Wednesday, May 24, 2023

Minor Trims on Major Issues: The Triviality of Current U.S. Debt Ceiling Negotiations.

Sunset, Yosemite Valley.
© 2013 Dliff.
In an article today in the New York Times, Jim Tankersley discusses the ongoing negotiations between President Biden and House Republicans concerning the U.S. debt ceiling. The primary focus of these talks has been to curtail nondefense discretionary spending, which encompasses areas such as education, environmental protection, and national parks. However, this sector represents less than 15% of the government's anticipated spending of $6.3 trillion for the year. Meanwhile, the negotiations have precluded any substantial changes to Social Security and Medicare, which account for the majority of future projected spending growth, and military spending, which rivals nondefense discretionary expenditure in size.

The proposed budget cuts chiefly target areas that are not primary sources of spending growth in the upcoming years, such as education and environmental protection. The reductions could lead to a 30% decrease in many popular government programs, according to White House officials and independent analysts. Additionally, the negotiations are unfolding in the wake of a substantial spike in federal spending during the Covid-19 pandemic under both President Trump and President Biden's administrations. Despite this increase, the Congressional Budget Office expects a modest drop in total government spending for this fiscal year, followed by a rise later in the decade.

The projected increase in federal spending over the coming decades is attributed primarily to major federal health programs and Social Security. These trends were apparent even before President Biden took office. The current negotiations, with their focus on trimming relatively small parts of the budget, have been criticized from both ends of the political spectrum. The stalemate over addressing mandatory spending programs and the nation's tax system continues with no immediate solution in sight. The trajectory suggests that an agreement capable of significantly altering federal spending in the future is unlikely under the current approach.

Monday, May 22, 2023

Balancing Equity and Efficiency: The Case for Congestion Pricing on Highway 37.

 "Road Pricing in Singapore."
© 2007 VK35.
Highway 37 is once again making headlines. A recent article by Susan Wood for The North Bay Business Journal announced that the California Transportation Commission has endorsed a Metropolitan Transportation Commission proposal to institute a toll on State Route 37. The exact toll figure is yet to be established, but it's expected to reflect the $7 charge for San Francisco Bay Area bridges, projected to rise to $8 by 2025. The toll approval includes two amendments, namely regional income-based discounts and revised guidelines for toll hearings. The projected toll's purpose is to help fund the $430 million expansion of the highway, currently carrying over 35,000 vehicles per day, predominantly from Solano County and the City of Vallejo.

The toll implementation on Highway 37 should consider the integration of a congestion pricing system, where fees vary based on traffic volume. This approach addresses several critical policy principles. Higher charges during busy hours promote vertical equity, as those choosing to drive at such times are often more financially able. It might also enhance efficiency by discouraging traffic during peak times, facilitating more effective highway use. Despite being more intricate than a single flat toll, current technology can simplify comprehension and compliance with variable pricing. Revenue sufficiency might be amplified by earning more during peak periods, contributing to highway upgrades. Congestion pricing might spur economic growth by reducing traffic and rendering the highway more attractive to businesses and commuters. It may also be more politically acceptable than a flat toll, as it provides drivers the option to evade higher costs by traveling during quieter periods. This approach's potential improvements in efficiency and equity might enhance the overall effectiveness of the toll policy. Hence, the adoption of congestion pricing for Highway 37 could better align with the tenets of an effective and fair policy, optimize the highway's efficiency, and secure the required revenue for its upgrades.

In contrast, a flat toll without supplemental congestion pricing has inherent shortcomings. While it exhibits horizontal equity by holding all drivers equally responsible, it lacks vertical equity as it is uniformly applied regardless of income. Public acceptability varies, with some considering it essential and others protesting the increased commuting cost. The toll is intended to cover a substantial portion of the $430 million needed for road enhancements, but a $250 million funding shortfall suggests potential insufficiency. Without price signals to enhance roadway efficiency or encouragement for better usage, a flat toll may prove deficient in areas like vertical equity and revenue sufficiency. Consequently, it could be less politically viable.

Friday, May 19, 2023

Potpourri for Friday, May 19, 2023.

"CA-37 at Sears Point."
© 2007 Aztecrosales.
The Thursday edition of the Press Democrat headlined three stories, each focusing on local roadway issues. The first, by Susan Wood, reported that the Metropolitan Transportation Commission had unanimously agreed to impose a toll on California's State Route 37. The toll aims to generate funding for upcoming enhancements to the highway. These include adding a lane and raising the entire route to combat flooding. The widening project, costing $430 million, and a $6 billion flood prevention initiative are due to start in 2025 and will span multiple years until completion. However, it's important to note that no plans have been formulated to manage potential increased traffic on the Napa River Bridge, a possible alternative route for those wishing to avoid the toll.

Madison Smalstig wrote about commencement of a $29 million repair program targeting nearly 50 miles of Sonoma County roads. The project, planned for this summer, involves paving, sealing cracks, and removing vegetation to address the poor conditions of these roads. Despite over $203 million invested in the past, the overall condition of the county's extensive 1,368-mile road network has only marginally improved. To elevate the roads to a "good" to "very good" standard, the county estimates a necessary investment of $954 million over two decades, amounting to about $47.7 million annually. The topic of road financing issues and the subpar condition of Sonoma County's roads has been a recurring theme on this blog.

Lastly, Amelia Parreira describes a new development in Petaluma. The City Council gave a green light to proceed with the proposed Caulfield crosstown connector bridge. Estimated to cost $48.5 million, the project involves the construction of a 300-foot movable bridge over the Petaluma River. Expected to be operational by 2026, the bridge will improve citywide connectivity and reduce traffic congestion. It will not only serve drivers but also provide a more accessible route for pedestrians and cyclists. Given the longstanding bottleneck at D Street and the peculiar layout near the 101/116 interchange in Southern Petaluma, the construction of this bridge, first proposed in 2006, seems like a logical solution. This highlights the prolonged timelines all too often required to implement meaningful transportation projects in Sonoma County.

Thursday, May 18, 2023

Struggling for Equality: The Battle Over Same-Sex Marriage in Japan.

"Tokyo Rainbow Pride in 2016"
© 2016 Nesnad.
Motoko Rich and Hikari Hida from The New York Times delve into the escalating tension in Japan over the legalization of same-sex unions. Japan stands alone as the only G7 country where same-sex marriage is not legal, despite public opinion being largely in favor. However, conservative entities, notably the Shinto Association of Spiritual Leadership and affiliates of the Unification Church, propagate an opposing viewpoint, likening homosexuality to an "addiction" that can be "cured." As international pressure mounts for Japan to champion equality, lawmakers have offered a tepid response, drafting a bill calling for no unfair discrimination against LGBTQIA+ individuals, although critics argue it falls short compared to a previous failed proposal.

These religiously associated organizations exert significant influence within the conservative political sphere, even though they may not echo the sentiments of their followers or the broader public. The national Shinto association, deeply interwoven with Japan's culture and traditions, uses its ideological drive to sway lawmakers on various social matters. Concurrently, Prime Minister Fumio Kishida, acknowledging the distinct circumstances of each country, stresses the need for a comprehensive dialogue on same-sex marriage. Yet, the political sway of the religious right, demonstrated through the assassination of Shinzo Abe and the implication of the Unification Church, overshadows these discussions.

Despite these challenges, the LGBTQIA+ community in Japan perseveres in their struggle for equal rights, with an increasing number of municipalities offering same-sex partnerships and legal challenges to the constitutionality of the non-recognition of same-sex marriages. Amidst these efforts, foreign diplomats led by U.S. envoy Rahm Emanuel continue to advocate for LGBTQIA+ rights, drawing attention to the strong public endorsement for same-sex marriage. As Japan contends with demographic changes, the call for embracing diversity and immigration reform grows stronger. Corporations such as Suntory and Coca-Cola Japan signal a shift towards inclusivity, underscoring the resilience and diversity of Japan's LGBTQIA+ culture.

Wednesday, May 17, 2023

Banking on Trouble: The SVB Collapse and its Impact on Financial Stability.

Gregory Becker.
2015 US Department of Labor.
In a New York Times article by Rob Copeland, Gregory Becker, former Silicon Valley Bank (SVB) CEO, defended his actions before a Senate Banking Committee hearing regarding the bank's failure. Becker deflected blame onto regulators, the media, and inflation-induced interest rate hikes. SVB's downfall, fueled by large investments in low-yielding government bonds and a high proportion of uninsured accounts, has triggered a debate around banking regulations. Becker, who earned nearly $10 million in 2022, faced questions about his compensation and potential return of bonuses. Senators critiqued his failure to accept personal responsibility.

An Economist article, "The prop-up job", provides an in-depth analysis of SVB's collapse. The authors posit the bank's rapid downfall exposed signs of instability in the U.S. banking system, despite post-financial-crisis regulations. The article highlights the implications of abandoning the "Lombard Street" rule of central banking, leading to potential instability. It also draws parallels to the banking crises of the 1980s under then-Fed chairman, Paul Volcker. According to historian Peter Conti-Brown, rising rates subtly affect interest-rate and credit risk, and can strain borrowers. The authors suggest that the banking system is more vulnerable than previously thought and smaller banks, especially those with uninsured deposits, may need to increase capital soon.

The "Lombard Street rule" or Bagehot's dictum, articulated in Walter Bagehot's "Lombard Street: A Description of the Money Market", argues for the Bank of England's role as a lender of last resort during financial crises to maintain stability. Bagehot proposes that in times of panic, the bank should offer high-rate loans to solvent firms against good collateral, ensuring sufficient reserves to meet demands and deter non-serious borrowers. This approach has significantly influenced modern central banking policy.

The breakdown of Bagehot's dictum has a predictable result, illustrated in Bagehot's other great work, "The English Constitution." There, he details the vital role the House of Commons plays in the British political system. Bagehot positions the Commons, including the Cabinet formed from it, as the power center reflecting the electorate's will, controlling fiscal matters, and determining legislation. Additionally, the Commons facilitates communication between the government and its people, conveying public opinions, desires, and grievances to the state and justifying state actions and decisions to the public.

Becker's congressional hearing underscores the significant role of Congress, the American equivalent of the Commons (Senate and House both being subject to popular elections) in addressing banking sector instability. This step opens a much-needed debate on banking regulations. Although the hearing was marked by partisan disagreements, it offered an opportunity to question actions leading to SVB's failure and to assess executive accountability. As Bagehot stressed, the banking system, along with regulatory bodies like the Federal Reserve and the U.S. Treasury, must ensure financial stability. Therefore, this incident should alert CEOs across the industry to the need for coordinated efforts to strengthen the banking system's integrity, even if Bagehot's dictum, as a practical matter, may apply no longer to any but the smallest of U.S. banks. 

Tuesday, May 16, 2023

America's Debt Dilemma: Hitting the Ceiling.

"The Republican Elephant."
Thomas Nast, 1874.

The Economist this week writes about America's continued struggle with the debt ceiling. As Congress and the White House continue to negotiate, America is in danger of defaulting on its debt in a few weeks, with neither Republicans nor Democrats willing to compromise. The Treasury could bypass the debt ceiling by minting a colossal commemorative coin and depositing it into the government's account at the Federal Reserve, which would allow for the payment of government expenses without borrowing from public markets. The Biden administration has a few options including invoking the 14th Amendment and issuing high-coupon low face-value bonds, to bypass the debt ceiling and resume borrowing. 

Despite the risk of litigation and the potential for market disruption, the possibility of brutal austerity as a workaround for Treasury debt payments has pushed policymakers to consider unconventional, yet ingenious plans. Treasury officials are uncertain of their ability to implement prioritization of payments and regularly sell bonds in order to pay off their debt, and if dealers decline to participate, the whole plan could be thrown into jeopardy. Faced with the risk of default, prioritizing payments to bondholders may be necessary to get both sides to reach a deal, but could have big costs. However, as almost every observer has noted, the world's biggest economy should not be managed in this manner. 

I've written previously on this, noting that the Biden administration's exploration of using the 14th Amendment to challenge the current federal borrowing limit has prompted heated debate among economic and legal advisors. Meanwhile, Kevin McCarthy is facing his first major test in leading the House of Representatives in Congress' negotiations to lift the debt ceiling, a controversial issue that requires bipartisan compromise while weighing both fiscal responsibility and the need for austerity. The ripple effects of the rise of the far-right within the Republican Party have left lasting damage to both faith in the political system and the party's overall stability. The rising tensions within the Republican Party over the debt ceiling are making it increasingly difficult to present a unified stance. To move ahead successfully, the Republican Party must find ways to address the factors contributing to its internal divisions and disarray.

Monday, May 15, 2023

The Battle for Democracy: Turkish Elections, Deepfakes, and the Threat to Press Freedom.

"The Demagogue"
In an article today by Ben Hubbard and Gulsin Harman from The New York Times, the recent Turkish presidential elections are reported to be heading into a runoff. After failing to secure a majority, the incumbent president Recep Tayyip Erdoğan will face opposition candidate Kemal Kılıçdaroğlu in a two-week battle that could redefine Turkey's political landscape. Erdoğan, having served as Turkey's dominant political figure for 20 years, has seen a decline in his standing due to economic issues and his consolidation of power. Meanwhile, Kılıçdaroğlu represents a coalition of six opposition parties, campaigning as the antithesis of Erdoğan.

Meanwhile, David Klepper and Ali Swenson of The Associated Press this morning discuss the potential political risks posed by advanced artificial intelligence (AI) tools leading up to the 2024 elections. The availability of inexpensive and increasingly sophisticated AI technology has heightened concerns about the creation of convincing deepfakes, including fake images, videos, and audio. These deepfakes, in conjunction with social media algorithms, have the potential to spread misinformation quickly and target specific audiences, possibly leading to new levels of election manipulation. Experts like A.J. Nash from the cybersecurity firm ZeroFox warn that society is unprepared for the impact of these AI-driven media manipulations, which could be used to confuse voters, slander candidates, or even incite violence. As we approach the 2024 elections, there are increasing calls for legislative measures to combat the potential misuse of AI in political campaigns. 

That may very well be a move too far. Daren Butler of Reuters, in an October 13, 2022 article, noted Erdoğan's use of misinformation and its impact on Turkey's democracy. The article refers to a controversial law enacted by the Turkish parliament, proposed by Erdoğan, which can jail journalists and social media users for up to three years if found guilty of spreading "disinformation". Lawmakers from Erdoğan's ruling AK Party and its nationalist allies MHP, who collectively had a majority in the parliament, approved the bill despite strong opposition from both national and international critics. These critics argue that the law's vague definition of "false or misleading information" could be exploited to suppress dissent.

Engin Altay, a member of the main opposition Republican People's Party, expressed concerns that the law will further limit press freedom in a country already lagging behind in this area. The AK Party, without shame, claims that the legislation is necessary to combat misinformation and false accusations on social media, asserting it will not be used to suppress opposition voices. The fairly clear intent of the legislation is to control narratives and limit critical voices, thereby influencing public opinion. Reuters' investigation highlighted the state of media freedom in Turkey, describing mainstream media as adhering to government-approved headlines while independent and opposition media face penalties. The Venice Commission, an advisory body to the Council of Europe, expressed concerns that this law could induce a "chilling effect and increased self-censorship" ahead of the elections.

The proliferation of misinformation, further magnified by artificial intelligence, presents a considerable challenge to democratic values, underlining the indispensable role of press freedom. Drawing parallels with Kléōn's emotional manipulation in the Mytilenean Debate, contemporary misinformation leverages public sentiment, especially anger, to influence portions of the electorate. However, Aristotélēs maintained that the robustness of democracy resides in the collective wisdom of its populace. This collective wisdom, cultivated from a variety of perspectives and experiences, tends to yield clear choices, exemplifying the tenacity of democratic systems. There's an expectation that the probabilities underpinning the Condorcet Jury Theorem have remained (mostly) unaffected by misinformation. However, it's almost certain that augmenting governmental control over information could lead to a detrimental shift. Other than ongoing voter education, few options exist to ensure that clear choices will still surface in the aggregate. The freedom of the press remains a key factor in assuring that the electorate is well-informed and capable of exercising its collective wisdom, thereby reinforcing the effective functioning of democratic systems, despite the emergence of AI-powered misinformation or even more worryingly, justifications for state control of the press based on such grounds.