Category Archives: Politics

How Does the US Federal Budget Work?

With all the talk about the budget, deficit, and debt lately, I’ve been trying to understand how the US federal budget works. It hasn’t been easy. I haven’t found any comprehensive and even-handed analysis of how the government spends and taxes, so I have tried to collect the information I found into one place and give it some context. I relied extensively but not exclusively on information from Wikipedia (which has a very good page on the budget) and used additional readings to double-check it. I use fiscal year (FY) 2010 numbers except where indicated. I include a list of sources at the end of this post if you want to do your own research or check my facts. Please let me know if you feel I’ve made a mistake, left something out, or failed to explain something. I will continue editing to improve this overview. This post will focus on how the budget does work and I am working on a companion post about how I think it should work. I’ve tried, for the most part, to keep my opinions out of this one.

The post is divided into three sections: Big Numbers, Spending, and Income. Continue reading

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Changing the Terms of the Debate on Government

I’m about as frustrated as the rest of the country as I hear about the stalemate in congress over raising the debt ceiling and dealing with our deficit and debt. I think that one of the reasons that the Tea Party and the fiscal conservative strand in the republican party has been able to gain so much traction in the last three years has much to do with the narrative clarity of their story. Government is inefficient. Inefficiency is bad. Therefore, government is bad. Freedom is good. Free markets epitomize freedom. Therefore free markets are good. The political left, meanwhile, seems mired in their arguments, full of piecemeal justifications, and unable to confront head-on the stripped-down logic of their opponents. My goal in this post is to try to point out the inconsistencies of the Tea Party’s logic and re-frame the discussion for the Left.

My arguments will follow this general sequence: Free markets don’t and can’t behave the way the Tea Party says they do. ‘Efficiency’ is a hollow concept as it is currently used and needs to be re-evaluated. Even freedom has been oversimplified and used as an ideological weapon rather than an ideal to work towards in practice. All of this means that the Left needs to challenge the Tea Party on their terms and assumptions and re-insert government into an efficient and freedom-pursuing solution.

Proponents of laissez-faire capitalism claim that the central strengths of free markets are their (theoretical) amorality, transparency, democracy, basis in individual freedom, and efficiency. Ask most economists and they’ll tell you that science and math back these claims up, but they will slip in that parenthetical fine print just as I did. The parentheses are what make free markets so slippery to pin down, but if we analyze what the reality of free markets are we can see that those two punctuations hold back a corrosive truth that, once released, eats through the foundations of the argument against government. Markets are fundamentally different in reality than they appear on paper and in the mathematical models. Here’s why:

Markets cannot be amoral because they are directed and influenced by people, who are fundamentally moral. Markets tend to favor certain outcomes because humans tend to favor certain outcomes. Markets cannot be separated from human systems, and therefore they cannot be considered amoral. Markets are not transparent because, as any economist will reluctantly grumble, there is no such thing as perfect information. Nobody can measure nor organize the information necessary to make perfectly informed decisions and there are myriad examples of individuals or groups warping or hiding information in order to cheat the system. Transparency is a nice idea, but it’s only that. Markets are NOT strictly democratic because democracy means one vote per person whereas markets mean one vote per dollar. Economic votes are cast by the people who control the dollars, so what would be a democracy given zero inequality is really an oligarchy in our current arrangement. The claim that free markets are based on individual freedoms seems to me to be basically true, with some qualifications involving the idea of freedom that I’ll deal with later on. Still, I accept that free markets are the best way to promote individual freedoms.

Now to efficiency. Markets can only be called efficient by a very particular definition of efficiency. If efficiency means that the greatest output is produced by the least input, then by golly markets (theoretically) are efficient. Leaving aside this particular parentheses, however, we can take issue with the definition itself and contrast this production-based definition of efficiency with a broader one: The means which most effectively obtain the desired outcome. All of a sudden we need to define the desired outcome. Implicit in free market economics is that the desired outcome is maximized production, but I propose that there are a few things that are more important than maximum production. Things like economic justice, equality, sustainability, and public goods like education, parks, peace, and security. I’m afraid that each of these things implies an inefficiency according to the production definition. Want justice? It’s simply not efficient to take care of the poor or nonproductive in society. Want equality? It just distorts incentives to produce and invest in order to maximize output. Like nature? It’s only another input that should be used to maximize production. Want public goods? Markets can’t really handle public goods because of the problems of controlling access and policing free-riders. No person that I’ve ever encountered really wants to give up on these important human values, which means that we should take a look at my expanded definition and work backwards.

Okay, so we want justice, public goods, nature, and equality as well as the freedom that comes along with ‘free markets.’ These are our desired outcomes. So what are the most efficient ways to achieve them? Well, it certainly appears that the free market economy is the best way to approach freedom, but how do we balance the benefits of free markets with our other priorities? Well, that’s where history has provided an answer. Societies organize themselves into political systems and make decisions to uphold their desired outcomes. That’s right, we’re talking about government. It turns out that, to go back to my definition, we want certain desired outcomes that cannot be provided by free markets and the most efficient way to achieve them is through government.

Wait a second. That’s the opposite of what the libertarians and fiscal conservatives have been saying.

Exactly. If we broaden our definition of efficiency beyond maximizing production to include the important human values that hopefully we all share, we can conclude that free markets are inefficient and government is the only solution.

Now, this does not settle the debate of ‘how much government is the right amount,’ but it does change the footing of the discussion in important ways. Now that we’ve concluded that government is efficient insofar as it helps us achieve our desired outcomes, we must define more exactly what they should be and how to measure and maintain them. This is where libertarians step in again and demand that we bow down to their god: freedom. Freedom is sacred and inviolable. Try to argue against freedom! Well, how about if I just bring to light the caveats that are often swept aside and ignored?

What is freedom, really? It’s something that’s not questioned much, but if we think about it we all know that freedom is kind of self-contradictory. Individual freedom needs to be curtailed or it will impinge on itself. If individuals are completely free to act as they wish, then they are free to limit the freedoms of others (say, by stealing or killing), thereby negating freedom. Freedom needs constraints to exist universally. True freedom comes from a system wherein individual freedoms are limited to actions that do not conflict with the freedoms of others. This will maximize current freedom, but we also need to consider the past and future if our idea of freedom is to go beyond a shallow abstraction.

I believe freedom needs a concept of justice to ensure that we don’t dismiss past atrocities as irrelevant and a sense of responsibility for the freedom of those to come after us. Because freedom has been violated in the past, we have historical injustices in addition to the current injustices of birth and fate to contend with. In order to pursue freedom generally, we need to limit some current freedoms to compensate for past denials. Policies like a progressive tax system, welfare for the disadvantaged, and restrictions on the power of money to control politics and society are aimed to do this. If we believe that future freedoms should be protected, then we need to make sure that what we do today won’t impinge on the freedom of others later on. We have to limit a bit more freedom to ensure that people don’t take advantage of natural resources for their own benefit, thus depriving others of the freedom to benefit from ecological diversity or clean air and water.

This logical sequence quickly puts the Ayn Rands out there in apoplectic fits because they see no end to the rationalizing away of our precious freedoms. Where will we stop? When the individual is subjected to the collective like an animal slave? When individuality, creativity, and innovation are crushed out of humanity?

Uh, no.

As I said from the start in my definition of efficiency, we only agree to the most efficient means to achieve the desired outcome. Since the desired outcome is not subjugation, we will not design a system that will lead to it. We agreed that our desired outcome included freedom as the central value, but now we can see that freedom in a meaningful sense requires limitations that can best be applied by a government. Additionally we agree that we need government to promote important values like justice, equality, ecological sustainability, and public goods. There is nothing totalitarian about ensuring that our government is strong enough to protect these values. The surprising thing is that by these understandings of efficiency and freedom, the left can turn the right’s argument on it’s head: government is perfectly efficient and is indeed the only efficient solution. To promote freedom we must compromise and limit freedom. More generally we need to clearly define what our desired outcomes are and show that government will be contained to effectively pursuing them.

My hope in this post was to undermine some of the ideological shouting matches that happen when we talk about the role of government so that we can discuss real solutions. There is still plenty to debate about, but let’s agree that both government and free markets are part of the solution and stop accusing the other side of hating either freedom or the poor. Unless we can find ways to talk reasonably about these issues we’re just going to keep filibustering, mudslinging, and wasting time and energy looking for short-term political tactical advantage.

Let me know your thoughts and comments on these ideas. It’s a work in progress. 🙂

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Tax Policy

An interesting article in the NY Times today got me thinking more about US tax policy and theory. The article casts the new health care bill in terms of economic inequality and argues that it is a corrective force against the rising income inequality since the 1970s. Opponents of taxation argue that government should take as little money from its citizens as possible, and that it is a matter of freedom to be able to spend one’s money as one chooses. For me, the questions that arise from this position are: How much money does the government need and how free should people be to spend their money as they wish to?
How much money the government needs depends on what the government is expected to do. Everyone basically agrees that government should provide military protection and domestic services like police and fire departments, and there is a large consensus on issues like public education, transportation infrastructure, and social safety nets for the poor, elderly, and disabled. To put it another way, the government is the best source of collective security. This security applies at least formally to all races and genders equally (though unfortunately not all sexual orientations) and covers areas like risks from attack, fire, flooding, starvation, robbery, financial hardship, and now medical disasters. Yet another way to think about these areas are protecting rights of citizens to freedom of action, belief, speech, religion, education, health, and opportunity. Really only in health care do we fall behind most other advanced nation. We in the US seem to think that it is the uninsured person’s fault if they get sick without insurance, when more likely their situation getting coverage was irrational or impossible. The government needs enough money to protect these basic rights. The idea that government should be smaller is probably correct, but it’s hard to disagree with the need for government to provide these goods and protections for its citizens.
The issue of a right to spend the money one earns is trickier than it sounds. First, the money we earn is predicated upon a system that we have accepted (through continuing to live here) and profited from. We are protected by US laws, given the services mentioned above, and profit from the opportunities that our citizenship entails. In addition to our debt to the government for these services, we are all living in a world that is socially, historically, and culturally biased. We know that heterosexual white males have a much easier time making money and achieving positions of power in this country than any other race or gender. While it is easy and comfortable to assume that what we earn is what we have a right to, it may not be the case where we have been unjustly privileged. Do the super-rich deserve all their after-tax income? What if they benefited from discrimination and a system that gives them a better chance for success than others? Then they have a moral claim (a right) to only a portion of their actual income. This is in fact the state of affairs in this country. There will always be structural inequality, so there must always be some level of redistribution to counteract it. This is where additional taxation and governmental policies must enter in again. No other organization has the ability or legitimate claim to correct these structural problems.
The government may not be anyone’s favorite institution, but it is necessary for protecting people’s rights and correcting for structural inequality and discrimination. Taxation isn’t popular, but it is morally justified.

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Government or Markets?

     Tea partiers would have us believe that anything that the government touches becomes inefficient and wasteful, and that they’re not operating on unsubstantiated assumptions. Many economists have written about public choice theory, which essentially points out that any time that you create a structure that gives people power you create interests that will work for their own profit. Politicians are seen as profiteers who look out for their own interests (by pleasing lobbyists who get them re-elected) and the interests of local constituents (to the detriment of the ‘public good’ eg. pork). These economists, and subsequently the tea party, advocate letting people make individual choices in their self-interest and allow the free market to balance the aggregate interests for the greatest overall benefit. They have the rhetorical advantage of both advocating individual liberty and the collective good.
    There are problems with this explanation of economic and political reality, however. First, individuals acting in their own self-interest frequently do not aggregate into the socially optimal outcomes. This failure is due to a number of characteristics of free markets: They quantify demand through price, thus shifting decision-making power to the rich. They operate on expectations of supply and demand rather than reality and are therefore vulnerable to mass optimism or pessimism (bubbles). They remove accountability of producers and consumers by stripping products of their context through the price mechanism (Where and how were your food and clothes made?).
    Second, markets allocate efficiently most of the time, but it is not clear whether efficiency should be the end goal of allocation. I don’t believe that we really want a completely efficient allocation of healthcare, because by definition it would leave ‘inefficient’ people like the old and terminally ill without care. If we do not really want complete efficiency, but rather want a principle of justice and equality to guide resources like healthcare, then we need to direct markets and create incentives to promote those principles. This is where the government comes in.
    Government is the only option we have to regulate industries as big and complex as health and finance (and sectors as important as education). Additionally, individuals in this country have direct influence over and checks and balances on government power, while they have none over markets (because we as individuals can’t interfere with others’ private property). I agree that government is not the most efficient option to allocate resources. However, in addition to efficiency being a poor moral compass free markets have inherent tendencies that are antagonistic of social goods. So let’s see how we can improve government, not get rid of it.

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The Problems of Bipartisanship

President Obama is catching a lot of flak these days for his compromises, stalled initiatives, and tentative stances. It’s interesting that we ascribe negative connotations to these realities considering that in theory I think most people view compromise and bipartisan consensus to be good things. I think the fundamental problem is that the way politics functions is based on distancing a candidate from his or her opposition, and cooperation and moderation are not good tactics for that strategy. Obama, by working to find middle ground, is being criticized from both sides for not supporting their agenda. The question is, then, can his approach work politically? Will the American people have patience with an inherently messy, vague, and time consuming approach to politics? Even if the people can wait, will the politicians have the self-control and value the public interest enough to refrain from vilifying compromise and consensus as political weakness? Then, of course, there’s the relationship between what the politicians say and what the people perceive. It really takes both public patience and political restraint to be able to accomplish meaningful change. How likely is this combination? I’m afraid not very. I do believe, however, that we have been given an opportunity in Obama to really accomplish something. The president has a powerful gift for communication and clear thinking that is evident in most of the decisions he makes. The question is how much of a difference it will make

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Politics as Usual

Well, so much for a supermajority. After the Republican victory in Massachusetts today, the Healthcare bill looks to be in trouble. According to a NY Times article, this leaves the Democrats with two options: find support from Republicans, or try to pass the Senate bill as is in the House. It will be interesting to see where this ends up. While I’m disheartened at the potential loss of healthcare reform power, I am unsurprised that the Republicans rallied and shifted the momentum. Any time that one political party is in the driver’s seat the other party has the advantage of playing the blame game and portraying the political scene as one of threat to the country. The perception of threat and culpability for all current woes is a powerful motivator for voters, and that was displayed today.
I think that this has less to do with political scapegoating and tactics as it does with the structure of the system itself. In a two-party system, there is a tendency to find an equilibrium point, and the self-correcting nature of politics through the mechanisms of blame and fear is inherent in the structure. This has positive and negative consequences, including moderate positions on issues, balanced discussions, but also an inability to make sweeping changes when there is no immediate threat of danger. Healthcare and government regulation of business and the environment are two areas where we are failing to deal with slowly growing problems that will have (and are having) serious implications for our economic and ecological wellbeing.
I’m afraid that it will either take a squeeze through the house of representatives or crippling compromises to get the healthcare bill through now, and neither one will be any help to President Obama in this politically precarious time. Best of luck to you, Mr. President.

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“Financial Crisis Responsibility Fee?”

I’m just reading about the Obama administration’s intention to charge banks that were allocated funds through the bailout bill $50 billion or so over the next ten years, if not more. This seems like a thinly-veiled politically-motivated mistake to me. Maybe I’m missing some big part of the logic, but as I understand it, the banks were forced to take the money in the first place, so not only did the government require that the chosen banks be a part of the bailout, but now they’re charging fees based on the fact that the banks took the money! Another problem is that the banks have already paid back the money (with interest) that they were given in the bailout. According to a NY times article, “the administration is justifying the levy by arguing that banks were responsible for causing the financial crisis in the first place.” This is also based on a misunderstanding of the causes of the crisis. Not only are the causes widespread and complicated, but the government itself is implicated in the building of the asset bubble. Examples include the Federal Reserve policies of easy money, regulatory failures related to complex financial derivatives, and their encouragement of Fanny and Freddie to make imprudent loans.
Finally, to have these narrow-minded and judgemental pronouncements come at a time when the news dominating the financial-political sphere is about high executive bonuses indicates that the move is pandering to a populist political fad rather than appealing to sound logial or moral principles. I’m fairly disappointed by Obama’s push for this, though if understood in the light of some of the other battles that he’s fighting, I can grant some leeway if it helps him get healthcare legislation pushed through.

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