Matt Yglesias

Endgame

Here we go again:

— Fenty vs Gray, the real debate.

— Belief in haunted houses is surprisingly widespread.

— You can’t believe what you read in Politico.

— Presidential power is complicated.

Elastica, “Car Song”. Ironically in the video they seem to be driving around an incredibly dense, transit-oriented Japanese city.

Four Reasons for a Mistake

In response to my post on Howard Dean’s wise February 2003 speech about Iraq a few correspondents have asked me to revisit my own war thinking in 2002. I’m not a huge fan of this kind of exercise because I think it shades into excuse-making, but in retrospect you can think of four strands of argumentation:

1. Erroneous views of foreign policy in general: At the time, I adhered to the school of thought (popular at the time) which held that one major problem in the world was that the US government was unduly constrained in the use of force abroad by domestic politics. More forceful intervention in Haiti, Rwanda, Bosnia, and Kosovo had all been called for. This led to a general predisposition in favor of military adventurism.

2. Elite signaling: When Hillary Clinton, Tom Daschle, Dick Gephardt, John Kerry, Joe Biden, John Edwards, etc. told me they thought invading Iraq was a good idea I took them very seriously. I knew that Carl Levin & Nancy Pelosi were on the other side, but the bulk of the leading Democratic voices on national security and foreign policy issues were in favor of the war. So was Tony Blair. These were credible people whose views I took seriously.

3. Misreading the politics: It seemed to me that the political consequences to George W Bush of invading Iraq to disrupt a nuclear weapons program and then discovering that there was no such program would be disastrous. Presidents do have access to secret intelligence, and it seemed nutty to me to suggest that the administration would be engaged in a massive, easily-debunked-after-the fact lie. Similarly, I didn’t take all the democracy-talk very seriously but the “better than Saddam” humanitarian standard is a low bar and I figured Bush wouldn’t be doing this unless he said some reasonable plan for extricating our forces and stabilizing the situation.

4. Kenneth Pollack: The formal case for war that I found compelling was Kenneth Pollack’s “The Threatening Storm: The Case for Invading Iraq.” I discuss this book in some detail in my own book, but to make a long story short its argumentative structure is badly flawed. Roughly speaking he says “if we invade Iraq and a pony shows up, that will be better than the alternatives, therefore invading Iraq is better than trying to muddle through.” Which is great, except we’re missing the pony! This problem is what Robert Farley’s Jedi Principle is about.

So that’s that. You can, however, always get more psychological. I was 21 years old and kind of a jerk. Being for the war was a way to simultaneously be a free-thinking dissident in the context of a college campus and also be on the side of the country’s power elite. My observation is that this kind of fake-dissident posture is one that always has a lot of appeal to people. The point is that this wasn’t really a series of erroneous judgments about Iraq, it was a series of erroneous judgments about how to think about the world and who deserves to be taken seriously and under which circumstances.

Anyways, one thing that’s always puzzled me is why other war supporters were so slow to turn against it. As I intimated in this morning post, notwithstanding any of the above considerations it was clear to me that something was badly amiss as soon as Bush/Blair/Aznar pulled the plug on the inspections process. By a couple of months later, it seemed pretty clear that there was no scary WMD program and also that there was no real for what to do. But it seems to have taken all the way until 2005-2006 for “this was a mistake” to become a conventional view even though no really important new information became available during the interim.

Lilly Allen and Macroeconomic Stabilization

Rather than trying to understand the current dynamics of monetary policy with a drought management metaphor, perhaps we could turn to the musical stylings of Ms Lily Allen:

Allen, speaking for the American people, is in a conflicted mood. “I want to be rich and I want lots of money,” she says, ignoring the fact that holding her savings as money rather than investing in higher-risk higher-yield assets is undermining the goal of wealth accumulation. Worse, she’s also spurred by instincts toward rapacious consumerism: “I want loads of clothes and fuckloads of diamonds.” Were she to achieve her aspiration of clothes-and-jewelry purchases, the economy would get moving again via employment in the relevant manufacturing and retail sectors. But in the real world, Allen is liquidity-constrained and her desire to stockpile cash prevents her from engaging in stimulative consumption. Once upon a time this wasn’t a big issue, as she sings there’s the debt option: “it doesn’t matter cause I’m packing plastic / and that’s what makes my life so fucking fantastic.”

Today, though, she’s “being taken over by the fear.” Prudent people have become concerned about the future and are attempted to transform as much of their income as possible into safe, highly liquid assets. This is causing a general glut of goods and services. What’s more, “the fear” affecting wealth holders is preventing the less-prudent from securing credit to finance their consumption or investment activities—that kind of lending, after all, is neither safe nor highly liquid. As a knock-on consequences of this, the inflation rate has been dropping and the price level is well below its expected destination. Due to money illusion, this is confusing people who “don’t know what’s right and what’s real anymore” distracted as they are by nominal prices.

The developed world’s population has not, however suddenly become lazy or indolent (”I’m not a saint and I’m not a sinner”), the problem is that elites have betrayed the population by failing to respond adequately to the rise of the fear. The excess desire for money can be met by printing additional money. The excess aversion to risk can be met with guarantees. Unfortunately, both congress and the Federal Reserve are themselves afflicted by the fear. Hence our current predicament.

The Decline of Private Health Insurance

I’m not very interested in the underlying dispute between Scott Winship and Mike Konczal, but I did think this Winship chart about health insurance was interesting:

I emailed Winship to ask him what this data looks like if we examine the under-65 crowd. To the eyeball, at least, the big story on this chart seems to be the creation of Medicare and then the aging of the population pushing a larger share of people into Medicare-eligibility. The answer turns out to be a bit interesting. Look at private insurance among working age people:

This decline in private health insurance coverage has, however, been entirely offset by an increase in the number of working age people on Medicaid, which stood at 13 percent in 2008. Among the under-18 set, private insurance is even rarer and public coverage even more common, since children are both poorer-than-average and politically easier to cover. In terms of causation, my understanding is that this is a blend of Medicaid “crowding out” private coverage and Medicaid filling a gap in private insurance’s affordability. The Affordable Care Act is going to continue this trend by substantially expanding Medicaid coverage.

Licensing and Health Care

I’ve been writing about barbers, but at the end of the day a the more important instances of license-driven cartelization occur in the health care sector. When we talk about health care in the United States, I think it should be uncontroversial to say that we have a cost-growth problem. And as Adam Ozimek observers, one reason is that high-wage occupations are using licensing rules to stifle competition from cheaper alternatives. If you’re a good boy like me and go to the dentist regularly to get your teeth cleaned, you’ve probably noticed that the dentist doesn’t actually clean your teeth. A dental hygenist does. So why don’t the hygenists band together and cut out the dentist? Well, they frequently can’t:

For instance, many states have regulations preventing dental hygienists from practicing without the supervision of a dentist. Dentists have an average of six years more schooling than a hygienists, who on average have 2.6 years of post high-school education. In addition, dentists make on average $100 an hour, and are 80% male, whereas hygiensts are 97% female and make around $37 an hour. Kleiner and Park find that these regulations transfer $1.5 billion dollars a year from hygiensts to dentists. This is a highly regressive transfer to a male dominated, higher educated, higher paid job from a female dominated, lower educated, lower paid job. In a very similar vein with likely similar impacts, many states restrict the ability of nurses to practice without the supervision of doctors. In fact these regulations are currently growing as regulators rush to restrict the number nurses working in retail health clinics in a variety of ways to prevent them from competing with doctors.

Not only does forcing hygenists to be “supervised” by a dentist raise the price of routine tooth-cleaning, it also raises the price of dental health services that really do require a dentist’s skill and training since it induces dentists to spend a share of each day shaking hands with patients who don’t need their expertise. This creates artificial scarcity in the supply of high-end dental services.

The bigger issue—though harder to estimate—is the way that these rules stifle potentially enormous gains from organizational innovation. Imagine a world in which in order to make clothes you needed a license from the State Board of Tailors, and the tailor lobby manages to persuade the state to extend the tailor’s monopoly by saying that to sell clothing you need to be under the supervision of a tailor. This set of rules doesn’t just reduce competition in the fields of clothing manufacturing and retailing. It prevents the technological and organizational innovations that have brought us mass-produced clothing, and retail chains. The cartel would justify its existence in the name of high-quality and consumer protection. And it’s even true that if we all went to work in handmade shirts and bespoke suits that we’d be wearing higher-quality clothing. But the impact on overall living standards would be devastating. There’s no H&M or Ikea of the health care sector, and there never will be without some relaxation of the rules governing who’s allowed to be a provider of health care services.

I’m perhaps more sensitive to this than most since I’m a first-generation political blogger and I can only imagine what the Massachusetts Board of Journalism would have done to me if it was illegal to provide news media services without a license back in 2002. But the potential social cost to letting professional groups insulate themselves from disruptive innovation is incalculable.

Yes, More Efficient Government Helps Taxpayers

(cc photo by rollingrck)

One of the most unfortunate trends in American politics is the tendency of the conservative and libertarian types who are ideologically predisposed to be aware of the problems with public sector programs to be totally uninterested in actually making the public sector work better. Thus you get things like Tad DeHaven from the Cato Institute launching an on attack on public sector leaders who try to make the public sector more efficient that condemns recommendations of a “pie-in-the-sky ‘good government’ variety,” ignoring considerable evidence that good government is a key driver of prosperity.

DeHaven even winds up advancing the odd assertion that “[m]aking government ‘more efficient’ is all well and good, but if the “savings” just get plowed into other programs – as has been the case in Indiana – then taxpayers aren’t any better off.” That’s nuts. Consider a state that spends money on different programs that are supposed to reduce the level of crime. The state has prisons. The state has police officers. The state has parole officers. And within those broad fields of endeavor, different kinds of things are happening. It matters a great deal to taxpayers whether resources are being allocated efficiently inside that system. If it turns out that the marginal dollar spent on police salaries is less valuable than the marginal dollar spent on literacy education programs for prisoners, then cutting the size of the police force and expanding literacy education will reduce crime, thus benefitting taxpayers. Alternatively, if it turns out that reducing spending on prison and increasing the number of police officers will reduce crime, that would also benefit taxpayers.

You could go on like this. If we’re considering two transportation proposals, and one costs 20 percent more but is much more useful than agreeing to the net increase in spending is probably the more beneficial choice for taxpayers.

Debates about the overall size and costliness of the public are inevitable and healthy. But what’s not healthy is to have a politics that’s completely dominated by this question to the exclusion of all others. There’s a huge difference between dollars spent on useful infrastructure and dollars spent on pointless boondoggles. There’s a big difference between dollars spent on schools that help kids learn and schools that don’t. There’s a big difference between paying the salary of a barber cartel enforcer and paying the salary of a regulator who’s preventing deadly oil spills. This stuff matters enormously, but if our overall political conversation insists on ignoring it we’re bound to get it wrong.

A Reason, Not an Excuse

Let me commend Ezra Klein’s post pointing out that an awful lot of “if only Obama had done blah blah” type commentary seems to suffer from a bad case of the post hoc, ergo propter hoc fallacy. He’s done a bunch of stuff. He’s less popular than he used to be. Congressional Democrats are going to lose tons of seats. Therefore, had he not done this stuff he’d be more popular and congressional Democrats would hold more seats. Realistically, Democrats are going to lose seats in the midterms because (a) it’s a midterm and the party in power almost always loses seats and (b) they have a giant majority, and the system has a tendency toward equilibrium*:

As for Obama, the comparative evidence is overwhelming that his popularity has dipped because (a) post-inauguration honeymoons are always unsustainable and (b) recessions always make incumbents unpopular.

Klein:

Obama’s current approval rating of 44 percent beats Clinton, Carter and Reagan. All of them were between 39 percent and 41 percent at this point in their presidencies. And all of them were former governors who accomplished less legislatively** than Obama has at this point in his presidency.

A serious treatment of “Obama should have done blah blah and then he’d be more popular” has start with the idea doing blah blah blah would have worked substantively to boost the economy.*** Which is to say you need to talk about policy, not about political strategy.**** When people put this idea forward, it sometimes comes across as an excuse and I should say that I don’t mean it that way. I think there are things the administration could have done to improve the economy. That starts with the fact that I know the administration has been less persuasive vis-à-vis congress in terms of recovery measures than the administration wishes it had been. Blame for this falls primarily on the members themselves on the rules of the Senate, but neither the president nor his staff can be fully exempt from the blame. The administration also decided for bad political reasons to shift its rhetorical emphasis to fiscal consolidation way too quickly. It dithered inexplicably in nominating people to Federal Reserve Board of Governors vacancies and failed to press congress to confirm them once nominated. Elements of the American Recovery and Reinvestment Act deliberately shortchanged short-term macroeconomic impact in order to advance long-term policy objectives***** in a manner that history will show ultimately undermined the administration’s ability to pursue its long-term policy objectives.

And one could go on. Unfortunately, a laundry list of policy items along these lines wouldn’t make for a very good magazine article since it would lack a kind of narrative arc and explanatory parsimony that makes for a better feature. Footnotes below the fold!

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Barack Obama, Barbering Deregulator

Mike Konczal points out that State Senator Barack Obama was not blind to the perils of overly aggressive barber licensing regimes:

Ms. Barber and Anthony Burton participated on a panel with State Senator Barack Obama and State Representative Constance Howard to discuss the federally funded Going Home program and several new laws that were passed by the state lawmakers. The lawmakers introduced to the audience several bills that had been passed, including one that would change some of the expungement laws in the State of Illinois and one bill that would allow formerly incarcerated individuals to seek regulatory licenses in several fields including barbering, nail technicians, cosmetology and dead animal removal. Under this bill, the formerly incarcerated individual would have the opportunity to seek a license once they have served their time in prison and have been given a certificate of good standing by the State of Illinois. NLEN also set up a booth at the Town Hall meeting to highlight its program and accomplishments.

The problem here is that when you set up these boards, they have incentives to think up any kind of halfway plausible reason to bar people from entering the field. Since being a felon sounds bad, and nobody but leftwing State Senators from Hyde Park wants to spend time standing up for the interests of ex-cons, making rules barring felons from your profession seems like an obvious move. But society suffers quite a lot from rules that make it more difficult for former criminals to integrate themselves into the legitimate economy. It’d be really nice to be able to say to a guy in prison “as long as you’re in here all day every day, we’re going to teach you to use hair clippers so if you feel like doing legal work for a living when you get out you can go be a barber.”

Meanwhile, I note that in Massachusetts unlicensed fortune tellers are subject to a $100 fine even though any fortune teller worth his salt is going to be able to see the future and avoid getting caught.

I think the whole issue will strike some people as silly, but unless you expect manufacturing sector productivity to stop increasing the future is going to involve a larger-and-larger share of the population working in these personal service fields.

Today in Lists

Not only did we learn this week that Harvard is the awesomest college in America, Newsweek decided that semi-arbitrary ordinal ranking of colleges is small time and decided to rank countries. Finland comes out as number one, followed by Switzerland. Coincidentally—or perhaps not—those fine countries were the locations of two of my favorite junkets. So listen up world leaders, the key to national success is to give me a free trip to your country.

Rounding out the top ten are Sweden, Australia, Luxembourg, Norway, Canada, the Netherlands, Japan, and Denmark. The United States comes in at #11 but since Luxembourg is hardly a country I think we should grant ourselves top ten status. At any rate, you obviously shouldn’t take this kind of exercise too seriously. But what you see across a wide range of methodological approaches to quality of life is usually that the Anglophone and “small northern european” blocs of countries come out the best. And I do think there’s something telling in that about the success of broadly speaking “liberal” policies of both the higher and lower tax varieties as opposed to the more corporatist approaches you see on the continent.

CBO’s Economic Projections

After another bad jobs number what more can way say than “Welcome to the Recovery”? Meanwhile, the latest Congressional Budget Office projections will probably attract attention for what they say about the budget, but the budget is largely driven by the economy so it’s worth looking at the macroeconomic projections:

Now as you can see with my trusty Paintbrush Trend Estimator chart below, we’re currently operating well below the trend rate of Nominal GDP growth:

So in 2011 are we going to start closing that gap with NGDP growth of 6.5 percent? 8 percent? Nope. According to CBO, in 2010 we’ll see 3.8 percent NGDP growth and the gap will get bigger. Then in 2011, we’ll see 3.1 percent NGDP growth and the gap will get even bigger. Then from 2012-2014 we’ll return to the trend rate with an average of 5.6 percent NGDP growth and then catch up to the trend level . . . never.

Or you can just look at the inflation numbers. Whether measured by CPI or core CPE, they project that we’ll undershoot the 2% target this year, undershoot it again next year, then undershoot it on average for three more years, and then start doing some very very modest catching up in the 2015-2020 level. All this during an extended period of elevated unemployment. This is monetary policy malpractice. I think it’s an open question how much better things would be with more appropriate monetary management, but the range is from “a little better” to “much better” and those are both good options.

Howard Dean Flashback

At this point in time, Howard Dean isn’t an incredibly powerful figure on the American political scene, so I’m not going to join in on the two minute hate currently being directly his way for his dumb stance on Park51. Instead, as Operation Iraqi Freedom comes to its official close, it’s worth remembering some of the stuff that made him an important person in recent political history in the first place.

Consider, for example, his February 2003 foreign policy address at Drake University:

My question is, why not use our information to help the UN disarm Iraq without war?

Secretary Powell’s recent presentation at the UN showed the extent to which we have Iraq under an audio and visual microscope. Given that, I was impressed not by the vastness of evidence presented by the Secretary, but rather by its sketchiness. He said there would be no smoking gun, and there was none.

At the same time, it seems to me we are in possession of information that would be very helpful to UN inspectors. For example, if we know Iraqi scientists are being detained at an Iraqi guesthouse, why not surround the building and knock on the door?

If we think a facility is being used for biological weapons, why not send the inspectors to check it out?

And if we believe terrorists – especially if they are terrorists linked to al Qaeda – have set up a poison and explosives training center in Northern Iraq, outside Saddam Hussein’s control, why haven’t we verified that information and destroyed that camp?

The events of February and March 2003 have sort of gone down the memory hole, but speaking as someone who spent the majority of the pre-invasion year supporting the Bush administration’s policy, what happened during those months was fairly shocking. Faced with the threat of invasion, Saddam Hussein was largely knuckling under to demands for inspections. The UN weapons inspectors were saying they found instances of Iraqi non-compliance with UN resolutions, but could not find evidence of active weapons programs. The US government insisted that it had such evidence. But instead of sharing everything we allegedly had with UNMOVIC and the IAEA so they could check it out, the governments of the US, UK, Spain, Australia, and a few others (Poland!) insisted on leaping ahead into a war. This should have changed people’s minds, exactly along the line of argument advanced by Dean, but most of the country’s elite—including the leaders of the Democratic Party—just sort of hummed along.

Obama is a Muslim Misperception on the Rise

Some interesting trends:

Nearly one in five people, or 18 percent, said they think Obama is Muslim, up from the 11 percent who said so in March 2009, according to a poll released Thursday. The proportion who correctly say he is a Christian is down to just 34 percent.

The largest share of people, 43 percent, said they don’t know his religion, an increase from the 34 percent who said that in early 2009.

My best guess is that we can just chalk this up to the general dynamic of recession-induced suspicion and incumbent unpopularity. But you have seen some efforts at the elite level to bolster this idea. For example, a couple of days ago Jon Chait noted Jennifer Rubin’s take at Commentary on the Park51 controversy which involved her saying that Obama’s “sympathies for the Muslim World take precedence over those, such as they are, for his fellow citizens. This is nothing short of an abomination.”

Chait noted that one ugly subtext here is that Muslims are—as such—not American, which is of course both false and also the kind of thing Commentary would be loudly and rightly objecting to if said about Jewish Americans. But the flipside is an effort to insinuate that Obama has insidious foreign/Muslim ties, albeit through rhetoric that’s a bit less crude than what you find at WorldNetDaily.

The Wayback Machine

Neil Irwin, August 26 2009:

Ultimately, the fact that Bernanke was a Bush appointee and a bit distant from the Obama White House may have worked in his favor, in that he is viewed in financial markets as independent from the administration. That helped assuage fears in financial markets that a chairman closer to Obama might boost the economy in the short-run at the expense of high inflation.

“The next big challenge will be maintaining the Fed’s independence and credibility after everything Bernanke has done to support the economy,” said Diane Swonk, chief economist at Mesirow Financial. “That credibility would be even more threatened if someone closer to the administration was put in.”

Consider an alternative scenario in which Larry Summers got the nomination instead, which led to higher inflation expectations over the past year. Today, we’d be better off!

Where Have All the Merrymakers Gone?

I was flattered to see that Chris Walla left a comment on my post about the music industry / National Association of Broadcasters rent-seeking team-up. He makes a few points, but probably the one that’s most directly in contradiction to what I said is:

Don’t ever assume that just because Flagpole Sitta is in your head or on your radio that those guys who were Harvey Danger must be rich, or even that they have an apartment.

That’s quite true. Still, based on what I can see on the internet all the guys from Harvey Danger seem to be doing okay in life—probably faring better economically than the average America, while mostly doing reasonably interesting jobs completely aside from however much money they made during their 15 minutes of fame or with the band’s less commercially successful albums.

But to put my point more precisely, the point is that whether or not the Harvey Danger crew made a lot of money off of “Flagpole Sitta” getting all that radio airplay, they certainly made more money than they would have made had “Flagpole Sitta” not gotten so much airplay. I liked the song so much that I bought the album, and I like it to this day. My favorite track off it is actually “Private Helicopter”:

Part of what’s interesting here is the story of how that song became a hit. Apparently the album was released in July 1997 and was a bit of an indie success. Then in January 1998, one radio station in Seattle played the song some and it became highly requested. Then it got picked up by KROQ in LA and spread from there to national radio and to MTV. All that exposure obviously helped sell more albums, concert tickets, t-shirts, etc. than would have been sold had KNDD in Seattle not played it in the first place. And of course other bands go from one huge radio hit to many huge radio hits and do get rich. Which is all just to say that FM radio exposure has traditionally been an important avenue to musical success. Like any sensible person I’m more instinctively sympathetic to musicians than to tech company executives, but the fact of the matter is that having mobile device makers pay money to radio stations so the stations can give money to the artists whose songs they play is a “solution” to a non-problem.

If you want to help your favorite band make more money, go to their show and buy some of their merch. Recommend their albums to friends. This proposed legislative change is loopy.

Endgame

Got real estate, I’m buying it all up in outer space:

— Howard Dean lines up with the bad guys.

— Ted Olson lines up with the good guys.

— College versus a stereo.

— What’s a good value in college education?

— “The Best Class Money Can Buy”.

— Reading things like this I wonder if there’s a case for a Romani State.

— Porajmos, the Romani Holocaust.

— Alaska politicians are the most hypocritical kind of politicians.

Fresh from the Scott Pilgrim soundtrack it’s my favorite Canadian band, Metric, playing as The Clash At Demonhead: “Black Sheep”.

The Coup of 2011

It occurred to me today that there’s at least some chance that in January of 2011 the US Senate will have 49 Democrats, Joe Lieberman, Charlie Crist, and 49 Republicans. Which is to say that Lieberman & Crist could form a two-man caucus, hold the balance of power, and drive organization of the Senate. Crist could leapfrog seniority and chair a committee. And if it looked like that might happen, mightn’t it make sense for Northeastern moderate Republicans (Snowe, Collins, Brown, Castle) and Southern moderate Democrats (Landrieu, Pryor, Hagan) to join their rebellion against the two party system? After all, Duverger’s Law predicts that we should only have two parties in any given place but it might make sense for those to be different parties in the different regions.

I recall back when Jim Jeffords switched parties in 2001 thinking that it would have been canny for Collins, Snowe, Specter, and Lieberman to all band together with him to form some centrist bloc that could control the agenda. There turn out to be lots of reasons why that sort of thing doesn’t happen. But one thing I’ve learned over the past nine years is that the American political system is very norm-driven in addition to rule-driven, and sufficiently entrepreneurial politicians can change things up quite a lot.

Development is Hard

One of the weirder things to happen over the past few years has been to see defense policy circles basically just recapitulate the errors made by in-retrospect-naïve development economists decades ago. That’s what came to mind when I read Reihan Salam’s post on Pakistan where he observes that though there’s a compelling case for humanitarian assistance in an emergency, it seems doubtful that there are good prospects for improving Pakistan’s economy over the long term through aid:

Planting crops, building infrastructure, restoring the agricultural and economic base: though I can certainly see how the U.S. and other affluent countries can be helpful in these domains at the margin, it’s fair to ask whether Pakistan’s government is willing to take the difficult steps it needs to take to provide a basis for long-term growth. Here are a few steps that come to mind: (1) a serious, long-term commitment to women’s literacy; (2) religious freedom for the Ahmadiyyas and various oppressed Muslim sects, Hindus, Christians, and other minorities; (3) aggressive land reform that would break the back of feudalism in rural areas; and (4) a sharp reduction in military expenditures directed at countering the supposed threat from India.

Until these steps are taken, one can plausibly argue that aid flows to Pakistan will essentially subsidize the country’s corrupt, militaristic elite. Money, after all, is fungible. It is the Pakistani elite that decided to invest in nuclear weapons rather than the rural poor, not the much-despised United States. But the U.S. has helped keep the Pakistani government afloat despite abominably bad human capital policies by transferring billions in military assistance.

But rather than target this critique at a hypothetical plan for Pakistan, why not focus on the actual plans unfolding across the border in Afghanistan? As I understand it, our policy there puts economic development at the core of our strategy. But if the US government knew how to produce development in foreign countries just because we want to see it happen, the world would be a very different place. The fact of the matter, however, is that promoting development is really hard. We know a fair amount about how to do humanitarian assistance. And we’re learning more and more about how to be helpful in supporting governments that want to do the right thing. But we don’t know much about how to promote sustainable development in the teeth of Afghanistan’s corrupt elites.

And I think we need to worry much more about the possibility that even though we’re nominally committed to improving governance, in practice we’re basically feeding the parasites whose malgovernance is stifling the Afghan people’s aspirations. My colleague Caroline Wadhams has repeatedly raised the point, for example, that Afghanistan’s budget is completely unsustainable absent massive, continued government-to-government financial transfers. That means that we’re creating an Afghan state whose real clients are in Washington rather than Afghanistan; a state whose officials would risk a massive financial hit if the war were to end.

Nominal Wage Cuts

The combination of sky-high unemployment and policymakers’ apparently determination to persistently undershoot inflation targets means that the only way for the economy to adjust is via a cycle of difficult nominal wage cuts. Steven Greenhouse’s article on workers at a Mott’s plan resisting demands for such reductions helps illustrate the difficulties of the process:

“It’s disgusting, honestly, that they want to take things away from the people who made them profitable,” said Ms. Muoio (pronounced MOY-oh), a $19-an-hour machine operator who has worked at the plant 15 years.

The company that owns Mott’s, the beverage conglomerate Dr Pepper Snapple Group, counters that the Mott’s workers are overpaid compared with other production workers in the Rochester area, where blue-collar unemployment is high after years of layoffs at employers like Xerox and Kodak.

Chris Barnes, a company spokesman, said Dr Pepper Snapple was seeking a $1.50-an-hour wage cut, a pension freeze and other concessions to bring the plant’s costs in line with “local and industry standards.”

The company, which has 50 brands including 7Up and Hawaiian Punch, reported net income of $555 million in 2009, compared with a loss of $312 million the previous year. Its 2009 sales were $5.5 billion, down 3 percent.

The problem here is that both sides are right. Thanks to economic developments unrelated to the juice industry, there is high unemployment in the United States of America and especially high unemployment in the Rochester area where major employers Kodak and Xerox have been hurt by technological shifts. The result is that exactly as Dr Pepper Snapple says, the full employment wage for the area has gone down and thus in some sense wages at the plant “should” decline. Conversely, as the union observes Dr Pepper Snapple is a profitable firm even under current conditions and operating the plant at the current wage level is a profitable undertaking. There’s a lot of economic surplus to be had in operating this plant, it’s currently divided between the workers and the owners, and the workers quite reasonably don’t feel like giving it all to the owners for no reason. So now we’re in a classic bargaining standoff where there are a whole range of outcomes that would be better for both sides than a continued strike but precisely for that reason neither side wants to give in.

Appropriate monetary policy would, by getting the price level up, help ameliorate the difficulties involved in these wage adjustment issues. What’s more, it would do so while avoiding the debt-deflation problem that would arise if the entire economy tried to Mott-ify and start paying everyone less simultaneously.

Sharon Angle and the Depression

I haven’t written much about the Sharon Angle Follies, but this exchange is quite interesting:

Q. Did Keynesian economics, the stimulus spending, work in the Depression of the ’30s?

A. No. And I think history has really proven that to be true. Most economists agree that the thing that really worked, which is a sad commentary, is the war.

And she’s right. Stimulus spending during the 1930s had little positive impact on the economy since there was in fact very little stimulus spending during the 1930s. Expansionary monetary policy moves made a great deal of difference in FDR’s first term, but then contractionary fiscal and monetary measures undertaken in 1937 prompted a new recession. Shortly thereafter, World War II revived the economy. But as Steve Benen says “The war was a shot in the economy’s arm because of all the spending.” The war is a textbook example of how deficit spending by the government can boost the economy by mobilizing real resources for some public purpose.

Now obviously it would be morally wrong to revive the economy over the next two years via a deficit-financed effort to destroy Germany and Japan. But the point is that if we use deficit spending to target and mobilize idle resources, the economy will grow. What’s more, if we target those resources and mobilize them to do something useful we’ll reap substantial benefits.

Department of Excuses

I was hanging out last night with an old friend from high school who’s pursuing his PhD in philosophy. And I was saying I think studying philosophy as an undergraduate is a useful thing for a political pundit to do. Realistically, you’re never going to “know more” than all the people out there. But people commit blunders of reasoning all the time, and if you can spot them you can add value to the conversation.

For example Narayana Kocherlakota (who the bankers of Minnesota, Montana, North Dakota, South Dakota, northwestern Wisconsin, and the Upper Peninsula of Michigan have selected to exercise important public functions) certainly knows more about economics than me. So when he says “[m]ost of the existing unemployment represents mismatch that is not readily amenable to monetary policy” I’m prepared to defer to him or to leave the job of explaining why he’s wrong (if he is wrong) to other people. But it’s worth observing that as a reason to avoid monetary stimulus this makes no sense, and is just a piece of misleading rhetoric that distracts people from the real issue.

The US unemployment rate stood at 4.5 percent in November of 2007. If it rose to 6.5 percent and none of the increase was due to structural factors, then Kocherlakota would advocate monetary stimulus to bring it back down to 4.5 percent. After all, if you can decrease unemployment by 2 percentage points you do it. But instead of rising to 6.5 percent it’s risen to 9.6 percent. Say that of that 5.1 percentage point increase, 2 percentage points are due to inadequate demand and 3.1 percentage points are due to structural factors. Then it be true that “[m]ost of the existing unemployment represents mismatch that is not readily amenable to monetary policy” and it would also be true that monetary expansion could reduce the unemployment rate by 2 percentage points. And using monetary policy to reduce the unemployment rate by 2 percentage points is a good thing to do. After all, 2 percentage points of unemployment is a big deal. If we could reduce unemployment by 2 percentage points, we’d alleviate a substantial quantity of human suffering up to and including suicide. We’d increase the total quantity of goods and services available for the world to enjoy. We’d reduce Unemployment Insurance expenditures and increase tax revenue, reducing the budget deficit.

So let’s do it!

Ending Homeownership Support

According to Tim Fernholz’s reporting, everyone is still really jazzed about the idea that government intervention into the economy is necessary to promote homeownership. Also according to Fernholz, this consensus is a good thing. I’m really dubious. He does make the very good point, however, that you can’t just lazily assert that you want to see the government get out of this business and “leave it to the private sector.” If we leave it to the private sector, things will look very different:

Before the government became involved in the mortgage market, homeownership was largely based on down payments and five-year mortgage loans that put borrowers at the mercy of short-term economic changes; in short, homeownership was for the wealthy. [...] Were the United States to ditch federal involvement in housing finance completely, as some critics have suggested, some of the trade-offs would include rising mortgage interest rates, reduced access to home loans and a dearth of long-term credit for home loans; not to mention that doing so immediately would lead to irrevocable economic damage.

I think it’s important here to distinguish between the short-term and long-term issue. I think introducing a chaotic reorganization of housing finance into the current economic mess would be an unwise risk.

But think about the long-run equilibrium here. There’s all this housing stock in the United States. And there are all these households in the United States. Households will want to live in houses and will be willing to pay for the privilege of doing so. And housing stock exists in which for them to live. If it’s not feasible for non-wealthy households to borrow funds to purchase homes, but non-wealthy households still have income they’re willing to spend on housing, then it will become profitable for cash-rich firms or individuals to start (or invest in) businesses that pay cash for houses and then rent them to non-wealthy families. The current existence of large subsidies for homeownership means that the rental market is dominated by efforts to serve the non-creditworthy with low-quality housing, and by amateurs engaged in small-scale landlording spurred by temporary relocation or as part of some kind of speculative scheme.

Absent such subsidies, there would be an obvious business opportunity for larger-scale professionalized residential property management companies. The analogy would be, I think, to the current market for office space which firms generally lease from other firms that specialize in the field of owning and renting office space. It’s a perfectly workable system, and shifting housing in that direction would inject some much-needed flexibility into the economy. It would also appropriately shift risk off the shoulders of middle class families and onto the shoulders of larger firms who are more capable of hedging and managing that risk.

Private Buses

Bus lines don’t have the power to transform neighborhoods that rail construction possesses. But buses are by far the cheapest and simplest way of adding mass transit, and municipal leaders should always have their eyes on potential ways to improve things. One possibility that naturally suggests itself is to let entrepreneurs start private intracity bus lines just as we have inter-city buses running from New York to DC, Philadelphia, Boston, etc.

Unlike the barbering field I would want to see regulation of this kind of activity since there are genuine public safety issues and it would be useful to consumers to impose some kind of uniformity so that buses are recognizable, have interoperable farecards, etc. New York City features sufficient demand for this kind of thing that the local authorities sporadically find themselves doing “dollar van” crackdowns. I’m not sure real market opportunities for this kind of thing would exist anyplace else, but it would probably be worth other cities’ while to try to find out. Ultimately, instead of a publicly-operated and publicly-subsidized set of bus lines, you could have a set of competing private bus companies with government subsidies provided directly to the consumer.

Parking Feedback Loops

Tyler Cowen recently did a column lamenting mandatory parking regulations which prompted a bizarre-but-predictable retort from Randall O’Toole who thinks libertarians shouldn’t worry about this kind of regulation. Which wouldn’t be so noteworthy except that O’Toole is the only person who does transportation policy at two different flagship institutions of American libertarianism. Fortunately, Tim Lee was able to chime in on the Cato blog to observe some of the pervasive impacts of mandatory parking lots on the urban fabric.

But I think Lee leaves out what is perhaps the most important dynamic here, the feedback loop.

The building I live in is two years old. Directly to its north is a vacant lot. To its south is a vacant lot. And to its west is a vacant lot. But it’s actually a very walkable area—only five blocks from the corner of 7th and H which is probably the most vibrant spot in the whole city. So a person moving into the building could get by without a car, but also might plausibly want to have one. If the developer had been required to build more than one parking space in the garage per unit in the building then a couple of things would have followed from that. One is that the building would have had to have been shorter, and thus contain fewer units, since it’s not feasible to dig the garage any deeper than its current depth. The other is that parking spaces in the building would have been “free” to anyone who bought a condo. Making it cheaper to buy a parking space would, at the margin, increase the proportion of residents who own cars.

So now you’ve got fewer people, a larger proportion of whom own cars. And what does that mean? Well, it means the neighborhood will support fewer walking-distance retail options. So what does that mean when the apartment under construction on the lot to the north is completed? Well, it means that car ownership is more desirable than it otherwise would have been. Which means a higher proportion of people will own cars. Which, again, means less pedestrian-oriented retail. And you can lather, rinse, and repeat.

It’s perfectly appropriate that some places are built around this dynamic. Everyone owns cars so all the retail facilities assume car ownership so anyone who moves there buys a car. But it’s pernicious that in many metro areas all places are like that. And mandatory parking regulations essentially make their emergence inevitable. There are tipping points where you either have a critical mass of retail that’s meant to be accessed on foot, or else you don’t.

We Are Here to Seek Your Rents

Under current law, radio stations pay royalties to songwriters but not to performers. Naturally, performers don’t like that rule but radio stations do. Obviously, I understand that performers want to make more money, but it’s hard to see what the policy problem with the status quo is. You don’t see artists with big radio hits starving in the gutter, you see artists clamoring for the opportunity to have their songs played on the radio. Given that radio spectrum is in much shorter supply than songs, the economic logic of the situation is that artists ought to pay radio stations, not vice versa, which is why you have endless payola scandals.

But instead of standing on principle, the National Association of Broadcasts seems to have hatched a plan to perfectly exhibit the concept of rent-seeking:

Radio would agree to pay around $100 million annually to artists and their representatives. In return, Congress would mandate FM radio chips in all handheld mobile devices. The deal is reportedly being worked out between the National Association of Broadcasters and the music industry, and could be taken to Congress later this year.

Now instead of simply transferring wealth from radio stations to artists (”and their representatives”) we’re going to transfer wealth from device makers and consumers to radio stations, and then have the stations pass a share of that wealth on to artists. All to solve the non-problem of artists not receiving any compensation for allowing radio stations to give them massive amounts of valuable free publicity. The good news is that device-makers have a lobby too, and in situations like that there’s actually some room for congress to consider the merits of an issue. Anyways, I wouldn’t want to get too melodramatic about this, but I think you’d have to say that the “handheld mobile device” sector is the single most vibrant slice of the American economy at the present moment so it’d be mighty odd to slap a de facto tax on their for no reason whatsoever.

LA Public School Quality

Kevin Drum writes a bit of a prelude to the latest Los Angeles public school controversy:

I don’t live in Los Angeles and don’t follow its affairs closely, but there’s at least one thing I can say about this: every single person I know who does follow LA politics, both liberal and conservative, thinks the LAUSD is a complete disaster. Obviously some of this is simply because LA has all the usual pathologies of urban school districts: it’s huge, it’s heavily poverty-ridden, it’s fantastically expensive to build new schools, and virtually all the middle class parents who normally drive concerns over quality have long since abandoned it for private schools. Still, even beyond that LA seems to be almost uniquely bad.

Fortunately, in some American cities this question is amenable to analysis since they agree to participate in the National Assessment of Educational Progress’ Trial Urban District Assessment program. And one of the few good things you can say about the LA Unified School District is that they’ve been consistent NAEP TUDA participants. So here’s a convenient summary of TUDA districts’ performance on 8th grade math relative to the average large American city. We see that LA’s black kids do worse than the average big city black kid. LA’s Latino kids do worse than the average big city Latino kid. And LA’s poor kids do worse than the average big city poor kid. LA’s non-poor kids, its white kids, and its Asian kids are average for kids in big city public school systems. Relative to the national average LA’s 8th grade math scores are below average for blacks, Hispanics, and Asians. They’re below average for poor kids and they’re below average for non-poor kids. But LA’s non-Hispanic whites do right in line with the national average.

Poking around on the TUDA site can show you more, including scores for other grades and scores in other subject matters. But judging by the 8th grade math score, the conventional wisdom that LAUSD schools are bad seems to be right on the mark—they’re doing substantially worse than the average big city. That said, middle-class white parents should perhaps relax a bit since about the only thing LAUSD seems to be average at is educating middle-class white kids. And perhaps if more middle class white families were involved in the system there’d be more political support for improvements.

At any rate, the idea that all big city public school systems are equally troubled is a fairly pernicious myth. TUDA isn’t a perfect statistical analysis of every subgroup imaginable, but it reveals substantial differences in system performance from city to city. More cities should participate and more people should learn the data.