How to Fix What Ails Us

[badlydrawnjeff.livejournal.com]

Intel's CEO, Paul Otellini, had some fairly harsh words for the folks in power this week:

Otellini singled out the political state of affairs in Democrat-dominated Washington, saying: "I think this group does not understand what it takes to create jobs. And I think they're flummoxed by their experiment in Keynesian economics not working."

Since an unusually sharp downturn accelerated in late 2008, the Obama administration and its allies in the U.S. Congress have enacted trillions in deficit spending they say will create an economic stimulus -- but have not extended the Bush tax cuts and have pushed to levy extensive new health care and carbon regulations on businesses.

...

As a result, he said, "every business in America has a list of more variables than I've ever seen in my career." If variables like capital gains taxes and the R&D tax credit are resolved correctly, jobs will stay here, but if politicians make decisions "the wrong way, people will not invest in the United States. They'll invest elsewhere."

Take factories. "I can tell you definitively that it costs $1 billion more per factory for me to build, equip, and operate a semiconductor manufacturing facility in the United States," Otellini said.
The rub: Ninety percent of that additional cost of a $4 billion factory is not labor but the cost to comply with taxes and regulations that other nations don't impose. (Cypress Semiconductor CEO T.J. Rodgers elaborated on this in an interview with CNET, saying the problem is not higher U.S. wages but anti-business laws: "The killer factor in California for a manufacturer to create, say, a thousand blue-collar jobs is a hostile government that doesn't want you there and demonstrates it in thousands of ways.")

"If our tax rate approached that of the rest of the world, corporations would have an incentive to invest here," Otellini said. But instead, it's the second highest in the industrialized world, making the United States a less attractive place to invest--and create jobs--than places in Europe and Asia that are "clamoring" for Intel's business.

This is similar, as CNet reports, to what Carly Fiorina had to say on the matter, with the difference being that Otenelli isn't running for office. But clearly the business class is less concerned about speaking up right now.

We do need to think ahead to what's going to fix the problems, though. "Unexpectedly," unemployment claims are increasing again, home sales are in decline, and the stimulus, which was supposed to save us all, has "done exactly as we expected it to", which is to mean not performed as intended at all.

So let's see - we have a failed stimulus, a looming tax hike, new costs associated with health care and financial reforms, and businesses are not spending money in anticipation of this uncertainty. What's the way out? How do we fix this problem? Where do we go from here?

Comments

[badlydrawnjeff.livejournal.com]

I don't believe that the CBO is not allowed to independently research the facts behind their analyses.

From the CBO FAQ (http://www.cbo.gov/aboutcbo/faqs.cfm):

By statute, CBO's baseline projections must estimate the future paths of federal spending and revenues under current law and policies. The baseline is therefore not intended to be a prediction of future budgetary outcomes; instead, it is meant to serve as a neutral benchmark that lawmakers can use to measure the effects of proposed changes to spending and taxes. So for that reason and others, actual budgetary outcomes are almost certain to differ from CBO's baseline projections. For a related discussion, see Chapter 1 of CBO's Budget and Economic Outlook; see also The Uncertainty of Budget Projections: A Discussion of Data and Methods for supplemental information.

From the CBO policies (http://www.cbo.gov/aboutcbo/policies.cfm):

CBO employs standard methods of economic analysis and closely follows professional developments in economics and related disciplines. CBO frequently seeks outside experts' advice on specific analytic matters, such as the outlook for agriculture production, spending projections for Medicare and Medicaid, and business prospects in the telecommunications industry. For its economic forecasts, CBO draws on the advice of a distinguished panel of advisers that meets twice a year.

So what happens is this: the Congressperson goes to the CBO with a plan and says "this is what we want to do." It then applies the multiplier theories assumed by the bill, and runs calculations. So the original CBO estimate that it would create X amount of jobs comes about. Now, every so often, they release an update, saying "based on the calculations, we've spent X and created Y jobs." How do they get Y? By using the same theoretical models used to establish the thing to begin with. It's all about forecasting using existing models - models that often cannot account for situations that the reporting isn't prepared for.

The best piece I've read about it was from Reason in May 2009 (http://reason.com/archives/2009/12/08/the-gatekeeper). It inadvertently details an example of how the CBO cannot act independently:

When the Senate Finance Committee released the preliminary draft of its health care bill in September 2009, the accompanying CBO analysis reported that the legislation, as written, would reduce the budget deficit over the next two decades. This projection was based on the highly dubious assumption that Congress would follow through on the bill’s proposed Medicare payment cuts—cuts Congress has been loath to make in the past. The report acknowledged these past failures, but the CBO is prohibited from making judgments about the likelihood that Congress will keep its own promises.

However, I think the point is -- there is no empirical verification possible at this point. Ultimately, we don't know yet how well it's working or not, but the best economic models we have say it probably is.

The best economic models project that it probably has, based on the idea that $1 of government spending equals X in production (http://www.theatlantic.com/politics/archive/2009/03/cbo-on-stimulus-multipliers/1126/). That doesn't have to be true in practice, it's merely the model they're working off of.

So, for instance, the model may say that the government spending $2 million on a highway project will create 40 jobs, but cannot account for the jobs lost due to the construction from local businesses or from other non-stimulus projects being abandoned as a result of the influx of federal money.

[penguin42.livejournal.com]

It then applies the multiplier theories assumed by the bill, and runs calculations

This is the fundamental thing I'm having an issue with. Yes, CBO has to assume current laws and policies. Yes, CBO has to assume proposed laws will be enacted as written. However, the economic theories, models and empirical economic data that the CBO utilizes to run its analyses are NOT encoded in the laws themselves. They are determined independently of the laws, by -- as you quoted -- "professional developments in economics and related disciplines ... outside experts' advice on specific analytic matters ... the advice of a distinguished panel of advisers" and so on.

Your premise that the multiplier theory they used to determine the effect of the stimulus bill was somehow encoded in the stimulus bill is just plain wrong. It was drawn independently from state-of-the-art economic research.

The CBO is given a proposed law, and then it's up to them to draw on the expertise of the field to determine how that law -- if enacted as written -- will effect the budget and the economy. And they do this in whatever way they see fit -- ie, independently.

[badlydrawnjeff.livejournal.com]

Your premise that the multiplier theory they used to determine the effect of the stimulus bill was somehow encoded in the stimulus bill is just plain wrong. It was drawn independently from state-of-the-art economic research.

If that's the implication that I put out there, it wasn't my intent. The bill does not assume or state a multiplier, just those requesting the study by the CBO do, citing whatever relevant economic theories that are available. I think (hope) that makes my intent clearer.

[penguin42.livejournal.com]

Well I'm interested in seeing these actual requests to the CBO that specify what economic theories they are to use.

Here's what the June ARRA report (http://www.cbo.gov/ftpdocs/117xx/doc11706/08-24-ARRA.pdf) has to say:

Section 1512(e) of the law requires the Congressional Budget Office (CBO) to comment on reports filed by recipients of ARRA funding that detail the number of jobs funded through their activities. This CBO report fulfills that requirement. It also provides CBO’s estimates of ARRA’s overall impact on employment and economic output in the second
quarter of calendar year 2010. Those estimates—which CBO considers more comprehensive than the recipients’ reports—are based on evidence from similar policies enacted in the past and on the results of various economic models.

And Section 1512(e) of ARRA (http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h1enr.txt.pdf) itself:

OTHER REPORTS.—The Congressional Budget Office and the
Government Accountability Office shall comment on the information
described in subsection (c)(3)(D) for any reports submitted under
subsection (c). Such comments shall be due within 45 days after
such reports are submitted.

So far I don't see anything about specific multipliers or models to use. It seems to me that the CBO has a lot of leeway in how they choose to "comment" on the reports filed by other agencies.