Matthew Yglesias's Blog, page 2354

Trust and the Economy

I think people have stronger views of other people than they do of issues, so this is an interesting question from Gallup:

This seems to me like a huge problem for progressive politics. Imagine that you're a rich businessman. You probably wish your taxes would be lower rather than higher. Under the circumstances, you'll find it psychologically comfortable to believe that lower taxes on rich people will be good for the national economy. And if the public is more inclined to trust rich businessmen about the issue of what's good for the economy than they are to trust the President of the United States, then it's going to be hard for the President of the United States to win a high-profile argument on the subject.

Appropriations Deal Leaves Defense Relatively Untouched

My colleague Ben Armbruster considers the proposition that advocates of reduced military spending should find plenty to like in the appropriations deal between Barack Obama and John Boehner and finds it wanting:

Defense Secretary Robert Gates called for at least $540 billion for FY2011 and this budget deal funds DOD "just north of $530 billion" a figure that includes military construction, which the AP seems to have left out. Thus, as Defense News noted yesterday, "defense spending is left relatively untouched" in this budget deal. Moreover, as the AP correctly noted, the overall baseline budget is an increase of $5 billion from last year. How would deficit and debt hawks find "plenty to like" in that?

The AP also ignores the lopsided nature of the deal's DOD spending versus State Department and foreign aid cuts. The $8.4 billion cut to the foreign affairs budget represents a 14 percent reduction. If the budget deal subjected DOD to the same level, the Pentagon would have lost nearly $80 billion. And while the AP highlighted some of the military programs that would be scrapped — many of which came with strong bipartisan and Pentagon support — it largely ignored how reductions in foreign affairs spending will effect U.S. diplomacy.

CAP Sarah Margon has a piece on the impact of the diplomatic cuts.

What's more to note the obvious, defense spending has a large event-driven element. Sometimes that's like "Hitler invaded Poland, so we're going to build a big military." But other times it's "we've got this giant military laying around, and Gaddafi's about to kill a bunch of people in Benghazi, we should step in and do something." In the latter sorts of cases, since the marginal cost is low relative to the average cost, it often seems to make sense to do more at the margin. But this should be understood as part of the economic cost of a national security strategy that amounts to maintaining a large quantity of military-related excess capacity. Not only does the capacity cost money, but the existence of the capacity encourages its use which costs even more money.

The False Promise of Class Size Reduction

The idea of reducing class sizes is very popular with the public, and there's no organized interest group opposition to it. Consequently, one of the main things we've done in US education policy over the years is make class sizes smaller. But as Matthew Chingos writes for CAP, there's precious little reason to believe this is a good use of money:

The evidence on class size indicates that smaller classes can, in some circumstances, improve student achievement if implemented in a focused way. But CSR policies generally take exactly the opposite approach by pursuing across-the-board reductions in class size at the state or federal level. These large-scale, untargeted policies are also extremely expensive and represent wasted opportunities to make smarter educational investments.

Large-scale CSR policies clearly fail any cost-benefit test because they entail steep costs and produce benefits that are modest at best. But what about reductions in class size at the district or school level? When school finances are limited (as they always are), the cost-benefit test any educational policy must pass is not "Does this policy have any positive effect?" but rather "Is this policy the most productive use of these educational dollars?" Assuming even the largest class-size effects in the research literature, such as the STAR results that indicate that a 32 percent reduction in class size increased achievement by about 15 percent of a year of learning after one year, CSR will still fail this test because it is so expensive. Reducing class size by one-third, from 24 to 16 students, requires hiring 50 percent more teachers. Depending on how much extra space schools have, new facilities may need to be built to accommodate the additional classes.

The better approach for any given lump of teacher compensation money is to plow it into ensuring that you're recruiting and retaining the best possible teachers. In other words, just pay the teachers you have more money and hope that generates more and better applicants for positions in the future. It's interesting to note, however, that the exact same trend exists in private and public schools. The public—whether as voters or as consumers—wants quantity over quality, probably because people like to pay for attention. But from a policy point of view, there are significant positive externalities associated with kids actually learning more while the customer satisfaction that comes from smaller class sizes doesn't.

The Political Economy Of Industrialization

Consider a broad sketch or model of a national economy that contains roughly five kinds of people. You have industrialists who've made large fixed capital investments in factories that run generous operating profits. You have landowners who are living off renting land to peasants. You have peasants whose labor (and therefore earnings net of rent) is very unproductive due to scarcity of land. You have workers whose wages are low due to competition from the peasants. And you have a variegated class of service professionals—shopkeepers, tailors, accountants, etc.—who work for the rich people.

Industrialization in Yiwu, China (my photo available under cc license)

In this economy, the fundamental fact is that there's a huge gap between the workers' wages and their productivity because their wages are held down by the low average productivity of workers + peasants and the peasants' wages are held down by a shortage of land. This wage gap creates giant profits for the industrialists. But it also creates an opportunity. If the workers band together, they can force the industrialists to share a larger portion of the profits with the workers. On the other hand, the higher the industrialists' profits are the more rapidly they'll build new factories pulling more peasants into the (marginally) higher wage factory sector and (marginally) increasing the available land per peasant.

This creates a number of possible political coalitions:

1) The industrialists might persuade the peasants that their interests are aligned in pursuing high factory profits and rapid industrial expansion, especially if the peasants have traditionalist views on sex & religion and the industrialists can forge an alliance with the majority church.

2) The industrialists might forge a broad front of "richer than average" people, aligning the landowners and the professionals with themselves in defense of private property defined not as abstract free market liberalism but rather as upholding all existing legal privileges.

3) The workers might form an alliance with the professionals on the theory that redistributing urban earnings from industrialists to workers will broaden the professionals' customer base and give them more practical autonomy.

4) The industrialists could engage in more-or-less voluntary profit sharing with the workers to form an urban coalition that reduces real earnings of rural land with trade policy.

5) The workers could forge a broad coalition with the peasants by combining the profit-extraction agenda with proposals to dispossess the landowners and redistribute their land.

Obviously, that's all pretty skeletal. But that's the idea of a model. And historically and presently, I think it's a model that approximates a lot of scenarios. Some versions of numbers one and two are the classic right-wing political strategies of the industrializing west. Number four is roughly the ruling philosophy of the People's Republic of China and I think it more or less describes what the liberal coalition was trying to do in 1930-70, when it rarely had a working majority but always influenced events. Number three is more like the "revisionist" socialism of the SPD in pre-World War One Germany. And obviously number five is the most properly left-wing approach.

Anyway, nothing particularly original here. But I think it's important to note both that this kind of political economy is an important element of human history and also that it doesn't apply at all to the contemporary West. It's founded on the combination of low rural labor productivity and the existence of viable technological and organizational strategies for industrial production. And over time, even thought he mix of political responses implemented varies from place to place, it comes to an end. Eventually the quantity of people involved in rural production falls to the point where average rural labor productivity is quite high. At this point the windfall cooperative surplus of the industrial sector largely goes away, and higher industrial wages are directly related to the adoption of productivity enhancing technologies that reduce employment. Trying to apply political ideas from that world to today's world doesn't work. Of the five political strategies sketched above, only strategy number two has a clear applicability to a modern economy. And I think it's not a coincidence that some version of number two seems to be winning the day.

Barack Obama's Proposed Debt Failsafe Trigger

Diane Rodgers found a lot to like in the president's fiscal policy speech, but also had some concerns, among them about his proposed debt trigger mechanism:

[P]roposes a "fail-safe" trigger that I worry would be either ineffectual because of its exemptions (Social Security and Medicare, and "emergency" situations) or even economically damaging because of its procyclical nature (cutting spending during recessions).

According to the information the White House sent around about the proposal, they're allegedly avoiding the pro-cyclicality issue. Their bullet points say:

— A debt failsafe that will ensure that our nation's debt is on a declining path as a share of our economy. If by 2014, budget projections do not show that the debt-to-GDP ratio has stabilized and is declining in the second half of the decade, the failsafe will trigger an across the board spending reduction, including on spending through the tax code.

— The trigger will ensure that deficits as a share of the economy average no more than 2.8% of GDP in the second half of the decade.

— Consistent with prior fiscal enforcement mechanisms put in place by Presidents Reagan, George H.W. Bush and Clinton, the trigger should not apply to Social Security, low-income programs, or benefits for Medicare enrollees.

— The trigger should also include a mechanism to ensure that it does not exacerbate an economic downturn or interfere with our nation's ability to respond to a national security emergency.

Obviously the problem here is that to the extent that you allow for discretionary fiscal policy as a tool of macroeconomic stabilization, you're undermining the efficacy of the caps. But that's more or less inherent to the issue and I don't see what the president can say or do to resolve the tension. What I think is actually promising here is the reference to tax deductions as being part of the trigger. That means that insofar as members of congress are aware that these loopholes should be closed but don't actually want to vote for closing them, the trigger mechanism will give them a way to vote for something that makes closure inevitable and then just passively fail to vote to restore the loophole. Our existing tax code, after all, contains plenty of provisions that nobody would put in were they not already there but that few people feel bold enough to specifically try to take out.

The Fraud Free Financial Crisis

Gretchen Morgenson and Louise Story have a great piece in The New York Times about the curious fact that the greatest financial collapse in many decades has produced no prosecutions of any leading figures anywhere.

They run through a lot of the nuance issues here. White collar criminal cases are very difficult to prosecute for a whole variety of reasons. And the very lax regulation that contributed to the crisis also made it difficult to prosecute, due to poor documentation. I might add that conservative hegemony in the federal judiciary makes the outlook dimmer. But as they say right up at the beginning of the piece, the key sentiment underlying the whole thing is that the Obama administration felt it was important to restabilize the global financial system. That meant, at the margin, shying away from anxiety-producing fraud prosecutions. And faced with a logistically difficult task, that kind of pressure at the margin seems to have made a huge difference. There simply was no appetite for the kind of intensive work that would have been necessary.

I'm not as persuaded as, say, Jamie Galbraith is that the failure to do this is a key causal element in our economic problems. Indeed, I'd say that if you look at the situation literally, Tim Geithner's judgment was probably correct. But psychology and politics matter. I think I've said this before, but I think the country would be in a better place if the passage of TARP has been immediately followed by Nancy Pelosi punching a bank CEO in the face on live television then letting everyone who voted "yes" give him a nice hard kick while he writhed in agony on the House floor. That would have been a useful way of distinguishing between banks and bank executives. Instead, the country rapidly developed bailout backlash. But that didn't make policymakers stop trying to ensure the health of the financial system. It meant a shift away from a strategy of recapitalization through public investments to a strategy of recapitalization through profits. Of the two ways of helping banks, the latter is dramatically friendlier to bankers but it's also easier to hide. And that, in turn, really has hurt our economy.

This whole episode continues, in my view, to be under-discussed and under-analyzed. There was a need to actually lance the psychic boils in order to make it possible to conduct recapitalization on the necessary scale. Fraud prosecutions could have worked, but even a good smack in the face would have helped.

Paul Ryan's Economic Vision For America: Cut Public Services To Finance Foreign Real Estate Speculation

This ground has been covered elsewhere, but Macroeconomic Advisers—a forecasting firm that, while by no means perfect, needs to sell its services to paying customers rather than gullible politicians—has delivered a righteous smackdown of the Heritage Foundation economic forecast that Rep Paul Ryan used to justify the benefits of his economic plan:

— We agree that addressing the nation's long-term federal fiscal imbalance is critically important, and that doing so might head off an eventual fiscal crisis that could threaten our standard of living over the long haul.

— The Committee's report included a simulation analysis showing the economy strengthening immediately as a result of the fiscal contraction; that is, a negative short-run fiscal multiplier.

— We don't believe this finding, which was generated by manipulating an econometric model that would not otherwise have produced the result.

— That analysis implied other questionable results — some of them probably unintended — including over $1 trillion of net new borrowing from abroad over the coming decade and the construction of several million unoccupied houses.

— We consider the analysis both flawed and contrived, and are concerned it will create the false impression among some legislators that implementation of the Budget Resolution would entail no short-run macroeconomic pain.

If you want to get policy right, you can't just look at debt through a moralistic "debt is bad" framework. Too much debt is bad. But it's bad for specific reasons. Like perhaps if the government weren't borrowing so much money, the private sector would borrow more and put the resources to good use. For example, foreigners might decide to lend tons of money to build useless houses. That sounds crazy. But it's not totally crazy. It did, in fact, happen in 2005 and 2006. But counting on it happening again seems unwise. And more to the point, even if you did temporarily employ tons of people in the "build useless houses with foreign money" sector, what you really be achieving? Why not have the government borrow the money and use it to build trains?

Exercizing More Improves Health Outcomes

As Tyler Cowen writes, "'health care' is only one way of many to better health care outcomes" which is why it's important and appropriate that the Affordable Care Act addresses health in a variety of ways other than the provision or subsidization of health care services. That's also why it's unfortunate that the House voted yesterday to repeal the creation of a Prevention and Public Health Fund in the Department of Health and Human Services. Especially odd is the stated reasoning for killing the project:

The bill, H.R. 1217, passed in a 236-183 vote. Only four Democrats supported it, as most argued that killing the program would reduce access to preventive healthcare, lead to higher healthcare costs later on and even destroy jobs in the healthcare industry.

Republicans dismissed all of these arguments and repeatedly called the program a "slush fund" that the secretary of Health and Human Services (HHS) can use without any input from Congress. Republicans said the program is so nonspecific in the law that it allows HHS to use it for dubious purposes, such as signs indicating exercise spots.

Now if you were to say "we'd rather use the money to lower taxes on rich folks" then fine. It's true. If you spend money on improving access to exercise facilities that reduces your ability to use the money to produce lower taxes on rich folks. And a large minority of Americans agree with Ayn Rand and Greg Mankiw that status quo policy in the United States is immorally unfair to rich people, and that taxation of rich people is morally wrong even if it improves overall well-being. But is the proposition that exercising more will promote good health outcomes really controversial? Are we going to start denying this in the name of low taxes? Can we get fitness freak George W Bush to talk this over with congressional Republicans? It's great to disagree about fiscal policy and the public purse, but at a minimum our political leaders should be giving roughly accurate advice to people.

The Natural Born Citizen Farce

The Arizona State Senate passed a birther bill yesterday mandating the following:

A CERTIFIED COPY OF THE PRESIDENTIAL CANDIDATE'S LONG FORM BIRTH CERTIFICATE THAT INCLUDES AT LEAST THE DATE AND PLACE OF BIRTH, THE NAMES OF THE CANDIDATE'S MOTHER AND FATHER, INCLUDING INFORMATION SUFFICIENT TO DETERMINE THE CITIZENSHIP OF BOTH PARENTS, THE NAMES OF THE HOSPITAL AND THE ATTENDING PHYSICIAN, IF APPLICABLE, AND SIGNATURES OF ANY WITNESSES IN ATTENDANCE.

The name of the game here, as Dave Weigel explains, is that it "has been written so that Barack Obama's certificate of live birth, which does not include the name of the hospital and attending physician, does not count." This reminds that though I am most certainly a natural born citizen of the United States of America, it turns out that I can't produce a birth certificate to prove it. I wanted to use mine a few years ago to document something to get a passport, and my dad didn't know where mine is. The best I can figure out my mother put it . . . somewhere . . . and now it's lost. But fortunately people don't run around making bad faith arguments about my non-American origins.

But a larger issue here is the injustice of the natural born citizen clause of the constitution. Why shouldn't an immigrant be president? My understanding of the provision is that the Framers were worried that a foreign power might send a prince to the United States to marry the President's daughter and then take over. Something like that. But this hardly seems like a pressing danger!

Barack Obama And The End Of Big Government Liberalism

In the wake of the Affordable Care Act's passage I wrote a post about the end of big government liberalism. My theme was that given how much the cost of meeting the government's existing programmatic commitments was scheduled to increase over the next several decades, that the scope for taking on net new programmatic commitments was small to non-existent. The near future of progressive politics would be a combination of action on other fronts (climate change and marriage equality, for example), efforts to devise politically and economically feasible ways of paying for existing programmatic commitments, and efforts to find ways to reduce expenditure on existing programmatic commitments in order to shift funds into other areas. It was not, as I recall, among my most popular posts among liberals. And in some ways, it's not a conclusion I was thrilled with myself. But I think Barack Obama's budget speech yesterday sets it in its proper context.

After all, listening to the speech on a rhetorical level I know a lot of liberals liked the speech. There, at last, was the talk about the need for the rich to pay more taxes. There, at last, was the defense of the welfare state. There, at last, someone gave Paul Ryan the spanking he so richly deserves.

All true . . . and yet . . .

. . . this was a speech that sketched out a position to the right of my "End of Big Government Liberalism" posture. He suggested ways to pare back projected increases in the cost of existing programmatic commitments to health care. And he proposed some increases in taxation to cover projected increases in the cost of existing programmatic commitments to health care. And then on top of that he proposed to pare back spending on other existing programmatic commitments ("domestic discretionary spending") in order to cover projected increases in the cost of existing programmatic commitments to health care. That doesn't leave any wriggle room if visions dance in your head of universal pre-k or paid family leave. It implies an end to the agenda of smaller class sizes and higher teacher salaries. It avoids the kind of catastrophic cutbacks in infrastructure spending and basic R&D that the Ryan Roadmap implies but also seems to rule out any substantial increase.

In those respects, I think Obama went too far. But the fact that it's possible to go that far while staying within the confines of acceptably progressive rhetoric highlights the basic shape of the policy problem. Existing programmatic commitments are going to get more expensive in the future so from the standpoint of "what should the government be doing" we'll need to run faster just to stay in place.