The two parts of deficit reduction

Deficit reduction needs to address two distinct issues that seem to often get fuzzed together in current media and politician speak.

1.  How to do it - what mix of taxes and spending cuts can accomplish the desired reduction.

The Bi-Partisan Simpson-Bowles Commission Report published in December 2010, after extensive study concluded the budget could not be balanced on spending cuts alone.  A problem is many Republican's have signed a no new taxes pledge.  So their deficit reduction plans have refused to even consider revenue increases of any kind.  

But the bigger problem is issue 2.

2.  What will be the economic impact of the particular mix chosen.

The Republican bottom line non-negotiable position of no new revenues is economic suicide.  It would have been great if they were this serious about cutting spending in 2003 or so when they were cutting taxes and the economy was reasonably healthy.  But their current obsession with big cuts in spending with no new taxes is like breaking a leg to cure a limp.   

The Economist July 16 issue, page 79, has a survey of what has happened historically when big cuts in public expenditures are made during a period of economic weakness.   The article discusses a recent study that looked at 173 policy changes in rich world economies between 1978 and 2009.  The study found cutting budgets consistently resulted in a drop in GDP and a rise in unemployment.  Is that really what we want to accomplish at the current time?   The few rare occasions where the cuts in government spending were followed by an economic upturn were in countries with really high interest rates - the exact opposite of our current situation.  It makes sense in that situation because when Government stops borrowing it lowered demand so interest rates drop - making money more available to business and consumers.  Couldn't be more inapplicable to our current situation where our interest rates are practically at zero.   

A classic example that it is a poor idea to start chopping at Government spending during serious downturn is the Great Depression.  In the mid-1930's as the US was beginning to crawl out of the worst depths of the depression deficit hawks talked Congress into big cuts in Government spending.  The stock market crashed again and the economy stalled.  Luckily (?) WW II came along a few years later to jump start our climb out of our economic doldrums with massive amounts of Government spending..

How our brains react to cities

Interesting article in the June 25 Economist (p.94) looking at a study just published in Nature about MRI studies of the brains of people raised in the city, in towns and in the country.  The study involved deliberately raising stress levels by giving subjects difficult problems and then chiding them for failure.  The study found varying responses in only two parts of our brain, both of which deal with emotion.   One part was in the "instinctual" part of the brain that is similar to the structure of animal brains.  This "instinctual" brain area deals with interpreting what we are experiencing right now.  The other part of the brain was in our cortex, the part of our brain that is so characteristically human, and seems to control whether our immediate experience alters our underlying willingness to change our learned behavioral responses.


With regard to activity in our "instinctual" brain, City folk experienced the most immediate stress, town folk less and country folk were the most relaxed.  In general the "thoughtful" brain reflected the amount of activity in the "instinctual" brain, city folks thought the most, country folk the least.  


In a way the first part of this finding is a no-brainer.  In cities you are constantly in contact with many people, and little potential conflicts arising over little things like vacant bus seats, or space to walk on a sidewalk  Those conflicts are far less frequent in towns, and even less frequent in the country.  City folk are forced to get smart about human interactions to a degree country folk are not.  The country folk seem to regard the fact the folks doing the study are criticizing them as unimportant in the grand scheme of things.  The city raised folk care.  That is a two edged sword - seems like the overall level of anxiety in the city raised folk is probably higher, but another word for anxiety is vigilance, so they are also probably becoming more capable of finding adaptive strategies to avoid the stress in the future.


The exception to the tendency for both parts of the brain to exhibit similar levels of activity was for people who grew up in the city.  There was sometimes a disconnect - either the "instinctual" brain could be buzzing away with the "thoughtful" brain much less active, or vice versa.   (The authors of the study note this sort of disconnect is characteristic of schizophrenia).  


It seems like as a result of the sheer level of stress people who are raised in the city experience some learn to tune the stress out from either the"thoughtful" brain or the "instinctual" brain.  It probably allows them to lower their overall anxiety level, but at the cost of giving up a degree of their ability to learn from experience.


I find my thoughts going to a completely unrelated bit of information I ran into, some research from the Pew Foundation that found that New York and Florida, in 2000, incarcerated the same amount of people, about 70,000 persons.  Today Florida has increased their prison population by an additional 30,000, while New York has added only 10,000.  Crime has fallen in both states about the same, slightly more in New York.


I assume a larger percentage of the population of New York state have more heavily urban life experience than in Florida, and more Floridians come from a more small town or rural environment.  That makes me wonder it this particular statistic reflects the fact New Yorkers are a bit more savvy about human behavior, about when incarceration is necessary and useful and when it is just wasted public money.