U.S. Government: Some International Perspective

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I found myself checking some facts about the relative size of U.S. government revenues, expenditures, and debt in the OECD publication "Government at a Glance 2011." Just to be clear, this data sums up all levels of government together, so for the United States, it includes federal, state, and local government.

Revenues

As a share of GDP, U.S. government revenues for all levels of government are well the OECD average in 2009, at a shade over 30% of GDP. Of course, this was a year when the Great Recession hit the U.S economy with particular force and held down incomes and tax payments quite substantially. In this group, the northern European economies like Norway, Denmark, Sweden and Finland lead the way by collecting more than 50% of GDP as government revenue. However, because the U.S. economy is richer on a per capita basis, even though U.S. government revenues as a share of GDP are low, government revenues in absolute dollars per personare actually just a bit above the OECD average--and similar to government revenues per person in Canada and the United Kingdom.



 
Expenditures

When it comes to spending as a share of GDP, the U.S. government at all levels ranks below the average for the OECD comparison group, but in spending, the U.S. isn't as much of an outlier as it is in expenditures. For example, expenditures as a share of GDP in the U.S. are quite similar to Canada, and above Japan and Australia. Again, because the U.S. economy is richer on a per capita basis, U.S. government expenditures on a per person basis are higher than the average for the group: for example, higher than expenditures per person in France, Germany, Italy and the United Kingdom.


How are government expenditures in the U.S. allocated differently than in the rest of the OECD comparison group? Not surprisingly, the table shows that 11.9% of all U.S. government spending goes to defense, compared with 3.8% in the other countries. More surprising, to me at least, is that the share of U.S. government spending going to health is substantially higher than the average for the comparison group: 20.5% in the U.S. compared with an average of 14.7%. Health care costs so much in the U.S. that our government ends up spending a larger share of its resources on health than the other countries, even though most of those countries have national health insurance systems. U.S. government as a whole also puts a greater share of its expenditures into education compared with the comparison group: 16.6% to 13.1%. The major area where U.S. government at all levels spends much less is the category of "social protection," which is non-health and non-housing spending to aimed primarily at those with below-median incomes. U.S. government puts 19.4% of its spending into this category, compared with 33.5% for the comparison group.



Debt 

The calculation here is "gross" government debt, not "net." The difference is that many governments owe some debt to themselves; in the U.S., for example, the $2.7 trillion or so in the Social Security Trust Fund is invested in Treasury bonds, which means that one part of the government owes the money to another part of the government. In a U.S. context, it is often common to look at "debt held by the public," and thus to leave out the case where government owes a debt to itself. But for purposes of international comparisons, using gross debt is common.

Japan far and away leads the pack on gross debt, at a debt/GDP ratio of about 200%. But Japan is also a special case with an extremely high domestic savings rate, and limited possibilities for Japan's consumers to invest those savings outside the country. Japan has financed its own public debt, without a need for an inflow of foreign capital. But not far behind are some of the problem children of the euro area: Greece, Italy, Portugal and Ireland. Spain, despite the recent travails of its banking system, was actually a bit below the average for public debt/GDP ratio in 2010.

The U.S. position in 2010 is uncomfortably high: a bit behind some of Europe's problem cases like Greece and Italy and Ireland, but with a higher debt/GDP ratio than Germany, Canada, or the UK. It's also interesting to me that the high-tax, high-spending economies of northern Europe--Sweden, Denmark, Norway, and Finland--are all below the average on debt/GDP ratio. Their governments do spend more, but in this comparison group, they do a reasonable job of collecting the revenues to pay for it.

Eight Bon Mots from Milton Friedman

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 Allen S. Sanderson has a nice tribute marking the 100th anniversary of Milton Friedman's birth in "Remembering Milton," which appears in the Second Quarter 2012 issue of the Milken Institute Review. (Available on-line, but free registration required.) The article offers a number of nice reminisces from Friedman's colleagues and students (two groups that often overlap).
Along with Friedman's status as one of the handful of most prominent economists of the 20th century, he also had a nearly wicked rhetorical ability to turn a phrase. Here are a few of Friedman's one-liners collected by Sanderson:

Concentratedpower is not rendered harmless by the goodintentions of those who create it.

Historysuggests that capitalism is a necessary condition for politicalfreedom. Clearly it is not a sufficient condition.

The problem ofsocial organization is how to set up an arrangementunder which greed will do the least harm; capitalism isthat kind of a system.

With somenotable exceptions, businessmen favor free enterprise in general butare opposed to it when it comes to themselves.

The free manwill ask neither what his country can do for him nor what he cando for his country.

The case forprohibiting drugs is exactly as strong and as weak as the case forprohibiting people from overeating.

If you put thefederal government in charge of the Sahara Desert, in five yearsthere’d be a shortage of sand.

Only a crisis —actual or perceived — produces real change. When thatcrisis occurs, the actions that are taken dependon the ideas that are lying around.

U.S. Imprisonment in International Context: What Alternatives?

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The May 19 issue of the Economist magazine, in an article  about California's budget problems and high prison costs, tossed in the following factoid: "Excessive incarceration is an American problem. The country has about 5% of the world’s population but almost 25% of its prisoners, with the world’s largest number of inmates and highest per capita rate of incarceration."

This comment sent me scampering to the website of the  International Centre for Prison Studies,          and based on data from their World Prison Brief, I put together the following table. The table lists the 20 countries around the world that imprison the greatest numbers of people, and the first column shows the total for each country. The second column shows how many people are imprisoned in the country per 100,000 population. Either way you slice it, the U.S. leads the way with its 2,266,832 prisoners and an imprisonment rate of 730 per 100,000 population.

I've posted back on November 30, 2011, about "Too Much Imprisonment," and that post has details largely based on U.S. Department of Justice Statistics about the rapid rise in U.S. imprisonment over recent decades, the share of this rapid rise related to nonviolent offenses, and the cost.  Here, I want to raise a different question: If not prison, then what?

Here's an example from the local news: A woman named Amy Senser (wife of a former Minnesota Vikings professional football player Joe Senser) was convicted of two counts of criminal vehicular homicide: failing to immediately call for help and leaving the scene. Apparently she was taking an off-ramp from the highway, and the victim, Anousone Phanthavong, was putting gas into his stalled vehicle. It seems clear that Senser was driving the car when it hit him: her defense was that although she knew she had hit something, she didn't know it was a person. Senser may end up spending four years in prison.

Let me stipulate that I'm utterly unsympathetic to drivers who leave the scene of accidents, and I'm broadly unsympathetic to many of those who commit crimes. But whatever the ins and outs of the Senser case, it seems to me highly unlikely that she is going to drive a vehicle that hits someone else who is putting gas in their stalled car on a highway off-ramp. Moreover, my lack of sympathy with criminal behavior collides with other feelings. My skinflint spending tendencies note that imprisonment costs about $50,000 per year in the United States. My hard-headed practicality notes that most people who are imprisoned will re-enter society at some point, and we don't want to make that re-entry harder than it already is. Finally, my general soft-heartedness notes that those convicted of crimes also have children, parents, spouses, lovers and friends. When someone goes to prison, their community of human connections suffers as well.

For those who use violence in committing crimes against strangers, imprisonment seems appropriate. But for offenders who pose little or no danger of future violence, America needs to think about alternatives rather than blowing state and local budgets on imprisonment. Of course, those alternatives need to be chosen with care.

While fines or monetary penalties have their place, they aren't enough for me. I don't want the wealthy, or those with wealthy relatives, to be able to buy their way out of their misdeeds. I want to take the person's time, not their bank account. 

I'm also not especially interested in the creative penalties that one sometimes reads about, where someone convicted of drunk driving needs to give talks to high school students, or attend the funerals of drunk driving victims, or spend weekend evenings in an emergency ward as casualties arrive. I doubt that it's practical to have tens of thousands of convicted criminals being shipped around from high school to YMCA to hospital emergency room. I don't like the legal system to be in the business of coercing half-hearted apologies. And I suspect that these "creative" penalties tend to apply more to those who are articulate and well-to-do and connected, and I see no reason why that group should get a break.

My thoughts about other alternatives are not well-formed. But in a world where we are deluged with concerns that technology is allowing us to be tracked and invading our privacy all the time, often without us knowing, it seems peculiar to me that our technology for dealing with criminals is a slightly more hygenic version of a penalty that has been around for millenia.

I find my thoughts turning to the "rubber rooms" where, as Stephen Brill discussed in the New Yorker magazine back in 2009, the New York City public school system was warehousing 600 public school teachers too incompetent to be returned to the classroom. These teachers much punch a time-clock at the beginning and end of the day, and in between, they stay in the room while the teachers' union appeals their disciplinary action. The average person has been there for three years--at full pay, of course. I also think about the jurisdictions where you see people in orange jumpsuits picking up trash by the side of the freeway. I think about ankle bracelets and applying advanced technology to old-fashioned house arrest, which might include monitoring or blocking of communication.

Put pieces of these together, and I imagine an alternative system that would serve many of the functions of punishment and incapacitation of the current prison system. It would combine requirements to report to supervised rooms for long periods of time, with an option to do certain kinds of physical labor around the community, but it would also send people home for most of the 24-hour day, under house arrest. There might be some flexibility where after a minimum time served, it would be possible for those in such a system to go to work, or to have a day or two off from reporting or surveillance each week. Those who didn't comply could of course end up in the traditional prison system. Such a system would still involve heavy and punitive restrictions on personal freedom. But it could be vastly cheaper for taxpayers, while also recognizing the reality that most of those convicted of most crimes will be walking, driving, working and living among us for most of their lives.

Why Official Medicare Costs are Understated

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When the Medicare trustees deliver their official forecasts for the Medicare system in their annual report, the actuaries who draft the report are required by law to assume that the law will be followed as written. For example, the current Medicare law says that physician payments will be cut 31% by 2013. For most other categories of Medicare services, 2009 hearth care reform legislation also specifies that the payment rates will be reduced each year by a rate equal to the economy-wide increase in multifactor productivity, which is projected at 1.1% per year. 

However, to their great credit, the Medicare actuaries also produce an annual background which explains why these assumed cost reductions are so implausible. This year's version was published on May 18 under the dry-as-dust title: " Projected Medicare Expenditures under Illustrative Scenarios with Alternative Payment Updates to Medicare Providers."

Here are a couple of figures projecting how Medicare reimbursement would compare with reimbursement from private health insurance. The first figure shows what current law projects for Medicare reimbursements for physician services, with comparisons to reimbursement from the Medicaid program and from private health insurance. Notice the 31% drop that is supposed to happen immediately, followed by an additional decline. In short, Medicare reimbursement of physicians is now about 80% of private health insurance, but under current law it is supposed to fall immediately to less than 60% of private insurance, and then over time to about 25% of private insurance.


The next figures shows a similar comparison for reimbursement for in-patient hospital services.  Medicare reimbursement for such services was about 90% of private health insurance reimbursement in the mid-1990s, is now down to about 65% of private health insurance reimbursement, and is projected under current law to continue falling to 40% of private health insurance reimbursement. 
 

Clearly, cost projections based on these continually falling rates of reimbursement can't be taken seriously. Indeed, there have been scheduled reductions in physician reimbursement every year since 2003--and Congress has overridden them every year. The scheduled 31% drop in physician reimbursements for next year is supposed to get us back on track for all the reductions that haven't happened since 2003, but no one believes it's going to happen. These kinds of reductions in reimbursements would either drive health care providers into insolvency, or lead them to stop serving Medicare patients.

As a result, the official current law estimates of future Medicare costs are wildly optimistic. The first column of this table shows that under current law, even with its unrealistic reimbursement reductions, Medicare costs nearly double as a share of GDP over the next seven decades. But under an alternative projection, which doesn't assume the immediate cut in physician reimbursements or the long-run slowdown in spending growth, Medicare spending is close to tripling as a share of GDP over the next seven decades. 

The actuaries are about as blunt as their profession allows about what all this means: "The immediate physician fee reductions required under current law are clearly unworkable and are almost certain to be overridden by Congress. The productivity adjustments will affect other Medicare price levels much more gradually, but a strong likelihood exists that, without very substantial and transformational changes in health care practices, payment rates would become inadequate in the long range. ... Thus, the current-law projections should not be interpreted as the most likely expectation of actual Medicare financial operations in the future but rather as illustrations of the very favorable impact of permanently slower growth in health care costs, if such slower growth can be achieved."

Will Jobs Be Reshored from China?

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China is becoming a less attractive place for off-shoring of manufacturing. But the result isn't likely to be a large movement of jobs back to the United States. Instead, globally mobile manufacturers are likely to seek out alternative low-cost destinations. Michel Janssen, Erik Dorr, and Cort Jacoby of the Hackett Group discuss these issues in a report called "Reshoring Global Manufacturing: Myths and Realities." The subtitle is: "By next year, China’s cost advantage over manufacturers in industrialized nations and competing low-cost destinations will evaporate." The report is freely available here, with free registration. 

"[T]he manufacturing competitiveness of China compared to advanced economies and low-cost geographies is eroding. Stagnant or declining manufacturing wages in the West, rising transportation costs, concerns about intellectual property protection, and Chinese wage-rate inflation have brought traditional calculations about global manufacturing sourcing strategies to a tipping point  .... Our findings debunk a myth about the future of manufacturing that has been much discussed in the press recently: that manufacturing capacity is returning in a big way to Western countries as a result of rising costs in China. The reality is that the net amount of capacity coming back barely offsets the
amount that continues to be sent offshore. Our study confirms that China’s relative competitive position is indeed eroding rapidly, to the detriment of its overall economy. However, few of the low-skill Chinese manufacturing jobs will ever return to advanced economies; most will simply move to other low-cost countries."

Here is their estimate of  the gap in manufacturing costs and in "total landed cost," which includes costs of manufacturing along with costs of raw materials and components, transportation and logistics, taxes and duties, and costs of carrying inventories. China continues to have an cost advantage, but the advantage is no greater than other  emerging markets. Moreover, the Hackett Group argues that when China's advantage in total landed cost gap drops to the levels projected for 2013, it starts to make sense to think about shifting production elsewhere.


I was also struck by some comments in the report about Apple's labor costs with the iPad and outsourcing to China. They emphasize that in some industries like furniture manufacturing, cost matters most. But in other industries, product quality, protection of intellectual property, time to market and ramp-up speed may matter more.

"The Chinese labor-cost component of an entry-level iPad retailing for $500 is estimated at $10, or 2% of revenue, while the profit margin is estimated at $150, or 30% of revenue. If Apple were to move production to the USA, and if one assumes that assembly costs would triple (to $30), it is conceivable that Apple could convince customers to pay for a large portion of the price increase based on the appeal of a “made in the USA” product. ... Furthermore, ...  such a move could substantially boost Apple’s corporate image. However, the U.S. lacks the sheer labor capacity that would be required in order to ramp up production of iPads at the speed needed to maintain the company’s edge in the hyper-competitive tablet and mobile device market. ... Thus one may assume that Apple’s manufacturing sourcing strategy is primarily motivated by scalability and supply chain
risk, and only secondarily by total landed cost."

U.S. Child Poverty in International Context

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UNICEF Innocenti Research Centre has issued its report: "Measuring child poverty: New league tables of child poverty in the world’s rich countries.  The United States doesn't stack up very well, although it's important to be clear on just what the comparisons are showing.

For comparability across countries with different income levels, the report uses a working definition of "poverty" as half of the median income in that country. This graph shows the share of children in each country who are growing up in families where the income is less than half the median income for that country. The U.S., with 23.1% of its children in such families, ranks 34th out of 35 countries.


It's important to be clear on what this graph doesn't show. It doesn't show that U.S. children are more deprived in absolute terms than children in other countries. The U.S. has a higher level if incomes than these other countries--much higher than some of them. Indeed, the UNICEF report notes that half of the median income for the 10 richest countries in this table is more than the actual median income for the 10 poorest countries in the table.

In addition, income is more unequally distributed in the U.S. than in many of these other countries. As a result, the U.S. will have a larger share of its population living in households that earn less than 50% of the median income compared with countries that have a much more equal distribution of income like Iceland or Finland.  The UNICEF report offers an extended discussion of poverty lines set in absolute terms and those set in relative terms, and the report offers data and examples for both approaches. The argument that it can be useful to look at a relative poverty line, like 50% of median income in a country, goes like this:

"In sum, a relative poverty line drawn at 50% of median income is an attempt to define a concept of poverty on which there is widespread agreement in principle – a concept which says that the poor are those who do not have access to the possessions, amenities, activities and opportunities that are considered normal by most people in the society in which they live ... 50% of the median is a plausible measure of what it is intended to measure – the sense of falling so far behind the norms of one’s society as to be at risk of social exclusion. ...

Thus, this argument holds that  the reason why the proportion of children in households below 50% of median income matters is that it represents the share of children missing the "possessions, amenities, activities and opportunities that are considered normal by most people in the society in which they live." As an example of how these forces play out, I posted on May 23 about "Dimensions of College Attendance," One figure in that post shows that for Americans born between 1979 and 1982, of those born into families in the bottom quarter of the income distribution, 9% completed a four-year college degree by age 25, and of those born into families in the top quarter of the income distribution, 54% completed a four-year college degree by age 25. I strongly suspect that this enormous gap has little to do with the cost of college or the availability of loans, but instead is closely linked to how those born into lower-income families get on average less support from family, local community, and the K-12 education system to prepare them for a college degree.


The UNICEF report also looks at the share of children living in households with less than 50% of median income before and after government taxes and transfers are taken into account. The darker blue bars show the child poverty rates from the preceding figure--that is, after government taxes and transfers are taken into account. The lighter blue bars show what the poverty rate among children would have been, if those taxes and transfers had not occurred. For countries at the top of the list, like Ireland, Hungary, the United Kingdom, Finland, and Australia, the overall effect of government taxes and transfers is a dramatic reduction in the proportion of children that would have been living in households below half of the median income. In the U.S., in contrast, the overall pattern of government taxes and transfers lead to a relatively small reduction in the number of children in such households. In Greece, remarkably enough, the overall pattern of government transfers actually increases the share of children living in households below 50% of the median income--which can happen if taxes are tilted toward families with kids and spending is focused on retirees.



The politics of designing government policies that affect children is complex, because only adults can vote. In many countries, including the United States, children are a decreasing share of the population. For example, U.S. Census data from 2010 showed that those under 18 years of age were 24% of the U.S. population--an all-time low. The U.S. Census Bureau (Table AVG1) estimates that America had 118 million households in 2011, which it divides into 78 million "family" households with an average of 3.25 people each and 40 million "nonfamily" households with 1.25 people each. Of the subset of "family" households, only about 46% have children--also an all-time low. No politician attuned to re-election ever says anything negative about "the children," but as the proportion of children in the population and the share of households with children drops, it becomes politically harder to focus spending and tax policy on the concerns of families with children. 
 
Of course, it is always delicate to design government policy in support of children, because a sensible policymaker needs to be concerned about the incentives created when resources typically flow through their parents. But along with thinking about how U.S. tax and spending policy might support families with children in direct ways, it's also useful to think about how schools, libraries, community organizations, and public areas like parks and sidewalks can be supportive to the children.


I ran across the UNICEF report at Miles Corak's blog here.  In a post called "The sad, sad story of the UNICEF Child Poverty Report and its critics,"  Corak offers some pointed commentary on how such reports have been received in the past.

Long-Term Budget Outlook from CBO

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The Congressional Budget Office has published "The 2012 Long-Term Budget Outlook." It's a go-to source for balanced and unheated analysis on this subject. The main focus is not on the annual budget deficits of the last few years or the next few years, but rather on the overall accumulation of federal debt. Here are some points that caught my eye.

Current Federal Debt in Long-Run Perspective
Here's a figure showing the ratio of federal debt/GDP from 1790 to the present. Notice that before World War II, the highest points of federal borrowing--the Revolutionary War, the Civil War,  World War I, and the Great Depression--were all below a debt/GDP ratio of 50%. World War II pushed the debt/GDP ratio above 110%, but then it dropped back down after a few decades. Even after the big budget deficits of the 1980s and early 1990s, the debt/GDP ratio didn't get above 50%. But the current debt/GDP ratio is now above 70%, higher than any previous episode in U.S. history other than World War II. The federal debt isn't in completely uncharted territory, but it hasn't visited this neighborhood often before.


Alternative Scenarios for Long-Run Debt
The CBO does two main projections for long-run federal debt. One projection assumes that current law will be followed exactly. Under this scenario, which the CBO calls the "Extended Baseline Scenario," the debt/GDP ratio soon flattens out and fades. But frankly, this current law scenario can't be trusted. After all, nothing stops Congress from passing and the President from signing a law that says all federal budgets will be balanced after, say, 2020. On paper, this solves the debt problem! But in practice, if the law is virtually certain to be changed before 2020, it solves nothing.

Thus, the CBO also offers the "Extended Alternative Fiscal Scenario," which "incorporates the assumptions that certain policies that have been in place for a number of years will be continued
and that some provisions of law that might be difficult to sustain for a long period will be modified, thus maintaining what some analysts might consider “current policies,” as opposed to current laws."

For example, tax cuts enacted by a Republican Congress and signed into law by President Bush in 2001 were scheduled to expire in 2010. But in 2010, a Democratic Congress and President Obama extended those tax cuts through 2012. The CBO "alternative" scenario assumes that this lower level of taxes will continue after 2012. It also assumes that Congress will continue to pass "temporary" relief from the Alternative Minimum Tax. It assumes that Congress will prevent the large cuts in Medicare now written into current law: a 31% cut in physician payments scheduled for next year, and automatic reductions of 1% per year in other reimbursements over the long term.  The alternative fiscal scenario also assumes that federal spending for activities other than health care and Social Security will remain more or less at their average levels for the last two decades (as a share of GDP), rather than dramatically falling in size over the next decade or two as current law somewhat mysteriously requires. The alternative scenario concludes that when push comes to shove, Congress and the President won't let the automatic spending cuts mandated by the Budget Control Act a few years ago take effect.

Under the alternative "current policies" scenario, the federal debt takes off.  It hits a debt to GDP ratio around 100% in about 2023, 150% by the early 2030s, and 200% by 2040. Of course, matters are unlikely to go that far. One way or another, the wheels would come off the wagon by then.

Health Care Spending Drives the Long-Run Debt Forecast
Social Security spending is slated to rise as the post WWII baby boomers hit retirement age, rising from 5% now to about 6% of GDP in 2037. However, spending on federal health care programs under current law (that is, assuming the unrealistic cuts in Medicare) would still rise from 5^% of GDP today to 10% of GDP by 2037. The sustained rise in federal spending in the alternative scenario is first due to health care spending and to not assuming that all other federal spending is slashed as current law projects--and then later due to monumental interest costs that build up from the earlier borrowing.

The upper left bar graph compares the average level of Social Security and federal health spending for the average of 1972-2011, and then looks at what it would be 25 years from now in 2037 under the baseline and the alternative scenario. Notice that under the baseline scenario the increase is large, and under the alternative scenario it's even larger. Under both scenarios, all other federal spending (except interest payments) decreases. Total revenues are higher in the baseline scenario, which assumes that the Bush/Obama tax cuts will be eliminated and the reach of the Alternative Minimum tax will greatly expand.



Why acting sooner is better than later.
The CBO is careful to take no stand on exactly how soon federal deficits should start coming down.  The report does make the point that sooner is better than later for long-term economic growth. But it also points out that postponing a solution tends to be better for anyone born more than 21 years ago---that is, for most voters!--because it pushes more of the costs of addressing the federal debt on to those who are under 21 or not yet born.

"CBO’s analysis suggested that, depending on the policy used to stabilize the debt, delaying action for 10 years—which would allow the debt-to-GDP ratio to rise by an additional 40 percentage points under the assumptions used for that analysis—would cause real output to be lower by between 2½ percent and 7 percent in the long run than it would have been if the ratio had been stabilized earlier at a lower level. ... Most of the decline in output caused by delaying action would stem from two factors: the crowding out of investment in productive capital, which would reduce the size of the capital stock by between 7 percent and 18 percent; and the effects of higher marginal tax rates (which would ultimately be required under the policy that stabilizes debt by raising taxes) on people’s incentives to work and save.

Another conclusion of CBO’s analysis was that generations born after about 2015 would be worse off if action to stabilize the debt-to-GDP ratio was postponed from 2015 to 2025. People born before 1990, however, would be better off if action was delayed, largely because they would partly or wholly avoid the policy changes needed to stabilize the debt ..."

There is legitimate room for disagreement over how quickly and how severely to try to reduce federal budget deficits, given the continued sluggishness of the economy. But a growing body of research (for example, see here and here) suggests that the ratio of public debt/GDP can reach about 90% of GDP without much negative effect, and then the chances of reduced growth or even a financial crisis become much more severe. Over the next 10 years, or maybe sooner, current federal budget policies are putting the debt/GDP ratio on a collision course with a very hard reality.