Tom Sgouros: Short Takes
Saturday, August 13, 2011
Cutting spending is harder than you think
In discussions of the debt ceiling debacle and the resulting agreement, much has been made of President Obama's unwillingness to give up calling for new revenue. In some accounts this makes it seem like both sides were unwilling to give ground. In a superficial fashion, this may be true, but it's hardly the important part of the story. Cutting spending is harder than it sounds. The parts that get the headlines are often insignificant pieces of the whole pie, and quite a bit of spending is honoring contracts, like bonds, but also like Social Security payments.
Some savings claimed can be elusive. In my town, my daughter's elementary school was closed to save money a few years ago, but increased transportation costs for the students who were moved and the costs of maintaining the empty building pretty much ate up whatever savings there might have been. Was closing it the right thing to do? Maybe, but the best evidence I know about says it didn't save more than a fraction of what it was supposed to.
What's more, much government spending is there in order to save money. That is, deferring maintenance is only a recipe for making things more expensive. Medicaid, for another example, is a program that offers savings over having poor people seek care at emergency rooms. The EPA offers cost savings over the health and safety risks of the pollution that was more a part of my childhood than my children's. And so on.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTThis is why it's so important to demand specifics. During the debacle in July, to my astonishment, there was never a point where Republicans had identified more than a tiny fraction of the total amount they were demanding be cut, and the whole "super committee" dodge ahead of us is simply a transparent dodge for them to continue avoiding having to do exactly that. If someone tells you we should cut government spending, ask them how. Ignore them when they say that's a trick question. It's not. It's the heart of the matter. If they can answer, you can decide whether you think that cut is a good idea, or whether it's possible. If they can't, then scorn is the only appropriate response.
Pension actuaries: Reamortization
Reviewing materials presented to the Treasurer's pension commission by the various actuary companies involved, I couldn't help but notice that all the solutions proposed so far involve re-amortizing the unfunded liability to some degree or another. The fact that these proposals are under serious discussion and will likely form the center of a consensus solution to the crisis is evidence of how dumb policy discussion can be around here. That is, for some reason reamortization is a solution that can't possibly be countenanced when it comes from Lincoln Chafee (or from me), but it's ok when it comes from an actuary, years later than necessary.
The debate over reamortization over the past few years could hardly be a better illustration of how bad policy can make a problem much worse. The truth is that bad state policy, lately championed by Senate Finance chair Dan Daponte (D-East Providence, Pawtucket), has made the cost of pensions higher than it needs to be over the last several years, for the state, and for every school system laboring under its rules. Daponte (pictured left) and his staff were important players in deep-sixing the possibility of refinancing the unfunded liability in 2010. They circulated a set of projections that claimed the cost of doing so would be over $2 billion in the long run. (It was true only if we promised to burn up all the money saved in the short run.)
Before Daponte, Governor Carcieri insisted that refinancing be taken off the table when discussing pension costs with state employee unions. And more recently, Treasurer Gina Raimondo pressured Governor Chafee to drop the possibility from his 2012 budget proposal. The truth is that refinancing the liability is a harmless and common way to spread out the cost of debts like this. Several states -- some of which have better bond ratings than we do -- do so every year. Much of the crisis over our pension system could have been avoided if sense had prevailed years ago. Better late than never, I guess.
Zombie economics
A funny and entertaining book -- entertaining in my favorite dark and nerdy kind of way, that is -- came across my path recently. "Zombie Economics: How Dead Ideas Still Walk Among Us," by economist John Quiggins, is a look at how important economic ideas live on despite both the lack of evidence for them and the abundant evidence against. The "Efficient Market Hypothesis," the idea of the economy as a dynamic equilibrium, the history of the "Great Moderation," supply side economics, and the important rationales for privatization all come under his scrutiny, and all come out lacking – not because of some ideological axe he's grinding, but because they've all been amply repudiated by recent events.
Nonetheless, despite their poor record, most of these ideas continue to rule public policy debates in subtle and not-so-subtle ways. After all, the thing about zombies is that they're really hard to kill. For example, here in Rhode Island, supply side economics rules the day and the only economic policies that ever get discussed seriously at the state house are tax cuts for rich people and special deals for corporations. These are proposals with a long track record of failure, and that haven't a prayer of working as promised, but if you poke a representative, chances are he or she will suggest them by reflex, proving the zombies still reside within. Supply side tax policy has little but a long record of failure behind it, but the Assembly leadership's desire to preserve its supply-side tax cuts is essentially why we let Central Falls go bankrupt and why your town had its state aid slashed last year.
There are more subtle effects, too. Quiggins writes well about the "Efficient Market Hypothesis," the claim that in any working market, especially financial markets, the market price of any asset incorporates all the important information about that asset. This "weak" form is not too objectionable, though it has to be qualified with what information is available to whom, but there is a strong form, too, that says it's impossible to do better than a working market in assessing value. This claim obviously underlies the utter lack of financial regulation that brought us worldwide disaster, but it's also hiding beneath such universal practices as using market prices to assess the value of real estate. The idea has virtually no rigorous real-world support, and virtually anyone who has been through an appeal of a real estate assessment can make a valid case against it, but yet it rules our world.
In the Night of the Living Dead, it seemed the zombies couldn't be killed except by a direct shot to the head. This book isn't going to kill these dead ideas, but it's ammunition we all can use. That is, it's not really a gunshot itself, but more like a supply of explosive bullets. Read it -- and take aim.
n.b. Quiggins writes frequently on the blog http://crookedtimber.org.
Tom Sgouros is the editor of the Rhode Island Policy Reporter, at whatcheer.net and the author of "Ten Things You Don't Know About Rhode Island." Contact him at [email protected].
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