Confessions of a Supply-Side Liberal

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Quartz #46—>One of the Biggest Threats to America’s Future Has the Easiest Fix

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Link to the Column on Quartz

Here is the full text of my 46th Quartz column, coauthored with Noah Smith, "One of the biggest threats to America’s future has the easiest fix," now brought home to supplysideliberal.com. (I expect Noah will post it on his blog Noahpinion as well.) It was first published on February 4, 2014. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© February 4, 2014: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2015. All rights reserved.

Noah has agreed to allow mirroring of our joint columns on the same terms as I do, after they are posted here.

I talked about some of the issues of capital budgeting addressed in this column a while back in my post "What to Do When the World Desperately Wants to Lend Us Money" and Noah has talked about the importance of infrastructure investment a great deal on his blog .

Other Threats to America’s Future: Our editor wanted to title the column “The biggest threat to America’s future has the easiest fix.” I objected that I didn’t think it was the very biggest threat to America’s future. I worry about nuclear proliferation. Short of that, I believe the biggest threat to America’s future is letting China surpass America in total GDP and ultimately military might by not opening our doors wider to immigration—a threat I discuss in my column "Benjamin Franklin’s Strategy to Make the US a Superpower Worked Once, Why Not Try It Again?"

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In the 1990s, with its economy stagnating after a financial crisis, Japan lavished billions on infrastructure investment. The Japanese government lined rivers and beaches with concrete, turned parks into parking lots, and built bridges to nowhere. The splurge of spending may have allowed Japan to limp along without a full-blown depression, but added to the mountain of government debt that remains to this day.

Given Japan’s experience, it may seem odd for us to call for an increase in America’s infrastructure investment. In terms of infrastructure, the US now is not Japan in the 1990s. They didn’t need to build … but we do.

First, the United States is a lot larger than Japan, and larger than the densely populated countries of Europe. We have a lot more ground to cover with highways, bridges, power lines, and broadband infrastructure. We need to be spending a higher fraction of our GDP on these transportation and communication links—but instead, we spend about the same or less.

Second, where Japan’s infrastructure was in good condition when the spending binge started, America’s infrastructure is in hideous disrepair. The American Society of Civil Engineers gives America’s infrastructure a “D+”. Although infrastructure opponents typically dismiss the opinions of civil engineers (who, after all, stand to personally gain from increased infrastructure spending), McKinsey released a recent report saying much the same thing. McKinsey notes that Japan is spending about twice as much as it needs to on infrastructure. But the US is spending only about three-fourths of what we should be spending. The Associated Press piles on, saying that 65,000 American bridges are “structurally deficient.” A former secretary of energy says our power grid is at “Third World” levels. The list of infrastructure woes goes on, and on, and on.

This is not the picture of a country with a healthy infrastructure.

We need to rebuild our infrastructure, and now is the perfect time to do it. Interest rates are at historic lows, but they are unlikely to stay there forever. Our government has a unique opportunity to borrow cheaply to fund infrastructure projects that will generate a positive return for the country. (If the increased spending acts as a Keynesian “stimulus,” so much the better.)

But infrastructure budgets have been cut, not expanded. Why? One reason is that in the race to cut the deficit, infrastructure spending has been lumped in with other types of spending. That is a tragic mistake. Unlike government “transfers,” which simply take money from person A and give it to person B, infrastructure leaves us with something that helps the private sector do business, and thus boosts our GDP growth. Infrastructure is a small percentage of overall federal spending, but tends to be a politically easy target.

One idea to boost infrastructure spending, therefore, is to treat government investments differently from other kinds of government spending by having aseparate capital budget.  A separate capital budget has been suggested, but so far, the effort has foundered. There is a lot of confusion over which types of spending represent an “investment in the future.” Some politicians tend to argue that almost anything that helps people is an investment in the future, and so is a legitimate part of a capital budget. But of course everything in the government’s budget is something that someone thinks will help people!  So what is needed is a clear criterion to determine what should be in the capital budget and what should be in the regular budget.

There should be a fairly stringent set of criteria for what belongs in a capital budget. Furthermore, these criteria should appeal to both parties. Here is what we suggest as criteria to keep the capital budget “pure”:

1.     If experts agree that an expenditure will raise future tax revenue by increasing GDP, then it belongs in the capital budget. If it can pay for itself entirely out of extra tax revenue in the future then it should be 100% on the capital budget. If it can pay for half of its cost out of extra tax revenue in the future, than it should be 50% on the capital budget. The provision “experts agree” requires some sort of independent commission doing an economic analysis with appointees from both parties, and with, say, two-thirds of the commissioners needing to agree that the value of future tax revenue is likely to be above a given level.

2.     Even if an expenditure will not raise future tax revenue, it can count as a capital expenditure if it is a one-time expenditure—that is, if it makes sense to have a surge in spending followed by a much lower maintenance level of spending in that area. This will only be true if it pushes the existing stock of infrastructure, other government capital, or knowledge to a higher level than before, not if it just keeps things even. Crucially, by this logic, anything that lets the stock of infrastructure or other government capital decline would count as anegative capital expenditure. This principle enables the capital budget accounting to sound a warning when the nation is letting its infrastructure crumble away, and also allows sensible decisions about shifting funds from older forms of infrastructure toward modern forms of infrastructure needed by a fast-moving economy.

As our mention of the stock of knowledge suggests, a capital budget can also be a good way to make sure that America doesn’t underinvest in basic scientific research. However great the importance of better roads and bridges, it makes sense to weigh the benefits of those roads and bridges against the benefits of research that might someday conquer Alzheimer’s disease, or research on how to make the way math is taught in our public schools so exciting that every high school graduate in America is able to do the math needed to, say, operate computerized machine tools.

With proposals like these on the table, we believe there is a chance that Republicans and Democrats could agree to set infrastructure and other legitimate capital spending aside as an issue that should not be a victim of titanic political battles over the deficit. Of course, someday, if we find ourselves in Japan’s position of spending so much on infrastructure that it starts adding significant amounts to the debt, then the capital budget should become an issue in deficit fights as well. But we are far from that point.

Both Republicans and Democrats want to govern a country that is as rich and prosperous as possible. America’s businesses need good infrastructure to move their goods from place to place—and there is no question that we need the solid new ideas that research can provide. Economists of all stripes will agree that if a nation is under-spending on infrastructure and other legitimate capital spending—as America is right now —then boosting that spending is a win-win. It’s time to look beyond our fights over how to divide America’s pie, and focus on making the pie bigger.

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Technical Afterword

There is a very interesting feature to our proposed capital budgeting system that we should highlight. How can the capital budget ever be negative? The capital budget plus the non-capital budget must add up to the total budget. So for a given total budget, a negative capital budget makes the non-capital budget bigger. What is going on is this: regular maintenance is like a quasi-entitlement within the non-capital budget. In any given year, regular maintenance as a component of the non-capital budget is fixed in advance and can’t be altered by the legislature. The only way it changes is that it is gradually reduced if the quantity of capital to be maintained gets lower, or gradually increased if the amount of capital to be maintained gets bigger.

In this lack of discretion about regular maintenance as a component of the non-capital budget, there is no real tying of the hands of the legislature: they could always choose to have a very negative capital budget, which would increase the non-capital budget enough to cover that maintenance. So if the legislature as a whole acted like a fully rational actor, this principle is not a constraint at all. But as political economy, it makes a difference, and a good one. The legislature can increase the non-capital budget and reduce the capital budget. But what the legislature can’t do is get more funds for other things by letting capital decay without it showing up in the accounting as an increase in the regular budget and reduction in the capital budget. 

Filed under fullcolumns longrunfiscal

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One of the Biggest Threats to America’s Future Has the Easiest Fix

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Here is a link to my 46th column on Quartz, “One of the biggest threats to America’s future has the easiest fix,” coauthored with Noah Smith. I talked about some of the issues of capital budgeting addressed in this column a while back in my post "What to Do When the World Desperately Wants to Lend Us Money" and Noah has talked about the importance of infrastructure investment a great deal on his blog Noahpinion.

Other Threats to America’s Future: Our editor wanted to title the column “The biggest threat to America’s future has the easiest fix.” I objected that I didn’t think it was the very biggest threat to America’s future. I worry about nuclear proliferation. Short of that, I believe the biggest threat to America’s future is letting China surpass America in total GDP and ultimately military might by not opening our doors wider to immigration—a threat I discuss in my column "Benjamin Franklin’s Strategy to Make the US a Superpower Worked Once, Why Not Try It Again?" 

Technical Afterword to the Column (Please Read Column First)

There is a very interesting feature to our proposed capital budgeting system that we should highlight. How can the capital budget ever be negative? The capital budget plus the non-capital budget must add up to the total budget. So for a given total budget, a negative capital budget makes the non-capital budget bigger. What is going on is this: regular maintenance is like a quasi-entitlement within the non-capital budget. In any given year, regular maintenance as a component of the non-capital budget is fixed in advance and can’t be altered by the legislature. The only way it changes is that it is gradually reduced if the quantity of capital to be maintained gets lower, or gradually increased if the amount of capital to be maintained gets bigger.

In this lack of discretion about regular maintenance as a component of the non-capital budget, there is no real tying of the hands of the legislature: they could always choose to have a very negative capital budget, which would increase the non-capital budget enough to cover that maintenance. So if the legislature as a whole acted like a fully rational actor, this principle is not a constraint at all. But as political economy, it makes a difference, and a good one. The legislature can increase the non-capital budget and reduce the capital budget. But what the legislature can’t do is get more funds for other things by letting capital decay without it showing up in the accounting as an increase in the regular budget and reduction in the capital budget. 

Filed under longrunfiscal columns

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Josh Barro: We Need a New Supply Side Economics—Here Are 8 Things We Can Do

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Josh Barro

Noah Smith and Christopher Cordeiro tweeted that Josh Barro’s column "We Need A New Supply Side Economics — Here Are 8 Things We Can Do" sounded like ideas I would favor. They are right. 

I fully agree with Josh’s lead-in:

Demand stimulation remains the right goal today, but it’s not going to be the right goal forever. …

We’re going to need a new supply side economics that encourages people to work, invest and innovate.

Some of Josh’s proposals cost money, for which he proposes more progressive income taxes as a revenue source (as his 8th point). I have proposed tapping the resources of the rich in a different way. I want to  finance an expansion of the nonprofit sector (see the links in "The Red Banker on Supply-Side Liberalism"). To get there politically, I enunciated the principle of "No Tax Increase Without Recompense." So I cannot go along with Josh’s proposal raise income taxes at the upper end in a conventional way. (Also see the Twitter discussions "Daniel Altman and Miles Kimball: Should We Expand Government or Expand the Nonprofit Sector?" and "Daniel Altman and Miles Kimball: Is It OK to Let the Rich Be Rich As Long As We Take Care of the Poor?") The expansion of the nonprofit sector that I propose will help the poor tremendously in many ways beyond the dimension Josh is focuses on. 

More generally, I think it is better to build progressivity into the spending side of the government’s activities—including transfers—than into the tax side. Instead, I think Josh’s proposed enhancements of programs to direct more resources toward the poor can also serve as ways to compensate the poor for increases in increases in taxes on externalities such as carbon dioxide emissions and the consumption of soft drinks and junk food that affect the behavior of all those around us through not-fully-conscious social influences

Here is Josh’s list, minus the income tax increase, with my comments:

1. Invest in smart infrastructure, ideally without building much.

Yes! Noah and I have an column on infrastructure investment. And I agree with Josh that it is a bad habit to get into to think of infrastructure investment as a demand-side thing. We need to keep in our sights getting supply-side benefits from the infrastructure investments that we make.  

I would emphasize government support for basic research in the same breath as infrastructure investment. Indeed, I think there is even more supply-side benefit to be had from government support for basic research than from additional infrastructure investment. 

2. Reform means-tested entitlements without soaking the poor.

Josh wants to phase out aid to the poor more slowly with higher income, in order to avoid discouraging people from working hard and avoid discouraging people from building their careers through education and other means. This is great, but it will cost the government more money. I would like to reward healthy eating and not contributing too much to global warming across the whole population, as well as rewarding the poor for working hard and getting an education. That combination can finance itself.    

3. Move the deregulatory agenda down to the state and local level.

This is one of Josh’s points that I think needs to be shouted from the rooftops. Here is the full text of what he said on this point:

In the 1970s, the big deregulation fights were properly at the federal level. Then the government deregulated airlines and trucking. Though technological change, regulation has become less important in broadcasting and telecommunications. Bank deregulation has been a mixed bag over this period; people talk about it as a cautionary tale, but some of the deregulations (such as ending the limit on savings account interest and allowing interstate banking) have served consumers very well.

The big federal regulatory fights that remain are in mostly areas where the federal government properly uses a heavy hand: banking and securities, and environmental protection.

The next round of big deregulation fights should be at the state and local level. Governments impose pro-incumbent regulations on a variety of industries from barbering to interior design to medicine to restaurants. These rules raise incomes for existing practitioners, but they make it difficult for new practitioners to enter the fields, and they raise consumer prices.

State and local governments should stop doing this.

In the interest of promoting interstate commerce, the federal government should pre-empt many of these regulations. For example, states should be forced to allow a broad scope of practice for nurse practitioners so they can serve as independent primary care providers. This would reduce doctors’ incomes, but it would reduce the cost of health care, raise patients’ real incomes and help to control government expenditure.

What I have said on this topic can be found in my post

4. Deregulate America’s most overregulated industry: real estate.

Here, Josh is on the same side as Matthew Yglesias, who wrote the book on this issue: The Rent is Too Damn High. I am part of the cheering section for their efforts. Given the fraction of household budgets spent on housing, this is a huge issue.  

5. Reform intellectual property — by weakening it. 

I endorse this idea in my link post "The Wonderful, Now Suppressed, Republican Study Committee Brief on Copyright Law." I also muse on how much protection is necessary in my post "Copyright." Wonderful, amazing new things will happen if we shift to less restrictive intellectual property rules. And if we overshoot in a way that undercompensates creators, that can easily be fixed later. It is high time we experimented with more fluid rules. 

Given the pace of innovation and the rate at which things become obsolete, one change that almost certainly a winner is to shorten the term for patents and copyrights. The only place this seems problematic is in retaining adequate incentives for the development of new drugs. There, combining a shorter period of exclusivity with the government paying for half of the cost of drug trials would probably keep just as much innovation while still helping the government budget, since the government pays for drugs as part of Medicare now.  

6. Improve education, somehow.

I have written a fair amount about education. Improving education will be an ongoing theme for me. Here is a link to my sub-blog on education, and here are some of the most important posts:

7. Admit more high-skill immigrants.

More open borders is something I am passionate about. But I would not limit it to high-skill immigrants. Helping the poor who are currently in other countries is also important. Here are some of my more important posts in that vein:

Filed under growth longrunfiscal

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The Red Banker on Supply-Side Liberalism

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Icon for the Red Banker blog (which also appears in Wikipedia article on the "Commercial Revolution")

Frederic Mari blogs as the Red Banker. He gives a positive take on my first post "What is a Supply-Side Liberal?" in his post "Supply Side Liberalism: The Interesting Case of Dr. Kimball and Mr. Miles." However, Frederic questions whether limited government is politically possible, saying

People oppose government spending but support all of its public good provision.

Here I wished he had discussed my central proposal for keeping the burden of taxation down while providing abundant public goods: a public contribution system that raises taxes rates, but lets people avoid 100% of the extra taxes by making charitable donations focused on doing things the government might otherwise have to do. These two posts lay out how a public contribution system would work: 

Also, my post 

is best understood in this context.  

I discuss a few other ideas for how to reduce the burden of taxation based on the ways in which human psychology departs from over-simplified views of homo economicus in this popular post: 

The bottom line is this: In my book, it isn’t Supply-Side Liberalism without a serious effort to lower the burden of taxation for any given level of revenue, using everything we know about human nature. 

Filed under reviews longrunfiscal class

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GiveWell: Top Charities

In my post “Inequality Aversion Utility Functions: Would $1000 Mean More to a Poorer Family than $4000 to One Twice as Rich?" I use math and survey data on inequality aversion to argue that the big gains from redistribution are from taking care of the desperately poor. GiveWell is a website that rates charities in a way consistent with that criterion. Take a look. 

I learned about GiveWell from Michael Huemer’s excellent book The Problem of Political Authority.

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An Experiment with Equality of Outcome: The Case of Jamestown

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Jamestown Colony

This passage is from Michael Huemer’s wonderful book The Problem of Political Authority, pages 192-194. 

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Take the case of a social theory proposing that all citizens should work for the benefit of society, while receiving equal pay. A simple theoretical prediction is that, in such a system, productivity will decline. Individuals have a high degree of control over their own productivity, and greater productivity usually demands greater effort….

This prediction is in fact correct. The twentieth century’s experiments with social systems in this vicinity are well-known, so I shall not dwell on them. An interesting, but little-known illustration is provided by America’s first experiment with communism, which took place at Jamestown, the first permanent English settlement in America. When the colony was established in 1607, its founding charter stipulated that each colonist would be entitled to an equal share of the colony’s product, regardless of how much that individual personally produced. The result: the colonists did little work, and little food was produced. Of the 104 founding colonists, two-thirds died in the first year—partly due to unclean water, but mostly due to starvation. More colonists arrived from England, so that in 1609 there were 500 colonists. Of those, only 60 survived the winter of 1609-10. In 1611, England sent a new governor, Sir Thomas Dale, who found the skeletal colonists bowling in the streets instead of working. Their main source of food was wild plants and animals, which they gathered secretely at night so as to evade the obligation to share with their neighbors. Dale later converted the colony to a system based on private property, granting every colonist a three-acre plot to tend for his own individual benefit. The result was a dramatic increase in production. According to Captain John Smith’s contemporaneous history, 

When our people were fed out of the common store and labored jointly together, glad was he [who] could slip from his labor or slumber over his task, he care not how; nay, the most honest among them would hardly take so much true pains in a week as now for themselves they will do in a day … so that we reaped not so much corn from the labors of thirty, as now three or four do provide themselves. 

One lesson from this episode is that, simple as the account of human nature I have advanced is, it can yield very useful predictions. If the company that created the Jamestown charter had known a little economics, hundreds of lives might have been spared. Another is that the impact of human selfishness depends greatly on the social system in which people are embedded: in one kind of system, selfishness may have disastrous consequences, while in another, it promotes prosperity.  

Filed under longrunfiscal

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Miles on HuffPost Live: Barack Obama Talks about the Long Run, While We Wonder about His Pick for Fed Chief

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Link to HuffPost Live segment “Back to the Economy”: Mark Gongloff, Edward G. Luce and Miles Kimball, hosted by Mike Sacks


It was a little odd having two fairly disparate topics in this HuffPost Live segment: long-run issues and who the new Fed Chief should be. Here is what I talked about:

Filed under longrunfiscal finance education money emoney laborio growth media

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David Byrne on Non-Monetary Motivations

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David Byrne

As illustrated by arguments I make in my posts "Scott Adams’s Finest Hour: How to Tax the Rich" and "Copyright," understanding the strength of non-monetary motivations for work is important for public policy. David Byrne gives a vivid description of non-monetary motivations in his line of work in this passage from his book How Music Works, pp. 203-204.

How important is getting one’s work out to the public? Should that even matter to a creative artist? Would I make music if no one were listening? If I were a hermit and lived on a mountaintop like a bearded guy in a cartoon, would I take the time to write a song? Many visual artists whose work I love—like Henry Darger, Gordon Carter, and James Castle—never shared their art. They worked ceaselessly and hoarded their creations, which were discovered only after they died or moved out of their apartments. Could I do that? Why would I? Don’t we want some validation, respect, feedback? Come to think of it, I might do it—in fact, I did, when I was in high school puttering around with those tape loops and splicing. I think those experiments were witnessed by exactly one friend. However, even an audience of one is not zero. 

Still, making music is its own reward. It feels good and can be a therapeutic outlet; maybe that’s why so many people work hard in music for no money or public recognition at all. In Ireland and elsewhere, amateurs play well-known songs in pubs, and their ambition doesn’t stretch beyond the door. They are getting recognition (or humiliation) within their village, though. 

In North America, families used to gather around the piano in the parlor. Any monetary remuneration that might have accrued from these “concerts” was secondary. To be honest, even tooling around with tapes in high school, I think I imagined that someone, somehow, might hear my music one day. Maybe not those particular experiments, but I imagined that they might be the baby steps that would allow my more mature expressions to come into being and eventually reach others. Could I have unconsciously had such a long-range plan? I have continued to make plenty of music, often with no clear goal in sight, but I guess somewhere in the back of my mind I believe that the aimless wandering down a meandering path will surely lead to some (well-deserved, in my mind) reward down the road. There’s a kind of unjustified faith involved here. 

Is the satisfaction that comes from public recognition—however small, however fleeting—a driving force for the creative act? I am going to assume that most of us who make music (or pursue other create endeavors) do indeed dream that someday someone else will hear, see, or read what we’ve made.

For balance, I should point out that in the paragraph after this passage, David writes of monetary motivations as well:

Many of us who do seek validation dream that we will not only have that dialogue with our peers and the public, but that we might even be compensated for our creative efforts, which is another kind of validation. We’re not talking rich and famous; making a life with one’s work is enough. 

But notice that in David’s description, even the monetary motivation has two dimensions: enabling consumption and validation. 

Filed under longrunfiscal class