Uncle Sam: Pinball Wizard?
Written by PT Editors   
Wednesday, 15 October 2008
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Amidst the turmoil in the financial markets, important policy issues have fallen by the wayside: can the US economy support a $16,000,000,000,000 ($16 trillion) deficit—or is this ‘tilt’?

Tommy, hero of the 1975 movie of the same name, “always got the replay, never tilts at all.” While the Treasury, Federal Reserve, and Congress play one ball after the other, we’re watching those buzzers, bells, and flashing lights for a score.

The Feds have put a lot of motion into their game. FRB Chairman Bernanke had estimated that the central bank had plowed $800 billion into the financial system as of several weeks ago. That excludes $200 billion for Freddie Mac and Fannie Mae, the $250 billion bank investment, and the $700 billion the Treasury expects to spend purchasing soured mortgages. Also left out are any amounts needed to clean up the CDO (Collateralized Debt Obligation), CDO (squared), and credit default insurance. These markets are estimated (net) at $2 trillion—see below. So, the action comes to $2-$4 trillion (we think).

All of this cash, though, is beside the point: none of it touches the major policy areas that are (or were) of concern to the country. In this article, PT looks at several policy areas that rate high on American’s minds: education, healthcare, energy, criminal justice, infrastructure, immigration, agriculture, and federalism. We’ve tried to identify the key issues, some responses, and resolving them within the context of the federal-state partnership. Then, we’ve tried to put a price tag on what these policy initiatives might cost.

Education: “Standardized testing” vs. “critical thinking” and the question of access

CA State Senator Jack Scott observes, “education is the future. Our greatest resource is our human resources—the intellectual capital.” Everyone agrees “that all Americans deserve a quality education,” but most political leaders launch into the ‘how?’ before answering the ‘what?’ in defining policy goals. The 2008 Presidential candidates' position statements, for example, focused on who sets educational goals and standards: parents or government? (Teachers, students anyone?) Who pays? And, for what? And, where do the federal, state and local governments fit into the equation? But their proposals beg the question of core principles – ultimate objectives – of what the country’s education policy is seeking to achieve.

The policy issues come down to three or four. First, take No Child Left Behind. Seeking to shore up America's public education system, the Administration bet heavily on standardized testing. With the act now up for reauthorization, parents, teachers and more than a few legislators are asking deeper questions. For starters, "what are we trying to accomplish in our schools? Are we building minds or storing information? Is our goal critical thinking or high test scores, or all of the above?"

By ignoring deep social divisions in the system, constraining good teachers, and adopting a "one-size-fits-average" premise, NCLB may damage the system it’s trying to help. Then there’s the issue of access: who has access to America’s top teachers and institutions? And for those who don’t, what can we do for them?

Finally, education has historically been the province of state governments. The Federal government could well serve a purpose by rearranging its priorities, providing some broad guidelines, and better funding certain programs, e.g., lowering the dropout rate, recruiting teachers or early child education. Most people are not anti-education. They are looking for guidelines and special funding that would empower them to improve the educational system.

To understand the order of magnitude on new education programs, states are currently spending $130 billion on education. Congress allocated $23 billion for NCLB, while the “unfunded” portion is estimated at $27-$40 billion. Let’s take a few programs: a study sponsored by the MIT Workplace Center and Legal Momentum’s Family Initative estimates that a universal early education program would cost $50 billion. The Center for Special Education Finance estimates that, questions of “adequacy” aside, providing special education for the 12% of US students who require it costs $50 billion.

Healthcare: MA has a model

Experts estimate that approximately 45-47 million or 15-16% of the American population lacks healthcare. But, the number is a little misleading. According to the latest federal data, there were, 13.7 million Americans aged 19-29 without health insurance in 2006. Nearly 18 million (40%) of the uninsured population reside in households that earn $50,000 or more—presumably able to pay a premiums if they chose to do so. The number of uninsured children in 2006 was 8.7 million. And about 9 million (20%) are neither native nor naturalized citizens. Statistically, the insured are likely living in the South and the West. There’s clearly a problem that needs addressing, but its profile is different than the conventional wisdom would suggest.

The State of Massachusetts has put together a program that seems to be working. According to MA State Senator Richard Moore, Senate Chair of the Legislature’s Joint Committee on Health Care Financing, “the theory behind the plan is the government is playing a role, which varies by people’s ability to pay. The plan is working with employers—it’s still an employer based plan. Therefore, they’re paying the fees. And finally, crucial to the plan is the individual mandate—that each person should be covered or provide a reason why they aren’t able to find an affordable plan.”

Senator Moore estimates that the “program will cost $170 million more than we anticipated so about $859 million.” Rounding up to a $1 billion and assuming there are 50 states, that’s a cost of $50 billion. Obviously, Hawaii and Alaska will be less, New York and California will be more.

The other side of the issue is the increasing costs of healthcare. THIS is an issue, whose resolution seems beyond the free market to resolve.

As Maine State Senator Lisa Marrache notes, “we need to focus on what would give us the greatest access to health care. It may be a blend of free-market principles and government action, but we need to be discussing what we want before we argue about how to get there.

She continues, “in each instance, the debate generally follows the same, tired lines: “Socialized Medicine” vs. “Market Free-For-All.” But for something as complicated as health care, a service that involves myriad interested parties, peculiar market dynamics and unique consumer behaviors, can the issue really be broken down into two fundamentally opposed camps?”

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At $1.412 trillion in FY 2006, mandatory spending is over half of the U.S. Federal Budget. Vic Miller, Senior Fellow at Federal Funds Information for States, says the largest mandatory spending programs are Social Security, $544 billion; Medicare, $371 billion; and, Medicaid, $197 billion. For 2009-2010, the Congressional Budget Office estimates that Medicaid payments will cost $465.4 billion and Medicare payments at $853.6 billion. The net increase over 2008 is $135.4 billion.

Energy: A portfolio of solutions

Despite the country’s growing need for energy sources to power virtually every aspect of our lives, as a nation, we have historically struggled to devise policies that would effectively address that need, especially in an era where factors such as independence from foreign oil, implementation of alternative technologies, and environmental protection must be considered and included in the language of new policies. Major decisions on offshore drilling, the role played by non-fossil fuels, conservation, and taxes on oil companies and rebates to consumers provide multiple flash points.

Integrated with these issues are those involving infrastructure: Where do we spend our resources: fuel efficient or battery-powered cars, new power grids to bring solar and wind to market, highways or trains? Who pays and how—federal and state governments or the user? And finally, there is the issue of political process: What role can or should government play in bringing about needed solutions?

Once we get the energy we need, will we know how to use it? How do we make energy conservation a priority for Americans to avoid energy shortages like those we’ve experienced in the past? A further issue is what role the states and local governments will play in the program.

In 1970, we imported 24% of our oil. Today it's nearly 70% and growing. As imports grow and world prices rise, the amount of money we send to foreign nations every year is soaring. At current oil prices, we will send $700 billion dollars out of the country this year alone.

In terms of alternative energies, there’s solar, wind, and nuclear. Take wind power for example. Boone Pickens estimates that building wind facilities in the corridor that stretches from the Texas panhandle to North Dakota could produce 20% of the electricity for the United States at a cost of $1 trillion. It would take another $200 billion to build the capacity to transmit that energy to cities and towns.

Smart grids are intelligent power distribution networks that rely on two way communications between power users and providers to enhance power distribution. FERC has estimated the cost of replacing today’s antiquated systems and developing a smart grid to be $45-$60 billion over the next 10 years.

A sum of $1.5 trillion will enable the U.S. to upgrade our power grid, intelligently invest in alternative energies, produce and develop recoverable fossil fuels, and implement a conservation education program for consumers.

Criminal Justice: Deterrence replaces the 3 R’s

As with any policy discussion, the initial challenge is to ask the right questions: (1) What is our criminal justice system trying to accomplish? (2) Why? (3) How do we get there?

Historically, our objectives have included the "3 R's," rehabilitation, restitution, and retribution, with emphasis on the latter. Why? Because the focus has been on apprehending miscreants rather than preventing their criminal behavior in the first place. We've implemented the policy by building more prisons, hiring more guards, creating larger police forces and enforcing mandatory sentences and harsher penalties. Policy-makers, however, increasingly understand the importance of a fourth objective: deterrence.

The United States has the world's highest incarceration rate, with one in 32 adults currently or previously behind bars. Is it a failure of the system or a failure of society? U.S. lawmakers are rethinking policies on both. "We can't pander to people's worst fears, which is one of the reasons we have mandatory minimums in the first place," says Rep. Michael E. Festa.

According to the National Prison Commission, the US spends $60 billion a year to incarcerate 2.2 million people on any given day. What would it cost to reorient the system—putting away the bad guys, but spending cash on preventing crime and giving those who’ve run afoul of society a decent second chance? No estimates available.

Infrastructure: Stretched to the limit, with no overall plan

The basic problem is that the federal government really doesn’t know how involved it wants or needs to be. For example, in the past the federal government has participated at different levels in the interstate system, mass transit, ports and airports, but none of it is coordinated. Congestion is probably the biggest issue, but whether it’s highways, airports, seaports or rail, our entire infrastructure is stretched to the limit.

The American Society of Civil Engineers says that just repairing the nation’s bridges (alone) would cost at least $9.4 billion per year for the next 20 years. Another estimate by the ASCE puts the cost of bringing the entire US infrastructure up to an “adequate” level at $1.6 trillion.

Immigration: Break the issue into its component parts

A good start to the immigration debate would be to divide the issue into its component parts: national security, the social principles underlying our objectives, and how to handle the 12 million illegal immigrants who are already here. By breaking it down, we can debate the actual goals and tactics of each. Taking this approach, border security would represent the low hanging fruit, an issue where the principles—namely national security—are evident and the debate could focus on the technicalities and details. But if protecting the borders and stopping the flow of illegal immigrants is an easy debate, the flipside would be discussing what to do with the 12 million illegal immigrants who already live here.

When the prospect of comprehensive immigration reform arose in the Senate in June 2007, the country geared up for a “great debate.” That debate never happened. The Senate's immigration bill would have raised government spending by as much as $126 billion over the next decade, as the government begins paying out federal benefits to millions of new legal workers and cracks down on the border, a Congressional Budget Office analysis concluded.

Law enforcement measures alone would necessitate the hiring of nearly 31,000 federal workers in the next five years, while the building and maintenance of 870 miles of fencing and vehicle barriers would cost $3.3 billion. Newly legalized immigrants would claim nearly $50 billion in federal benefits such as the earned income and child tax credits, Medicaid, and Social Security.

Agriculture: who gets subsidized and by how much?

America’s agricultural policies are varied and complex. But, politically, the many agriculture issues seem to boil down to one: who gets subsidized and by how much? The cost of the 2008 Agricultural Bill, a 673-page behemoth, was put at $307 billion.

(P.S. Defense: up 86% from FY 2000
Defense spending is estimated at $549 billion in FY 2007, an 86% increase over FY2000’s $295 billion. If past trends continue, it will grow at 10% per year. Thus around $1 trillion or an additional $110 billion will be required for 2009-2010.)

Federalism: formidable but forgotten

Federalism is one of America’s enduring political principles. Madison and the other delegates at the Convention recognized that effective self-government rests on a dynamic partnership between a "General Government" and "subordinate governments [who] retain their due authority and activity." The successful transformation of a largely agrarian and rural society into an industrial metropolis; and its evolution from a collection of local communities to a unified national society—set within a global community—reflects the wisdom of their design.

The difference between the two kinds of government, the one national, the other local, lay in the tasks assigned to each. Historically, state governments have been at their best resolving issues related to education, criminal justice, and human services. The national government has taken to overseeing defense, foreign relations, and interstate commerce and services. Federalism has also encouraged local government units to become laboratories for political experimentation. The states have increasingly proved their mettle in legislation covering areas such as universal healthcare, minimum wage, and the environment.

Yet, as political power and financial clout have gravitated to Washington, important national policies remain undone. By Teddy Roosevelt's time, the Capitol was well on its way to displacing state governments in the popular mindset—largely because it was what the nation wanted and needed at the time. The 17th Amendment, the New Deal, and two world wars accelerated that trend. Federal intervention in the civil rights movement, the Great Society, and marquee achievements such as NASA's space program cemented Washington's authority and omniscience—a number of ominous portents (the Vietnam War, ballooning federal deficits, and the cost imperative of TV-ad campaigns) notwithstanding. The Supreme Court sought to throw a Constitutional lifeline to the States through a series of decisions including National League of Cities (1976), Garcia (1985), Lopez (1995), and Printz (1997), but to little or no avail.

"Today, the states have the amount of power that Congress has given them. Constitutional provisions that have strengthened the states have died," says Henry P. Monaghan, Harlan Fiske Stone Professor of Constitutional Law at Columbia. He adds, "The remedy to reasserting the states' role is not going to be found in the Constitution."

"The Founders had no intention for federal lawmakers to be operating Medicare plans or public schools," says former Illinois State Senator Steve Rauschenberger. Similarly, Utah Senate Majority Leader Curt Bramble notes, "We have the federal government paying money to build a bridge somewhere in Mayberry. Why?"

State lawmakers believe they are being left out of the national discussion regarding federal measures they will inevitably become accountable for. As a side effect to this disconnect, states feel they must deal with "one size fits all" policy, creating more problems at the local level.

Federalism has its costs: certainly, there’s considerable duplication in 50 state capitols all trying to perform the same tasks. But, ultimately the Federal government can’t do the job, let alone come up with policies that make sense for a diverse nation of over 300 million people. Good government relies on accountability. And, the better chance for that is the representative closer to home not thousands of miles away in DC.

Financial Problem

Today’s financial problem is reasonably straight forward: too much debt to support too much spending with too little savings—by home owners, consumers, and financial players. Whether it’s home equity loans, credit card purchases, or hedge funds with debt-to-equity ratios of 30:1, the de-leveraging has to come from somewhere.

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US credit card debt has been estimated at $313 billion in January 1994, $753 billion in January 2004, and $962 billion in March 2008. The volume of home equity loans was $314 billion in 1995, $500 billion in 2001, and reached $1.1 trillion in May 2008. Aggregate global CDO issuance totaled US$ 157 billion in 2004, US$ 272 billion in 2005, and US$ 552 billion in 2006. No amount of investing in banks or purchasing soured mortgages can fix that.

Tilt?

American society seems to have reached a cross-road: How do we accomplish the economic, social, and legal objectives that are all competing for the same resources? What roles should government—federal, state, and local—play? What are the limits of free markets?

As the country stares a recession in the face and approaches a change in Administration, the many policy areas that have been swept under the country’s economic crisis loom in second place. Yet, their importance has not been diminished—just the attention paid to them.

The Federal government’s bailout package has meant lifting the national debt ceiling to $11.3 trillion from $10.6 trillion, from $9.0 trillion in early 2007. This is equivalent to 87% of a $13 trillion dollar economy. If the cost of implementing the policy objectives above is estimated at $5 trillion and then added to the current debt ceiling, the total approximates $16 trillion—about 25% above the entire US GDP in 2008. And, over 5 times the annual $3 trillion budget.

Wikipedia’s pinball glossary defines “the tilt mechanism” as registering the “motion applied to a machine; if too much motion is applied this way, the game is said to ‘tilt’ and the player is penalized, e.g. losing the ball in play, the bonus points or a combination of both.”

The numbers are staggering. And if events do go amiss, the penalties will be felt on the dollar and interest rates not to mention share prices and the entire economy.





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