So, which of the pending items on the legislative agenda will the lame duck session of Congress tackle?

• Extending the “Bush tax cuts”. What would they be called then? My guess is they’ll be called the “Bush tax cuts” when they’re re-extended in 2050.
• The inheritance tax
• The alternative minimum tax
• The scheduled cut in physicians’ reimbursements under Medicare
• The DREAM Act (allowing immigrants who came to this country illegally at a young age to obtain legal status)
• Card check

All? None? Something else?

I seem to recall that the Congress failed to pass a budget and we’re operating under a continuing resolution. Since they’ve kicked that can down the road until February I doubt anything will be done on that one.

The picture on the left is of my mom when she was in college. In this picture she’s between five and ten years younger than my earliest memories of her. This is much the way she looks to me as seen through the eyes of memory and far, far different from my last memories of her.

Over the last few months as I’ve had the opportunity of talking at length with my niece I have been very much impressed by the differences in childhood experiences between me and her mother, my youngest sibling.

My mother was a young woman with a husband with whom she was very much in love and who loved her. She took care of the house and children, made her children’s clothes, was a den mother. Despite the time and energy that all of this took she and my dad always took time for regular weekly date nights. They’d go to dinner or the movies or go down to Gaslight Square for live entertainment.

She lived in a small house in a rundown (to say the least) neighborhood in which we were the most prosperous family on the block. She dreamed of a bigger house in a nicer neighborhood, poring over pictures in magazines, going antiquing. She was my mom.

Her mother was a still relatively young widow who taught school full time, attended graduate school, and struggled to make ends meet. Although there were older kids in college (and graduate school), those older siblings rarely visited. Most of the time it was just my mom, my youngest sister, and her twin. The twins took care of the big house in the nice suburb while my mom worked. They were probably the least prosperous family in the neighborhood.

She was my friend.

And yet these two very different women were really one woman. I miss you, Mama.

When I read this quote from President Obama this morning:

“I neglected some things that matter a lot to people, and rightly so: maintaining a bipartisan tone in Washington,” he told reporters in a brief question-and-answer session aboard Air Force One as he returned from a 10-day trip to Asia. “I’m going to redouble my efforts to go back to some of those first principles,” he promised.

my immediate reaction echoed Inigo Montoya: that does not mean what he thinks it means.

A “first principle” is an axiom. You cannot put on or doff a first principle at will. I think he meant, simply, principle.

I believe that the clearest way to infer what a person’s principles are is by his or her actions. I think the president has made his principles pretty clear over the last several years and they have nothing to do with bipartisan tone.

My complaint about our presidents over the last several decades is that they do not appear to have solid principles. What did the last four presidents want to accomplish with their presidencies? I honestly have no idea.

As a follow-up to my earlier post on using the NYT game to balance the budget, I thought I’d round up what others in the blogosphere were doing.

Reuter columnist Felix Salmon elects a balance of 69% tax increases and 31% spending cuts, cuts mostly coming from the defense budget and by eliminating government contractors.

Barry Ritholtz of The Big Picture has a balance of 39% tax increase and 61% spending cuts. He doesn’t give his detailed choices.

Arnold Kling goes for cutting entitlements and no tax increases. His colleague, David Henderson, makes similar choices but also cuts military spending.

My colleague at OTB, Doug Mataconis, makes most of the spending cuts and increases taxes on the highest income earners.

Professor Stephen Bainbridge makes choices similar to mine but is more favorably disposed to an immediate reduction in the number of federal employees and a reduction in aid to the states than I am.

Steve Hynd of Newshoggers prefers 62% tax increases with 38% spending cuts, mostly from the military budget.

Robert Farley of Lawyers, Guns, and Money balances the budget by cutting military spending, means-testing Social Security (!), and raising taxes.

I’ll add others as I find them. The one conclusion I’d draw at this point is that there’s no simple consensus for anything revealed by the responses which pretty much tells you how we got to the point at which we find ourselves.

Update

Reuters columnist James Pethokoukis balanced the budget entirely via spending cuts.

Derek Thompson employed a 50/50 balance of spending cuts (varied) and tax increases. He summarizes his actual preferences:

My dream budget would be more wacky than the Times feature allows. For example, I would use a carbon tax to partially reduce corporate income rates and I would use a national sales tax (a value-added tax) to partially reduce payroll tax rates on employers. This would, ideally, move our tax code away from taxing income and employment toward incentivizing green energy and savings.

OTB colleague Steve Verdon weighs in with a package of spending cuts and, somewhat to my surprise, tax increases. It’s a pretty temperate, reasonable approach to the extent that’s possible within the confines of the game.

Quite a few people are all atwitter about the New York Times’s “You Balance the Budget” game. If you’re interested in how I approached the task, my results are here (PDF). In general, I cut defense spending, raised taxes, and cut healthcare spending. Those are the big ticket items at any rate.

My colleage at OTB, Doug Mataconis’s results are here.

I think the game is counter-productive, even pernicious, for a number of reasons. It’s not complex enough. You should be able to means-test Medicare as well as Social Security. There are any number of budgeting-cutting measures that are completely omitted. There’s no mention of increasing user fees. It combines some things that should be listed separately, e.g. reducing the size of the Navy fleet (which I oppose) with reducing the size of the Air Force fleet (which I support).

Possibly the worst defect of the game is that it resorts to handwaving in some critical areas. So, for example, “cap Medicare spending”, isn’t accompanied by the important “how?” I’ve given my answer here.

It trivializes the process. The question before us isn’t how we balance the budget. It’s how, in the absence of a consensus on what sort of a country we should be and in the presence of genuine differences of opinion, we can arrive at a political solution for balancing the budget that won’t wreck the U. S. or world economies.

Let me give some examples of some of the issues. I’m sure that “eliminate foreign aid” will be an alternative that many will select. What they don’t recognize is that a lot of U. S. foreign aid comes in the form of credits for the products of American businesses. Cutting foreign aid in that context means reducing subsidies for businesses. In the long run I’m in favor of that but in the short run I suspect it would drive us back into recession.

Similarly, I agree with the idea of reducing the number of federal employees and federal grants to states. However, doing so quickly enough so that it would have an effect on the budget by 2015 would add an additional million federal, state, and local government workers to the ranks of the unemployed. It’s got to be done more gradually than that.

It’s easy to balance the budget in the comfort of your own home, implementing solely your own priorities. Do your priorities represent the entire country? Do they represent anybody but you?

I have a suggestion for improving the NYT’s game. In addition to some of the things I’ve suggested above I think they should be capturing all of the preference data generated by people playing their game, eventually to publish it with some analysis of the broad patterns that are represented. I suspect that it would be very interesting and, possibly, horrifying to some.

Let me speculate on what they’d find. I think they’d find several patterns emerging, separately or in combination. I’m going to call these patterns “impulses”. Here are some of the impulses I suspect are present.

The Isolationist Impulse

This impulse would be represented by wanting to cut foreign aid and reduce U. S. military commitments abroad. This is a venerable view in American politics and it’s one with which I have a certain amount of sympathy. However, it’s short-sighted. Our foreign aid and foreign military commitments are a projection of our national interests. It’s true that we spend more than most (or even all) of the other countries in the world combined. That’s because the other OECD countries are all free riders on the world security and stability that our military expenditures provide. Everybody can’t be a free rider. Can we reduce our commitments substantially? Sure. Can we eliminate them altogether? That will probably cost us more than maintaining some level of commitment.

The Minarchist Impulse

This impulse is basically one to reduce everything—taxes, the military, entitlements, government subsidies of all flavors. Everything. This is another view with which I have a certain amount of sympathy. The U. S. of 2010 is not the U. S. of 1930. Government is an enormous part of daily life, too much, and constitutes a huge, intolerable drag on the economy. IMO there is no path to recovery that does not lie, in the long term at least, through a dramatic change in what the government does and how it does it.

The Welfare State Impulse

This impulse is, essentially, to emulate Germany. Cut military spending to a third of what it is now or eliminate it entirely. Tax more. Do not constrain the growth in Social Security, Medicare, or Medicaid spending. It works fine for Germany because the Germans can always free-ride off of us and there’s a U. S. to which they can export. We have no larger superpower on which we can rely and, as was seen in the G20 conference last week, all of the world’s exporters including Germany are vehemently opposed to our constraining our imports or expanding our exports. I also suspect that most Americans who admire this alternative have never lived in Germany.

The Jacksonian Impulse

Those who follow this impulse are likely to want to cut taxes and exempt the military from cost reductions. There may be some variants of this group, some wanting to preserve spending on Social Security and Medicare, others wanting to cut it.

These competing impulses are the nexus of the problems we have in arriving at fiscal sanity. For any one of these impulses to succeed fully means that the others must fail.

I’m posting this graphic, courtesy of the Kaiser Family Foundation, largely for future reference. Although I’ve read other estimates elsewhere, the estimates in that chart comport with most of the estimates I’ve read and with my own experience.

As you can see hospital care and physician/clinical services accounts for the majority of costs, 51-52%. However, if you pry a little more closely into nearly all of the expense items represented by slices of the pie, they boil down to wages. Physicians’ wages, dentists’ wages, administrators’ wages, pharmaceutical companies’ executives’ wages, all of the wages in the sector.

If someone were to ask me what I would do to reduce healthcare expenditures in the U. S. with a wave of my magic wand, I’d answer “cut healthcare wages in half”. If that were to be done, physicians, broadly, would still be earning more than their OECD counterparts and we’d still be spending more per capita and overall than any other OECD country but we wouldn’t be spending three times as much as the next-largest spender.

If you were to ask me how we got to where we are now, I’d answer “historical error”. Forty years ago we ignored rising healthcare costs (and wages!). After that initial period which ended around 1980 most of the increase can be explained by inflation (that healthcare inflation is a large component of the general rate of inflation so, consequently, cost of living adjustments in healthcare that are in line with the general rate of inflation creates a positive feedback situation is a subject for another time).

For those who believe that our high healthcare expenditures are due to something else, I have a question: how is price discovery done in healthcare?

One of the explanations frequently given (including in the link above), technology, is IMO hooey. The Japanese use high tech procedures as frequently as we do (in some cases more frequently) and their costs are a fraction of ours with better outcomes. Besides, actual ledgers for hospitals, etc. don’t show that. What they show (at least in my experience) is increasing costs of labor.

Another explanation given at the link is likewise hooey. It is mathematically impossible for prescription drugs to be the primary driver of healthcare expenses. It only comprises 10% of expenditures. That’s nearly the amount by which healthcare expenditures increased last year. It might be growing fast but it isn’t the primary driver.

There’s a little bickering going on among the associate bloggers at Outside the Beltway on the subject of earmarks, the appropriations that used to be referred to as “pork-barrel legislation”. First, Doug Mataconis scoffed that cutting earmarks was mere symbolism:

I’d call the earmark debate entirely symbolic, and quite possibly a diversion from forcing politicians to think about real spending cuts. According to one statistic, earmarks account for about an infinitesimally small part of the actual federal spending.

noting that Congressional pay is a microscopic proportion of the total budget. Then Dodd Harris retorted that cutting earmarks was more than mere symbolism:

We wouldn’t — and shouldn’t — wave off a few hundred million in spending for an unconstitutional program that harmed free speech as unimportant merely because it didn’t cost much in the grand scheme of things. The same logic applies to earmarking.

This morning James Joyner put in his oar:

…unless eliminating earmarks coincides with a radical reconception of how our government operates, it may be a step in the wrong direction. The feds spend billions on highways, airports, and other infrastructure projects. Without earmarks, we’d basically have federal bureaucrats deciding how to spend that money. That may in fact be less wasteful and more efficient. But I don’t see how this doesn’t constitute a major redistribution of discretionary power away from Congress — who’s supposed to decide how Federal funds are allocated — to unelected people not mentioned in the Constitution.

Rather than address the meat of this argument in this post I want to address a minor squabble that’s occuring in the comments to James’s post on the role and value of bureaucracy.

Resources are not infinite but scarce. There are any number of strategies that in theory result in an optimal allocation of resources including autocracy, representative government, techocracy, and markets. And I agree: benign all-knowing philospher-kings, humble, eager representatives of the people without ambitions or foibles of their own, brilliant polymath selfless techocrats, and perfectly efficient free markets would all be nifty. Unfortunately, none of them exist in life. Comparing our current Congress with an ideal bureaucracy isn’t just comparing apples and oranges. It’s comparing the bruised, worm-eaten apple on the shelf to a perfectly Photoshopped picture of an orange.

In practice there are any number of reasons to believe that representative government has advantages over autocracy or technocracy. It has been known for well over a half century that for many real world problems there is no one right way. Believing that there is one right way is merely an artifact of limited knowledge: it ignores competing information and unpredictable, capricious, and idiosyncratic personal utility curves.

Representative government, in theory at least, has the ability incorporate more information and to arrive at agreements that take these maddening variances into account. Markets, again in theory at least, have the ability to incorporate even more information and, hypothetically, arrive at an optimal allocation of resources.

However, we live, work, and function in the real world and in that world there are some activities in which bureaucracies are the only practical way of addressing them, some activities in which representative government should be preferred, and yet others in which markets should reign supreme.

The original form of our government in which the federal government was limited to its enumerated powers has, sadly but probably inevitably and permanently, been abandoned. In looking back at it we should recognize that the original form, particularly when incorporated with a commitment to the principle of subsidiarity, had much to recommend it.

To use the bridge-building metaphor, in that old, obsolete original form when Springfield (to pull a city name out of a hat) wanted to build a bridge the city fathers didn’t appeal to state or federal representatives or file a request with the state or federal Departments of Transport, they raised the money and built it. If they didn’t want the bridge enough to finance or build it, the bridge didn’t get built.

In these more enlightened times elected representatives appropriate money to build bridges for Springfield and, if the decisions were relegated totally to the federal Department of Transportation, the experts would decide whether Springfield should have a bridge, the desires, knowledge, and will of the people of Springfield be damned.

The New York Times is reporting that the bipartisan deficit reduction committee appointed by President Obama early this year has produced a draft report of its recommendations:

WASHINGTON — A draft proposal to be released Wednesday by the chairmen of President Obama’s bipartisan commission on reducing the federal debt calls for deep cuts in domestic and military spending starting in 2012, and an overhaul of the tax code to raise revenue. Those changes and others would erase nearly $4 trillion from projected deficits through 2020, the proposal says.

The plan would reduce Social Security benefits to most future retirees — low-income people would get a higher benefit — and it would subject higher levels of income to payroll taxes to ensure Social Security’s solvency for at least the next 75 years.

The article is quite terse. Among the elements of the proposal appear to be reducing marginal income tax rates, eliminating or curtailing some current deductions, some form of means-testing Social Security, raising the Social Security retirement age, military spending reductions, and a 3:1 ratio of spending cuts and revenue increases. I endorse all of those measures, at least in principle.

However, there are some things that fill me with foreboding. The NYT article doesn’t mention further cuts in Medicare spending. Without reductions in federal healthcare spending all other measures will be in vain. And then there’s this:

The Senate majority leader, Harry Reid of Nevada, and Representative Nancy Pelosi, who will remain the House speaker until January, have promised in writing that the Senate would vote first and, if it approves a plan, the House would vote as well.

Should the package of proposals fall short of the necessary 14 votes in the deficit commission, as many people expect, proponents of deficit reduction, including some administration officials, hope that at least some of its recommendations could be the basis of efforts to pare deficits once the economy fully recovers.

The emphasis is mine. “Fully recovers” to what? Some sectors of the economy will never recover to the heights they saw just a few years ago. The prices of tulip bulbs have never gone back to the levels they saw during the Tulip Mania of the 17th century and that was nearly 500 years ago. We were in the midst of a bubble a few years ago, for goodness sake.

What desperately needs to happen is for the Congress to act decisively and then to stop. The uncertainty will be as killing to the economy as the deficit and the current misallocation of resources that the last couple of years have seen the Congress dutifully bronzing for eternity.

Is the panel’s report dead on arrival? If that’s the case I’m afraid we’ll have a choice between deflation and hyperinflation. Our creditors won’t tolerate our current level of profligacy indefinitely.

I want to draw your attention to a fascinating speech by Jeff Rubin, formerly Chief Economist with CIBC World Markets, the investment banking arm of the Canadian Imperial Bank of Commerce. The transcript of the speech is at The Oil Drum. In the speech Mr. Rubin traces the intricate interaction between oil prices and economic growth, particularly in the U. S.:

Gee, I wonder what happened to oil prices before this recession. It seems to me that oil prices went from about $30 barrel, at the beginning of 2004, to almost $150 barrel by 2008. Even in real terms, that is, inflation-adjusted, that price increase was over double the price increase of either the first or the second OPEC oil shock. If they had led to devastating recessions, why would not the biggest oil shock of them all, be the obvious culprit for what has been the deepest recession to date?

There are many ways in which oil shocks create global recessions. First, the transfer of income. When oil went from $30 barrel, to about $147 barrel, over $1 trillion of income was transferred from the industrialized oil consuming world to OPEC. Now, that was not neutral for the economy, because the savings rates from which money was coming from, like the United States, was virtually 0%, meaning that consumers spent everything they made. And where the money was going to, places like Saudi Arabia, or Kuwait, or the United Arab Emirates, had savings rates of almost as high as 50%, so it certainly was not demand neutral.

High price also create recessions by crowding out non-energy expenditures. Two years ago, when gasoline cost us $4 gallon, low-income Americans were paying more to fill their tanks than they were to fill their stomachs.

But by far, the most important mechanism, the most important path, by which oil prices cause recession is through their impact on inflation, and their impact on interest rates.

He takes note, correctly, of the subsidies by which oil-producing countries including Russia, Mexico, Venezuela, Iran, and Saudi Arabia encourage their citizens to consume more oil. He fails to consider the implications of the similar subsidies that India and China.

He further notes that time is running out:

Now, a lot of people will say, “Jeff, economic history tells us that scarcity is the mother of invention. Give us 10 to 15 years of adjustment, and we will develop alternate technology, so we won’t be carbon-dependent.”

And they are right. Give us 10 to 15 years, and we will solve this on the supply side. But as I say, our rendezvous with triple digit oil prices is not in 10 or 15 years; it is in 10 or 15 months. So instead of trying to turn cow-shit into high octane fuel, we are going to have to learn to get off the road, and that is just what happened. In 2009, there were 4 million fewer cars on the road than there were the year before. In the next ten years, 40 million North Americans will be taking the exit lanes. The question is, “Will there be a bus to get on?” Instead of giving $40 billon to General Motors, what we should have done is spend $40 billion on public transit, so there would be a bus to get on.

The very forces that render oil’s competitors economically feasible, high oil prices, constitute a substantial drag on the economy that we can ill afford.

There are actions that we can take in the near term to reduce our consumption of oil. Among these are for us to end our own subsidies of oil consumption. These range from the maze of direct and indirect tax incentives for oil consumption to maintaining the free transit of oil in the Middle East. The amount spent on highway construction and maintenance in the U. S. is about twice what gasoline taxes bring in as revenue. The difference is a subsidy to oil consumption.