Tuesday, April 11, 2017

Auctioning Off the Friendly Skies

This is the smartest commentary I have seen yet on the mishap of United Flight 3411. Regulated companies have to produce policies and then abide by them. Failure to abide by their own policies is what gets these companies into an extra layer of trouble. This could get mighty expensive for United. Frankly, it should. This is a completely unforced error.

I have another suggestion -- that airlines augment their policies for how to deal with flights where passengers have to be asked to give up their seats. Instead of running the auction to get volunteers right on the spot, when emotions and other factors come into play, run it at the time the tickets are purchased, when people are more dispassionate. Give people a few different options, like:
  • re-booking on the next flight, even if the next day (an option only for those originating rather than connecting in the city), plus some token compensation
  • re-booking on the next flight, but only if the same day, plus some token compensation
  • ... all kinds of progressively juicier compensation ...
  • two vouchers for first class travel anywhere a partner airline flies
You get the idea. Then the gate agents can call names and give people what they signed up for. For many travelers, this would become part of their stored profile with the airline. For others, it might change for each flight depending on whether it is a business or leisure trip. In any case, it will save tears (and worse) later on.

Update: More good commentary here, highlighting some of United's constraints due to federal regulations and union rules. Quoting:

Department of Transportation regulations set maximum required compensation for involuntary denied boarding (in this case 4 times the passenger’s fare paid up to a maximum of $1350). So they’re not going to offer more than that for voluntary denied boardings, especially since the violent outcome here wasn’t expected and the United Express gate agent had no authority to do more.

So my (somewhat facetiously) proposed options should be simpler -- 1x, 2x, 3x, 4x ticketed price up to the cap, possibly subject to how the transportation will be completed. The limited room to negotiate when the shortage is at hand makes it even more important to resolve these potential conflicts ahead of time.

Update: And other one, describing both Delta's check-in questions and an alternative that gamifies the shortage.

Thursday, April 06, 2017

Tax Cuts and Growth, or Not

In yesterday's New York Times, Neil Irwin asks, "Do Tax Cuts Really Spur Growth?" I am quoted as follows:
“The basic finding in the literature is that it’s very hard to detect a robust impact from changing taxes to growth,” said Andrew Samwick, a Dartmouth economist who co-wrote a review of the evidence. “If you look across countries, unless they’re actually out there confiscating assets through their tax system, you don’t find a strong relationship.”

In other words, there are countries with high or rising taxes that have strong growth, and countries with low or falling rates that don’t.
The review in question is this paper with Bill Gale of the Brookings Institution, which has recently been published in a conference volume on The Economics of Tax Policy, edited by Alan Auerbach and Kent Smetters.

What I had in mind in the quote is this recent article by Nir Jaimovich and Sergio Rebelo, "Nonlinear Effects of Taxation on Growth," from the February issue of the Journal of Political Economy. Consider their abstract:
We propose a model consistent with two observations. First, the tax rates adopted by different countries are generally uncorrelated with their growth performance. Second, countries that drastically reduce private incentives to invest severely hurt their growth performance. In our model, the effects of taxation on growth are highly nonlinear. Low tax rates have a very small impact on long-run growth rates. But as tax rates rise, their negative impact on growth rises dramatically. The median voter chooses tax rates that have a small impact on growth prospects, making the relation between tax rates and economic growth difficult to measure empirically.
The notion that it is very hard to find a systematic effect of tax rates on long-term economic growth is common knowledge in academic circles. My favorite quote on the matter is a 20-year-old remark that Bill Easterly made in discussing this paper by Joel Slemrod, "... the data mock attempts to discern the growth effects of taxes ..."

Note that this is a different question than whether a cut in tax rates can spur economic activity in the short run. Reducing tax rates, without reducing current spending, can shift economic activity from the future to the present, and this will be measured as growth in the economy financed by an increase in debt. But this is not long-term economic growth. Economic activity will be lower in the future when either tax rates are increased to retire the debt or the interest payments to service the debt crowd out other spending. Shifting economic activity forward within a multi-year period is not economic growth when measured over the whole period.

Tuesday, March 28, 2017

How Successful Was the Tea Party Movement?

Over Dartmouth's recent spring break, I made some lunchtime remarks at a meeting of the Dartmouth Club of Dallas. The theme of my remarks was that we have recently seen, or will soon see, the poor outcomes of trends that have been a long time in the making. I used some examples that have been the subject of blog posts -- the depopulation of urban areas in the Midwest that put Wisconsin, Michigan, Pennsylvania, and even Ohio in play for the Republicans in 2016; the chronic underfunding of state and local pension plans; and the impending financial consequences of the Baby Boom generation shifting from being a large, productive cohort of contributors to old-age entitlement programs to being a large cohort of program beneficiaries.

On this occasion, I added a new outcome that we should have expected based on recent events. The election of Donald Trump represents the culmination of the Tea Party movement. Here's what I said:

As much as the media fomented stories about discord between the Trump campaign and the Republican establishment, Steve Bannon and Reince Priebus – reflecting the insurgent and the traditional elements of the Republican Party – were working together on Trump’s campaign since at least August 15th.

In light of this, I think we have to acknowledge that the Tea Party is one of the most electorally successful political movements in our lifetimes. I say electoral success – this does not necessarily imply ideological or policy success. And it has achieved its success without much formal, top-down mobilization. Recall that this movement began in February 2009 in opposition to Obama’s early policies, particularly his announced plans to give financial aid to bankrupt homeowners but also including the stimulus bill and eventually Obamacare. Some elements appear to be for a smaller public sector and lowering the public debt, but others have shown up to town hall meetings with, shall we say puzzling, slogans like, “Keep your government hands off my Medicare.” (In fairness, though, we do refer to Medicare as an “entitlement program,” so eventually people might start believing that.)

As an aside, lest you think it matters as much to Trump supporters as it does to his critics, you may have been reading in newspapers this week articles with sensational headlines that contend that Trumpcare or Trump’s budget will disadvantage areas that voted for him. This is more misunderstanding of the phenomenon. Recall the origin of the movement – in opposition to a government handout that would have sent money to some of these same areas. I would argue that “nothing is the matter with Kansas” – it just doesn’t always vote its pocketbook. (We might even note that there are some positive social aspects of that approach.)

The Tea Party’s first victory was to strongly influence the outcomes in the 2010 midterm elections, flipping the House back to Republicans, which the Republicans have held since. The House turns over every two years, the Senate every six. In the first three Senate elections following the Tea Party’s formation, the Republicans picked up 13 seats: +6 in 2010, -2 in 2012, and +9 in 2014 to regain control before giving 2 back while retaining the Senate in 2016.  Given how many seats the Democrats will have to defend in 2018, the Democrats are unlikely to retake the Senate, despite what we are observing in Washington these days. 

And in 2016, the Tea Party elected a president. Much of what Trump considers to be his agenda – national security and sovereignty, economic nationalism, and (using Steve Bannon’s language) the deconstruction of the administrative state – appeals to the Tea Party movement. I don’t see how the other elements of the Reagan coalition – pro-business, libertarian, evangelical – can find their way back to power until, first, the Trump coalition organized around these nationalist themes surrenders its narrow Electoral College majority to a Democratic administration and, second, the population is ready to move on from that administration.

I made these remarks on March 17, before the debacle of the failure to move the AHCA the following week. What I take from that episode is that 2016 is this culmination of the Tea Party movement is also the peak of its electoral success. The rhetoric of criticism of the Obama administration was ill preparation for the realities of governing. Conor Friedersdorf describes the unraveling in riveting detail in the Atlantic yesterday. Save for appointments to the Supreme Court, President Trump is unlikely to accomplish anything fundamental that requires the Congress to participate. That includes the budget, walls on the border, and many other planks in his campaign platform. And the reason isn't that the Democrats refuse to cooperate -- it is that the Republicans will be unwilling or unable to move these initiatives along.

Thursday, January 19, 2017

Republican Budget Policy, A New Look

At the Inauguration Panel on Tuesday, I noted that Mick Mulvaney, President-elect Trump's nominee for Director of the Office of Management and Budget, was considerably more of a deficit hawk while a Representative than was the Republican leadership in the House. This AP article from last month describes his time in the House well:
Mulvaney quickly came to oppose Boehner’s leadership before Boehner was pushed out in 2015. In 2013, Mulvaney declined to support Boehner’s re-election to the post. That year, Mulvaney unsuccessfully pushed for amendments to reduce Pentagon funding and proposed broad across-the-board federal cuts, including for the military.

He was an early backer of Trump during the presidential campaign, noting that the Republican billionaire had tapped into a populist sentiment dissatisfied with Washington.

“If you want to know, members of Congress, why you have Donald Trump, go look in the mirror, because we’ve over-promised and under-delivered for so long,” Mulvaney said in February.

The problem with the Republican Party on the budget in recent years is that it likes to portray itself as fiscally responsible, but when it actually comes time to impose budget discipline, its leaders lose their nerve. They either don't vote for grand compromises like Simpson-Bowles that balance expenditure reductions with revenue increases, don't run a budget process that offers a disciplined budget even when they control both houses of Congress, or confuse tax cuts with budget cuts.

In a report today, The Hill describes the budget being contemplated by the incoming administration. It specifies reductions of $10.5 trillion over a decade in federal spending:
The proposed cuts hew closely to a blueprint published last year by the conservative Heritage Foundation, a think tank that has helped staff the Trump transition.

Similar proposals have in the past won support from Republicans in the House and Senate, who believe they have an opportunity to truly tackle spending after years of warnings about the rising debt.

Many of the specific cuts were included in the 2017 budget adopted by the conservative Republican Study Committee (RSC), a caucus that represents a majority of House Republicans. The RSC budget plan would reduce federal spending by $8.6 trillion over the next decade.

“Mick Mulvaney and his colleagues at the Republican Study Committee when they crafted budgets over the years, they were serious,” said a former congressional aide. “Mulvaney didn’t take this OMB position to just mind the store.”

“He wants to make significant, fundamental changes to the structure of the president’s budget, and I expect him to do that with Vought and Gray putting the meat on the bones,” the source added.
That would be a genuine change in Republican policy, as implemented. It also suggests how the Trump administration would make good on promises to leave entitlement programs largely intact while restoring some balance to the budget without significant tax increases. It remains to be seen whether Congressional Republicans will go along.

Wednesday, January 18, 2017

Inauguration Week Panels at Dartmouth

This week, we are hosting four panels on opportunities and risks facing the new Presidential administration. My contribution was to yesterday's panel on domestic issues, focusing on budget policy. Here is how I opened my remarks:
Stated plainly, our federal budget policy has been a mess since our first modern experiments with tax cuts in the 1980s. A favorable combination of factors restored some sanity to it in the late 1990s. Our second modern experiment with tax cuts in the 2000s messed it up again.

All the while, the aging of the Baby Boom generation through its peak earnings years made our old-age entitlement programs temporarily less expensive to fund. Its continued aging into retirement and thus beneficiary years will cause Social Security and Medicare to switch to large and growing annual deficits.

So there is serious work to be done, and we haven’t been close to being up for the challenge in at least 6 years. 
The video is available here:

And the other three panels, focusing on global issues, health care, and energy and the environment, can be livestreamed or viewed here.