Questions about the need for fiscal rules

Over at Stumbling and Mumbling an interesting question;

Which raises the question: why do we need external rules to do this? Why can’t the electorate do it? Younger voters should see that big borrowing is merely deferred taxation, and punish governments for imposing it. And older voters who care about their children and grandchildren should also punish governments.

So why don’t they? One possibility is that our electoral system is just too clumsy to permit them to express their discontent; we are only ever offered a choice of job-lots of policies, not individual ones.

Another possibility is that, for all our drooling and drivelling, we as a nation don’t actually care about our children.

Whichever it is, let’s be clear. If we need fiscal rules, it is only because of moral and/or political failings. But are technocratic constraints really an adequate substitute for adequate political structures or more sophisticated moral sensibilities?

James Poterba on Insurance Pricing

Region: You've developed a significant body of work on asymmetric information in insurance markets, much of it with Amy Finklestein. In a recent paper with Amy and Casey Rothschild, “Redistribution by Insurance Market Regulation,” you estimate the efficiency costs and distributive impact of regulations that prohibit insurers from looking at buyer characteristics in determining prices. Are the cost and impact quantitatively significant? In an age when genetic testing is growing ever more sophisticated, what is the policy import of such findings?

Poterba: I am fascinated by insurance markets and the contracts that are available to individuals. This strikes me as an important and somewhat understudied area. My work with Amy and Casey tries to understand what happens when regulations preclude insurance companies from using some information to set insurance prices.

There are many examples of such regulations. Many states limit the data that firms can use to price automobile insurance. We consider the market for retirement annuities. In the United States, a firm cannot offer different pension payouts to men and women with the same salary history and years of service, retiring at the same age, even though life expectancy for women is several years longer than that for men at typical retirement ages.

In most settings, a ban on using some information to price insurance transfers resources toward those whom this information would show to be high-risk insurance buyers. In the market for annuities, someone who is expected to live a long time is more expensive to insure than someone who is unhealthy and has a high mortality risk. An insurance company could offer to pay higher monthly benefits to those who are ill or infirm if it could identify them. Sometimes insurance regulations make this difficult or impossible and therefore represent a transfer from one mortality risk group to another.

One of the intriguing questions is the extent to which insurance companies can induce policy buyers to reveal something about their underlying mortality type through the creative design of insurance policies. In Britain, insurers offer both inflation-indexed and nominal annuities. The households who buy the inflation-indexed products, which deliver more of their value at advanced ages than nominal products, tend to live longer than those who buy nominal annuities. This enables insurers to partly distinguish their client base. The extent to which such distinctions can be made is likely to vary across markets and settings.

Read the entire interview on the latest issue of The Region

Lewis Black on Tax Rebate

'I wonder who I could invade with 600 dollars'- Lewis Black

Carnival of Podcasts

Credit Shocks and Economic Aftershocks

Global Economic Trends: The Credit Crunch: A Conversation with George Soros

Brusuelas Says Rise in Commodity Prices Is `Permanent'

Goldman Sees Putin Controlling Russia's Domestic Policy

China: Is Political Reform Possible?

How Did We Get Into this Mortgage Mess, and How Do We Get Out?
Alan Blinder, Professor of Economics and Public Affairs, Woodrow Wilson School, Princeton University, Zanny Minton Beddoes, Economics Editor, The Economist magazine, Peter Orszag, Director, Congressional Budget Office

The Culture of Food in Rural China
Ellen Oxfeld

Totalitarian Consumerism and the Death of Citizenship
Benjamin Barber, president of CivWorld and Professor of Civil Society at the University of Maryland

Delivering Critical Care in Developing Nations: A New Approach

Dictatorship and Repression

THE BRAIN: A HISTORY

STW: Nicholson Baker, Jeffrey Sachs, Sarah Walker and Leo Hollis

Dollars for Defense: War, Taxes, and Sacrifice
“The history of America’s tax system can be written largely as a history of America’s wars.”

We-Think: the power of mass creativity

Pop Finance
We welcome sociologist Brooke Harrington, whose new book Pop Finance is a fascinating survey of investor behaviour and the massive rise in popular engagement in US stock market in the 90’s, when investing in stocks, once the province of a privileged elite, became a mass activity involving more than half of Americans.

The Secular State - the best option for British Muslims?


White British working class children make the worst progress in secondary school

Israel at 60: the Etgar Keret Version

Douglas Blackmon: Neo-Slavery in Our Times

Common Wealth: economics for a crowded planet

Brazil’s Statesman at Large-Fernando Henrique Cardoso

After the Empire: Must Reading from Parag Khanna

Nudge: Improving Decisions about Health, Wealth, and Happiness

Taxation in Colonial America
Taxation was central to the evolution of government in colonial America, and complaints about taxation led directly to the Revolution in 1776. Taxation in Colonial America provides a definitive history of taxation in the colonies from Jamestown to the Revolution. In almost 1,000 pages, Rabushka’s book covers an array of fascinating subjects such as the monetary systems of the colonies, British governance and politics, tax evasion and tax revolts, the development of colonial legislatures, and differences in tax systems between the colonies. The level of interesting detail about both tax and nontax subjects in this book is astounding. This forum will be a treat for anyone interested in taxation, American history, or the development of English and American political structures.

The Man Who Dated the Hobbit
Chris Turney has always been obsessed by weather. He confesses to Paul Willis that he used to keep weather statistics even as a boy. He is also keen on fossils and has now combined these interests in a book on the history of climate and how much it changes. Turney discuses the likelihood of Snowball Earth when life was nearly snuffed out, and the Hobbit, which he helped date as part of an international team

In cold blood?
Sir David Attenboroug

Maths rules!
Marcus du Sautoy is as close to a superstar as you can get in maths - without being Newton

After the scientific mums, how about their children?
Dr Sue Stocklmayer's experiment with mothers was a huge success. She taught them science, so that they could, in turn, answer their children's questions. The mothers loved the course at the Australian National University and interest in the scheme was sparked around the world. So what next? And how do we stem what seems to be a stampede away from science in our youth. Dr Stocklmayer has some firm suggestions — even involving soap operas on TV.

Australian sea floor expands
Australia is 2.5 million square-kilometres larger following the United Nations recognising Australia's claim to more of the sea floor around the continent. Australia doesn't own the fish in the water, but it is responsible for the sea floor. Some trenches go to a depth of 10 kilometres below the surface

A challenge to global warming orthodoxies- Part 1 and Part 2


Ventriloquism, lip reading and left and right

Schizophrenia and the origin of human nature

Quitting the habit: neurobiology, addiction and the insidious ciggie

The allergy generation and the EpiPen epidemic
Allergies to everything from dust, to cats, to peanuts are hitting young children hard, and doctors don't really understand why or what to do. Long held theories are changing, and there's great confusion.

One family farm
Today's generation of farmers is experiencing unrelenting change - climate change, drought, globalisation and plummeting incomes. Many families are finding the pressures too much to bear. Reporter Di Martin grew up in sheep and wheat country, and tells the story of one of her cousins, as he puts his property on the market.

Israel: selling out secularism?
The Olmert government is dependent on the support of the extremist, ultra orthodox religious movement in Israel. They now make up 10 per cent of the population, and make no secret of their desire for Israel to become a religiously based state.

Islam and democracy

Political expenditure laws

The Australian car industry: do we need one ?

The next Christendom
Philip Jenkins is possibly the most respected writer on the subject of demographics and Christianity. He's looked at the effect different birth rates are having on the world's Christian populations. His conclusion is that Third World Christians, with their much more conservative, Bible-focused beliefs, are likely to dominate the big Christian churches.

Paris May 1968

The 1929 stock market crash

eBay's Big Adventure
Internet auction giant eBay is under scrutiny from the competition regulator. It wants to force all its Australian buyers and sellers to use just one method of payment. Is this a restrictive trade practice or a consumer friendly move?

What makes a good opening sequence?
Danny Yount has an interesting job in the world of design. He says of himself that his 'primary focus is main title design'. Today on By Design we look at the magic of designing the 'look' of a film, the power of the opening sequences, for example, the way a trailer is designed to hit the mark. Danny Yount is the man who designed the powerful opening sequence of Six Feet Under, and his work on this cult TV show earned him an Emmy.

Complete works of Shakespeare: a new edition

Erotica - is it porn or is it literature?

Rotten English: writing in the vernacular
'A howl, a shout, or a machine-gun, or the wind or a wave', this is how Caribbean poet Kamau Brathwaite describes writing in the vernacular.

The literary Karl Marx
Karl Marx became one of the most significant political scientists of his age and then of the 20th century, but during his college years he wasn't sure what path to take in life. At one stage he considered a literary future but wasn't sure if he should write poetry, plays or fiction. He burned much of his lyrical work after his political transformation but his fictional attempts are contained in a violet notebook that he sent to his father.

Self-censorship in Israeli media

On the power of language


History under siege: battles over the past
History, like politics, is about national identity. So the work of historians frequently comes under attack, amid calls for the refurbishment or restoration of national identity. From the United States to the decolonised countries in Africa and South East Asia, the trend towards historical revisionism has been surprising in its breadth, scale and diversity of argument.
History under siege: battles over the past surveys the tensions and debates around history, identity and contemporary society in four countries around the world. It features interviews with historians, as well as oral history and testimony, and archival material.
Japan / Argentina / France / Australia

Christian Emissary of Kublai Khan
Before Marco Polo plied the Silk Route to visit the great Khan in the 13th century, the Mongol Emperor sent out a Christian emissary to retrieve relics from Jerusalem and send a message to the Pope. His name was Rabban Sawma.

The Origins of the Eucharist
Is the central sacrament of the Christian Church a true reflection of what Jesus meant when he said, 'this is my blood' and 'this is my flesh'? Bruce Chilton reveals a different meaning of the Last Supper rite.

U.S. Airport Privatizations?

Winston of Brookings Seeks U.S. Airport Privatizations

Austerity for Saudi Kings- can it work?

Saudi Arabia’s central bank governor on Tuesday called on the government to fight inflation by curbing public expenditure, warning that economic policies in the kingdom faced “a critical situation”.

The call by Hamad al-Sayari followed a government announcement that it would invest in agricultural and livestock projects in foreign countries to ensure food security and control commodity prices....

Saudi Arabia’s oil-fuelled boom is producing massive investment in infrastructure projects but is also leading to growing social pressure as inflation spirals, reaching 9.6 per cent in March year on year. Although lower than in Qatar and the United Arab Emirates, the inflation rate is tormenting a country accustomed to near zero inflation.

Insisting that inflation is driven by domestic factors – mainly housing and foodstuffs – the central bank has resisted calls to drop the riyal’s peg to the dollar, thus limiting its ability to use monetary policy.

“Powerful and contradictory factors put economic policymakers before difficult choices,” said Mr Sayari at a Euromoney conference, pointing to the need to promote economic growth but also the burden inflation was putting on low-income families.

“The Saudi Arabian Monetary Agency [the central bank] has taken steps to reduce domestic liquidity by raising the statutory reserve requirement several times. Given the dominance of fiscal policies on the economy, it is necessary to reprioritise spending and programme it to fit the absorptive capacity of the national economy,” Mr Sayari added.

-Call to Saudis to curb spending

Related;

A Royal Order was issued on 28/11/1428H (8/12/2007) granting a subsidy of SR1,000 per ton on imported rice, and increasing the flat subsidy on baby milk from SR2 to SR12 per kilo.

Hillary on Economists

This morning, George Stephanopoulos began his televised interview with Senator Hillary Clinton by asking if she could name a single economist who supports her plan for a gas tax suspension.

She did not. “I’m not going to put in my lot with economists,” she said on ABC’s “This Week” program. A few moments later, she added, “Elite opinion is always on the side of doing things that really disadvantages the vast majority of Americans.”

Throughout the exchange, Mrs. Clinton argued that she trusted her own eyes and ears instead. “This gas tax issue to me is very real because I have been meeting people across Indiana and North Carolina who drive for a living, who commute long distances, who would save money,” she said.

Senator Barack Obama has derided the gas-tax suspension as a gimmick that would save consumers little and cost thousands of jobs, and Kara Glennon, a member of the audience at a town-hall meeting, seemed to agree. Gas prices are “not academic” for her, she told Mrs. Clinton, because she makes less than $25,000 a year—and then she accused Mrs. Clinton of pandering. “Call me crazy, but I listen to economists because I think I know what they studied,” she said.

-There Goes the Economists’ Vote

Structural Reforms in crisis times

Any attempt to deal with the full range of structural changes while also trying to manage a short-term recovery from the crisis put severe strains on government competence that made economic recovery and foreign debt negotiations more difficult.

-Martin Feldstein critiquing IMF on response to the Asian Financial Crisis of 1997

Message Force Multipliers

Behind TV Analysts, Pentagon’s Hidden Hand

Internal Pentagon documents repeatedly refer to the military analysts as “message force multipliers” or “surrogates” who could be counted on to deliver administration “themes and messages” to millions of Americans “in the form of their own opinions.”

Though many analysts are paid network consultants, making $500 to $1,000 per appearance, in Pentagon meetings they sometimes spoke as if they were operating behind enemy lines, interviews and transcripts show. Some offered the Pentagon tips on how to outmaneuver the networks, or as one analyst put it to Donald H. Rumsfeld, then the defense secretary, “the Chris Matthewses and the Wolf Blitzers of the world.” Some warned of planned stories or sent the Pentagon copies of their correspondence with network news executives. Many — although certainly not all — faithfully echoed talking points intended to counter critics.

“Good work,” Thomas G. McInerney, a retired Air Force general, consultant and Fox News analyst, wrote to the Pentagon after receiving fresh talking points in late 2006. “We will use it.”

Again and again, records show, the administration has enlisted analysts as a rapid reaction force to rebut what it viewed as critical news coverage, some of it by the networks’ own Pentagon correspondents. For example, when news articles revealed that troops in Iraq were dying because of inadequate body armor, a senior Pentagon official wrote to his colleagues: “I think our analysts — properly armed — can push back in that arena.”

The documents released by the Pentagon do not show any quid pro quo between commentary and contracts. But some analysts said they had used the special access as a marketing and networking opportunity or as a window into future business possibilities.

John C. Garrett is a retired Marine colonel and unpaid analyst for Fox News TV and radio. He is also a lobbyist at Patton Boggs who helps firms win Pentagon contracts, including in Iraq. In promotional materials, he states that as a military analyst he “is privy to weekly access and briefings with the secretary of defense, chairman of the Joint Chiefs of Staff and other high level policy makers in the administration.” One client told investors that Mr. Garrett’s special access and decades of experience helped him “to know in advance — and in detail — how best to meet the needs” of the Defense Department and other agencies.

In interviews Mr. Garrett said there was an inevitable overlap between his dual roles. He said he had gotten “information you just otherwise would not get,” from the briefings and three Pentagon-sponsored trips to Iraq. He also acknowledged using this access and information to identify opportunities for clients. “You can’t help but look for that,” he said, adding, “If you know a capability that would fill a niche or need, you try to fill it. “That’s good for everybody.”

At the same time, in e-mail messages to the Pentagon, Mr. Garrett displayed an eagerness to be supportive with his television and radio commentary. “Please let me know if you have any specific points you want covered or that you would prefer to downplay,” he wrote in January 2007, before President Bush went on TV to describe the surge strategy in Iraq.

Conversely, the administration has demonstrated that there is a price for sustained criticism, many analysts said. “You’ll lose all access,” Dr. McCausland said.

Q. I am wondering if you have any statistics concerning the amount of taxpayer dollars spent on these so-called analysts?
— NHD, Ann Arbor, Mich.

A. It is difficult to assess the total amount of tax money spent on this effort. Significant sums were spent taking military analysts on trips to Iraq and Guantanamo. For example, when a group of analysts were taken to Iraq in 2003, they were flown each morning on military transport planes from their hotel in Kuwait to Baghdad, and then back to Kuwait at day’s end. They traveled around Iraq in heavily guarded convoys. In recent years, the Pentagon has paid the commercial airfare of some analysts who participated in trips to Iraq. The Pentagon also paid hundreds of thousands of dollars to a private contractor to monitor their news media appearances.

Assorted

Graph of Interbank Spreads Suggests Financial Crisis Continues Unabated

Politics and trade: evidence from the age of imperialism

On the Link between Dollarization and Inflation: Evidence from Turkey

A spending spree

Food prices

Oil numbers

Developing Debt Management Capacity

Interesting radio revenue data from Charlotte

The Per Capita Recession

Italian Public Finance

Why teach the Solow model? (Part II)

OECD: Unchecked Deleveraging ‘Cannot Be Allowed to Happen!’

Why Don’t More Poor Countries Get Rich?

Assorted

5 Myths About NAFTA

More False Budget Comparisons

Just so that we are clear - the U.S. does manufacture things

Stiglitz on Monetary Policy

Permanently high home prices?

Korean chaebol, hedge funds, and double standards

The euro’s rivalry of the dollar does not depend on tipping
IMF Says Financial Losses May Swell to $945 Billion

Central banks are dangerous

Politicians are "stupid"

New development papers this week

The cost of the war: A comment on Stiglitz-Bilmes

Assorted Pakistan

Demand Analysis For Tax Reform In Pakistan
Angus Deaton and F. Grimard

Abstract: Pakistan, like many LDCs, derives most of government revenue from indirect taxation. However, the system of taxes and subsidies has grown up piecemeal over the years. Previous exercises in price reform for Pakistan have been forced to make very restrictive assumptions about consumer preferences, and have typically used demand systems that prejudge what are the desirable directions of price reform. In this paper, the methodology of Deaton (1988, 1991) is extended and applied to the 1984-85 Household Income and Expenditure Survey. A theory of quality variation based on separable preferences is developed, and the implications for welfare and empirical analysis laid out. The prices of oils and fats and of sugar do not vary very much in the survey data, and the symmetry and homogeneity restrictions from the theory play an important part in obtaining sharp estimates of own and cross-price elasticities. The parameter estimates suggest that there are significant cross-price elasticities between the high-calorie foods and the presence of these substitution patterns means that the effects of potential price reforms are quite different from those that would be estimated using the traditional assumptions. Based on demand patterns alone, it would be desirable to raise government revenue by raising the consumer price of rice. However, in Pakistan it is not generally possible to decouple the producer and consumer prices of rice.

Zakat and Inequality: Some Evidence from Pakistan

This paper presents empirical evidence on the extent to which zakat---a form of religiously-mandated charity under Islam---achieves its intended objective in Pakistan. Detailed income and expenditure data from Pakistan's Household Income and Expenditure Survey for 1987-88 are used to construct two income distributions---one containing the distribution of income which would have obtained if relevant forms of charity were not given, and one containing the distribution of income which obtains under a regime in which such charitable giving takes place. Atkinson-Kolm-Sen (AKS) ethical relative indices of income inequality are computed for Pakistan and each of its four provinces, for each of these two income distributions, and are compared over a range of parameter values. Evidence is found that zakat does redistribute from the better off to the worse-off, and so achieves some reduction in measured income inequality in Pakistan. Both intra-province and inter-province components of over-all inequality decline, though the amount of change is generally small. These conclusions are shown to be robust to a wide range of normative values the investigator may select.

An Islamic Perspective on Inequality in Pakistan;

This paper examines the distribution of income in Pakistan, and in each of its four provinces, from an explicit and formal Islamic perspective. A cardinally significant Atkinson--Kolm--Sen relative index of inequality reflecting that perspective is proposed and computed from the full HIES data series for the years 1984-85, 1985-86, 1986-87, and 1987-88. There is evidence of a significant decline in overall inequality in Pakistan from 1984-85 to 1987-88, but the level of inequality remains very high. Inter--province and inter--urban/rural differences in inequality profiles within Pakistan and each of its provinces are found to be generally less significant than intra--province and intra--urban/rural differences.

NY City Budget and how not to do budgets

In her evolution from a campus activist nicknamed Mad Dog to the first female speaker of the City Council and a likely candidate for mayor, Christine C. Quinn has taken care to project an image of reform and an openness about the workings of government.

Since taking office in 2006, Ms. Quinn has devised a more public system for reporting pork-barrel spending and has muscled tough new restrictions on lobbyists through a resistant Council.

But Ms. Quinn, facing her first significant embarrassment as speaker, has spent much of the last 48 hours trying to explain how the Council ran what many government experts have called a strange and even disturbing system for stashing away taxpayer dollars. For years, the Council budgeted millions of dollars for dozens of fictitious community organizations and used the money later for grants to favored neighborhood groups.

The Citizens Budget Commission, an independent watchdog organization, was bluntly critical of the practice on Friday: “There is no excuse for fictional items in a budget,” the commission said in a statement. “All elected officials bear responsibility for the budgets that they adopt, and Speaker Quinn, in particular, should be held accountable for the City Council’s fiscal practices.”

Ms. Quinn, despite her reputation as a focused manager with an understanding of the levers of city government, has said she knew nothing of the unorthodox budgeting practice. She and her staff have gone to great lengths to show that she had tried to put an end to it but was stymied by staffers she forced out.

For the moment, no one has stepped forward to contradict her account, and there is no evidence that anything about the system was illegal or that any money was misspent. Mayor Michael R. Bloomberg has expressed confidence in her, calling her “the most honest person I know.”

But Ms. Quinn’s defense hinges largely on her assertion that when she learned about the practice she immediately ordered it to cease, only to learn that her staff disobeyed her and carried it on for several more months.

“There were meetings, there were oral conversations,” Ms. Quinn, a Manhattan Democrat, said Thursday. “There were many people in the numerous meetings with myself and the finance staff during the budget process, with many people in the room who can confirm that.”

On Friday, however, when Ms. Quinn’s office was asked to produce some of the “many people” who could confirm it, only her chief of staff stepped forward, saying he had remembered her noting in one meeting that they would no longer use the reserve system.

And numerous former and current City Council officials said Ms. Quinn had during her tenure taken an unusually active role in overseeing the budget, leaving them wondering how she could not have known or, if she had truly objected to the practice, authoritatively ended it.

“It’s an off-line extra budget slush fund within the city’s budget, and it’s used at the discretion of the speaker,” said Dick Dadey, executive director of the Citizens Union, who joined Ms. Quinn to overhaul the lobbying rules and is now calling for all future Council appropriations to be monitored by an outside agency. “Given the speaker’s drive to create more transparency about the Council’s own budget and member items, it would have been appropriate to go public with this bad practice even if it did shine a bad light on the Council.”

Indeed, the revelations have been particularly troubling for Ms. Quinn, consultants said, in part because she has made open government a mantra of her tenure as speaker.

“She’s no Eliot Spitzer,” said Kellyanne Conway, a Republican political consultant, “but we have a very recent example in the governor’s precipitous fall from grace that the more you crusade as someone having a transparent budget, open to the public, governing according to ethics, then the higher those accountability standards will be.”

-Backer of City Hall Openness Trips on a Budget Maneuver

On New York State Budget

Random Public Finance introductory courses

Public Sector Economics- McGill

Public Finance- UC Davis

Optimal Disaster Insurance

On the Optimal Design of Disaster Insurance in a Federation
by Timothy J. Goodspeed and Andrew F. Haughwout

Abstract: Recent experience with disasters and terrorist attacks in the US indicates that state and local governments rely on the federal sector for support after disasters occur. But these same governments are responsible for investing in infrastructure designed to reduce vulnerability to natural and man-made hazards. This division of responsibilities – regional governments providing protection from disasters and federal government providing insurance against their occurrence – leads to the tension that is at the heart of our analysis. We explore these tensions building on the model of Persson and Tabellini (1996). We show that when the federal government is committed to full insurance against disasters, regions will have incentives to underinvest in costly protective measures. We derive the structure of the optimal second-best insurance system when regional governments choose investment levels non-cooperatively and the central government cannot verify regional investment choices. Surprisingly, second-best transfer levels (and the corresponding regional investment levels) can be greater or less than their first-best counterparts, depending on the relative probability of a disaster. If the probability of a disaster is low, secondbest transfers will be designed to reward regions that succeed in avoiding disasters and punish those that do not, thereby giving regions an incentive to increase investment in protective infrastructure. However, this raises the further question of whether the central government can credibly commit to such a scheme, and we find that ex-post an optimizing central government will decrease transfers if a region provides protective infrastructure that increases its expected future income, generating a soft-budget constraint for regions. This provides an additional incentive for regions to underinvest in protective infrastructure. We discuss these results in light of recent disaster policy outcomes in the US.

Arnold Kling vs Peter Orszag

Arnold Kling disagrees with Peter Orszag;

Orszag argues, as others do, that because health spending is highly concentrated, catastrophic health insurance will not reduce spending very much. The point is that for very sick people, catastrophic coverage is like comprehensive coverage. This in turn suggests that there is not much to be gained by trying to tinker with insurance incentives.

I tend to disagree. First, I think that having a multi-year term for catastrophic policies, as sketched out in my book (soon to be out in paperback, by the way), would mean that a much larger percentage of health care spending would be subject to incentives than the typical analysis would suggest. Second, it is possible to restructure insurance to use co-payments rather than deductibles as the main mechanism for cost sharing. Third, if we were to phase out Medicare and replace it with actuarially fair catastrophic insurance, the remaining lifetime deductible (again, this is discussed in my book) would be so high that even high-spending consumers would still be responsible for much of their spending.

On balance, however, I am in the same camp as Orszag. Our camp believes that the United States could reduce health care spending substantially without hurting health care outcomes. However, the path to getting there involves lots of research into the efficacy of various procedures as well as changes in behavior (Orszag refers to physician norms as an example).

Econ Talks

"Health Care: Capturing the Opportunity in the Nation's Core Fiscal Challenge"
Peter Orszag, Director, U.S. Congressional Budget Office

"Diminishing Returns: Income Inequality in the United States"
Panelists: Alan Krueger, the Bendheim Professor of Economics and Public Policy and Director of the Survey Research Center at the Woodrow Wilson School; Douglas Massey, the Henry G. Bryant Professor of Sociology and Public Affairs at the School; and Viviana Zelizer, the Lloyd Cotsen '50 Professor of Sociology at Princeton.

Viviana Zelizer on Money and Intimacy

From Sub-Prime to Prime-Time -- A Debate On the Current Financial Crisis
Guillermo Calvo, Professor of Economics, International and Public Affairs, Columbia University; former Chief Economist, Inter-American Development Bank.
- Charles Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia University.
- Richard Clarida, C. Lowell Harriss Professor of Economics and International Affairs, Columbia University; former Assistant Secretary for Economic Policy, US Treasury, 2001-2003.
- Vincent Reinhart, Resident Scholar, American Enterprise Institute, Washington, DC; former Director of the Division of Monetary Affairs, and Secretary and Economist of the Federal Open Market Committee.

The Three Trillion Dollar War

For soft landing try fiscal

Achieving a Soft Landing: The Role of Fiscal Policy

Summary: This paper utilizes an open-economy New Keynesian overlapping generations model to assess the extent to which fiscal policy, along side an inflation-forecast-based monetary policy, could enhance macroeconomic stability in Colombia. The model simulations indicate that, in addition to stabilizing output and inflation, a stronger response of the fiscal balance to excess tax revenue would reduce the burden on the central bank of adjusting interest rates, lessen the associated degree of exchange rate volatility, and contribute to a more stable external current account balance. The analysis also assesses how the success of fiscal policy in enhancing macroeconomic stability depends on the type of shock, the response of monetary policy, and the length of fiscal policy implementation lags.

Tax Policy in Down Under

THE Rudd Government should scrap dividend imputation credits and instead reduce the company tax rate by about a third if it wants to increase investment in Australia, according to a tax expert and former Labor government adviser.

Nicholas Gruen, chief executive of Lateral Economics and Peach Home Loans, said dividend imputations — which allow companies to pass on to shareholders the benefit of Australian tax paid on profits — cost $20 billion a year but did not substantially improve a company's cost of capital.

Speaking at the Committee for Economic Development of Australia's tax forum in Canberra yesterday, Dr Gruen said imputation credits were an inefficient form of tax expenditure.

"The evidence suggests that it doesn't increase share prices," he said. "If you got rid of dividend imputations and spent the $20 billion on reducing company tax rates, you would make the shares much more attractive to foreign shareholders … The price would go up a lot and the cost of capital would go down."

Dr Gruen, who worked as an economic adviser to John Button as industry minister and John Dawkins when he was treasurer, said the $20 billion in tax revenue gained could then be used to lower the company tax rate from 30% to about 19%.

The Corporate Tax Association's executive director, Frank Drenth, and PriceWaterhouseCoopers partner Tim Cox expressed reservations about scrapping the system, saying dividend imputations helped the Tax Office monitor whether companies paid tax.

The forum also included a panel discussion on how to increase workforce participation. Australian National University research fellow and economist Andrew Leigh said Government should consider earned-income tax credits, which are used in the US and Europe. The credits are paid to low-income earners to provide incentives to work.

Ann Harding, director of the National Centre for Social and Economic Modelling, cited research released last year estimating that 910,000, or 7.1%, of working-age Australians faced an effective marginal tax rate of more than 50%. She said it was difficult to eliminate the problem, where people who earned more money faced the loss of government assistance.

Book recommendation to the new governor

The importance of the upcoming budget negotiations for Mr. Paterson was apparent throughout the day. In a radio appearance Thursday morning, he said he had not been heavily involved in drafting Governor Spitzer’s budget and would have to work quickly to gain command of the issue.

“I kind of feel like the student who’s getting ready for the final exam but they didn’t attend any classes,” he said in a radio broadcast on Fred Dicker’s radio program on Talk 1300 AM in Albany.

Mr. Paterson said he had been involved in other tasks while Mr. Spitzer ironed out a budget proposal and said he would rely on “those who have done this before, including Majority Leader Bruno and Speaker Silver.”

Reaching a budget compromise is almost never easy in Albany, and the task could be particularly difficult this year with the state facing a $4.4 billion deficit. To some extent, the budget is moving forward under its own momentum. Assemblyman Herman D. Farrell Jr., the Manhattan Democrat who heads the Assembly budget committee, said the Senate and the Assembly have just passed their modifications to the governor’s budget proposal. Conference committees, which will iron out a compromise, are scheduled to begin on Monday.

“It’s not going to be easy because he has 40,000 things he has to deal with,” Mr. Farrell said of Mr. Paterson. But he said the incoming governor was familiar with the process from long experience as a legislator and “I am comfortable in that he can come up to speed on it.”

-Paterson Faces Early Test With State Budget

Memos to the Governor-Introduction to State Budgeting
Dall W. Forsythe, Foreword by Governor Mario M. Cuomo

Not Related;
How a Blind Man Will Lead a State