Saturday, April 16, 2011

The Problem of "Common Sense" Solutions

It's been a busy few days for budgets, finance, and government. Just over a week ago, negotiations between the House, the Senate, and the White House resulted in a tentative deal to keep the government operating for the balance of the fiscal year (although it wouldn't have passed the House without Democratic support). President Obama gave a wonderful speech on Wednesday clarifying some of his fiscal priorities. Yesterday the House passed the Paul Ryan Budget blueprint for 2011 with all Republican votes except 4. And of course, this weekend is the tax deadline (it's Monday because of an obscure DC holiday).

I've complained before about the rhetorical frame, "What the American people want" and no doubt will again. It's a selective argument that doesn't consider the diversity of opinion and sometimes, as Ezra Klein of the Post points out, doesn't pay any attention to popular opinion at all. In the case he describes, the "American people" want Medicare left alone.

My new complaint is "common sense solutions". This is a regular offering, particularly on the right. (The left would do well to stop over-engineering policy, but I'll address that another time.) Examples abound: make medical insurance portable across state lines, reduce regulations that inhibit business, put more money in the hands of the job creators. But I have two problems (at least) with these arguments. First, I'm currently reading a wonderful book titled, Everything is Obvious (Once You Know the Answer) by Duncan Watts. The subtitle is "How Common Sense Fails Us." Watts devotes the first half of the book to demonstrating why common sense does a terrible job of explaining, estimating, or predicting. It's all related to how well we can control variables. Without control, we wind up making ad hominem arguments. Since they are not testable, they wind up being statements of faith and not explanations.

For example, it's argued that regulations are inhibiting business innovation, stunting job creation, and forcing companies overseas. Why? Because companies that go overseas say so. But Watts wants us to consider the companies that thrive in regulatory environments as well. Perhaps the companies that go overseas simply had corporate cultures that looked for loopholes whereever they can find them (last time I wrote about GM not feeling obligated to Flint and about GE getting a tax refund). I could deconstruct insurance across state lines, malpractice reform, greenhouse gas control, and oil drilling in much the same way.

My second critique of the "common sense" argument stems from its "Colbert-like" sense of faith. The common sense critique of policy is strangely absent of any data or at the very least avoids a careful consideration of assumptions made or alternatives foregone. Watts has a great chapter describing Strategic Flexibility, a practice of discussing alternative scenarios to allow assumptions to be uncovered. But too much of the common sense proposals are simply assertions that sort-of work as talking points.  When you begin to explore those assumptions against real data, they don't wind up looking common nor do they make much sense.

Consider the claim: "We're broke!". By any indicator of national finance, we aren't broke. People get paid, services are provided, etc. What we face is a situation where our indebtedness takes an increasing proportion of our budget. What this claim really means is that if we continue in our current pattern and nothing changes, we won't be able to handle future debt payments. By the way, in business this is called "leverage" which is a practice of taking on short-term debt for long-term gain. As the movie Inside Job illustrates, in the decade before the housing bubble we allowed banks to increase their debt to asset ratios from 3 to 1 to 100 to 1. This is what the successful businesses do (you know, the ones so inhibited by regulations.) But there's a huge difference, even at the family level, between "we can't keep doing this" and "we're broke". For all those folks who've lost jobs and houses, it's an insult to use this rhetoric.

But isn't panic called for? Not if we look at the data. We're in this situation because of a number of factors. I'll name five: 1) the unbudgeted costs of the wars in Iraq and Afghanistan, 2) the Prescription Drug benefit that was passed with no offset, 3) the costs of the interventions in the financial sector to avoid a depression, 4) the increased impact on government services caused by the retirement of the front edge of the baby boom generation, and 5) the impact of the recession itself measured in suppressed tax revenue. Now, at some point #1 will end (or at least get budgeted), #4 will be a challenge for awhile but will get better if we control health costs as the baby boom is replaced by the generation following, and #5 will improve as the economy continues to grow. The Drug benefit gets absorbed in the Affordable Health Care Law and the misnamed "bail-outs" are not repeating expenditures.

Here's a very concrete illustration of where the common sense rhetoric fails upon examination. It is often claimed that the tax burden on the "job creators" prevents them from hiring new employees at a time when we need to boost the economy. The first challenge to this comes from looking at job creation prior to the Bush-era tax cuts. Job creation was robust because the economy was expanding in the late 90s (which is what created the surplus). But the second issue comes from breaking apart the logic of what is being claimed. The top-end tax cut was 3% (by the way, excuse a rant here while I point out that when these rates go back up, that was what the Republican administration passed in 2001 -- it's not a tax increase, it's a sunset clause as proposed.) Now, let's assume you are one of those folks worth $1,000,000 in taxable income (remember, that's after all your deductions). What's the impact of that 3% increase? It's easy math -- it comes to $30,000 per year. Like the bit that Amy Poehler used to do on SNL, REALLY? You aren't hiring new employees because you had to pay an additional $30K in taxes? Actually, it's puzzling to take that in the other direction. What are you, Mr. Millionaire, doing with your extra $2,500 per month? Another trip? At least the Republican budget cuts the top end rate down to 25% which would result in significant savings for those in the top brackets (with dramatic impacts on federal revenues).

Here's a related example: we often hear that we don't want to inhibit "small business, which is where the jobs get created." But when you look at actual data of who makes up a small business and whom is impacted by tax issues, they aren't the same people. Glen Kessler is the Fact Checker at the Post. Here's his take on the small business question. It's interesting that he manages to avoid calling people liars, only because they were so careful in how they constructed their sentences!

Here's a final example. It's "common sense" to hold federal outlays at some fixed percentage of the total revenue. Why? And who decides what number? Matt Miller wrote an interesting piece in the Post yesterday that shows how arbitrary both this position and the specific number used happen to be. In light of the wars and the baby boom, it makes sense to argue that we need a higher percentage of spending (by 2 or 3%) while we manage the transitions I described above.

As always, REALLY talking about these issues requires us to be more truthful about our assumptions about government and finance. If you believe that we have to get out of the entitlement business, the current (temporary) financial crisis provides cover to do that. (I'm still having a hard time figuring out what entity will pick up the slack after medicare funding is slashed but costs remain, but Ryan's is a philosophical position some find great value in). If I assume that our collective society is strengthened by looking out for "widows and orphans" and their contemporary equivalents as the Bible instructs, then we have to include that in our planning.

At the very least, we need to pay attention to the actual data, consider alternative scenarios (remember gas prices are high because of uncertainty and not lack of domestic drilling), and speak the truth.

Thursday, April 7, 2011

The "Promise" of Choice

We face a possible government shutdown, with political parties unable to come to consensus on goals and strategies. There is much that could be discussed over the long run as we approach questions of the deficit, but our legislative maneuvering has forced a confrontation that was anything but urgent. There is absolutely no reason that this particular increase of the debt ceiling would mark our social demise. It's just an easy tool to use for political posturing.

In the midst of this posturing, Rep. Paul Ryan (R, WI) introduced some broad outlines of his proposed budget for 2012 that will be considered by the House. There are many sources of analysis one can read: some of his numbers are very unclear, the CBO disputes some assumptions, the Chairs of the Deficit Reduction Task Force think it puts too much burden on the poor, the young, and the elderly.

Yesterday on NPR, I heard the explanation that Ryan's approach to Medicare would be to give vouchers to future seniors (exempting those like me who are over 55) to allow them to shop for the plan right for them. Medicaid would be changed to a block grant program, giving a fixed amount to the states and letting them experiment with the best way to deliver services in their area. Both of these moves were described as valuable because they allowed people CHOICE.

Ever since hearing that comment, I've been thinking about the idea that choice isn't evenly distributed. One has to have a certain level of resources before choice can be properly exercised. As if to make that point for me, today's LA Times comics page included the following strip from Candorville (written by Darrin Bell):

There is a true temptation to think all the world is like my people. We generalize from our situation.

Yesterday I had another illustration of this same problem. I was watching Roger & Me, one of Michael Moore's earliest documentaries about the impact of GM plant closing on Flint, Michigan (where GM was founded) in preparation for relocating to Michigan and to spur some of my thinking on my Broken Stories project. Moore wanted CEO Roger Smith to go to Flint and meet with unemployed workers impacted by GM relocation, but GM was non-responsive. One executive explained how a business needs to be concerned for the bottom line and not in supporting a community's needs.

Folks were working at fast food places (WalMart greeters were not the rage in 1989). One woman was selling rabbits out of her home. When Moore approached her about her business, she asked if he was interested in rabbits "for pets or for meat".

The documentary shows President Reagan telling people to relocate to the Sun Belt because that's where the jobs were going (in what proved to be a stop-off point to overseas). At another time not in the documentary, he encouraged unemployed factory workers to get jobs as computer programmers. Celebrities Pat Boone and Anita Bryant, both of whom had be spokespeople for GM, encouraged people to "have a positive attitude" and things would work out.

Listening to Reagan, Boone, Bryant, and GM folks, I realized the limits to our naive belief in choice. There are significant segments of the American population who do not have geographic mobility. They lack resources, they have parents who need care, there are family members in institutions. Furthermore, they need to deal with complicated choices between programs, options, deductibles, eligibility, and the like.

I remember when the last administration passed the Prescription D drug benefit (which, by the way, was a bigger deficit challenge than even the tax cuts for the wealthy). When that first passed, senior citizens were inundated with materials informing them how to choose among the various providers. Many were simply not capable of working that out without help.

Of course, the middle class seniors had less to worry about. Companies showed up who would make the best decisions for you for a fee. You could maximize your choice just like those folks on the financial services television commercials (why are none of those folks concerned about how to keep grandma out of the home?).

The idea of choice lies behind some of the Tea Party fury. They argue, "it's my money" and not the government's (a ridiculous position articulated by GW Bush). They should have the say in what they do with that money. It's less clear what they'd propose for those whose money won't go far enough to allow choice. Of course, the more money one has, the better one can choose to keep it out of the government revenue stream. You do that by having tax lawyers who can help you avoid taxes. The most unbelievable example is General Electric, that got a $3 billion dollar TAX REFUND because of the excellent work of the nearly 1,000 tax attorneys in their employ.

But the lower part of the economy doesn't have these options. If you are not geographically mobile, don't have skills that translate to other industries, are unemployed, or elderly, or very young, you will choose between the options that you have. This most likely means lessened coverage, poorer health, inadequate nutrition, earlier mortality, and crime in the streets.

I'm not suggesting Rep. Ryan or the late Roger Smith are insensitive to workers and the unemployed. I am suggesting that they've made the mistake of building programs or corporate strategies based on what would work for them. They'd exercise rational choice to maximize outcomes.

But for the poor, the young, and the elderly, it's no choice at all.