Stimulating My Nostalgia - ARRA's Five Year Anniversary

I woke up Sunday morning, opened up The New York Times and scrolled down to the Opinion section. Listed at the top was an Op-Ed penned by the NYT's Editorial Board about the five year anniversary of the American Recovery and Reinvestment Act and what it had accomplished. I couldn't help but feel nostalgic. At the time of the bill's passage I was 22 years old and finishing my last year of undergrad in beautiful San Luis Obispo, Ca. It was one of the happiest periods of my life, even despite the fact I was about to graduate right as the Great Recession began. 

At the time I was very hopeful about the Obama presidency (I voted for him in November 2008) and his stimulus bill; I was sympathetic to progressive economic ideology. But it didn't take long for my hope to turn to doubt. In January 2009, while ARRA was making its way through Congress, I was enrolled in two Economics courses taught by Dr. Michael Marlow. The key takeaways in class were that the macroeconomy is extremely complex and there is a hidden side to everything. The famous Friedrich Hayek quote became one of my favorites, "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

Hence my skepticism Sunday upon reading the NYT Editorial Board's proclamation that the stimulus package worked, even though the NYT stated ARRA was not well constructed nor big enough. My personal bias is that ARRA destroyed value and that the American economy would have been better off had we not borrowed and spent $832 billion through political and government channels, but instead let the American people keep the billions and save or invest it as they best saw fit. Although the Times eloquently claimed that the stimulus was worth it, their math was not convincing.

The NYT editorial board distilled ARRA's benefits into one paragraph, but one sentence succinctly summarized their evidence, "(ARRA) raised the nation’s economic output by 2 to 3 percent from 2009 to 2011."

Some back of the envelope math on these numbers are as follows...U.S. GDP grew from $14.5 trillion in 2009 to $15.2 trillion in 2011, or ~4.8%. 3% of which ($435 billion) is directly attributable to ARRA according to the NYT and their survey of "fair-minded economists."

Perhaps I'm misunderstanding the Times, but $435 billion of value is $397 billion short of the original investment five years in, using the rosiest assumption, and ignoring opportunity costs and the extra costs of interest rates. ARRA's actual GDP contribution of 3% could be lower, as is often the case with headline numbers. So much for that economic multiplier we kept hearing and reading about in early 2009. 

Taking into account the interest payments future generations are now forced to repay and the picture looks fuzzier (as well as selfish and unfair to those young Americans). Assuming the government financed the $832 billion ARRA package via 10 year notes at 2.5% (interest rates ranged from ~2% to ~4% in the 2.5 years following ARRA) is ~$21 billion in interest per year. A total of $210 billion in interest costs will by incurred by 2019 directly related to ARRA. By 2019 the total cost of ARRA will be $1.04 trillion. 

The final cost of ARRA will probably be much higher as there is no current plan from Democrats nor Republicans (save Rand Paul) to reduce our total outstanding debt...so ARRA will continue to sit on the government's books accruing billions in interest each year. This debt will most likely be a drag to future growth as future generations will be left to pay ARRA's bill...and by that time whatever short term 3% GDP blip will be long forgotten and arguably less significant than the $1+ trillion dollars of debt. 

The NYT tried to answer a seemingly simple question: was ARRA worth it? Too bad there is not a simple answer, and it's most likely not "yes". A tougher, more pertinent, question is what would have happened had we not borrowed $832 billion and spent it on a smorgasbord of spending bills and temporary tax cuts? That's impossible to answer but after analyzing the NYT's proof we probably would have been better off not adding $1 trillion of additional debt onto our collective books. 

In addition to the pleasant nostalgia I received while reflecting on early 2009, the NYT Editorial Board reminded me of that Hayek quote. The curious task of economics is to prove to politicians that the outcomes of their ambitious economic designs may end in a lesson in humility, and an example of the limitations of macroeconomics as a precise science. 

My Zimmerman Verdict

The case of Trayvon Martin and George Zimemrman is so sad, simply because this entire tragedy could have been easily avoided. Consider if Zimmerman had instead yelled out to Martin on that fateful February 2012 night, “Hey there, how are you doing? Do you need help? Are you lost?” Trayvon Martin would be enjoying this beautiful Sunday with his family.

Instead, George Zimmerman’s common sense told him to profile Trayvon Martin as a criminal, and then call the police, which he had done 46 times before, even though Martin was not doing anything wrong. 

Next Martin's common sense told him to defend himself and run from Zimmerman--an arguably reasonable action given how Zimmerman was following/stalking Martin as he walked around the neighborhood. 

After that the details get fuzzy, which is probably why the jury found Zimmerman not guilty.

However we know Zimmerman's common sense--or his overzealous attitude and desire to be a police officer--told him to keep following/stalking Martin after he initially fled, even after 911 dispatch said it wasn't necessary, and even after Zimmerman agreed with 911 dispatch by saying "Ok". 

Therefore Zimmerman is guilty of engaging in an overzealous pursuit of an unarmed and otherwise peaceful Martin. Why did Zimmerman pursue Martin to such extents, even after Martin initially fled the scene? 

Zimmerman's handgun embolden him to pursue Martin to such extents--a pursuit based on the biased perception that Martin appeared suspect. Sure the neighborhood had suffered a recent string of robberies. And if Zimmerman saw Martin do something wrong this would be a different story, but Zimmerman didn't because Martin was not doing anything wrong. 

Florida's “Stand Your Ground” laws are guilty of encouraging the use of deadly force during physical altercations, even when retreat is a viable option. Ironically enough, if Martin stood his ground instead of fleeing from Zimmerman, he may still be alive today. 

After Martin fled and Zimmerman followed him, both Martin and Zimmerman are guilty for not following Dr. Bernice King’s advice to “conduct ourselves on the higher plane of dignity and discipline”  by letting this escalate into a physical altercation. Who started the fight is an unanswered question, all we know is that Martin ran away, Zimmerman (against the common sense of 911 dispatch) zealously followed him in pursuit, there was a fight, and Martin was killed. 

Now onto the hot button (i.e. racial) aspects of this case…

First let me set the stage. Is there racial discrimination in the U.S.? Absolutely, America’s war on drugs is a clear example of institutionalized racism.

Is Zimmerman guilty of being a “creepy ass cracker?” Yes (even though Zimmerman is multi-racial Hispanic). 

Is Zimmerman guilty of profiling Trayvon Martin as a criminal based on his appearance? Yes. 

Is Zimmerman guilty of engaging in an unnecessary pursuit of an unarmed, peaceful 17 year old who was suspected of nothing more than (I'm using Zimmerman's own words to the 911 dispatcher): 1) being born with black skin, 2) walking around in a hoodie with one hand in his hoodie's pocket, and 3) running away from an armed, emboldened, and overzealous wannabe cop? 

Yes, yes and yes.

Is Zimmerman guilty of murder? Apparently not. 

It’s all very sad. A young man is dead, his life cut short. A beautiful family torn apart. A country divided.

In Defense of Free Market Food Capitalism

A few weeks ago Michael Pollan was in town promoting his new book Cooked. Kaitlyn and I became big fans of Mr. Pollan after reading In Defense of Food, and we really enjoyed the documentary on his book Botany of Desire. Since then I've read more of Mr. Pollan's editorials and found that we share similar concerns about the government's involvement in the food industry, and how the government's agriculture industrial policies contribute to America's obesity and health care cost epidemics. But I also sensed that Mr. Pollan and I would disagree on how government could fix these related problems.

After Mr. Pollan discussed his inspiration for Cooked and started the Q&A session, I walked up to the microphone and asked, "I think we both agree that government does more harm than good when it comes to both nutrition and health care in this country, but what do you think the government could do to help improve this situation?"

He started by offering two examples of the federal government's ineptitude in these fields: the omnibus farm bill currently slithering its way through Congress, and the recently passed "Monsanto Protection Act". Pollan added, "I think we need to try everything," including bans on soda like the ones recently championed by Michael Bloomberg.

 "I think he [Michael Bloomberg] is a good business man because the largest contributor to New York City's rising hospital costs is type-II diabetes. So reducing the size of sodas is a good business decision because it reduces type-II and will lower health care costs in New York City.

 "I also think we should try things like having the government reward farmers for planting good crops. I advocate using government to nudge consumers into making the right food choices...this nudging theme is cited in the field of behavioral economics, and I think it has some real promise. But really we need to try everything."

"Try everything" yet Mr. Pollan did not offer one recommendation that expanded freedom, nor one that channeled the power of the free market. I don't drink soda, but I would still like to have the freedom to buy a Big Gulp on a hot summer day (no Sarah Palin reference intended). And I believe that the amalgamation of American consumers, commonly referred to as the "market", is well equipped to reward farmers for planting "good" crops. No government involvement needed.

Restricting our freedom to make lifestyle choices and having the government pay farmers for planting good crops are not necessary solutions to fight obesity and rising health care costs. Instead of soda taxes and having government reward farmers, the government should allow for health insurers to price discriminate. I know discrimination has a negative connotation, but an insurance system that hides the true cost of our individual, voluntary lifestyle choices is not efficient and will not lead to lower obesity nor lower health care costs. Am I arguing that insurance companies should discriminate against people with any preexisting condition? No, and that's another discussion about what qualifies as an unavoidable preexisting condition. 

What I'm getting at is an individual who makes unhealthy lifestyle choices should not pay the same insurance premiums as an individual who makes healthy ones. But that is exactly what happens today. In effect, our government discourages personal responsibility, so unhealthy Americans can keep drinking all the soda they want while their fellow citizens pick up the tab. This is not right.

This is even more troubling because a large portion of America's rising health care costs stem from avoidable (and expensive) ailments such as: type-II diabetes, heart disease, many types of cancer, stroke, hypertension (high blood pressure), and a host of other ailments and inconveniences. If individuals had a monetary incentive (via lower insurance premiums) to improve their diet then many of these ailments would arguably decrease, as would the costs of treating these diseases.

Now moving onto a separate but related topic--I find it disturbing to hear claims or insinuations that free market capitalism is ruining our health care system, and/or that greedy capitalists are increasing health care costs, because America's health care system is far from a free market. 

The foundation of capitalism is that it's a profit and loss system; when individuals make healthy lifestyle choices they should profit (via lower insurance premiums), and when individuals make unhealthy decisions they should lose (via higher insurance premiums). And free markets work best when individuals are free to make their own decisions; if I decide that drinking three Big Gulps per day are worth the extra health insurance costs, then I am free to do so. What is not acceptable is drinking three Big Gulps per day, not exercising, and paying the same health insurance rate as my health conscious, soda avoiding, vegan wife. 

That's why I find it laughable to hear a smart man like Michael Pollan advocate for restricting New York City's freedom to purchase a 20oz Big Gulp; it's just not a necessary solution to America's health care and obesity crises. 

Mr. Pollan's specific public policy recommendations attack the symptom, not the disease. The only cure for the disease is to liberalize our health care and insurance systems by enabling insurers to price discriminate, and by doing so it will encourage personal responsibility and provide a meaningful incentive for individuals to make healthy lifestyle choices.

Limiting our soda freedoms to 16oz is silly, just as silly as making you pay for my unhealthy Big Gulp habits.

Celebrity-in-Chief

Michelle Obama's politicized appearance during the crescendo of last night's Academy Awards, plus today's Politico column reporting on Barack Obama's unnecessary and ingracious name calling, inspired me to create the hashtag #CelebrityInChief. Anytime the Obama's step outside the political arena to throw bread and circuses at the American people, I'm going to use #CelebrityInChief and post something to Twitter/this blog.

Given the mutual infatuation between Obama, Hollywood, and celebrities-at-large, I'm looking forward to seeing where this hashtag journey takes us.

All I could think about during the last night's Academy Awards was that Michelle's husband has yet to answer a very important question regarding his Cheney-esque use of drones:

This Isn't Hard, Mr. President: Do You Think You Can Kill Us on American Soil or Not?

Bread and circuses. Bread and circuses.

Trading Barbs

Wise words from Retired Gen.Stanley McChrystal in an interview with Foreign Affairs

“To the United States, a drone strike seems to have very little risk and very little pain. At the receiving end, it feels like war. Americans have got to understand that. If we were to use our technological capabilities carelessly—I don’t think we do, but there’s always the danger that you will—then we should not be upset when someone responds with their equivalent, which is a suicide bomb in Central Park, because that’s what they can respond with.” 

The bold portion of Gen. McChrystal's quote reminds me of my admittedly long winded post The Next 9/11. I created this flow chart to illustrate how our Middle Eastern foreign policy often creates a negative feedback loop. I was happy to read Gen. McChystal and I share a relatively similar view on the matter. 

The stereotypical terrorist does not live in a nation with strong institutions nor representative government. Thus when Obama authorizes a drone strike in Yemen or Pakistan, the Yemenis and Pakistanis don't have a formal institution or outlet to address their understandable grievances about our drone war. This lack of an outlet means these people are more likely to take radical measures to vent their anger, such as a "suicide bomb in Central Park."

Incentives Matter

This Washington Post article and this Huffington Post article discuss a recent Senate investigation into a $1.4 billion Department of Homeland Security (DHS) program fraught with waste:

...the report documents spending on items that did little to help share intelligence, including gadgets such as “shirt button” cameras, $6,000 laptops and big-screen televisions. One fusion center spent $45,000 on a decked-out SUV that a city official used for commuting. (WaPo)

Also:

A marquee federal effort to share intelligence about terror threats with state and local law enforcers has produced no evidence of any. But it does appear to have caught a motorcycle gang telling members to obey laws, suspicious fishing at the border, and Muslims offering advice on marriage, success and reading. (HuffPo)

The waste present in this DHS program is a microcosm of a larger problem, namely that the federal government does not seem capable of managing the myriad of different, and often overlapping, programs it administers. Even programs deemed "[centerpieces] of U.S. counterterrorism strategy" by DHS chief Janet Napolitano are not immune to government mismanagement and waste.

The waste uncovered in this Senate investigation reminded me of an argument my liberal/progressive friends have used, in which they claim that centralizing government functions and programs at the federal level will lead to greater economies of scale.

This argument is intellectually tempting, but in reality breaks down for two primary reasons: 1) the federal government is convoluted and has undertaken too many functions to capture economies of scale, and 2) the federal government lacks incentives to organize itself efficiently, which is required to capture economies of scale.

Let's put federal spending into perspective. The feds spent ~$3.5 trillion in FY2012. Subtracting the $780B spent on Social Security transfer payments leaves ~$2.72T...or 7.8x what Wal-Mart spends on stocking their shelves and paying their store employees. To manage $2.7T in spending, and on top of that judge whether this cash is being well spent, is an undertaking that requires exceptional organizational efficiency, not exactly something the government is known for.

My bias, right or wrong, is that our federal government has undertaken too many functions and is not efficiently managing most, if any, of them. Even nonpartisan functions like infrastructure, education, and national security are fraught with waste and inefficiencies.

Rather than mismanaging thousands of programs, the federal government should focus on a select number of functions, preferably those defined in Article I Section 8 of the Constitution (plus any future amendments that expand these powers), and manage them well.

The mismanagement problem is compounded by another of government's weak points: incentives. What inherent incentives motivate the federal government to be efficient with our tax dollars?

We can't say the media, which in theory should function as a government watch dog, but in reality more closely resembles an annoying pack of yippity chihuahuas who never shut up.

We can't say voting because elections seem to be more about political brands and less about ideology, as discussed in my last post. And we can't say partisan politics because government inefficiency is one of the few things in Washington DC that reaches across the aisle.

The answer is more basic. The federal government has little incentive to spend our tax dollars wisely because the federal government is free from competitive forces, which would incentivize it to operate efficiently. Furthermore, the government has a captive customer base. Americans are forced to give the government money, and if we refuse, we are sent to jail. This dynamic does not bode well for efficiency. Government has little to no incentive to spend our money wisely (as evidenced by the DHS's "shirt button" cameras and pimped out SUVs).

Competition always benefits the consumer. It's a truth that innately makes sense--organizations operating in competitive markets are constantly innovating processes that increase efficiency, improve customer service, and lower costs.

An organization with no competition and captive customers is a monopoly. And monopolies are monopolies because they are able to serve themselves before, or in lieu of, serving their customers. Sound familiar?

The recession has been good to DC, judging from the number of construction cranes shown here. 

I think it's time we bust our federal monopoly and elect candidates who want to divest federal programs back to the state and local levels. But that's a whole different blog post.

Politics and Thinking

Politics these days is less about ideas and more about political brands (or has it always been about political brands?).

Or as this week's Economist puts it,

Turning out your base, not winning arguments, is increasingly the key to electoral success