Sunday, February 10, 2013

Book Review: Here's The Deal

David Leonhardt's book Here's the Deal is well worth reading. For the $1.99 Kindle price you can't go wrong. It is a short, informative introduction to the federal budget deficit, along with some suggestions about how to fix it. Most of what he says is correct--it's what he doesn't say that is greatly mistaken. Mr. Leonhardt is the Washington Bureau Chief for the New York Times.

As Mr. Leonhardt amply demonstrates, the budget deficit in and of itself is not a big deal. It amounts to about 5% of GDP, a tractable if painful sum in our current economy, and an easy hurdle in circumstances of strong, economic growth. The book ultimately agrees with Mr. Obama and argues that some combination of tax increases and entitlement cuts is the solution.

He faults both Democrats and Republicans for political cowardice. Neither party levels with the American people and tells them that some long-term sacrifice will be necessary to solve this problem. The Democrats simply over-promise, touting a political program that in this blog we mock as "free unicorns for all." The Republicans--who come off worse in Mr. Leonhardt's account--are guilty of a tax fetish, and unreasonably claim that any increase in taxes starts us down the slippery slope toward catastrophe.

Within the purely fiscal argument that Mr. Leonhardt makes, his criticism of the Republican position is correct. There is no way that increasing tax rates from 35% to 38% is going to ruin the economy. And he makes an argument (that I don't know enough to disagree with) that taxes as a percent of GDP are now at record low and that we can afford to raise them slightly.

But his argument ignores the primary reason why Republicans (or at least us Tea Party types) oppose higher taxes. That is, we believe in limited government as a matter of principle, and that the federal government has no constitutional right to be in the entitlement business at all--independent of economic arguments. Now he'll accuse us of being "constitutional fetishists" rather than anti-tax fanatics, and note that the world has surely changed since 1789. Fair enough--most notably life expectancy is now around 80 instead of 35 (or whatever it was), making social security and (probably) Medicare necessities. And those are faits accompli--no serious political thinker believes those programs should be abolished.

But apart from life expectancy, the world has not changed that much. Basic political morality certainly has not changed. Government tyranny--even the well-intentioned tyranny imposed by forced income redistribution--is as immoral today as it was 224 years ago. It is instructive that Mr. Leonhardt hardly mentions Obamacare. I don't blame him--it is still not possible to calculate the damage it will do to federal and state budgets, not to mention our constitutional rights.

Mr. Leonhardt argues that there is no fiscal crisis. In his view, covering 5% of GDP over the next couple decades is a tractable problem. Maybe he's right. But if so, then why is the Federal Reserve printing $1.2 trillion annually? Why is it so important to keep interest rates at or near zero? Would Mr. Leonhardt be as sanguine about the federal deficit if interest rates were to spike to 6%, or 8%? By viewing the federal deficit as a long-term problem, Mr. Leonhardt misstates the issue. He is correct--long term it is tractable. But the problem is short term. The issue is that debtors are very much at the mercy of who is lending them money, and if the creditors change their minds and call in their loans, then all hell breaks loose. And that's the problem.

The federal government depends on low interest rates, but this greatly distorts the economy. It is arguably responsible for the real estate bubble, it is probably leading to a bubble in asset prices right now, and it is totally screwing anybody who is trying to save for their own retirement. In a word, it results in a huge misallocation of resources--people investing in things that simply don't make any sense. Student loans come to mind--what a phenomenal disaster that is. It will literally ruin the financial lives of millions of young people and their parents because the money is priced arbitrarily cheaply. Free unicorns for all.

Mr. Leonhardt discusses education and medical care in some detail. His argument is that our investment in education from 1950 through the 1980s was extraordinarily successful (no disagreement there), and therefore we need to keep investing money. That latter clause is completely wrong, and as a college professor and former college administrator this is something I know something about. Mr. Leonhardt has apparently never heard of the Law of Diminishing Returns. Regards higher education, not only are the returns diminishing, they are completely non-existent.

The key task confronting higher education today is to lower the cost to students and taxpayers without lowering the quality of education. This is possible both because of new technology, and also because of large reservoirs of accumulated waste. College education is too long, involves too many mediocre faculty, way too many college administrators, and no longer meets the needs of the modern world. Briefly, it's an example of massive resource misallocation. Mr. Leonhardt, by advocating that we spend even more money on this Rube Goldberg contraption is simply enabling waste. Higher ed will employ far fewer people in the near future, require less time and money from students, and be much more effective.

I'm much less knowledgeable about the medical industry, and can't cite line and verse like I can with higher education. But I suggest that the only way to lower medical costs is to lower medical costs. That is, to sharply reduce employment in that industry by taking advantage of technology and eliminating accumulated waste.

In summary, Here's The Deal is a very good, short introduction to the federal deficit, and is well worth reading. On narrow fiscal issues I think it is correct (as far as I know). But broaden the picture just a little bit and Mr. Leonhardt's proposed solutions fall apart.

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