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The latest Case-Shiller data are out, and the news is not pretty.  From The Washington Post yesterday:

The Standard & Poor’s Case-Shiller index shows that single-family home prices fell 4.2 percent nationally in the first quarter from the previous quarter, leading analysts to conclude that prices have fallen by more than they did during the Great Depression.

The article goes on to discuss that a rebound might come, eventually, when the backlog of foreclosures are worked through the system.  I am more pessimistic -- we are seeing these housing price declines in an interest rate environment that is designed to prop up prices through low mortgage rates.  Mechanically, when those rates begin to rise, there will be even further downward pressure on prices.  This ride is far from over.

 

Sydney Freedberg, formerly of National Journal, is the founder of the Learning from Veterans project.  Since 2004, he has conducted extensive interviews with over 200 veterans of the wars in Afghanistan and Iraq.  If you haven't done so already, today would be a great day to visit the project's website.  We were pleased to host him at the Rockefeller Center at Dartmouth last Veterans' Day for a presentation on "Policy at the Sharp End."  You can watch that video below:

I have been trying to find the right analogy for what the federal government is doing to the nation's finances.  I am torn between "the Treasury getting beaten at a game of Monopoly" and "fiscal policy as a game of Angry Birds."  If you would like to take a break from either one and read a sober assessment of our current macroeconomic outlook, with some surprising optimism about the construction sector, spend a little time with Brad DeLong here.  Here are the two paragraph that resonated most with me:

It is a fact that if congress simply goes home--doesn’t do anything for the next 10 years except keep the federal government on autopilot, or if it does do things if it pays for whatever increases in spending it enacts by raising taxes and pays for whatever tax cuts it enacts by cutting spending--that we do not have a long run deficit problem. If congress goes home for ten years our program spending is matched to our tax revenues, which means a declining debt burden because the growth rate of the economy is larger than the interest rate on our debt.

Our belief that we have a long-run deficit problem is based upon the belief that congress will pass laws that increase spending and that cut taxes--that it will repeal the Independent Payment Authorization Board's authority to try to make Medicare more efficient, that it will repeal the Affordable Care Act's tax on high-cost health plans. Given that the fear is based on a belief that some future congress will bust the budget, it is hard to see how we can address this fear through any possible piece of legislation today--for no congress can bind its successors.

Read the whole thing.

Earlier this week, reacting to the weak GDP growth rate of 1.8% in the first quarter, David Leonhardt wrote:

But our working assumption should be that this recovery will remain at risk for a long time. If it stalls out for a second year in a row, the consequences could be particularly bad. The specter of a “lost decade,” like Japan’s, would become commonplace. Pessimism would feed yet more hesitation from businesses and households.

So far, so good.  He then goes on to make the case for short-term stimulus of a particular form, as it is "the only way in which I can imagine Congress taking action to help the economy:"

At the end of this year, about $225 billion of temporary tax cuts and emergency jobless benefits are scheduled to expire. These provisions were part of the compromise bill in last year’s lame-duck Congressional session that also extended the Bush tax cuts. The Bush tax cuts were extended through 2012, however, while the other provisions — including a payroll tax cut for households and a tax cut for expanding businesses — expire at the end of 2011.

We are nearly forty -- that's right, forty -- months beyond the moment when we should have begun to commit to this level of additional spending per year.  The problem that we are experiencing in Washington is in part due to the absence of the notion that we should be getting long-term value for the spending that we do.  Why do we have to spend $225 billion on temporary tax cuts and emergency jobless benefits?  The answer that we would infer from Leonhardt's column, and the countless other columns like it, is little more than "we have to."  This is hardly persuasive, and I continue to think this is the wrong reasoning.

The right reasoning is that with aggregate demand lower by hundreds of billions of dollars a year, there are unemployed and underemployed workers and underutilized capital whose services could be purchased on the cheap.  If we have projects that add long-term value, this is the right time to be undertaking them.  Plenty of those projects are to repair and maintain our seriously degraded infrastructure.  Others are to make the upgrades necessary to plan for a future with different forms of energy transmission and communication.  Instead of fighting about which multiplier is the biggest and clingng to the misguided notion that all measures be "timely, targeted, and temporary," we should be building while it's cheap.

We should have started this years ago.  Given the continued worry about the fragile state of the recovery, we should start it now.

(If this is the first time you are reading my views, go here and here for the original presentation of the ideas.)

The way Ezra Klein tells it is largely the way I remember it, too.  Antecedents of President Obama's policies -- an individual mandate in health insurance, cap-and-trade on emissions, and some willingness to raise taxes to close deficits -- can be found in Republican policies of the George H.W. Bush era.  I supported them then and support them now, though in a way that comes from the right side of the political spectrum rather than the left.  More specifically:

• I would implement the individual mandate as a default into Medicaid with a fairly rapidly rising premium schedule collected on the tax form as income increased, rather than explicit subsidies for the purchase of health insurance.
• I would take cap-and-trade under the presumption that the permits are auctioned off rather than given away, and I'd prefer a comprehensive fossil fuel tax to either version of cap-and-trade.
• I would start my budget policy changes with letting the Bush-era tax cuts expire for everyone and cutting defense spending by at least 10%.  I would then move to the entitlement programs, phasing in increases in eligibility ages and other benefit reductions linked to income.  The small piece of the federal budget that's "non-defense discretionary" would also see reductions, but that's not where the heavy lifting can be done.  I wouldn't stop until the budget was in balance on average over the business cycle and the debt-to-gdp ratio was projected to remain steady at a number not larger than about 60 percent.

But I am not a dictator, don't think I should have the only or final word on this, and would expect to have to compromise.  I don't find Obama's policies to be beyond compromise.  Transported to a different era, Obama would have been a Rockefeller Republican -- actively using the government's powers to try to solve public policy problems and willing to go to the voters to get more revenues to do so.

The place where I disagree with Ezra's reasoning is here:

The normal reason a party abandons its policy ideas is that those ideas fail in practice. But that’s not the case here. These initiatives were wildly successful. Gov. Mitt Romney passed an individual mandate in Massachusetts and drove its number of uninsured below 5 percent. The Clean Air Act of 1990 solved the sulfur-dioxide problem. The 1990 budget deal helped cut the deficit and set the stage for a remarkable run of growth.

Rather, it appears that as Democrats moved to the right to pick up Republican votes, Republicans moved to the right to oppose Democratic proposals.

What was not wildly successful was the impact of the 1990 budget deal on President Bush's re-election campaign.  If politicians are not rewarded at the polls for the choices they make, don't expect other politicians to make similar choices.  The first move to the right wasn't by the Democrats.  It was by the Republicans on issues of tax policy.  More recently, this dynamic has been at work -- on issues not related to tax policy, the Republicans are moving to the right to oppose proposals that were previously part of their platform.

The Rockefeller Center conducted its fourth annual State of the State Poll among registered voters in New Hamsphire, with eye toward the first-in-the-nation primary early next year.  The headline result: Mitt Romney tops Obama in a head-to-head contest, 47-39, with the rest undecided.  Interestingly, the poll also finds that Colin Powell would win, 48-28.  No other Republican candidate gets a plurality matched up with the President.  Read the full results here.

Stories like this one in the AP by Ricardo Alonso-Zaldivar are much of the reason why I doubt that any forward-looking reductions in the growth of entitlement spending will ever be implemented.  Even when the reductions are part of the legislation, they are undone bureaucratically before they are implemented.  This is just the "doc fix" all over again.

Millions of seniors in popular private insurance plans offered through Medicare will be getting a reprieve from some of the most controversial cuts in President Barack Obama's health care law. In a policy shift critics see as political, the Health and Human Services department has decided to award quality bonuses to hundreds of Medicare Advantage plans rated merely average.

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The health care law itself tried to soften the impact of Medicare Advantage cuts by providing quality bonuses for highly-rated plans that received four or five stars in a government grading system.

Then, in a policy shift quietly completed this month, HHS decided to grade on the curve. Average-quality plans garnering just three or three-and-a-half stars would also get bonuses, although at a lower percentage than top-tier plans.

The title of the article is "Obama administration eases pain of Medicare cuts."  Nothing has been eased.  It has merely been shifted.  Someone else now has to endure the "pain" of financing this $6.7 billion.

Annie Lowery's provocative piece about budget policy is making the rounds this morning.  There is a lot to enjoy and a lot of familiar ground to disagree with, but the essential point is worth repeating:

So how does doing nothing actually return the budget to health? The answer is that doing nothing allows all kinds of fiscal changes that politicians generally abhor to take effect automatically. First, doing nothing means the Bush tax cuts would expire, as scheduled, at the end of next year. That would cause a moderately progressive tax hike, and one that hits most families, including the middle class. The top marginal rate would rise from 35 percent to 39.6 percent, and some tax benefits for investment income would disappear. Additionally, a patch to keep the alternative minimum tax from hitting 20 million or so families would end. Second, the Patient Protection and Affordable Care Act, Obama's health care law, would proceed without getting repealed or defunded. The CBO believes that the plan would bend health care's cost curve downward, wrestling the rate of health care inflation back toward the general rate of inflation. Third, doing nothing would mean that Medicare starts paying doctors low, low rates. Congress would not pass anymore of the regular "doc fixes" that keep reimbursements high. Nothing else happens. Almost magically, everything evens out.

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What I like about her argument is her point that it is not the baseline that has the deficits, it is all of the interventions that Congress and the President enact.  If you are worried about the defcit, stop intervening to extend the Bush-era tax cuts, stop extending AMT relief, and stop suspending the "doc fix" in Medicare.  And, I would add, if you are worried about the deficit, pick the low-hanging fruit first.  Recognize that a $700 billion defense budget is a lot for any country to bear and that 62 is an early age for the government to be facilitating the retirement of healthy people who could continue to work and pay taxes.

I was on a bit of a blogging hiatus over the past few weeks -- anything interesting happen while I was gone?  Part of the hiatus was to finish up work related to the end of Dartmouth's winter term, which had me teaching and grading more than usual.  Part of the hiatus was a vacation.  What I learned on vacation is that the TSA should outsource its staffing to Disney.  Nobody is better at crowd control or the customer's experience.  And part of the hiatus was to write up some ideas on entitlement costs and the design of programs.

I consider the health care legislation last year to be a new entitlement programs, on a par with Social Security, Medicare, and Medicaid.  Certainly the funding obligation is there -- the gross costs of the Medicaid expansion and the premium subsidies will each be running about $100 billion per year by the end of the decade (see Table 2 of this CBO report).  So I began to wonder about whether aspects of this legislation will have some of the same issues that the other entitlement programs have, and, in particular, what the interactions with labor force participation will be.

The premium subsidies raised some concerns.  The basic design is that eligibility for a premium subsidy is based on whether income (a modified adjusted gross income) is within 400% of the federal poverty level.  You can see the full list for 2011 here.  For the example, let's consider a married couple, for whom the FPL is $14,710 (outside of Alaska and Hawaii) and thus 4x that level is $58,840.  Every couple with income less than that number has its premium capped as a fraction of income.  At the maximum level, the cap is 9.5% of income for the premium, or $5,590 for this couple.  (See more in this brief from the Kaiser Family Foundation, whose site is indispensible.  The brief also discusses the out-of-pocket maximums that would apply in this example.)

The concerns that I have stem from the linking of the subsidies to current income.  If the couple is retired, current income is low -- for most retired couples, it seems like $58,840 is sufficiently high that they could live below that threshold and thus qualify for the subsidy and the low premium for health insurance. So I fear that we have just encouraged and facilitated older workers to leave the workforce.  Recent research (see Figure 3 on page 26 of this paper) indicates that people tend to retire at age 62 if their health insurance status will not change by doing so (e.g. they either don't have health insurance or they have both employee and retiree health insurance) but wait to age 65 if their health insurance status would change (e.g. they have employee but not retiree health insurance).  So the premium subsidies will likely encourage more retirement at age 62 for those who previously were waiting until age 65.  And the effect will be seen at earlier ages as well.

I am not against low premiums -- I am against low premiums for retired people who could still be working when the subsidy comes from taxpayers.  As I have previously advocated for means-testing in Medicare, the way to fix this is to have the premiums related to lifetime income, not current income.  There are several permutations on this idea, but the simplest way to think about how it would apply to most people is that you would calculate their Average Indexed Monthly Earnings, as if they were going to get Social Security Disability benefits based on their earnings to date, and base the premium thresholds on that.  Since the AIME is based on a lifetime of work, retiring and thus presenting with low current income would not generate a premium subsidy unless lifetime income was also low.  (For spouses who will likely claim as a dependent or for widows, use the AIME of the person whose earnings history forms the basis of their benefits.)  So perhaps we would encourage less retirement (and loss of tax revenue that comes with early retirement) and more effectively target our subsidies.

Here are two headlines and excerpts to make a budget wonk smile, both from The Wall Street Journal:

Promise on Taxes Sparks GOP Rift

Two decades after President George H.W. Bush abandoned his "read my lips" promise, some Republicans are chafing at their party's stand against new taxes.

A few prominent GOP lawmakers believe they will have to raise some tax revenue if they are to bring Democrats along on a bipartisan compromise to address the U.S.'s long-term fiscal problems. Many Democrats want higher taxes to cover at least part of future budget gaps. That has led to clashes between Republican lawmakers and a Washington advocacy group, Americans for Tax Reform, the self-appointed keeper of the party's anti-tax flame.

Democrats Split on Social Security

Democrats have broken ranks over a move to consider Social Security changes—including possibly raising the retirement age—to ensure its long-term fiscal health in combination with an effort to reach a deficit-reduction package.

The idea of putting Social Security into play has triggered a firestorm of opposition from several corners of the Democratic party. Senate Majority Leader Harry Reid (D., Nev.) and Sen. Chuck Schumer (D., N.Y.), two of the Senate's most powerful lawmakers, have said revisions to Social Security shouldn't be attached to a deficit-reduction plan. They argue the program's benefits are covered by giant trust funds that have no impact on the deficit.

Rift and split -- very nice.  (And clashes and firestorm, too.)  Does any sensible person really think we will (or can) achieve deficit reduction without new revenues?  Ditto for leaving entitlement programs with the same generosity of benefits that they currently entail?  Of course not.  It is about time that political parties and their dubious contributions to crafting better public policy took a back seat to the need to address our budget problems like adults.