Saturday, January 31, 2015

Balanced Budget Amendment: The View from History

Since the 1840s, many U.S. states have had balanced budget requirements in their state constitutions. Some have worked but others have gotten worked around in various ways, via exceptions or pushing the debt down to the municipal level. Exceptions can be minimized by the language of the clause or amendment but the tradeoff is that ironclad language is inflexible in the face of crises, unexpected situations, etc.

I much prefer returning to what Bill White has called America's Fiscal Constitution. Here are excerpts from my review of his book as it appeared on page 38 of the fall edition 2014 of Financial History:

Every policymaker, politician, and pundit in America should read this book even though author Bill White, a long-time Democratic  mayor of Houston turned investment banker, might seem at first blush an unlikely policy hero. White’s weighty tome (500+ pps.) would qualify as a doctoral dissertation at any university on the planet because it contains 40+ pages of notes, almost 40 pages of bibliographic entries, and almost 40 pages of statistical appendices reconstructed from original sources. Most impressively of all, the end result is not a partisan political screed but a highly readable and well-balanced account of the rise and demise of America’s unwritten fiscal constitution, the set of budgetary rules that made the United States one of the world’s most creditworthy nations in the nineteenth and twentieth centuries.

White shows that U.S. lawmakers long countenanced only four acceptable use of debt: preservation of the union; expansion of the nation’s borders; waging of war; and keeping the government afloat during recessions. After each war, expansion, and recession, the federal government stopped borrowing and sometimes even ran surpluses. That, combined with robust economic growth, prevented the national debt from ballooning out of control and kept the country’s credit strong, ready for use during the next emergency or opportunity.


White suggests that America’s fiscal constitution could be reconstituted through a few, simple-to-implement reforms. First and foremost, the budget needs to be made, in Jefferson’s words, “clear and intelligible” to “any man of any mind” (p. 363). That means producing a tax-financed budget based on good faith revenue estimates updated monthly. Any appropriations above the tax-financed budget need to be clearly distinguished as such and voted on separately so that voters can readily identify politicians who want to borrow and spend instead of make difficult choices about tradeoffs. Second, the debt ceiling system needs to be dismantled because Congress votes on the ceiling only after it has voted to spend more than its tax revenues. Third, bond issue votes, like the thousands held annually at the state and municipal levels, should be held at the federal level as well. “Nothing,” White argues, “prevents Congress from holding a national referendum on whether to incur federal debt for specific purposes and amounts” (p. 369). Since 1970, he notes, state and local debt levels have grown at only half the federal rate.

Friday, January 23, 2015

Genealogy of American Finance

Book launch!: Tuesday, March 10, 5:30 at Museum of American Finance in downtown Manhattan.

Monday, January 12, 2015

Economics of Interstellar Are Far From Stellar

I watched Interstellar in the cut rate movie theater in Sioux Falls yesterday (1/11/15) and wish I had my $3.50 and 3 hours back! I've wanted to watch the movie ever since reading a laudatory review of it on a bulletin board in a theater back east over Christmas break. The reviewer focused mostly on the science of black holes and so forth and not being a physicist I guess that part of the movie was okay. But the economics were ... underdeveloped to say the least. The reason Matthew McConaughey has to travel to another galaxy ***spoiler alert, spoiler alert *** to have his ass kicked (well, his face mask smashed) by Matt Damon is that earth is dying due to giant dust storms a la the Great Depression and plant diseases that have somehow become uncontrollable. Only corn remains and is somehow directly feeding the remaining billion people on the planet. Seriously, McConaughey's character complains that they have to eat popcorn at a baseball game instead of hot dogs! Corn is a good choice for "last crop" standing but there are no mentions of other crops (soybeans for example) aside from wheat and ochra or what happened to all the domesticates that can eat corn and end up in hot dogs, like hogs. (And I mean that literally, not just that if you remove the "ot d" from hot dogs you end up with hogs.) And where the heck are the locusts?

But here is the big question: If you are spending millions on actors and special effects, why not spend a few bucks on an economic consultant? Heck, I'd have done it for a grand and business historian Mary Yeager (wife of John Lithgow, who appears in the movie as McConaughey's father-in-law) might well have helped out gratis. What sense does it make to produce a movie that has (apparently) passable physics only to motivate the story with some leftist-sounding economic hooey?

Friday, January 09, 2015

Update on Minimum Wage

UPDATE 1/9/2015: As of 1 Jan. 2015, the famous "three dollar movie theater" in Sioux Falls now charges $3.50! Coincidence? Of course this would be an example of a price response rather than a reduction in employment but as we know from Bastiat's essay, "That Which Is Seen, and That Which Is Not Seen," employment somewhere/everywhere will be negatively effected by the price increase.

Tuesday, January 06, 2015

The Minimum Wage and Holy Scripture

The King James version of Ecclesiasticus 34:22 reads: "He that taketh away his neighbour's living slayeth him." One way to take away a neighbor's job, his means of life, is to use the coercive power of the state to force the neighbor to accept a wage that potential employers are unwilling/unable to pay. If a minimum wage law leads to a single person's unemployment, ergo, it goes against Scripture as well as civil rights. And while the number of unemployed created by minimum wage laws is disputed, the number is certainly greater than one. The fitness center here at Augustana College has cut its hours due to the minimum wage increase that took effect in South Dakota the first of the year and look what suddenly appeared in the local Sam's Club, in lieu of the woman who used to hand out the samples. How many more people shall we slayeth?

Sunday, January 04, 2015

The Usefulness of History

Over the holiday break, while languishing at my step daughter's house, I watched two series on Netflix, Wentworth, an Australian women's prison series a la Orange Is the New Black (only better), and Jericho. In one scene in Jericho, a schoolteacher (Emily Sullivan played by Ashley Scott) tries to motivate students to study history but almost all of them leave once they discover that school attendance is no longer mandatory in post-apocalyptic western Kansas. Making candles in the bathtub, as one of the students claimed he would do in lieu of class, may have been more important at that moment but a society that forgets its past is doomed to suffer costly calamities. I won't roll out the usual litany of pro-history quotations here but instead will point to the use of history in public policy, specifically my chapter on the history of chartermongering (attracting charter fees from out-of-state corporations) by South Dakota and its influence on the state's current chartermongering efforts as reported today (5 January 2015) in the Rapid City Journal in the article by Seth Tupper called "Look Out Delaware."

History can also help policymakers with a wide range of other issues, including preventing asset bubbles and reducing the incidence of modern day slavery. That is why I accepted the offer to edit a monograph series published by Cambridge University Press and sponsored by Historians Against Slavery that aims to use historical insights to help to fight slavery, which is still widespread today. The first three volumes in the new series, Slavery Since Emancipation, are under contract and will be appearing over the next few years,with more surely to follow.

So (until the EMP anyway) the next time you feel like making bathtub candles (or wasting time some other way), read a good history book instead! Here is a great place to start.

Tuesday, December 30, 2014

SSDI Solutions Initiative Not Interested In Private/Market Solutions to Disability Insurance Disaster!

I received the following from the SSDI folks over the Christmas break:
Dear Dr. Wright, 

Thank you again for your interest in the SSDI Solutions Initiative. We reviewed all the proposals carefully and we regret to inform you that the Co-Chairs have not selected your proposal.

We received a large number of high quality proposals competing for very limited resources. While the Initiative thought your ideas were very promising, the highly competitive selection process forced us to make hard choices. We encourage you, however, to publish your ideas through other venues. The SSDI program is in critical need of reform and your contribution could help make a difference. 

We hope you will consider getting involved in the SSDI Solutions Initiative through other activities. For instance, we may be publishing shorter policy briefs in our website to help disseminate reform ideas and we will be reaching out to disability experts to serve as peer reviewers. Please let us know if you would be interested in either of these opportunities.

Project staff 
In the spirit of publishing my ideas "through other venues," I copy my proposal (and its addendum below) and will let readers decide what is really going on here. Of course I think that these folks aren't really interested in economic/practical solutions but rather in political ones. It is Fubarnomics all over again!

McCrery-Pomeroy SSDI Solutions Initiative
Proposal Submission Form

Author Name(s): Robert E. Wright
Institutional Affiliation(s): Augustana College SD
Proposed Paper Title: Mutual Security: Disability Insurance By, and For, the Masses
Email Address(es):
Phone Number(s):605-274-5312
Mailing Address: 2001 South Summit Ave./Sioux Falls, SD 57197
Do you have an employer or sponsor that is willing to compensate you for your time on this paper?                                                                                                                                                                        Yes                        No
If your employer or sponsor would like to be recognized for its contribution, what name should be used (or write “n/a”)?  Augustana College SD
If you will require a stipend to complete this project, how much will you require? Pro bono

The SSDI Solutions Initiative reserves the following rights: It may accept or reject any proposal or paper according to the selection criteria outlined in the call for papers. It may make any editorial changes it deems necessary to make a paper suitable for publication or to avoid infringing third-party rights or law. It may refuse to proceed with publication of any paper for any reason.
Neither selection of a proposal nor publication of a paper implies or reflects endorsement of that proposal or paper by the SSDI Solutions Initiative, its co-chairs, members of its advisory council, or any affiliated organizations.
Neither the SSDI Solutions Initiative nor any affiliated organization discriminates on the basis of race, creed, color, ethnicity, national origin, religion, sex, sexual orientation, gender expression, age, height, weight, disability status, veteran status, military obligations, or marital status.

Mutual Security: Disability Insurance By, and For, the Masses

Historical Background:
In the 1910s and 1920s, America’s insurers created a system of “private security” that included income insurance for people who died or became unable to work prior to accruing sufficient assets to retire. The unprecedented depth and length of the Great Depression effectively destroyed the disability insurance segment of that system by inducing an increase in disability claims larger than insurers had believed possible. The Social Security system moved into the resulting vacuum and to this day provides most “any occ” disability insurance, which defines disability as an inability to work at any job, while a few private insurers provide more extensive and expensive “own occ” disability policies, which define disability as an inability to work in one’s chosen occupation.

The Case for Privatization:
The Social Security Disability Insurance (SSDI) system has long been beset by the types of problems endemic to large government programs (cf. Peter H. Schuck, Why Government Fails So Often and How It Can Do Better [2014]). Moreover, no compelling economic reason why disability insurance needs to be provided by the government has been shown. Disability insurance certainly is not a public good as the private system worked well until the Great Depression and the high-end, private part of the market today functions as well as can be expected given the constraints placed upon it. Tellingly, the government also insinuated itself into the life insurance market by providing Social Security beneficiaries with a death benefit but wisely allowed its influence to dissipate by not raising the benefit level as inflation eroded it away.

Privatizing the Mutual Way:
Critics of the re-privatization of disability insurance fear that premiums will increase, as will the percentage of Americans without coverage. If the policy mistakes made in health insurance during and after the Great Depression (through employers and via joint-stock/publicly-traded insurers) are repeated, such a dire outcome could certainly transpire. I propose, instead, that disability insurance be offered directly to individuals and only by mutual insurers. Policyholders, not stockholders, own mutual insurers, which have a long history of providing a wide range of quality, low-cost life, casualty, and other insurances. The success of mutual insurance is rooted in incentives: mutual managers do not have to make quarterly numbers to please distant investors, so they can concentrate on long-term projects aimed at helping the insurer’s customers/owners.

Government’s Roles:
First, current SSDI recipients should continue to receive the benefits promised them and pending claims should be processed under the current (or improved) guidelines. As those claims are determined and recipients return to the workforce, transition to other programs (like OASI), or pass away, SSDI will slowly fade away, allowing natural attrition to shrink its workforce without major disruptions. Second, if disability insurance is too expensive, the government should reduce regulatory costs for insurers and encourage new entry and allow the subsequent increase in competition to reduce premiums. If necessary, it should establish and pay the start up costs of additional mutual insurers. Third, the government will also have to create some mechanism for ensuring that Americans purchase adequate disability insurance coverage. A compliance system linked to taxes or the healthcare mandate may be the most cost-effective method. Finally, the government may want to subsidize premiums for low income individuals.

By mutualizing the provision of disability insurance, the government will no longer be in the expensive business of “improving the disability determination process, modernizing determination criteria and program eligibility, strengthening program integrity and management” and so forth because it will have essentially outsourced those problems not just to insurers but, via mutualization, to the insureds themselves. The wisest public policies do not directly solve problems but rather create environments conducive for individuals or businesses to mitigate them.
October 29, 2014 
Dear Mr. Wright,

Thank you once again for submitting a proposal to the McCrery-Pomeroy SSDI Solutions Initiative. We are giving every potential author the opportunity to submit a one-page addendum to their proposal. The purpose of this addendum is to complement the initial submission with any additional information that authors consider relevant and to allow an opportunity to clarify questions raised by the project staff about the proposal. If you choose to submit an addendum, we ask that you please consider addressing the following questions, though you are not required to do so: 

1. Do you think the private insurance industry is currently equipped for such a shift and, if not, will you address what will be necessary to get them there in your paper? 
2. Given the dramatic change proposed, will the paper include a discussion on any proposed interim steps towards the new system?
3. Will you address the potential distributional implications of a move from public to private insurance?

In case you write an addendum, you do not need to answer the individual questions one by one. It would be preferable if you could address these questions in your narrative. We request that you submit the short addendum by next Wednesday November 5th or let us know if you need additional time. 

Project staff

McCrery-Pomeroy SSDI Solutions Initiative – Invited Addendum to Wright’s Mutual Security Proposal

The mutual insurance industry is only partially prepared at present for the proposed shift. It certainly has the general expertise but of course it does not currently have the capacity because the government effectively monopolizes the large, low end of the market. The paper will outline discussions with mutual insurers regarding an appropriate implementation timeline and phase-in strategy. 

Consumers, too, will need time to adjust, as will universities, like the University of Pennsylvania, that offer professional insurance-related instruction. The paper will include summaries of discussions with the latter about phase-in but due to budget limitations can offer only general guidelines based on secondary research about how to approach the former, who, generally speaking, have little knowledge of disability insurance (public, private, or mutual) at present. For example, replacing stock market-based curricula with insurance-based education in primary and second schools may prove helpful as everyone needs disability insurance but relatively few people need to trade individual stocks.

The distributional implications of a move to mutual disability insurance will be discussed, but they are difficult to parse because it is not clear what the market will look like given the complex regulatory environment, hence the suggestion in the “Government’s Roles” section that the government should be prepared to subsidize premiums for lower income Americans, especially at first. Of course regulations can change over time, especially when a large or powerful constituency, like a mutual insurer with millions of policyholders, desires reforms. Moreover, markets generally supply consumers with more options than government programs do, so some Americans will opt for disability policies that are more costly than SSDI but that provide them with a more individualized fit given their risk perceptions and preferences. That means that, although we must presume that Americans would not knowingly render themselves less well off, the distributional implications of privatization (specifically in this case mutualization) will be difficult to discern even ex post.

Finally, it is difficult to predict what mutualization may bring in terms of future business innovation. Some economists, for example, believe that life, health, and disability insurance will be most efficiently (and hence inexpensively) offered in a single insurance policy. So even if mutualization proves regressive in the short-term, it may lead to innovations that will prove progressive in the longer term.