Matthew Yglesias's Blog, page 2473

Liquidity in Nassau County, Insolvency in Ireland

David Halbfinger profiles the budget woes of Nassau County, Long Island. It's a good piece and worth reading. It's also important to keep in mind that the basic story here—voters want politicians who provide generous social services and low taxes—is really pretty different from the story in Ireland.

Nassau County (like, say, California) is a very rich place and could afford to support a very large public sector if voters were willing to pay the taxes. That's not to say they necessarily should want this, but Texas shows you can be rich and get by with low taxes and low services while Scandinavia shows you can be rich and get by with high taxes and high services. What you can't do is repeal math or have a dysfunctional political culture.

Ireland, though, just doesn't have the money. Households couldn't pay back debts to banks, so the government said it would assume the debts. But the government doesn't have the money either since its revenues come from taxing the very same households who can't afford the debts in the first place. This difference, roughly speaking, is why America is currently awash in long-term fiscal consolidation plans that aren't being implemented while Europe is awash in furious implementation of austerity measures that aren't undergirded by any kind of real plan.

Inequality and Stagnation

I think it's excellent that Bernie Sanders used his quasi-filibuster to try to bring more public attention to the issue of income inequality in the United States. Still, I think there are some important questions about this that remain largely unanswered in the progressive community. Most importantly, how does the explosion in income for the very tip-top of the income distribution related to the stagnation of wages at the median?

One answer would be that it relates very closely. That gains in the top 1 and top 0.1 percent (and so on) have come at the expense of the median. But I think it's equally plausible that this is wrong and the co-occurrence of explosive top-end inequality and median wage stagnation is basically a coincidence. Perhaps the top 1 and top 0.1 percent have gotten rich not at the expense of the average worker, but at the expense of the other college-educated professionals in the top 10-20 percent. Meanwhile, as a separate phenomenon middle class wages have stagnated simply because real GDP growth in the past 30 years has been disappointing.

If you look at what's happened in recent years, it's easy to see how banking policy has helped lead to the growth of very big banks at the expense of medium-sized ones. And it's easy to see how this might help very rich executives of very big banks get rich at the expense of modestly prosperous executives at mid-sized banks. And it's also easy to see how low aggregate demand has led to sky-high unemployment which prevents the broad mass of less-skilled workers from bargaining for raises. But these are pretty clearly separate phenomena. De-concentrating the banking sector might be good economic policy for the long-run, but it has nothing in particular to do with short-term labor market conditions. Conversely, adequate fiscal and monetary stimulus would turn the labor market situation around and help middle class wage earners, but that wouldn't change the fact that Jamie Dimon is a much richer and more important banker than was any bank executive in 1965.

Of course that's a story about 2007-2010 and not the whole 30 year view. But it's an example of how these issues can come untangled. Alternatively, if you look at the 1995-2000 period it was the only time since the end of the Great Inflation that we had a really tight labor market in the United States. It's also the only time that we had substantial middle class wage growth. But that wasn't a period when the trend toward accumulation of super-fortunes among the super-elite was halted.

Lone Star

I'm fascinated in a vague way by Europe's Texas-themed restaurants. Here's Lone Star Taqueria in Berlin:

My funniest entry in this genre for overall absurdity is the Texas Outback Bar and Grill in Helsinki, where you can get the traditional Tex/Mex/Australian dish of creamy chicken pesto with grilled goat cheese.

Who Exports?

Few things in life tickle my nationalist bone quite like talking about the balance of trade with Germans. One thing you often hear from Germans on this issue is a kind of patronizing line about "oh, are you saying we should make our products worse? If America has a trade balance problem, you guys should make better stuff!"

This whole line of thought seems to me to be largely based around confusing exports with net exports. If you just look at aggregate exports then Germany and the United States are very closely packed. There's only slightly more German-made stuff being purchased by non-Germans than there is American-made stuff being purchased by non-Americans. And if you look at adjacent countries, the combined GDP of Poland + Czech Republic + Austria + Switzerland + France + Belgium + Netherlands + Luxembourg + Denmark is wildly higher than Mexico + Canada. Indeed, France alone has a bigger economy than Canada and Mexico combined. Or to look at it in the most clear-cut way, the per capita output of the American economy is higher than the per capita output of Germany, whether measured at market exchange rates or with PPP adjustments.

This discussion then tends to loop around into the idea that they have more manufacturing in Germany (which is true) but output of agricultural commodities, software, movies, TV shows, music, etc. all counts as real output and the German economy is only about 27 percent manufacturing anyway.

Long story short, the issue here really and truly is one of German households engaging in a very high rate of savings and not one of Germany firms being somehow extra awesome at making desirable products. German firms are great, the German people make a lot of stuff, and on a per hour basis the German workforce is incredibly productive. And good for them! But they're not actually not outproducing the United States of America, they're buying less stuff. Which would be fine if when the world turned around to look at what's happening with these savings we saw the world's finest banking system financing highly productive investments all 'round the world. But is that actually what we see? I see German banks financing bum real estate developments in Ireland, Nevada, Spain, Florida, etc. It seems to me that people all around the world—but not least in Germany—would be better-off if German households owned more XBoxes, MacBooks, jamon iberico, and feta cheese and fewer indirect claims on mortgage-backed securities.

The issue of the questionable prudence of the savers is a real one here. If I heard more people saying with a straight face "Matt, the reason our households save so much is our banks are uniquely skilled at channeling savings into profitable investments" I'd feel much happier about the whole thing. Referencing the virtues of mittelstand industrialists doesn't really grapple with the full scope of the issue.

Paternalism and Poverty

Niklas Blanchard further explores the case for cash transfers:

I'm guessing that I have a much weaker paternal instinct than Matthew, such that once it was identified the socially optimal level of transfer, then I say just simply give people money — which is the cheapest thing to do from a deadweight loss perspective. I am guessing that Matthew would much prefer a system of voucher payments, in order to exert more control over how poor people spend money.

I . . . don't really know that I have a systematic answer to give to this. I'm actually not very sympathetic to our main existing "voucher"-type programs—namely SNAP ("food stamps"), housing vouchers, and things like LIHEAP (a really odd energy consumption subsidy)—and think replacing them all with cash grants would be a step in the right direction. But I don't think I would even call what's going on with these vouchers paternalism. Instead, it's a form of subsidy to politically privileged housing, agriculture, and energy sectors.

If you really want to talk about paternalism and giving things to the poor, then I think that if you imagine a country where education has been fully voucherized it would be a mistake to turn the vouchers into cash transfers. But that's because children and their parents are actually separate free and equal human beings whose welfare it makes sense to consider separately. The other thing is that I think it makes sense to make special provision for poor people's retirement security, for both practical and Parfittian reasons.

In terms of broader paternalism, I think there's something ugly about targeted anti-poverty paternalism but I'm all for broad-based solution. Tax booze and cigarettes, subsidize vegetables (as a first step don't subsidize partially hydrogenated soybean oil), etc. But I don't think these are really "poverty" issues.

My Favorite Tings German

Sometimes it's time to ask yourself "what would Tyler Cowen do?"

— National trait: Punctuality!

— Culinary innovation: Döner kebab.

— Band: Stereo Total.

— Painting: Ubu Imperator.

— Underappreciated historical figure: Otto Braun.

— Mineral water: Gerolsteiner.

— Movie: Das Weisse Band though if you consider that one Austrian I'll give you Das Boot.

I'm serious about the punctuality. I find the American thing where you're supposed to show up late for everything but exactly how late depends on the precise details of the situation to be incredibly stressful. I'm really compulsive about time in a way that most people I know find very annoying. Germans (and Swiss) have this right. Pick a time and stick to it!

Endgame

With a smile like hell:

— 15 charts about inequality in America.

— "JEFFERSON WRITES 'DECLARATION,' BUT BRITISH VOW ARMS BUILD-UP."

— Good post on cashing in.

— Obama's making a huge error in not continually calling out the need for Senate reform.

— The implicit message of the DREAM Act.

— Supervillain real estate.

German nineties rock! Plan B, "Life's a Beat".

Hate to Say I Told You So

Jamelle Bouie calls the Democrats' handling of the "nuclear option" debate in 2005 , observing "I'm sure there are plenty of Senate Democrats who look back and wish that they would have let Frist go nuclear."

Since this is something I managed to be right about at the time, it's worth rehashing the issue in some detail.

For one thing, note that what the Republicans were actually trying to do at the time was nuts. They wanted to use Calvinball mid-session methods to establish a new rule holding that supermajority voting would be used for everything except judicial nominations. That's a bit odd. If you were designing a legislature from scratch, I'd say that judicial confirmations are, along with constitutional amendments, one of the relatively few areas where it might make sense to require a supermajority. So it was perfectly fine that Democrats didn't want to simply "give in" on the point.

But this would have been a natural time to propose a broader reform of congressional procedure. It's possible that doing so would have produced broad congressional reform. It's also possible that doing so would have led the GOP to defend the status quo, and let Democrats continue obstructing the nominees in question. But instead the "gang of 12″ got us the worst of both worlds—Bush's nominees were put on the bench (bad) but the "principle" of minority obstructionism was upheld. It was a disaster and the disastrous nature of the deal was foreseeable at the time.

Counterinsurgency in Rio

Brazil's recently mounted an ambitious combined military/police effort to bring a particularly notorious gang-dominated slum under effective government control. Initially, the incoming troops were greeted as liberators. A week later, Alexei Barrionuevo reports:

Residents watched stone-faced as Mr. Beltrame passed. No one applauded or rushed to shake the hand of the man who had orchestrated the program to "pacify" Rio's slums ahead of the 2014 World Cup and 2016 Olympic Games. Instead, a 54-year-old mother confronted him for several minutes, telling him that a Military Police officer had entered her home, pinned her against her kitchen sink and demanded her son's money. [...]

After a week of searching here and in another slum, the police said they had recovered about 34 tons of marijuana; 692 pounds of cocaine; well over 400 pistols, rifles, machine guns and grenades; but comparatively little cash: about $68,000. All of the money, moreover, was recovered by the army and the federal police — Rio's own forces turned in none — raising broad suspicions of police corruption. [...]

Even military officials have expressed concern that their soldiers would be "contaminated" by the "culture of corruption" inside Alemão, a high-ranking military officer acknowledged. And despite the community being surrounded by about 2,600 personnel from the police and the military, most of the traffickers somehow escaped, fueling an investigation into whether officers helped some of them.

My thoughts naturally turned to Afghanistan. Think of the drug dealers as the Taliban, the Brazilian military as the US military, and the Rio police as the Afghan security forces. Obviously, the parallels aren't perfect but I think the comparison is instructive especially because there's no "ideological" or "ethnic conflict" element here and yet a somewhat similar underlying dynamic can clearly exist.

Haircutting the Eurozone

Barry Eichengreen has another good column on the Eurozone debt situation making the point that for countries such as Spain, Portugal, Greece, and Ireland to successfully implement a strategy of "internal devaluation" (i.e., wage and price cuts) they almost certainly need to restructure their external debts. That means coordinated action, and it means some kind of backstopping function from the government of Germany, the ECB, etc:

Now we get to the hard part. All of this requires leadership. German leaders must acknowledge that their country's banks are dangerously exposed to the debts of the eurozone periphery. They must convince their constituents that using public money to provide sweeteners for debt restructuring and to recapitalize the banks is essential to the internal devaluation strategy that they insist their neighbors follow.

In short, Europe's leaders – and German leaders above all – must make the case that the alternative is too dire to contemplate. Because it is.

Something that really comes through spending time in Germany and talking to members of the German press (and just scanning their papers) is that mass consciousness of "European" issues is just very low across the board here. I've asked a bunch of people if they think people understand the circular flow of debts and how it is that much of this money is owed back to German institutions, and nobody seems to think the answer is yes. If you look at the serious newspapers like FAZ and the Suddeutscher Zeitung, none of the featured articles on their websites this morning related to these European questions. So while leadership is certainly needed, it also doesn't seem incredibly likely. I think European elites thought they were doing something very clever in the 1990s when they sort of built up EU institutions by stealth. Part of what's happening now, though, is that the continent is paying the price for having built a set of political institutions that's totally at odds with public awareness.