Moneybox

Latvia, reports Andrew Higgins, is the land where austerity works:

Latvia, feted by fans of austerity as the country-that-can and an example for countries like Greece that can’t, has provided a rare boost to champions of the proposition that pain pays.

Hardship has long been common here — and still is. But in just four years, the country has gone from the European Union’s worst economic disaster zone to a model of what the International Monetary Fund hails as the healing properties of deep budget cuts. Latvia’s economy, after shriveling by more than 20 percent from its peak, grew by about 5 percent last year, making it the best performer in the 27-nation European Union. Its budget deficit is down sharply and exports are soaring.

It's worth recalling the math on this. You start with $100 and then you drop 20 percent from peak to $80 and then obtain 5 percent growth and you're left with $84. That's not much of a bounceback. If Latvia can continue five percent annual growth for five more years, then by 2018 they should have re-obtained their 2007 peak output level. Which is to say they'll basically have had a lost decade, except instead of 10 years of stagnation it'll have been four years of terrifying collapse followed by six years as not-fast-enough bounceback.

I think the right way to think about Latvia is this. The Latvian government places more importance on securing independence from Russia than on the short-term trajectory of Latvian living standards. Therefore "do what EU officials want and integrate as rapidly as possible into EU institutions" is a sound strategic approach. Given that priority, Latvia genuinely had no choice but to implement a stark austerity program. And if you're going to implement an austerity program, you're better off doing it in an orderly Latvian manner than a chaotic Greek one. So I would say this is a success story—part of the ongoing success story over the past twenty years of Latvian independence. It's a reminder of what's genuinely fantastic about the European Union and its amazing success at creating a framework in which Europe's nations can live in peace, Europe's smaller nations can enjoy an unprecedented level of security, and where the lure of EU expansion has helped consolidate liberal democratic institutions in large swathes of eastern and central europe. None of that changes the fact that EU currency policy in particular has caused a lot of collateral damage and posed a lot of unforeseen risks in countries that signed on for basically geopolitical rather than economic reasons.

Your funny reporting of the day:

It was only a few days before the nation would go over the fiscal cliff, no bipartisan agreement was in sight, and Reid had just publicly accused Boehner of running a “dictatorship” in the House and caring more about holding onto his gavel than striking a deal.

“Go f— yourself,” Boehner sniped as he pointed his finger at Reid, according to multiple sources present.

An amusing anecdote, but what's at issue here is deadly serious—party cartel domination of the House of Representatives. The Senate had already passed a bill providing for a one year extension of Bush-era tax rates for people earning less than $250,000 a year. Harry Reid was trying to bait Boehner into allowing an open floor vote on that measure, hoping that a handful of House Republicans would join with the overwhelming majority of Democrats to pass it. But that's now how the House works.

The House operates on the "majority of the majority" principle, aka the Hastert Rule, that the Speaker only moves legislation to the floor if most of the members of his or her caucus support it. So even if Nancy Pelosi's majority in 2007 rested on members with pro-gun or socially conservative views, pro-gun or socially conservative legislation still couldn't pass because House Democrats wouldn't allow it to come for a vote. While the Senate is largely run by its pivotal members, the House is essentially run as a party cartel—by the leaders of the majority party on behalf of the views of the majority party.

This rule isn't sacrosanct. The McCain-Feingold bill passed in violation of the principle, and eventually so did the fiscal cliff bill. But even in those cases, the majority caucus makes a strategic decision to let itself get rolled. House Republicans didn't like the McCain-Feingold bill and didn't want to vote for it. But ultimately they didn't want to be the "bad guys" who were holding it up. So they allowed it to pass, counting on either the Bush administration to veto it (which they didn't) or the Supreme Court to largely undo it (which sort of happened) and away we went. But even though the principle can be violated on occasion, we should expect it to be upheld in general. Not just because Boehner likes it that way, but because there's no obviously superior alternative to it as a general rule of procedure. The predecessor to the Speaker-and-caucus centric House cartel dynamic was a weird kind of super-empowerment of the Rules committee that allowed it to arbitrarily bottle up proposals. 

You could say, as Reid did, that any given Speaker should just be more statesmanlike on any given issue and let the damn bill come to the floor. But clearly routinely ignoring the preferences of your caucus membership is not a viable option for a caucus leader. Another option would be to de-center the Speaker and make the House more like the individualistic senate except with over 400 individuals, a prospect that should make sensible people shudder.

Something I've noticed this week is that the people most inclined to think that the White House struck a bad bargain on the fiscal cliff over the weekend are generally also the people who were most hostile to the much grander bargain that was almost reached a couple of weeks ago in which taxes would have gone up by $1.2 trillion and been offset by $1.2 trillion in spending cuts. But it's actually quite difficult to construct a coherent viewpoint from which the deals are both bad. Which leads me to the conclusion that while the weekend deal looks pretty lame to me from the viewpoint of Obama's stated negotiating objectives, that says more about the stated negotiating objectives than about the deal.

It's a bad bargain, in other words, but a fine deal.

The way this works is that Obama started out by saying he could easily pocket $800 billion in revenue "for free" but was willing to dangle huge spending cuts in front of John Boehner in order to obtain billions more. That was a pure Pete Peterson agenda totally detached from the basic economic reality of the present day—high unemployment, low inflation, and ultra-low interest rates. But Boehner turned that balanced deal down, at which point the natural strategic move for Obama would have been to firm up his position and go over the cliff in a to-the-mattresses fight for the $800 billion he believed he could secure. Instead, Obama blinked and settled for more like $600 billion in tax revenue in exchange for the guarantee that he'd be able to secure the one year UI extension, the five year extension of stimulus credits for poor people, and the clean energy production tax credits.

If you don't think we should be worrying about the budget deficit, you shouldn't be enthusiastic about the overall state of FY 2013 fiscal policy but you should still think this deal is clearly superior to the fight-like-a-dog-for-the-extra-two-hundred-billion-bucks option. 

That's why Paul Krugman—who's normally eager to castigate Obama for weak negotiating—is so soft on this deal. It's also why David Brooks, who's a true blue grand bargaineer, is so upset about it. Obama started this process with stated goals that were much more Brooks' than Krugman's. And relative to those goals, he played his hand relatively weakly and ended up achieving surprisingly little progress. But those goals weren't really so important. And relative to the goals that are important—minimizing economic damage in 2013, minimizing cuts in useful spending—the deal that ultimately got made was a pretty good one. Again, that's not to say anyone should be thrilled about FY 2013 fiscal policy. The legacy of the Budget Control Act of 2011 is still with us and still quite pernicious.

Zipcar, one of the pioneering "sharing economy" companies, is being bought today by the Avis Budget Group (proprietors, as I'm sure you can guess, of the Avis and Budget rental car brands) for $500 million in cash.

The strategic logic of the deal is very clear. A year ago, there were four major rental car concerns in America—Avis Budget, Dollar Thrifty, Hertz Global, and Enterprise. Hertz and Enterprise have both launched in-house hourly rental operations to compete directly with Zipcar. Avis Budget bought Dollar Thrifty a few months ago. So that left the rental car world with two players that do both hoursly and traditional rentals, plus Zipcar and Avis. A meger gives Zipcar investors a nice exit while creating a very strong firm.

Zipcar's big outstanding problem is that demand for Zipcars is highly spiky. People who want to use a car to commute to work are going to want to own their own vehicle. And people generally need to work during weekdays. Which means that demand for spot rentals is very highly concentrated on the weekends, which makes it hard for Zipcar to manage inventory efficiently. Avis says that combining its fleet with Zipcar's will make it much easier to meet those demand peaks, as individual vehicles can switch from hourly rental to traditional rental on a day-by-day basis.

One reason companies like Zipcar and Parking Panda are important is that they change urban political economy. There's been a mini-trend in recent years toward city planning departments embracing reducing regulatory parking minimums and selective upzonings. But even though those ideas are catching on in policy circles, the politics around them remains very constrained and dominated by risk aversion and incumbent interests. The arrival on the scene of businesses whose models benefit from parking and zoning liberalization can bring a lot more balance to the debate, and certainly Zipcar has quietly been a player in a lot of progressive urban reforms. A post-merger company could either end up being a bigger voice on that front, or else a more muted one that's less specifically interested in the topic.

Paul Kane reports that the White House and Senate Republicans have reached a deal, with Obama giving in to GOP demands on the estate tax. He writes that "a vote on the package could be held by 10:30 p.m., beating a midnight deadline" while "The House will begin considering the bill tomorrow, with final passage in the next day or two."

It's worth taking a minute to savor the full-on absurdity of this timing. Why have many people had their New Year's Eve ruined? Well, because this is perfect timing. The new Congress begins on Jan. 3. But the new tax baseline begins on Jan. 1. That means that if a bill passes the Senate on Dec. 31, the House has two days under the new budget baseline before the lame-duck session ends and Senate legislation expires. This lets the Senate pass a bill that Obama says raises taxes (which it does, relative to 2012 law) and then the House will vote on a law that John Boehner can say cuts taxes (which it does, relative to 2013 law) and thus you get a politically magical immaculate tax hike.

The exact terms of the deal remain somewhat unclear, but the basic shape of things is this: Tax rates will return to Clinton-era highs on adjusted gross income above $400,000 for individuals and over $450,000 for couples filing jointly. The top rate on capital gains and dividend income will rise to 20 percent. The PEP and Pease deduction limits will be partially reinstated. The refundable tax credits from the stimulus will be extended for five years. The uncontroversial corporate tax credits will be extended, and so will the more contentious ones for clean energy. There's money for another year of unemployment insurance. Implementation of the sequester cuts are going to be delayed for two months—which means they'll collide with the debt ceiling.

From the viewpoint I outlined on Dec. 13—"Cutting Spending to Obtain Tax Hikes Is Nuts"—this is a decent deal. Relative to what Obama had already agreed to, there are no spending cuts whatsoever in this package. In exchange, he ended up securing much less tax revenue than he was initially looking for. That's an epic defeat for the Pete Peterson and "Fix the Debt" crowd, but even though liberals are disappointed with this, they didn't end up actually losing anything the way they were going to in deals that cut Social Security benefits or raised the Medicare eligibility age. Conservatives, meanwhile, can say that in the face of an objectively unfavorable situation they kept taxes remarbly low and have maintained their leverage to press for further spending cuts in February.

On to the next crisis.

There's a phrase in the business "too good to check" and that's what happened to me this morning when I picked up a striking chart on age and health care spending in international context from Austin Frakt. The chart is based on an old Laurence Kotlikoff article about government spending that's really just making the banal point that the federal government doesn't spend much on health care for the non-elderly (because if Medicare) and I think there may be other problems with the data as well.

After a long afternoon when a fiscal cliff deal kept being imminent, the House leadership has said there won't be any fiscal cliff votes today.

A lot of reporting is saying that the only holdup in the deal is disagreement about how to deal with the budget sequester cuts, but that strikes me as an understated way of saying it. On tax rates, you've got a compromise. Which is to say that conservatives and liberals are both being asked to swallow something they're not totally thrilled with. Then in another bucket you have this sequester stuff. Depending on what that is, a member of congress might look at it and say "there's some tax stuff here I don't love, but the spending stuff makes it worthwhile." That's how a legislative package works. But if you don't know what the spending stuff is, then you can't assess whether all things considered the tax stuff is good enough.

The cliché is that in a complicated DC negotiation like this "nothing is agreed to until everything is agreed to" and that's a good rule of thumb. But a natural corollary of that is that a deal that encompasses everything but the sequester doesn't actually encompass anything.

As of two weeks ago, the conventional wisdom was that bargaining had to take place between Democrats and John Boehner because the House of Representatives was the sticking point for negotiations. As of today, bargaining is taking place between Democrats and Mitch McConnell.

I see tactical virtues of that arrangement for conservatives, but no clear sign that the fundamental logic of the situation has shifted. We know from the failure of "Plan B" that there's substantially Republican opposition to casting an affirmative vote in favor of anything that does anything other than fully extend the Bush tax cuts. So a deal will need to pass with Democratic votes. And the House Democratic caucus is much more liberal than the Senate Democratic caucus. The Senate contains Democrats from Alaska, Akransas, Louisiana, Missouri, North Carolina, South Dakota, North Dakota, and Montana. It includes Joe Lieberman.

The House isn't like that. The flipside of House Democrats having fared so poorly in the 2010 midterms is that virtually everyone sitting in the current House has a very safe seat. To be sure, Obama could roll them. But when you consider the timing, if liberal members think they're literally a few hours away from locking a more favorable baseline into place that becomes a tough exercise in arm-twisting. You're not talking about holding out indefinitely against pressure. You're talking about blowing things up for one afternoon so that things can resume in the new year. Now if the deal is a deal that Nancy Pelosi likes, that's no problem. But Tom Harkin's early and aggressive statements against mere rumors of a deal are an indication that what's being discussed is something liberals don't like. Now you don't need Harkin to pass a bill in the Senate, but unless Boehner can get his troops in line you do need House members with Harkin-esque views to pass something there.

As bargaining terms continue to leak out over the course of the morning, I'm considering revising my morning take that the White House's willingness to move off the $250,000 goal makes sense.

The problem isn't that $250,000 is sacrosanct, the problem is a timing mismatch between what Democrats are asking for and what Republicans are asking for. The GOP is asking for a permanent change in the tax code. That's very different from the 2010 lame duck deal where lots of people felt Obama got rolled, but in fact he preserved tons of leverage by making none of the Bush tax cuts permanent. In exchange, Republicans seem to be talking about giving Democrats temporary concessions in terms of Unemployment Insurance, sequester, doc fix, etc. That temporary mismatch is a bad deal.

In policy terms, note that it's also totally different from a "barbell" stimulus proposal that spends more in the short-term in exchange for spending less in the long term because the tax concessions make the long-term deficit bigger rather than smaller.

Now the White House is apparently pointing out to people that at one point Chuck Schumer and other Senate Democrats were pushing for a $1 million cutoff for tax increases. And so they were. But by the same token, we saw that when John Boehner tried to take that up as his Plan B that House Democrats held firm against it and he couldn't deliver enough GOP votes for it to pass the House. So it's hardly inevitable that the White House will get rolled if they refuse to make a deal. Dealing on the $250,000 point makes perfect sense if Obama can get something good in exchange. But getting temporary concessions for permanent ones just to set the table for inevitable fights over appropriations bills and the debt ceiling doesn't make much sense.

Correction, Dec. 31, 2012: This chart does not accurately show what I purported it showed. The data reflect only health care spending by the governments of these countries, and therefore it is unsurprising that the amount rises so much for seniors in America, because that spending represents Medicare outlays, for which young people are generally not eligible. Because of this misunderstanding, the contents of my blog post are largely no longer valid. The original post remains printed below, and my fuller explanation is here.

That per capita health care spending is higher on older people than younger ones will surprise nobody. Nor will it surprise anyone to learn that American health care spending is systematically higher than what you see in other rich countries. But this chart via Austin Frakt and Dan Munro is pretty shocking.

Starting in the mid-fifties, American per capita health care spending goes from marginally higher than Germany or Sweden to a lot higher. Then as Americans reach their late sixties, a large share of that spending is shifted onto the public books as Medicare and the spending gap keeps on rising.

Read Frakt for a bit of an account of how this arises operationally, but what I think is more important is that it arises on a meta-level because we have such a fragmented health care system. When your health care spending is all in one bucket, then at any given level of spending you face a question about how to allocate it. And when allocating spending between young and old, you're cross-pressured. On the one hand, older people have more need for health care services which militates in favor of allocating spending to them. On the other hand, providing health care services to younger people generally offers better value in terms of years of life and quality of life saved. A 25 year-old who's in a bad car accident can, if found in time and treated, still live a very happy and healthy life. If you're 95 and get into the same car accident, then treatment is going to be much more difficult, recovery will be much less complete, and in the grand scheme of things you're not going to live very long anyway. 

In all countries, the majority of health care spending goes to the older half of the population distribution in deference to the greater demand for health care services among the elderly. But the less unified, less planned American system takes this to the extreme. To an extent, this reflects what people want. The "death panels" charge was a potent one for a reason. But not only is this health care spending on the elderly the key issue in the federal budget, our disproportionate allocation of health care dollars to old people surely accounts for the remarkable lack of apparent cost effectiveness of the American health care system. When the patient is already over 80, the simple fact of the matter is that no amount of treatment is going to work miracles in terms of life expectancy or quality of life.