The recent surge in interest in Nominal GDP Targeting, as an alternative to money targeting or inflation targeting if the central bank is to commit to a nominal target of some sort, has prompted some pushback.   This is not surprising.  But one of the responses is most peculiar.  This is the allegation (1) that the surge comes from liberals opportunistically adopting an idea that was originally proposed by conservatives, and (2) that they will not stick with this “fad” in the longer run because it is only designed to fit current circumstances of high unemployment and low output.   Remarkably, every component of this argument is wrong.

 I have in mind, especially, the views of Benn Steil and Dinah Walker of the Council on Foreign Relations, as expressed in “Why  Nominal GDP Targeting is a Fad“:  
 ”NGDP targeting having once been the intellectual stomping ground of economists on the right (notably Scott Sumner), its newest supporters come overwhelmingly from the left (such as Christy Romer)…. We think the rage will be short-lived. The reason is that NGDP targeting’s newest supporters are bad-weather fans. That is, they like it now, when NGDP is well below its 2007 “trend” line, meaning that the policy implies extended and more aggressive monetary loosening. But what happens when NGDP goes above its target, as it eventually will? NGDP targeting then requires tightening….”

Let’s consider the analytics first, and hold off awhile on the less edifying political labels.   The nominal GDP proposal was originally studied and supported by many prominent economists in the 1980s.  The problem at the time was a need for monetary discipline, anchoring expectations, and reducing inflation.   Nominal income targeting was not designed as a way of getting easier monetary policy, but rather the opposite.   It is equally good for either purpose:  the target can be set high or low, depending on the times.

Originally, the leading competitor for the role of monetary anchor was money supply targeting (monetarism).  This was the regime that was adopted in the early 1980s by the central banks of the largest economies. But they were forced to abandon it subsequently.  Later on, the leading competitor became Inflation Targeting;  but it too ran into difficulties in the 2000s.   The general argument for nominal GDP throughout has been that it is robust to a variety of shocks, positive and negative.   It dominates money targeting in that it is robust with respect to velocity shocks.  It dominates inflation targeting in that it is robust to supply shocks. 

In other words, Nominal GDP Targeting is not a short-term expedient but is fit precisely for the long run.

It is true that a major reason why the nominal GDP proposal has been revived over the last two years is that it could help deliver easy monetary policy in the short run, which is what the economy has needed recently.  Some supporters may indeed view it as a short-term expedient, to be jettisoned when the economic recovery has become better established.   And I can see the attraction of the proposal that the Economist magazine has made for the UK: that the Bank of England commit to keeping interest rates low until nominal GDP has re-attained a level 10% higher than today’s level.  But I personally favor keeping it as the framework in the longer term, with loose nominal GDP targets set annually at a horizon of two years.  The width of the bands and the degree of commitment could be similar to whatever it would be under the alternative of inflation targeting.

The targeted nominal GDP growth rate would not be the same every year, let alone every decade.    If the US were to adopt the framework now, 4 ½ % would not be a bad number for the center of the target range.  (A lower number would be appropriate for some, like Japan, and a higher number for others, especially emerging market countries.)

Steil and Walker support their argument that the proposal is not fit for the long run with an attractive graph.  It shows that in many of the years since 1981 when the rate of growth of nominal GDP was above 4 ½ %, which they claim would imply monetary tightening under the proposed regime, unemployment was above 5 ½ %, prompting the Fed to loosen (wisely, in the authors’ view, if I understand them right).

The problem with this argument is that of those eight years when the Fed is shown loosening  in response to unemployment above 5 ½ % (by my count), seven of the years came during the first part of the sample: 1983, 1985, 1986, 1987, 1990, 1992, 1993.   (The only year from the more recent half of the sample is 2003.)  Why is this a problem for the argument?  In the 1980s and even the 1990s, it seems to me that nobody would have set a target so aggressive as to require monetary tightening when nominal GDP reached 4 ½ %.   Back then we were coming down from high levels of inertial inflation and this process was understood to be gradual.   Furthermore, the rate of growth of potential output was higher than today as well.   Thus the numbers chosen for the nominal GDP target would have been higher than today.  They would not have forced the Fed to tighten when unemployment was 7%.

Now to the political labels.  Recall that Steil-Walker claim that the nominal GDP proposal was originally put out by economists on the right and has recently been adopted opportunistically by economists on the left as a short-term fad.   But the originator of the nominal GDP proposal in the UK was Sir James Meade (1978, 1982), who (it turns out) was an “interventionist” and member of the Social Democratic Party.  The earliest proponent in the US was James Tobin (1980, 1983), also a Nobel Prize winner and also on the left.   (I am trying to avoid the confusing word “liberal” which in the US usually means on the left but in the UK continues usually to mean pro-free-market.) 

The recent revival of Nominal GDP Targeting came from a group of bloggers who describe themselves as conservatives (Scott Sumner, Lars Christensen and David Beckworth,)   Even those now proposing a one-time threshold for the level of nominal GDP are not noticeably  clustered on the left of the political spectrum.  The current British chancellor is, of course, a Conservative.   Perhaps what is confusing some observers is the reflexive, but wrong, assumption that Labor/Democrats always favor more expansionary policy than Conservatives/Republicans.

In other words, it would be more correct to say that the idea was a proposal of the left picked up by the right than the other way around, as Steil and Walker claim.   But there are plenty of nominal GDP proponents from each side of the political spectrum, currently as in there were in the 1980s, as well as many whose political views are not immediately apparent.  That is all to the good.   This proposal is neither liberal nor conservative.  Nor is it one that I, personally, will be abandoning as soon as the economy returns to full employment.   With money targeting and inflation targeting discredited, Nominal GDP Targeting is left.  Right?

[Notice to readers:  Starting today, my blogposts will also appear at On Deck, the blog space of Project Syndicate.   Some are elaborated versions of Project Syndicate op-eds.  Others, like this one, stand alone.]

          Needless to say, the US has a long-term debt problem.  The problem is long-term both in the sense that it pertains to the next several decades rather than to this year.  (Indeed, the deficit/GDP ratio has been falling since 2009, despite the weakness of the economy.)   The problem is also long-term in the sense that we have known about it for a long time; it was clear in 1991 and should still have been clear in 2001.
     It should be almost as needless-to-say that the approaching debt ceiling bomb is not helpful in solving our fiscal situation, any more so than were previous standoffs:  the January 1, 2013, fiscal cliff; before that, the August 2011 debt ceiling standoff, which led Standard and Poor’s to downgrade the credit rating of US debt for the first time in history; and before that, the 1995 shutdown of the government, which largely discredited Republican House Speaker Newt Gingrich.  
     The current debt ceiling bomb is, of course, another attempt to hold the country hostage under threat of blowing us all up.  The conflict is usually phrased as a question of ideological polarization, a battle between fiscal conservatives and their opponents.  This familiar frame does not seem right to me.  There is in fact no correlation or consistency between the practice of federal fiscal discipline and the political rhetoric, either across states or across time.

          What are the demands of the hostage-takers?   Even if there existed an explicit ransom letter detailing specific severe spending cuts, in exchange for which it credibly offered to raise the debt ceiling, President Obama’s refusal to negotiate under such conditions would be fully justified.  But the situation is worse than that.  There is no specific set of demands, and never has been.  I truly believe there does not exist any set of spending cuts that the blackmailers would accept if they came from Obama. 
     Remember the occasions in the past when he has announced that he will accept the Republican position on some issue, only to have his opponents switch places, saying “if you are in favor of it, we are against it”?    One example was the idea of Obamacare itself, which originally came from conservative think tanks and Mitt Romney.   Another example was the proposal for an automatic version of what in February 2010 became the Simpson-Bowles Commission.
     There are only so many dollars that can be cut out of PBS and foreign aid.   If, hypothetically, Obama were to come out in support of severe cuts in agricultural supports, oil and gas subsidies, Medicare benefits and other programs, Republicans would attack him for proposing hurtful cuts. (Remember attacks on Obama’s health plan for non-existent “death panels” and fictional cuts to Medicare benefits?)  Simultaneously, Republicans would say that the cuts were not big enough. 
     What would be enough?   Some debt crazies have said they think it would be fine if we failed to raise the debt ceiling.  Some are crazy enough to think it is not a problem if the US government were to default on its legal obligations.  (They may not realize that defaulting on the bill for office supplies that you ordered from Staples is as bad as  missing interest payments on your debt.)  But some want to enforce a balanced budget immediately:  the refusal to allow the government to borrow any more is not just a negotiating tactic, but is the outcome they want.  This is crazy in light of the adverse economic and financial impact (which would be much worse than that of the fiscal cliff that we just dodged two weeks ago).    
     But the prize for ultimate insanity must go to those who want to eliminate the budget deficit rapidly and insist on doing it without raising taxes, cutting defense, or cutting programs for seniors.  These people deserve the label “deranged” because what they are demanding is for a literally false proposition to be true.  It is arithmetically impossible to eliminate the budget deficit if the cuts are to come primarily in non-defense discretionary spending.  
     To be very clear, I don’t think most Republicans believe all of this.  Certainly my many economist friends who are Republicans do not.  The truly “deranged” people are just a subset of the “crazy” people, who are in turn a subset of those who are unwise enough to favor the debt ceiling threat as a tactic, who are in turn a subset of the Republican Party.   The problem is that it is this minority of a minority that is holding the whole country hostage.  The size of the minority evidently shrunk after the August 2011 debt ceiling debacle, after the November 2012 election, and after the January 1 cliff.   But it still has its finger on the grenade pin.

          So that leads us to the question of tactics.  A variety of stratagems have been proposed for the White House to use to defuse the bomb, if it comes to that.  These are all designed as ways that the federal government can continue to meet its legal obligations beyond March, even if the Congress doesn’t raise the debt ceiling.   While these unconventional proposals are beyond anything that would have been contemplated under normal conditions, they must be considered, in light of the correspondingly absurd situation in which the country would find itself.  If the Congress refuses to act, the White House would have to choose between two contradictory laws: the one that Congress passed to authorize spending and taxes versus the debt ceiling law that apparently prohibits the government from borrowing to make up the difference between spending and taxes.  Following the implication of the latter law would have disastrous impacts on the country and the world if obeyed.

• Given the contradiction between the two laws, President Obama could just ignore the debt ceiling and follow the direct implications of the spending and taxation laws. I am not qualified to judge the legality of this course of action. The courts would eventually have to sort it out. The hope is that by then the Congress would have come to its senses and raised the debt limit.
• In the meantime, the White House might try invoking the 14^th Amendment, as Bill Clinton suggested at the time of the last debt ceiling standoff, in 2011.  The Amendment includes the passage “The validity of the public debt of the United States…shall not be questioned.” Again the Supreme Court would eventually have to decide the issue.
• The Treasury could issue “IOUs” to the office supply stores, soldiers, Social Security recipients, etc. The IOUs would just be written acknowledgements of a legal fact: that the government owes these people money. Maybe the Federal Reserve could let it be known that it will honor these IOUs. (There must be something wrong with this, or somebody besides me would have proposed it already.)
• The government writes an option to buy all its property and buildings for $1, and then sells that very valuable option to the Federal Reserve for something like its true value. This proposal has been made by the Yale constitutional expert Jack Balkin last time around, from which I infer that it is not obviously contrary to the law.
• And finally, the most colorful of the proposals: the trillion dollar coin. The Treasury would exercise its legal authority to mint a commemorative coin made out of platinum, with a face value of $1 trillion. The Federal Reserve would then buy the coin for $ 1 trillion, allowing the Treasury to pay its obligations by drawing down its checking account at the Fed up to that amount. This proposal originated in the blogosphere and was one of those anointed by Balkin in July 2011. Paul Krugman greatly elevated its prominence by declaring his support earlier this month.

     Contrary to some fears, none of these proposals need result in the money supply being any larger than it would otherwise be.  The Federal Reserve determines the money supply.  If it creates a new component of money by buying a platinum coin, a property option or IOUs, it can offset it by shrinking other components of the money supply by the same amount, leaving the total unchanged.
     The Obama Administration so far is eschewing gimmicks, and is calling on the Congress to do its job in a responsible manner.  This is the right approach.  
     But in the event that the minority does succeed in blocking a debt increase, it may be worth turning to some legal gimmick to avert the financial and economic catastrophe.   Of the five proposals bulleted above, the platinum coin is the one that seems to have the most experts currently expressing belief in its legality.  It is certainly clever.  Unfortunately, it would probably be the worst from a political standpoint.  The reason is - I am guessing here - there is a fairly high overlap between the debt crazies (defined above) and people who have paranoid conspiracy theories that relate to the Fed, money and precious metals (especially gold, but platinum is too close for comfort). For all I know, some of these people are the same who believe that Obama was born outside the U.S.  (That would fall into the category of deranged propositions, also defined above; but there is no need for us to go there.)  When you are dealing with a crazy person, it is best to avoid anything that would pour gasoline on the flames of his paranoia.  We actually want to win back some of those people who are merely misguided but not really insane.  After all, just getting past the current debt cliff wouldn’t solve the problem, with sequester and shutdown deadlines also looming.   So I’d go for some other legal gimmick, one that would be less likely to feed the paranoia and more likely to continuing chipping away at popular support for the extremists.

[I was interviewed this week on the trillion dollar coin by Boston magazine and radio station WGBH.] 

This blogpost also appeared on Econbrowser, Jan. 17, courtesy of Menzie Chinn.  Comments may be posted there.

Politicians who advertise themselves as “fiscal conservatives” sometimes campaign on crowd-pleasing pledges to cut taxes and simultaneously reduce budget deficits.  These are difficult promises to deliver on in practice, since the budget deficit equals government spending minus tax revenue.

Aspiring fiscal conservatives may be interested in learning four innovative tricks that are commonly used by American politicians who like to promise what seems impossible.   Each of these feats has been perfected over three decades or more.  Indeed they first acquired their colorful names in the early years of the Ronald Reagan presidency:

1. The “Magic Asterisk”
2. “Rosy Scenario”
3. The Laffer hypothesis
4. The “Starve the Beast” hypothesis.

As shop-worn as these four conjuring tricks are, voters and journalists continue to fall for them. Thus they remain useful equipment in the repertoire of the fiscal conservative.

The first term was coined by Reagan’s Budget Director, David Stockman.  Originally it was an act of desperation, because the numbers in the 1981 budget plan didn’t add up.  “We invented the ‘magic asterisk’:  If we couldn’t find the savings in time - and we couldn’t-we would issue an IOU. We would call it ‘Future savings to be identified.’” [p.124]   Since that time the Magic Asterisk has become a familiar device in the American policy arena.   Recent examples include the recommendation of the Simpson-Bowles commission to cut real spending growth by precise amounts, without saying where.   US Presidential candidate Mitt Romney has done the same in his spending plan.    Another current application of the Magic Asterisk is Romney’s plan to eliminate enough tax expenditures to make up the revenue lost by cutting marginal tax rates by 20% (which is $5 trillion in revenue), while steadfastly refusing to say what tax expenditures he would eliminate.

As Election Day nears, the pressure on a candidate to get more specific grows.  The conjurer is thus forced to go to Trick Two:  since he can’t find enough tax loopholes to eliminate, he must claim that what he meant by closing the revenue gap was that stronger economic growth will bring in the added revenue.   The most popular magician’s assistant of all time makes her encore on the stage.  Murray Weidenbaum, Reagan’s first Council of Economic Advisers Chairman, deserves the credit for originally dreaming up Ms. Rosy Scenario, “perhaps my most lasting legacy” [p.57].  The Reagan Administration in its early years forecast 5% income growth (twice the long-run average), in order to imply in its projections a boost to revenues big enough to make up for its many tax cut measures [p.93-97].   Since then candidates of every party have made use of Rosy’s talents.

Indeed official growth forecasts are systematically overly optimistic in almost all of a sample of 33 countries, contributing to overly optimistic budget forecasts.   European governments are particularly biased.

In the Republican primaries last year, candidate Tim Pawlenty assumed a 5 per cent growth rate to make his own plan work.   He was all but laughed out of the race.  Mitt Romney probably can’t get away with this sleight-of-hand either.   The press asks, “Why should we believe that the growth rate will magically accelerate just because you become president?   Where will this GDP come from?   It sounds like pulling a rabbit out of a hat.”  Right on cue, it is time for Trick 3.

Trick 3 is the famous Laffer Hypothesis.   This is the proposition, identified with “supply side economics,” that reductions in tax rates are like magic beans:  they stimulate economic growth a lot — so much so that total tax revenue (the tax rate times income) goes up rather than down.   One might think that the Romney campaign would never resurrect such a hoary and discredited trick.  After all, two of his main economic advisers, Glenn Hubbard and Greg Mankiw, both have textbooks in which they say that the Laffer Hypothesis is incorrect as a description of US tax rates.  Mankiw’s book, in its first edition, even called its proponents “charlatans.”  But the historical record is that each Republican presidential candidate since Reagan has had good economic advisers who disavow the Laffer Hypothesis.  Yet time and again the president (or candidate), and his vice president (or running mate) and his political aides read from a script that relies on the Laffer logic (Appendix I). They are the ones who make the policy if the candidate wins, not the academic economist.   George W. Bush had these same two top economic advisers in his first term, Hubbard and Mankiw, when he cut taxes and transmogrified a record surplus into a record deficit.

Trick 4, “Starve the Beast,” typically comes later, if and when the president is elected, has enacted his tax cuts, and discovers that smoke and mirrors don’t work against hard fiscal reality. He can’t find enough spending to cut (Magic Asterisk has disappeared up the conjurer’s sleeve); the acceleration in GDP is nowhere to be seen (Rosy Scenario has vanished in thin air); and tax revenues have not grown (no rabbit in the Laffer hat).   The audience is now told that losing tax revenue and widening the budget deficit was the plan all along.  The performer explains that the deficit is all the fault of Congress for not cutting spending and that the only way to tame the beast is raise the budget deficit because “Congress can’t spend money it doesn’t have.”  This trick never works either, of course.  Congress can in fact spend money it doesn’t have, especially if the “conservative” president has been quietly sending it budgets every year that call for that.   “Starve the Beast” as a budget strategy, like the other three, dates back to the first Reagan Administration. (Bartlett, 2007, p.6-7.)

By the time the crowd realizes it has been had, the confidence man has pulled off the greatest trick of all:  yet another audience who came to see the deficit shrunk instead leaves the theater with the deficit bigger than when it came in.

References
Bruce Bartlett, 2007, “‘Starve the Beast’ Origins and Development of a Budgetary Metaphor,”The Independent Review, XII, 1, summer, 5-26.
Jeffrey Frankel, 2008, “Snake-Oil Tax Cuts,” Economic Policy Institute, Briefing Paper 221, September.
–2011, “Over-optimism in Forecasts by Official Budget Agencies and Its Implications,” Oxford Review of Economic Policy vol.27, no. 4, 536-562. NBER WP 17239; Summary in NBER Digest.
David Stockman, 1986, The Triumph of Politics: Why the Reagan Revolution Failed (Harper & Row).
Murray Weidenbaum, 2005, Advising Reagan: Making Economic Policy, 1981-82 (Washington Univ., St.Louis).

[A version of this column appeared earlier at Project Syndicate, which has the copyright.  Comments can be posted there.]

        Mitt Romney, presidential candidate, said in now-infamous comments that 47% of the American electorate is dependent on the federal government, that he will never be able to teach them to take personal responsibility for their lives, and that they are certain to vote for Barack Obama in November.   He continues a tradition in his party that goes back at least three decades:  building political campaigns around the proposition that folks in the heartland exhibit the American virtues of self sufficiency and personal responsibility and the implication that other, more urban, regions display decadent social values and dependency on government.

          It is a good general rule to judge individuals on their own merits and not on the supposed attributes of the racial, socioeconomic or geographic groups to which they belong. Cultural generalizations are dangerous.   But since questions have been raised, the fearless social scientist will not shrink from confronting them.  Are residents of “red states,” who tend to vote Republican, indeed more likely to take responsibility for their personal behavior than those who live in “blue states” and tend to vote Democratic?

       Inspired by the role that religion plays in the red-state view of the world, I will organize the investigation in terms of the Seven Deadly Sins:   Greed, Gluttony, Lust, Sloth, Wrath, and so on.  We will see that measures of these “sins,” state-by-state, bear a statistical relationship with voting patterns - but not the relationship that many assume.  (For data sources and econometric details, see the statistical appendix at my website.)    

1)      Greed  
 
    The red states receive more federal spending, relative to taxes, than the blue states, as I wrote in a 2010 blog post.  Updated data show that the pattern continues.  Those who claim to be fiscally conservative are the ones who in truth tend to feed the most voraciously at the federal trough. Alaskans are the most dependent on the federal government, receiving $7,448 in spending (net of taxes) per capita.  New England, the Mid-Atlantic States, Minnesota and Illinois are the biggest net givers.  Regarding Romney’s specific  ”47%” allegation: the states with high percentages of people who pay no income tax tend to vote Republican, not Democratic.

     Figure 1 shows on the horizontal axis each state’s receipt of spending by the federal government, net of tax payments, per capita.  The vertical axis shows the ratio of Democratic to Republican votes state by state, in the last three presidential elections.    The red states (low in the graph) tend to be on the receiving end (high spending).  The blue states (high in the graph) constitute a majority of the ones that foot the bill (positive contributions to the nationwide kitty).  The relationship is highly significant statistically.
  

Figure 1:  Federal Spending Received minus Taxes Paid, among Blue vs. Red States
(Average of votes in 2000, 2004 and 2008 presidential elections)  Click here for larger image.

2) Gluttony

     States where residents suffer more from obesity, in part because they have worse eating habits, tend to vote Republican, as I showed in a blog post last June.  To illustrate, a mere 1 percentage point decrease in a state’s obesity rate is associated on average with an estimated increase in the ratio of Democratic to Republican voters from 1.00 to 1.07.  The relationship is highly significant statistically.   (Figure 2.)

               
Fig.2: Obesity (% of population) Click for larger image     Fig.3: Fitness Index  Click for larger image  

3) Sloth

     States where residents get less physical exercise tend to vote Republican.  (Figure 10d in appendix.) The relationship is highly significant statistically.    Figure 3 combines physical exercise and lack of obesity into a single index of physical fitness.

      In his recent book, Coming Apart, Charles Murray argues that those who live in the “super-zip codes” - the areas with high education levels, like Belmont, Massachusetts  - have maintained traditional American values of hard work, while those who live elsewhere show “crashing” rates of industriousness.   He writes that those who live in areas with less education have been leaving the labor force for years, often falsely claiming disability. They “goof off,” “sleeping and watching television” (p.180-181).  Those that remain employed have reduced the length of their work-week and their dedication to their jobs, at the same time that those living in the super-zip codes have increased theirs (p.176-77).  Some academic researchers and news media fear accusations of liberal bias if they talk about such things.  AEI scholar Murray may be immune from this fear: he is well-known as a conservative/libertarian whose earlier book The Bell Curve dealt with black-white differences in test achievement.  (The statistics in his recent book look at whites alone, so as to control for race.)   

4) Lust

     Sex is interesting.  Red states residents buy more online adult entertainment, according to a 2009 study in the Journal of Economic Perspectives by Benjamin Edelman.   Notwithstanding proclamations about the importance of pre-marital chastity, evidence suggests that young people in red states do have sex before marriage.  It is less likely to be safe sex than among those in blue states.   States that vote Republican have higher birth rates among 15-17-year-old girls, as Figure 4 shows.   Again, the difference is highly significant statistically.    They also have higher rates of the sexually-transmitted disease Chlamydia .  (This difference, unlike the others, is not statistically significant at the aggregate state level; but it is when combined into an overall measure of unsafe sex.)

      Apparently the gap between what they say and what they do is particularly wide for teen-agers who describe themselves as evangelical Christians.  According to research by Mark Regnerus, a sociologist at the University of Texas, Austin, white evangelical adolescents usually state a belief in pre-marital abstinence — 74 per cent — but in fact are surprisingly active sexually, compared to mainline Protestants and Jews who do not tend to state such a belief.  When the evangelicals do engage in sex, they are less likely to use protection than others.  The gap between word and deed is strikingly high for the millions of teenagers who take a formal pledge to remain celibate until marriage, typically in a ring ceremony, according to a New Yorker article by Margaret Talbott (”Red Sex, Blue Sex“).  The majority of them, though holding out for awhile, “end up having sex before marriage, and not usually with their future spouse.”   Two other sociologists, Peter Bearman (Columbia University) and Hannah Bruckner (Yale) find a positive correlation between the abstinence pledge and Sexually Transmitted Disease (STD).  Pledgers are less likely to use a condom if and when they first have sex and overall are slightly more likely to contract a STD.  (Under George W. Bush, the federal government subsidized such abstinence pledge program despite their questionable effectiveness.)
              

                  
Fig.4: Teen pregnancy rates  Click for larger image         Fig.5: Firearms Assaults  Click for larger image

5) Wrath

     Nobody is surprised to hear that red states have higher rates of gun ownership than blue states.  But there is an important distinction between those who use guns responsibly and those who do not.   The data show that ¾ of the states with high rates of firearms assaults vote Republican.  (Figure 5.)   The regression is statistically significant.

6) Drunkenness  

     People who drink too much endanger themselves and endanger others as well.  You guessed it: States with high rates of fatal accidents from drunk driving tend to vote Republican (Figure 6).     Statistically significant. 

     
Fig.6: Drunk driving fatalities  Click for larger image       Fig.7: Smoking rates  Click for larger image   

7) Smoking

     Finally, states with high rates of smoking vote Republican too, as Figure 7 illustrates.   Again, the relationship is highly significant statistically.   

     Many of the Seven Deadly Sins can indeed be deadly.  It is particularly striking that the states where the most residents exhibit behavior that endangers their health and that of others - with many of these unhealthy people later free-riding on their fellow citizens when they show up uninsured in the hospital emergency room - are also the states where congressmen tended to vote against the Affordable Care Act (Obamacare) in 2010.  This risky behavior includes poor physical fitness (as measured by rates of obesity, lack of exercise, and poor diet), careless sexual behavior (as measured by rates of teen pregnancy and Chlamydia), smoking, drunk-driving (as reflected in fatalities) and irresponsible use of guns (as reflected in armed assaults). 

     Each obese American incurs medical costs 42%  higher than those of normal weight.  Often others are stuck with the bill, if the patient has not been able to get health insurance because of a weight problem.  These people are free-riders on the health care system even if they don’t want to be.   The individual mandate of Obamacare was designed to fix this free-riding problem and re-establish personal responsibility.  Yet congressmen in states with high rates of obesity or other health risk factors voted against the legislation.  (See my blogpost or an op-ed on Obamacare for the evidence.)   

     Utah is the most conspicuous outlier in most of these relationships.  It has a high population of Mormons. Apparently they follow the strictures of their religion more closely than those of other religious denominations.  (Could this be why evangelicals tend to resent Mormons so much, according to opinion polls?)   But Utah notwithstanding, the relationships hold on average.

     The five most “red” states are Wyoming, Oklahoma, Utah, Idaho, and Alaska.  The five most “blue” are New York, Massachusetts, Rhode Island, Vermont and Hawaii.   The average score of the five reddest states is worse in each category than the average score of the five bluest states: more obesity, smoking, Chlamydia, teenage pregnancy, drunk driving fatalities, and firearms assaults.  In the latter three of those measures, the “reckless” shares of the population are almost twice as high among the first five states as among the last five.  While we are at it, we might as well acknowledge that the red state populations also tend to be less educated and more prone to divorce. 

     There you have it, the surprising statistics.  ”Let he who is without sin cast the first stone.”

[This article draws in part on an op-ed concerning Obamacare in the Christian Science Monitor and another concerning Romney's "47%" remarks at Project Syndicate.    VoxEU also has a version.   Details on data and computations are available in a posted statistical appendix.]  

Once again this morning, the BLS employment release tells conflicting stories depending on whether one looks at the unemployment rate or job growth.   The U.S. unemployment rate fell from 8.3% in July to 8.1% in August, continuing the gradual three-year downward trend (from its 2009 peak at 10 %).     Political economy equations often say that the direction of movement of the unemployment rate in the period preceding a presidential election is the main economic determinant of whether the incumbent is re-elected.  

“Are we better off than we were four years ago?”   Yes.   If the criterion is to be a narrow unemployment comparison, and one counts from the month following the day Obama took the oath of office, then we are now at a lower unemployment rate.   But that is very simple-minded as a criterion.   (Look at GDP.  Better yet look at how the free-fall turned around  and the recession ended within his first 5 months.)

Employment growth is the more important statistic, to evaluate the progress of the economic recovery.  Here today’s BLS report was disappointing: only 96,000 jobs created.    The jobs number climbs into six digits if one looks at private sector employment growth.  

By the way, am I the only one who sees a general bias toward negativity in the media?   When the unemployment number looks bad and job creation looks good, like a month ago, the newspapers seem to headline the former.   When the unemployment rate looks good and employment disappoints, as this time around, they tend to focus on the latter.  The TV shows do the same (including those on which I appear).

In any case, as always, one should look at a longer run trend.   The fact is that private sector job growth has been running at an annual rate of 162,000 per month over the last two years.    This is far greater than the rate during the Bush Administration even if one looks only at the years in between the Bush recessions of 2001 and 2008  (83,000 per month, on average, from November 2001 to December 2007.)   It is not enough.  For example it is much less than the rate during the Clinton Administration, month in, month out (218,000 private sector jobs created per month, on average).  But it is a big improvement over where we were.

On the subject of Bill Clinton.  His speech to the Democratic Convention  Wednesday night again demonstrated his unique ability to explain wonkish policy details in a folksy way.    This included pointing out the statistics on private sector job creation under Democratic presidents since 1961 compared to Republican Presidents.   The rate has been just over twice as great.   Thus the current Obama-Bush comparison continues a half-century tradition.

The point about private sector job expansion looking better than overall employment growth is of course what Obama was trying to say in June when he made his unfortunately worded statement that “the private sector is doing fine.”   He quickly retracted that language, which was the right thing to do.  But the point still needs to be made.

Why look at private sector jobs, instead of total jobs?    I have a feeling that this is a Republican way of looking at things.  The Republicans don’t seem to believe there is anything amiss if a million public sector workers lose their jobs.  (Which is what has happened over the last year:  934,000.)    Teachers, firefighters, construction workers…   Apparently those don’t  count as real jobs because they are in the public sector.    That would explain the Republican congressional opposition to Obama’s initial fiscal stimulus in 2009 (the one that ended the recession) and their more successful subsequent attempts to block Obama’s job proposals.  

So maybe we should be looking at total employment after all, rather than private employment.  Or even focusing on the underemployed and discouraged workers.  But these are all reasons why we need to resume enacting the policies that Obama has been trying to enact.

     My preceding post bemoaned the tendency for many US politicians to exhibit a procyclicalist pattern:    supporting tax cuts and spending increases when the economy is booming, which should be the time to save money for a rainy day, and then re-discovering the evils of budget deficits only in times of recession, thus supporting fiscal contraction at precisely the wrong time.  Procyclicalists exacerbate the magnitude of the swings in the business cycle.        This is not just an American problem.  A similar unfortunate cycle — large fiscal deficits when the economy is already expanding anyway, followed by fiscal contraction in response to a recession — has also been visible in the United Kingdom and euroland in recent years.   Greece and Portugal are the two most infamous examples. But the larger European countries, as well, failed to take advantage of the expansionary period 2003-07 to strengthen their public finances, and instead ran budget deficits in excess of the limits (3% of GDP) that they were supposed to obey under the Stability and Growth Pact. Then, over the last few years, politicians in both the UK and the continent have made their recessions worse by imposing aggressive fiscal austerity at precisely the wrong time.      Historically, developing countries used to be the ones where dysfunctional political systems produced procyclical fiscal policies.  Almost all of them showed a positive correlation between government spending and the business cycle during the period 1960-1999.  But things have changed.   Remarkably, during the decade 2000-2010, about a third of emerging market governments - in countries such as China, Chile, Malaysia, Korea, Botswana, and Indonesia - managed to reverse the historical correlation.  They took advantage of the boom years 2003-2007 to strengthen their budget positions, saving up for a rainy day.  They were thus in a good position to ease up when the global recession hit them in 2008-09.        In fact a majority of the governments that have followed countercyclical spending policies since 2000 are in emerging market or developing countries.   They figured out how to achieve countercyclicality during the last decade, precisely the decade when so many politicians in “advanced countries” forgot how to.

       The world is in the grip of a debate between fiscal austerity and fiscal stimulus.  Opponents of austerity worry about contractionary effects on the economy.  Opponents of stimulus worry about indebtedness and moral hazard.

Is austerity good or bad?   It is as foolish to debate this proposition as it would be to debate whether it is better for a driver to turn left or right.   It depends where the car is on the road. Sometimes left is appropriate, sometimes right.  When an economy is in a boom, the government should run a surplus; other times, when in recession, it should run a deficit.    

True, it is hard for politicians to get the timing of countercyclical fiscal policy exactly right.  This is the reason, more than any other, why Keynesian policy lost its luster.  “Fine-tuning” it was called.  Sometimes the fiscal stimulus would kick in after the recession was already over.   

But this is no reason to follow a pro-cyclical fiscal policy.  A procyclical fiscal policy piles on the spending and tax cuts on top of booms, but reduces spending and raises taxes in response to downturns.  Budgetary profligacy during expansion; austerity in recessions.  Procyclical fiscal policy is destabilizing, because it worsens the dangers of overheating, inflation, and asset bubbles during the booms and exacerbates the losses in output and employment during the recessions.  In other words, a procyclical fiscal policy magnifies the severity of the business cycle.

Yet many politicians in the United States, the United Kingdom, and the eurozone seem to live by procyclicality. They argue against fiscal discipline when the economy is strong, only to become deficit hawks when the economy is weak.  Exactly backwards.

            Consider the positions taken over the last three decades by some American politicians. 

First cycle:    During a recessionary period, President Ronald Reagan in his 1980 campaign and in his 1981 Inaugural Address urged immediate action to reduce the national debt “beginning today.”  (Recession: austerity.)    But in 1988, as the economy approached the peak of the business cycle, candidate George H.W. Bush was unconcerned about budget deficits, even though the national debt was rapidly approaching three times the level it had been when Reagan had given his speeches.   “Read my lips, no new taxes,” Bush famously said.  (Boom: profligacy.)

Second cycle:  Predictably, the first President Bush and the Congress finally summoned the political will to raise taxes and rein in spending growth at precisely the wrong moment, that is, just as the US was entering another recession in 1990.   (Recession: austerity.)  Although the timing of the legislation was poor, the action was courageous.    The Pay as You Go Rule and other reforms switched government finances back onto a path that eventually was to eliminate the deficits by the end of the decade.   

But three years later — and even though the most robust recovery in American history had begun — every Republican congressman voted against Clinton’s 1993 legislation to continue Bush’s spending caps, PAYGO, and tax increases.  Nor did they change their minds in response to the subsequent success of the policy.   Even after seven years of strong growth, with unemployment at the peak of the business cycle dipping below 4% for the first time since the 1960s, George W. Bush based his 2000 campaign on a platform of large long-term tax cuts. (Boom: profligacy.)

Third cycle:  Even after the Bush fiscal expansion had turned the inherited record budget surpluses into record deficits, the Administration went for a 2^nd round of tax cuts in 2003, and continued a rate of growth of spending that was triple the rate under Clinton (both national security and domestic spending).  Vice President Richard Cheney said “Reagan proved that deficits don’t matter.”   These policies were maintained for five more years, as another $ four trillion was added to the national debt.  (Boom: profligacy.)  

Predictably, when the worst recession since the Great Depression hit in 2007-09, politicians felt constrained from an adequate fiscal response due to the big deficits and debts the government had already been running. Republicans suddenly re-discovered the evil of budget deficits and decided that retrenchment was urgent.  They opposed Obama’s initial fiscal stimulus in February 2009, even though GDP growth and employment were much worse than they had been when Reagan and Bush had launched their tax cuts and spending increases.  (Recession: austerity.)   Subsequently, with a new majority in the House, they succeeded in blocking further efforts by Obama when the stimulus ran out in 2011.  The government spending cutbacks of the last two years are the most important reason, in my view, why the economic recovery which began in June 2009 subsequently stalled in 2011.

Three cycles.   Three generations of politicians who favored expansionary fiscal policies during a boom and then decided after a recession had hit that budget deficits were bad after all.  (See the graph below.)

This is not to say that the procyclicalist politicians have always succeeded in getting their policies adopted.   Clinton had a strong enough congressional majority in August 1993 that he was able to pass his budget balancing legislation (Omnibus Budget Reconciliation Act) — even though every Republican in Congress voted “no” at a time when the economy was expanding.  Similarly, Obama had a strong enough majority in January 2009 that he was able to pass some initial fiscal stimulus (the American Recovery and Reinvestment Act), without a single Republican vote, at a time when the economy was in freefall.  But too often the countercyclicalists are overpowered by the procyclicalists.

            Trying to turn left or right at precisely the wrong points in the road is a worse record than one would get by switching policies randomly.  To explain this perverse pattern, let us switch metaphors in mid-stream.   It is the old problem of needing to fix the hole in the roof when the sun is shining, rather than waiting for a storm to realize that it is necessary.  When the economy is booming, there is no political support for painful spending cuts or tax increases.  After all, everything seems fine; why make a change?   Then when the deluge comes, sinners suddenly see the evils of their ways and proclaim the necessity of reforming.  Of course it is very difficult to fix the roof in the middle of a thunderstorm.

Procyclical Politicians:  Support for fiscal contraction (down-arrows) and fiscal expansion (up-arrows) 

 (Click here for larger version) (more…)

     The Supreme Court today upheld the Affordable Care Act of 2010, otherwise known as Obamacare.  Judging from the polls, American public opinion appears to be very sharply divided over the legislation.  Some view it as socialism, others as the first success in a half-century of efforts to achieve a sensible national policy on health care.

       What explains the wide divergence of views?   An economists’ approach - cynical or naïve depending on how you look at it - would be to assume that citizens vote according to their own personal interests.   Getting the uninsured onto paid insurance through the individual mandate is very much in some people’s interest, but not necessarily as strongly in others’ interests.  Let’s take a look.

       Those who have the most to gain from President Obama’s health care legislation are those who have a pre-existing condition or are pre-disposed to illness, for example because they are overweight.  They are more likely to need medical care in the future, but can be charged higher rates if they try to buy private insurance, by virtue of their condition.  Or they can be excluded completely.   (Each obese American incurs medical costs 42% higher than those of normal weight.)     

         Figure 1:  States with higher obesity rates tend to oppose the Affordable Care Act     

     I show how Congressmen from each state voted on the Affordable Care Act on the vertical axis of Figure 1, with the state rates of obesity on the horizontal axis.   There is a statistically significant relationship.  But the relationship goes the other way:    states where more people are overweight, such as Mississippi, Alabama, South Carolina and Texas, are more likely to oppose Obamacare.   In those parts of the country where people are slimmer, such as New England, New York and Colorado, there is strong support for health care reform.  For every one percentage point increase in obesity, support for Obamacare declines by an estimated four percentage points on average.

     Obesity is partly genetic, of course, but also is determined by habits of exercise and eating.  The states where residents get the most physical exercise are Minnesota, Utah, Oregon, Washington and Vermont; the states that get the least are Mississippi,  Tennessee,  Kentucky,  Lousiana and Alabama.   Another data source tells us the states with bad eating habits:  the five worst-ranking are Mississippi, Alabama, Missouri, Kansas and Oklahoma.

      There are some outliers, of course.   Utah’s population appears to be physically fit (and to do well by other measures that we will be looking at later), while opposing the Affordable Care Act and voting Republican.   Mormons look exceptional in the extent to which they abide in their personal lives by the strictures of their religion.   Could this be why evangelicals tend to resent Mormons so much according to opinion polls?  

       It’s not just obesity and exercise.  The states that rank the best on an overall health index are Vermont, New Hampshire, Massachusetts, Minnesota, and Maine and Iowa.  The states where people are the least healthy overall are Louisiana, Mississippi, New Mexico, Nevada, Oklahoma and Texas.  The weight of the evidence is fairly clear: the states where people are most in need of help getting private insurance are the states opposing the legislation that helps them do that.    (I hope in future blogs to look at such other specific risk factors as unprotected sex, drunk driving, and smoking habits.)

      It seems that the economists’ view of the world is wrong.  People are not voting in their self interest.  What is going on here?

       I can think of two plausible explanations as to why those who stand to benefit from Obamacare should oppose it politically:   (1) lack of knowledge regarding the bill, and (2) partisanship.  

       Most people don’t know what Obama’s bill does.  Many think that it reduces personal responsibility for health care.  But the truth is the opposite.  Under the current system, hospitals are required to treat patients who show up at the emergency entrance with a heart attack - even if their condition is partly their fault, due to habits of overeating and under-exercising.  The hospitals have to pass the costs on, and the rest of us end up footing the bill.   The individual mandate is designed to fix that, by making everyone pay for the health care they get (and perhaps even encouraging them to see a doctor who will advise them to adopt a healthy life style).  Establishing personal responsibility, not socialized medicine, is the reason why conservative think tanks such as the Heritage Foundation proposed the idea of the ndividual mandate in the first place, and why Mitt Romney enacted it in Massachusettts.   But most people still seem unaware of this.  If people do not understand their economic interests, that may explain why the voting patterns do not line up correspondingly. 

       The other, not inconsistent, explanation, is that people are voting along simple party lines.   Figure 2 shows the popular vote in the 2008 presidential election on the vertical axis, state by state.   The states where people are most likely to be overweight or obese tend to vote Republican.  Evidently the people in New England, New York, Hawaii and DC, who tend to vote Democratic, are slimmer.   A one percentage point increase in the obesity rate is estimated to raise the ratio of Republican to Democratic voters from 1.00 to 1.06 (easily enough to swing an election). The statistical confidence interval — “margin of error” – is thin enough to exclude the possibility of a zero effect.      

                 Figure 2:   States with higher obesity rates tend to vote Republican                                 

        Ideology is much less important than party affiliation.  This is the same result when one looks at which states receive more federal subsidies: despite all the rhetoric about “getting the government off our backs,” it is the red states, i.e., those where people vote Republican, that receive the most transfers from Washington.  Alaska, Mississippi, Louisiana, West Virginia, and the Dakotas top the list.   The Democratic-leaning states are the ones paying into the federal government and subsidizing everyone else:  New England, New York, New Jersey, California.   Those who claim to be fiscally conservative are the ones who in fact tend to feed voraciously at the public trough.

[Econometric results are available in an appendix.]

In the current issue of Foreign Policy, the editors of the FP Survey ask “top experts” for pithy solutions to the world’s economic problems, “twitter style.”  Some of the answers:

THE BIGGEST THREAT TO THE GLOBAL ECONOMY IS …
Anti-market bias. -Bryan Caplan •  Procrastination. -Peter Diamond •  Short-term thinking. -Esther Dyson •  A euro meltdown. -Dean Baker  •  Tax-cut fanatics. -Jeffrey Frankel •  The bond market. -Andy Sumner •

MY OUT-OF-THE-BOX SUGGESTION TO REVIVE THE GLOBAL ECONOMY IS
Wipe out debts. -Daron Acemoglu •  Require candidates for national office to pass ninth-grade tests on arithmetic, history, and geography. -Jeffrey Frankel •  Double down on science. -Tyler Cowen •  A government lottery where winners have mortgages, student loans, or other debt paid off. -Mark Thoma •  We don’t need “out-of-the-box” solutions; we need “head-out-of-the-sand” ones. -Adam Hersh •  Pray. -David Smick

BARACK OBAMA’S BIGGEST ECONOMIC MISTAKE HAS BEEN …
Letting Larry Summers go. -Gary Hufbauer •  Not reorganizing the big banks. —David Smick •  Trying too hard to find common ground with an opposition that won’t compromise on any terms. -Vincent Crawford •  Assuming office in January 2009. -Jeffrey Frankel

OCCUPY WALL STREET IS …
A misdirected tantrum. -Philip Levy •   A harmless pastime for unemployed youth. -Gary Hufbauer •  Reasonable complaints about crony capitalism plus self-righteous economic illiteracy. -Bryan Caplan

BY ELECTION DAY 2012, THE U.S. ECONOMY WILL BE …
Improving, but leaving many people behind. -Arnold Kling .  Limping along, with unemployment declining but still around 8 percent. -Daron Acemoglu .  Blamed for the outcome. -Jeffrey Frankel

ECONOMISTS SHOULD BE PAYING MORE ATTENTION TO …
How people actually behave rather than how they are idealized to behave. -Abhijit Banerjee •  Corporate governance. -Peter Diamond •  The fact that macroeconomic theory went up a blind alley some 20 years ago. -Jeffrey Frankel •  Creeping protectionism across the global economy. -Gary Hufbauer •   The impediments to job creation for young people. -Valerie Ramey •  Reality. -James D. Hamilton

President Obama said yesterday, “The only question is whether politics or ideology are going to get in the way of preventing a government shutdown.” This is indeed the interesting question: Is politics motivating the Republicans, or ideology? I realize that Obama meant to ask whether the government would be shut down. But humor me while I interpret the sentence the other way:   Politics versus ideology.

Most of what the Grand Old Party has done in the last two years can much better be explained by politics than ideology. For example, only politics can explain a systematic strategy of opposing whatever the White House favors, even when this requires changing one’s vote — for example on the fiscal commission bill that Senators like John McCain had previously been sponsors of. Only politics can explain the long-time refusal of so-called fiscal conservatives to name the specific spending programs they want to cut.

On Tuesday Representative Paul Ryan unveiled a new long-term budget plan that apparently comes closer to naming the specific programs he wants to cut.   Medicaid and Medicare.  Perhaps we are getting closer to the point where we can actually have a debate over ideology, over competing policy priorities. This would be an improvement over the nonsense that has passed for public debate in recent years.

If so, let us be clear that, despite the rhetoric, the policy priority of the Tea Party and Paul Ryan is not fiscal conservatism. Fiscal conservatism is supposed to mean the reduction of budget deficits, paying for what you spend, matching tax revenue to expenditure. Someone who was sincere about eliminating the budget deficits that we have inherited would propose a long-term plan that included roles for raising tax revenue and cutting defense spending, in addition to slowing the growth of entitlements and domestic spending. But the tax cuts in the Ryan plan in fact would lose revenue almost equal to its spending cuts. In other words, it mostly uses the cuts in federal medical care spending to pay for more tax cuts.  This pattern is not new. The supposed fiscal conservatives who were elected to Congress last November have increased the budget deficit. Their insistence on renewing the Bush tax cuts (for the rich, as usual) has added hundreds of billions of dollars to the current deficits, outweighing all the specific spending cuts that they have proposed, combined. Other ways they are adding to the deficit include trying to cut funding for IRS enforcement and trying to repeal the Obama health care reforms. (The Ryan plan would repeal the health reforms, but ignores that doing so would add to the deficit according to CBO’s scoring.)  These choices follow the tradition of those “fiscal conservatives” Ronald Reagan and George W. Bush whose budgetary policies created the majority of the national debt we have to live with today.

Even though Obama’s opponents in Congress cannot sustain the claim of being fiscal conservatives, it is possible that some will now genuinely lay claim to the other two-word ideological phrase: “small government.” Do they want to, finally, come out and say explicitly that their goal is to cut domestic spending (especially entitlements) in order to cut taxes, putting the priority on shrinking government rather than eliminating the budget deficit? Are they prepared to own Dick Cheney’s claim, “Reagan showed that deficits don’t matter”?

I am not sure if they are.  Ryan said Sunday “We are going to put out a plan that gets our debt on a downward trajectory and gets us to the point of giving our next generation a debt-free nation.” This incredible sentence suggests that he still lacks the requisite numeracy (or sincerity) that many have inexplicably attributed to him. The numbers in the plan that he proposed two days later don’t come close to the headline claims of shrinking the budget deficit by $4 trillion cumulated over the next decade, let alone eliminating it altogether.   But does Ryan even understand that to pay off the debt that Reagan and Bush bequeathed us we would have to run $100 billion surpluses for a hundred years?