Gas goes up, gas goes down... you can't explain that!

My favorite Bill O'Reilly moment came during an interview last year with David Silverman of American Atheists. O'Reilly was arguing that the regularity of phenomena in the universe supported the existence of God.

O'REILLY: I'll tell you why [religion's] not a scam, in my opinion: tide goes in, tide goes out. Never a miscommunication. You can't explain that.

SILVERMAN: Tide goes in, tide goes out?

O'REILLY: See, the water, the tide comes in and it goes out, Mr. Silverman. It always comes in, and always goes out. You can't explain that.

There's nothing better than a guy who calls people he disagrees with "pinheads" revealing his profound ignorance of 8th grade Earth Science.

This week, O'Reilly went on The View, and when the topic turned to gas prices, O'Reilly criticized the Obama Administration:

O'Reilly pushed back and said, "gas will be at 8 dollars a gallon." Host Joy Behar jumped in, criticizing O'Reilly's argument. "Americans know that gas prices don't have to do with Obama. It has to do with world affairs. Everybody knows that," she said. "I don't know that. I don't know that," O'Reilly charged.

Whether or not O'Reilly knows it, gas prices are set in a global market. How do we know this? The best evidence is the extent to which gas prices are correlated across different countries. If countries that have different energy policies see gas prices move the same way, then it's clear that they are exposed to the same global market. As the chart below shows, this is most certainly the case:

Source: U.S. Energy Information Agency

Given that these countries have differing energy policies, it seems that global economic trends overwhelm domestic concerns. Further, it's not clear what the Obama administration could even do here. The most frequent Republican criticism on this issue is that the U.S. needs to drill more, but the inconvenient truth is that U.S. oil production is at its highest level since 2003 and has grown considerably since 2008. Whether or not you think it's a good policy, the charge that the Obama administration opposes domestic drilling is patently false.

The U.S. accounts for roughly 9% of global oil production, so in order to impact the global price it would need to expand production far beyond any reasonable estimate of remaining reserves. Even then, the increased production would be offset by reduced output from OPEC member states (most of the world's oil is produced by countries with considerable market power).

So yes, Mr. O'Reilly, gas prices are set in a global market; we can explain that.

Wait, what was the question again?

Controversies involving Rush Limbaugh are as simple as they are boring: a guy who gets paid to say mean and offensive things says something mean and offensive, resulting in people being offended. These incidents are not worth the attention they receive, but 24-hour cable news being what it is, we all have to hear about it.

More interesting (to me, at least) is the line of reasoning used in his and other conservative's arguments.  For example, as Rachel Maddow ably explains, Limbaugh's statements suggest a profound ignorance about the workings of hormonal contraception.

Beyond the medical issue, there seems to be a lot of confusion about the policy question at hand.  Bill O'Reilly, while eschewing Limbaugh's vitriol, questions whether he personally, or society more broadly, should have to pay for people's sexual activities:

The question O'Reilly seems to be addressing is whether taxpayers should have to pay for birth control coverage. I think this is an interesting question and one that is worthy of debate. But it is simply not the question that is being addressed here. We are not discussing public provision of contraception, or any other healthcare, for that matter. The question here is whether private insurance companies should be required to cover hormonal contraception as part of their insurance packages. Thus, it is not a question of public spending, but rather one of regulation.

So if the concern is the cost of providing contraception, then this would reflect higher insurance premiums, not greater public spending. Does covering contraception increase insurance premiums? It doesn't seem like it. A review of published evidence by the Guttmacher Institute found that, "contraceptive coverage does not raise insurance premiums and that employers providing such coverage can, in fact, save money by avoiding costs associated with unintended pregnancy." Basically the cost of providing contraception is offset by the forgone cost of pre-natal care and delivery services. So Mr. O'Reilly's and Mr. Limbaugh's fears should be allayed.

With all the charged language and demagoguery, we seem to have lost sight of the topic. Instead, we have commentators denouncing non-existing policies and their imaginary consequences. Sure makes for good ratings, though.

Art & Infrastructure Mash-up

There is power from keeping ones voice soft and calm during an argument. Being quiet but holding your ground causes the other person to feel a bit ridiculous shouting at you and often they run out of steam. According to this article, Caracas, Venezuela got a similar result when using mimes as traffic cops. Apparently, the silence professionals are making an impact by injecting the unexpected as well as modeling quiet on the busy streets.

So here are some more suggestions on other ways to inject art into our societal infrastructures:

Playgroup meets courthouse: Would our trials go smoother if everyone started the session with some cookies and juice, wore name tags and had the freedom to pull down a nap mat from the wall if they got tired or cranky? All "it's mine" toy disputes are still decided by the judge.

Tax paperwork meets photojournalism: Similar to a nonprofit appeal, tax payers would get vivid and real photographs of the public spaces and families that are going to benefit from their tax money.

Opera meets utilities: Could mournful arias play anytime you used water or electricity in excess as a reminder of the dwindling resources? You could even add some triumphant fanfare when the offending appliance was turned off. The only downside is it could make showers even longer...

Punch & Judy meets political debates: Why no one has thought of this yet I do not know.

Comic strips meet public policy: All new bills and laws must also be rendered in comic strip form and distributed to everyone effected by them.

A New Way to Measure Poverty

The official federal poverty measure, designed in the 1960s, is the most commonly used indicator of economic hardship in America. Unfortunately, it provides no guidance on pressing questions like the role of regional price variations on poverty or the impact of Food Stamps.

Researchers have been aware of these deficiencies for some time. Now the Census Bureau will begin reporting supplemental poverty measures based on recommendations from the National Academy of Sciences. These new measures will take into account the impact of taxation, in-kind public assistance and medical out-of-pocket costs, and will use more realistic poverty thresholds.

While this is a new step at the federal level, the City of New York has been working on alternative poverty measures since 2008. The efforts of New York City's Center for Economic Opportunity are described here in today's New York Times. A copy of CEO's new report is available on CEO's website for download. It describes the development of the measure as well as poverty trends in NYC between 2005 and 2008.

Department of Really Unintended Consequences

One important factor that set the stage for last year's financial crisis was the "global savings glut". Massive savings accumulated around the world, particularly in East Asia, which needed to be invested somewhere--that "somewhere" ended up being the US housing market*. Paul Krugman explains:

"The speech, titled 'The Global Saving Glut and the U.S. Current Account Deficit,' offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century. The causes, argued Mr. Bernanke, lay not in America but in Asia.

In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what’s happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world."

The Chinese, in particular, provided a lot of capital. This begs the question, "why do the Chinese save so much?" Shang-Jin Wei, writing in VoxEU, has an answer:

"In my recent research paper with Xiaobo Zhang (Wei and Zhang 2009), we hypothesised that a social phenomenon is the primary driver of the high savings rate. For the last few decades China has experienced a significant rise in the imbalance between the number of male and female children born to its citizens.

There are approximately 122 boys born for every 100 girls today, a ratio that means about one in five Chinese men will be cut out of the marriage market when this generation of children grows up. A variety of factors conspire to produce the imbalance. For example, Chinese parents often prefer sons. Ultra-sound makes it easy for parents to detect the gender of a foetus and abort the child that’s not the 'right' sex for them, especially as China’s stringent family-planning policy allows most couples to have only one or two children.

Our study compared savings data across regions and in households with sons versus those with daughters. We found that not only did households with sons save more than households with daughters on average, but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed gender ratio. Even those not competing in the marriage market must compete to buy housing and make other significant purchases, pushing up the savings rate for all households."

His thesis makes intuitive sense: if the relative supply of women decreases, they can demand more on the marriage market. Why settle for a man of modest wealth if a wealthier man is just around the corner? So families with male sons have to amass more wealth if they want to marry those sons off.

Unintended consequences are a reality for policymakers. I wonder if the Chinese officials who first devised the "one-child policy" ever thought it would have an impact on the country's savings rate, let alone global financial markets?

__________________________________________________________________
* This is not intended to "blame" East Asians for the financial crisis. They did not force anyone to make bad loans or underestimate the risks in the housing market. East Asian savings merely provided the capital necessary for the investment boom.

Some Unhelpful Advice for Haiti

New York Times columnist David Brooks has an uncanny ability for sounding so reasonable in one column and sounding so crazy in the next. Last week, he managed to do both in the same piece.

Brooks began by correctly observing that the devastation from Haiti's earthquake was so great because the country is so poor. Disasters of similar scales in richer countries come with vastly smaller death tolls. However, while growth is the key to mitigating such tragedies, Brooks also (correctly) points out some unfortunate shortcomings in development knowledge:

"In the recent anthology 'What Works in Development?,' a group of economists try to sort out what we've learned. The picture is grim. There are no policy levers that consistently correlate to increased growth. There is nearly zero correlation between how a developing economy does one decade and how it does the next. There is no consistently proven way to reduce corruption. Even improving governing institutions doesn't seem to produce the expected results.

The chastened tone of these essays is captured by the economist Abhijit Banerjee: 'It is not clear to us that the best way to get growth is to do growth policy of any form. Perhaps making growth happen is ultimately beyond our control.'"

At this point, however, the wheels come off the bus. He argues that there are some uncomfortable truths that we must acknowledge about Haiti:

"...it is time to put the thorny issue of culture at the center of efforts to tackle global poverty. Why is Haiti so poor? Well, it has a history of oppression, slavery and colonialism. But so does Barbados, and Barbados is doing pretty well. Haiti has endured ruthless dictators, corruption and foreign invasions. But so has the Dominican Republic, and the D.R. is in much better shape. Haiti and the Dominican Republic share the same island and the same basic environment, yet the border between the two societies offers one of the starkest contrasts on earth — with trees and progress on one side, and deforestation and poverty and early death on the other.

As Lawrence E. Harrison explained in his book "The Central Liberal Truth," Haiti, like most of the world's poorest nations, suffers from a complex web of progress-resistant cultural influences. There is the influence of the voodoo religion, which spreads the message that life is capricious and planning futile. There are high levels of social mistrust. Responsibility is often not internalized. Child-rearing practices often involve neglect in the early years and harsh retribution when kids hit 9 or 10.

We're all supposed to politely respect each other's cultures. But some cultures are more progress-resistant than others, and a horrible tragedy was just exacerbated by one of them."

As I've written before, I'm skeptical of these types of cultural explanations of poverty. While they can be excellent rationalizations of current facts, they seem to have little predictive value. As the previous link highlights, German, Japanese and Korean cultures were all viewed as hostile to capitalism and progress... that is, until each of these countries rapidly developed, at which point their cultures were viewed as promoting hard work and innovation.

Further, while Brooks highlights the aspects of Voodoo culture that stifle economic progress, he neglects to mention that certain aspects of Christianity (at least on paper) similarly discourage investment and growth. Many Americans believe in the Rapture. They believe that at any moment, they will be brought up to Heaven to observe the Tribulation and Apocalypse on Earth. Seems like that sort of mindset might impede a small business owner deciding on whether or not to expand. And yet, America is the richest country in the world.

Worse still, is Brooks' suggestion for changing the undesirable aspects of Haitian culture:

"...it's time to promote locally led paternalism. In this country, we first tried to tackle poverty by throwing money at it, just as we did abroad. Then we tried microcommunity efforts, just as we did abroad. But the programs that really work involve intrusive paternalism.

These programs, like the Harlem Children's Zone and the No Excuses schools, are led by people who figure they don't understand all the factors that have contributed to poverty, but they don't care. They are going to replace parts of the local culture with a highly demanding, highly intensive culture of achievement — involving everything from new child-rearing practices to stricter schools to better job performance.

It's time to take that approach abroad, too. It's time to find self-confident local leaders who will create No Excuses countercultures in places like Haiti, surrounding people — maybe just in a neighborhood or a school — with middle-class assumptions, an achievement ethos and tough, measurable demands."

I'm not really sure what this even means. There are many complex reasons for Haiti's poverty, but I'm not sure how creating the international development version of "Kitchen Nightmares" is going to solve it. Unlike with the Harlem Children's Zone, we don't have the authority to install "no-nonsense" leaders in another country. And when we've tried it, it hasn't worked out so well.

In the short-run, Haiti will need a lot of humanitarian relief to recover from this disaster, something even aid skeptics agree on. The long-run question of how to help Haiti (and other poor countries) develop is a more complicated one and we don't have a complete answer. I don't think, however, that naive appeals to "no excuses" paternalism is going to help.

(for a vastly snarkier critique of Brook's argument, read this piece)

How I learned to stop worrying and love the deficit

Large deficits can elicit emotional reactions (see Tea Party Movement). But Robert Frank gives some good reasons not to be too worried about our current fiscal situation:

"...when total spending falls well below the level required for full employment, the economy won’t recover quickly on its own. Consumers won’t lead the way, because even those who still have jobs are fearful they might lose them. And most businesses won’t invest, since they already have more capacity than they need. Only government, Mr. Keynes concluded, has both the motive and opportunity to increase spending significantly during deep downturns.

Of course, if the government borrows to do so, the debt must eventually be repaid (or the interest on it must be paid forever). That fact has provoked strident protests about government “bankrupting our grandchildren.” It’s an absurd complaint. Failure to stimulate the economy would mean a longer downturn. That, in turn, would mean longer stretches of reduced tax receipts, increased unemployment insurance payouts, and depressed private investment. The net result? Higher total public borrowing and a permanent decline in productivity compared with what we would have had under effective economic stimulus. Once the economy is back on its feet, deficit logic changes. At full employment, extra borrowing often compromises future prosperity, just as critics say. On President George W. Bush’s watch, for example, the national debt rose from $5 trillion to $10 trillion. Some of that borrowing paid for an expansion of prescription coverage and a financial bailout a year ago, but most went for a war in Iraq and tax cuts that largely just allowed for additional consumption. Our grandchildren will be forever poorer as a result.

But the reverse would be true if government borrowing were used for productive investments. After decades of neglect of the nation’s infrastructure, attractive public investment opportunities abound. It’s been estimated, for example, that eliminating bottlenecks on the Northeast rail corridor would generate $12 billion in benefits at a cost of only $6 billion. These are present value estimates. When government undertakes such investments, our grandchildren become richer, not poorer...

In the meantime, however, such commentary continues to render intelligent political decisions about deficits less likely. For example, 58 percent of respondents in a recent NBC News-Wall Street Journal poll said the president and Congress should worry less about bolstering the economy than keeping the deficit down, while only 35 percent said economic recovery was a higher priority. If we really want to bankrupt our grandchildren, that poll charts a promising course."

Much of Frank's argument is basic Keyensian economics: in a recession, government spending is needed to offset the decline in private spending. But whatever your feelings about Keynes' theories, Frank's basic point is quite intuitive. The vast majority of the deficit has been caused by a collapse in tax receipts, which were caused by the recession. That means that anything that will cause output to grow faster will reduce the long-term deficit by increasing tax receipts. That means that spending today won't necessarily "bankrupt our grandchildren".

The politics of deficit reduction are all too predictable: when a party is out of power, they seem to find that old religion. But that doesn't mean we can't have a rational discussion about budgets.

Debating the Keynesian Multiplier

The old joke about economists is that if you laid them all together from head to toe they still wouldn't reach a conclusion. While there are many areas where economists broadly agree, the virtues of economic stimulus is not one.

The latest salvo in this rather un-gentlemanly (and gentlewomanly) debate comes via Harvard's Robert Barro, writing in the Wall Street Journal:

"The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP."

Barro is summarizing his research into the size and impact of multipliers, in which he analyzed US GDP and changes in government spending data over time. Increases in government spending, according to Barro, haven't led to proportionally larger increases in GDP, as Keynesian analysis might suggest.

Mark Thoma chastens Barro for essentially re-cycling an op-ed (compare his new piece to this article from January) and, in response, re-posts some of the criticisms made at the time by people like Paul Krugman, Brad DeLong and Christina Romer.

For as important an issue as fiscal stimulus is, there is surprisingly scant research into its effectiveness. The best work is by David and Christina Romer, but they look at tax cuts as opposed to government spending.

Fortunately, Ethan Ilzetzki, Enrique G. Mendoza and Carlos A.Vegh have just published some new research, which looks at the impact government spending on GDP for a panel of 45 countries (20 developed, 25 developing). Their conclusions include:

1. In developing countries, the response of output to increases in government spending is smaller on impact and considerably less persistent than in high income countries.
2. The degree of exchange rate flexibility is a critical determinant of the size of fiscal multipliers. Economies operating under predetermined exchange rate regimes have long-run multipliers of around 1.5, but economies with flexible exchange rate regimes have essentially zero multipliers.
3. The degree of openness to trade (measured as exports plus imports as a proportion of GDP) is another critical determinant. Relatively closed economies have long-run multipliers of around 1.6, but relatively open economies have very small or zero multipliers.
4. In highly-indebted countries, the output response to increases in government spending is short-lived and much less persistent than in countries with a low debt to GDP ratio.
5. The multipliers for the US in the post-1980 period are rather small (in the range 0.3-0.4) both in the short and long-run. On the other hand, multipliers for government investment are large (around 2).

While far from the last word on the issue, the Ilzetzki, Mendoza and Vegh (IMV) work provides us with a much more subtle analysis of the nature of the Keynesian multiplier. It suggests that developed countries can use fiscal stimulus to boost employment in recessions, particularly if the spending takes the form of government investment. Interestingly, IMV's conclusions support Keynes' original claims. I'm currently reading Keynes' "The General Theory" and stumbled upon these passages:

Fiscal stimulus in rich vs. poor countries:

"Thus whilst the multiplier is larger in a poor community, the effect on employment will be much greater in a wealthy community, assuming that in the latter current investment represents a larger proportion of current output." (p126)

Trade openess and fiscal stimulus:

"In an open system with foreign trade relations, some part of the multiplier of the increased investment will accrue to the benefit of employment in foreign countries... so that if we consider only the effect on domestic employment as distinct from world employment, we must diminish the full figure of the multiplier." (p120)

It seems that Keynes, writing in 1935, predicted findings (1) and (3) in IMV.

Finally, as one might expect, Paul Krugman weights in, yet again:

"On a happier note, this piece by Ilzetzki et al is interesting, and offers a wide range of multipliers depending on a country's situation. The question for the United States is which estimate is most relevant.

I'd say it's the fixed exchange rate estimate. Yes, I know, we have a floating rate. But they explain the relatively high fixed-rate number by pointing to Mundell-Fleming, which says that fiscal policy is effective under fixed rates because it doesn't drive up interest rates (capital flows in). We're in a similar position for a different reason: fiscal expansion doesn't drive up rates because we're at the zero bound.

Oh, we're also relatively closed.

The thing is that both the fixed rate and closed multipliers are around 1.5 — which so happens to be just about the number assumed by Christina Romer in her analysis for the Obama administration. Just saying."

The trouble with tariffs

The stated logic behind tariffs is that they protect domestic jobs against international competition. That's the justification behind the recent tariffs on Chinese tire imports imposed by the Obama administration. Many people think this is a laudable goal; but is it worth the cost? As Brad DeLong explains, probably not:

"Let's see... 250 million cars in America... need 4 tires per car... need new tires every 2.5 years. 400 million tires a year... $1.4 billion dollars a year... 10,000 worker jobs saved... $140,000 dollars per worker-job per year.

Looks like we could (a) let the Chinese sell us tires, (b) tax each tire by $2.50, (c) pay each tire worker who loses his or her job $100K a year, and we come out ahead: American households have more money to spend on other things, China has more jobs to help what is still a very poor country grow, and tire workers have higher incomes and more leisure as well.

But, you say, it would be stupid to impose a $2 a tire tax and use the money to pay each laid-off tire worker $100K a year.

That's the point: when the policy you are adopting is worse for everybody than a policy you agree is stupid, the policy you are adopting is best characterized as really stupid."

We should not ignore or diminish all concerns about free trade. But the trouble with tariffs is that they usually cost more than they're worth in terms of protecting domestic jobs*.

Some have suggested that this tariff is designed to boost support for healthcare reform among labor groups. In that case, the cost/benefit calculation changes depending on the desirability of the proposed legislation. However, the point is that tariffs are rarely justified by their overall economic impact.

*Not everyone would agree that protecting domestic jobs is a worthwhile public policy goal. Assuming that it is, however, we need to consider whether it's a cost-effective policy.

Why care about inequality?

This is a follow-up post to a previous discussion about economic inequality.

Emmanuel Saez, the UC Berkeley economist, recently produced a fascinating chart on income distribution in the US, depicting the share of national income held by the top 10% of Americans over time:


As you can see, the top 10% of families accounted for roughly 50% of national income in 2007, a level not seen since the time of Jay Gatsby. Though this is only one of numerous measures of income inequality, it clearly shows that the distribution of income in America is more skewed now than at any point since before the Great Depression.

Why should we care about this? There are good economic reasons for discounting measures of inequality. First, economics is not, in general, a zero-sum game. We can all do better even if some gain more than others. And conversely, while some poor societies are highly equal, equal poverty is no great virtue.

Second, there are good reasons why some people make more than others. People who make great innovations (eg the founders of Google) or who have specialized skills (eg neurosurgeons) have every right to be compensated for what they do, since they provide value for society. Bill Gates is enormously wealthy, but he didn't get that way by stealing from others; he became wealthy by providing valuable products to society, making everyone better off (Vista notwithstanding). The carrot of great individual wealth has done much to improve human welfare.

However, there are equally good economic reasons to care about inequality. First, sometimes inequality does result from zero-sum interactions. As Harvard labor economist Larry Katz notes,

"Much of the growth of high-end incomes stemmed from market forces, like technological innovation... But a significant amount also stemmed from the wealthy’s newfound ability to win favorable government contracts, low tax rates and weak financial regulation".

If government is captured by narrow interests, then we are likely to see the growth of policies that privilege one group and do nothing to help (or sometimes even hurt) other groups. A less regressive tax code, for example, helps the wealthy but can hurt the poor.

We should also care about changes in inequality because it can indicate how well the economy is functioning for different groups in society. For this reason it is important to understand what is driving inequality. For example, Katz and co-author Claudia Goldin have argued that inequality has increased because of a decline in the relative supply of highly skilled workers. This suggests that increasing college enrollment (and completion rates) for lower-income groups would stem the growth in inequality and increase incomes for poorer Americans.

On the other hand, Arnold Kling and others have argued that inequality has been driven by changes in technology and the growth of "winner take all" markets, as well as changes in family structure. People today are more likely to marry someone of a similar economic and educational background than they were 50 years ago. This re-enforces inequality among now and in the future, as successful, highly educated parents are likely to have successful, highly educated children. If these are the causes, Kling argues, then there is little government policy to can do to stop them, since we are obviously not going to put restrictions on technological progress or prevent wealthy people from marrying each other.

Inequality is not something that the government can directly set, like interest rates or the budget deficit. It is the product, of complex economic, political and social forces. It is important to recognize that inequality has many causes and that by understanding those causes, we can understand fundamental structures in the economy. We should care about inequality because we should care about an economy that satisfies the needs of everyone in society. By understanding what causes inequality, we can better understand how to get there.

On the other hand...

Maybe President Obama doesn't have plans to euthanize the elderly and disabled.

Last week Iowa Senator Chuck Grassely seemed to agree with Sarah Palin's "death panel" accusation, saying:

"There is some fear because in the House bill, there is counseling for end-of-life... And from that standpoint, you have every right to fear. You shouldn't have counseling at the end of life. You ought to have counseling 20 years before you're going to die. You ought to plan these things out. And I don't have any problem with things like living wills. But they ought to be done within the family. We should not have a government program that determines if you're going to pull the plug on grandma"

Due to the outrage caused by Palin's asinine comment, Congress is no longer considering end-of-life counseling as part of the health care bill. But now that the faux controversy is over, Grassely can re-acquaint himself with reality:

"Grassley says he opposes that counseling as written in the House version of the bill, but a spokesman said the senator does not think the House provision would in fact give the government such authority in deciding when and how people die. The House bill allows patients to decide for themselves if they would like such counseling."

If someone proposed an bill covering end-of-life counseling in a different context (were we not debating health care reform), it would be overwhelmingly popular. Too bad.

Usually when people make comments as dumb as Grassely's, I'm left asking myself whether they are stupid, crazy or disingenuous. Fortunately, Grassely answered the question for us.

The way we count stuff matters

NYU Law professor Anthony Thompson points out an interesting quirk in the way the census works: prison inmates are counted as living in the same county as their prision, even if they will be released within a year or two. Why does this matter? It has a direct impact on how federal and state congressional districts are drawn and how government money is channeled:

"...the district of State Senator Elizabeth O'C. Little, a Republican in upstate New York, has 13 prisons, adding approximately 13,500 incarcerated "residents." Without the inmate population, Ms. Little would face an uncertain future. Her district would probably have to be redrawn because it wouldn't have enough residents to justify a Senate seat.

The residence rule raises two fundamental issues:

First, inmates in nearly all states aren't allowed to vote, yet their presence affects electoral representation in places where they do not live permanently.

Second, a disproportionate number of state prison inmates are from urban areas. Most state prisons, however, are in rural areas. As a result, resources and electoral authority are transferred from inner cities to rural jurisdictions.

The effects are plain to see. Cities lose out on funds that could be used both for crime prevention and prisoner rehabilitation; rural areas do their best to thwart reform because they don't want to lose the benefits that prisons confer on them."

As I've written before, most American live in what the Census classifies as urban areas. So the residence rule will skew public funds in an inefficient and non-representative way.

Conducting a census presents myriad conceptual issues, and no strategy is perfect. But there's something fundmentally wrong with counting incarcerated citizens who are legally barred from voting towards a district's population total. This will ultimately give voters in those districts disproportionate voting power and will result in policy choices that do not reflect the will of the majority.

Prices also ration goods and services

Princeton bioethicist Peter Singer has an interesting piece in the NT Times Magazine about rationing health care. On the general point of "rationing", Singer says:

"There’s no doubt that it’s tough — politically, emotionally and ethically — to make a decision that means that someone will die sooner than they would have if the decision had gone the other way. But if the stories of Bruce Hardy and Jack Rosser lead us to think badly of the British system of rationing health care, we should remind ourselves that the U.S. system also results in people going without life-saving treatment — it just does so less visibly. Pharmaceutical manufacturers often charge much more for drugs in the United States than they charge for the same drugs in Britain, where they know that a higher price would put the drug outside the cost-effectiveness limits set by NICE. American patients, even if they are covered by Medicare or Medicaid, often cannot afford the copayments for drugs. That’s rationing too, by ability to pay."

While it seems painfully obvious, the point needs repeating: prices are used to ration goods. So the American healthcare system, which is largely based on individual ability to pay, rations healthcare in this way. Yes, most medical costs are payed by insurers, but insurance is expensive for individuals to buy and employer provided benefits are more generous for higher-payed workers.

No American should oppose any public health plan on the basis that it will ration care. Rather, we should judge policies based on how efficiently and ethically that care is rationed.

Thoughts on the Waxman-Markey Bill

The Waxman-Markey bill is the US's first major attempt to control the emissions linked to global warming. As you might expect, it has elicited a fury of views from economists.

Greg Mankiw points out the bill's major shortcoming: that most of the emissions permits are given away for free. These permits were projected to bring in $1 trillion in revenue over the next ten years, money that could be used to pay down the debt or help fund healthcare reform; instead, the bulk of this value will simply be given away to business interests.

In spite of the shortcomings, however, Dean Baker and Paul Krugman support the bill because the cost of doing nothing is higher than the cost of a bad bill:

"Temperature increases on the scale predicted by the M.I.T. researchers and others would create huge disruptions in our lives and our economy. As a recent authoritative U.S. government report points out, by the end of this century New Hampshire may well have the climate of North Carolina today, Illinois may have the climate of East Texas, and across the country extreme, deadly heat waves — the kind that traditionally occur only once in a generation — may become annual or biannual events.In other words, we’re facing a clear and present danger to our way of life, perhaps even to civilization itself. How can anyone justify failing to act?"

Provocatively, Krugman calls failure to act against the "existential threat" of Global Warming treasonous.

Don Boudreaux takes issue with Krugman's accusation:

"It's more accurate to say that Mr. Krugman is committing treason against reasoned debate. One of the most compelling arguments against climate-change regulation is not that global warming isn't occurring but, rather, that the dangers of further regulation far outweigh its likely benefits. Government regulation inevitably is a political animal; it's never guided purely, or even largely, by disinterested science.

Is it treasonous to worry about the influence of interest-groups on regulation? Is it treasonous to fear that centralizing more power in Washington will result in unforeseen negative consequences? Is it treasonous to believe that the threat to our well-being posed by further constraints upon markets is worse than is the threat posed by higher temperatures?"

The interchange between Krugman and Boudreaux highlights the major ideological conflict surrounding attempts to curb Global Warming. Putting science aside for a moment, we are talking about the correct response to a market externality (carbon emissions). For Krugman, externalities can be dealt with through policy intervention, such as a tax (or a cap-and-trade bill, which has the same desired intent). Boudreaux, on the other hand, is a firm adherent of Public Choice Theory, and worries about interest groups capturing the policy process and stifling individual liberty. Theirs is a conversation that would be substantively the same if we were talking about subsidizing research, overfishing or any other commonly cited externality. Krugman is more worried about the externality and Boudreaux is more worried about the intervention.

Like anything else, we economists can easily boil the issues of our time down to the basics of "government vs. the market."

Where can we find the money?

Here's a terrific Letter to the Editor from today's New York Times, courtesy of an economist from the US Air Force Academy:

To the Editor:

Re "Lettuce From the Garden, With Worms" (column, June 21):

Nicholas D. Kristof makes a compelling case for the link between how our food is produced and our health. He doesn't mention that agricultural subsidies (on sugar and corn, for instance) are one reason Twinkies are cheaper than broccoli. Here's a suggestion for how to pay for health care reform: Eliminate all agricultural subsidies.

Kate Silz-Carson
Colorado Springs, June 22, 2009

I couldn't have said it better myself.

We've been spending for a long time

David Leonhardt has a great piece in today's Times about where our tremendous deficit came from (here's the article and here's the accompanying Economix post). As he shows, the $1.22 trillion deficit for 2009 has many components:

"...we were [sic] able to construct a time series, showing how budget estimates for 2009-12 have changed over time. Because the C.B.O. attributes the changes in its estimates to specific causes — namely, changes in the economy and new legislation — we were then able to create four different categories to explain how the $846 billion annual surpluses that were forecast in 2001 for 2009-12 have turned into $1.22 trillion annual estimated deficits. Those four categories are: economic changes, which I refer to as the business cycle in my column; Bush administration legislation; Bush-era policies that are scheduled to expire but that Mr. Obama is extending; and new Obama administration policies."

While many are apoplectic about our current fiscal situation, it's important to distinguish between long-term and short-term deficits. Many, if not most, economists agree that it's a good idea to run short-term deficits during recessions. These deficits stem from a decline in tax revenue and from expansionary policy (eg the stimulus). Amazingly, the stimulus plan accounts for only 7% of our current deficit.

On the other hand, longer term deficit policies are a bigger concern. While the economy will recover and the stimulus will expire, spending on upper-income tax cuts (if made permanent) and long-horizon wars may haunt the government for years to come.

Governments run deficits all the time, so why worry now? The chief concern is that our creditors (countries like China and other foreign investors) may come to question our ability or willingness to pay them back. This could lead to sharply increased interest rates (which will hamper the economy) or necessitate the Fed to print money (which will cause a significant rise in inflation). UC Berkeley economist Alan Auerbach cites recent increases in interest rates on 5-year Treasury bills (a sign that investors worry about getting their money back) as evidence that this is already starting.

Like most American's, the US government will have to start tightening its belt sooner or later. What spending gets cut will likely be contentious. Some spending, such as universal healthcare, may be popular enough to maintain traction. Others, like extending the Bush tax cuts or some proposed Obama programs may not. It will be interesting to see our political system if it finally acknowledges we can't have it all.

Finding common ground between liberals and libertarians

Despite similar sounding names, liberals and libertarians are often at odds with each other. While the former favors a large welfare state and government intervention in the economy, the latter are loath to acknowledge any legitimate role for government. But as Bruce Bartlett points out, there may be more common ground than most think:

"On the surface, there would appear to be potential for an alliance. Libertarians tend to be liberal on social issues, favoring such things as gay marriage and drug legalization; and also liberal on defense and foreign policy, opposing the wars in Iraq and Afghanistan, and opposing torture and restrictions on civil liberties in the name of national security.

But libertarians are conservative on economic policy--favoring a free market with virtually no government intervention except the enforcement of contracts, and no government spending or taxes except those to pay for a very minimal police force and military.

Libertarians' views on social policy and national defense make them sympathetic to the Democrats, while their views on economic policy tend to align them with the Republicans. If one views social, defense and economic policy as having roughly equal weight, it would seem, therefore, that most libertarians should be Democrats. In fact, almost none are. Those that don't belong to the dysfunctional Libertarian Party are, by and large, Republicans."

Of course, Bartlett shows that these three areas do not have equal weight, as libertarians tend to emphasize economic freedom over all else.

For Bartlett, the dialogue between liberals and libertarians should involve each side conceding a little ground to the other:

"...many of the liberals persuasively argued that the pool of freedom isn't fixed such that if government takes more, then there is necessarily less for the people. Many government interventions expand freedom. A good example would be the Civil Rights Act of 1964. It was opposed by libertarians like Barry Goldwater as an unconstitutional infringement on states' rights. Yet it was obvious that African Americans were suffering tremendously at the hands of state and local governments. If the federal government didn't step in to redress these crimes, who else would?

...In return, liberals can learn something important about economics from libertarians. Liberals often turn to government to solve social problems simply because that is their default position. But often, there are private-sector alternatives that may in fact be superior. The rich diversity of America's states and localities shows there are many different ways of dealing with social problems that don't necessarily require more government."

"Liberalism", very broadly defined, is about promoting individual liberty and equality. But there are large differences within the philosophy. For modern American liberals, "equality" means a narrower distribution of incomes; for libertarians, "equality" means that everyone is free to pursue their economic interest, accepting a wide variation in individual outcomes.

Personally, I often find myself torn between these political views. I do favor a limited scope for government intervention, focused on expanding freedom rather than promoting traditional cultural institutions or engaging in social engineering.

Government should play a robust role in helping to alleviate freedom-reducing inequities in society; but we should also willingly acknowledge when government interventions in the economy privilege the few over the many, including regressive tax policies such as the mortgage interest deduction or the tax exemption on employer-provided health insurance. This is akin to Ed Glaeser's "libertarian progressivism", which is skeptical of certain government interventions because they favor the privileged over the poor.

Perhaps the key is avoiding falling in love with one's ideology. A dialogue between liberals and libertarians would involve the former admitting their great protagonist (government) is not always the best tool to enhance freedom, while the latter would admit that their great antagonist (government) sometimes is the best tool for enhancing freedom.

(HT: Mark Thoma)

The buck stops somewhere else (try Treasury... or the Fed)

Tyler Cowen says that Congress has opted out of much of the economic crisis. That might not be a bad move on their part:

While Congressional leaders are consulted on the major policies, Congress is keeping its distance, perhaps to minimize voter outrage. This way, Congress can claim credit if a recovery comes, but deny responsibility if the price tag ends up higher than advertised or if banks seem to be receiving unfair benefits from the government.

Of course, while this may be a smart decision for Congress, it might have serious consequences for economic policy in the future:

A Congress that won’t accept much responsibility for the financial bailouts, for example, is unlikely to rise to the occasion when the time comes to make tough decisions on the budget...

On any single policy, the abdication of Congressional responsibility may not be a problem. Sometimes it is good to let the technocrats have their way. In the longer run, though, the United States requires a Congress courageous enough to accept responsibility for potentially unpopular policies. We are moving further away from that every day.

Most economic models typically assume that government will follow some optimal policy. But in reality government is subject to incentives, and in this case Congress doesn't have much reason to get too involved in this crisis. This is why the Federal Reserve (and much of the bureaucracy) is insulated from political pressure: there are tough decisions to be made and no one up for re-election wants to make them.

As Cowen points out, the danger comes about when the elected body doesn't have to make the tough decisions. When the time comes and they have to address the budget deficit--or whether to nationalize part of the banking sector--they won't have built up political capital by leveling with the public about what needs to be done and what can be done.

It may be time for Congress to bite the bullet and, well, actually do something.

Trying not to oversell it

Wouldn't it be great if "green jobs" could simultaneously end the recession and prevent global warming? Of course it would. But before you sit down to your free lunch, Paul Krugman reminds us that it's not quite that simple:

"...limiting emissions would have its costs. As a card-carrying economist, I cringe when 'green economy' enthusiasts insist that protecting the environment would be all gain, no pain."

UCLA economist Matthew Kahn explains why most economists feel this way:

"Many of these ideas are very much worth pursuing for environmental reasons. But it’s doubtful they offer a double dividend of helping to jump-start the economy. For one thing, the global financial crisis is fundamentally about different issues: the popping of housing and credit bubbles from St. Petersburg to San Francisco, the associated implosion of a highly leveraged international banking sector, and the resulting fallout on real economies. These pressing problems won’t be solved by switching to hydrogen-powered cars or installing solar panels on every roof.

Second, let’s be honest: Anti-carbon regulations will simultaneously create and destroy jobs. Take the United States: Given the country’s current reliance on cheap, coal-fired power plants, carbon caps will translate into higher electricity prices. (How much higher remains an open question.) Older manufacturing firms—especially in energy-intensive industries such as petroleum and coal products, paper, cement, and primary metals—will face higher costs of doing business, and this may lead them to shut down or seek international locations where electricity prices are lower and carbon regulation is less stringent.

In the long run, a little creative destruction will likely be a good thing. The same regulations that might kill jobs in smokestack industries will act to stimulate a host of new manufacturing opportunities, ranging from energy-efficient household appliances to solar panels to energy-efficient vehicles. Even former U.S. Vice President Dick Cheney might consider buying a fuel-efficient vehicle if gas prices rose enough.

But don’t count on clean technology to pull us out of the doldrums. The green revolution won’t happen overnight."

The obvious, but important lesson to remember here is that tradeoffs are everywhere. A "green revolution" is a long-term project, and in the mean time investments in alternative energy divert investment from other projects.

But it's not all bad news. Just because green policies aren't free, we can still afford them:

"Even with stringent limits, says the M.I.T. group, Americans would consume only 2 percent less in 2050 than they would have in the absence of emission limits. That would still leave room for a large rise in the standard of living, shaving only one-twentieth of a percentage point off the average annual growth rate."

So while there are no free lunches in life, there are some cheap meals, if you know where to look.

Let my rich people go!

Ed Glaeser wonders if the new, higher marginal tax rates in New York State will lead to an exodus of the rich:

The problem with a tax on millionaires is that the economic success of a region is closely tied to its ability to attract highly skilled workers. The figure shows that a 10 percent increase in the share of a metropolitan area’s adult population with college degrees in 1980 is associated with a 7 percent increase in that area’s income between 1980 and 2000.

Any policy that makes a place less attractive for workers with high skill and education levels, including millionaire’s taxes, carries risks since localities that are dependent on skilled workers for long-run economic success. If all states simultaneously taxed the rich, then this would be essentially a national policy with little geographic consequences, but if some states raise taxes more than others, then economic activity will respond to those taxes.

All else being equal, people will seek to live in states with lower tax rates. Of course, all else is not equal. Many northeastern states have higher tax rates (New York, New Jersey, Massachusetts), but they also have other amenities that attract highly educated and productive workers. People are attracted to the culture, vibrancy and dynamism of cities like New York and Boston, and probably wouldn't choose Fort Lauderdale just because of the tax rate.

However, as Glaeser points out, if there are lower cost alternatives within commuting distance (such as Greenwich, Conn in the case of New York City), then high income workers may choose to relocate. Given the fact that the rich are more able to afford moving, this is a completely plausible story.

It's a tough spot for cash-strapped states, but they may face situations where raising tax rates will actually lower tax revenues (yes, in very rare cases, supply-side economics does work!). However, if there are no lower tax alternatives within communiting distance, then states might be able to tax the rich without creating an exodus. If Colorado raised its income taxes, high skilled workers in Denver or Boulder will probably not move to Wyoming just to take advantage of the tax break.