Bill Bradley's New American Story is an intriguing yarn, spot on in some places and patchy in others. It's clear that Senator Bradley talked to a few smart people before he put together his proposals; it's also clear that if he asked any economists for advice, he often ignored it. Perhaps that will endear him to his readers but it didn't always endear him to me.
Take the senator's view of debt. He's right that national debt is a tax on our children: it results from spending now that will have to be funded by taxes later. Is that so wrong? Imagine traveling back in time to the Great Depression to tell your great-grandparents to build fewer roads and pay more taxes so that the national debt would be smaller today, letting you buy a flat-screen TV without worry. Would that be fair, or would you decide your great-grandparents had enough troubles?
The same reasoning tells us that our children are likely to be richer than we are. I know they don't look it at the moment as they toddle around in diapers, but they'll be relatively rich. And don't the rich deserve to pay more tax?
In any case, if you're worried about the tax burden on your kids, you could always put beef up their inheritance. Since you're enjoying government spending programs that aren't being paid for by your taxes, you should be able to afford it.
We shouldn't worry so much about debt, and that becomes clear when you realise how hard Senator Bradley struggles to explain why it's bad. In one breath he's concerned that debt will mean high interest rates, which would be scary. But in the next breath he's worried that interest rates are very low: that's apparently scary too. Surely it can't just boil down to "interest rates are low, which is bad, because one day they might be higher"?
Here's my suggestion: we should stop worrying about government debt and start worrying about government spending. If we're confident that the government is spending our tax dollars better than we could - which it may well do, since I'd struggle to get the neighbours together to pay for roads or a police force - then all well and good. When we see foolish government spending, that should worry us, no matter what the debt is.
In this respect, government debt is not so different from personal debt. The debt is not the problem: the problem is what you did with the cash, and whether you think you can pay it back. If you borrowed $250,000 to buy a house, congratulations! If you borrowed it to go to Vegas, that's not so good...
But the senator has some smart things to say about tax. He wants to cut it on income and labour and partly replace those taxes with a tax on gasoline and carbon emissions. Unless you hate it when people make money and love it when they choke the planet, this is a very sensible idea. People usually do less of whatever gets taxed. Which would you rather see less of?
Another good point: inequality in America has been rising for years. And Senator understands that technology is as much to blame for this as global competition. If why try to shut out either of those we'll all be poorer for it. So what to do?
This is a difficult one. I don't think the education system has necessarily gotten worse, but the truth is that it was always bad for some of us, and that matters much more than it used to. We need to do much better.
Senator Bradley's idea is - here I paraphrase - to subsidise college tuition for smart kids who went to bad schools. That's not a terrible idea, but I wonder if it will be enough? Those kids have a 14 year disadvantage to overcome: it's a late, late intervention.
Better would be to improve the schools, and my guess would be that the quickest, most effective way to do that would be to give parents an education grant that they could spend sending their children to any school, public or private. The evidence on school choice from places such as Sweden suggests that when parents have this kind of choice, the public schools improve dramatically. Competition works well in most parts of the economy - why not give kids the benefit, at a time when it matters more than ever before?
The Senator has a lot to say for himself, but I'm going to wrap up here. I look forward to hearing what other people thought of his ideas on the economy.
Tim Harford is the author of the international bestseller, The Undercover Economist, available from Random House.
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Comments: 27
I would like to see a return to zero based budgeting in which every department has to justify its budget and headcount in terms of actual work/need every year rather than just asking for a smaller increase.
The second thing I'd like to see done is public accountability for every penny slipped into appropriations bills. This would name the person proposing it and who benefits. On top of that, I personally would like to see one of two things happen when it comes to appropriations bills: either there could be no pork whatever in them and the pork bills have to stand on their own as individual bills, or if that's too many bills at one time, there could be an omnibus pork bill, maybe we could call it Porky, which would contain them all.
We need to stop spending money on teapot museums and bridges to nowhere that benefit a handful of people at best, and concentrate on things like our schools. Rather than funding tuition for kids who are not prepared for college (though that's a great idea) I would also like to see funding for special preparatory schools for smart but poor kids who otherwise wouldn't qualify for college because of their schools. This would pay the country back multiple times in terms of the taxes these people would pay later.
Another tax friendly school reform would be to recognize that not all young people are college bound. Offer them legitimate vocational training as part of their high school education. Training for real jobs in the real economy. Imagine for a minute what that would do in terms of a ripple effect. Trained kids. Ready to work when they leave high school, with skills employers need. There could even be cooperation between businesses and schools to ensure that the training met the employer's needs. Make sure these kids can also read and write, have a sense of history and social sciences, etc. but give them skills that enable them to be contributors rather than drains on society.
Finally we could prioritize our spending based on the amount of money in the Federal budget. If we're flush then lower priority items might be funded. If we are not, then they have to wait. The government should be accountable for what it spends. War spending should be a separate item, but I personally want to see how much of those billions are being poured down a rat hole because of shoddy or nonexistent accounting practices, waste, and graft.
We're all in favour of less waste and I have a lot of sympathy with your post. The question, of course, is how to get there. "No pork" is a nice idea, but pork is hard to define, isn't it? As for pouring money down rat holes, remember that the original "rat hole" for US government money was South Korea - that spending turned out to justify itself a hundred times over. You never know.
Accountability has to be a good idea: how to get more of it? An idea I'd like to see used more often is the controlled trial for goverment programs. (Search for "MIT Poverty Action Lab" or "Moving to Opportunity" for two examples.) The world is a complex place and we don't always know how well a program is going to work. A randomised trial helps to provide more information in a murky world.
I'm not saying that concern about public debt is misplaced, but that all sides of the story must be considered.
We fail to point out that a person making a million a year can handle more debt than a person making 50,000 a year and that is kind of how we as a nation relate with our national debt. Historically it is not so high in percentage and we can handle it. Priming the pump as Kennedy, Regan and Bush did is beneficial and will correct things.
However, the pork barrel spending is terrible and do you feel if campaign finance was not supported so much by special interests it would give more power back to the people.
Gingrich had a good contract with America and cut spending dramatically but our politicians of both parties are now out of control.
Have you looked at the Fair Tax? I have read everything I can get my hands on about it and done some estimating myself. It would correct many problems, not increase the cost of products (I can justify that statement) and put a control on government spending. (Not borrowing-just spending) because it takes control of the tax code deductions away from the politicians. It also increases everyones income. (I can prove that too)
Yes, we need competition in education.
No, we do not want to tax items that we need, I suppose Senator Bradley thinks that backetball tickets would be great to tax because many are sold at high prices. So when people stop going to games he might get the point.
Thanks for some clear thinking. Please give us more.
I'm not convinced that the Fair Tax will solve all these problems: one of the reasons the tax system is complex is because apparently-simple concepts such as "income" are hard to define.
That said, I think there's a lot of opportunity to simplify the tax system, to raise the same amount of revenue while causing less damage to the economy. For a discussion, search for my recent Financial Times article "Emission Impossible".
(For a sillier discussion check out my piece in Slate, "Tax the Middle Aged". Not everyone has realised the article is a joke...)
There are links to all these articles on my website, timharford.com/writing.
Best,
Tim
First, thank you for a simply put, but well-detailed, view of the ecomony chapter of Senator Bradley's book and of the American economy in general.
Second - "The same reasoning tells us that our children are likely to be richer than we are. I know they don't look it at the moment as they toddle around in diapers, but they'll be relatively rich. And don't the rich deserve to pay more tax?" That has to be the best 'spin' I have ever heard put on the 'rich people should pay more taxes' argument. I love it.
Third, I could not agree more that it is government spending with which we need to take issue. The amount of waste in even simple things like electric bills is astounding. The lack of an established telecommuting policy for federal employees is also a contributor (imagine the commute benefits and time away from work we could save!). Finally, the fact that an agency must spend all of its dollars to receive more the next fiscal year (or the same amount under a continuing resolution) is frightening... so many wasted dollars just to spend for the sake of spending.
Sorry you think I'm naive and ignorant.
You are quite right if you think that real interest rates will rise if the creditors of the US government start to doubt its ability to repay. Senator Bradley rightly makes this point. But the Senator is also worried that interest rates are low. If he is worried that rates are low and also worried that they will rise, I am not sure what he really thinks.
Look at it another way: debt was far higher after the second world war - almost twice as high - but the government found it easy to pay down that debt and, indeed, was lending money to us over here in Europe. (Thanks guys!)
So the question isn't really about whether the US can afford the debt. Of course it can. The question is whether you should pay the taxes or your kids should. (If you think you should, raise tax yourself by raising their allowance - or inheritance.)
An even more important question is whether the money is being well spent. Several commenters are concerned about that and I think they're right.
Cheers,
Tim
the house that Jack built, but it makes sense to me.
Hard to argue with that. But how? I find the research on school choice quite suggestive: even without extra funding, when schools face competition they do better.
Best,
Tim
There is a complex balance of many factors is judging the importance of debt in forecasting the coming years. We cannot just look at the debt amt during a slice in time (i.e., post WWII) and compare it to an isolated figure right now. We must be looking at where that debt falls in the overall scheme of things. Our major traditional markets are not doing well right now (automobiles, for instance) and these are markets that assuaged the post-war debts. We are moving more and more of our service economies overseas as communication technologies progress. These are just a couple of factors that go into not boding well for a large debt in the future.
I do agree that we need to spend smarter, and that can mean taking some things out of the private capital markets and putting them back in government (i.e., Medicare drug negotiating and purchase). I do most heartily agree that we need to improve our education here in the states - not just putting more money into it, but really revamping it to provide our next generations to support new industries we will need to maintain our economy.
Again, sorry for the misunderstanding. Must be a language thing. : - )
No need to apologise, but thanks.
What you're really saying, then, is that you think that America's future growth prospects look grim because older industries are struggling. That might be true but there's not much evidence of it: we Europeans would love to have the dynamism of your new industries (software, law, medicine, finance). They may not make stuff you can drop on your foot, but they make stuff that many people value. There's still a tax base out there.
I absolutely agree that we need to get education working well to keep that dynamism up - hence my title "Fix the schools, but..."
Hey! Looks like we're starting to agree after all!
Yours,
Tim
Don't be too optimistic about our "new" industries. Many of the jobs connected with those industries are going overseas. I have no problem with off-shore out-sourcing - I say, if India has the wisdom to push their kids to excellence in higher education, then they deserve the jobs. What I'm saying is that eventually, you can't have a growing, prosperous economy if you don't have a solid consumer base. It's no secret that we are getting more and more dependent on personal credit (debt, if you will) and buying into the "buy now, pay later" philosophy. That can be very dangerous in the long run. Most of our population do not have the social safety nets to fall back on as most Europeans do.
Having said that, I am eternally optimistic that Americans will continue to develop new economies - we lead in research in many areas at the moment. But we need to watch the fact that government is continually bowing to the big guys in the field and not supporting these new industries (i.e., stem cell research). More and more of this cutting edge R&D goes off-shore. I don't think it will end until the fat-cat CEO's of some of these aforeprivaleged industries collapse under their lack of foresight and their increasing greed. (Gosh, that sounds a little socialistic, but I'm a small business owner who believes in free markets, really I am!)
If you are a Brit you probably don't mind too much since the fourth of July really isn't your favorite holiday and you would probably like to see America get its comeuppance.
What you need to think about though is that if it were not for fortress America and an endless stream of men and material you would be speaking German now. Back then we could produce anything. Now we can't produce anything. Meanwhile the Chinese are building a industrial giant and arming itself to the teeth with all of the technology it can steal or buy. One day they will challenge the west for world dominace and fortress America won't be there. Are you working on your Chinese Tim?
If they tax the oil companies, for example, I hope they devise a way to make sure the tax comes from profits and isn't passed along to the pump.
Personally, I'm not so sanguine about the national debt, especially when we realize how much of our current budget is wasted. I know it's important to have a strong military, but do we have to spend over half of what is spent throughout the world?
Many elements are in place for a resumption of inflation, although there is perhaps a 50% chance of deflation. However, should we go on an inflation run as we did in the eighties, has Bradley considered the impact of the interest costs on a debt that, i suppose, with his lack of concern, could be somewhere between $10 trillion and $20 trillion by then? It would not be an historic event if our interest costs rose higher than our military expenditures under such circumstances
I believe much of the public felt quite comfortable with the way Clinton handled the budget and, while it may be unrealistic to duplicate that record, it would be nice to at least see a move towards fiscal sanity.
I think the school funding proposal is very interesting, and it seems that such a competitive system might finally produce positive results. Something definitely needs to be done in a different direction from the way we are going today.
When my father went into WWI in 1914 (in the Canadian Army) immediately after graduating from what we would call high school he kept a diary. In reading that chronicle of his four years in combat, it was obvious that his command of the language was far superior to that of the young people today coming out of high school.
And his entire schooling up to that point had taken place in a one-room schoolhouse. That convinced me that it's not how much you spend on education, but rather how you spend it.
Thanks again for the fine post.
One of my points of disagreement is on the carbon emissions tax. Think about the possibilities; everyone breathes carbon emissions into the atmosphere, so everyone can get taxed. How about an extra tax on smokers, for their extra carbon emissions?
If technology and global competition created inequality in America, I'm a monkey's uncle. Technology, competition, and inequality have been around much longer than America has. "Global" is the key word missing from my last sentence. Technology has exponentially increased global commerce, but competition has been "global" for several hundred years.
My last strong dissent is that I believe the public education system has gotten worse over the last 30 years. I agree with your solution, though. I've written a few posts on the public schools, and am a strong supporter of vouchers.
I'm watching NYS battle over charter schools, which are supposed to introduce "competition." Gov. Spitzer has caved to the UFT on union rules, and number of new charters allowed. He is even allowing the union to open their own charter school. This ought to be interesting, but the real competition is whether the charters will survive as real "competition," if the UFT has it's way.
Education has been on a downward spiral for a long time. The new fads in education are similar to some of the nonsense I encountered in the mid '70's, when I first went to a public school. It probably started before then, but I think that it's gotten much worse since the establishment of the federal Department of Education.
Public sector unions contributing to political campaigns of politicians in office are "paying off the boss" for their perks; the taxpayer and voter be damned. In the case of the UFT, the children be damned, as well. They won't give up the status quo without a huge, and messy fight. I doubt Gov. Spitzer's up to it, in NYS.
best,
Tim
Sheryl: Absolutely right about the power of big business. There's a difference between being a supporter of markets - as you and I both are - and a supporter of big business. Markets depend on competition; big business prefers to do without that!
Christopher: I'm not saying you're a monkey's uncle, but... check out the recent work by the IMF (World Economic Outlook) or recent remarks by Ben Bernanke, or the original research by Kevin Murphy of Chicago GSB. They all think that technology has created a bias in favour of the skilled worker. Not that that's inevitable (in the industrial revolution, technology helped the unskilled worker) but it's what's happened recently. I'm sure you'd enjoy the read, you're clearly thinking hard about this stuff.
Carbon/gasoline tax commenters: Sorry, but the idea of the tax is to raise prices at the pump! The US has had much lower levels of gasoline tax than Europe, and as a (partial) result uses five times more gasoline per dollar of wealth created than Europe does. (Source: IMF, World Economic Outlook April 2007) There's big scope for efficiency savings without destroying the quality of life.
I believe in the tax because I think that's far more efficient way of meeting legitimate environmental objectives than with rules and red tape.
And since I don't actually like taxes - they're no fun to pay, are they? - I think the government should cut taxes elsewhere to make up for the increased gasoline tax.
Phew! Enough politics. I'm going to get back to my real passion: handing out dating advice using economic theory.
Check out: http://www.timharford.com/writing/labels/DearEconomist.html or search me out on YouTube...
I do not agree with the suggestion of giving out grant money to send children to what ever school a parent wants...the focus needs to be in maintaining ALL schools with the best quality of tools, and teachers and healthy safe environments.. for those of you who have children with learning disabilities...and your schools have only recently put in programs that help them...My children were attending a school in Barrington Il in 1966, and they had a program there at that time - for children with learning disabilities...yes 1966...and there were at least 3 different authors of education that had books out to assist parents with these children...when we moved away in 1968 to 4 other states over the years...not one of the schools the children attended had a program such as Barrington...If it could work there - it should have worked everywhere...and it was a public school system.
I hate to say this, but any time there is grant money or freebies, you have an element of society that misuses and takes advantage of that money for other reasons - and the kids never see it...small % I'm sure - but never the less a temptation.....
I find taxes on luxury items and gasoline reasonable...if someone thinks nothing of paying $85,000 for a Mercedes - goes over to Europe to make the purchase to save money, where here it would cost $125,000 or can afford other cars - boats in the 6 to 8 digit numbers, should not be concerned about a luxury tax....I am not saying the person that buys a Chevy or Ford should not also pay taxes on their automobile..but then if they have to have an 8 ton truck...they are going to use more gas...so knowing that when they make the purchase...know they will be paying more at the pump...
Recently it was reported that Mr. Gates of MSFT has funded a school in one of the eastern inner city areas...picking up the tab for teachers and building and equipment...that tells me...our educational system is not dealing with skilled workers that will be needed for the future...
Great article - great book!
As for schools, there is absolutely a great deal of room for improvement. As a student at one of three state universities (my classes are all online, so my computer is also not a luxury item!), I am amazed, offended, and saddened by the quality of my classmates' (and even sometimes my instructors') writing skills - or lack thereof. These are college students (implication: high school graduates) who cannot - or don't bother to - create a literate sentence with correct spelling and punctuation. It's embarrassing! Yes, competition for students might improve the available options for schools. But I think (daughter of a public school teacher, here) one of the best things we can do for our children is to pay teachers a decent salary, in which case not quite so many teachers will leave the schools for higher-paying jobs in business. Several years ago, in an attempt to slow the flight of teachers, Connecticut made their teachers the highest-paid, on a statewide basis, in the country. Since I now live on the other side of the country, I haven't heard how it's working, but I have my suspicions that it's working just fine. Most people become teachers because that's what they want to do, not for the money. But they leave teaching because they can't afford to raise their own families - or to have them. If the salaries teachers are paid are mediocre, then mediocre teachers are the best you can hope for. Don't our children - and our economy, and our country - deserve better than mediocre? There are always exceptions, but excellent, caring teachers should be the rule, not the exception.