Why Worry about the Fiscal Slope?

Lessons from the American Recovery and Reinvestment Act (ARRA)

Or, cognitive dissonance in the conservative world

Almost three years ago, some analysts (I use the term loosely) argued that the stimulus embodied in the ARRA (which was about one third tax reductions) would have no impact on GDP, i.e., would not be stimulative. Consider the following statement by Mr. Brian Riedl of the Heritage Foundation:

… Spending-stimulus advocates claim that Congress can “inject” new money into the economy, increasing demand and therefore production. This raises the obvious question: From where does the government acquire the money it pumps into the economy? Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.

Now, as I discussed in this post, there is a model that rationalizes this perspective. (It is, by the way, not S ≡ I, which is an identity in a closed economy) Assume supply is given by:

Y = ΦF(K,N)

And demand is given by:

Y = α[A + β(M/P)]

When P is perfectly flexible, then output is always determined by the level of technology, Φ, the capital stock (K), and the labor force (N). α is the (IS-LM) Keynesian multiplier (any variant will work), and β is a function of investment and money demand interest sensitivities. This is depicted in Figure 1 below; movements in aggregate demand have no impact on output, only on the price level.


Figure 1: Aggregate Supply and Aggregate Demand in a Classical Framework; and AD shift

The AS curve is vertical in short and long run; shifts in the AD curve merely get reflected in changes in the price level.

What this implies is that if the stimulus was ineffective because each dollar spent by the government was a dollar taken away from the private sector, then we should rejoice when each dollar no longer spent on defense (paying fighter pilots guarding US airspace, maintaining nukes, etc.) is released to the private sector for purchases of yachts and mansions. (By the way, a new classical formulation leads to a similar conclusion.)

Of course, there is a pretty solid consensus that the ARRA did have a measurable impact on output and employment (so, I’m excluding Heritage Foundation, Eugene Fama, etc., and including CBO, CEA, IMF, Federal Reserve Board (see FRB/US simulations), and most of the business sector economists). Hence, I think we should worry. Figure 2 shows the trajectory of GDP under current law, and under the CBO’s fiscal alternative, and if only low income tax cuts are implemented.


Figure 2: Log GDP (Ch.2005$, SSAR) (blue), CBO August forecast (red), CBO Alternative Fiscal Scenario (green triangle) and extending low income tax cuts only (purple circle). NBER defined recession dates shaded gray. Dashed line at 2009Q1 (passage of ARRA). Source: BEA (2012Q3 2nd release), CBO, Budget and Economic Outlook: An Update (August 2012), and CBO, Economic Effects of Policies Contributing to Fiscal Tightening in 2013, November 2012.

CBO’s Alternative Fiscal Scenario includes eliminating the “automatic reductions in defense spending specified in the Budget Control Act, eliminate the automatic reductions in nondefense spending specified in the Budget Control Act and the scheduled reductions in Medicare’s payment rates for physicians, extending most expiring tax provisions and index the AMT for inflation” for two years.

Note that if one excludes tax cuts for income above $250 thousand from the CBO Alternative Fiscal Scenario, the difference in income is virtually indistinguishable from zero on this graph. [1]

So for me, there is a macroeconomic impact from the sequester, and there is an impact from the tax increases (although the impact via disposable income is larger than via labor-leisure tradeoffs). But I have the advantage of internal consistency — I believed that the ARRA had an impact on economic activity.

More on the empirics of stimulus here.

65 thoughts on “Why Worry about the Fiscal Slope?

  1. jonathan

    I believe, to be fair, that many people are objecting to the tax increases more than the spending cuts, though of course those are being objected to as well because they hit what these people care about.
    Bottom line though is January would be the implementation of British style austerity with the US doing the “Cameron” which so many people urged years ago. (I’m thinking of David Brooks but I know economists also wanted this.) British austerity consisted of tax increases – notably a VAT increase – and spending cuts that mostly hit public investment. Same is mostly true for what will happen to the US though Britain spent more on social spending – as the economy faltered – while the US will, it seems, be spending less. But then since the crisis is long past, spending less on social need is exactly what was intended with austerity over time.

  2. DS

    It seems to me that the basic problem with the conservative formulation that “each dollar spent by the government was a dollar taken away from the private sector” is that it fails to understand that money circulates.
    So in fact, the second part of the statement isn’t true because the dollar the government spends is spent in the same economy and therefore circulates back into the private economy where it will be spent again.
    The conservative formulation acts as though money can only be spent once in an economy when in fact the measure of economic activity is really the measure of how many times all the dollars in the economy are spent.
    Therefore, government spending only reduces economic activity if it reduces the number of times the dollar it taxed would have been spent had it not been taxed. However, if the dollar taxed would have just sat under a mattress somewhere or just invested in bonds, then the government taking that dollar and spending it, it seems to me, might actually increase the number of times it is spent.

  3. Ricardo

    When the government takes money from the private sector it does not change the circulation of money. Dollars in the productive economy circulate the same as money in government coffers (perhaps more but let’s not quibble). The biggest difference between government spending and productive economic spending is the mix of purchases.
    But because of the nature of government much of the spending is for productive, government buildings or low use capital investment such as sports stadiums. Governments fall prey to the same inability to engage in economic calcualtion as socialism. But there is another consideration. The materials used for this unproductive spending are removed from the productive economy and so material costs in the productive economy increase. Never forget that factories are not build out of colored pieces of paper but of steel and concrete.
    I know you were taught about the multiplier in school but turn on your brain and think it through.

  4. Jeff

    Menzie: Internal consistency may be enough to poke fun at someone at the heritage foundation but it doesn’t help much if you are asking the wrong questions. So you have to ask yourself, are you satisfied with poking fun at the heritage foundation or do you want to properly focus the discussion?

  5. randomworker

    Most government spending is actually transfer payments, throw in defense and you’ve got about 80% of it…not for sports stadiums and whatnot.
    But anyway…

  6. 2slugbaits

    DS Conservatives have a hard time understanding the difference between stocks and flows. Ricardo is a case in point. He believes the economy is always operating at full employment and every dollar of government spending comes at the price of crowding out the private sector. His usual defense is to deny the reality of a concept like aggregate demand. He usually ends his screeds with some Austrian mumbo-jumbo about lengthening production cycles, malinvestment and “concertina” effects.
    Jeff Since Sen. Jim DeMented just announced that he’s going over to the Heritage Foundation, does that mean Heritage will give up economics and focus on finding fossils that will prove Adam and Eve rode around on the backs of dinosaurs?

  7. Steven Kopits

    No one questions that government spending has an impact on activity. The question is, is the impact lasting and was it worth the cost?
    In the case of cash for clunkers, first time home buyers credit, census hiring and the payroll tax holiday, the result would suggest that the effect disappears immediately as the stimulus is removed. It doesn’t prime the economy, it merely props it up for a bit. It’s an aspirin, not an antidote.
    The Administration seems to be mulling a modest tax increase on the Top 2%, increasing marginal rates by, say, 2%. This would net revenue on the order of $20 bn–absolutely invisible in terms of aggregate receipts, the deficit, or GDP impact. If this is the President’s plan, it leads nowhere in terms of policy.
    By contrast, if we allow the payroll tax and Bush tax cuts to expire, coupled with the 0.9% tax increase for Obamacare, then you’ll see a real impact on the deficit–as well as the real possibility of recession.
    But when the recesssion’s done, it’s done. And it would free the Republicans to use the debt ceiling as an expenditure management tool. The Republicans can then argue, well, they have abided the biggest tax increase in US history. The US voters voted for Big Government; now they have to pay for it.
    However, beyond this, if the Administration wants additional spending, the Obama administration will have to propose and pass such legislation in the Senate for subsequent consideration in the House. The House will not countenance borrowing from China to pay for Social Security, Medicare or Medicaid. It has to be pay-as-you-go.
    I doubt the Democrats will find the support for further necessary tax increases–even among their own constituents. The Obama Supporting Californian Professionals (let us refer to them as OSCAPs) will be utterly shell-shocked by the tax increases they are forced to swallow. And this provides an opening for the Republicans to get spending under control by unconventional means. They should take advantage of the situation.
    Greenspan on the matter: http://www.bloomberg.com/news/2012-12-06/greenspan-says-painless-solution-to-u-s-debt-is-fantasy.html
    Howard Dean on the matter:
    The end of the Dean interview is quite compelling. The MSNBC reporter says something to the effect that, “We’re going to have to raise taxes on a lot of people, it’s just a question of timing.” Wow. That’s new.

  8. Joseph

    Richardo: That is a very interesting article. It illustrates both the ignorance and dishonesty about small business taxes.
    First, the ignorance. I love the business owner who says she will turn down work in order to stay under the $250,000 limit. This is as stupid as the worker who says he is turning down a raise because it will increase his income taxes. This is an astounding display of irrationality and misunderstanding of how progressive taxation works.
    Second, the dishonesty. One owner talks about the cost of inventory and the other talks about the cost of employees. Both of these are tax deductible expenses and reduce taxes, not increase them. Neither of these are affected by personal income taxes for the owner.
    Really, these articles about whining business owners should just be ignored. In most cases the owner is just displaying ignorance about their taxes. In others, it is simply self-serving lying/whining.
    Look, I do a lot of consulting for businesses, from large Fortune 500 companies to small sole proprietorships. From what I have seen business owners are hard working and knowledgeable about operating a business in their field. But most of them don’t have the faintest idea of how their taxes work. It is not their area of expertise, nor should it be. The best use their time is spent by concentrating on operating their business and leaving their taxes to accountants. When they complain about taxes, it is often just an incoherent whine. They really don’t understand how taxes affect their business.

  9. Edward Lambert

    The supply-side economists don’t mention that money directed to capital for job creation is money directed away from consumption. It is better to talk about a balance for optimization.
    I also want to comment on the productive capacity equation of…
    Y = ΦF(K,N)
    Productive capacity reflects production at 100% employment of the participating labor force. but it also reflects 0% capital income (100% labor share of income), because the only way to maintain 100% utilization and 0% unemployment is to direct all the income into labor consumption.
    Obviously this state only exists as a point of reference in theory.

  10. 2slugbaits

    Steven Kopits a modest tax increase on the Top 2%, increasing marginal rates by, say, 2%. This would net revenue on the order of $20 bn
    Where do you and a few others here keep coming up with numbers like that? Obama’s plan calls for about $160B/yr in additional revenues, which strikes me as a wee bit more than $20B. The plan increases the top two tax rates, restores the estate tax and increases the rate at which dividends are taxed.
    I absolutely agree that longer term taxes will have to go up on everyone, not just the top income gang.
    You should not lump all entitlement spending into one big category. The disability part of Social Security is in trouble and needs some attention; but the retirement side of Social Security is fine for another 25+ years, and what problems it has are easily manageable. Parts of Medicare will be in trouble, while other parts are probably okay for awhile. Obamacare extended Medicare for another decade or so. But ultimately fixing Medicare and Medicaid means fixing healthcare in general. People may not like paying higher taxes for Medicare & Medicaid, but they really won’t like paying even higher insurance premiums if healthcare isn’t fixed and those costs are pushed off to the private sector. And then some of the proposals to “fix” Medicare are just downright stupid; e.g., extending the eligibility age without setting up exchanges would actually increase costs.
    Here’s my suggestion for streamlining government and cutting overhead costs: eliminate state governments. They add no value, carry very high overhead costs, and engage in all kinds of schemes that increase deadweight costs. Do we really need 50 departments of motor vehicles? Do we really need 50 different Medicaid programs? Do we really need 50 different criminal investigation offices, 50 different highway programs, 50 different pollution monitoring agencies, etc.? Look at the NIPA tables and ask yourself which governmental level is growing the fastest.

  11. Edward Lambert

    I am researching now the demand components in the UT equation.
    Labor share is a contraint on capacity utilization based on real wages/unit labor costs. Unit labor costs also reflect demand. Thus demand is built into the equation to determine total unused and available capacity of labor and capital.
    The availability constraint on utilization from labor income is an aggregate of many demand variables. Unpacking the constraint is a big job. but the interesting thing is that the calibration for this aggregate demand variable has been consistent since at least 1967 and continues to be so. It is a sort of equilibrium value that the equation returns to under various and different conditions, especially seen when UT goes to the zero lower bound.
    When the UT index has distance from the zero lower bound, you can change the money supply, price level or even money velocity, all you want and watch the results, but when the UT index gets close to the zero bound, all factors adjust themselves to the UT non-negative constraint.

  12. Left Coast Bernard

    Uncle Sam does not have to get the money he spends by taxing or borrowing from the private sector.
    Uncle Sam is fully sovereign and the monopoly issuer of his own currency.
    Individuals, businesses, state and local governments, however, do have to get the money they spend from someone else. Ultimately, they get this money from Uncle Sam. They do not issue their own currency.
    Uncle Sam does not maintain a pile of dollars in the basement of the Treasury Department to which he adds dollars paid to him and from which he removes the dollars he spends. Dollars given to Uncle Sam no longer exist, except as a matter of accounting habits, and dollars he spends did not exist before he spent them. There are no dollars in the basement of the Fed either.
    When Uncle Sam wishes to lower aggregate demand in the economy, he taxes or borrows. When Uncle Sam wishes to increase aggregate demand in the economy, he lowers taxes, pays back his bonds, or buys stuff himself. He does this by asking a clerk in the Treasury Department to credit someone’s bank account. Tap, tap, tap, on her computer keyboard.
    He can always meet any obligation he wishes to meet, but if the Tea Partiers have their way, he may adopt the method of tyrants, which is to borrow money from people and decide not to pay it back.

  13. Steven Kopits

    Slugs –
    The 2% was mooted on NY public radio today. The thinking was that Obama would split the difference on the top rate w Reps, bringing it to 37%. But I agree, you hear a lot of different things.
    I’m with Rich on this. If you expect to raise $160 bn from the top 4%, then that’s 8-8.5% of average income. Allowing for avoidance, you’d probably have to raise rates 12-15%. That’s not Clinton rates, it’s Clinton + 8% or so.

  14. ppcm

    Built in the above linear functions are axioms, an elastic choice between public expenditures and private expenditures. It seems plausible as long as economies have been in compliances with general equilibrium, but empirical data please see among others, Pr Ramey paper « Government spending and Private activity » may disturb the free and elastic choice between government spending and the multiplier effect on private economy. All is fine, then are governments spending better than the private sectors? Hereunder is an excerpt of the findings.
    « This paper asks whether increases in government spending stimulate private activity. The first part of the paper studies private spending. Using a variety of identification methods and samples, I find that in most cases private spending falls significantly in response to an increase in government spending. These results imply that the average GDP multiplier lies below unity. In order to determine whether concurrent increases in tax rates dampen the spending multiplier, I use two different methods to adjust for tax effects. Neither method suggests significant effects of current tax rate changes on the spending multiplier. In the second part of the paper, I explore the effects of government spending on labor markets. I find that increases in government spending lower unemployment. Most specifications and samples imply, however, that virtually all of the effect is through an increase in government employment, not private employment. I thus conclude that on balance government spending does not appear to stimulate private activity. »

  15. Rodrigo

    “I’m with Rich on this. If you expect to raise $160 bn from the top 4%, then that’s 8-8.5% of average income. Allowing for avoidance, you’d probably have to raise rates 12-15%. That’s not Clinton rates, it’s Clinton + 8% or so.”
    Is this like when you were claiming that housing in Princeton should cost $5,000 for a family making $250k per year, and that Princeton private schools cost less than public ones?
    You know, a numerical claim that will fall apart under cursory scrutiny?

  16. hummbumm

    raising tax bracket from 35% to 39.6% is raising taxes 12% as 4.6/35 =~12%, on incremental income above 250K. Taking tax rates to 47% as per clinton +8, would be raising taxes by 33% or so
    math is hard

  17. Steven Kopits

    Rodrigo –
    For the public school costs, check it out for yourself. The pay of private school teachers is much lower than for public school. That’s the difference.
    Now, there’s also a huge difference among private schools. Chapin School is pretty modest; Lawrenceville School, we’ll now that’s really for the Top 1%. It has its own golf course. It’s really fantastic. Just a beautiful campus.
    Priceton Day School, it has two ice rinks. (Motto: “Be Prepared! Have an ice rink to spare!”) Even the Princeton Middle School (public) has a lovely pool (essentially brand new).
    No ice rinks, no pools where my kids go to school.

  18. Steven Kopits

    And for a family making $250k a year in housing, I would expect that housing expenses would be on the order of $6,000. (Again, this depends significantly on number of children and schooling choices.)
    Below is an example in Princeton Township. It’s $6,000 per month, mortgage, insurance, taxes. (Taxes are really good on this house.) It’s walking distance to town, the property has just been renovated big time, so everything’s new. It’s a little tight upstairs (I’ve been in this house), but it looks really nice. If you had 2, max 3 kids, you might live here. (Note only 1 car garage. It’s on a busy street.)
    I’d describe this house as upper middle class. It’s not a mansion, but you’re doing pretty well if you live here.

  19. Anonymous

    Of course they had an effect, but if their effect wasn’t greater than their cost, it wasn’t worth it. Did the economy grow enough to pay back the debt we took on for the package? No. It is undeniable we are heading down the exact same path as Japan. That is, more or less, our future.

  20. Rodrigo

    @Steven Kopits

    So, what I’m getting from your responses are two things:

    1) You didn’t process anything from the prior thread where we discussed this. Not the analysis of actual housing costs in and around Princeton Township, not the fact that Princeton public schools cost about 17k per student while private schooling costs (your estimate) 25-30k per student, not the reality that a family making $250K in Princeton is competing with familes that have a lot more money to throw around. None of that made any impact on you, apparantly, because you’re doubling down on the same claims that proved unsupportable in the other thread.

    …actually it’s just the one thing.

    I agree that what you linked is a gorgeous home and anyone living there ought to consider themselves to be doing very well. But you’ve missed the point of the housing cost analysis. A family with 3 kids can get a good home in the township for half that (that was the linked example in the other thread) or a good home in the surrounding county for 1/4 of that. The point is that it is 100% optional for a family of 5 to spend that much on housing in that area so it is inappropriate to use that amount as your assumed cost of housing for a family struggling to make ends meet.

    “For the public school costs, check it out for yourself. The pay of private school teachers is much lower than for public school. That’s the difference.”

    I did check this out for myself, and the Princeton public school system spends about $17k per head to educate its students. You’ve said that private school tuition costs $25-30K per child. Some of that is profit to the school, sure, and some of it goes to the awesome facilities you referenced. But I’m not sure how that changes the fact that if the quality of education is similar, public school in Princeton is far cheaper than private school.

    Let’s analyze it another way:

    A family with 3 kids in public school and the house you linked is paying around 16K in taxes plus some incidental expenses to fund their childrens’ schooling. Not 16K per child, just 16k.

    If that family sent all their kids to an inexpensive private school they might pay 20K per child – 60k total.

    The point isn’t that it’s not great to send your kid to an excellent private school. When I have kids they’ll go to fantastic private schools here in Chile. The point is that kids in the Princeton public school system also get a great education, so it’s totally optional to choose to spend the extra money. And we shouldn’t take that as a baseline for deciding if a family can make it work in your area for 250K/year.

  21. Rodrigo

    @Steven Kopits

    All this is to try to help you counter the point that your analysis (and any other analysis of why the well-to-do have it sooooo hard) boils down to (paraphrasing another poster) “Sure, 250K may be 5 times what the median family earns, but it’s a lot less once I’ve spent it all on rich people stuff”

    I agree that 250K does not make a family rich, exactly, in the sense that there are many families much richer than that. But being a cash strapped family with that income is a choice in a way that it really isn’t for a family only making 50k.

  22. Steven Kopits

    Rodrigo –
    Princeton regional schools system: 2012-2013 budget: $75 million, 3100 students; cost per student: $24,000.
    Private school: average realized tuition, $22,500.

  23. Steven Kopits

    Rodrigo –
    As regards the $465 house: It’s on Rt 206 (State Rd) and the intersection of Ewing: dense, 50 mph traffic right on your doorstep; heavy cross traffic on Ewing. (That corner, by the way, has the most automobile accidents in all of Princeton.) As far as the house goes, it’s a great buy for Princeton, but the location is about as bad as it gets there.

  24. Ricardo

    The fiscal cliff debate is actually a battle between C-Corps and S-Corps. President Obama is funded by the C-Corps while economic growth comes from pass-through businesses.
    Men like Warren Buffett and Fred Smith are not concerned about the Bush tax cuts expiring because they are in the 1%. The 1% have their investments in non-income producing investments. Take a look at Table 1 in this Tax Foundation publication. The average tax rate on the top 50% of earners is 13.06% but the rate on the top 1% – the Warren Buffets and Fred Smiths – is 11.81%. How is it that they keep their tax rate so low? They have the ability to shelter their income. President Obama’s increase on those making over $250K will devastate the pass-through businesses but will leave the 1%, the C-Corps, virtually untouched. President Obama is even advocating reducing tax rates for C-Corps.
    This whole debate in Washington DC is a head fake. Neither the Democrats nor the Republicans have any plan that will actually stop the economic decline and generate growth. Both sides are simply protecting their ability to steal from taxpayers. And the C-Corps are finding ways to destroy their competition through government intervention.
    Check out the testimonry of the S-Corp Association before congress here.

  25. Steven Kopits

    So, while you have me going on about schools, you can see the choice between public and private school in Princeton is not primarily one of money. It one of funding methodologies.
    If someone making $50k got a voucher, they could send their child to a private school, or a public school. They’d have the same choice as wealthy people. (And I could assure you the principals of the public schools would be out shaking the hands of arriving students every day.)
    And let’s do means testing. For me, that would be good. Remember, a lot of people in the public school system are by no means poor in Princeton. For example, we have acquintances where the wife is a dentist, the husband a computer science professor at the university. They probably make $350-400k per year. Their kids go to public school, even though they are Top 1%-ers.
    Now, I am paying for their kids to attend, because I am paying both taxes and tuition. It’s not that I am opposed to paying for public education, but for people making much more than I do? That’s a bit rich.
    If you means tested vouchers, these folks would get essentially nothing, and rightly so. Property taxes would be lower, or for those qualifying for support, the value of vouchers could be higher.
    Further, real estate taxes could be lower. This matters, because retirees can hardly afford to live in Princeton anymore. An average house has taxes of $15,000, as I have said before. That’s as much as social security for many people. Thus, older people on fixed incomes are literally forced out of the community. With lower taxes, lower income people could better afford to stay in their homes.

  26. The Rage

    Ricardo is living the dream.
    The truth is, a weakened state allows a market state to exert even more influence and lead toward the nation states dissolvement.
    Sounds like a plan some global owners of capital would love.

  27. Joseph

    Uh, Ricardo, you need to go back and read your own Table 1 that you cite. The average tax rate for all taxpayers is 11.81%. The rate for the top 1% is 23.39%. Your own data show that the top 1% pay a higher average tax rate than any other group. (Note that only includes income tax).
    Kind of shatters your argument when you can’t even read your own data. That isn’t to say that there are some individuals like Buffett that pay a lower rate, but the data are the exact opposite of your statement using your own table.

  28. jonathan

    I sometimes think the innumeracy of small business owners is faked for political purposes. If you don’t understand marginal revenue and cost, then you are lucky to make a profit. I’ve run into a few who didn’t get the idea of cost of sales versus pricing, notably an ice cream store owner who priced below cost until this was explained (but he was the proverbial exception that proves the rule).
    If you make $50k over whatever limit is imposed – say $300k instead of $50k – and you pay 3% more, that is $1500 in taxes. Any business which doesn’t take $48,500 more while paying $1500 doesn’t deserve to be in business.

  29. Rick Stryker

    I don’t think there is any inconsistency here. Many of us thought the stimulus would be ineffective for two reasons: 1) temporary tax cuts are saved rather than spent; and 2) the spending component of the stimulus wasn’t designed well, implying that government spending was not going to actually increase that much. The most shovel ready projects typically involve defense spending which they were not about to do.
    In contrast, the fiscal cliff involves changes in marginal tax rates and serious reductions in government spending, defense being one example. That will certainly damage the economy just as cutting marginal tax rates and moving forward defense expenditures in time would have helped it.
    Nonetheless, I still think the evidence for a multiplier greater than 1 is weak. The evidence you cite, CEA, Fed, IMF, etc. is tautological. They assume that multipliers are greater than 1 in their models and then conclude that the stimulus was effective on the basis of that assumption.

  30. Rick Stryker

    Princeton is a very expensive place and people who live there are not really living an upper middle class lifestyle (in terms of standard of living) unless they spend several million dollars on their house, something no one in the 250K category can do. The reason that Princeton is so expensive is that you are paying for three things: 1) access to the school system; 2) proximity to Princeton Junction train station; and 3) aesthetics of the town. People who come from other parts of the country are often quite surprised to see the quality of house they get for the money. The 300K house they lived in in Charlotte is $1 million dollars in Princeton and not as good. Houses that are in the price range you cite are often very run down and need significant work or have some other major problem. It doesn’t look that way from the ads–you have to go see them. 250K can go quite far in Kansas City or St. Louis, but not in the NY metro area and certainly not in the Princeton area. That’s been Steven’s point.
    If you want a better house but don’t want to sacrifice the school system you can move to West Windsor NJ, not far from Princeton which also has very good NYC train access. But once you got outside of the Princeton/West Windsor/Plainsboro area, the quality of the schools can degrade fast.
    Even though they are much better than the school systems of the surrounding areas, both Princeton and West Windsor school systems have real problems and most parents supplement the education a lot. The private schools such as Princeton Day School, Hun, Stuart Country Day, etc. are significantly better than the public schools but they are too expensive for most people, even for people who have incomes well over 250K.
    Each of these private schools has parents who are making huge financial sacrifices to send their children there. I think Steven Kopits is one such parent. He should be commended for caring that much about his children’s education. But instead you are saying he’s a rich guy with rich guy problems. He has his own idea about how he wants to spend the money that he has earned–on his children’s education. But you think what he wants to do is illegitimate. You know much better how that money ought to be spent–on your priorities. And since you believe your priorities supersede his, you are helpfully suggesting ways for him to cut his standard of living in case he wants to go on spending on his children–as long as you get your cut.
    I find that an amazingly arrogant point of view. I’m sure you believe a born-again Christian has no right to tell a women what she can do with her body. But you think you have the right to decide for someone else what is a luxury and what is a necessity and what he is allowed to do with the fruits of his labor.

  31. Steven Kopits

    Might we not invite Gary Gorton to expound a bit on the ideas in “Misunderstanding Financial Crises”? In particular, he suggests chartered institutions to deal with wholesale depositors. I think this is a rather interesting idea worth more extended discussion, including pros and cons his approach versus Dodd-Frank.
    [email protected]

  32. Menzie Chinn

    Rick Stryker: Really, you should read the documents you allege to understand. For instance, the CBO has tabulated on numerous occasions what fiscal provisions have multipliers less than one (e.g., tax cuts for income about $250K) or greater than one. Geez.

    Since you dislike multipliers (which typically in macroeconometric models are estimated, with the exception of some DSGE’s) I wonder what would be an alternative; maybe do a regression analysis, say a VAR, project out what would happen in the absence of intervention, and then compare against what actually happened. Oops, that’s what CEA did

    Well, I guess, for you faith determines what you believe, as you start with the null of no or little effect, and are actively avoiding reading evidence of an effect.

  33. Rodrigo

    @Rick Stryker
    “But instead you are saying he’s a rich guy with rich guy problems. He has his own idea about how he wants to spend the money that he has earned–on his children’s education.”
    I’m not, in any way, trying to tell Steven what to do with his money. Private schools can be great, and if that’s something someone wants to spend on then more power to them. This thread of conversation started with Steven arguing that 250K doesn’t go very far in Princeton, and me pointing out that it doesn’t go very far

  34. Rodrigo

    @Steven Kopits

    I don’t know where you’re drawing those numbers from, but I’m looking at the 2012-2013 budget for the district and they estimate their per-pupil costs at $18,111.


    Page 5.

    Lower than $22,500 average realized private school tuition – and can you explain what that figure is? Is that accounting for financial aid as well?

    I’m not where you’re going with the voucher idea. A public school isn’t literally spending (for instance) 18k to educate each student – that’s a division of all the district’s costs over the student body. Most of those costs do not go away when a student moves to another school, so allowing parents to take that chunk of money in the form of a voucher seems like it would have a catastrophic effect on public school funding. And there’s no guarantee that parents are going to be able to take their voucher and place their kids into private schools that are better than the public schools (because Princeton schools are very good). Exclusive private schools are exclusive – you’re not going to see many voucher cases there no matter what – and why defund a stable system that is working well to send kids to the mediocre private schools their vouchers are likely to give them access to?

  35. Steven Kopits

    The cost to educate a student in Princeton public school is $24,000 according the budget.
    Vouchers will create competition, both on the student and the school side. Yes, that’s the idea.
    Personally, I find it bizarre that you wouldn’t want people with lower incomes to have access to the best schools and that you would want people stuck in non-competitive institutions, when money is not the issue.
    If public schools are non-competitive, they deserve to be closed. But in truth, what will happen is that they buckle down and become customer-oriented.
    But this question was decided in the US some time ago. In essence, the halfway house of charter schools was chosen, which is a step up, to be sure. I just want to emphasize to you that it’s not a matter of money and that Top 1%-ers are free riders on a system where they are being subsidized by retirees and low income residents.

  36. Steven Kopits

    Rodrigo –
    2012 Average Assessed Value in Princeton:
    Borough $ 748,155.00
    Township $ 822,263.00

  37. Rick Stryker

    I thought the subtext of your comments to be that SK really can afford to pay for the administration’s tax increase once he realizes that his marginal spending is about illegitimate rich guy stuff that he doesn’t really need. I haven’t read the full thread so I apologize if I’ve misinterpreted your remarks.

  38. EC

    Unlike Rodrigo, I don’t care how much a house or school costs in Princeton, NJ. What I care about is that $250,000 is much, much higher than the median income, even in NJ, and I dare say even in wealthy Princeton. If our country, led by a bunch of quite rich men, has decided to spend vast amounts of money on this and that (I’d cut defense first), then when the time is right to raise revenues, I would like the revenues to come from those sectors of the population that have benefited enormously over the past 40 years, not from those making near the median income, a median income that has hardly budged over my entire lifetime. Going back to Kennedy-era tax rates would hardly be a tragedy, even for those of us making 250k and sending our kids to private school and having to live in a house with only three or four bedrooms in a fancy town like Princeton. Some people are strapped for money. You are not one of those people. If someone has to pay more, who should? Paying teachers less, or handing out vouchers, or whatever, is not going to solve the problem.

  39. Rick Stryker

    I think you have it backwards. SK’s taxes should be cut and yours should be raised.
    Not too many people realize that at the end of the Clinton administration federal spending as a percent of GDP was only a little over 18%, lower than the 20% historic average. Bush and the Republican congress started spending and raised that ratio back to its historic average at the end of Bush’s second term. Then the big recession hit and spending as a percent of GDP rocketed up to about 25%.
    The problem is that the Administration and the Democrats (not your nameless “rich men” but they are quite rich nonetheless) want spending to be maintained in the 23-24% range for the foreseeable future rather than drop back to historic averages. Because Democrats and Republicans could not agree on the level of spending and taxes going forward we have the fiscal cliff.
    To pay for this spending spree, the administration and the Congressional democrats have started a class war in which they have tried to convince people that the so-called rich have not paid their fair share and must pay more. This in spite of the fact that the small group of tax payers with AGI of 250K and higher already pays almost 50% of total federal taxes.
    This con tends to succeed I think precisely because the rich already pay so much. It’s easy to go along with the orgy of additional spending when you are only paying for a fraction of it right now. It’s even easier when these politicians are whispering to you that the income of this 250K group is somehow illegitimate or ill-gotten rather than the product of hard work and sacrifice. If you believe that, then you can morally justify taking even more from them. They don’t need their private schools and fancy houses. They only have that stuff because they’ve had a 30 year party thrown for them, not because they worked hard, got advanced degrees, took risks, and gave up time with their families, right?
    I’m not in favor of higher taxes for anyone but if taxes must be raised it would be better for yours to go up now and SK’s to be cut. If your taxes were to rise, it might focus your mind on the increases in spending coming because you’ll realize that you’ll be paying. In that case, you might be willing to listen to those who are proposing the sensible solution to all this: just create a glide path to gradually cut the increases in spending until we are back to the historical average of 20% of GDP in perhaps 8 years or so.
    If not, then I think your taxes are going up anyway. You refer to Kennedy level taxes but the fact is the wealthy did not pay them. As I mentioned, federal spending as a percent of GDP has tended to be about 20% of GDP historically. When taxes go up too high, the rich find ways around them. That’s what happened during the period of high taxes and that’s what will happen again. The administration and the Congressional Democrats want you to believe, and perhaps believe themselves, that you won’t be paying for all this. But experience says otherwise. You may think that high income earners will be stuck with the bill but you’ll be wrong. You’ll be paying.

  40. Anonymous

    cognitive dissonance in the conservative world
    If there is one thing made clear from the fiscal cliff hysteria it is that the conservative austerity policy has been a fraud from the beginning. The real agenda has been finding an excuse for dismantling the New Deal and cutting benefits.
    Today even Christine Lagarde of the IMF is begging the U.S. not to go over the cliff. Funny that she doesn’t look in her own backyard for a similar problem. Cognitive dissonance indeed.

  41. 2slugbaits

    Rick Stryker I think it’s time to call BS. Non-defense government consumption expenditures and investment as a percent of GDP have actually fallen the last couple of years. Most of the increase in government expenditures came from Bush’s defense budgets. There is simply no evidence for this supposed explosion in government spending outside of defense.
    Where you’re getting confused is when you add in the so called entitlement programs. Social Security as a percent of GDP has been pretty flat and CBO projects that it wil be flat for a long time. And Social Security doesn’t contribute to the on-budget deficit…in fact, in general Social Security runs a surplus that offsets much of the on-budget deficit. If you want to understand the growth in future federal spending, then it’s all about healthcare costs. That means Medicare and Medicaid. Do the Republicans have a constructive proposal for controlling healthcare costs?…and by constructive I mean one that does not rely on a magic asterisk. In fact, the GOP has opposed any plan that would cut the incomes of healthcare providers. The kind of “reform” that the GOP is pushing typically involves greater reliance on “cadillac” healthcare plans that are pretty much exclusive to the top income earners. And to make matters worse the GOP insists that those “cadillac” employer-based healthcare plans have to be deductible for the employer.
    The old 20% historical average is irrelevant because it ignores demographic realities, which you seem unable to come to grips with. The ~23% of GDP that’s coming is a fact of life. Deal with it.
    When taxes go up too high, the rich find ways around them.
    That’s true. But we can actually measure the extent to which that will happen. And current tax rates are nowhere near high enough for that to be a significant factor. This isn’t 1979.
    You may think that high income earners will be stuck with the bill but you’ll be wrong. You’ll be paying.
    You’re the one who doesn’t understand what the GOP/Romney plan would have done. The very, very, very rich would have gotten off quite lightly. Those who would have been stuck paying the most taxes under the GOP/Romney plan are those in the top 2% but not in the very, very top 0.1%. The super rich do just fine under the GOP plan; the merely comfortably rich get socked. Under Obama’s plan it’s the top 0.1% that get socked and the merely comfortably rich pay about the same as now or perhaps slightly more.

  42. Steven Kopits

    EC –
    I believe I have stated before that I think we should take the fiscal cliff and that my taxes would rise by $14,000. This would not happen to me under the Obama plan. But I personally cannot see closing the deficit with the $40-80 bn increased taxes to be paid by the Top 4%–especially given that Obama has reintroduced his budget with a structural 22.5% of GDP spending level. Obama’s tax increase is not a plan, it’s not governance. It is, at best, class warfare and endless politicking. But it’s not a solution, and it’s not good for the country. The Taiwanese now claim to have a PPP per capita higher than Germany. By the end of the decade, Singapore’s GDP per capita looks to be twice that of Germany. To me, these developments are alarming, and suggest we are focusing too little on growth and accountability, and spending too much consumption and allowing too many to take a free ride. Rodrigo doesn’t want public schools to be held accountable; I have yet to read a left-leaning commenter call to allow the economy to adjust and express a willingness to personally assume higher taxes to do so. No one on the left seems even perturbed that so most children in the lower income strata are born out of wedlock, the single strongest correlator to poverty. Is it a surprise that the western world is quietly slipping into irrelevance?
    The lapsing of Bush cuts would result in my pulling of my daughter–who is top of her class, class president, and whose 7th grade SAT scores would have gotten her into Bucknell, thank you–into the public high school. For me, this is a personal failure, but I want to live in an America with a future. I was born in Argentina, and lived in Hungary for many years–I understand what it means to live in a country without a future, and that’s where this country is headed. When people believe that everything is someone else’s responsibility, that there is no us, then we are adopting the mentality of Latin America, where every house is surrounded by a high wall. That’s the standard of governance we are adopting.
    My vision of the US is not that it is someone else’s country, that everyone else pays and I reap the benefit, but rather that I am as responsible for it as anyone else, and I will shoulder my share of the burden. I have offered to do so, at great personal cost to my family when I could have easily externalized this problem to some group of people with more money than me.
    As someone who believes in economics, my vision of the world is where we make the best of our resources. In most cases, people making their own decisions, and benefits aligned with those incurring the costs results in the best for society. That someone would pull their children from public schools–which my children attended collectively for nine years–and pay that tuition again is damning indictment of the quality of public education, even in a place with as good public schools as Princeton.
    In Princeton, as house values tell us, the average, the average household income is in the $200-250k range. Perhaps half the people with children in public school have incomes in the range. They are being subsidized by the 97 year old widow one house down from me, and the Hunter College math professor across the street. Indeed, if I put my children into public school, lower income people would be subsidizing me. Why? Rodrigo seems to think this is social justice. I don’t get it.
    EC and Rodrigo, I get the sense that you feel someone owes you, that you are entitled to the fruits of others’ efforts. I have no such feeling. It is my responsibility to try to make the best of my own talents, to care for my family, and to support my community.
    What do you contribute?

  43. Rodrigo

    @Steven Kopits
    The document you linked to discusses the budget and provides the size of the budget (75.6 million) but does not mention the number of students in the district. As far as I could tell you cannot get to $24,000 per head from the information in that document because there are no enrollment figures present.

    I linked you to the actual budget document, which does have all of that information and in which they derive a cost-per-head calculation of $18,111.

    By restating the $24,000 figure, do you mean to say the actual budget document is inaccurate? Why should we accept your figure over what the district itself reported?

    On the housing figures, I take your point that Princeton is an expensive place and that 250K doesn’t put one at the top of the purchasing power pecking order. Just browsing listings I came across many homes worth a lot more than 900K. My point is that you don’t HAVE to spend 900K on a home, even in Princeton, and even though it will be a nice home, if that’s going to strain the family budget. That’s a choice and I wouldn’t criticize our hypothetical people for making it – just for complaining about what they can’t afford because they stretched to buy their home.

    “Personally, I find it bizarre that you wouldn’t want people with lower incomes to have access to the best schools and that you would want people stuck in non-competitive institutions, when money is not the issue.”

    I think you’re making a number of assumptions about this arrangement that do not seem obviously true. Why would you think vouchers would give people with lower incomes access to the best schools? The Hun school and other exclusive private schools are not going to start taking more scholarship cases (for unremarkable students), nor is the value of the voucher going to cover tuition at those institutions in any case. Vouchers will let more students go to mid-level private schools but why would those necessarily be any better than public schools? Because something-something competition?

    Maybe because private schools can practice selective enrollment while public schools have to take everyone? That seems a lot more plausible to me, but then you’re talking about creating a dynamic that keeps the worst students in public schools with less money to educate them and even more unstable annual budgets. Unless mandatory enrollment should also be extended to private schools?

  44. Liberal

    Wow, Rick Stryker and Steven Kopits:
    I had no idea it was so hard to be rich. My father, who sent two sons to private universities on his lawyer salary, managed to do so without complaining about his taxes. And the shocker: both of his sons went to public (disgusting poor social justice world!) high schools. Yes, the kind with minorities.

  45. Liberal

    And to be clear, this moocher filled public high school was in close suburb to a medium sized dying city in Pennsylvania.
    Kopits, as a recent college graduate (gainfully employed in the field of progressive economics), I really hope you burst your daughter’s insular 1%er bubble before you send her to college. Where my brother and I came from, the kids wore clothes from Old Navy and were lucky if they got grandma’s Buick to drive to high school. At the colleges we went to, the kids from North Jersey drove Audis they got for their 16th birthdays. The girls drowned in fashion and alcohol while the boys exhibited a weird tribal tendency toward dressing like idiots and joining fraternities.
    “When people believe that everything is someone else’s responsibility, that there is no us, then we are adopting the mentality of Latin America, where every house is surrounded by a high wall. That’s the standard of governance we are adopting.”
    I believe you’ve got it exactly backwards. The mentality of latin america is extreme inequality, where only the rich have houses surrounded by high walls. Leave Princeton and see how the rest of America lives.

  46. Steven Kopits

    You folks sure are interested in Princeton regional schools:
    2012 Students: 3404
    2012 Total Spend: $82,387,000
    Spend per student: $24,200
    But so what, Rodrigo? Why is it so critical to you that public school spending be lower? Is it pure disbelief that what you thought was low-end education actually turns out to be the high cost solution?
    The government is invariably less efficient in the provision of services. Is that a surprise? It’s the same story for charter schools.

  47. AWH

    these guys live in a fantasy world. and this relates to the multiplier debate. where these guys think it can be less than one. even approaching zero.. on Zero evidence. basically they make stuff up.

  48. Rich Berger

    Your responses have been temperate, thoughtful and responsive to the “arguments” others have thrown at you. In return you get resentment, envy and bitterness. Is this really a useful exchange?

  49. Anonymous

    SK – I feel bad for your daughter, but probably not for reasons you are hoping!
    Anyway…according to the rough calculations on the Fiscal Cliff calculator at Creditcards.com, the only way I can get you to a $14,000 tax increase is if your income is $400,000 married with three exemptions standard deductions. (So with a half-million dollar Princeton mortgage your gross income may even be greater than $400K!)
    If I had a 3.5% hit to my gross income I would have to save or spend less too. But there are a lot of choices when you have that kind of means.

  50. Rodrigo

    @Steven Kopits

    I keep pushing the point because you’re being fuzzy with numbers and that makes it impossible to have this discussion without forcing you to be explicit about how you arrive at your figures.

    For example, your latest response cherry picks numbers from the budget. Why not use the total number of pupils on the roll instead of only the regular full time students? Or why not all the students the district is responsible for? The difference amounts to over 800 students, which is material to the calculation. Why switch to total spend from total operating budget (which matches revenues requested – that’s as close a comparison as you’re going to get to private school tuition)? But overall, instead of trying to massage the budget figures to make a point, why not accept the district’s own calculation? Did they do it wrong? Do they not know how to calculate per-student costs? Are they conspiring to make it harder for you to argue on the internet? What?

    It seems to me like you’re doing what you accuse me of doing – refusing to accept the facts because you have an ideological commitment.


    “The government is invariably less efficient in the provision of services. Is that a surprise? It’s the same story for charter schools.”

    That is a firm ideological position – one I’ve seen you express in a lot of contexts – and it doesn’t appear to be true in this case. The numbers don’t work unless you assume the district is wrong about the size of its budget, how many children it serves, or how to calculate per-pupil costs. Even if we do our own calculations, the only way to get above the 22.5k average realized tuition figure is to lop off a chunk of the student body. Why so resistant to the idea that at the very least it’s not obvious that private schooling is cheaper?

  51. Rodrigo

    To be clear…

    I’m a lot less interested in trivia about the Princeton school system than I am in people being honest with numbers. If we’re going to do anything more productive than shout at each other we need to be able sort out the facts of a matter when those facts are in dispute. That isn’t possible unless we agree that we can’t simply pick the facts that suit us.

  52. Rick Stryker

    You want to start with the premise that demographics imply that spending 23% of GDP is some kind of law of nature. That way you can focus the debate on how to raise taxes. But people do not have much incentive to make the system more efficient if they think they can solve these problems with tax increases.
    Instead, we should set a spending budget along the lines that I suggested, with spending gradually returning to 20% of GDP. Once we do that, the debate will be about how to wring out the efficiencies necessary in the medical system given the budget. Given how overregulated the US medical system is, we can easily live within this budget and provide better care despite the demographic changes, once we introduce markets and competition into the system.
    One of the best articles that details the insane incentives, inefficiencies, and outrageous costs built into the US medical system is: “How American Health Care Killed My Father”
    It’s irresponsible and unjust to ask a group that is already paying almost half the tax burden to pay even more without seriously looking at the free market reform alternatives. A very good start would be to scuttle Obamacare.

  53. Rodrigo

    “As someone who believes in economics”

    Now if only you believed in MATH…

    “What do you contribute?”

    I run a small business that imports medical items to supply Chilean hospitals. In some small way, because of my work, some number of people who wouldn’t have gotten medical care are able to do so, and a larger number of people have to pay a little less than they otherwise would have.

    Your move, Mr. Oil Analyst.

  54. Rick Stryker

    You asked why not accept the district’s own calculations? Steven’s back of the envelope is much closer to the truth than the district numbers you are citing.
    Districts in NJ are required to publish the “User Friendly Budget” that includes a per pupil expenditure. However, the problem with this number is that it only includes costs that are common across districts to educate the average student.
    Governor Christie and the NJ Dept of Education have addressed this problem by putting out the “Tax Payers Guide to Education Spending,” a tool that includes all costs. In general, the budget numbers from the NJ school districts are underestimated by at least $3000 per student.
    You can visit the tool online at
    and if you check Princeton you’ll see that the cost per pupil in 2010-2011 was $22,570, not far from Steven’s estimate.
    Now, if you compare the local private schools to the Princeton public schools in terms of class size, extracurriculars, college placement services, etc. the private schools really blow the public school away. But that’s not even the comparison we should be doing. Princeton public schools are top in the state (along with WWP and Short Hills). Instead, use the calculator to look at some of the other districts to see how much they are spending per student and then think about the performance of the schools for dollars spent.
    For example, I know someone who is a math substitute teacher who says that if you go to the Princeton public school to teach the calculus class you do integrals. But if you go just a few miles north to South Brunswick, you first have to teach the calculus class how to add fractions. Admittedly, the calculator shows that expenditure per student in South Brunswick is about 15K per student but that level of achievement per dollar spent is scandalous. I don’t think it’s about the money necessarily anyway. Asbury Park spends 29K per student and I’ve heard similar horror stories.
    SK is right. The private schools are much much more efficient.

  55. 2slugbaits

    Rick Stryker More fact-free “analysis.”
    It’s irresponsible and unjust to ask a group that is already paying almost half the tax burden to pay even more without seriously looking at the free market reform alternatives.
    Where do you get this stuff? It’s true that only half the people pay federal income taxes, but that is by no means anything like “half the tax burden.” Every hear of payroll taxes? Ever hear of state income taxes? Ever hear of sales taxes? Ever hear of property taxes? Ever hear of import and excise fees? And all of labor pays about 20% of the total tax burden on capital. And a lot of those who don’t pay federal income taxes are retired, institutionalized, or involuntarily unemployed. The federal income tax is only a fraction of the total tax burden.
    The Atlantic Monthly article is singularly uninformative. But what would you expect from somebody who is a media and technology executive and who admits having no expertise in medicine or health economics. Did you catch all of the contradictions in his article? Probably not. He blames his father’s death on a lack of regulations to mandate handwashing, and then a few paragraphs later whines about how regulations are causing hospitals to behave inefficiently. It’s just horrible. If you want to actually read serious stuff on heath economics, you might want to try reading some of the academic papers by Uwe Reinhardt or Amy Finkelstein. And economists have known for 50 years (Kenneth Arrow) that market forces do not work well in healthcare. Even the labor markets in healthcare are characterized by monopsony.
    As to Obamacare, the CBO has crunched the numbers and Obamacare reduces healthcare costs. So if you want to abolish Obamacare, then you better be prepared to pay higher taxes.

  56. Steven Kopits

    Thanks, Rick, for the Princeton numbers. I think it’s pretty tricky to get the apples-to-apples comparison right. I don’t know, for example, whether the school budget includes teacher pensions or whether there are other off balance sheet items. And there are lots of students in different categories. So Rodrigo’s math may be better than mine, but I suspect the Governor’s numbers are reasonably close.
    And yes, Rich, I believe this horse is largely beaten to death. But I have no problem with people expressing their views. Teach and learn, teach and learn. That’s why I comment on Econbrowser.

  57. Rick Stryker

    No problem Steven.
    The nice thing about the taxpayers guide is that it includes all costs (other than payments to charter schools) and so facilitates the apple to apple. So, for example pensions and benefits costs are not included in the Budgetary Per Pupil costs in the User Friendly Budgets but are included in the tax payer calculation. Similarly, tuition and costs associated with students sent out of district are included in the taxpayer calculation and those students are also included in the denominator as well. But these costs and students are not included in Budgetary Per Pupil costs.
    I agree with you that vouchers would be an important improvement. One big problem with the public school system is that the school administration has little incentive to care about our satisfaction since they get our tuition money whether we like it or not.

  58. Rick Stryker

    You misinterpreted the point I was making. I wasn’t talking about the half of people who pay taxes. Instead, I was referring to the proposal to pay for the permanently higher federal spending by raising federal income taxes on those with AGI of 250K and above. That group already pays almost half of federal income taxes and shouldn’t have to pay any more in federal taxes. I’m painfully aware that other taxes exist besides federal.
    I mentioned the Atlantic article because it makes some good simple points for the general reader about the causes of the costs and inefficiencies of the health care system. The message of the article is that since the tax system encourages routine health costs to be covered by insurance and also divorces the payment for services from those receiving the services, there is little incentive for consumers to use health care economically and little incentive for health care providers to supply good service. Top down government cost controls and best practice advisories will not replace cost controls inherent in consumers spending their own money nor make the system more responsive to consumer needs. Only competition can do that.
    Reinhardt never met a socialized medical system he didn’t like and has spent his career trying to socialize US medicine. I don’t take him seriously. Finkelstein is much more objective and worth reading I think.
    As long as Obamacare promises to cut medicare costs, the CBO will dutifully score it as cost cutting. But promising and doing are two different things. When it’s all said and down, Obamacare will dramatically raise costs, damage the health care economy even more, and cause further tax increases. Thankfully many states are not setting up exchanges.

  59. Anonymous

    Rick Stryker: “That group already pays almost half of federal income taxes and shouldn’t have to pay any more in federal taxes.”

  60. Menzie Chinn

    s2c: Thanks – my students brought this to my attention this morning. I laughed and laughed and laughed. I never knew that microfoundations were inconsistent with New Keynesian models. I’ll have to tell John Taylor that. That the Heritage Center for Data Analysis economist wrote the post is just “icing on the cake”.

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