Friday, March 5, 2010

My Government Priorities, version 1.5

A friend noted last night that it's much easier to criticize than be constructive, a point I agree with and a major reason I started this blog. I've done this for specific issues before (healthcare reform, stimulus, financial reform, somewhat on climate change, trade deficits and government deficits), but here I'm trying to put together a list of what I'd actually want to see a government do. These are all interrelated, and while I think they're valuable individually, they're definitely intended to be a "whole is greater than the sum of the parts" list.

1) import certificates or capital controls, outlined here: The general gist is that each imported good should be assigned a tax exactly high enough to offset a trade deficit. If the trade deficit drops, the tax drops (which is why it's so far superior to tariffs). Doing this on a currency by currency basis would be one option, but it would be better to allow trade imbalances with some countries as long as it balances out overall - if China has a substantial comparative advantage over Europe (or wishes to duke it out with Europe and steal its consumption), then all the better for America to be able to run a current account deficit with China and an offsetting surplus with Europe - we get more goods for each dollar while still maintaining trade balance.

An equivalent idea that could be easier to implement is one that I read on interfluidity (, which would target not the goods being traded but the equivalent capital flows. If we import an extra billion dollars of goods each year, we export an extra billion dollars of capital (dollars - basically, claim checks on future US goods). When we send dollars overseas to finance our goods, those dollars get invested in US financial assets - stocks, bonds, treasuries, etc. Taxing the investment of dollars into dollar denominated assets by foreign holders of dollars at an exact level to offset the trade deficit would be equivalent to taxing goods. Both are difficult things to do, but the capital control may be easier to implement. The major trouble would be a purchase of commodities by foreign countries using dollars, because the US can't tax that. If this makes a capital control impossible, then the import good certificate policy would have to be implemented.

I'll note that I do NOT favor Krugman-style immediate implementation, but instead a much more gradual approach. Instituting it immediately would be a major shock to the system for US consumers, and for the entire economies of Germany, China, Japan, South Korea and a few other large-trade-surplus Eastern European economies, whereas instituting it gradually (over 5 or more years) would allow the systems time to adjust (decreasing US government spending would take time - see number 2 - allowing Chinese exporters to adjust to greater internal Chinese consumption would take time, etc).

2) decreased government spending. Means-testing social security and overall defense spending are wonderful targets here, as are increasing the age of eligibility for Medicare and Social Security and indexing them to life expectancy, as should have occurred from the get-go. A better appropriations process (line-item veto, anyone?) would add some incremental benefit, as well. A more competitive health insurance market would be useful in reducing the requirements for people to be on Medicaid (note that the current reform bill accomplishes none of these things - see below for my healthcare reform). Given the size of Defense, Medicare and Social Security, these types of adjustments could actually cut the deficit by 80%. Economic boosts listed below actually could end up closing the whole thing.

3) Ensure appropriate government spending for the future by passing a "reasonable budget in the long term" constitutional amendment. This would look something like "The government must be able to look at rolling 6, 8, 10 and 12 year periods, and have ONE of them display a deficit of no more than 1% of GDP over the period." Assuming the US is capable of better than 1% GDP growth (which I certainly believe, and hope, it is), that's a sustainable debt load, and it also allows for "saving in good times so we can spend a lot in bad times", which allows for neo-Keynesian intervention in crises (like a number of the stimulus provisions).

4) Substantial R+D tax credits, capital equipment credits, somewhat lower corporate taxes and better-directed and funded NIH, NSF, NASA and Defense research grants for basic research. For more, see my post on gene patenting:

5) Allowing educated immigrants into the country without massive visa hurdles (ideally, allowing more immigrants into the country, period, conditional only on them not committing crimes and having someone in their family be at the very least intermittently employed).

6) Steady and consistent government investment in a) public commercial infrastructure (efficient highways, efficient rail, a more reliable and more "smart" electricity grid, better powerplants) and b) technology/research to reduce reliance on imported oil (cars that don't need gasoline or as much gasoline, for example)

7) Pigouvian taxation of economically destructive goods - Cigarettes, alcohol, trans-fats, gasoline (not just for climate, which is a strong side benefit - the idea here is energy independence for national security and a reduced trade deficit), sugary drinks, perhaps red meat, bottled water, energy-inefficient lightbulbs and appliances and cars, etc. I also think financial turnover belongs here, but I outlined it in financial reform.

8) an enforcement of "ecosystem" provisions, which are provisions that ensure the continuing well-being of the economic ecosystem. These aim to address future productivity of our natural resources and our structural systems of capitalism and innovation. These include giving the FTC more teeth to fight true anti-consumer market power (I'm thinking Visa/Mastercard, AT&T/Verizon, Monsanto, etc. This is distinct from those who have market power through their own excellence or luck but don't flex it  - Google, EBay, etc.),  consumer safety provisions and anti-environmental dumping legislation (to reduce long-term health costs and improve overall consumer welfare). This also includes FDA reform, which I've included in the healthcare section below.

9) Patent reform - a number of things that are patentable perhaps shouldn't be (someone actually made a convincing case the other day for disallowing software patents altogether and making them licensable "trade secrets" - maybe extreme, but very interesting), and certainly patents shouldn't be approved with the idea that if they're not really legitimate, a court can overturn them (which happens all the time). Patents should not apply to problems, they should apply to very specific mechanisms of solutions, to protect real innovation, but not stifle other innovative ways of solving the same problem. You can protect "problem discovery" with a tax credit system as listed in the link: . Generally, you can write off most of the cost of research (but not all) in transferrable, persistent tax credits, and you get the rest of the cost of research written off at the completion of the project, as measured in a number of different possible ways (publishing a paper, beginning preclinical trials of a treatment targeting a medical problem, selling a good using that research, etc).

10) Corporate board reform - elimination of proxy voting (which entrenches board members), isolation of CEO and chairmanship from one another in public companies, biannual board elections and mandatory publicity for board challengers. Compensation should based on long-term profits, instead of short-term profits or short-term stock price, and if that means paying the CEO after he/she is gone, so be it. We might consider punishment for litigation (probably excluding patent litigation, which is more benign). They should be required to be significant shareholders in the company of which they're on the board, and should probably receive a pay of zero.

11)  an education system overhaul, involving vouchers for charter schools and a deemphasis on teachers' unions, would give America a more competitive and efficient labor force for generations to come.  I don't believe in full privatization, certainly, and this would need to be treated with a degree of incrementalism. I admit that education policy is not my specialty, so I will defer to experts here, as long as their arguments and empirics make sense.

12) Financial regulation that makes the system safer but doesn't crushingly increase the cost of capital. I go through this in heavy detail here:

Ideas I've had in the past are a turnover tax (, adjusting mutual fund loads, placing standard products on exchanges and reducing interconnectedness of firms, and mandatory waiting periods and processes for consumer lending (all outlined at the bottom here:, more here: Another idea, prompted by reading a friend's thesis, was that perhaps underwriters should be forced to hold onto a junior tranche or piece of equity from the deals they originate - not to loan against, but to incentivize more responsible underwriting. This would have to be done carefully to minimize distortion of deals to create high reward, low probability option value. I'll think about ways to offset this. First outlined here:

 13) Healthcare reform. Not the current bill, I think that bill is awful (I've written why here: I've written a substantial post on a better version of reform here: It integrates the good portions of the current reform while fixing a number of the problems, I think.

14) Campaign finance reform, and perhaps even government structural reform. I disagree with the Supreme Court's recent "Citizens United" decision, in which corporations are allowed to advertise or donate to politicians. I think we should mandate campaign finance contributions be sealed and anonymous, because lobbyists and interest groups become far less powerful when they can't credibly show they donated. Interest groups can't even view if their own constituents voted the way they wanted. If contributions are limited, and nobody is aware of who donated to him or her and sees donations only in aggregate (this would have to be done with some sort of unique and personal identifier used only for contributions), then that strips out a lot of the special interest politics.

I'd also like to see Congressional voting records sealed until a few months before elections - so nobody knows what a Senator votes for until, say, six months before Senate elections - enough time for opposing senators to campaign, but when campaigns AREN'T happening, it's impossible for party leadership to force party members to take a party line on a bill they think will have bad consequences.

The structure of government has become inefficient as media coverage has grown and politicians are forced to jockey harder and harder for votes. I wonder if a rebalancing of the powers is in order - the legislative branch seems to be getting more and more ridiculous over the years. Things like "jungle primaries", where the parties hold their primaries together for the top two candidates, may be very helpful, as would a number of changes to incentives for congresspeople (in terms of pay, publicity, comfort and exposure, as well as perhaps in the publicity/anonymity of votes).

I'd also like to see line-item vetoes for the President on Appropriations bills (just appropriations bills, of course).

EDIT: To quote Charlie Munger: "The rules of the U.S. Constitutional Convention: totally secret, no vote until the whole vote, then just o­ne vote o­n the whole Constitution. Very clever psychological rules, and if they had a different procedure, everybody would've been pushed into a corner by his own pronouncements and his own oratory and his own... And no recorded votes until the last o­ne. And they got it through by a whisker with those wise rules. We wouldn't have had the Constitution if our forefathers hadn't been so psychologically acute. And look at the crowd we got now."

The secret voting means people don't publicly commit themselves to lousy policy and can't easily be politically pressured.

15) Other than immigration (which has a substantial economic impact), I've stayed away from social issues because so many of them are not complex in understanding their consequences - they're more personal and moral decisions. That said, there is no basis for the government to be enforcing the religious beliefs of the majority upon the minority when those beliefs are personal and don't involve others, which means things like school prayer, DADT and bans on gay marriage are highly, highly unjust and should be gone.

Affirmative action probably needs to go, as well, for four reasons - not only 1) does it institutionalize decision-making based on race alone (probably unconstitutional and definitely morally questionable from both an "all individuals are created equal" and a role of government perspective) but it also 2) reinforces racism by making even qualified minorities appear less qualified than their majority counterparts (The "I'm all for diverse surgeons but if I have a surgeon he or she had better be white or asian cuz they're the ones who really deserve to be there" complex). Additionally, 3) it gives highly qualified minorities less incentive to keep working hard, because they'll be held to lower standards than their majority counterparts, ensuring the persistence of the performance gap. Finally, 4) in certain bizarre situations, it can be used to exclude people. Christians were "affirmative actioned" into the Ivy League in the 30s and 40s because too many Jews were getting in for the liking of the elite. When that was found to be illegal, athletic scholarships were invented. Not joking. If you think this is ridiculous today, imagine your reaction if teams were told that they needed to have one white point guard or cornerback on their roster. That hardly seems like an "including whites" condition; it's far more likely a "we can't have ALL blacks!" situation.

I exclude two pressing issues for specific reasons - gun control, because neither side seems to be more right than the other in reducing gun crime (the only laws that seem to statistically affect gun crimes are ones that make gun crimes more severe than crimes with other weapons, which is good because other weapons are usually less lethal), and abortion, because while I'm pro-choice, I understand the pro-life argument and can't object to the reasoning, even if I think pro-life would make society much worse off. On gun control, I could see a legitimate argument for "an armed populace reduces the likelihood of later authoritarianism", but I don't know enough about the issues to actually advocate for that.

16) The piece I'm least certain about would be climate reform. I say this not because I don't see climate change as a massive risk that needs to be addressed (see my post on it here:, but because I generally think the best way to deal with climate change is split in pieces between 4, 6 and 7, with some 8 as well. As I mentioned before (including that post), Cap and Trade could be wonderful with an efficient, non-partisan government that didn't overweight elections relative to results, but I'm not sure it's a great system with the political structure we have. A carbon tax is simpler and harder to game, but also can crush some very innovative industries that may be vital in actually solving the long-term carbon problem. In short, other than encouraging efficiency (and yes, there are plenty of ways we can encourage efficiency), I think the solution has to be energy supply based, not demand based.

That said, I just thought of an interesting idea to incentivize carbon efficiency - If you array products intended for the same use in a distribution based on how much carbon they emit, total, during their manufacturing and useful lives, and put an "excessive carbon" tax on products that are in the top half of that emissions distribution that's weighted by how far away they are from the median, and then turn around and give that tax money in subsidies to the best 20% of the distribution, you're giving companies a strong, strong incentive towards efficiency. The hard part is the classification and measurement, of course, but we actually don't do that terribly now with all the consumer safety provisions and such. The Departments of Commerce and Energy could jointly come up with a system that isn't awful, as long as the classifications could avoid politicization (as in, not designated by Congress). Some products would be hard to classify and measure, and you may just have to not tax them, but many products have lots of competition... that way you reward the best performers within industries, not industries that happen to be low carbon.

17) I'd like to see tax, welfare and wage reform. In addition to Pigouvian taxes and taxes enacted for capital control, I'd like to see a simplification of the tax and welfare codes to better align peoples' incentives. Currently, the marginal tax rate on income for those making under $40,000 per year is near 100%, and in many patches of that (25,000-40,000, particularly) it's above 100%. Additionally, the welfare system is not optimally structured to get people back to work.

I'd propose the following: firstly, instead of offering a flat welfare rate that ends after a period of time, I'd like to see it start just a bit higher than the current flat rate and then decline week-by-week. The psychological force of perceptual contrast would mean that this would disincentivize people waiting til the very end of their welfare benefits to start a job, which actually does seem to happen, empirically (see Mulligan's analysis of Pittsburgh in 1980). It also better benefits those who are hard on their luck but looking (and thus are more likely to find a job early in their welfare tenure), and provides less benefit to those who are on welfare because they're a) lazy or b) a member of the underground economy who collects benefits because he/she can.

It would also be interesting to see a system in which your level of welfare was related to your level of education. This has fairness advantages - people who invest more of their time and money into education thus find it more costly to be unemployed - as well as incentive ones - people go and get the education that is offered to them freely. Outlined here:

Secondly, I'd like to see a reduction in the minimum wage. Not to zero - those who advocate a zero minimum wage miss the critical point that working for barely more than free has a societal cost, which is that you're not looking for a better job while you're working at the worse one, which you could be doing if you weren't working. However, the current minimum wage prevents unskilled workers (often teens) from getting work when they want it, and overcompensates relative to the value of one hour used for looking for a decent job. It's the old sweatshop argument - yes, if you illegalize sweatshops, the people who actually work there will have much better conditions than they would otherwise. By raising the cost of labor, however, the sweatshop employs fewer people, and the people who would have worked in the sweatshop but couldn't get a job now have a job that's even worse than the sweatshop. Declining utility of money at scale, and the generally elastic need for labor in most minimum-wage, unskilled jobs means that you're hurting more people, by more, than you're helping.

Third, it seems to me that the tax system in general isn't a phenomenally incentive-aligned beast. Here's the problem:
1) Non-progressive taxes don't acknowledge a fixed cost of survival
2) Progressive property taxes encourage urban sprawl
3) Progressive income taxes discourage work
4) Progressive consumption taxes discourage consumption
5) Progressive investment taxes discourage investment

These things sound like tautologies, but they're important to keep in balance. The benefit of property taxes is that any income taxes at all shifts people to leisure somewhat, and consumption and investment taxes do, somewhat, as well, but property taxes should do so far less, in general.

Given that Americans seem to overconsume as it is, I'd then propose a two or three-tiered consumption tax to address progressivity, and a flat property tax. (you don't want to encourage urban sprawl, so the property tax could be flat, and provide a lot of money). Consumption would be tax-free up to some poverty level, then at a low rate. Perhaps at one more higher rate, you could ratchet up consumption taxes a little bit more.

In addition to Pigouvian taxes, this seems to be a far more efficient tax system.

18) Litigation reform. Society is extremely litigious, partially because it's very cheap to litigate relative to awards, in many cases, so the upside/downside still supports litigation even when you have a low probability of winning because you're in the wrong.

This is reasonably simple to fix. Many states in Europe have "loser pays" litigation, in which the loser of the lawsuit has to compensate the winner some percentage of legal fees. This presumably reduces litigiousness by people who know they will lose but wish to stall. That should reduce demand for lawyers and thus get people out of law. (100% probably isn't an appropriate number, because that means that companies can act very badly knowing that if they're sued for it and win, they get off scot-free. But some nonzero percentage would be an improvement, I think - as long as the justice system tends towards fair outcomes, which in some courts - family court, for example, or medical malpractice court - isn't necessarily the case, but in many others it is)

1 comment:

  1. Agree with much; mostly good and well-thought-out points. Busy as a bee lately, so I'll have to read it more carefully and offer some more random thoughts when I have the time, but in any case, I'd love to see a tie-in with geopolitical realities and the implementation of some of these ideas...esp with items like #16.