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October 30, 2009

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I don't know that it's exactly a counter-argument, but I don't exactly see disaster looming.

-The healthcare system is excessively expensive given the similarity in outcomes to cheaper systems, but that's mere inefficiency.

-The climate, pace, isn't looking particularly bad to me. I can live with losing the Maldives

-Fiscal problems are basically problems of social organization. Somebody wants something, and somebody else (or perhaps the same somebody) isn't willing to pay for it. The fisc is generally, in all times and places, under strain because of that dynamic; there is always pressure to spend to beyond whatever proportion of calls-on-resources the state disposes of. It appears to me that collapses only happen when an absolutely vital, cannot-live-without-it expense cannot get enough people who dispose of calls-on-resources to pony up for it. And that would generally involve warfare on one's own territory, which I see no danger of.

Putting the last point another way, bankruptcy does not destroy actual physical assets, land or human capital. It does damage trust, as the part of the social fabric embodied in the debts so vacated is shredded. But it leaves the existing productive assets intact, and trust can return quite quickly. Else you wouldn't see so much DIP finance, or the sorts of loans I've specialized in for the last 8 years. Want to guess at how many folks I've spoken to in the last 6 months thinking about starting up (or going to work for) subprime start-ups? :^)

Additional point: Yeselson is off:

"It is sheer good fortune that the Democrats had 59/60 Senate seats this cycle and thus were able to pass any stimulus at all, albeit the inadequate one they did. Think about it: With a robust 56 Senate Democratic seats, the stimulus would have failed"

And with a Democratic minority, the Republicans would have done precisely what they proved to be capable of in the past few decades: spending as much, if not more, as any Democrat. Would have been structured differently, but a highly efficient deployment of capital is not what stimulus is about, so the argument about structure is sort of moot (so long as it gets spent quickly.) The only danger is a near 50/50 split, where the smaller party stands to gain by siding with the anxious. But that in and of itself is an unstable situation. To the extent that the GOP makes gains going forward while the economy is still in the crapper, it will find itself under increasing pressure to spend more to fix things. It will surely find new and creative "conservative" ways to blow the dough, but that hardly matters. And to the extent that the Democrats fall into disfavor, they will come under pressure to complain about all the nasty deficits. But not too loudly.

I’m not sure how to take your first comment. It’s much too sanguine, to the point where it seems like you must be devil’s advocating. Are you?

(1) “The healthcare system is excessively expensive given the similarity in outcomes to cheaper systems, but that's mere inefficiency.” True, but why use the word “mere”? After all, economic growth is pretty much by definition the reduction of inefficiency. Here you have a large and rapidly-growing sector of the economy that basically acts as a tax on the rest. Worse yet, that hidden tax is growing rapidly.

And worse still, that growing tax holds the seeds for a catastrophic collapse of the health care system. Eventually employers will start to opt out en masse — as they already have begun to do — leading to a large drop in real wages and a large deterioration in health outcomes. Even abstracting from the human costs of such a collapse, it is likely to lead to very adverse social outcomes that you would probably find deleterious. In addition, many sectors would find it impossible to drop coverage — or be forced to compensate their workforce for rising health costs — and find their competitive position therefore compromised.

In short, while your point is clearly correct, but I don’t understand why growing inefficiency in a sector that already makes up a sixth of the economy is “mere.”

(2) “The climate, pace, isn't looking particularly bad to me. I can live with losing the Maldives.” I have no doubt that you can, but the Maldives are not the issue. At home, you’re talking about the possibility of massive droughts and very large climactic shifts that will bring with them significant economic costs. You’re also talking about a significant risk of losing large quantities of coastline to storm surges, increased hurricanes and rising sea levels. Worse still, there is clear risk of catastrophic flooding should the Greenland and Antarctic ice sheet begin to crack.

Abroad, the real worries come from glacial melting and the resulting disappearance of water supplies in Asia and parts of South America — which would produce massive problems for the United States. It would seem to that people who have demonstrated high levels of risk-aversion with respect to other public policy questions should consider a political system that cannot act to avoid this risk while the cost of avoidance is still low to be a failure. No?

(3) “Fiscal problems are basically problems of social organization … putting the last point another way, bankruptcy does not destroy actual physical assets, land or human capital. It does damage trust, as the part of the social fabric embodied in the debts so vacated is shredded. But it leaves the existing productive assets intact, and trust can return quite quickly.” This is an excellent point, but you’ve lived in Latin America. Trust returns in the U.S. because trust in the basic social institutions remains after individual firms (or even whole sectors) go bankrupt. Trust is not so easy to rebuild in countries that have seen large-scale government defaults.

Worse still, the resulting distributional battles often leave long scars, poisoning the political system and leading to very bad policy outcomes. (Argentina is the case in point.)

Now, that doesn’t have to be true … but isn’t a political system incapable of avoiding that risk also a political system that is not working well?

Furthermore, the deleterious economic effects of high levels of inflation are well-known. As you have argued in the past, rather persuasively in fact, inflation in excess of the magically 5% level is the most likely outcome of an “if this goes on” fiscal scenario.

In other words, your analysis is correct (and in the case of your point about bankruptcy it’s not only correct but it’s actually extremely incisive and very well stated) but I fail to understand why you’re so dismissive of the risks. It doesn’t fit other stated policy preferences. Are you sure you don’t want to change your position?

Regarding your second post, I have to admit that I don’t follow. It seems as though you changed counterfactuals halfway through, from a Democratic majority of 56 votes to a Republican majority. It also seems as though your analysis of a Republican majority assumed (IMO correctly) that the Democratic Party would behave differently in opposition than the Republican Party has behaved, but that isn’t consistent with saying that Yeselson’s 56-vote counterfactual is incorrect. Would you mind restating?

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