Monthly Archives: February 2012

The Economics of Lent

My local grocery store’s deli often puts out samples of chicken in hopes that a quick taste test will entice shoppers enough to buy a few wings. The amount of chicken varies, however, from night to night. Some of this may simply be due to the personal preference of the employee behind the counter, but some of it is also due to supply and demand.

Namely, when demand for chicken is high, there is less chicken left to put out as the night winds down. When demand falls, however, there is more chicken to put out. The samples seek to stimulate demand for the chicken, and the sample size, as noted, seems to grow or shrink roughly according to demand. The lower demand, the greater the number of potentially demand-stimulating samples.

On Wednesday, I saw the biggest pile of chicken samples I have yet seen.

Something clearly happened to the demand for chicken, but what? As a Roman Catholic, I knew immediately. Wednesday was the first day of Lent, also known as “Ash Wednesday.” And, seeing as how Catholics refrain from meat on Ash Wednesday, Good Friday, and all Lenten Fridays, there seemed to be a large fall in the demand for chicken.

Catholics didn’t always refrain from meat just on these specific days. For years, Catholics refrained from eating meat during the entire Lenten season, as well as every Friday during the year. Like many traditions, this started out as a plethora of different preparation practices, before eventually evolving into standardized rules that barred meat but allowed fish. In 851, Pope Nicholas I made meatless Fridays mandatory.

Abstaining from meat on Fridays was, on some level, meant to serve as a sacrificial reminder of Jesus’ death on Good Friday — but many Catholics will also tell you that the meatless day had a dual aim of helping fishermen, especially since many early Christians (including Jesus’ right-hand man and the first pope, Peter) were fishermen. Whether this is apocryphal or not, the effect was the same. Meatless Fridays proved a boon for the fishing industry, as they essentially had a captive market every Friday and for the entire Lenten season.

Yet, things change. The standards were revised by Pope Paul VI in 1966, essentially allowing Catholics to consume meat on non-Lenten Fridays.

That year, according to a column in the Lewiston Daily Sun, the Wall Street Journal ran front-page coverage of the new rule and it’s potential effects, proclaiming: “Fishing industry seems sure to suffer if Pope ends Friday meat ban.” A 1968 study of the decision concluded that the ruling caused a drop in demand for fish. The finding was summed up in a 1993 book called “The Economics of Aquaculture” thusly:

This change had the effect of reducing the demand for various species as some individuals substituted meat for fish. When the Catholic prohibition against eating meat ended in December 1966, the consumption of cod fell by 29.0 thousand pounds. The consumption of large haddock fell by as much as 7.1 thousand pounds after December 1966 when the rules were relaxed.

Another book, “The Marketplace of Christianity,” attempts to place this shift in the context of a shift in the church’s leadership structure “toward meat producing and relatively Catholic nations and away from fish producing and relatively non-Catholic nations.”

Of course, one should also consider the cultural stimulus the fishing industry derives from Catholic abstinence from meat. The biggest example is probably the Feast of the Seven Fishes on Christmas Eve and, to a lesser extent, the fish fry. Such traditions are embedded in the Catholic culture (likely as a result of the abstinence from meat) and, while they may not have offset the drop in demand from the 1966 decree, have at least provided a seasonal boost.

Even religious laws have economic effects. Just some food for thought.


Why Any Debt Deal Will Need to Include Taxes

One of the major downsides to the otherwise enthralling roller-coaster ride that is the 2012 GOP primary is the way that the fight for the Republican ticket has dragged the rhetoric further and further to the right. After all, you cannot become president if you do not win the party nomination — and you cannot win your party’s nomination if you do not appeal to the base voters that turn out at the primary elections. The result is a competition to “out-conservative” each other, which may yield short-term electoral gain, but does so at the expense of cooperative politics and sound policy.

Consider this excerpt from an August 2012 GOP debate in Iowa. Fox News anchor Bret Baier asks the candidates if they would walk away from a deficit reduction deal that would cut $10 in federal spending for every $1 it raised in tax revenues. Every candidate agreed that they would.

This is, of course, absurd. There is no realistic way in which deficit reduction will ever occur solely through spending cuts alone. Think about the budget for a moment. Over 60 percent of the federal budget is mandatory spending, mainly on programs like Social Security, Medicare, and Medicaid. These are programs that, by law, provide certain benefits if you meet certain requirements, such as age or income level.

There is no wiggle room here. These payments must happen unless Congress amends the law to change benefits or eligibility requirements. It would be prudent now to recall that changes to Social Security have always been controversial among the electorate. President Roosevelt planned it that way. In 1941, he recalled:

“We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.”

Because employees pay into the Social Security system with every paycheck, they feel entitled to their own future benefits. This makes paring back benefits or raising the retirement age very unpopular politically. There is a reason why reforms to the Social Security system in 1983 were limited to an ever-so-gradual increase in the retirement age and an increase in payroll taxes. The math is simple: retirees like their Social Security benefits, and retirees reliably turn out to vote in larger numbers than younger citizens. Similar problems face the Medicare and Medicaid programs.

Interest payments on the debt are likewise mandatory, though, they are listed as a separate category from mandatory spending.

But if cutting mandatory programs (again, over 60 percent of the budget) would involve highly risky political moves, doesn’t that still leave discretionary spending of about 40 percent to carve up? Surely, we can reduce the deficit by lopping out a chunk of discretionary spending?

Not so fast. As it turns out, a lot of discretionary spending is not so discretionary after all. More than half of all discretionary spending is defense spending — a spending area that is also fraught, as politicians strive to “support the troops” and avoid being called “soft on defense.” And the nondefense portion of discretionary spending? What does that encompass?

From the Congressional Budget Office (CBO):

Seven broad budget categories accounted for more than 75 percent of the spending for nondefense discretionary activities last year [2010]. The largest of those is the category covering education, training, employment, and social services; it is followed in size by the categories for transportation, income security programs (mostly housing), and health-related research and public health. Categories with smaller amounts of discretionary spending include administration of justice (mostly for law enforcement activities), veterans benefits and services (mostly for health care), and international affairs.

It also is worthwhile to note that President Obama’s proposed nondefense discretionary spending for 2012 is about $450 billion, or around 12 percent of the federal budget. The deficit for 2011 was over $1 trillion. So, if the entire nondefense discretionary budget evaporated, it would still not have covered last year’s deficit. Nor would it cover the projected 2012 deficit of around $828 billion. If you had the entire discretionary budget (which, when you add the $868 billion in the 2012 proposed Obama budget for defense to the total for nondefense spending comes to about $1.3 trillion), you would have just covered the deficit, at least in the short term.

In the long term, you’d still have an aging population that would stress mandatory spending programs. When the baby boomers were in their working primes, taxing their large numbers enabled the government to meet entitlement payments. There were enough workers to tax to support Social Security pensions and Medicare insurance coverage. Now that those same huge numbers are retiring, there will be a shrinking pool of people to pay and a growing pool of people that will be drawing benefits.

And then, in our hypothetical, there is the fact that we just abandoned all of the government’s defensive duties, diminishing our global power and destabilizing the world as a whole. Also, with more than $1 trillion dropping out of the economy, we’ve just descended into the depths of a long depression that will send federal revenues spiraling, creating a whole new deficit problem.

Now, this hypothetical is obviously utterly unrealistic. No one (who actually understands the federal budget) is calling for the government to abandon all discretionary spending. But it nevertheless serves a purpose. It shows that the size of the deficit is comparable to an entire section of the budget. Furthermore, it shows that, as much as people talk vaguely of “cutting waste,” there is almost no part of the budget that could be touched without sparking controversy.

This is important because cuts must occur if we are to get the deficit under control. Such cuts should be timed so as not to derail economic recovery from the Great Recession (that is to say, they should not be implemented immediately) and, importantly, entitlements like Social Security and Medicare must be reformed.

The real question is a political one: how do you pass a deficit reduction package that cuts popular programs?

The Republican candidates’ unanimous rejection of a hypothetical deficit reduction package with $10 in cuts for $1 in tax increases is one way to not accomplish this goal. The reason why is, like the question posed above, inherently political.

In order to pass such legislation, one needs the president and both houses of Congress to be onboard. A simple majority would suffice in the House of Representatives, but a supermajority (two-thirds) would be needed to overcome the inevitable filibuster in the Senate. That would be virtually impossible if one side of the aisle refused to compromise, which is essentially what the Republican candidates said when they indicated they would reject any and all tax increases.

But pretend for an instant that the impossible occurs, and the Republicans land both the presidency and a filibuster-proof majority in the Senate. Also pretend that the few moderate Republicans left in the Congress (Olympia Snowe, Scott Brown, etc…) don’t jump ship. They’ve got the numbers. Do they pass this all-cuts deficit reduction package?

No.

Any economist would tell you that the Republicans don’t pass the package, even though they have the numbers. Why? They do not pass the all-cuts package for the same reason the GOP candidates are demanding an all-cuts package: incentives.

Right now, the Republican presidential candidates have a very strong incentive to call for an all-cuts package because it will help them win the primary election. As mentioned earlier, the candidates have been pushing each other further and further to the right in a race to win the presidential ticket. Calling for an all-cuts package allows them to curry favor with primary voters and gives them cover from opponents that would otherwise attack them for not ruling out tax increases.

However, passing such a package is not in our hypothetical Republican Congress’ interests because it would be widely unpopular and would energize the opposition. Unlike the presidential candidates, such a package would actually hurt their electoral prospects.

Democrats, of course, would vote in lockstep against this package, making the issue a partisan one. Democrats across the country would campaign against the hard-hearted Republican deficit reduction that was weak on defense (cuts to defense spending), harsh on both the poor and the middle class (cuts to the social safety net and Medicare), a burden to the elderly (cuts to Social Security and Medicare), but also went easy on the rich (lack of tax increases).

Voters across the country, seeing their Social Security checks shrink, their insurance coverage dropped, their unemployment evaporate, would turn their Republican representatives out of office in record numbers at the next election. And if it is one thing that political parties loathe, it is losing power.

But how would including tax increases in deficit reduction legislation prevent any of this?

Well, first of all, it makes the legislation likelier to pass than an all-cuts package — the latter having absolutely no chance at becoming law. It has a better shot because it provides a platform for cooperation and compromise. The Democrats may have to swallow painful spending cuts, but at least they in turn get to temper some of them with tax increases. The Republicans may have to suffer tax increases, but they also get their desired spending cuts.

With members of both parties onboard, the legislation has a better chance of making it to the president’s desk. Additionally, it can be presented as bipartisan, robbing either party of the ability to use it against the other in future elections. Individuals and primary challengers may still use this narrative in specific elections, but the overall narrative will be very different with bipartisan cover. It is also much easier to take the dive when you are joined by both your allies and opponents.

There would still be much opposition in the electorate, but it would be more manageable. A compromise package could call for ‘shared sacrifice’ from every American.

History also provides a good guide. As the Economist notes:

Put simply, no fiscal consolidation that the IMF has judged to be successful relied on public spending cuts for more than 83% of its impact. In successful fiscal consolidations, tax rises accounted for between 17% and 33% of deficit-reduction measures.

So yes, deficit reduction legislation should probably rely more on spending cuts than tax increases — but both are essential parts of any successful package. This will probably not come as a surprise to the American people, as numerous polls have shown that they recognize the need for including tax increases in a deficit reduction package.

But, you might ask, why focus so much on how the GOP candidates responded at some primary debate in Iowa? Once they got into office, things would change. Everyone knows presidents never keep their promises anyway!

Not so.

Studies of the topic have shown that presidents generally try to keep their promises. And on the subject of taxes, any Republican president would likely be fearful of repeating George H.W. Bush’s mistake in choosing fiscal responsibility over ideology. The elder Bush infamously agreed to raise taxes in order to cut the deficit, despite promising he would do no such thing in the 1988 election. At the next election, Bush faced a primary challenger (Pat Buchanan) that emphasized Bush’s broken promise and went on to have a surprisingly strong showing early on in the primary season. Bush, of course, went on to face Bill Clinton who, like Buchanan, threw Bush’s 1988 promise back at him. “Read my lips: no new taxes,” Bush’s broken promise, went on to become a solemn warning to politicians of all stripes (and a Wikipedia page, too!).  Bill Clinton went on to take the presidency.

The irony here is that the very candidates who have staked their campaigns on fiscal responsibility are unlikely to successfully cut the deficit, should any of them take the White House.

Perhaps they should take a page from President Reagan’s book. Sure, Reagan passed the largest tax cuts in American history. But he also, when faced with gaping deficits and a Democratic Congress, reached across the aisle, compromised, and, yes, raised taxes.


The New Republican Dream

Once upon a time, the Republican Party in America stood for balanced budgets, efficient government, and private enterprise. No more. To be sure, you will still hear many Republican candidates give lip service to such ideals, but their actions in office tell quite a different story. The GOP of today does not stand so much for small government as it does for no government at all, and it hopes to achieve this new American Dream through a systematic wrecking of the nation’s finances.

But before I delve into the details, I should first say that I want the Republican Party to succeed. Not the Republican Party of today, of course. I would prefer not to ruin the lives of countless Americans just to prove an ideological point. Rather, I would like to see the party welcome back the pragmatic centrists it has expelled — the Eisenhower and Rockefeller Republicans. The GOP seems to have wholly abandoned the legacy of the first post-New Deal Republican president. With a unified government (the presidency and both houses of Congress controlled by Republicans), many rightwingers wanted to see President Eisenhower attempt to roll back the New Deal. Instead, he launched a massive infrastructure project (the interstate highway system). A true believer in balanced budgets, he actually sought to pay for his initiatives by cutting military spending and keeping tax rates at levels that would sustain his administration’s expenditures.

The heart of Old Republican dogma — the balanced budget — predates Ike. Actually, it was not exclusively Republican — it was the general consensus, before John Maynard Keynes revolutionized economic theory and described how running deficits during recessions (and surpluses during booms) could help smooth out economic cycles. Presidents Hoover and Roosevelt (in the earlier part of his presidency) both sought to balance their budgets, as did Coolidge and Harding before them. Tax cuts were good, if they could get them, but secondary to managing the nation’s finances responsibly. Put another way, when faced with a choice of either chronic deficits or a balanced budget, members of the Old GOP chose the latter.

Things started to change in the late 1970s, however. In California, citizens passed a ballot initiative, Proposition 13, that made it virtually impossible to raise taxes. The Reagan revolution added to the momentum, as the president called for and received massive tax cut legislation. One would (rightfully) conclude that such large tax cuts, even if spending remained flat, would result in huge deficits and increasing debt. But emerging New Republican orthodoxy placed less emphasis on balancing budgets and maintaining fiscal responsibility than at cutting the size of government and slashing taxes, at all costs.

The argument was that balancing budgets would necessarily follow cutting taxes. At a 1980 debate, Reagan framed it like this: “Well, if you’ve got a kid that’s extravagant, you can lecture him all you want to about his extravagance. Or you can cut his allowance and achieve the same end much quicker.”

The problem is, drastic tax reductions necessitate similar spending decreases to balance budgets. Although some revenue from the cut can be recouped thanks to increased economic activity, the ultimate effect is a net loss of revenue. (This economic consensus — that tax cuts do not “pay for themselves” — stands in stark contrast to the talking points of many GOP politicians). A huge loss of revenue, when coupled with the fact that any sizable cuts would necessarily affect politically popular programs like Social Security, Medicare, and defense spending, leads to an untenable situation in which tax cuts are not followed by spending cuts.

Whereas American appetite for tax cuts is voracious, neither citizens nor politicians have had much appetite for cutting programs that comprise the bulk of U.S. spending: Social Security, Medicare/Medicaid, and defense spending. To the contrary, spending in these areas has trended upward while taxes have trended down. Reagan, for instance, ramped up military spending to bankrupt the Soviet Union while simultaneously slashing income tax rates. The result was huge, chronic deficits, and the Reagan Administration subsequently signed off on numerous tax increases. In fact, the Reagan Administration presided over largest peacetime tax increases in American history, as well as a tax reform that broadened the tax base and removed many deductions from the tax code, effectively raising revenue. The George H.W. Bush and Bill Clinton Administrations similarly increased taxes and cut spending. These actions were driven by the very real need to address budgetary issues.

As this graph from Wonkblog shows, spending cuts were dominant in the Bush and Clinton deficit reduction packages (and were likely made easier due to the collapse of the Soviet Union and the end of the Cold War).

Today, however, New Republican dogma is to avoid any and all tax increases. Republican candidates clamor to take tax activist Grover Norquist’s “no tax pledge,” effectively tying their hands once in office. Break the pledge, and prepare to be bludgeoned by political adversaries in your next campaign. This, of course, sets the stage for a frozen Congress — how can you hope to govern if one side of the aisle is completely unwilling to yield any ground?

Note that every  Republican presidential candidate in a 2012 debate indicated they would walk away from a debt deal that cut spending $10 for every $1 tax increase. Now read this, from the Economist:

Put simply, no fiscal consolidation that the IMF has judged to be successful relied on public spending cuts for more than 83% of its impact. In successful fiscal consolidations, tax rises accounted for between 17% and 33% of deficit-reduction measures.

Deficit reduction is generally more successful when spending cuts are more numerous than tax increases. Reducing the deficit wholly through spending cuts is unprecedented, not to mention impossible, politically. There is a reason why Social Security, Medicare, and defense are known as “third rails” — you touch them, you die. Even were it possible, it is not clear that such a solution would be desirable or advisable. And, indeed, polls have shown that large majorities of Americans recognize the need for both tax increases and spending cuts.

Still, even tax increases to help balance the budget are anathema to the New GOP. Their primary goal, despite what they might say, is not to get America’s fiscal house in order. It is, in Grover Norquist’s words, to get government so small that you can “strangle it in a bathtub.” And to do this, they have employed a strategy known as “starving the beast” — cutting revenues to force a budgetary crisis, and then demanding that tax increases play little to no role in the fiscal consolidation.

This is the party that wants to claim the mantle of ‘fiscal responsibility.’

Three words: I like Ike.


Church, State, and Contraceptives

Philadelphia Archbishop Charles Chaput recently described the Obama Administration’s move to ensure access to birth control for women as both “dangerous” and “unprecedented.” Fortunately, neither of these charges is true.

The ruling in question requires employers to offer insurance plans that cover the cost of contraceptives. Such laws already exist in 28 states, and have been upheld by state courts. It would appear that there is a very clear precedent for the “unprecedented.” These states’ experiences also reveal that the fear of Catholic-affiliated universities and hospitals suddenly dropping employee health coverage in order to avoid providing contraceptives is unfounded.

Archbishop Chaput also argues that this decision undermines the Constitution by forcing Catholics to “violate our consciences.” But such action is not necessarily unconstitutional. After all, Catholic taxpayer dollars continue to fund the death penalty, an act that likewise violates the Catholic conscience, according to the Vatican. Yet the death penalty is undeniably constitutional.

Furthermore, the archdiocese does not object when the terms involve violating other people’s consciences. It has not come out against the White House Office of Faith-Based and Neighborhood Partnerships, despite the fact that many Americans feel it violates the Constitutional protections of the Establishment Clause. And just last fall, the Pittsburgh Archdiocese sought to use tuition assistance as leverage to convince parents to lobby the state legislature in favor of a school voucher bill. They eagerly supported this bill, ignoring that it explicitly violates Article 3, Section 15 of the Pennsylvania Constitution by providing funds for religious schools.

Also, one should keep in mind that the Obama Administration’s decision does not require any woman to violate her conscience. It does not force anyone to take contraceptives. Rather, it simply makes them more accessible by offering to cover the cost. Contraceptives, it should be noted, is one of the most effective ways to reduce the abortion rate because it addresses a key underlying cause of abortions: unintended pregnancies. It also has additional health benefits, such as reducing the risk of cancer, and is also widely accepted by Catholic Americans. Almost all sexually active Catholic American women use contraceptives, and a solid 58 percent of Catholics Americans believe health insurance should cover contraception.

Finally, it is important to remember that churches, with a specifically religious mission, are exempt from this mandate. The Catholic-affiliated institutions that are not exempt have secular aims, such as health care or education. That they employ and serve people of all different faiths underlines this fact.

With all this in mind, one can probably think of many ways to describe the Obama Administration’s recent ruling on contraceptive coverage – but “dangerous” and “unprecedented” are not two of them.