Asymmetrical Information

Well, we did just give a boatload of money away. Whoops, I forgot that money was sacred.

Thirty Helens agree . . .

Thirty Helens agree . . .

darn it. apologies for the double (triple) post.

Future David Ignatius Stories

- When Mrs. Smith's 6th Grade class - boys and girls, nerds and cool kids - unanimously agrees that homework is excessive, that's a powerful message.

- When all 50 residents of the Delta Phi fraternity complain that free beer is too had to find, that's a powerful message.

Future David Ignatius Stories

- When Mrs. Smith's 6th Grade class - boys and girls, nerds and cool kids - unanimously agrees that homework is excessive, that's a powerful message.

- When all 50 residents of the Delta Phi fraternity complain that free beer is too had to find, that's a powerful message.

Oops. Well, if even Jane can impatiently hit the "post" button twice, I don't feel so bad.

Well, a not-insignificant contributing factor to the budget crunch that the states currently face are unfunded federal mandates, like the Leave-Every-School-Board-Behind, I mean the Leave-No-Child-Behind Act.

Also, most states are forbidden by law to run deficits; the federal government ($400 billion and goin' strong!) isn't.

You hit the nail on the head, Jane (IMO). I've often wondered what the purpose is behind the federal government taxing the bejeesus out of us, and then our congressmen begging, lying and stealing to "appropriate" it back it some federalized form (see, e.g., things named after Sen. Byrd) that may not necessarily be what we wanted in the first place. Id.

That is, I wondered about it until I realized how much political cover the federal government provides for the state governments when it comes to pet projects. Since your congressmen can always claim that it was some other state senator or representative that voted to raise your taxes or saddle you with new federal regulations, it is often much harder to hold them accountable. In contrast, representatives at the state level usually deal with their constituents every day, and are more likely to be called out when they don't align their political behavior much closer with the voters' interests. Although in truth very people actually vote in elections at the state or local level, it would stand to reason that voters would behave differently if they thought such votes would make a bigger difference in their lives. As it stands now, people turn out for presidential elections based on what should really be local issues.

By using the federal government to shield their decisions, local and state officials can be forced to tinker with peoples lives using "federal" money. For example, the legal age of drinking would not be the same in every state if it weren't for federal highway funds. IIRC, Louisiana held off for a real long time before succumbing to the federal teat. The District of Columbia also held out for quite awhile since they new that Congress wouldn't allow the streets to get too bad. Meanwhile, the federal government was raking in the tax revenue and letting the states duke it out for the spoils. Controlling the purse strings allow the feds to socially engineer at the local level. Every time the feds get an itch to control people's behavior, they threaten to withhold some federal funds or other from the states, who then obiediently roll over and play dead because they don't want to be forced to raise taxes. Every once in awhile there is a state that will hold out -- like Virginia did when George Allen was governor because he didn't want to adopt the federal education standards. Usually, however, its a simple pavlovian transaction.

Other strategic behavior that results from this dirigiste-style of government is that it becomes vitally important for state's to elect congressmen with longevity (see, e.g. Byrd, Thurman, Kennedy, Hatch, or Biden). If your representative or senator can't reach senior status then your state doesn't have as good a chance of reaping a larger portion of the federal tax revenue pie than you put in; or worse, you may reap a much smaller share (which is kind of the point anyway -- just like progressive taxation). The longer they are in congress, the more relative power they can accumulate, and the more control over everyone's lives they can wield.

Normally all of this strategic behavior on the part of government is beneath the radar. But when all 50 states demand more federal revenue (WTF?), and someone like Jane helpfully points the flaw in their thinking by drawing a big, red circle around it, you would have to believe that people will realize the charade that's going on. That is of course, unless they think they can steal more from their neighbor than their neighbor can steal from them.

What a lovely way to transfer some of that "blue state" money to the "red states".

"IIRC, Louisiana held off for a real long time before succumbing to the federal teat."

As I recall, Louisiana qualified for that federal money... they outlawed drinking while under 21 (with a slap on the wrist), but it was perfectly legal to sell alcohol to people under 21. Problem solved.

Until Richard Ieyoub (may his name be cursed... he's running for governor this year, don't forget to vote against him!) raised a stink and got the legislature to outlaw the selling of alcohol to adults under 21. But I don't think Federal money was on the line in that case.

"What a lovely way to transfer some of that "blue state" money to the "red states"."

That's the bit that puzzle me. Folks from the blue states seem even more gung ho on keeping these transfers going, and even expanding them wherever possible. It isn't Bush's base in the red states that are raising a hue and cry for more Federal money for the states... (although the drinking age thing was Elizabeth Dole's bright idea... too bad I couldn't vote against her)

Perhaps a blue stater could explain that to us.

hi ken,

"It isn't Bush's base in the red states that are raising a hue and cry for more Federal money for the states..."

well the red states are, on the whole, making out quite well from tax distributions. they get more than they give out in fed tax receipts, whilst many "blue" states get less than they give to the fed gov't in tax receipts. its a bit like urban, mainly african american or hispanic school districts getting less money per pupil than predominantly white surburban school districts...

and so far, no one has answered frankenstein's excellent observations re taxation (its not as neutral as jg makes out. the fed gov't has been trying to pass off a greater part of the taxation burden on states with unfunded mandates. i find the analysis a tad--simplistic.

Just for reference, this is the first post-war recession where the federal government hasn't provided assistance to the states.

Ignatius' column requires some deciphering. Maybe someone should point out to him that scattershot columns like this do a poor job of informing readers. (Though his point about "Bush is ruining the country" comes across.) I think one of the things he's trying to say is that the 50 governors want Washington to rethink how Medicaid is funded. Sounds like a good idea to me; maybe the various governors could talk to their Senators and Congressmen, if the latter have time to see them.

I tried to find some actual numbers on Arkansas' budget to check Ignatius' quotes from Huckabee, without much luck. (The www.arkansas.gov site seems to be down.) That quote about "91 percent of [AK's] budget now goes for education, Medicaid and prisons" sounds a little suspicious. So highways, state salaries, police, judges, fire, welfare are all the other 9%? I'd guess he's lumping all the police and justice stuff in with the prisons, and all the welfare-related stuff in with Medicaid.

Sure, nobody wants to cut "education", but there's probably all sorts of programs that Arkansans could live without.

According to my trusty (dead tree) almanac, Arkansas' budget in 1997 was $8.8 billion. The 2002 budget seems to be around $10.5 billion, and that apparently was after some cuts. I can sympathize with the squeeze Huckabee is in, but even another 10% cut still leaves Arkansas with a bigger budget than in 1997... and we all remember how horrible things were in 1997...

Ignatius also wants to blame state goverments for cutting taxes back in the 1990s. Which is silly, because if they hadn't cut taxes, they just would have spent the money, and now would be even worse off. (Did California cut taxes back in the 90s, does anyone know?) The state governments at least have the option of raising their taxes back to the former level, if they are willing to brave the voters. If they're not that brave, then maybe the crisis isn't that critical...

I thought Ignatius' take on the Vietnam war was fun, too: "...the one clear lesson of Vietnam... is that if you decide to go to war, you have to pay for it -- or risk the damage of severe inflation." So I guess WWII (and probably Korea, tho I don't know) was one of those exceptions that prove the rule. I always understood it was LBJ's attempt to have his guns and butter too that led to the severe inflation in the 70s; and of the two, I expect the Great Society programs (wasn't Medicaid one of those?) have cost us lots more than Vietnam did, at least in dollars.

All in all, this column is a waste of space. Ignatius could have given us a rundown on why Medicaid is hurting the states and some possible solutions; instead, we just get a melange of budget factoids and Bush-bashing.

One more thing.............What a nifty little political tool the governors are attempting to hand the Congress. Think of all the back-room deals that could be made when deciding who gets how much of our hard earned money...

"Just for reference, this is the first post-war recession where the federal government hasn't provided assistance to the states."

The fiscal stimulus provided by the federal gov't for this recession is the largest ever -- in fact, it exceeds the the total reduction in GDP below trend due to the recession, the only time that's ever happened (as Gene Steuerle has pointed out and I've noted before).

That doesn't benefit the states? There's nobody but the people in the 50 states and DC for it to benefit.

So what you mean is that the federal gov't hasn't directed that help institutionally to assist state politicians.

Which gets back to pretty much the same point as Jane's -- helping state politicians perhaps should not be the sole definition of helping the states.

I find it amusing that some of the more left-oriented posters are bringing up unfunded mandates, since I have a feeling it is they who would start shrieking at the top of their lungs if GWB and Congress got together and simply eliminated the laws associated with the unfunded mandates--as they are predominantly associated with programs that are the sacred cows of the left (environmental protection, the ADA, educational requirements). But hey, I agree that unfunded mandates are an expensive burden on the states--let's axe them.

hi jim,

"The fiscal stimulus provided by the federal gov't for this recession is the largest ever -- in fact, it exceeds the the total reduction in GDP below trend due to the recession, the only time that's ever happened "

and so? there is a whole lot of eco theory and water under many bridges between this claim and the hope that state governments will actually have monies to cover budget programs.

so, what is the increase in gov't spending? a big chunk of military spendin, and ....? homeland security spending?- could that also be part of the unfunded mandates issue? put answer here... or by "fiscal stimulus" are you talking about those wonderfully targeted tax cuts that help out the working and middle class recipients of social programs?

I'm a little confused by this claim that Bush ought to be providing assistance to the states. Aren't some of the same people making this assertion also screaming over the size of the federal deficit?

"The fiscal stimulus provided by the federal gov't for this recession is the largest ever -- in fact, it exceeds the the total reduction in GDP below trend due to the recession, the only time that's ever happened (as Gene Steuerle has pointed out and I've noted before)."

Yes, how nice of the government to blow a huge proportion of GDP on tax cuts to those least likely to spend it, rather than give it to the states, which spend it in high demand-influencing ways.

There's that unsupported "least likely to spend it" claim again. What do you think they're going to do with it, Jason, hide it under a mattress?

hi david,

"Jason, hide it under a mattress?"

put it into bonds, domestic and foreign stocks, buying expensive imports, bank accounts, and yes, under their mattresses... and spend some of it on domestic consumption (and hopefully a tad of investment?).

“Yes, how nice of the government to blow a huge proportion of GDP on tax cuts to those least likely to spend it...”

This is a patently mistaken notion. The very wealthy almost always spend a huge proportion of their earnings on investments. This fuels a growing and vibrant economy.

“...rather than give it to the states, which spend it in high demand-influencing ways.”

The financial grief experienced by the individual states is often nothing more than their inability to curtail the desires of the special interests. A focussed minority unwilling to take any prisoners virtually always has a major advantage over the rest of us. Why is this? A spending proposal may only have a very minor direct impact on my finances. However, those advocating for this spending bill may be greatly rewarded many times over.
It simply does not behoove me to lose time from work and spend an inordinate amount of money to oppose this legislation.

Also, do I define special interests as only a liberal phenomenon? Nope, not in the least. Both Republicans and Democrats are guilty of raiding the public treasury.

Yes, how nice of the government to blow a huge proportion of GDP on tax cuts to those least likely to spend it

But guaranteed to invest it in the private sector.

rather than give it to the states, which spend it in high demand-influencing ways.

Investments in business prompt businesses to hire new workers and buy new equipment, and (in general) produce new products or services materials the public demands. Money given to the state, on the other hand, gets spent on crap nobody really wants, because if they really wanted it they'd have paid a business to do it already.

If you want to increase the supply of useless crap, give money to the state. If you want to increase both the demand and supply for useful goods, on the other hand, give cash to investors.

“If you want to increase the supply of useless crap, give money to the state. If you want to increase both the demand and supply for useful goods, on the other hand, give cash to investors.”

An individual desiring to market their product and services in the free market must earn the consumer’s favor. In the political sector---one merely needs to gain approval of those in power. This is perhaps the central reason to privatize everything as much as possible. Politicians innately cater to those most helpful in keeping them in office.

This issue transcends the categories of right and left. As I said in my previous post, both Republicans and Democrats are guilty of dipping their hands into the government treasury. I actually agree with many of Ralph Nader's complaints concerning welfare for the corporate interests.

Is this bastardized version of Keynes - that deficit spending on the rich is somehow the best way to fix a demand shortfall, even though the rich don't spend very much, which kind of conflicts with the whole "increasing demand thing" - actually laid out in coherent form somewhere? Not that I'm holding my breath.....

Still wondering when any sort of factual backing for the claim that the wealthiest are least likely to spend a tax cut. Not that I'm holding my breath...

Oops, unfinished sentence. I'm not going to finish it; either you understand or you'll have to wait until tomorrow.

Keynes' idea that handing money to those who spend it, even if you support it, was based on the idea of excess savings -- that bonds, bank accounts, etc. wouldn't be spent because there was an excess of savings over investment. With consumer debt soaring, this is not our current trouble.

Watch your wallet when politicians agree unanimously to anything. The last time I remember noticing anything significant that passed unanimously, it was California's pitiful attempt at electricity deregulation.

Jason writes, "Yes, how nice of the government to blow a huge proportion of GDP on tax cuts to those least likely to spend it, rather than give it to the states, which spend it in high demand-influencing ways."

So, why is Wal-Mart going like gang-busters and back-to-school spending is up? And why the biggest housing surge in 19(?) years? And those houses are going to need hard goods.

You just don't like who has the influence.

This is a patently mistaken notion. The very wealthy almost always spend a huge proportion of their earnings on investments. This fuels a growing and vibrant economy.

It astounds me that tax-cutters can't see the fallacy in their logic that cuts for the rich (or anybody) mean more investment. Every dollar in tax cuts, absent offsetting spending cuts, means that the deficit increases by a dollar. That means the government has to borrow that dollar from somebody. So even if every dollar of tax cuts is invested, rather than spent, then there is a net zero gain in investment thanks to the additional borrowing that the Treasury must do.

If a portion of the tax cuts are consumed (which of course is the case in reality), then total investment decreases. This can be desirable in providing short-term stimulus, but it is foolish to argue that tax cuts increase investment thanks solely to the additional money they provide investors. That additional investment is sucked up by the additional borrowing the government must do.

Sorry, my first paragraph should be italicized or quoted.

The basic justification for federal aid to state and local governments is that state and local governments carry the burden of providing a wide range of highly essential public goods, while the federal government has much more flexibility in raising revenue, especially in recessions.

The reason for libertarian opposition to such aid is dogmatic narrowness. The reason for Republican opposition is that one element of the long-term Repub strategy, articulated by Norquist, Gingrich, etc, is to systematically starve the public sector of funds, thereby driving down the quality of public services and providing seeming support for the case for privatization.

So what the heck is the theory behind the tax cuts, then? I seem to recall Bush advisors insisting it was Keynesian; if not, what's the theory?

And I'm pretty sure there's more to the concept of excess savings than looking at the consumer debt number.

Are we ever going to see some justification for the "least likely to spend" claim, Jason? Even an admission of just making it up would be greatly preferable to pretending it never happened.

As for the theoretical basis for tax cuts: I hear Google is pretty handy. If it's not on the web, you can always try the library.

David, that marginal preference to consume decreases is income goes up is extraordinarily well established. To boot, I seem to remember lots of Republicans, talking about how rich people are more likely to invest, and that's why you should give them tax cuts.

When money is rolling in we will spend it like it will always roll in. When it stops due to fluxuations in the economy we'll ask the guv'mint for more money instead of managing our money responsibly. D'oh!!

>>The fiscal stimulus provided by the federal gov't for this recession is the largest ever -- in fact, it exceeds the the total reduction in GDP below trend due to the recession, the only time that's ever happened (as Gene Steuerle has pointed out and I've noted before).

"Yes, how nice of the government to blow a huge proportion of GDP on tax cuts to those least likely to spend it, rather than give it to the states, which spend it in high demand-influencing ways."

Reality check time:

1) As Steuerle also pointed out, the bulk of the unprecedentedly huge federal stimulus comes from the "automatic stabilizers" in the economy -- increased (and lengthened) unemployment benefits, various transfers *to* the states that *do* occur in such situations (even if new ones haven't been enacted), reduced tax collections across the board, and so on.

2) As far as the minority of the stimulus coming from tax cuts are concerned, last year saw a big but temporary *business* tax cut, specifically designed as a short-term stimulus, in the form of increased expensing/depreciation incentives for equipment purchases, 100% of which must be used for business activity. This year's tax act increased these business incentives further, for a limited term.

In contrast, the "huge" tax cuts for the rich enacted last year lowered the top tax bracket rate by all of one percentage point. This year's tax act lowered it by another three percentage points.

Remember that Bush's personal tax cuts are heavily back-loaded (the estate tax "repeal" and all). Indeed that is a common criticism of them from the "need for stimulus" point of view -- they will increase future deficits without having a stimulus impact today. (Although it's an odd combination to say "they are bad and we need them faster".)

3) As to the later claim, "that marginal preference to consume decreases is income goes up is extraordinarily well established", well, there are other views on that.

E.g: "early Keynesians argued that redistributing income from profits to wages would raise consumption demand, because workers save less than capitalists (actually they don't, but that's another story)"
-- Krugman http://slate.msn.com/id/1917/

They don't?

Modigliani's life cycle income hypothesis fits the data better, which is why it got him a Nobel. That is, people gauge their income on a lifetime basis, save more during their high income years and spend more during their low income years to balance their lifetime income and spending overall -- no matter what their income level. And this creates a statistical illusion that the saving/consumption rate varies by income.

E.g. a doctor will consume more while young (via student loans and the like) and during retirement (from savings) while saving more during highest-earning mid-life years. Now if you just take snapshots of him at those three points of time it may look like his propensity to consume depends on income.

Except the same thing is true for everybody at all income levels, even "the poor", which shows the MPC depends on stage of life, not income.

And this explains why as national income has multiplied over the past century the MPC hasn't fallen. If anything, higher incomes overall have been accompanied by a lower savings rate.

So if one wants to really target income tax cuts at those with a high MPC, they should be targeted by age -- and Bush should get whacked for giving them to those in their middle high-earning years instead of just to the young and the old.

4) As for the idea that money should best go not to real people but "to the states, which spend it in high demand-influencing ways", well, there's a leap of faith.

Second Avenue subway, anyone?

I actually agree with many of Ralph Nader's complaints concerning welfare for the corporate interests.

Ralph Nader is guilty of it himself. When I attended UCSD (a public university), I was forced to pay a fee to his CALPIRG organization.

Looking at state and local spending since the last recession, as a share of GDP, is interesting:

1992: 10%
1993: 9.9%
1994: 9.7%
1995: 9.7%
1996: 9.6%
1997: 9.5%
1998: 9.4%
1999: 9.4%
2000: 9.6%
2001: 10%
2002: 10.1%

(Source: 2004 OMB historical tables)

Dan wrote:

Ralph Nader is guilty of it himself. When I attended UCSD (a public university), I was forced to pay a fee to his CALPIRG organization.

It used to be mandatory at the University of Minnesota but they eventually changed it to a “negative checkoff” – meaning that if you didn’t want to pay you had to check it off (as opposed to checking to make a contribution like you do for most things). When the school went to online registration and had the inevitable computer glitches including crashing in the middle of registration, if you didn’t check that you didn’t want to pay, you had to physically go to their office and get them to write you a check to get your money back.

David Perron wrote:

I'm a little confused by this claim that Bush ought to be providing assistance to the states. Aren't some of the same people making this assertion also screaming over the size of the federal deficit?

Only the ones that complained about the deficit and who weren’t willing or able to come up with a list of spending cuts to bring the budget back into balance.

There are a lot of us who are upset with the federal government’s spending orgy – agricultural subsidies, the Department of Education, yet another “entitlement” for seniors in the form of “free” pharmaceuticals, “alternative” energy R&D, increased foreign aid in the name of fighting “AIDS,” etc. to say nothing of the already obscene amount of money spent by the federal government on already-existing wealth transfer programs.

IMNHO the worst thing the federal government could do is to bail out the States who have also been spending like a bunch of drunken persons who spend a lot of money. The State governments have made their own bed and now have to deal with the problems their spending has created. Granted there are unfounded mandates from the federal level and I would be willing to support repealing many if not most of them regardless of whether the States are running deficits or not; but frankly this is pretty much a red herring. I’d be willing to bet that if you looked at most of the States who are having problems (open invitation to get into budgetary specifics), I doubt that most of it was due to any “unfounded mandates” from the federal level but rather the taxing and spending decisions made by the governors and legislatures of those States. Having the feds bail them out only encourages this sot of behavior in the future which is why you’ll find that it’s really only people who generally support taxing and spending for the Nanny State who want the federal government to provide “assistance.”

As to the MPC/income relation - looks like the econ courses I was taking back in college were being a bit cute with me. Argh, need to do some reading.

That they're extremely back-loaded indicates to me that demand stimulus is just a convenient excuse, anyway.

Doesn't it strike else as a bit...odd...that this is the first post-war recession where no assistance went to the states? It's a wierd thing; a rather large change in "norms of political activity" with no discussion whatsoever.

"Doesn't it strike else as a bit...odd...that this is the first post-war recession where no assistance went to the states? "

One man's "odd" is another's "refreshing." The federal government is not a safety valve for state government overspending, recession or not.

--systematically starve the public sector of funds, thereby driving down the quality of public services and providing seeming support for the case for privatization.--

And we can look to Europe and find the opposite.

Public sector certainly isn't starving there. They're going on vacation en masse.
---

And yet TX and TN, even w/the boondoggle TenCare, balanced their budgets.

Jason McCullough wrote:

Doesn't it strike else as a bit...odd...that this is the first post-war recession where no assistance went to the states?

Actually what strikes me as odd is the idea that State governments ought to be able to look to the federal taxpayer via the federal government to subsidize their proclivity for over-spending. Doesn’t it strike anyone else as odd that the people in a State can have spending for their preferred State government programs subsidized by people living in other States? Especially since the anti-tax cut crowd is now professing to worship at the alter of the Almighty Balanced Budget (except when it comes to supporting spending cuts)?

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