Economics | The American Scene

03/17/10

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Notes Towards a Policy Platform: Part VI - deferred

My last topic was going to be education, but I need to pick up my son. And, unfortunately, I won’t have time later. And starting tomorrow I’m taking Robert McKee’s famous Story Seminar, so I won’t have any time to write.

And I need to do more work before writing about education. This is a topic where I know more than most of what I yabber about, given my involvement on the board of a charter school, but precisely because I know more I almost know too much to be really coherent. And, as well, I feel like I haven’t fully grappled with Diane Ravitch’s latest arguments on the subject, and since nobody knows more than she does I really can’t open my mouth until I’ve figured out where I agree with her and, when I disagree, why.

So this topic is deferred, but not abandoned.

Oh, and in answer to your unspoken question: yes, I finished the screenplay (2 drafts), and yes, that’s why I suddenly am doing a bunch of blogging. Not promising to continue at this pace; indeed, I suspect that when I start getting feedback, and see what I need to change, I’m going to drop off the face of the earth again. Or, if I don’t need to make major changes to this screenplay, when I start working on the next one (which could be pretty soon).

But I’m back for now. And when I leave again, I won’t be gone for good.

And now, if anyone knows a producer they’d be willing to introduce me to . . .

by Noah Millman

03/17/10

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Economics

Notes Towards a Policy Platform: Part V

Another short one: Infrastructure.

Notice how President Obama and a variety of talking heads said a lot during the stimulus debate about infrastructure projects, but almost none of that money has been disbursed? Notice that China seems to be able to build entire cities faster than we can build a single skyscraper in New York? Think that might be a problem?

We’ve come a long way from the days of Robert Moses. The local regulatory net that entangles any effort at development is not exclusively a left- or right-wing phenomenon; generally, what it’s about is protecting economic incumbents without regard to ideology in any larger sense, to say nothing of any public interest. The result is not only to stifle development but to wildly raise costs because of lack of competition. Nobody wants to get into the game unless they have a lot of political chits and very deep pockets. Lack of competition means that the few who are in a position to play can now hold up the local administration for a variety of “incentives” to bother to build the project they wanted to build in the first place. Other “incentives” are provided to local interest groups to buy their acquiescence in the project. Then once ground is broken and the public is desperate just to get the project done, the project is changed – costs to the public go up while the public benefit goes down as the project is scaled down in various ways. All of this feeds further opposition to development.

I wish I knew the solution to this problem. But I have a suspicion as to one part of the solution: streamline democratic accountability and create incentives for functioning political competition.

When it’s not clear who is responsible for these kinds of decisions, you practically guarantee local regulatory capture by parochial interests, whether these are NIMBY types out to block development or incumbent developers out to stop competition. And when you don’t have functional political competition (which is the case in many urban areas that are effectively one-party states) there is limited incentive for public officials to effectively tend to the public interest. This is one reason I’d like to see an effective Republican party in the Northeast.

At a Federal level, though, I don’t know how much one can do about these problems. They are a huge impediment to effective public spending on infrastructure, though.

by Noah Millman

03/17/10

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Economics

Notes Towards a Policy Platform: Part IV

Short one: immigration.

I live in New York City. New York City is really crowded. Most of the country isn’t. We have plenty of room to grow, and if we want to amortize our debt effectively, we should do it over a modestly growing population.

But we need a population that is more productive. Right now, we’re selecting our immigrant population very peculiarly. We strictly limit the number of highly-skilled immigrants. Unskilled immigrants who sneak in we harass and generally leave vulnerable to economic exploitation and other suffering, but we don’t do much of anything punish the exploiters.

It seems to me that a very simple way of cutting the Gordian knot of immigration would be to auction visas.

Each year, Congress would set the number of visas available for auction. They would then go up for bid by anybody. With a visa in hand, anybody who passed some form of security check to make sure you’re not a criminal, spy, terrorist, etc. would be permitted to reside in the U.S.A. for the duration of the visa, and work, study – whatever.

NGOs could purchase visas for political or economic refugees. Employers could purchase visas for desired employees. Universities could purchase visas for desired students. Individuals could purchase their own visas to do whatever.

Work here without a valid visa? Somebody’s defrauded the government; you should have purchased that visa at auction. There’s really no good excuse for not having one. Sanctions could be split between the individual and the employer according to some formula. Take the whole question out of the hands of the INS and give it to the IRS, who seem to get better results generally.

With such a system in place, I think you’d immediately see an uptick in the average skill level of the immigrant population. The economy would benefit from reduced labor market friction. And the American people would get the benefit of the revenue from the auctions, which would offset the socialized transaction costs of absorbing immigrants.

The United States is anomalous relative to other countries that are generally open to immigration (e.g., Canada, Australia) in paying negligible attention to trying to attract skilled immigrants. Rather than having the government decide who we need to bring in, this is basically a proposal to let the market decide.

by Noah Millman

03/17/10

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Economics

Notes Towards a Policy Platform: Part III

Let’s talk taxes.

We’re going to have to raise them.

There: I said it. You can’t borrow as much money as we’ve borrowed in the last decade, and are going to borrow in the next decade, and expect to simply grow out of it, not with a mature economy like ours. The Federal Government is going to have to raise more revenue.

Now, if that’s the case, and if we’re not simply going to settle for lower growth and a spiral into stagnation, we’re going to have to pay much more attention to the efficiency of our tax system.

The most economically efficient tax out there, meaning the one that is creates the least distortion and the least dead loss, is a value-added tax. There’s a limit to how high you can raise a VAT without creating a black market. But right now, in the U.S.A., the rate is zero. It could be higher. It should be.

The VAT is usually hated by progressives because it’s regressive. Which it is. But spending is generally progressive, and the overall level of spending is up and is going to stay up. And if we cut military spending, and spend more on health care for children and less on the (relatively wealthier) elderly, then our spending priorities are getting more progressive.

Personally, I’d like to see the payroll tax eliminated and replaced by a VAT. The payroll tax is a tax on employment; currently we have very high unemployment. Seems to me we should be doing everything we can to encourage employment. Moreover, paying payroll taxes is a major incentive for individuals to hire other individuals on the books. The VAT is much harder to evade. We’d effectively be bringing a big chunk of the underground economy onto the books. Finally, the employees most willing to be paid off the books are those who are themselves off the books – i.e., illegal immigrants. Not only would replacing the payroll tax with a VAT directly bring this underground part of the economy under the tax umbrella, it would reduce an incentive for employers to hire illegals, and eliminate an incentive for illegals themselves to remain undocumented (currently, going on the books could well mean an after-tax pay cut).

In the income tax code, we need to see a revival of the Spirit of ’86: close loopholes, broaden the base, and lower rates. I think the conservative enthusiasm for lowering the top rate is misguided today; top rates aren’t at 70%, to say nothing of 90%. Rather, we should lower the whole curve, and simplify the code as much as possible. The mortgage interest deduction is long overdue for trimming. If we could eliminate the corporate income tax entirely, and raise capital gains rates to be equal to regular income tax rates, I’d be thrilled, though that would potentially create some very perverse incentives to turn everything into a corporation and provide sole employees a wide array of in-kind benefits. But the general direction that I would take the tax code should be clear: eliminate taxes that are disincentives to employment or investment; eliminate loopholes; simplify the code; and raise the overall amount of revenue to the Federal Government by instituting a VAT. The overall goal: a tax system that encourages capital formation, that generates more revenue than our current system at a lower cost in terms of tax-avoiding malinvestment, compliance costs, and so forth.

by Noah Millman

03/17/10

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Economics

Notes Towards a Policy Platform: Part II

Larger than military spending looms the specter of massive, out-of-control entitlement spending, primarily spending on health care.

President Obama’s proposed health reform was sold, initially, in large part as a way to control this spending. That’s the biggest reason why it’s proven at best tepidly popular: because controlling spending means taking something away from current recipients.

A variety of advocates have tried to explain that there’s a lot of low-hanging fruit, but these protests have convinced almost no one. With good reason: dramatic improvements in an industry’s efficiency produced by government mandate are not our usual experience of the world.

As smarter advocates have pointed out, the biggest driver of the high price of American health care is simply that we pay providers more than other countries. American doctors rightly perceive that, relative to their own historical experience, they are doing worse and worse – and relative to other options for people with their cognitive capabilities (Wall Street, say) they are doing wildly worse. The idea that the “problem” with American medicine is that they are still paid too much strikes them as simply mad.

But there’s another way to slice the same data. We spend more than any other country on health care, for broadly comparable results. But we spend hugely more than comparable countries on health care for the elderly, specifically. If you compare spending on routine, preventative care for the young, not so much.

The challenge, then, is not so much to figure out how to pay doctors less but how to change the employment mix of the medical profession as part of an overall reorientation of our medical spending modestly away from the elderly (who will inevitably consume the lion’s share of health-care dollars) and towards the rest of the population.

It’s obvious why this would be wildly unpopular. The elderly vote reliably; kids don’t vote at all. The elderly are also much whiter on average than the young. To be blunt about it, while grandma may well want good health care for her granddaughter, she may not feel as strongly about the daughter of her home-health aid.

But, like I said, this isn’t a post about the politics of the matter; it’s about what we need to do to face our competition. Poor health care for young people and working-age people is a big problem. It makes a material contribution to the poor educational outcomes among the poor, which in turn results in the entrenchment of poverty with wider negative social and economic consequences. The tie between employment and healthcare produces labor market rigidities, inhibits entrepreneurship among the non-rich, has strangled a number of old industrial corporations – it’s a huge problem.

Meanwhile, on the subject of entitlements more generally, the expectation of a comfortable retirement in one’s early 60s is not tenable in a world of longer life expectancies. Most people are going to have to die sooner or work longer. I think people should work longer.

My own inclination is to say that Obama’s health-care proposal is a step in the right direction, the kind of reform that would make it easier for a subsequent Republican administration to reform it in a direction that will be more open to the kinds of price signals that drive medical innovation and, in turn, actually lower costs. Such reforms are essentially impossible until a functional individual insurance market is created, and the Obama health-care plan, if it works, promises to create such a market. That’s a big “if” – but if it doesn’t create a functional individual insurance market, then it will fail, and the citizenry, rather than demanding repeal, will demand that it be changed to make that market work. (Or to eliminate the insurance industry, which I wouldn’t be averse to if you could create a system where price signals reached the consumer in some fashion, something like the DeLong plan.)

And speaking of the DeLong plan: I want to highlight one paragraph from same:

Sin taxes (and, perhaps, someday general revenues) pay for an army of barefoot doctors and nurses and mobile treatment vans roaming the country, knocking on doors, and providing preventive and other long-run lifestyle services for free: Let me examine your prostate. Mind if I check your refrigerator and tell you how to eat healthier? Have you exercised today? I’m a Pilates instructor, and we could do a session now? Are you up on your immunizations? Anybody here have a fever and need antibiotics? Come on out to the van and I’ll clean your teeth.” The idea is to make the preventive care cheaper-than-free, to insure that nothing with a high long-run benefit/cost ratio gets left undone because people would rather get a bigger check the next April to use to buy an HDTV.

That army of barefoot doctors and nurses and so forth? Would they be members of 1199? Or, even more likely, AFSCME? I ask because I like the idea a lot – it’s exactly the kind of paternalistic initiative I tend to go for – but I want to get some idea of what kind of insane long-term costs we’re going to be locking in with this initiative?

by Noah Millman

03/17/10

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Economics

Something in Reserve

Matt Yglesias writes more than a post per day about how he doesn’t understand why the Fed isn’t being more aggressive at easing to further reduce unemployment, or why we can’t simply devalue our currency against the renminbi, or why we don’t set a higher inflation target, or other topics related to monetary and exchange rate policy.

I understand where Matt’s coming from, and I don’t want to discount the possibility, which he raises frequently, that this is all a matter of class interests. But on the admittedly idealistic assumption that everyone involved is actually trying to look out for the national interest, here’s one reason why we might be acting more cautiously than he would like.

The dollar remains the predominant world reserve currency. As such, the U.S. government benefits from the ability to issue debt at a lower interest rate than would otherwise be the case, and the rest of the U.S. economy benefits in turn from this subsidy.

It will not always remain so. The United States’ percentage of the global economy will inevitably shrink over the next generation, as the mega-nations of China and India, along with Brazil and perhaps other nations (Russia? Turkey? Iran? Vietnam?) begin to realize their considerable upside economic potential. Regardless of whether Europe and Japan stagnate, and whether the United States regains the growth trend it was on prior to the recent crisis, at a certain point it is no longer going to be tenable for much of the world to transact in dollars or to subsidize American borrowing.

What will replace the dollar is a real question; most likely it will be no single other currency but a basket thereof, or a supra-national construct pegged to such a basket. But regardless of what replaces the dollar and how, eventually Americans are going to lose the benefits of being issuers of the global reserve currency.

But many factors will affect the timing of this shift, and one of them is the perception in foreign capitals of how serious America is about protecting the value of its currency. I don’t happen to think that markets are so skittish that an announcement of a 4% inflation target, say, would result in a run on the dollar. But I do think it would be a sufficiently significant departure from past practice as to raise real questions about the long-term prospects for dollar debt holdings. Which, in turn, would lead to an acceleration of the process of unwinding the dollar as global reserve currency.

Again: this is inevitable. It’s going to happen one day either way. But when it happens, it’ll cost us something in terms of diminished growth. So we rationally want to delay the inevitable.

A more aggressive effort to raise the rate of inflation in America, or to devalue the dollar against, particularly, the yen and renminbi, could indeed result in higher nominal growth in the United States, and hence lower unemployment. But it could also result in a more rapid move away from the dollar as a reserve currency, with a resulting rise in borrowing costs over and above the expected effect from higher expected inflation, and a cost in terms of lower long-term growth for the U.S. economy.

Which policy is optimal? That’s a judgment call; even in retrospect, we probably won’t agree on the answer. But the policy mix we’ve got now – a big spike in government debt and short rates at zero, but not actually maxing out the credit card and trying to end extraordinary monetary actions like quantitative easing as early as possible – doesn’t strike me as a crazy one. The distribution effects of the policy should be disturbing to someone with Matt’s political commitments – but that might be something we need to tackle some other way than by throwing caution to the winds on monetary policy.

Ultimately, I think the debate about whether the inflation target or the exchange rate should be here or there is somewhat off the most important point. The important point is that a shift away from the dollar is inevitable, and we should be preparing for a day in which it is relatively more expensive to borrow abroad than it is today, and where we have to generate more capital at home.

Does that mean we need to borrow less today? Not at all. You borrow when rates are low. Rates are now low.

What it does mean is that we need to be much more attentive to how we invest the money that we’re currently borrowing.

Both the United States and China spent a lot of money on economic stimulus during the recession. But the character of that spending was and is very different. The American stimulus was composed of things like tax cuts to boost consumer spending at the margin, assistance to the unemployed and poor for similar purpose (and to alleviate acute suffering), aid to the states to forestall layoffs of government workers, and so forth. China’s stimulus focused on rolling out to the interior provinces and second-tier cities the kind of infrastructure development they’ve already executed in the higher-income coastal regions. America borrowed from the future to keep people afloat today – which is good, because it is much more expensive to climb out of a hole than to avoid falling in. But China is investing in the future, their internal market. As the coast gets wealthier, it will move up the value chain, producing more and more valuable products for export; as the interior develops, low-wage manufacturing will move inland, exporting not only abroad but to the coastal regions, and importing higher-value products from the coastal regions rather than predominantly from abroad.

The United States can’t do what China is doing. We don’t have a deeply impoverished hinterland to develop, Mississippi and West Virginia notwithstanding. But there is still plenty we could do – in terms of changes to our tax code, to public investment priorities, to regulatory regimes, to to our immigration policy, to our education and health delivery systems – to prepare for a more competitive world, a world in which we will have to generate roughly the same amount of capital we deploy, rather than importing it from abroad.

I don’t get the sense that, in general, this is where the Obama Administration’s heart is, though the Administration definitely has some ideas. That said, it’s abundantly clear that the Republic Party as an institution is incapable of even thinking coherently about this kind of question. There are some smart guys out there writing papers and things, but the political leadership is completely incapable of even asking coherent questions about America’s future, much less answering them. Rather, the party is committed to a strategy of incoherent populist rage coupled with interest-group logrolling. It is hard for me to recall a time when I saw less to like about the G.O.P., and yes, I include the Bush years in that assessment. The Democrats seem wrong to me about a whole bunch of things. The Republicans are not even wrong.

Assuming I can keep focused, I’ll try to frame my own thinking on some of the areas I mention above in a series of posts. Consider them notes towards a policy platform for a party that does not currently exist.

by Jim Manzi

01/21/10

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Politics

President Obama’s Excellent New Banking Proposal

President Obama has outlined a new banking proposal:

The White House wants commercial banks that take deposits from customers to be barred from investing on behalf of the bank itself—what’s known as proprietary trading—and said the administration will seek new limits on the size and concentration of financial institutions.

The limits on size and concentration are extensions of existing caps, and the meaning of this part of the proposal can only become clear with a lot more detail.

The first, and core, concept of the proposal is the re-segregation of commercial banking from proprietary trading (or roughly what used to be called commercial banking from investment banking). This is an excellent proposal. More precisely – since, as Megan McArdle’s shoe leather work has highlighted, many important details of even this part of the proposal remain to be determined or revealed – the concept the president has proposed is excellent.

I have been arguing for more than a year that this was the direction financial regulation needed to go, and that the logic of the situation would drive us here. The reason why is straightforward.

Finance professionals, like members of all occupational categories, attempt to build barriers that maintain their own income. One of the techniques used is to shroud what are often pretty basic ideas in pseudo-technical jargon. The reason that it is dysfunctional to have an insured banking system that is free to engage in speculative investing is simple and fundamental. We (i.e., the government, which is to say, ultimately, the taxpayers) provide a guarantee to depositors that when they put their savings in a regulated bank, then the money will be there even if the bank fails, because we believe that the chaos and uncertainty of a banking system operating without this guarantee is too unstable to maintain political viability. But if you let the operators of these banks take the deposits and, in effect, put them on a long-shot bet at the horse track, and then pay themselves a billion dollars in bonuses if the horse comes in, but turn to taxpayers to pay off depositors if the horse doesn’t, guess what is going to happen? Exactly what we saw in 2008 happens.

If you want to have a safe, secure banking system for small depositors, but don’t want to make risky investing illegal (which would be very damaging to the economy), the obvious solution is to not allow any one company to both take guaranteed deposits and also make speculative investments. This was the solution developed and implemented in the New Deal. We need a modernized version of this basic construct, and as far as I can see, this is what President Obama has proposed.

This is not the full extent of what’s needed, however. Though it’s impolitic to say this now, other parts of the financial system have become enormously over-regulated over the past couple of decades. Section 404 of Sarbanes-Oxley, as an example, could be easily renamed the “more accountants, fewer IPOs” act. Here is how I put this in a recent National Affairs article:

[T]he financial crisis has demonstrated obvious systemic problems of poor regulation and under-regulation of some aspects of the financial sector that must be addressed — though for at least a decade prior to the crisis, over-regulation, lawsuits, and aggressive government prosecution seriously damaged the competitiveness of other parts of America’s financial system. Since 1995, the U.S. share of total equity capital raised in the world’s top ten economies has declined from 41% to 28%. We do not want the systemic risks of under-regulation, but we should also be careful not to overcompensate for them.

Regulation to avoid systemic risk must therefore proceed from a clear understanding of its causes. In the recent crisis, the reason the government has been forced to prop up financial institutions isn’t that they are too big to fail, but rather that they are too interconnected to fail. For example, a series of complex and unregulated financial obligations meant that the failure of Lehman Brothers — a mid-size investment bank — threatened to crash the entire U.S. banking system.

As we work to adapt our regulatory structure to fit the 21st century, we should therefore adopt a modernized version of a New Deal-era ¬innovation: focus on creating walls that contain busts, rather than on applying brakes that hold back the entire system. Our reforms should establish “tiers” of financial activities of increasing risk, volatility, and complexity that are open to any investor — and somewhere within this ¬framework, almost any non-coercive transaction should be legally ¬permitted. The tiers should then be compartmentalized, however, so that a bust in a higher-risk tier doesn’t propagate to lower-risk tiers. And while the government should provide guarantees such as deposit insurance in the low-risk tiers, it should unsparingly permit failure in the higher-risk tiers. Such reform would provide the benefits of better capital ¬allocation, continued market ¬innovation, and stability. It would address some of the problems of cohesion by allowing more Americans to participate in our market system without being as exposed — or unwittingly exposed — to the brutal effects of market ¬collapses. It would also help get the government out of the banking business and preserve America’s position as the global leader in financial services without turning our financial sector into a time bomb.

As I argued in the post a year ago, limits on executive compensation in the regulated institutions are closely related to this structure:

[L]mits on executive pay, if they have any teeth as they are really implemented, are likely to have several knock-on effects. People who are able to make millions per year in a competitive market will tend to drift away from these firms (even though these restrictions only apply to senior executives, they would change the compensation culture for the firm as a whole), and form new asset management firms, M&A advisory boutiques and so on. Along with limits on comp, the government-sponsored entities will have restrictions on investment behavior imposed by the government – they will not be issuing a lot of credit default swaps. This will mean these large institutions will be unable to offer very high rates of return as compared to the firms that don’t take government money, but will offer safety.

Think of what we would then have: a tier of government-supported, low-risk / low-return big commercial banks that are run by competent, but not exceptional, bankers who are paid like senior civil servants; and another tier of high-risk / high-return financials that look like the “old Wall Street” that everybody says is dead. This is a world of walls, not brakes. When this tiering is in place, the government should be able to get out of the business of doing things like directly setting executive compensation.

The political aspects of such reform are compelling. People are disgusted at recent bank bonuses. I’m a right-of-center libertarian businessman, and I’m disgusted by them. Make no mistake, many banking executives right now are benefiting from taxpayer subsidies. Even if they pay back the TARP money, the government has demonstrated that it will intervene to protect large banks. This can’t be paid back. And this implicit, but very real, guarantee represents an enormous transfer of economic value from taxpayers to any bank executives and investors who are willing to take advantage of it. Unsurprisingly, pretty much all of them are.

The “populist” observation that the fact of a bunch of well-connected guys each pulling down $10 million per year while suckling on the government teat constitutes almost certain evidence of self-dealing is accurate, and all the fancy finance talk in the world can’t get around it. President Obama has a clear political incentive to pursue this proposal. I assume Republicans will see that they have a clear political incentive to go along, rather than standing up for such a situation. Hopefully, this will create the political dynamic that will allow real, positive reform.

by Jim Manzi

01/20/10

Filed under:

Politics

The Implications of Massachusetts

It’s important to separate the causes of Scott Brown’s win from its possible effects.

I don’t know why Scott Brown won. The causes are hard to identify, mostly because any election like this is massively over-determined. I agree with Jon Chait that structural factors (in this case specifically, the unemployment rate) have an enormous role. Further, people in the business of analyzing politicians have a vested interest in over-emphasizing the importance of rhetoric, campaign tactics and so on. For reasons that I have elaborated at length in other posts, however, I believe that we should be extremely skeptical of the ability of social science to quantify the relative impact of these factors.

In the face of this kind of uncertainty, expert opinion should be given great weight. Unfortunately, all the experts are self-interested. Elected officials are the leading experts in one thing: winning elections. The fact that so many say that they believe that this election indicates that support for health care and other elements of the Obama agenda will matter for them in November is important, but unfortunately, you can’t trust that are speaking objectively. Politicians speak in order to win elections, not to provide expert testimony. We should assume that they are using this analysis as a way of accomplishing other objectives.

What other politicians say about the causes of the election result, however, can provide much more useful clues about the effects of this election. It will obviously become much more operationally difficult for Obama / Pelosi / Reid to get health care reform in its current form passed. The loss of this senate seat matters in and of itself; the information contained in the election result will presumably negatively affect the calculation of self-interest on the part of many politicians (even though we can’t know by how much); and, it will provide cover for those who did not want to go along with this reform for other reasons to come out against it now. It’s possible that there is some inside baseball play, based on information unavailable to me or anybody else who is talking about it, to get health care reform in something close to its current form done. But it sure doesn’t look likely from here.

I didn’t believe on his inauguration day that Obama was either a genius or had an FDR-like opportunity, based on objective conditions, to change the public agenda. I don’t believe that he is somehow incompetent now, nor that – holding the presidency and with large Democratic majorities in both houses of congress – he is somehow not in a position to implement policy now. Just like retrospectively analyzing the causes of the outcome of an election, it is easy to talk about what alternatives he might have followed to: (1) his decision to prioritize health care and climate change versus jobs and the economy, and (2) his tactical approach to advancing his policy goals on the topics that he decided to prioritize. But even in retrospect, with the information available to him at the time, his choices seem defensible.

That Senator Kennedy would die, and that Massachusetts would then elect a Republican senator in a special election that happened to occur just as health care reform seemed to be nearing completion, is a true “black swan” event. What is striking to me, however, is that he has allowed himself to get into a position in which the loss of one senate seat threatens his prioritized domestic policy goal.

I have a pretty unromantic view of politicians. I don’t believe that I can see somebody on TV, and understand them very well. I do think, however, that specific previous very large-scale executive experience is the only correlate I could ever find with subsequent Presidential experience . This is correlation, not an empirical demonstration of causality, but strikes me as sensible.

One practical lesson that I believe operational experience teaches people is that you always need a lot more margin for error in any plan than you would rationally believe. In this light, Obama’s decision to push for a health care reform plan that could be threatened by losing one seat in the senate is what is troubling. You couldn’t predict this specific event, but it was always safe to assume that something would go wrong as the legislative process dragged on. It is my theory that his lack of executive experience is showing here, just as it did on cap-and-trade.

Now, it’s possible that there was no realistic alternative available as he was setting out on this a year ago – in effect, he had to go for broke, because there was no 80-vote alternative that he considered to be in any way worthwhile, and all we’re seeing now is that the coin came up tails for him on a bet that was smart at the time. Or, as I said, it might be that he has some way to pull a rabbit out of the hat now. Events will show us whether or not that is true. But barring these alternatives, it seems to me that Ross Douthat offers good advice: basically, take half a loaf and get on with things.

I say this not as a partisan, but as an American. I don’t know anybody who supports the status quo health care finance system in the U.S. Reform is required, and what is likely more important than the specifics of the first step is that we get underway on what will, if we’re lucky, be iterative reform in which we have a political system that can learn from experience.

Sensing just how much reform is possible, and getting a nation to go along with you is one mark of a statesman. FDR, Churchill and Reagan all had this mysterious ability (and good luck) – they were each able to reconcile the eternal tensions of a society, as manifest in the specifics of their time and place, inside one mind. I believe that Bill Clinton and Newt Gingrich were able to do this only in productive tension with one another; in combination, they produced pretty good governance. As per Ross’s comments, I suspect that we will discover during 2010 whether Obama is able to do this, or will require tension with a more conservative congress.

by Jim Manzi

01/13/10

Filed under:

Politics

Omnibus Reply to Criticisms of Keeping America’s Edge UPDATE

In a lengthy article for National Affairs, I wrote the following sentences:

From 1980 through today, America’s share of global output has been constant at about 21%. Europe’s share, meanwhile, has been collapsing in the face of global competition — going from a little less than 40% of global production in the 1970s to about 25% today. Opting for social democracy instead of innovative capitalism, Europe has ceded this share to China (predominantly), India, and the rest of the developing world. The economic rise of the Asian heartland is the central geopolitical fact of our era, and it is safe to assume that economic and strategic competition will only increase further over the next several decades.

These have been the subject of extensive criticism in the left-of-center blogosphere. Let me take the criticisms, as I see them, one at a time.

Criticism 1: I presented incorrect numbers. Accurate data is the foundation of all empirical analysis. Without it, progress is not realistically possible. Paul Krugman wrote a blog post in which he accused me of either gross negligence or dishonesty. The specific charge he made is:

But I went back to Manzi’s source of data, and it turns out that it’s even worse than that. If you use the broad definition of Europe, which includes the USSR, it did indeed have 40 percent of world output in the early 1970s. But that share has not fallen to 25 percent — it’s still above 30 percent.

His assertion is flatly false.

First, Professor Krugman incorrectly identified my source of data.

I have never corresponded with Professor Krugman concerning data sources and analysis for the passage in question, so I can not know on what basis he asserted that the dataset to which he links is my “source of data.” It is not. As per the blog post in which I reviewed multiple data sources for the analysis in question, I averaged multiple sources of data. Professor Krugman has selected only one of these sources, presented it as if it were my sole source, and therefore (obviously) failed to replicate the published result for both the 1970s and the current day. The error is his.

Second, Professor Krugman misread the economic dataset that he did identify.

According to the dataset in question, that part of Europe excluding any part of the USSR had about 40% share of global GDP in 1973 [Cell H59 in the spreadsheet]. According to this dataset, if you add the USSR to this definition [Cell H59 + Cell H102], then such a constructed entity would have had global GDP share of about 44%, not the 40% that Professor Krugman asserted. This error is his as well.

I have invited Professor Krugman to explain how I am wrong, or failing that, to retract his charge.

[UPDATE]: Professor Krugman has responded. I will reproduce his post in its entirety here:

The debate over European economic performance has gone in two directions. One is the usual response of people when they get something very wrong: they start quibbling over minor details (which dataset was Manzi actually using? what about immigration?) to throw up dust clouds. The key thing to remember is that we had a flat assertion that social democracy leads to stagnant economies; that assertion is just wrong.

The other is to point out that even rich European countries have lower GDP per capita than the United States. Indeed. But there’s a story there that is a lot more complicated than a simple table conveys. I wrote about it a few years back.

I’ll leave it to readers to evaluate this response.

Criticism 2: Defining Europe to include Russia and other parts of Eastern Europe is ludicrous when the argument concerns the trade-offs involved in the social welfare state.

Critics argue that since we all know the social welfare state is only present in Western Europe, then it is disingenuous to bundle together Western and Eastern Europe.

In the article, I explicitly defined the ‘European model’ as I used the term by methodically listing out each element of it:

Seen together, these initiatives — shifting government spending away from defense and public safety toward social programs; deeper direct involvement of the government in the operation of large corporations across a substantial portion of the economy; energy rationing in the name of managing climate change; more direct government control of health-care provision; and higher tax rates that probably include a VAT — point in a clear direction. The end result would be an America much closer to the European model of a social-welfare state, which prioritizes cohesion over innovation.

It turns out that Europe as whole is systematically different than the U.S. on each of the listed dimensions. As a further, and more severe statement, it is also true that Eastern Europe as a region (defined as Russia and other west of Urals components of the old Soviet Union and countries of the old Soviet Bloc) and Western Europe as a region (defined as all other countries in Europe from Iceland to Greece) are also each systematically different than the U.S. on each of the listed dimensions.

I’ll take each one at a time

shifting government spending away from defense and public safety toward social programs

The governments of both Eastern and Western Europe have a much higher weighting of social spending than does the government of the U.S. According to the OECD common governmental expenditure classification system, in 2006 the ratio of government spending on the sum of Housing and Community Amenities, Health, Recreation, Culture and Religion, Education, and Social Protection to government spending on the sum of Defense plus Public Order and Safety was at least about twice as high as in the U.S. in every country for which the OECD reports in Eastern Europe (Czech Republic, Estonia, Hungary, Poland, Russia [using transaction code P3CG], Slovak Republic and Slovenia), and every country for which the OECD reports in Western Europe (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden and the UK).

deeper direct involvement of the government in the operation of large corporations across a substantial portion of the economy

In finance, according to the NBER working paper Government Ownership of Banks (2000), the share of government ownership of the assets of the 10 largest banks was as high or higher in every reported Western European country and in every reported Eastern European country than in the U.S. (where it was 0%).

In products, according to the OECD Indicators of Product Market Regulation, in 2008 product market regulation was heavier than in the U.S. in every reported Western European country (although the UK was almost tied with the U.S.) and in every reported Eastern European county.

Health care is addressed below.

energy rationing in the name of managing climate change

The following Western European countries are ratified Annex I signatories to the Kyoto Protocol that commits nations to defined emissions caps: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Liechtenstein, Luxembourg, Monaco, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

The following Eastern European countries are ratified Annex I signatories: Belarus, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russian Federation, Slovakia, Slovenia, and Ukraine.

The United States has not ratified participation in the Kyoto Protocol.

more direct government control of health-care provision

According to the OECD Health Data 2009, in 2007 the U.S. had lower public expenditure on health as a percent of total expenditure on health than every reported country in Western Europe and every reported country in Eastern Europe.

higher tax rates

According to the OECD Factbook 2009, in 2007 the U.S. reported lower total tax revenue as a percentage of GDP than every reported country in Western Europe and every reported country in Eastern Europe.

that probably include a VAT

The following Western European countries have a VAT: Austria, Belgium, Denmark, Finland, France Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, UK, Iceland, Norway, and Switzerland.

The following Eastern European countries have a VAT: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia, Albania, Belarus, Bosnia, Croatia, Moldova, Montenegro, Russia, Serbia, and Ukraine.

The U.S. does not have a VAT.

There is obviously tremendous variation across the nations of Europe, but at the level of abstraction carefully defined in the article, there are systematic differences between Europe and the U.S. in their respective approaches to the political economy of the social welfare state. In the article, I also carefully reviewed the evidence that actions to date in the late Bush and early Obama administrations, plus the publicly stated intentions of the current administration and congressional leadership, have made and/or would make the U.S. more like a European social welfare state in each of the defined dimensions.

Criticism 3: This comparison does not demonstrate that the social welfare state causes lower economic growth.

As I said almost immediately when this was pointed out, this is exactly correct. No matter what the relative growth rates (however defined) of Europe and the U.S. over any period, such a comparison could never constitute a reliable empirical demonstration of causality, because we could never know the counterfactual of what would have happened had one entity or the other executed some alternative policies. I have argued in many posts over a period of years that even less-naïve econometric methods that attempt to control for other factors are not sufficient for the task of identifying non-obvious causal relationships in human society reliably.

The purpose of the article as a whole, never mind the short passage in question, was not to provide an empirical demonstration that less regulated markets tend to provide faster economic growth under many conditions than more regulated markets. Nor did it ever claim to provide this. The purpose of the article was to describe why even though I (like many, many other people) accept the advantages that less regulated markets can provide, this does not lead to the conclusion that we should advocate a deregulation-oriented path of economic development without considering the balancing consideration of social cohesion, and modifying our proposals accordingly.

As I also said immediately, it is easy for me to see how these sentences could be read naturally to be an asserted demonstration of causality. And as I also said at that time “the responsibility for lack of clarity rests on the shoulders of the author, not the reader.” I acknowledged this, and thanked my interlocutors for improving my expression; I continue to do both.

Criticism 4: The fact that the difference in total GDP performance between Europe and the U.S. is entirely due to different population growth rates proves that it can not have been caused by the social welfare state.

In effect, this argument is that GDP = GDP / Person X Population, and that GDP / Person has grown at about the same rate in the U.S. and Europe over the past several decades, so the only real difference has been population growth. This is a factually (approximately) correct statement. There are two big problems with arguing that this shows that therefore differences in political economy of the welfare state did not matter to this difference in outcome. Both are counterfactual problems. First, just because growth in per capita GDP turned out to be the same in this period, it does not follow that had the U.S. adopted policies more like those in Europe that growth rates would not have have been lower, and per capita GDP converged. It is almost always harder to maintain a lead. Europe and the U.S. had previously been on a generally converging path of GDP / Person, and maintaining this lead in productivity (by this metric) was very far from preordained. Second, it assumes that the political economy of the welfare state can not affect population growth, either through impacting fertility or impacting immigration. There are many plausible models for how this can happen. We can’t know through econometric analysis (whether of the simple “I just know that the welfare state can’t influence fertility or immigration” variety cited in the title of this section, or of the more sophisticated variety that attempt to control for other factors) what U.S. population growth and per capita GDP growth would have been had the U.S. adopted different social welfare policies.

Many variants of these criticisms have been repeated over and again through a certain segment of the blogosphere. I have here answered each of them directly, and I believe comprehensively. In any event, barring new information brought to the debate, this is where I intend to leave it.

by Jim Manzi

01/13/10

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Omnibus Reply to Criticisms of Keeping America’s Edge