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.

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