First Takes

So Obama put out his plans to help the middle class and to begin "attacking" the budget deficit. I am thus far rather unimpressed. Since these are putatively reforms aimed at ameliorating the concerns of independent-minded voters (like me), I submit that whoever thought up these ideas and released them in a packaged format for public consideration should be fired.

First off, the budget deficit attack consists solely of a freeze on discretionary spending. This is in fact a fairly large portion of the budget. There is, in my opinion, a considerable amount of waste already in there to be had and thereby cut from the out pile of the federal budget (though there will exist a considerable amount of political opposition to doing so). However, like the attacks on pork legislation this is largely a political stunt rather than a serious attempt to reign in spending. Sure we would benefit from less pork spending and thus less government waste and interference or distortion in the industrial policies of the nation. But there's several places we could do that with far less invasion (though perhaps, at times, more political resistance). For example, we could reform the income tax code to remove several key exemptions (like the home mortgage interest deduction), which we would have the effect, even if offset by some middle class rate reductions, of increasing government revenues, thus increasing the in pile of the budget mess (It would also have the effect of simplifying the tax code and decreasing the unproductive man hours spent on compliance with it by average taxpayers).

More importantly, most of the spending in our budgets consists of the following: the bloated military budget and associated national security industries (like intelligence or Homeland Security) which combine to exceed the spending of all other countries in the world, much less the spending of our erstwhile foes in public forums like Iran and North Korea, entitlement spending in the forms of social security, public pension programs, and public costs of health care, and the interest financing of the public debt. None of these three areas are at all threatened by a freeze in spending. Defense spending goes up by billions of dollars and we are told it is "decreasing". Health care reform was not, in my opinion, serious enough at addressing the cost curve or future deficits, but it is still no less essential that we begin looking at ways to do that regardless of whether a bill passes or not. Social benefits of retirement programs will at some point have to be indexed to a higher age of retirement or take in greater sources of revenue to remain fully funded (or else people will start to take seriously the idea of privatization for retirements, with the caveat that such savings be mandatory). At no point has the President or the country wrestled honestly with these as problems, and thus they continue to raise the importance of the last arena: the increasing public debt, the ceiling for which was just raised yet again.

Meanwhile, while pulling a political stunt is supposed to mollify these independents who are concerned about rising spending, it neglects that in the midst of a recession, it is probably unwise to place too much importance on reducing that spending. Where that spending is shown to be unproductive and wasteful, it should be cut. I do imagine there is plenty of federal and state monies that are dispensed in this way and could be slashed from their budgets. Almost certainly as much as the President assumes can be cut by freezing the increases (other than inflation adjustments like COLAs for public employees). I don't doubt that such cuts would be fruitful even in a recession simply by allowing the government to re-allocate that money to more productive ventures. But as I said, these are small potatoes. The bigger ones we spent a year on one of them and have made no real progress. Even if a bill passes I will not be impressed with the cost controls it contains, particularly if the unions get to keep their exclusion. And we are not even discussing the probability of reducing the military expenditures, or even whether those military spending contracts already allocated for the next decade are prudent and wise given the types of asymmetric and irregular forces we are dedicating our forces to oppose in open conflicts. Sure we can replace the F-15s and F-16s with F-35s and F-22s to insure that we'll have some high quality fighters to intercept some mythical attack by the Chinese or Russians and to deter them from even trying to do so. We cannot actually use them that efficiently against insurgents however (as a point of order, the F-22 and the F-35 hasn't even been deployed into combat in anything other than Michael Bay type movie). So what would be the point of having thousands of them? Prestige?

I give Obama some credit here. He did block more successfully the Congress' attempts to allocate discretionary spending than Bush ever did. Even when Congress was controlled by Democrats from 2007-2008. So he has a political track record at fighting these kinds of political waste and handouts that may be worth something if he chooses to pursue this as a centerpiece for the 2010 agenda. But I question the judgment of not even looking at the bigger fish in the room, much less the wisdom of looking at these small fish when we are still in a time of some economic confusion. One of the great criticisms of FDR arises from his sudden retreat away from fiscal and monetary expansion in 1937 during his second term and the immediate and painful effect that had on the economy, to the extent that the Depression lasted the entire decade instead of being aborted early in his second term. Reversals of policy in this way are not only politically suspect for the passage of expansionary policies like health care "reform" or the tabled climate/energy bill and the as yet unrevealed educational reforms (many of which I was mildly pleased with in their proposed forms, it remains to be seen how well they fared once Congress and the several states' governments get a hold of them), but they may even be economically dangerous and unsound.

Speaking of Presidential agendas that such a move may make unsound, there's a concurrent attempt to "help" the middle class.

1) Since I have no children, I will not comment at length about the prospect of increasing tax exemptions (but not tax credits) for people who have such expensive needs as those required in caring for their spawned relations. I don't think this is a terribly expensive reform since it amounts to a middle class tax cut of some sort. But I also don't see that this will substantially help most people either. A better approach would be to move the start of the school day back which would greatly reduce the costs of monitoring children while parents are at work at a more essential time: after school.

2) Helping old people/caregivers. I guess this is okay because it's pretty cheap. But didn't we start up Social Security and Medicare (and the expanded coverage for prescriptions) precisely so this wouldn't be a burden on individual middle class families? What does this say for the effectiveness of such approaches?

3) College loan limits on repayments. This to me is the biggest idiotic part of this proposal. Virtually any rational commentator on the expense of college will acknowledge the amount of distortions that easy money from the federal government has had on the rising costs of college. It is one thing to make it easier for students who would be greatly advantaged by attending college, and who cannot afford it, to go to college. I think that's a fine idea as it has the effect of increasing equality of opportunities. I don't think the way we've gone about it has made any sense or had the practical effect of reducing the cost, thereby increasing the affordability of colleges in a more general way. And, as a bigger problem, limiting college repayment amounts to 10% of income is not likely to actually diminish the underlying problem of the expense of college tuition increases (which have risen faster than even health care costs). College tuition costs are the root problem, and they will continue to increase in order to compensate for the decrease in loan repayment schedules. The simpler way to do it is to allow loan repayments to follow a schedule of repayment based on income for anybody who receives a loan. Rather than a 10% limitation, it should simply be a fixed amount based on actual income, say 5% of someone's income per year for 30 years (depending on the cost of the college attended and the degree/career field's likely income). This would give students the ability to pursue less fruitful careers without fear of being unable to pay their debts, such as public service in teaching, but also give colleges an incentive to provide better opportunities in profitable career fields, like professions (doctors, lawyers, engineers) and business or finance training. Somewhere in between there would be a market balance, and more people could complete college training without being indebted in a way that is unsustainable and we would not see college tuition costs continue to rise in an unrestrained manner (which is the actual problem that the middle class is dealing with).

4) Automatic enrollment in 401k/IRAs, with an opt-out. This is one of those "nudge" ideas from Cass Sunstein. I recognize this will help in the long-term a great deal by increasing the net savings rate. It does very little to deal with the immediate needs of people in the middle class, in part because the low savings rate was paradoxically necessary to sustain growth and it will take time to adjust to an economy with a larger rate of savings than we have had for a generation. I am skeptical that an automatic enrollment is necessarily great. Many company 401ks are terribly cost-inefficient, thereby decreasing the actual effectiveness of forced savings anyway, and others do not offer employer matches, making them roughly useless. The tax benefits of most 401k and IRAs are also very sketchy in the long run, given that these retirement devices are often taxed at normal income rates rather than the far lower capital appreciation tax rates that they are often invested into as a matter of form. It is also implied that the government may offer a match. To which I say: why didn't this idea fly when social security was on the table? I'm not sure how well this idea would help on net for the middle class, though in practice some nudge toward savings based economics would be very useful for the growth of the middle class (if not the particular individuals who presently comprise it).

5) Accordingly, none of those things does anything about job creation, which is, in effect, the actual problem facing middle class Americans. Many previous middle class jobs, such as automobile factory work, have diminished as firms have moved to more automated production or out of former bastions of industrial policy (Detroit) to other new bastions of such policies (Georgia), or the firms themselves have diminished through competition with more efficient foreign firms who still employ productive American workers. These jobs offered middle class pay or benefits but they do not accord themselves well to transition toward a modern service economy sector, such as being a nurse, teacher, entrepreneur, or any other form of modestly skilled labourer. This is a structural economics problem that Obama and others have acknowledged in passing (by saying things like "some jobs aren't coming back") but have not addressed in any political way. I did however finally see some progress on the job creation front this week as two opposing party Senators announced support for a plan to offer a new hire break on the payroll taxes. This isn't quite what I wanted. A simple payroll tax cut would be better than a flat new hire tax exclusion, which may perversely incentivize firms to fire people who are marginally productive and not end up doing much about actual unemployment, or at best, will simply amount to reducing wage stickiness as new hires are brought on at cheaper, more profitable wages. But at least they're talking about fiddling with the payroll taxes to decrease the cost of a marginal job to employers. Progress I guess.