Matthew Yglesias's Blog, page 2346

The Economics Of Trust

Catherine Rampell shows that Americans are not a very trusting people by OECD standards:

Trust correlates with a lot of other important economic variables, including the fact that high-trust countries tend to be richer countries and that more egalitarian countries tend to be more trusting countries. My colleague David Madland published an article on growth and the middle class recently in which he develops the argument that the main line of causation is that equality increases trust and trust increases growth.

It's difficult to disentangle these issues statistically, but I think the theoretical argument that trust causes growth rather than the reverse is strong since more trust should mean lower transaction costs. It also seems to me that high levels of trust (as in Northern Europe) boost political will to spend money on poor people (lacking in the US even in situations where people's spending priorities are generally progressive) since people have more confidence that anti-poverty spending is meeting genuine needs rather than to "welfare queens" or what have you.

What's The Matter With Medical Tourism?

It looks like President Barack Obama got a question about the idea of traveling abroad for cheaper health care services at an event in Virginia yesterday and offered the disappointingly dismissive answer that "My preference would be that you don't have to travel to Mexico or India to get cheap health care. I'd like you to be able to get it right here in the United States of America that's high quality."

That's my preference, too. But the fact of the matter is that wage levels in Mexico and India are substantially lower than in the United States, so it's possible to reap large gains in human welfare when American consumers pay Mexicans and Indians to perform labor-intensive work.

Neither increased medical tourism nor increased immigration by foreign-trained health care professionals is a silver bullet for the American health care system but they're both perfectly reasonable elements of improved policy. What we ought to be doing is looking at the practical problems here and trying to find ways to resolve them by developing cross-border standards. As Dean Baker is fond of pointing out, what people in poor countries really need in this regard is some kind of guarantee do this, that, and the other thing and you'll be eligible to work in the US or meet these standards, and Americans will be approved to travel to your clinic. This is no different from trade in manufactured goods, and considering the large and growing role health care services plays in the American economy barriers to exchange in this field are extremely costly.

Senator Bob Corker Holds Debt Ceiling Hostage To Arbitrary Spending Ceiling

Senator Bob Corker (R-TN) voted in favor of deficit increasing tax cuts last winter, and voted against the deficit reducing Affordable Care Act, but now he says we shouldn't increase the nation's debt ceiling unless the president agrees to an arbitrary cap on federal spending:

The Tennessee Republican told CNBC spending must be reduced to 20.6 percent of gross domestic product, which he characterized as a historic average.

"I have found that it's irresponsible not to be responsible prior to a debt ceiling increase," said Corker. "If we don't have something that dramatically changes spending in this country and gets it in line, I will not vote for a debt ceiling increase."

There are several problems with this. The first is that it implies the federal government should engage in pro-cyclical spending cuts every time there's a recession, and then make it up with pro-cyclical spending hikes during boom times when it's not needed. The second is that it falsely implies that revenues are somehow unrelated to debt issues. The third is that it completely ignores the question of need. The country has long spent money on pensions for elderly people. But "historically" there weren't as many elderly people as there are today or as there will be fifteen years from now. Historical context is a relevant consideration, but you have to look at all its dimensions. Keeping up with the federal government's traditional responsibilities will require a higher-than-traditional level of spending but that's no reason to leap to the conclusion that we should abrogate those responsibilities to stick with an arbitrary target.

Higher Education Costs Are Exacerbated By Declining State Aid, But The Increase Is Real

In response to my post on the screwy incentive structure facing college administrators a couple of correspondents wrote in to say that the real issue here is state and local disinvestment from their public university systems. That's certainly an issue, particularly over the past ten years, but it's not the issue.

Consider:

The private school line illustrates that the basic cost structure is rising at a rapid rate. The even more rapid increase on the public side reflects disinvestment, driven initially by the increased burden of Medicaid on state budgets and then by the recession.

Another way of seeing this is to look at Pell Grants:

In this case, Nancy Pelosi's tenure as Speaker of the House was associated with a huge increase in the federal government's willingness to engage in tuition assistance. That, however, had only a modest impact on the actual purchasing power of a Pell Grant since, again, the underlying cost structure is exploding too much.

Other correspondents noted to me that focusing on headline tuition can be misleading because many students get discounts of various kinds. That's quite true. And at the super-fancy elite schools, the discounts ("financial aid") tend to be allocated in terms of need. But the important point to understand about this is that current incentives point toward the median college using target discounting to improve the quality of its incoming freshman class (see Matt Quirk's excellent article on this) as a way of increasing prestige. That's very nice for the top-ranked seniors finishing high school, but it doesn't do anything to help the average student or the average family. And that's the point. The current incentive structure points toward always reinvesting excess money into moving up the prestige hierarchy rather than toward lowering prices to broaden the customer base.

Congress Readies To Mobilize In Favor Of Wasteful Medicare Spending

To my mind, the biggest farce in the world is the idea of congress passing a law in 2011 that aims at cutting Medicare spending at some point in the far-off future. When congress cuts food stamps, it cuts food stamps right away. When state legislatures cut child care funding, they cut child care funding right away. Yes, people rely on those services. Yes, immediate cuts make people upset. But that's life. So while we're all here in Washington talking about promising drastic Medicare cuts for my generation, Congress is also mobilizing to ensure that there will be no actual reduction in wasteful Medicare spending:

Mr. Obama wants to expand the power of the 15-member panel, which was created by the new health care law, to rein in Medicare costs.

But not only do Republicans and some Democrats oppose increasing the power of the board, they also want to eliminate it altogether. Opponents fear that the panel, known as the Independent Payment Advisory Board, would usurp Congressional spending power over one of the government's most important and expensive social programs.

Somehow a lot of conservatives have managed to convince themselves that by adopting Paul Ryan's plan to delay all changes by 10 years and then insert an additional level of rent-seeking for-profit insurance companies endowed with a fiduciary obligation to shareholders to lobby furiously for increased subsidies that the political problem here will go away. Meanwhile, the very same members of congress who voted this month to privatize Medicare in 2022 and enact draconian cuts throughout the 2020s and 2030s are here in town right now defending health care providers' right to charge the government high prices for services that don't work. Indeed, as recently as 2009 no less a figure than Paul Ryan himself was fuming at the idea of reducing government subsidies to for-profit insurance companies.

The Right Bailing The Left Out On Spending

I wrote about this earlier in the specific context of Grover Norquist, but Elise Foley's account of the Obama administration's rapidly unraveling deficit reduction initiative is another illustration of the fact that at the moment the right is big government's best friend:

The White House's proposed deficit talks with Congress appear to be unraveling before they've even begun.

House and Senate Republican leaders announced Tuesday that their sole appointees to the May 5th meeting would be House Majority Leader Eric Cantor (R-Va.) and Senate Minority Whip Jon Kyl (R-Ariz.)–neither of whom are budget leaders and both of whom function largely as political mouthpieces for their party. GOP leaders also each opted to send only one appointee, instead of the requested four, to the meeting.

You have a government set to steadily increase spending on autopilot as a result of demographic change and rising health care costs. And you have a Democratic President urging congress to enact spending cuts. But you have conservative politicians refusing to make a serious effort to reach an agreement out of some blend of taxophobia and fear of giving the President a win. The result, again, whether the right realizes it or not, is a gift to the wing of the Democratic Party that disagrees with Obama about the desirability of enacting spending cuts.

Taxes and Growth

Ross Douthat says that "conservatives need to accept that taxes will probably go up somewhat relative to the post-World War II average" but he still wants to lean against this trend because "[w]hatever the differences between the Scandinavian experience and our own, as a general rule tax increases tend to dampen economic growth."

Obviously this isn't a question that one is going to resolve in a single blog post, but I really think it's mistaken in a way that gets to the core of how so much of our political debate is basically besides the point.

Think about it this way: Grant to the tax skeptic all he wants about the idea that high taxes reduce the level of economic output. There's an easy story to tell here. The quantity of economic output is, in part, a function of how much time and effort people want to put into doing market production. And the amount of time and effort any given person wants to put into market production is in part a feature of how much purchasing power extra time and effort put into market production will get him. Higher taxes—either on his labor or on his consumption of goods and services—reduces the purchasing power of extra time and effort on market production, and thus tend to reduce the amount of time and effort people put into it. You can tell a different, more leftwing story about this, but the point I want to make here is simply that this rightwing story about taxes and output is a story about levels not growth rates. If Americans started working the number of hours per year that South Koreans work, our per capita GDP would go way up.

But that'd be a one time adjustment. Countries don't grow over time by steadily increasing their number of hours worked. They grow, roughly speaking, because people think up better ways to do things and then businessmen either adopt those new better methods or else they get put out of business by those who did.

And what do taxes, really, have to do with this? It's hard to tell a story. If someone invents a new, radically more efficient way of retailing over the counter medicine then CVS is either going to adopt that method or else it will be driven out of business. If America shifted to Swedish levels of taxation, it's not like the company's CEO would spontaneously forget that he's supposed to try to cut costs and increase profits. But Sweden's not just a land of high taxes. Until July 2009 it was also a country with a government run monopoly on over the counter medicine retailing. That is the kind of policy that could prevent the adoption of best practices. CVS will either adopt promising new methods, or else it'll go out of business. But while a monopolist might adopt promising new methods, it also might not. And if it doesn't, it won't go out of business.

That's bad stuff and that's why it was smart of Sweden to drop that policy. But these are the kind of initiatives that we should be looking at for pernicious growth impacts. Not so much state-owned firms (which are very rare these days) but the copious instances of incumbent firms trying to use their political clout to limit competition. Those limits on competition prevent the emergence and adoption of new, smarter, better ways of doing things and thus reduce our economy's ability to grow.

Endgame

I don't want no hippie pad:

— Conservatives still way ahead while pulling less than 40 percent of the vote.

— Singapore aims to be renmimbi hub.

— Arizona Governor Jan Brewer signs tea party flag bill.

— I'm old enough to remember when we had trials before punishing people.

— Misrata asks for NATO boots on the ground.

Descendants, "Suburban Home".

To Improve Living Standards, Improve Housing And Transportation Policy

Something people sometimes miss is that for technological improvements to boost overall living standards, the improvements need to come in sectors that constitute a large share of spending. So while the invention of the telescope and related improvements in lens-making in the 17th century were interesting episodes in the history of science, nothing of economic importance really happens until the Industrial Revolution started generating huge productivity improvements in textile manufacturing. The lens sector just lacked economic significance.

In that spirit, Karl Smith gives us the median household's spending pattern:

The biggest ones on the list are shelter and transportation, so these are the areas in which relatively small improvements would create big gains in living standards. Part of what's interesting here is that housing and transportation tend to be offsetting. My daily commute takes about 15-20 minutes and costs $0 because I live 0.7 miles from work and walk. But land that's located near central business districts tends to be very expensive. That could simply mean very tall buildings, but we have a lot of regulatory restrictions on density so instead it means expensive homes. But the "technology" of better public policy could create large improvements here.

Stockholm Taxi Syndrome

Neil Sinhababu is not a fan of haggling for cab fare:

The free market system one does see in some places, either as a legally established option or as the way things run de facto because price regulations aren't enforced, is one where you have to haggle with the taxi driver about the price of going to your destination. I've done it in other parts of Thailand, and I hear it's common in Malaysia. People's sentiments will vary, but I don't like this system. Haggling takes time, is unpleasant, and can result in no deal happening because somebody presented an overly ambitious ultimatum when both parties were actually willing to settle for a middle price. It also can lead to visitors who aren't familiar with the local haggling economy getting ripped off.

The one place I've been where haggling for cab rides is the formal system is Stockholm, Sweden where (as is often the case) the Scandinavians combine high taxes with radical free market ideas. It was, as Neil suggests, extremely annoying. But it also made me wonder why more cities don't do this. After all, the main impact seems to be that tourists get ripped off. But why should city governments care about stopping tourists from getting ripped off? Charging a kind of "ignorance tax" on visitors seems like exactly the kind of thing you'd expect cities to do.