to acquire new customers, and consumers like groupon for the large savings they provide. In many cities, businesses have 6 month waiting lists to run their Groupon offer, while on the consumer side many of the offers sell out. So if GDP contracted by 10% next year, would Groupon grow more slowly, or actually grow even faster? I would argue Groupon might grow even faster in a slower economy.
The second example is Kiva, which integrates robots into automating fulfillment processing. This allows companies to fulfill orders faster and cheaper. Regardless of aggregate demand issues, I think companies will implement these systems as the cost savings are so huge and the ROI payback fast. Let’s pretend that GDP decreases by 10% next year. Will Macy’s still buy the Kiva system to automate their e-commerce logistics? I would argue they would buy it regardless, because again, this sort of business is not really affected by aggregate demand type issues – so long as we are not talking about a depression with lots of bankrupt firms.
More examples include the many outsourced logistics companies that are taking over these tasks from other companies. Here again I would argue that, as long as these businesses are in business, they will outsource functions to save money regardless of overall GDP growth rates or declines.
So at this point it would seem strange if someone was advising the government to spend more money on road infrastructure, so that there would be more companies created like those above, which are the source of new jobs. In addition, when these companies do grow, they do have a large affect on demand for other goods and services in the economy. For example, Groupon still needs copying machines, servers, secretaries, accountants, and lots of other services to execute. This is a source of real, sustainable demand as opposed to government created demand that is by nature temporary.
So did I just cherry pick companies that are rare successes in the current economic climate? By looking at the Inc. 500 list, I believe most of the new, fast growing companies that are creating jobs are not affected as much by aggregate demand GDP swings as we might think. As another example, let’s pretend that I invent a colon cancer screening device that costs $10 and is just as good as the current expensive method. What would be the demand for this product? Does the overall aggregate demand in the economy matter at all, in terms of demand for this particular product? I would argue new products and services created by new, fast growing companies are not as affected by aggregate demand issues as much as we might think, and these are the exact firms that create almost all the net new jobs in our economy. Again, any good or service that saves money or does something better/cheaper will always be in demand, even if GDP is contracting. In some cases, demand might even increase as companies struggle with more competition and need to act faster to save their current sales.
So the next obvious question would be why are we not creating these types of fast growing companies that hire lots of people like we were were in earlier economic recoveries? I think the answer to this has a lot to do with the financial crisis and credit availability, which I will address in a future post.
Suzanne Mettler has written a truly worthwhile piece in the Washington Monthly on tax expenditures — tax breaks buried in the tax code that are awarded to particular classes of people for engaging in particular and preferred classes of activity. Whether it’s an individual buying a home, an employer providing health insurance, or charitable donations, these expenditures cost the government several hundred billion every year.
But my beef with these is less about the budget shortfall to which they contribute (which is obviously important) than with the distortionary affects they have on the market. Why should employers be encouraged to provide health insurance? That always seemed a bit counter-intuitive to me. First, it’s not free; we receive less money in our paychecks as a result. That money we don’t get can be used to buy our own insurance from a wider pool of options. Second, if we lose our jobs, we not only lose an income, but our health insurance, too. Why we wouldn’t want a system that promotes coverage regardless of employment is a bit of a mystery to me. The transition from this system would take time, but eliminating the employer contribution deduction would be the right place to start.
The mortgage deduction similarly distorts the market by over-incentivizing purchase over rent, when equity and investment provides enough incentive to own already. I’m currently in the market to purchase an apartment in New York City, but I’m not sure I would be if it wasn’t for that deduction. At the root of our economic condition are foolish home purchases. Predatory lending, yes, but let’s not forget the role of deductions, too.
Not only are these deductions themselves distortionary, but phasing them out will create more market interference, I’d imagine. At the end of the day, I’d much rather have all these deductions take the form of broad based tax cuts rather than a reward for preferred behavior.
