Month: November 2010

NYT: You Fix the Budget

Over at the New York Times, David Leonhardt, Bill Marsh, Shan Carter, Matthew Ericson, and Kevin Quealy have prepared a great online tool for analyzing federal budget options.

Your charge, if you choose to accept it, is to assemble a combination of spending cuts and tax increases that will adequately reduce the budget deficit balance the budget in 2030. To do so, you will need to find $1.355 trillion in budget adjustments.

I particularly like their decision to list cutting foreign aid in half ($17 billion) and eliminating earmarks ($14 billion) as the first two items. These are popular options in many circles, but they are small potatoes when it comes to the overall budget. Choose both options and you still have $1.324 btrillion to go.

Good luck.

* As Vivian Darkbloom notes in the first comment, I originally misread the goal for this exercise. The graphic refers to closing the budget gap, which I mistook as budget balance. David Leonhardt’s accompanying blog post makes clear that the goal is essentially getting down to a sustainable deficit level, which is an easier target.

Budget Process Reform with Judge Judy and PowerPoint

Scott Adams recommends a unique budget process reform:

There’s a TV show I’d like to see, perhaps on public television, or on the Internet. The premise is that the President of the United States sits in a room with economists and prepares his three-slide PowerPoint presentation to the voters on the topic of raising taxes versus cutting spending to balance the budget.

Now add Judge Judy, or someone with a similar skill set, to run the meeting and cut off the participants when they don’t offer brief answers to clear questions. Also include several economist/researchers who are there to verify the accuracy of any assertions made during the meeting.

During the course of the show, as Judge Judy (for example) nails down certain facts, the facts are put on the PowerPoint slide for viewers to keep track of what is settled. When enough facts are assembled for a verdict, Judge Judy and the President discuss what they have learned until the President arrives at a conclusion that is consistent with the facts. And if the data doesn’t point in a conclusive direction, the President would be free to make his decision on some sort of principle, such as fairness, or practicality. At least the decision process would be transparent.

Adams was motivated by his (quite correct) observation that Americans aren’t familiar with key budget facts:

I thought of this idea after reading the comments to my recent blog about the national debt. It’s clear that no citizen has enough information to justify an opinion on raising taxes versus cutting spending. Everyone, including me, seems to have a handful of questionable factoids and some dogma. That’s it.

I somehow doubt the President will sign up for this form of reality of TV. Which is unfortunate. Judging by this year’s uninspired lineup, primetime would benefit from some economists playing with PowerPoint.

DC’s New Mayor Should Say No to Taxi Medallions

I love taxi medallions.

As an example for my microeconomics students, not as policy.

Just last week, I used New York City’s medallion system to show how an entry barrier — the requirement that each yellow taxi have one of a limited number of medallions — could create profits in an otherwise viciously competitive industry.

How much profit? Well, according to the most recent data from the city’s Taxi and Limousine Commission medallions for independent cab drivers traded at between $610,000 and $620,000 in October. If you figure 8% as a reasonable rate of return of this asset, that translates into almost $50,000 in pure profit each year from driving a cab, thanks to the entry barrier.

Good exam question: Who gets that profit? Hint: It isn’t the cab driver, who either has to lay out $600,000+ for a medallion or lease one at perhaps $50,000 per year.

Of course that profit comes at the expense of taxi riders, who face a double whammy: they pay more for the cab rides they can get, and they end up taking fewer cab rides (the latter effect is known as a deadweight loss – society loses the benefit of the cab rides that would have happened without the medallion system).

Given that background, I was horrified to learn from Matt Yglesias that taxi drivers in Washington DC are lobbying Vincent Gray, the city’s new mayor, to introduce a medallion system. Yglesias quotes Alan Suderman of the Washington City Paper thusly:

Derje Mamo, a taxi driver who helped run transportation for the mayor-elect’s campaign, said cabdrivers already are pushing Gray to reshape the Taxicab Commission and allow for the creation of a medallion system. A medallion or certification system would limit the number of cabs operating in the city. Proponents of such a system argue that too many taxis are flooding D.C. streets. ‘He’s got one year, that’s it,’ Mamo said.”

As Yglesias notes, this is a really bad idea. There’s no reason to believe that there are too many cabs on DC streets (except, of course, from the view of cab drivers who hate the competition), and in some neighborhoods there may well be too few. A more plausible concern, as some commenters on his blog note (but I can’t link to because of some glitch), is that current taxi fares might be a bit too low. Taxi fares are still a new thing in DC–until 2008 the city had a zone system that many passengers, myself included, found bewildering–and it may be that the initial levels weren’t set exactly right. If Mayor Gray wants to do something for the cabdrivers, he should ask the Taxicab Commission to ponder whether some upward tweaks to fares might induce some extra supply that passengers would value.

Update: For further discussion, please see this later post.

October Rail Traffic – Still Upbeat

October was another solid month for America’s railroads, according to the Association for American Railroads. October traffic was 11% higher than the depressed levels of a year ago:

Intermodal traffic (think trailers and containers) is up 14% over 2009, thus returning to 2008 levels:

Carloads (think bulk materials like coal, grains, minerals, and chemicals plus autos) are up almost 9%:

Behold the Power of Cheese

American cheese policy is full of contradictions. (If it were full of holes, it would be Swiss cheese policy.)

What, you didn’t know America has a cheese policy? Well, we do, as part of our larger dairy policy. And over the years the dairy policy’s failures have led to caves full of uneaten cheese, subsidized cow euthanasia, and, as Michael Moss documents in the New York Times this morning, the creation of a marketing board whose goal in life is to encourage Dominos and Taco Bell to use even more cheese on their pizzas and quesadillas:

Every day, the nation’s cows produce an average of about 60 million gallons of raw milk, yet less than a third goes toward making milk that people drink. And the majority of that milk has fat removed to make the low-fat or nonfat milk that Americans prefer. A vast amount of leftover whole milk and extracted milk fat results.

For years, the federal government bought the industry’s excess cheese and butter, an outgrowth of a Depression-era commitment to use price supports and other tools to maintain the dairy industry as a vital national resource. This stockpile, packed away in cool caves in Missouri, grew to a value of more than $4 billion by 1983, when Washington switched gears.

The government started buying only what it needed for food assistance programs. It also began paying farmers to slaughter some dairy cows. But at the time, the industry was moving toward larger, more sophisticated operations that increased productivity through artificial insemination, hormones and lighting that kept cows more active.

In 1995, the government created Dairy Management Inc., a nonprofit corporation that has defined its mission as increasing dairy consumption by “offering the products consumers want, where and when they want them.”

Dairy Management, through the “Got Milk?” campaign, has been successful at slowing the decline in milk consumption, particularly focusing on schoolchildren. It has also relentlessly marketed cheese and pushed back against the Agriculture Department’s suggestion that people eat only low-fat or fat-free varieties.

The pro-cheese policy thus runs exactly counter to the anti-cheese policy of the Agriculture Department’s nutrition efforts.

The whole article is worth a read for its glimpse into how Dairy Management operates. The organization is private in many regards, most notably the $633,475 in CEO compensation. But it is ultimately financed by the power of the government, which imposes a levy on dairy farmers. The standard argument in favor of this structure is that dairy marketing is a public good, from the perspective of the individual farmers, and that the government role is necessary to coordinate that activity. On the other hand, many industries manage to create trade associations without any government role.

With rising concern about obesity, perhaps now is the time to get the government out of the cheese marketing business? Dairy Management could still exist as a fully private entity, but the government would no longer face a conflict between encouraging healthy eating and pushing quesadillas.