Is government like a household? Is it like a business?

When I began to take economics courses in college, many, many moons ago, one of the big issues under debate was whether the federal government should run budget deficits and take on large amounts of debt. Those arguing the negative made analogies with households who were contractually required to repay their debt or face consequences, such as repossession of cars, foreclosure on homes, garnisheeing of wages, etc.

That debate is back, with a vengeance. Many are arguing that governments should reduce current deficits and outstanding debt, despite the continuation of depression levels of unemployment and underemployment, in order to restore business confidence and stave off future inflation. Ezra Klein, in his Washington Post blog (here) has made an analogy between business and government in support of the affirmative. Just as business should borrow if they see legitimate profit opportunities, even if already in debt, so should government if there are opportunities to enhance public welfare. Klein's current example is infrastructure, where government spending would enhance economic expansion both in the short run, and over time.

While both analogies are formally correct, they miss something important. Both individual households and businesses are required to repay their debt. Both can refinance debt, that is, borrow again to repay the original debt as it comes due, which is what government does. But more important,the household sector taken as a whole, and the business sector, never has to repay its debt, even if individuals don't refinance. Suppose I buy a house on a 30 year mortgage. After 15 years, I decide to sell. I use proceeds from the sale to pay off my mortgage and am now debt free. But the buyer of my house most likely has taken out his or her mortgage so that while my debt is repaid, the total mortgage debt is not, and most likely continues growing. And if I buy a new house, most likely I will need a new mortgage.

Governments, of course, act as single entities while households and businesses don't. Those using a microeconomic perspective would likely argue that this is a crucial distinction. But a macroeconomic perspective operates in terms of sectors. What, then, is the justification for treating one sector as requiring balanced budgets, and another sector as being OK with continuous long-term indebtedness?

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More on the 90% Solution

A few days ago, I commented on the problematic use of a single number to define a diverse set of events, in the context of using the Rogoff-Reinhart 90% figure, for a country's debt to GDP ratio, as a threshold beyond which GDP growth will be seriously affected. This particular figure, and the concept of a threshold applicable to all situations, has been critiqued by many in the blogosphere including Brad DeLong, Mark Thoma and Paul Krugman.

One of my favorite critiques is in a different context, from a different time and about a different issue. The famous geologist and paleontologist Stephen J Gould was diagnosed with a virulent cancer in 1982 and told by his doctor that his cancer was incurable and had a median mortality of eight months after diagnosis. When he was physically and emotionally able Gould, a trained scientist, went to Harvard's medical library and read the studies on his particular cancer, abdominal mesothelioma. Knowing that the median meant that half the population studied lived longer than eight months, he found that he possessed all of the characteristics of the upper tail of the distribution. Since the distribution was right skewed, he also realized he was probably fairly far out on the right tail, and that his chances were quite good.

Gould's eight months became 20 years. He died in 2002, of cancer but of an entirely different type. He wrote of his earlier experience in 1985, and after his death, the article was posted on a number of web sites, including here. Maybe those who read Rogoff and Reinhardt should also read Stephen J. Gould.

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Ugly Reminders of a Past Prolonged

A recent story about the ocean dumping of chemical weapons made the news back in June after a report suggested that the best thing for the present was to continue monitoring the deterioration of the weapons and expand the study "if funding is available." Another report looked into the Army's desire to blow up remaining arsenals. Both stories served as reminders to check into where Russia and the U.S. are on their promises to rid the world of their chemical weapon stockpiles. But before we do that, a little history helps...

The Prolonged Past...
The Cold War ended but many ugly reminders of 20th century warfare endure in collective memories, secret laboratories and military stockpiles. Chemical weapons, among the ugliest of all weaponry, remain in arsenals and under active research despite the efforts of government leaders and the Organization for the Prohibition of Chemical Weapons (OPCW), the organization that implements the Chemical Weapons Convention (CWC). Not all signatory states have adhered to the CWC requirement to adopt laws aimed at reducing the proliferation of chemical weapons. Perhaps worse yet, according to the U.S. Government, some 16 countries are currently reported to have active chemical warfare research programs, including China, North Korea, and Iran. While the weapons and know-how remain at the ready, many experts consider potential terrorist acquisition or fabrication of chemical agents to be a persistent and present danger.

The Chemical Weapons Convention and where we are today...
The Chemical Weapons Convention which was opened for signature in January 1993 and entered into force at the end of the signature period in April 1997, bans the use, production, acquisition and stockpiling of chemical weapons and requires the destruction of chemical weapons by all member nations. Currently 188 countries are States Parties to the Convention. The Hague-based OPCW is charged with maintaining a regime to verify destruction of chemical weapons and with preventing their re-emergence.

From Incapacitating to Lethal...
While the CWCs definition of toxic chemicals includes all chemicals that cause incapacitation, there is general agreement that law enforcement has the right to deploy riot control agents (RCAs) in instances of domestic rioting. However, use of riot control agents as a method of warfare is strictly prohibited. Other non-lethal chemical incapacitants, such as what was surmised to be an opiate derivative used in the October 2002 Moscow theater hostage crisis, are also prohibited by the Convention. Despite the ban against such agents, and the fact that the line between lethal chemical weapons and non-lethals is thin, some states parties continue to conduct research into ostensibly non-lethal chemical weapons.

The 80s just won't go away...
In the 1980s, Iraq was known to have used chemical agents both in its war with Iran and against Kurdish civilians. North Korea also began developing chemical weapons in the 1980s and has stepped up its research into chemical agents and delivery mechanisms. Iran's chemical weapons program remains largely obscured from vision. In February 2008 testimony to the Senate Select Committee on Intelligence, then DNI Mike McConnell stated that: "Tehran maintains dual-use facilities intended to produce CW agent in times of need and conducts research that may have offensive applications. We assess Iran maintains a capability to weaponize CW agents in a variety of delivery systems." OPCW experts assisted the United Nations in the destruction of chemical agents in Iraq and completed an inventory of Libya’s chemical weapons program; in both countries, disposal efforts are ongoing.

Missing Deadlines or Safer Disposal?
Nonetheless, at present, the destruction of chemical weapons in signatory states has been delayed in some countries. Among a few other notable convention parties, both the United States and Russia have twice been given extensions to complete the destruction of their once massive stockpiles. Russia aimed to have its stockpile, once the world’s largest at 40,000 metric tons of chemical agents, destroyed by 2012, as did the United States. As of today, Russia has eliminated 50% of its chemical weapons stockpiles and now aims for complete elimination by 2015. The United States now expects to destroy and dispose of its former stockpile of 20,000 metric tons of chemical weapons by 2021. While accepting that these new deadlines are considered safer and to be on a more realistic schedule, the need remains for continued commitment to eliminate stockpiles and for public scrutiny of disposal techniques.

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Guns

Visitors to this country and commentators from abroad are often puzzled by aspects of American culture and politics. Baseball is an example: bursts of action surrounded by what seems to be endless nothingness. How can one truly explain the subtleties of pitch counts, the hit and run or the positioning of outfielders? I try to be patient; after all, I find it impossible to understand cricket.

On a recent trip to Philadelphia, I came across news reports -- in the Inquirer and the Daily News, July 17 -- that made me scratch my head about US culture and politics. The stories were about two police officers who had been shot in the process of chasing cars occupied by apparent felons. In the first shooting, in 2008, the officer was killed, while in the second, on July 15, the officer was wounded but in good condition. What united these shootings was that in both cases the apparent perpetrators were heavily armed with automatic weapons, including military grade assault rifles. Both officers were shot with a military grade SKS assault rifle that had been modified to increase its firepower. The second incident happened two days earlier, while the first was in the news because the trial of two defendants was underway. A weapons expert had testified that the SKS rifle was designed to penetrate armor and kill soldiers at a range of 300 yards; the dead officer was hit by a shot through his car door and wearing police body armor would have provided no protection. All of the weapons recovered, including the SKS, are legal to purchase in Pennsylvania; the SKS and modification kits are readily available in the US and over the internet.

With the Supreme Court recently ruling, based on the Second Amendment, that cities do not have the right to regulate gun sales, these incidents highlighted my confusion regarding the issue of gun control. Why does this culture, and the politics of this country, permit individuals to buy weapons of this lethality? How does the Second Amendment, written to protect the existence of "a well regulated militia", lead to a situation where anything goes with respect to weapons purchases. We accept that the use of such weapons is illegal -- anyone who actually shot one in a municipality, or on property owned privately or owned by a government, would most likely be subject to criminal penalties. Why then, do our laws and culture allow the purchase of such weapons, and how can the Supreme Court not see the irrelevance of protecting the rights of well regulated militias in the 21st century? Is it culture, economic interests, the power of rhetoric, or ...?

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LeBron and Me, Just Hanging Out

If LeBron James and I were alone in the same room, the average height of the people in that room would be six feet, one inch. But that number would convey almost no information about the people in the room. LeBron James is 6'8", of African-American descent, quite wealthy, in his mid-20s and one of the world's greatest and best known athletes. I am none of that. We do have a few things in common. We are both male, we like sports and we both voted for Barack Obama for president. At least I think he did. The mean height, therefore, is essentially useless to characterize the people in that imaginary room.

This hypothetical example is one of many that can be used to show the limits of averages yet averages continue to be cited in support of policies. The most important current example is the number 90%, the ratio of a country's public sector debt to its Gross Domestic Product (GDP). In the now heated debate over stimulus versus austerity, countries projected to approach and exceed the 90% figure should, according to the austerity side in this debate, begin cutting government expenditures and reduce their public sector deficits in order to lower their debt to GDP ratios and prevent a future financial meltdown, and possible default.

The 90% threshold comes for the work of Kenneth Rogoff and Carmen Reinhart, as derived in their book (This Time is Different: Eight Centuries of Financial Folly, Princeton, 2009) and summarized in a recent article, "Growth in a Time of Debt." In an article in the Financial Times (July 20, 2010) Rogoff does not use the 90% figure but does write of a sharp and sudden reversal in financial markets "as a country approaches its debt ceiling" and cites the existence of a "threshold where growth might be affected." While less precise, such language does imply the existence of a ceiling or threshold beyond which a country's economic prospects will dramatically change.

Unfortunately, while the Rogoff-Reinhardt ceiling is derived from a larger sample than my height example above, it suffers from the same weakness. Measures of central tendency, such a means, modes, medians, standard deviations, etc., while useful to describe certain characteristics, can be seriously incomplete. Rogoff and Reinhardt analyze data from the experiences of 66 countries over a span of 200 plus years, giving what is most likely the largest sample of financial crises yet assembled. The 90% "ceiling" or "threshold" applies to the average experience of these countries over this time period, and includes examples of events that exceeded this ceiling as well as examples that fell short of this ceiling. To use an average to project events and recommend policy, one should have information about where a particular country or group of countries falls in the distribution of events and outcomes.

Also, one should be careful about imputing causation -- is it that high debt causes slow growth, or does slow growth cause high debt? -- and whether the observations included in the sample are relevant to the present situation. Paul Krugman has raised some of these issues with the Rogoff-Reinhardt data in his blog.

Going back to my hypothetical height example, there have been a few players with height close to mine who have had good careers in the NBA -- Nate Robinson of the Boston Celtics is a current example -- but none have reached the stature of LeBron James, or Kobe Bryant, or Michael Jordon, or Magic Johnson. They have me beat by a foot or more. Some averages really are meaningless. Is that also true of the 90% "ceiling"?

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We're Baaaack!

This blog has been silent for almost a year. Starting today, that will change. Please stay tuned.

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A Health Care Snapshot

Just returned from a long weekend in Toronto. At the hotel restaurant, our waitress had an arm in a soft cast. When I asked what happened, we received a description of the travails of two people, the waitress and her boy friend, with the Canadian health care system. She was about to have surgery to remove a calcium deposit that was pinching a tendon in her elbow but it took six months and several different doctors to get a diagnosis. Her boy friend had a burst appendix which was missed by two doctors before a third got it right. She was quite critical of the quality of the doctors they each saw, although praising the ones who finally succeeded. She also pointed to delays in the system; her rule of thumb is that every pain should be described as severe -- a 10! -- or else one can wait and wait for needed tests.

Is this an indictment of Canada's system? In part, yes, although tales of woe from two people hardly represents a viable sample. Moreover, similar tales can be told in the US -- from people without insurance or without sufficient insurance, from over worked hospital staff, from over reliance on ambiguous tests, etc., etc. Aggregate data suggest that health outcomes in Canada and the US are quite similar, with Canada having less inequality in reults and significantly lower costs. Is this enough to push us towards reform?

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