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Ragout
A Spicy Stew of Economics, Politics, Data, Food, Carpentry, etc.
 
Saturday, July 31, 2004

The Veteran Vote: Kerry Doing No Better Than Gore


Crime Policy Expert Mark Kleiman asks how CBS can report that Kerry is behind by six points among veterans without bothering to put this figure in any context.

CBS reported that "a June CBS News poll found that 52 percent of veterans backed Mr. Bush, while 37 percent supported Kerry. Last week, Kerry had closed the gap to 6 points, with Mr. Bush at 47 percent to Kerry's 41 percent." CBS doesn't elaborate further.

"My guess is that it's pretty good news," writes a frustrated Kleiman, "but why should I have to guess? Just tell me how Bush and Gore split the veteran vote in 2000."

Surprisingly, Kleiman's guess turns out to be wrong: Kerry is doing about the same as Gore among veterans, and possibly worse. The Pew Research Center reports that Gore was down by seven points on average from March through July, while Kerry has been down by nine points over the same five months of 2004.

Pew averages five months of polls in order to get a reasonable sample size, because veterans are only about 13 percent of the population. CBS gives us no indication of sample size, but media polls typically sample 1,000 people, at most, which would yield about 130 veterans. If you work out the margin of error, it turns out to be 17 percentage points.

That is, Kerry was down by 15 points (+/- 17) in June, and 6 points (+/- 17) in July. Kerry has gained 9 points on Bush over the last month, plus or minus 24. CBS thinks he's "closing the gap," but in truth, polls with a sample of 130 are not particularly informative.

By the way, the median age of veterans is only a little less than sixty. Most served in WWII, Korea, or Vietnam, and were probably draftees rather than gung-ho volunteers. Their main concerns surely include Medicare and Social Security. They do lean towards Bush, but not by as much as you'd think, since older people tend to vote Democratic.


Bush Kerry Diff +/-
June 52 37 -15 17%
July 47 41 -6 17%
Difference -5 4 9 24%

 

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Thursday, July 29, 2004

The Coase Theorem in Action


As reported by the Associated Press:
When neighbors raised a stink over Scott Teston's request to change his property's zoning from agriculture to business, he responded with a bigger one - he put 17 pigs in his yard.

His neighbors aren't happy about the pigs:
Scott LaCoste moved his nearby construction company Monday because of the stench. Mary Preston wants to sell her home, but potential buyers flee when they get a whiff.

According to Ronald Coase, who won a Nobel Prize for the idea, it doesn't matter whether Teston has the right to stink up the neighborhood or if his neighbors have the right to be free of stink -- as long as the property right to stink is clearly assigned, society will get an efficient outcome.

In this case, Teston has the legal right to his pigs, and their smell has apparently made the neighbors a whole lot more willing to support his request to rezone his land.

His neighbors are lucky. Since it sounds like the neighborhood was rendered pretty much uninhabitable, he probably could have extracted tens of thousands of dollars in exchange for removing the pigs. Perhaps that's an efficient outcome -- the neighbors get the valuable boon of habitable home, and Teston gives up his pigs, which he doesn't seem to have really wanted anyway.

But paying tens of thousands to someone using his right to farm like a mugger uses a gun hardly seems like a fair redistribution of wealth. Efficiency isn't everything.
 

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Bubble or No, Expect House Price Declines


I'm working on a post about the housing bubble. For now, an interesting article in the NY Times, Eduardo Porter's "The Perils of Predicting Financial Bubbles," provides a good round-up of current thinking. Porter reports that Yale behavioral finance economist, and probable future Nobel Prize winner, Robert Shiller thinks we're experiencing a real estate bubble [very big pdf]. So does Dean Baker of the liberal Center for Economic Policy Research. I thought the most interesting take was Kevin Hassett's:
Mr. Hassett of the conservative American Enterprise Institute thinks housing prices will be pretty much O.K. He acknowledges there might be some bubble dynamics at play in some regions. But he argues that for the most part people are paying more for homes because their incomes are higher and interest rates are lower, reducing the cost to own a home.

Mr. Hassett expects that rising interest rates would raise this cost and home prices would then decline proportionately. But he sees no reason to expect a catastrophic decline. "I don't think a catastrophe is very likely," he says.


There are two interesting points here. First, Hassett's position is a lot like Brad DeLong's. There's may be some local bubbles, and house prices are likely to decline, but we won't see a macroeconomic disaster, like, say, Japan's decade long near-depression.

It's nice to hear that we're not facing catastrophe, but prospective homebuyers should still beware. As interest rates go up, prices are likely to decline substantially. My prediction (which I'll justify in a future post) is that when interest rates rise to more normal levels, we'll see a decline in house prices of 30% or so in real terms (adjusting for inflation).

The other interesting point is Hassett's track record as a forecaster. As the article points out, the sanguine Dr. Hassett was the guy who predicted in 1999 that the Dow would be hitting 36,000 right about now.

 

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Wednesday, July 28, 2004

Bush's Health Plan: Tax Breaks for the Rich


I've argued before that one of Bush's goals in putting forward a health-care plan is simply to match Kerry. The press can pretty much be counted on to cover policy proposals as "he said/she said" and ignore the fact that Kerry's proposal would cover about 70% of the uninsured, and Bush's would cover about 5%. In a future post, I'll discuss another of Bush's goals, to use "health savings accounts" (HSAs) to undermine Medicare. This post is about a third goal: to sneak by some more tax cuts for the rich.

Bush has already been very successful in wrapping tax cuts for the wealthy into his health package. A little-noticed provision of last year's prescription drugs bill created HSAs, which are essentially a super-generous IRA tied to a high deductible health insurance plan. One of Bush's campaign health care proposals is to make premiums for privately purchased HSA-tied insurance deductible too.

There, now you already know more about the Bush health care plan than conservative commentators, who confuse HSAs with Health Reimbursement Accounts (a less generous version of the same scheme authorized by the Bush administration two years ago), or who aren't aware that HSAs are tied to high-deductible health insurance.

Employers or employees can make contributions to HSAs up to the amount of the insurance deductible, with a maximum of $2,600 for self-only policies and $5,150 for family policies (indexed annually). Older people can make additional "catch-up" contributions. More details can be found here.

HSAs are actually more generous than IRAs, because not only are contributions tax-free, but so are withdrawals, as long as they're used for medical expenses. Unspent HSA money can be invested by the employee; withdrawals can be made after retirement penalty-free, although they're taxed (making the HSA equivalent to a traditional IRA). In fact, HSAs probably will be used more as savings vehicles than to pay for health care. You'd be foolish to contribute any money to an IRA until you've maxed out your HSA contributions, because HSAs provide a bigger tax break. Similarly, anybody with unsheltered savings will tap the savings to pay medical expenses before the HSA money. So, for people in high tax brackets, who are saving for retirement, HSAs will be very attractive, even if they are combined with a high-deductible health plan.


HSAs: Potential Disaster?

So HSAs certainly amount to yet another tax cut for the rich. But I think they're potentially worse than that. After my last post on this topic, I worried that my rhetoric about Bush undermining everybody's health insurance was a little overheated. But the more I think about it, the more I worry that I might be right. HSAs are really something quite new: we've never tried combining health insurance with tax breaks for the savings of the rich before. Just as we've never had an administration that was so willing to subordinate good policy to the narrow interests of its supporters before. Big changes to our health insurance system seem quite possible to me.

HSAs create conflicts between the interests of high and low paid employees that weren't there before. Even when they offer health insurance, many firms offer only one plan -- including over 2/3 of firms with less than 200 employees. Multiple plans are expensive to administer, and there are legal restrictions requiring the same plan (or choice of plans) to be offered to all employees. Before this year, health insurance plans were just about paying for health care, and it was relatively easy (or at least possible) to find a compromise that all employees in a firm could live with.

But now, by bundling together an IRA and a health insurance plan, HSAs create a package that's quite attractive to high-income employees. But HSAs are much less appealing to low-paid employees, who are in too low a tax bracket to benefit from the deduction, probably aren't saving much anyway, and won't be pleased about the high deductible. So imagine a small firm where the managers would like an HSA, but the workers want a plan with a lower deductible. I'm betting a lot of those firms will switch to HSAs, perhaps compensating lower-paid workers, perhaps not. And a lot of those firms will require an employee contribution. Many low-paid workers won't find worthwhile to pay for a policy that only covers catastrophic expenses, and will go without health insurance. So people in the top tax bracket will end up with a nice nest-egg, and everybody else will get limited health insurance, or none at all.

 

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Tuesday, July 27, 2004

How Bush Can Win


Suppose that a few months from now, the polls show that Kerry is poised to win Ohio or Florida, either of which would probably give him the election. What could Bush do to claw back some of those votes? No, I'm not going to predict a faked terrorist attack or rigged electronic voting. Instead, Bush could simply call up his allies of those states, and have them change the way their electoral votes are allocated, from winner-take-all to some sort of proportional allocation.

This change would be perfectly legal. Currently, Nebraska and Maine allocate their electoral votes this way (one per congressional district plus two for the statewide winner). In both Ohio and Florida, Republicans control both the legislature and the governor's office, so it's quite possible that it could be passed. Especially since the Republicans seem to have abandoned any deference for tradition and fair play, or interest in bipartisan harmony, as we saw in the Texas off-year redistricting.

At the moment, these are the only Republican-controlled states with a decent shot of voting for Kerry. There are a number of states where the Democrats could pull the same trick: Louisiana, Oklahoma, Tennessee, and West Virginia are Democrat-controlled states that are likely to vote for Bush. On the other hand, local Democrats in these states probably don't want to be tied too closely to the national party.

The state that seems likeliest to make the switch this year is Colorado, where a ballot initiative is being circulate to replace the winner-take-all system. A petition is being circulated in Missouri too. If they get on the ballot and pass, both initiatives would take effect immediately, for the November election. Both states seem likely to vote for Bush, so proportional allocation would probably help Kerry.

 

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Sunday, July 25, 2004

Vote for Nader, Avenge the Dixiecrats!


Neo-Stalinist Alexander Cockburn, writing in the LA Times, makes the case for Nader, which turns out to be: vote for Nader as revenge for President Truman's infidelity to labor. I kid you not. Cockburn is partially making the point that Nader's challenge is just as justified as Henry Wallace's challenge against Truman in 1948, which is at least sane, but he's also pretty explicit about the revenge element:
The laws -- including the Taft-Hartley Act, supported by 106 Democrats in the House -- that led to the destruction of organized labor were passed by bipartisan vote, something you will never learn from the AFL-CIO or from a thousand hoarse throats at Democratic rallies when the candidate is whoring for the labor vote.
Of course you will never hear the AFL-CIO criticize the Democrat's role in passing Taft-Hartley: it happened over 50 years ago. As it happens, Cockburn is distorting history too. The anti-labor Taft-Hartley act passed over Truman's veto, and the sucessors of the southern Democrats that supported it are now the core of the Republican party.

Cockburn also criticizes Clinton for ignoring labor, writing, "during President Clinton's years in office, union membership as a percentage of the workforce dropped because he did nothing to try to change laws or to intervene in disputes." There is some truth to this charge, but overall, I think labor-blogger Nathan Newman has the right interpretation: it only takes 40 votes to block legislation in the Senate and Clinton didn't even have a majority in Congress for most of his term. His attempts to pass pro-union legislation were blocked by the Republicans, most notably the bill to ban permanent replacements during strikes. Clinton did make pro-labor appointments to the National Labor Relations Board. To take just one issue I happen to know something about, that's why Clinton's NLRB endorsed unionization efforts by graduate student teaching assistants, and Bush's NLRB has blocked them.

Apparently, Kerry isn't free of Truman's sins either:

And what does John Kerry propose to help workers? Raising the minimum wage to $7 an hour by 2007, which would bring a full-time worker up to two-thirds of the poverty level.

This is doubly false. First, Kerry has many proposals to help workers: the card-check system of organizing unions, expanding health care, a child tax care credit paid for by cutting corporate tax shelters, to name just a few. [BTW, Kerry has recently improved the issues pages of his web site. If you found the web site confusing and badly-organized before, it's worth another look.]

Second, $7 an hour or $14,000 a year would bring a married couple with two children (I assume that this is the family that Cockburn has in mind) up to 75% of the poverty line. It would bring a single person almost 50% over the poverty line. But these calculations ignore the Earned Income Tax Credit. A married couple with one minimum wage earner and two kids is eligible for a $4200 tax credit, bringing them within a few hundred dollars of the poverty line.

It is perhaps because Cockburn is not familiar with the EITC, greatly expanded under Clinton, that he charges that there is "tacit agreement" between the two parties on "economic redistribution."

Of course, Clinton raised taxes on the wealthy and Kerry has proposed the same, while Bush has pushed through massive tax cuts for the rich. Maybe Cockburn thinks he can get away with misrepresenting Truman's record, but does he really think his readers don't know the two party's positions on taxing the wealthy?


 

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Kerry's the Favorite


This Sunday's Washington Post has an article pointing out what ought to be the conventional wisdom: the polls look good for Kerry.

Kerry's pollster Mark Mellman makes the case:

Since 1964, Mellman notes, incumbents with approval ratings below 50 percent in the spring and summer of the year when they are running for reelection have always lost...By contrast, incumbents with approval ratings above 50 percent five and six months before the election always won...Bush's current approval rating is in the mid- to upper 40s.

Every incumbent who has won reelection in modern times had a double-digit lead over his opponent at this stage in the race, Mellman notes. A single-digit lead isn't enough. That's what the first Bush had over Clinton in early summer 1992. Carter held a small lead over Reagan in early summer 1980, and it survived until late October in many polls. Both those incumbents lost. So that puts Bush in company that he'd rather not keep.


And Republican pollster Richard Wirthlin agrees:
"It's a pretty solid picture," he said. The problem for Bush is that a challenger enjoys natural advantages that tend always to erode an incumbent's early lead: "If a challenger runs an effective campaign, and that always has to be assumed, you've got to have a margin for the incumbent, because you almost always lose support as the challenger becomes better known, and is better able -- and I think this is often overlooked -- to pick and choose which issues can be driven to the disadvantage of the incumbent."
 

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Friday, July 23, 2004

Nationalize Pepsi!


In comments, J.W. Mason argues that because of the monopoly power given by patents, pharmaceutical companies engage in socially wasteful research into me-too drugs Me-too drugs steal some customers (and monopoly profits) from existing drugs but don't cure anybody new. Others (Dr. Angell & Western Mass) argue that drug companies engage in socially useless and expensive marketing, also trying to steal customers from one another. Mason says we ought to look at replacing the patent system for pharmaceuticals with some other way of developing drugs, perhaps subsidizing universities.

This is a better argument than Angell's idea of banning me-too drugs, and I plan to discuss the alternatives to patents proposed by Dean Baker, Dennis Kucinich, and Michael Kremer in a future post.

For now though, I want to repeat my point that the case is at least as good for more government intervention in many other markets besides pharmaceuticals. In particular, let's consider soda, as in Coke and Pepsi.

I think it's pretty clear that soda companies have some monopoly power. Price is way above marginal cost, just like pharmaceuticals. I've read that carbonated water and syrup in fountain soda costs only pennies per glass. Soda companies engage in price discrimination, which is classic monopolistic behavior. In particular, 6-packs (sold to more price-sensitive customers) are cheaper per can than single cans. How do they maintain their monopoly? Trademarks, somewhat similar to patents, help. So do vast marketing budgets, which serve exactly the same function (creating demand) as the critics charge pharmaceutical advertising does. The main factor keeping out new entrants, I suspect, is the high fixed cost of setting up a nationwide distribution network (soda might be a "natural monopoly"). So I think that soda meets J.W.'s criteria of having monopoly power.

Further, there's a lot of monopoly profits to capture. About $100 billion of soda is sold every year. This is less than the amount spent on prescription drugs ($160 billion a year), but not by much. And after we've nationalized the soda companies, we can move on to other industries, like casinos (Casinos also clearly have monopoly power, being illegal in most places. I don't know why Mason denies this. He may be right that candy is competitive though).

Now, the point of intervening in the soda market wouldn't be to lower the price, as with pharmaceuticals. The government probably would want to keep the price high and use soda profits to replace tax revenue, just as many state governments run liquor stores, and most run the lottery and other forms of gambling. And no doubt there's some more sophisticated plan that would be better than simply nationalizing the soda companies. Maybe we should just nationalize the soda distributors, and allow private firms to continue to produce soda and introduce new varieties. Maybe the distributors should just be heavily taxed or regulated, like the electric grid. I'm not sure of the details, but I do know that if this argument (monopoly->high prices, wasteful investment and marketing) is right for pharmaceuticals, it's even more right for soda. And unlike pharmaceuticals, if the government gets it wrong and ends up providing lousy soda, it's no big deal. It's just soda, not life or death.

I mean this partly as a reductio ad absurdum, but I'm also somewhat serious. Why wouldn't this be a good idea? Sure there would be some waste, corruption, and inefficiency, but the same is true of taxes, and government soda profits would allow us to cut taxes.

So, I repeat, why do consumer advocates attack the drug companies, and offer radical proposals for overturning a system that works awfully well, and don't make the same arguments about more mundane industries?

Or on a note that most people will probably take more seriously: why don't they attack doctors salaries? Doctors have plenty of monopoly power, and they account for more than twice as much medical expenditure as prescription drugs. Quotas limit the number of people going to medical school, and the number of interns trained each year. The world is full of doctors who'd be thrilled to come to the U.S. and work for a mere $100,000 a year, but they're not allowed in. To his credit, Dean Baker has criticized these practices, but he's about the only one.



Sources:
Cost of prescription drugs and doctors: Statistical Abstract, 2003, table 129.
Cost of soda: Statistical Abstract, 2003, table 216, assuming soda costs $0.65/12 oz.

 

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Thursday, July 22, 2004

Bush's Assault on Employer-Provided Insurance


Paul Krugman wrote a great column last week critiquing Bush's health care plan, but there are a few points worth some additional comment, especially since Krugman's conservative critics don't seem to have understood Krugman's point.

The first part of Bush's plan is a modest tax credit, to help low- and middle-income families buy health insurance. Krugman offers a clear description of the second part:
The other main component of the Bush plan involves "health savings accounts." The prescription drug bill the Bush administration pushed through Congress last year had a number of provisions unrelated to Medicare. One of them allowed people who purchase insurance policies with high deductibles, generally at least $2,000 per family, to shelter income from taxes by setting up special accounts for medical expenses. This year, the administration proposed making the premiums linked to these accounts fully tax-deductible.


Personally, I think that health savings accounts (HSAs), combined with high-deductible insurance policies are a pretty good idea. Insurance for small losses is usually drastically over-priced, paying tax-free out-of-pocket dollars seems preferable to a HMO, there should be less paperwork, and consumers have incentives to economize if they're paying the full cost. (Yes, I know that a lot of people are likely to hate this kind of policy). But despite the fact that I'm sympathetic to HSAs, I still think that Bush's version of the HSA idea is a terrible one.

The main problem with Bush's health care plan is that it would undermine the present employment-based health-care system. Right now, employer-provided health benefits are tax-free. If employers stopped paying for health insurance and used the money to raise pay, workers would be much worse off, because they would have to use post-tax dollars to buy their own health insurance.

Individual health insurance is also much more expensive than group insurance because of adverse selection. Since many people go uninsured, especially the young and healthy, insurance companies are suspicious of their customers, assuming (correctly) that they are more sick than average. Hence, they jack up premiums, further pricing the healthy out of the market. And individual insurance provides much less risk-pooling, since insurance companies are free to screen on pre-existing conditions and the like. If they could do this perfectly, there'd be no insurance at all, just pre-paid health care.

So it's crucial that the government provides tax benefits to employer-paid health insurance, but not to individual-paid coverage. Without these tax incentives to get coverage through work, there would probably be little health insurance available at all. Health insurance would become like private disability insurance, where policies are priced at sky-high rates, and almost nobody buys them. Or like almost-nonexistent private unemployment insurance.

David Hogberg, writing in this week's American Specator, tries to rebut Paul Krugman's column, but entirely misses the point. He provides a welter of figures (mostly provided by insurance companies, but never mind) that allegedly show how wonderful HSAs are. As I said, this may well be true today, when HSAs don't come with much in the way of tax breaks. But if Bush passes his plan, and premiums for HSA-linked insurance are made tax deductible, we'll be seeing a lot more companies drop their health-insurance benefits, according to projections by MIT health-insurance guru Jonathan Gruber.

Bush's proposals, which provide tax credits and deductions only to privately purchased insurance, could really be disastrous. By moving us towards a world where the tax incentives to purchase insurance privately are just as great for employer-paid insurance, Bush threatens to undermine everybody's employee health insurance.

Why would Bush want risk all this for a plan that will only increase insurance coverage of the population from 85.3 to 85.9%? As I'll discuss in a later post, the main goal of Bush's health insurance plan doesn't actually seem to be providing medical care to the uninsured, instead it's to sneak though some more tax cuts for the rich.
 

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Ban Me-Too Pills? Ban Me-Too Chocolate?


A commenter from Western Mass. charges that I''m being unfair to "public interest types" when I "say that they do not criticize the marketing of casinos or candy. These are both important public health campaigns." He also says that there's a much better case for a paternalistic policy towards pharmaceuticals, because consumers, not being medical experts, aren't in a good position to judge which drugs are best.

Obviously there's something to these points, but I don't think they're as important as the commenter does. As to campaigns against candy and casinos, sure they exist, but the general criticism is that these things are harmful in excess. Some activists (including me) would like to see fewer casinos, keep candy machines out of school, and generally make them less available.

The critics of me-too drugs are making a far more radical case. They admit me-too drugs are beneficial, but they still want to ban them, unless there's strong proof that they're better than the old drugs. Nobody says that we have too many types of similar chocolate bars, and no more should be allowed unless they are proven to be more delicious. Nobody says that Las Vegas should ban "me-too" casinos, to save on construction expense.

The commentator would answer, I think, that consumers are perfectly capable of judging chocolate bars, but not blood-thinning pills. Instead, by allowing too many similar blood-thinning pills on the market, we're just allowing drug company marketers to overcharge for something that's no better. As I argued in a previous post, I think that more competition drives prices down, even in health care, not up.

I also don't believe that me-too drugs are exactly identical. Given that a doctor tells me I need a blood-thinner, I might very well be able to determine which one works best for me. The pills might have different side effects, and I can perfectly well judge that one pill makes me nausous, and another doesn't. I also think that people's reaction to medicine are diverse: some people might respond better to one me-too pill than another. I don't know if there's any evidence for this, though I suspect that determining who is likely to respond better to which drug is a very difficult and expensive question to answer. Those who would ban me-too pills seem to think that we're sure that the additional atom in the molecule doesn't make any difference, and I don't believe that we're sure at all.



 

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Wednesday, July 21, 2004

Mmmm, Brandywine Tomatoes




Heirloom Tomatoes
Posted with Hello

The LA Times covers the heirloom tomato scene in Southern California. Heirloom tomatoes are mostly old-fashioned varieties bred for taste rather than the mass market. They're said to taste great, but they don't ship well: they're mostly thin-skinned and fragile, with short shelf lives. So, buy local (if you can find them): heirloom tomatoes shipped cross-country are apt to prove disappointing.

 

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Tuesday, July 20, 2004

We Need Me-Too Drugs Too


In a recent article in the NY Review of Books, Marcia Angell, former editor of The New England Journal of Medicine, promises to tell us "The Truth about the Drug Companies." Her version of the truth turns out to be pretty much the same rant put out by Ralph Nader's health policy organizations. Indeed, her 19 footnotes are mainly citations to Nader organizations, other advocacy organizations, newspapers, magazines, and also a blog, and rarely to academic research.

Angell makes one particularly wrong-headed proposal:
We need to get the industry to focus on discovering truly innovative drugs instead of turning out me-too drugs...The me-too business is made possible by the fact that the FDA usually approves a drug only if it is better than a placebo...

The me-too market would collapse virtually overnight if the FDA made approval of new drugs contingent on their being better in some important way than older drugs already on the market. Probably very few new drugs could meet that test. By default, then, drug companies would have to concentrate on finding truly innovative drugs.
There are at least two problems with this plan. First, there's no reason to think that banning me-too drugs would spur more research into innovative drugs. There isn't some fixed pot of industry research money. The drug industry, and its investors, are presumably already doing all the research into breakthrough drugs that they think will be profitable. If they can't put their money into me-too drugs, they're just as likely to invest in Las Vegas casinos, Hollywood movies, or maybe munitions, as in truly innovative pharmaceutical research.

Second, banning me-too drugs would raise drug prices. Me-too drugs, by definition, are close substitutes for drugs already on the market. Hence, they increase competition and lower drug prices. It may not be the optimal way to set drug prices, at least if the me-too drugs are really identical to the old ones, but it could well be a second-best solution.

Another way that Angell's proposal would raise drug prices is to increase the cost of clinical trials, which account for most of the cost of developing a new drug. Consider a drug trial where 50% of those given a pill recover, while only 25% of those given a placebo do. Now consider a me-too drug that worked for 55%. Angell wants us to test this drug against the old 50% pill, rather than a placebo. But to do this we need a dramatically larger study. In fact, about 25 time larger: 2500 patients instead of 100! These kind of costs could easily rule out any possibility of doing the research. And that would mean that the extra 5% won't ever get to benefit from the drug. Further, if the "me-too" drug doesn't benefit exactly the same types of people, the number of potential beneficiaries is higher than 5%.

I've always been puzzled: why do public interest organizations spend so much time criticizing the drug industry for "wasteful" research and marketing, and so little time criticizing the billions spent on the development and marketing of marketing of movies, casinos, candy, and all the other products that are a lot less valuable than new pharmaceuticals?

 

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Should I Invest? Or Will the CEO Rob Me?


Ever since I posted about Ekasse, a financial firm that promises to provide an overseas credit/debit card and "coded bank accounts solutions to avoid taxation," I've gotten a steady stream of hits from people searching for information about the company. Since it's not like their web site is hard to find, I suspect that these people are concerned that after they deposit their money, with "complete privacy and anonymity," Ekasse will steal it.

Guys, I don't know if Ekasse is going to rob you. I do know that you should pay your taxes, though. You'll sleep better and feel better about yourself, if you act honestly.

Concerns similar to those of Ekasse's potential customers are the subject of a recent paper by Harvard tax shelter expert Mihir Desai and rising star Dhammika Dharmapala. They point out that tax shelters have some drawbacks from the point of view of a firm's stockholders. The problem is that if managers use tax shelters to hide profits from the government, they can also hide them from stockholders, allowing the managers to pocket the money themselves. Enron, which had hundreds of shell companies in the Cayman Islands, is the quintessential example. Desai and Dharmapala say that they've found econometric evidence of this kind of behavior: better governed firms (where managers can more easily be ousted by stockholders) use tax shelters less.

Desai and Dharmapala's findings highlight another efficiency cost of the government's failure to crack down on tax shelters. Besides costing the government tax revenue, they may also reduce investment, growth and jobs. Tax shelters create an environment where investors must be fearful that CEOs will steal their money.
 

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Monday, July 19, 2004

The Myth of the 'Poverty Draft'


Over at Crooked Timber, there's a remarkably fact-free discussion going on about the morality of going to war with a volunteer military. Lumberjack Chris writes,
I just got back from seeing Farenheit 9/11. There's a little voice saying I should pick away, argue about this point or that point, qualify, criticize. Others can do that. Moore makes one point quite brilliantly: that those who suffer and die come overwhelmingly from families and communities that are, shall we say, somewhat poorer than the politicians who chose to go to war, or the executives of the corporations who hope (hoped?) to profit from Iraqi reconstruction.
A typical comment in the 90+ post thread is "Moore's point is that, basically put, the military is about the only good option for the poor wanting to get a better life."

But if poor means anything like the official poverty line (the bottom 10-15% of society), this just isn't true. The military mostly excludes the poor: the military recruits about 1/3 fewer people than in did at the end of the Cold War. Today, you can't get in without a high school diploma or GED. And even in these highly educated times, about 15% of young American are high-school drop-outs.

Similarly, 87% of new officers have 4-year college degrees, which puts them among the top 30% most educated young Americans. 17% have advanced degrees (doctors, lawyers, chaplains), putting them in the top 6% of young Americans.

It may well be true that the real elite of society are underrepresented in the armed forces. According to military sociologist Charles Moskos,
In World Wars I and II, the British nobility had a higher killed-in-action rate than the working class," he said. "Our enlisted ranks resemble the British: they're lower- to middle-class, working-class, intelligent people, who are joining for both the adventure and economic opportunity. But the officer corps today does not represent American nobility. These are not people who are going to be future congressmen or senators. The number of veterans in the Senate and the House is dropping every year. It shows you that our upper class no longer serves.
I'd be willing to bet, though, that the upper class isn't really underrepresented, it's just not overrepresented like it used to be. In 1957, the majority of Princeton's graduating class served in the military. Today, students at elite colleges still enroll in ROTC programs (Harvard, Yale, Columbia, MIT), though most have to travel off-campus to attend.




New Enlisted
Army Military Civilian 18-24
HS/GED or more 100 99.1 79.4
GED 13.6 7.2 n/a
Some College 10.6 8.5 46.7
HS Drop-out 0.0 0.8 20.6

New Officers
Army Military Civilian 25-29
Less than College 6.1 13.3 70.7
Some College n/a n/a 28.7
HS n/a n/a 28.4
HS Drop-out n/a n/a 13.6
4-year College 78.9 70.2 23.4
Advanced Degreee 15.0 16.5 5.9
Source: DoD (tables 2.7 & 4.13), Census Bureau

 

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Thursday, July 15, 2004

Corporate Tax Payments Fall Off a Cliff


If corporations were still paying taxes at the 1999 rate, the federal government would have collected about $100 billion more in taxes last year, and the budget deficit would be over 25% smaller.

No one is exactly sure why tax collections from corporations have fallen so precipitously, but there are two main reasons:
* An annual $50 billion or so of the decrease is due to corporate tax cuts included in the 2001 and 2003 tax bills (mostly greater write-offs for new investment). Source: CBPP.

* Much of the rest is probably due to increasing use of tax shelters and various techniques for avoiding and evading taxes.

Paul Krugman wrote a few years ago, "Tax receipts this year are falling far short of expectations, even taking the recession into account; my bet is that it will turn out that newly aggressive tax avoidance by corporations (and wealthy individuals) is an important part of the story. And it will get worse next year." Now, with corporate profits soaring, it's becoming clear the Krugman's prediction was right.


Posted with Hello

Source: Congressional Budget Office (CBO), and BEA National Income and Product Accounts (NIPA).

Note: Total corporate profits and tax payments from NIPA. NIPA tax payments include state & local taxes, "taxes" paid by the Federal Reserve, and some other amounts. CBO figures are for federal corporate income tax only. The CBO tax rates divide fiscal year taxes by calendar year profits.
 

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Wednesday, July 14, 2004

Psst...Want to Rent a Bridge?



Did you know that much of Europe's infrastructure -- bridges, dams, subways, sewer systems [101k pdf]-- has been leased to American corporations? So says a former leasing executive who testified anonymously before Congress last year.

What do American companies do with their European bridges? They lease them back to the European owners, usually a city or other government entity. The transactions are a wash: often, no rental payments change hands. But The American company gets a big tax deduction for depreciation. In exchange, the European city receives an up front payment.

Pretty shocking, huh? But when the NY Times reported last year on the German city of Frankfurt's plans to enter the tax shelter business, they played it for laughs, in an article titled "Latest German Fad: Leasing Out the Subway." Not until the 16th paragraph, more than halfway through the article, does the Times mention that the Americans won't actually be operating the subway, and that the motivation for the transaction is to take advantage of a tax loophole.

Tax shelters like the rent-a-bridge scheme came back in a big way in the 1990s, along with Enron and other accounting scandals. The Clinton administration tried to rein them in, but the Republican Congress refused. Instead they passed the "Taxpayer's Bill of Rights," which shifted IRS staff from compliance to customer service and laid out a number of new fireable offenses. Tax collectors worried that they could be fired for mistakes. As a result, by 2001, the IRS was auditing less than half the number of corporate returns it had in 1997, and enforcement actions dropped even more drastically.

The corporate tax bill currently before Congress plugs some of these loopholes. But without systematic changes in the law and a genuine will to crack down, new tax shelter schemes will soon be invented. Indeed, the rent-a-bridge loophole described above has already been plugged, and quickly replaced by new variants on the same scheme. Somehow, I don't think that George Bush and the Republicans, having presided over the tax shelter boom, plan to make a very serious effort.
 

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War is Peace, Says the War President



Self-proclaimed "War President" Bush announced his "strategy for peace" on Monday,

We are defending the peace by taking the fight to the enemy...We have followed this strategy -- defending the peace, protecting the peace and extending the peace -- for nearly three years.


Some might call this language Orwellian. Perhaps we are defending our country by launching overseas invasions and "taking the fight to the enemy," but are we really "defending the peace?"

But I won't join in the denunciations. Instead, I hail War President Bush for admitting that he has been defending, protecting, and extending the peace for less than three years. That is, since 9/11. Before then, one assumes, he was more interested in cutting taxes on the rich, expanding faith-based programs, and vacationing in Crawford.

Lest you think I'm exaggerating, Bush later in his speech makes more explicit his confession of pre-9/11 failure:

Three years ago, the world was very different. Terrorists planned attacks, with little fear of discovery or reckoning. Outlaw regimes supported terrorists and defied the civilized world, without shame and with few consequences. Weapons proliferators sent their deadly shipments and grew wealthy, encountering few obstacles to their trade.


I think someone needs to remind Bush that he was President before 9/11 too.
 

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Tuesday, July 13, 2004

Corporate Tax Scam Week!


With a new corporate tax giveway making its way through Congress, larded with narrow tax breaks for the particularly favored, I'm declaring it Corporate Tax Scam Week here at Ragout!

The bill includes some good provisions, like complying with the World Trade Organization ruling against U.S. export subsidies, but "the centerpiece is a tax credit to effectively lower the tax rate on domestic manufacturing from 35 percent to 32 percent," Jonathan Weisman reported last month. White House economists initially opposed the bill on the grounds that it could "inadvertently distort production and have unintended and harmful results." That is, it creates incentives for large firms to shift costs to their manufacturing units and encourages elaborate schemes to reclassify everything possible as manufacturing. More recently, the Bush administration has flip-flopped, and is now quietly supporting it.

Like all tax bills nowadays, most provisions are set to expire in a few years. But if extended, as the Republicans surely intend, the House version will cost $167 billion over ten years, charges Citizens for Tax Justice [41k pdf].

It's also stuffed with provisions that benefit narrow interests, including special tax breaks for NASCAR race tracks and Oldsmobile dealerships, the Washington Post reported today. GE was the biggest winner, according to Post reporters Jeffrey H. Birnbaum and Jonathan Weisman, snaring various provisions to lower taxes on its overseas earnings. They quote Michael J. McIntyre, a Wayne State tax law professor (with an excellent web site):
"The bill is truly amazing," said [McIntyre]. "We had an incentive for exports that was illegal and had to be repealed. Now Congress takes the money saved by the repeal and uses it to reduce taxes on the income earned by U.S. companies in foreign countries, thereby making foreign investment more attractive than U.S. investment."

Remember, Corporate Tax Scam Week ends this Friday at Ragout, but if the lobbyists buckle down and make one last push in the House-Senate Conference, we've got a good shot at Corporate Tax Scam Decade! Fight, GE, fight!
 

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Barlow Defends Moore, Slanders Aluminum


Ted Barlow, at Crooked Timber, responding to a silly attack on Michael Moore by some right-wing warblogger, writes, "I could argue with this nonsense. But wouldn�t all of our time be better spent sharing a genuinely delicious recipe for braised lamb shanks in red wine?" Indeed, the recipe is mostly pretty good (well-written, emphasizes important points like "don't crowd the pan").

Unfortunately, Barlow's recipe in defense of Michael Moore turns out to be quite deceptive. While Moore is said to have hired a fact checker from the New Yorker to vet Fahrenheit 9/11, Barlow's standards appear to be somewhat lower.

Barlow passes on myth as gospel, insisting on a "nonreactive saut� pan," presumably because the recipe calls for braising the lamb in red wine and tomato paste, two acidic ingredients. Now, it is true that acidic foods can discolor aluminum cookware, but who cares what color the pan is? Many's the time I've cooked tomatoes in "reactive" aluminum, without harming the flavor or the color of the food. Julia Child, who is careful to specify non-reactive pans where necessary (to prevent discoloring white wine or egg yolks, she says), does not specify non-reactive pans for tomato sauce.

The Food Network has a pretty good discussion of the issue, noting that "those who claim that some foods take on a metallic taste when cooked with aluminum cookware are counterbalanced by just as many who insist they don't." If only Barlow had done his homework, and taken an even-handed tone, rather than launching a vicious assault on the favorite pan of America's restaurant industry.
 

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Tax Havens and the Deficit


The biggest single item in Kerry's plan to cut the deficit is "cutting corporate welfare" to save $65 billion a year. My initial reaction was skepticism: politicians always talk about reducing "waste, fraud, and abuse." But after hunting around on the web for a while, I'm a believer. The invaluable Center on Budget and Policy Priorities says:

* Treasury Department figures show that actual corporate income tax revenues fell to $132 billion in 2003, down 36 percent from $207 billion in 2000.

* As a result of these low levels, corporate revenues in 2003 represented only 1.2 percent of the Gross Domestic Product (the basic measure of the size of the economy), the lowest level since 1983, the year in which corporate receipts plummeted to levels last seen in the 1930s.

So there seem to be plenty of untaxed profits out there.

Cracking down on corporate welfare and tax havens has been receiving much less attention recently than it did last year, when Congress held hearings on the issue. Kerry too seems to be talking about this much less now than he was during the primaries, perhaps because he's trying to move towards the center. But it seems to me that reducing tax evasion and avoidance is a perfectly centrist issue, and populist too. And it could plausibly bring in fairly large amounts of revenue, making it a great answer to the question, "so how are you going to pay for your programs, and still reduce the deficit?"

Even better, there are lots of great stories. For example, did you know that over a million Americans have credit/debit cards that allow convenient access to bank accounts in tax havens like the Cayman Islands? David Cay Johnston, the NY Times crack tax fraud reporter wrote in 2002,

These people --� most believed to have incomes that would put them among the top 1 percent of taxpayers --� "are using offshore cards to pay for living expenses," the I.R.S. said, from groceries to cars to college tuition for their children. Offshore accounts would be of little use to people whose wages are reported to the I.R.S. by their employers. But entertainers, business owners, investors and others who control what is reported to the I.R.S. can use offshore accounts to hide fees, profits, dividends, interest and capital gains.


And these services remain readily available. Here's a company that advertises "Tired of government watching your transactions and profits? Ekasse uses offshore structures and coded bank accounts solutions to avoid taxation and provide complete privacy and anonymity." If you prefer a bigger name, Barclays will help you set up an account in one of the Channel Islands.


 

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Saturday, July 10, 2004

World Court: No Right of Self-Defense for Israel


The International Court of Justice has issued an advisory opinion ruling that Israel has no right to self-defense against Palestinian terrorist attacks. I haven't seen much reaction to this, perhaps because few take the World Court seriously. But given the continuing pressure for the U.S. to defer more to international organizations, it's worth discussing how those institutions behave.

UK judge Higgins wrote a concurring opinion, finding the wall illegal, but blasting the court for being "unevenhanded."

34. I also find unpersuasive the Court�s contention that, as the uses of force emanate from occupied territory, it is not an armed attack �by one State against another�. I fail to understand the Court�s view that an occupying Power loses the right to defend its own civilian citizens at home if the attacks emanate from the occupied territory -- a territory which it has found not to have been annexed and is certainly �other than� Israel. Further, Palestine cannot be sufficiently an international entity to be invited to these proceedings, and to benefit from humanitarian law, but not sufficiently an international entity for the prohibition of armed attack on others to be applicable. This is formalism of an unevenhanded sort. The question is surely where responsibility lies for the sending of groups and persons who act against Israeli civilians and the cumulative severity of such action.


In other words, Israel doesn't have the right to self-defense, because the West Bank isn't a state, but the Palestinians are entitled to benefits of international law that protect only states.

By adopting the position that the right of self-defense doesn't apply to Israel, the court avoided the need to balance Israel's security needs against Palestinian human rights. Several judges criticize the court for failing to consider Israel's contention that the wall is needed to prevent terrorist attacks. Judge Owada of Japan concurs with the decision, but writes,
Indeed, there is ample material, in particular, about the humanitarian and socio‑economic impacts of the construction of the wall. Their authenticity and reliability is not in doubt. What seems to be wanting, however, is the material explaining the Israeli side of the picture, especially in the context of why and how the construction of the wall as it is actually planned and implemented is necessary and appropriate.


It seems to me that a court could reasonably find that portions of the wall are a legitimate defense against Palestinian suicide attacks, and that others infringe too much on Palestinian territory to be justified. The Israeli Supreme Court has done just this, finding some parts of the wall to be illegal. At the same time, any court should give great deference to the views of the Israeli government. The government, with its military, police, and intelligence agencies, is in a much better position to determine Israel's security needs than any court can be. This is how the U.S. Supreme Court usually behaves. I assume it's how the Israeli court acted too. But the World Court says pretty clearly that saving the lives of Israeli citizens counts for nothing at all.


 

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Thursday, July 08, 2004

Perils of Predicting Future Budget Surpluses


A commenter asks how seriously we should take 10-year budget forecasts. I think the answer is that (1) the forecasts are generally honest though (2) they aren't very accurate (can easily be off by trillions); but (3) conclusions about where the surplus went are still fairly solid and (4) the forecasts are a good way to compare different policy proposals.

On honesty: I'm inclined to believe that the CBO (Congressional) and OMB (White House) forecasters are professionals who are fairly insulated from politics. Fiscal expert Alan Auerbach [102k pdf] has found that both CBO and OMB forecasts, though often wrong, are unbiased, or at least enough so that any systematic biases can't be distinguished from mistakes.

Auerbach writes that errors can be divided into three categories: policy (e.g. unforeseen spending and tax changes), whether the economy booms or busts, and "technical" errors.

Technical revisions [i.e. errors] are residual, containing changes that the agency attributes neither to policy nor to macroeconomic changes. For example, a technical revision in revenue would result from a change in the rate of tax evasion, a shift in the composition of capital income from dividends to capital gains, or a change in the distribution of income. In general, 10-year budget forecasts depend on 3 things: the economy, policy, and tax revenue given the economy and policy.


Forecasting the economy, I think, is the smallest problem. It's hard to know exactly when a recession will hit, but over 10 years, errors tend to cancel out, and it's fairly easy to forecast average growth. According to the study I discussed yesterday, $700 billion of the $5 trillion surplus disappeared because of the bad economy. This is a fairly small number compared to "technical" errors and tax cuts, despite the fact that the economy has been shockingly slow to recover from the recession.

"Technical" errors seem to be a pretty big problem. Over half of the surplus proved to be illusory. Perhaps tax evasion increased, perhaps the falling stock market reduced capital gains, perhaps income of the very rich fell. The CBO's explanation for the error speculates about these things, but ultimately concludes that they're not sure what happened.

Policy changes make a big difference, but as long as the analyst is upfront about what assumptions are made, these aren't really errors. The budget numbers I discussed yesterday originally came from the CBO. The CBO is legally constrained to make the silly assumption that current law will continue into the future, even if it is very likely that new laws will be passed. For example, no one really believes that the Bush tax cuts will expire in the bizarre way that's currently scheduled.

The discussion of the disappearing surplus from yesterday was put out by the Center on Budget and Policy Priorities, the Concord Coalition, and the Committee for Economic Development. These groups are, respectively, center-left, centrist, and center-right proponents of a balanced budget.

That study started with CBO numbers and made different policy assumptions. For example, the baseline CBO projections assume that the tax cuts expire at various points in the future. The study assumed that they all become permanent (as Bush has proposed) and that "alternative minimum tax relief" passes. The CBO projections follow Bush's budget in projecting little increase in defense spending. The study says that Bush's defense plan (put out by the Dept. of Defense) calls for substantial increase in military spending, and assumes that this is what will happen. Whether the tax cuts become permanent and military spending soars is obviously unpredictable -- it depends on who is elected this year and in 2008 too. But this isn't really an error: the study is warning us what will happen if Bush gets his way, it's not really predicting that Bush is going to get his way.

Similarly, if we started with the CBO numbers and conducted a similar analysis of the Kerry plan, we'd have a valid comparison. Suppose we found that Bush's plan will lead to a $4.4 trillion deficit (as the CBPP/CC/CED found) but Kerry's will lead to a $2 trillion deficit (pulling a figure out of a hat for the sake of concreteness). It might turn out that the CBO made, say, $1 trillion in forecast errors. But the error would be the same in both the Bush and Kerry forecast, so it wouldn't affect the conclusion that Bush's deficit is $2.4 trillion bigger than Kerry's.
 

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My CV is Longer Than Yours


Luskin and his pal Seater, an actual economist at NC State, attack Brad DeLong's CV:
DeLong published quite a bit up to 1993, when he got tenure. After that, his scientific contributions fell almost to zero, and overall the vita is embarrassingly weak for someone at a big time department like Berkeley. There are almost no papers in refereed journals over the past 10 years, and almost all of those are comments, surveys, introductions to conferences, or such; original research since 1994 is virtually non-existent. DeLong appears to have largely ceased doing serious work.

Kautilyan has published a refutation, pointing out that DeLong has been ranked 118th best economist on the basis of citatations, and a number of DeLong's other achievements. I think there's one point worth adding to Kautilyan's defense: economists of DeLong's stature have luxury of being invited to publish in prestigious but non-peer-reviewed outlets. I count five of these articles on DeLong's CV since 1994, as well as two articles in top peer-reviewed macro journals, many book chapters, plus a textbook, a history book, and numerous articles in the popular press. So the claim that DeLong has produced almost no "original research" since 1994 is just false. And I'd guess it's legally slanderous too. Seater and Luskin are treading on dangerous ground. Sue him Brad! I bet Luskin has deep pockets!

Of course Luskin is just using the squid defense: squirting ink to disguise the fact that he's been caught in multiple errors and has almost no credentials at all. Compared to an intellectual pygmy like Luskin, DeLong is unquestionably a giant and it's silly to debate whether he's 7' or 8' tall. Admittedly, this is faint praise for DeLong: most first-year economics graduate students are intellectual giants compared to Luskin. Luskin is a guy who's proved incapable of even looking up the correct data on real exchange rates, yet has devoted his life to criticizing Krugman, the guy who literally wrote the book on exchange rates.
 

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What Happened to the Surplus?


January 2001. Bush takes office. The 10-year surplus is estimated at $5.0 trillion, but we now know this figure was an overestimate. The falling stock market and "technical" problems with the Congressional Budget Office projections of tax revenue have since reduced the amount to $2.4 trillion.

June 2001. Almost 1.5 trillion in tax cuts enacted.

August 2001 Radio Address. Bush remains optimistic about the budget:

A new budget report, released this past week, shows that despite the economic slowdown that began in the third quarter of last year, the federal budget is strong, healthy and in balance. In fact, the 2002 budget surplus will be the second biggest surplus in American history.

The report also shows we are funding our nation's priorities, meeting our commitments to Social Security and Medicare, reducing taxes and still retiring record amounts of debt. This is a great achievement, and it happened because Congress worked with me this spring to agree to a responsible total level of spending.


September 11, 2001. The terrorist attacks and subsequent war in Afghanistan "change everything," but have relatively little effect on the budget. The lingering recession ultimately reduces the surplus by $700 billion. The 10-year surplus is down to just $200 billion.

January 2002. State of the Union Address. Bush promises that deficits will be temporary:
Once we have funded our national security and our homeland security, the final great priority of my budget is economic security for the American people. To achieve these great national objectives -- to win the war, protect the homeland, and revitalize our economy -- our budget will run a deficit that will be small and short-term, so long as Congress restrains spending and acts in a fiscally responsible manner.


March 2003. War in Iraq begins and the defense budget begins to grow quickly. Through 2011, defense and homeland security spending are expected to increase by $1.8 trillion. The surplus has turned into a $1.6 trillion deficit.

May 2003. Despite the war and the deficit, Bush persuades Congress to enact more tax cuts. The cuts are officially projected to cost $350 billion if they expire as scheduled from 2004 to 2008. But Bush soon calls for them to be extended, raising their cost to about $1 trillion.

January 2004. State of the Union Address. Bush calls for making the 2001 and 2003 tax cuts permanent. If enacted, all the tax cuts will total $2.7 trillion. The administration also supports "alternative minimum tax relief" which would cost another $700 billion. The tax cuts, actual and proposed, are now $1 trillion larger than the original $2.4 trillion surplus.

Bush has long since stopped speaking of surpluses or even temporary deficits:

In two weeks, I will send you a budget that funds the war, protects the homeland, and meets important domestic needs, while limiting the growth in discretionary spending to less than 4 percent. This will require that Congress focus on priorities, cut wasteful spending, and be wise with the people's money. By doing so, we can cut the deficit in half over the next five years.


But Bush's promise of reducing the deficit ignores $400 billion in future military costs and the $1 trillion plus cost of his proposal to partially privatize social security. It also assumes draconian cuts in domestic programs, to begin after the election.



What Happened to the Surplus?

10-year surplus in 2001: +5.0 trillion

Falling stock market and
"technical" errors -2.6
Recession & economy -0.7
Tax cuts -3.4
Defense & Homeland Sec. -1.8
Rx drugs & entitlements -0.6
Other domestic -0.2

10-year deficit -4.4 trillion

Source: CBPP 2003 [153K pdf], Table 4.


Note: all figures in this post refer to the 10-year period 2002-2011 and are from either CBPP 2003 [153K pdf] or CBPP 2001 [88K pdf].
 

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Wednesday, July 07, 2004

Markets Like Edwards VP Pick


The Tradesports prediction market has Bush falling by about 4 percentage points to 53% on news of the the Edwards VP selection.

Tradesports is an Irish "trading exchange," that allows customers to place bets on events like "Bush wins presidential election," "Bin Laden captured by 9/30/04" (currently trading at 12%), and (more typically I assume) "Yankees beat Red Sox tomorrow."
 

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Another Error Exposed Prompts More Bile From Luskin


An update on Krugman-stalker Luskin's "critique" of the 1982 Krugman-Summers memo on inflation.

Brad DeLong catches Luskin in another egregious error, writing "what Luskin has plotted here is not the real exchange rate: the U.S. real exchange rate did not change by a factor of three between 1973 and 1988. I suspect that what Luskin has done has been to divide a nominal exchange rate series by the home country's price level, rather than by the ratio of the home to the foreign price level, and thus created a series that is essentially meaningless."

Luskin's response? He admits to using the meaningless series. He offers a bunch of cheap shots aimed at DeLong, flings some more insults at Bobby of the Paul Krugman Archive, and blathers on for many many words. But he doesn't even both to claim that he's plotted anything other than a "meaningless series," much less make an argument that he's plotted something meaningful.

So of the three series Luskin plotted, two were simply wrong (I discussed his use of the wrong inflation series in an earlier post). Luskin just isn't capable of looking up the right data, or, apparently, of admitting his errors.

He does draw pretty graphs though. Here's Luskin's original graph:


[Hosted by Hello]


And here's the corrected one (just a wee bit different):


[Hosted by Hello]
 

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Tuesday, July 06, 2004

Saudi Plot to Help Bush: Pollkatz's Graph is Unconvincing


Prof. Pollkatz writes, "Bush's approval ratings go up and down with the cheapness of gasoline. It looks like maybe our election is in the hands of the Saudis." So there are two claims: (1) a strong relationship between gas prices and Bush's popularity, and (2) the Saudis are manipulating the price of oil to help Bush.

As proof Pollkatz offers this figure (note that gas prices are plotted on an inverted scale, so that when the gas index is higher, gas prices are lower).

Now it's true that Bob Woodward has reported that "Saudi Arabia's ambassador to the U.S. has promised President George W. Bush the Saudis will reduce oil prices before this November's election to help the U.S. economy." The Bush administration and the Saudis have acknowledged this, (though they deny any deal). So it may well be true that the Saudis are trying to help Bush, but a figure showing a correlation between oil prices and Bush's popularity provides no obvious evidence about Saudi motivation.

The figure does seem to show a correlation between prices and popularity. But there's a pretty obvious explanation about why the price of oil and Bush's popularity move together so strongly: it's because they're both driven by events in the Middle East, such as the U.S. invasion of various countries in the region. For example, Pollkatz writes, "Why did gas prices fall with the beginning of the Iraq invasion? Ordinarily, gas prices rise during Middle East crises." Uh, could it be that gas prices fell after it became clear that Saddam had been unsuccessful in sabotaging many of the Iraqi oil wells?

Ultimately, I don't deny that lower gas prices help Bush, but the effect is a lot smaller than the figure seems to suggest.
 

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Saturday, July 03, 2004

Dealing with Saddam


Spencer Ackerman at The New Republic's Iraq'd, writes
Perhaps the most surprising finding in the poll is what Iraqis consider not to be a priority at all. By a tremendously vast margin--83.7 percent, with the next most-frequent response (about increasing oil production) coming in with only 6 percent--Iraqis are not concerned with "dealing with the members of the previous government."

Ackerman assumes that this means that Iraqis don't care much about Saddam's trial. Perhaps they don't want him to be tried at all. But "deal" doesn't mean "put on trial," it means something weaker like "take action towards." Another common meaning of "deal with" is "bargain with." Since the poll was presumably translated into Arabic and Kurdish, it isn't at all clear exactly what was asked, and what Iraqis understood it to mean.

The relevant part of the dictionary definition is:
Deal, verb intransitive
3 a : to engage in bargaining : TRADE b : to sell or distribute something as a business
4 a : to take action with regard to someone or something [deal with an offender] b : to reach or try to reach a state of acceptance or reconcilement [trying to deal with her son's death]

So a common meaning of "dealing with the members of the previous government" is "bargaining with them." Another reasonable interpretation is Ackerman's "taking action towards them." A bad translation could even be "accepting the loss of the previous government."

In general, we ought to be very cautious about interpreting polls translated into a foreign language, where we don't know the connotation of the questions. Even in English, the exacting wording of questions can make a big difference. Consider the popularity of "aid to the poor" and the unpopularity of "welfare." This problem must be even worse in polls translated into multiple foreign languages, like the Pew global surveys.
 

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