Who Pays for Sandy?

by Dave Schuler on November 9, 2012

The political battle over who pays for the damage caused by Hurricane Sandy has begun in earnest:

Northeastern lawmakers are preparing to push Congress to approve extra spending to pay for repairing the damage wrought by Sandy, setting up a potential sideshow fight over resources as legislators return to Washington next week to consider spending cuts and tax increases to avoid the so-called fiscal cliff.

If approved, the extra federal funding would likely pay for work such as repairs to the electric grid, transportation network and housing. Congressional action isn’t urgent, since the Federal Emergency Management Agency has enough money to pay for immediate repairs.

But Washington has traditionally approved extra spending after major disasters such as the Sept. 11, 2001, terrorist attacks and Hurricane Katrina to help state and local governments recover. New York Gov. Andrew Cuomo said Thursday that the storm would add to a $1 billion hole in the state’s budget and estimated the economic cost to the region at $50 billion.

Both of New York’s U. S. senators think that Uncle Sugar should pay for 90% or even 100% of the damages:

Sen. Charles Schumer called the fallout from Hurricane Sandy a “national disaster” and called on a federal government to cover at least 90% of the costs.

“This is one of the biggest disasters to have ever struck this state and even this country,” Schumer said at an afternoon briefing with Gov. Cuomo. “The federal response has to measure that scope and be equal to that that scope.”

“We cannot cut corners. We cannot count nickels and dimes. This isn’t a New York disaster, a Connecticut disaster, a Jersey disaster. It is national disaster. It needs to be treated that way by every member of Congress, by all the members of the executive branch.”

My heart goes out to those who lost their lives or property or were injured by the hurricane. I absolutely think that New York, New Jersey, and Connecticut should receive emergency assistance from the federal government. I know it sounds Scrooge-like for me to say it but I can only think of one coherent (non-political) reason that the federal government should pick up the tab for all of the damage caused: unlike the federal government the states must balance their budgets.

The metropolitan area affected is the richest in the United States, with an aggregate GDP higher than all but a dozen or so countries. There is a tremendous difference between Hurricane Sandy and Hurricane Katrina. New York is one of the richest states in the Union; Louisiana one of the poorest. New York is the richest city in the country; New Orleans is one of the poorest. Much of the damage in New Orleans was arguably caused by the failure of levees that were the responsibility of the U. S. Army Corps of Engineers; much of the damage in New York was caused by inadequate sea walls or poorly designed and poorly maintained electrical infrastructure, solely the responsibility of New York.

If “making the rich pay their fair share” means anything at all, doesn’t it mean that rich New Yorkers should be paying for what they consume, i.e. New York? I think that the damage to New York should be paid for by a temporary increase in the New York city earnings tax.

I’m a reasonable person and open to persuasion. Can anyone make a good argument for why people living in rural Arkansas should be paying for infrastructure improvements in Manhattan? I mean an argument that doesn’t also argue that the federal government should be paying my heating bill.

Update

The largest concentration of multimillionaires, those with a net worth of $30 million dollars or more, in the United States is in the vicinity of New York. The state with the largest number of multimillionaires, not the state with the largest percentage but the largest number, is Connecticut. New Jersey is #3. New York is #11. Illinois is down at #18. New York, New Jersey, and Connecticut don’t need us to pay for improving their infrastructure. But they’d sure like us to do it. That’s how the rich stay rich, folks.

{ 41 comments… read them below or add one }

Janis Gore November 9, 2012 at 8:48 am

10…9…8…

Where’s TastyBits?

PD Shaw November 9, 2012 at 9:14 am

Its a bit worse than that. A poorer community without resources will almost certainly be rejected disaster relief. An example is Harrisburg, Illinois, which was hit by a tornado, killing eight, injuring 110 and wiping out homes and businesses. It didn’t get disaster relief because the property values were too low, the city of less than 10,000 too small, and under FEMA’s formula, the state of Illinois (still broke) was supposed to be able to pay for it.

Drew November 9, 2012 at 10:12 am

Quite frankly, Dave, I see no Scroodge like sentiments. Noreasters are well documented.

I own property in Naples, FL. Should I expect the state to take care of me if a hurricane hits Naples? No. Hurricanes hit Naples. Rarely, but they do. I should pay out of my own pocket the appropriate insurance premiums. I get benefits from owning property in Naples. Similarly, those on NY proper., LI, NJ etc should do the same? Yes.

It’s a better view than Nebraska. But hurricanes don’t hit Nebraska. They should not subsidize me. Period.

Sam November 9, 2012 at 10:33 am

I mostly agree with you Dave, but the argument that comes to mind is: in 2007 alone NY paid 90 billion more in tax than it received in Federal spending. With that in mind it’s more like “let us keep a little of our own money for once so we can fix this”

Dave Schuler November 9, 2012 at 10:56 am

On the list of which states receive the most per dollar of federal tax New York ranks #46. Illinois ranks #47. I am unsympathetic to that argument. When you cross the state line from Illinois into Missouri, Iowa, Wisconsin, or Indiana you are immediately struck by how much better the highways are in those states. Illinois sends more money to DC than Missouri, Iowa, Wisconsin, or Indiana. If we kept more of it at home, maybe we’d have better roads. That’s an argument against doing so much at the federal level and it’s an argument with which I’m sympathetic. But that isn’t our system as it functions today.

In my view federalism is pooling our resources to do those things the states can’t do on their own and to help each other out when we’re in trouble. In a month or so New York won’t be in trouble. The way it works under our system is that the wealthy states like New York, New Jersey, Connecticut, and Illinois give a helping hand to the poor states like Louisiana and Mississippi. If we didn’t, we’d be in the same fix as the EU. I think that the idea that Illinoisans should pay to maintain New Yorkers’ standard of living when New Yorkers won’t pay for it themselves is a perversion of federalism.

Chicago doesn’t have the power to impose a city earnings tax. New York City does and has one. That means that the city has the ability to respond to budget challenges like this if the need arises in a non-regressive manner.

I understand that New Yorkers don’t want to spend tax dollars on infrastructure. Illinoisans don’t, either. It’s a common problem.

steve November 9, 2012 at 11:09 am

I think Sam makes a good point, but the people who live there also benefit from the higher income they make. If there is a net benefit to the US from having a New York City, that should be taken into account. You can also make the same argument that is made about New Orleans being a major port. Still, I think that if you want to live next to an ocean, a lot of us do, you need to be prepared for the consequences. I can see the feds helping with port rebuilding and some basic infrastructure. Private homes should be paid for by their owners. Perhaps low interest loans for private homes would be a viable option, but with relatively low limits.

Steve

Steve Verdon November 9, 2012 at 11:15 am

Nobody. According to economic experts Ben Wolf, John Personna and others over at OTB disasters like this are a net economic gain.

TastyBits November 9, 2012 at 11:17 am

@Janis Gore

It is all about politics. They people affected are pawns to be used bashing the other side. When you have seen all your possessions in a pile waiting to be picked up, the world looks a lot different, and when that pile is covered in snow, it is unfathomable to me.

Most of the money will be pissed away. The clean-up effort will be far greater than the local or state has the capacity to complete, and the gov’t will need to get private companies to help. The same a$$wipes who have a problem with the gov’t providing assistance will be fighting to get those contracts. (Think mortgage mess.)

It looks like some of Romney’s people were bad mouthing Gov. Christie because he put people before politics. I am sure he will be blamed by more Republicans. Philosophically, I would have preferred Romney, but after hearing about this, the Republicans can go f*ck themselves. I would like to knock their teeth out with a pair of steel toed boots.

The help that is provided will be based on political goals, and as such, it will hurt as much as help. It will provide perverse incentives for some people, and it will not get to many people who could use some help. It is always about money and power.

I am still waiting for the a$$wipes to call for NYC to be depopulated.

PD Shaw November 9, 2012 at 11:31 am

I can’t find more recent figures, but a 2005 CRS Report to Congress identified the following states as having the most repetitive flood losses by dollar amount:

(1) Louisiana
(2) Texas
(3) Florida
(4) North Carolina
(5) New Jersey
(6) New York

While just one component of federal aid, NJ and NY have been utilizing the national flood insurance program extensively, which has paid out to them more than they have paid in premiums. They are net beneficiaries of federal flood insurance. But certainly a large part the reason that NY & NJ are in the top part of the list is that they have more money and more people to build denser more expensive structures in flood zones.

Jimbino November 9, 2012 at 11:34 am

It is exactly the young, working, single, childfree and poor Black male of Arkansas who should foot the bill. Why?

Because he is so used to being taxed and otherwise disadvantaged by support of old indolent White women through Social Security & Medicare, breeding women through Medicaid and refundable tax credits, old retired White folks through the state and national parks, forests and beaches that he never visits, the rich White folks through the suburban schools he never had the chance to attend, the married folks through their favorable tax and inheritance treatment, and so on. If rich, White New York breeders ever were called upon to pay their own way, they’d die of apoplexy.

Steve Verdon November 9, 2012 at 11:42 am

The largest concentration of multimillionaires, those with a net worth of $30 million dollars or more, in the United States is in the vicinity of New York.

Well then take tax their wealth!

Steve Verdon November 9, 2012 at 11:44 am

Most of the money will be pissed away.

No, no, no! Ben Wolf, John Persona and other serious commenters at OTB have assured me it will be a net economic gain. So spend away. In fact, put $100,000 into everyone’s checking account in New York.

Ben Wolf November 9, 2012 at 11:46 am

“I’m a reasonable person and open to persuasion. Can anyone make a good argument for why people living in rural Arkansas should be paying for infrastructure improvements in Manhattan?”

Arkansas won’t be paying for it because federal taxes don’t fund anything. If you want to make a point solely relating to what each state and what the wealthy should be responsible for then I think a case could be made for that, but this idea that federal spending will somehow deprive another state of its financial resources is totally inaccurate. Money is never a constraint, only the concrete, the power lines, the labor and other real resources are limited.

Steve Verdon November 9, 2012 at 12:01 pm

Money is never a constraint, only the concrete, the power lines, the labor and other real resources are limited.

There you go again….

Dave Schuler November 9, 2012 at 12:15 pm

Ben, I think you’re too quick to identify what the federal government might do with what it does do. The federal government might act as you’ve suggested; it does act as I have. Money is in fact moved from state to state by the federal government. When the government taxes people in state A and spends the revenues derived in state B, that’s what’s happening.

TastyBits November 9, 2012 at 12:15 pm

@Steve Verdon

The OTB crowd has no idea of how it will actually work.

A family has a 10 year old sofa. It may not be the best, but it does the job. It has another 5 years before they will replace it, but now, it is sitting on the curb. The sofa cost $500, and they will be reimbursed $500. They will soon learn that the replacement sofa will cost $700. The $200 difference means somebody’s Christmas present just got smaller.

Where the $500 comes from and where the $700 goes are additional discussions, but I will leave that to you all.

Steve Verdon November 9, 2012 at 1:08 pm

TB,

I know, I was being sarcastic. There is no way this works out to a net positive except if the spending results in new capital that puts on an even higher growth path than we were previously and one that is high enough to offset the lost production while we wait for the destroyed capital to be replaced.

But spending on a sofa is not going to result in more economic output in the future. Even spending on the electrical grid is unlikely to result in more growth. After all, the “new grid” is going to do what the old one did. There might be some marginal improvements like maybe a slight decrease in outages, but that is unlikely to result in significant economic growth over the next several decades.

This gets back to one of Dave’s points…we need more investment and less consumer spending.

Ben Wolf November 9, 2012 at 1:08 pm

@Dave Schuler

There is no series of accounts whereby the federal taxes you pay end up as part of FEMA’s budget. Those “funds” are not stored in any way, they are simply debited from the taxpayer. Pay taxes by check or electronically and the IRS alters the digits in your bank account. Pay in cash and an IRS agent will shred it (you can buy that shredded money in D.C.) It isn’t just deficit spending which comes into existence as government issuing currency, it’s also the funds which people consider “their” money, the stuff that gets deducted from their paychecks. ALL government spending under our current monetary system is produced by crediting accounts.

This is why Warren Mosler and others advocate large tax reductions in areas favoring productive investment and consumption. In fact this is one way the federal government could provide assistance, by simply suspending taxes in affected areas.

Dave Schuler November 9, 2012 at 1:18 pm

There is no series of accounts whereby the federal taxes you pay end up as part of FEMA’s budget.

Well, actually there is but that’s another issue.

It doesn’t really matter whether there is or not. When I send a check along with my 1040ES every quarter and the IRS cashes it, my bank account is debited for the amount of the check. That amount is no longer available for me to spend here or anywhere else. Indeed, it would be illegal for me to try. That means less money available for me to spend here in Illinois (or wherever else I might want to spend it).

You’re right that it doesn’t need to work this way. But it does, indeed, work this way. I think the adverse secondary effects of doing it the way you’re suggesting far outweigh the benefits of doing it the way you’d like to; you don’t. That’s a difference of opinion between us.

Janis Gore November 9, 2012 at 1:27 pm

If you could measure emotional upheaval in watts, you’d figure out quickly how great a loss events like these incur.

But sure, New York has plenty of money to pay for their own infrastructure. New Yorkers are such prissy little things, once they start climbing the ladder.

Bloomberg and Cuomo both strike me that way. Sandra Lee is twice the man Cuomo is.

Dave Schuler November 9, 2012 at 1:33 pm

Ben, what would it take to convince you that you’re wrong about how the federal government operates in practice? Not in theory or how it might work if it elected to but in practice?

I’ve been a federal contractor and have seen how several different departments work close up. What you’re saying and what they’re doing are not really very close.

My point is that the federal government does, really, truly act as though it were constrained by the amount of money it has whatever the reality. The argument should be over whether it should not over whether it does.

What it would take to convince me that you’re right is evidence. Not theory. Eye-witness testimony at the very least. Preferably documentary evidence.

Steve Verdon November 9, 2012 at 3:24 pm

Ben,

Yes, we get that. When I pay my taxes my account is reduced numerically and another account is increased. Still it does have an impact on my spending. And there is nothing that says the government can’t increase Louisiana’s account and decrease California’s either. So your point doesn’t really disprove Dave’s claim.

And based on our previous discussion you yourself have said that there are limits to this. We just can’t run around increasing the money in various accounts electronically. I know you see no problem with debt, but I don’t think it is reasonable to disagree on that one.

And let me give my impression of Dave’s overall point. The area hit by Sandy is generally speaking “rich”. That means there are lots of “rich” people there. A guy with a net worth of $30 million who has suffered a $2 million loss is bad…but he does have $28 million to fall back on, so pardon me if I don’t shed too many tears. A guy with a net worth of $100,000 who suffers a $100,000 loss on the other hand…he’s pretty screwed. Okay, so help him out. But like any reasonable “insurance scheme” it probably should not anywhere near 100% and eve 90% might be too high.

Ben Wolf November 9, 2012 at 3:42 pm

@Dave Schuler

I’ll respond later tonight, a post of the magnitude you’re asking will take me a couple of hours.

PD Shaw November 9, 2012 at 3:54 pm

Ben has already suggested one limitation. Every time a major hurricane hits the Gulf, building material costs go quite high, sometimes doubling costs. If the government gives Bruce Springsteen $100,000, and he spends it to re-roof his house, the more Bruce Springsteens there are, the more it will impact my cost to re-roof the house a thousand miles away because supply is limited and demand is up. I suppose the answer to the riddle is to give everybody $100,000, but don’t let them spend it on anything.

PD Shaw November 9, 2012 at 4:07 pm

For full disclosure, my city was hit by two tornadoes about six years ago. The mayor had a cringe-worthy moment where he described the wreckage as resembling Katrina. (Only plausible if Katrina had cut a path no greater than fifty yards wide through a commercial stretch of big national box stores housed in steel and concrete) We got disaster relief, and I don’t think it was fair that we got it and not Harrisburg, IL. But those are the rules. The Illinois Senators (R & D) have proposed changing the disaster relief rules to be more fair, but the legislation (which I believe has the word “Fair” in it) sits idle.

So fairness to me means rules that are applied to everyone alike. If New York wants the rules changes for their advantage, its not fair.

TastyBits November 9, 2012 at 4:49 pm

@PD Shaw

Actually, the price may go down. More Chinese drywall will be imported. It is toxic, but it is cheaper. The medical problems and corroded metal will provide even more economic benefit.

TastyBits November 9, 2012 at 5:34 pm

The Federal Flood Insurance program was an outgrowth of the Hurricane Betsy in 1965. It was intended to lessen the amount of money the gov’t spent on flooding disasters. It should operate similar to the FDIC. The problem is that people who do not pay into the fund benefit as much or more.

FEMA has morphed into something beyond what it was intended to be. What is needed is something like the Army Corps of Engineers. Military assets would be used in the disaster relief providing infrastructure assistance. The military presence provides a sense of safety and competence. Combat Engineers and the Seabees know how to operate heavy machinery.

More money is not better. Reasonable people could generate a reasonable plan, but a reasonable plan has no political value.

Ben Wolf November 9, 2012 at 6:01 pm

Firstly, there is no question that it appears government funds its activities according to the mainstream description of taxes and bonds providing the necessary streams of revenue. Taxation debits the accounts of the taxed and is deposited in Treasury accounts, and government spends by writing checks out of the Treasury’s reserve accounts at the Fed.

Stephanie Bell, (now Stephanie Kelton) addressed this in a paper which helped get the ball rolling in 1998:

“Many readers will undoubtedly remain unconvinced, based on the intuitive analysis just presented, that the treatment of taxation and bond sales as financing operations should be discontinued. Fortunately, there is another, more powerful, method by which to argue that taxation and bond sales should not be considered financing operations. The argument is a technical one and requires an understanding that Federal Reserve notes (and reserves) are booked as liabilities on the Fed’s balance sheet and that these liabilities are extinguished/discharged when they are offered in payment to the State. It must also be recognized that when currency or reserves return to the State, the liabilities of the State are reduced and high-powered money is destroyed. . .

Notice that the government writes checks on an account that does not comprise part of the money supply or HPM but that as it does, the funds become part of the money supply (M1 if deposited ito checking accounts, M2 if savings accounts, etc.) and part of HPM. It is therefore apparent that while the payment of taxes destroys an equivalent amount of money . . . spending from this account creates an equivalent amount of new money . . .”
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=115128

Dave Schuler makes a comment which, I think, neatly encapsulates the difficulty many have in accepting the MMT framework.

“My point is that the federal government does, really, truly act as though it were constrained by the amount of money it has whatever the reality.”

To this Scott Fullwiler (whom I regard as one of the world’s top experts on money) responds:

“Particularly where the operational realities of the Treasury’s actions are concerned, blogposts by MMT’ers can be met with dissenting comments. A good deal of this is because the MMT understanding of the operational realities of the monetary system is completely counter to that of the neoclassical economics that most learn. But another reason is that a number of people appear to confuse the MMT description of the operational realities of the monetary system with procedures self-imposed by existing laws and/or regulations. . .

While there is over 20 years of MMT literature published in books, refereed journals, and in working papers available all over cyberspace (though most can be found at CFEPS, CofFEE, the Levy Institute, and MoslerEconomics) it’s only recently that we began blogging, and it is clear that many commenters on MMT-related posts are largely unaware that this extensive literature exists and serves as the basis for our blogposts that are by necessity less detailed. Indeed, over the past 10-15 years, I have personally waded through all of the publications from various official sources on the (relevant-to-MMT aspects of the) monetary system’s functioning that I could get my hands on and have found nothing that is inconsistent with how MMT describes it. We have had numerous conversations with individuals responsible for Fed operations, Treasury operations, and relevant parts of the financial system, and cannot recall any significant disagreements there, as well. It is interesting to note that an increasing number of neoclassical economists are publishing research describing the monetary system in a manner consistent with MMT (without appropriate attribution, usually), though these descriptions have yet to make their way into neoclassical models of the macroeconomy.”
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1723198

“Two common and important [self-imposed] constraints are a) the treasury keeps a deposit account at the central bank, and must draw upon that in order to spend, and b) the central bank is prohibited from buying bonds directly from the treasury and from lending to the treasury (which would directly increase the treasury’s deposit at the central bank).”

Close study of Federal Reserve and Treasury operations (observations strangely lacking in the mainstream literature) show a very specific series of transactions required for deficit spending:

“1B. The Fed undertakes repurchase agreement operations with primary dealers (in which the Fed purchases Treasury securities from primary dealers with a promise to buy them back on a specific date) to ensure sufficient reserve balances are circulating for settlement of the Treasury’s auction (which will debit reserve balances in bank accounts as the Treasury’s account is credited) while also achieving the Fed’s target rate. It is well-known that settlement of Treasury auctions are “high payment flow days” that necessitate a larger quantity of reserve balances circulating than other days, and the Fed accommodates the demand. (Note that the point here is not that the Fed necessarily engages in operations that are equal to or greater than the auction, but that the operations ensure that sufficient balances circulate such that the auction settles without the effective federal funds rate for the day moving above the target rate. This requires that the balances already in circulation plus those added via operations are sufficient to settle the auction and enable banks in the aggregate to end the day with their desired positions at the target rate largely equal to actual positions.)

2B. The Treasury’s auction settles as Treasury securities are exchanged for reserve balances, so bank reserve accounts are debited to credit the Treasury’s account, and dealer accounts at banks are debited. Treasury auctions can only settle via reserve balances using the Fed’s Fedwire clearing and settlement system. The auction itself is an asset swap of reserve balances and thus do not affect the private sector’s net wealth.

3B. The Treasury adds balances credited to its account from the auction settlement to tax and loan accounts. This credits the reserve accounts of the banks holding the credited tax and loan accounts.

4B. (Transactions 4B and 5B are interchangeable; that is, in practice, transaction 5B might occur before transaction 4B.) The Fed’s repurchase agreement is reversed, as the second leg of the repurchase agreement occurs in which a primary dealer purchases Treasury securities back from the Fed. Transactions in A above are reversed.

5B. Prior to spending, the Treasury calls in balances from its tax and loan accounts at banks. This reverses the transactions in 3B.

6B. The Treasury deficit spends by debiting its account at the Fed, resulting in a credit to bank reserve accounts at the Fed and the bank accounts of spending recipients. This increases the net financial wealth of the private sector.”
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2008542

The nature of the accounting rules dictates that tax receipts taken in means an equal amount of money destroyed dollar for dollar. The system we have simply cannot function without creation and destruction of net financial assets every time the government and non-government sectors interact financially.

“Ben, what would it take to convince you that you’re wrong about how the federal government operates in practice? Not in theory or how it might work if it elected to but in practice?”

The same standard I applied when weighing MMT: does it provide not only a superior description of the system, but also provide greater predictive power? If a model consistently provides accurate forecasts of future macroeconomic events, it is highly likely to be more correct in its description. Show me a conventional model produced by the mainstream which accurately projects the behavior of bond yields, interest rates, inflation, growth, bond markets, savings, recessions etc.

I think you guys really need to think about why you rarely take being right into consideration. Why is a mainstream which not only couldn’t see a financial tidal wave coming, but can’t articulate a way out, respected? Why is a mainstream which doesn’t even understand out interest rates are set a valuable thing?

If Mike Norman can’t convince you, who can?
http://www.youtube.com/watch?v=AHlOa9mJypI&feature=BFa&list=UUZhuQXtpH2dXeEAX_5MKGow

jan November 9, 2012 at 7:15 pm

More money is not better. Reasonable people could generate a reasonable plan, but a reasonable plan has no political value.

Tastybits — no truer words than those ….. unfortunately, ‘reasonable people’ must be on back order somewhere.

TastyBits November 9, 2012 at 7:36 pm

@jan

What the Democrats did to President Bush for Hurricane Katrina was a disgrace. The Republicans were not much better, but they did not start it. The response to Hurricane Sandy is having the same problems. These events overwhelm the locals.

Gov. Christie is reasonable. He put the people of NJ before politics.

DaveC November 9, 2012 at 7:49 pm

The Federal Government could simply condemn and seize the hopelessly damaged property and use to for build the New York Olympics village. Win-win.

Janis Gore November 9, 2012 at 8:46 pm

Do any of you know who Sandra Lee is? She is Cuomo’s girlfriend.

She has (or had) a much despised show on the Food Network. She doesn’t work from scratch.

But, I saw a documentary about her. She came from a screwed-up family. She started taking care of her younger siblings when she was 13. Making sure they did their homework, making sure they were fed, making sure they had decent holidays.

She started entrpreneurial work when she graduated from school. I can’t remember if the went to college. She had a decent idea about a little form for pouffing drapes. She made money at it.

Great Girl.

Cuomo is part of a political dynasty.

Dave Schuler November 10, 2012 at 6:25 am

Ben:

There’s a lot to digest there. It will take me a while.

Andy November 10, 2012 at 7:33 am

I’ve been gone for a week and missed all the political election stuff – thankfully.

On this topic I know just enough to be dangerous, but it seems to me the devil is in the details and everything would depend on what the funding measure would actually do.

On one hand, if the spending measure was funded by increasing the debt then the effect on Illinoisans would be minimal, at least for the short-to-medium term. Dave’s tax money would not, for the time being, be “diverted” to this purpose. What happens to that debt down the road could have a big effect, but no one really knows how that debt will be dealt with or what the effects will be.

On the other hand, Congress could fund the bill by reducing spending from other parts of government or by raising taxes to make the measure “revenue neutral”. In this case I think Dave’s argument (as I understand it) would be exactly right.

Dave Schuler November 10, 2012 at 8:02 am

Ben:

I think we need to define our terms. Could you define this:

accurately projects the behavior of bond yields, interest rates, inflation, growth, bond markets, savings, recessions

in 25 words or less? Specifically, I mean “accurately”, “project”, and “behavior”. The reason I ask is that I don’t think that any model does by the definitions that I’d use which suggests you’re using some other definitions.

There are any number of econometric models using pretty conventional economic assumptions which predict the general trends in these things pretty well. So I guess that’s not what you’re talking about.

PD Shaw November 10, 2012 at 9:32 am

@andy, as its now constructed, FEMA is an independent agency that is supposed to be funded by its budget and flood insurance premiums. It pays for shortfalls by borrowing from the Treasury Dept., presumably with interest. Currently FEMA owes $18 billion, and has a line of credit for a few more billions. Presumably the reason for this accounting is to force FEMA to be more efficient when Congress does not know how, or does not trust itself. FEMA is charging more for flood insurance, removing grandfathering, updating the flood maps. FEMA is also suing a lot of people who received money from Katrina that it later determines should not have received.

Which is a long way of suggesting, the most likely outcome here is that Congress will extend FEMA’s ability to borrow from the Treasury, and FEMA will be responsible for figuring out how to pay them back, at least in part, maybe for all. That would mean other disaster victims or flood-prone areas will take the hits.

Janis Gore November 10, 2012 at 9:41 am

And that’s why I think Obama would be a top-notch director of FEMA. He has a good enough grasp of numbers, he can motivate the community, and his heart is in it.

Pres. is an enormous job.

Again, Onion headline: 47 year-old-black man given worst job in US

Andy November 10, 2012 at 10:24 am

PD Shaw,

From what I’ve read, Sen. Schumer is proposing an emergency spending bill. It’s not yet clear what the money would be designated for. Some could go to “refill” FEMA’s accounts (which happened after Katrina), some could go to the military (which also happened after Katrina), and some could simply be a kind of “disaster relief” slush fund (again, happened with Katrina). Some could be transferred to state coffers.

Sen. Schumer also came out and said all this “relief” should simply be added to the deficit and not offset with reductions elsewhere or ta increases. So, I still don’t see how this impacts taxpayers in Illinois or anywhere else in the short-medium term. The funding mechanism described is the same mechanism Congress used to fund almost the entire Iraq war – they simply appropriated the money and spent it.

TastyBits November 10, 2012 at 12:28 pm

@Ben Wolf

… Why is a mainstream which not only couldn’t see a financial tidal wave coming, but can’t articulate a way out, respected? …

Political expediency and money. The crisis was foreseeable to whomever did not close their eyes. The financial crisis and the way out is an indictment of the system. The financial system is rigged, and the crisis was the result of printing money willy-nilly.

Housing prices, financial instruments, stock prices, Wall Street bonuses, and some commodity prices (oil & gold) were/are being inflated by the additional money sloshing around.

From the little I have read of MMT, it is accounting identities, and it mistakes the possible for the probable. The gov’t controls the printing press and financial ledgers, and it could start printing currency or adding zeros to accounts. The gov’t also has a monopoly on the use of violence, and it could use it without restraint.

The word dollars is used for several different concepts. A gay man can be: (1) a homosexual man, (2) a happy man, or (3) a happy homosexual man. The context matters. Dollars are:

(1) currency-dollars representing real value, e.g. – gold
(2) counterfeit-like dollars created through the printing or zeros
(3) pseudo-banknotes created by leveraging all three

MMT appears to use the three interchangeably without understanding the difference and the consequences.

TastyBits November 10, 2012 at 12:47 pm

@Janis Gore

I googled “Sandra Lee”, and I saw she had a cooking show. I did not know that she is Gov. Cuomo’s girlfriend. Is he still married?

Gov. Cuomo has a “deer in the headlights” look. Mayor Bloomberg is the stereotypical rich guy. I do not want to dump on them, and therefore, I have not said anything about them.

I would nominate General Honoré as Director of FEMA. He is not as well known as he should be. He was one of the heroes of the Hurricane Katrina mess. I liked when told the Soldiers to lower their weapons. “This is not Baghdad. These are American citizens.” More people need to be told, “We do not sh*t on our fellow Americans.”

Janis Gore November 10, 2012 at 1:33 pm

Yes, Honore was on form. A fine representative of the military.

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