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Zingales on Education Equity
Luigi Zingales has a good op-ed on education in today’s NYTimes:
… scholars like me…work in the least competitive and most subsidized industry of all: higher education.
We criticize predatory loans by mortgage brokers, when student loans can be just as abusive. To avoid the next credit bubble and debt crisis, we need to eliminate government subsidies and link tuition financing to the incomes of college graduates…Just as subsidies for homeownership have increased the price of houses, so have education subsidies contributed to the soaring price of college.
…These subsidies also distort the credit market. Since the government guarantees student loans, lenders have no incentive to lend wisely. All the burden of making the right decision falls on the borrowers. Unfortunately, 18-year-olds aren’t particularly good at judging the profitability of an investment…
Last but not least, these subsidized loans keep afloat colleges that do not add much value for their students, preventing people from accumulating useful skills.
Instead of subsidies Zingales, drawing a page from Milton Friedman, proposes income-contingent loans.
Investors could finance students’ education with equity rather than debt. In exchange for their capital, the investors would receive a fraction of a student’s future income — or, even better, a fraction of the increase in her income that derives from college attendance. (This increase can be easily calculated as the difference between the actual income and the average income of high school graduates in the same area.)
As I wrote about earlier, Bill Clinton received a loan like this from Yale’s law school and later created a national program but it didn’t get very far (although Obama wants to expand the program). Australia, however, implemented an income contingent loan program in 1989. Australian students don’t pay anything for university when they attend but once their income reaches a certain threshold they are charged through the income tax system. Many other countries are experimenting with income contingent loans.
Lumni is a private organization, started by economist Miguel Palacios (here is his book and Cato paper on human capital contracts), that is funding loans like this right now.
One point that Zingales doesn’t examine is adverse selection – an income-contingent loan will appeal most to people who want careers with low-income prospects, say in the non-profit sector. (Redistribution of this type was one of the reasons for the Yale law school program.) Thus, the program works best when incomes differ due to luck. My guess is that the adverse-selection problem can be handled if education venture capitalists are left free to price.
Could Japan use some more private equity?
Noah Smith writes:
In Japan, there is no big private equity industry, because it is very difficult to do a leveraged buyout of a company. The Japanese government allows companies to defend themselves from takeovers in ways that are illegal in America. Also, Japanese companies often hold each other’s shares, a practice known as “cross-shareholding”, which tends to prevent hostile takeovers. Cross-shareholding creates huge financial risks; however, many of the Japanese companies that engage in cross-shareholding are big banks that are backed by the government (much as ours are here in the U.S., but more explicitly), so this risk is assumed by the Japanese taxpayer. For a comprehensive primer on Japanese corporate governance, see here.
Upshot: In Japan, private-equity firms cannot buy companies and force them to restructure.
Fact 2: Japan has a productivity problem. We think of Japan as being super-productive, and in fact some industries (and most export-oriented factories) are. But overall, Japanese productivity kind of stinks. Since at least the 90s, Japan’s Total Factor Productivity has lagged far behind that of the U.S. Nor is this due (as Ed Presott has tried to claim) to a slowdown in technology; it appears to be a function of how resources are allocated within and between Japanese companies.
The Paul vs. Paul debate
That’s Ron Paul vs. Paul Krugman, the video and transcript is here, here are a few comments under the fold…
1. RP: I don’t understand RP’s claim “I want a natural rate of interest.” Even gold standards allow for monetary influences (distortions? …depends on your point of view) on interest rates. RP has not fully absorbed Myrdal (1930) and Sraffa (1932).
2. K’s response to RP: Numerous good points, but Christie Romer (!) has shown that economic volatility was not higher before WWII. (Somehow that’s one Romer paper which isn’t discussed so much anymore.) That’s a major hole in K’s argument. Relative to the evidence, he is overreaching when a more modest point would suffice.
3. RP: The transcript may be garbled here. In any case, the Fisher effect is imperfect and so inflation does to some extent tax savings, also through interaction effects with the tax system. That said, I don’t see that two to four percent inflation has unacceptable costs, especially when AD is otherwise weak. On Diocletian, via Matt, here is a good recent paper.
4. K’s response: Modern liberals have a bad and selective case of 1950s nostalgia. Krugman is significantly overrating the role of policy here. More overreaching. He should stick to analyzing the “no bailout in 2008-2009” scenario, and how much worse it would have been, including for RP’s preferred ends. On earlier time periods, he should reread his own writings from around the time of The Age of Diminished Expectations. There is very little in The Conscience of a Liberal which actually trumps or overturns the earlier book and its focus on productivity rather than politics.
5. RP: I don’t understand his discussion of the liquidation of debt. Perhaps the transcript is garbled again. He is correct that the massive spending cuts which followed WWII brought no depression but rather the economy boomed. Keynesians have a hard time explaining that episode without recourse to Ptolemaic epicycles, etc., or without admitting the importance of real shocks.
6. K’s response: On Friedman, correct and on target. That said, K’s blogged claim today — that Friedman misrepresented his own views — lacks a quotation or citation altogether; furthermore it is contradicted by this excerpt from Free to Choose, which was Milton at his most popular but still he represented the truth correctly (ignore the heading, which is not from Friedman). K won’t address the WWII point, although he could if he revisited his earlier writings on changing rates of productivity growth.
7. RP’s response: The decline in the value of the dollar since 1913, or whenever, has not been a major economic cost. No one has had such a long planning horizon, for one thing. We don’t see much indexation, for another.
8. RP on the Fed: If we had “real monetary competition,” dollars still would reign supreme. Who now is opening up U.S. bank accounts in other currencies? Or using gold indexing? It is allowed.
9. K’s response: Mostly I agree, though it is odd to think of shadow banking as “currency competition.” It is more akin to “not explicitly regulated banking, with stochastic under-capitalization, and with bailouts in the background and largely driven by regulatory arbitrage.” That makes it less of a counter to RP than PK is suggesting.
10. RP: Equating inflation with “fraud” is an excessive moralization of the issue. The point remains that gentle inflation is usually a good thing, and that the money supply under free banking, or a gold standard, would be excessively pro-cyclical. The best shot is to hope that a natural monopoly private clearinghouse would institute nominal gdp targeting in terms of levels and perhaps “targeting the forecast” too.
11. The exchange about Bernanke: I don’t know whether Krugman literally has “printing money” in mind, so this is hard to interpret. They are stuck in the vernacular, when a more precise economic language would allow for more targeted commentary.
12. PK: Demographics, plus government gridlock and lower productivity growth, make a higher debt-gdp ratio more problematic than Krugman admits.
13. RP: Polemics from RP.
14. K’s response. Very short. But if he likes the market so much, why does he so often seem to be pushing for much higher taxation and higher government revenue? I understand why he wants single payer, but he also seems to favor direct government provision of health care itself.
15. RP: The discussion of debt doesn’t make sense, though it is correct to argue that eight percent measured unemployment underestimates the depth of our labor market problems. I fear, though, that he may be holding an exaggerated version of this point. U6 matters, but it should not be taken as the correct measure of unemployment.
16. RP: Seigniorage isn’t a major source of government revenue, and in general it is worth thinking about why corporate profits are so high and why the stock market, at least in recent times, has done OK. Is it really all about policy uncertainty? Lots of polemic here. Still, RP raises the point that Fed purchases of T-Bills may be helping to keep rates artificially low. This remains unproven, but it is also unrebutted.
17. RP (again): There is no credible alternative to the dollar as reserve currency today. On Spain, it is nonetheless a good point that spending cuts in a dysfunctional economy don’t help very much if at all.
More RP: Doesn’t PK get to speak again? Did Austerians suddenly cut the funding for his part of the transcript? (Had I watched the video, I wouldn’t have had time to write this post.) In any case, pegging the dollar to gold in an era of commodity price inflation would be a disaster and lead to massive deflationary pressures or more likely a complete abandonment of the gold peg rather quickly.
In sum: There were too many times when RP simply piled polemic points on top of each other and stopped making a sequential argument. He overrates the costs of inflation, including in the long term, and for a believer in the market finds it remarkably non-robust in response to bad monetary policy. Still, given that Krugman is a Nobel Laureate in economics, and Paul a gynecologist, the score could have been more lopsided than in fact it was.
The Age of the Shadow Bank Run
The introduction to my column is this:
I RECENTLY asked a group of colleagues — and myself — to identify the single most important development to emerge from America’s financial crisis. Most of us had a common answer: The age of the bank run has returned.
I would like to see more discussion of how the permanently high demand for T-Bills as collateral will affect the U.S. economy:
Another feature of this new order is that more and more financial transactions will be collateralized with the safest securities possible: United States Treasuries. Demand for them will remain high, and low borrowing costs will ease our fiscal problems. Still, the resulting low rates of return serve as a tax on safe savings, encourage a risky quest for yield and redistribute resources to government borrowing and spending. It isn’t healthy for the private sector when investors are so obsessed with holding wealth in the form of safe governmental guarantees.
The bottom line is this:
The core problem is that the growth of short-term credit has been outracing our ability to protect it, and since 2008 most investors have realized that these shadow-banking transactions are not risk-free.
I didn’t have space to discuss whether this was a corporate governance issue or a moral hazard issue. Under one view, managers/CEOs could purchase capital insurance to plug the runs, they just don’t have the incentive to do so. The downside simply isn’t that bad for them. Under another view, the market for “runs insurance” creates too much moral hazard to be feasible, or to some extent the market exists (CDS, etc.) but it just pushes the problem back another level and may even make matters worse by creating another level of credit. A third view is that the collateral behind these short-term loans is somewhat of a farce, since it (sometimes) has value problems precisely in those world states when it needs to be called in. It is probably a bit of each.
The conclusion is this:
In short, no promising financial path is before us. It’s good that the American economy seems to be recovering, and this may shove some problems into the future. But banking and finance remain a mess at their core. Welcome to the 21st century.
Assorted links
1. How much does the corporate income tax matter?, and how to argue using Siri (video, recommended, but one use of the f-word).
2. The do-nothing plan is now > $7 trillion. Maybe too much gridlock is not the best way to describe the problem…
3. I, too, would give Darth Vader free public land, and Scott Winship is Rybka.
4. I,toaster.
5. Bill Simmons on labor economics and sticky wages and the Coase theorem, essential reading.
Shining a light on solar subsidies
In Why they call it Green Energy: The Summers/Klain/Browner Memo I discussed the Shepherds Flat wind project, a $1.9 billion dollar project subsidized to the tune of $1.2 billion. Today, the NYTimes has a good piece on an even bigger subsidy sucker, a $1.6 billion CA solar project that is nearly 90% subsidized by taxpayers and ratepayers leaving a nice profit but virtually no risk for its corporate backers. The grateful but perhaps overly voluble CEO of the corporation building the project had this to say:
As NRG’s chief executive, David W. Crane, put it to Wall Street analysts early this year, the government’s largess was a once-in-a-generation opportunity…
“I have never seen anything that I have had to do in my 20 years in the power industry that involved less risk than these projects,” he said in a recent interview. “It is just filling the desert with panels.”
I suspect that he might have continued, “it was like taking candy from a baby,” but that is just a suspicion.
There are good reasons for taxing all sources of carbon and subsidizing cleaner energy sources (especially R&D) but huge subsidies targeted on a handful of corporations without “skin in the game” are a recipe for waste, corruption and abuse. We can only hope that this was just a once in a generation opportunity.
Addendum: The NYTimes usually has great info-graphics but today’s experiment made it more difficult not easier to get to the key information.
Hat tip: Daniel S.
Addendum 2: It’s telling that so many people want to shift the debate away from the advisability of particular solar and wind subsidies to whether I or others have been consistent about coal, oil and nuclear subsidies.
For the record, in this very post I discuss taxing carbon, obviously including oil and coal, so it is clear that I do not favor subsidizing those energy sources. Also, careful readers (most MR readers!), will see that I am especially worried about “huge subsidies targeted on a handful of corporations,” both of those clauses are important. In this case, for example, we are talking about nearly 90% subsidies and they are targeted on a case by case basis; put these two things together and you get waste, corruption and abuse. For these reasons, I am less worried about subsidies to green energy that leave private firms with lots of skin in the game and that are open to any firm.
Why they call it Green Energy: The Summers/Klain/Browner Memo
The LA Times reports that Larry Summers and Timothy Geithner “raised warning flags” about the loan guarantee program for renewables long before the Solyndra bankruptcy. The article doesn’t have a lot of new information (the key players are clearly protecting themselves) but it does link to a fascinating briefing memo written for the President in October of 2010 by Summers, Ron Klain (then chief of staff to the Vice President), and energy advisor Carol Browner.
The memo says that OMB and Treasury were concerned about three problems, “double dipping” (massive government subsidies from multiple sources), lack of “skin in the game” from private investors and “non-incremental investment,” the funding of projects which would occur even without the loan guarantee.
The memo then illustrates with one such program, the Shepherds Flat Loan guarantee. Here is the relevant portion of the memo:
The Shepherds Flat loan guarantee illustrates some of the economic and public policy issues raised by OMB and Treasury. Shepherds Flat is an 845-megawatt wind farm proposed for Oregon. This $1.9 billion project would consist of 338 GE wind turbines manufactured in South Carolina and Florida and, upon completion; it would represent the largest wind farm in the country.
The sponsor’s equity is about 11% of the project costs, and would generate an estimated return on equity of 30%.
Double dipping: The total government subsidies are about $1.2 billion.
Subsidy Type Approximate
Amount
(millions)Federal 1603 grant (equal to 30% investment tax credit) $500
State tax credits $18
Accelerated depreciation on Federal and State taxes $200
Value of loan guarantee $300
Premium paid for power from state renewable electricity standard $220
Total $1,238
Skin in the game: The government would provide a significant subsidy (65+%), while the sponsor would provide little skin in the game (equity about 10%).
Non-incremental investment: This project would likely move without the loan guarantee. The economics are favorable for wind investment given tax credits and state renewable energy standards. GE signaled through Hill staff that it considered going to the private market for financing out of frustration with the review process. The return on equity is high (30%) because of tax credits, grants, and selling power at above-market rates, which suggests that the alternative of private financing would not make the project financially non-viable.
Carbon reduction benefits: If this wind power displaced power generated from sources with the average California carbon intensity, it would result in about 18 million fewer tons of CO2 emissions through 2033. Carbon reductions would have to be valued at nearly $130 per ton CO2 for the climate benefits to equal the subsidies (more than 6 times the primary estimate used by the government in evaluating rules).
In my view, the Summers/Klain/Browner analysis was a damning indictment of the Shepherds Flat project. The taxpayers were expected to fund by far the largest share of the bills and also of the risk and in return they weren’t getting many benefits in terms of reduced pollution. In contrast, Caithness Energy and GE Energy Financial Services, the corporations behind the project, weren’t taking much risk but they stood to profit handsomely. I guess that is why they call it “green” energy.
In short, the Shepherds Flat project was corporate welfare masquerading under an environmental rainbow.
So are you surprised to learn that shortly after the memo was written the Shepherd Flats loan guarantee of $1.3 billion was approved? Of course not; no doubt you also saw that the memo authors were careful to inform the President that the “338 GE wind turbines” were to be “manufactured in South Carolina and Florida.” Corporate welfare meet politicized investment.
In the Solyndra case just about everything went wrong, including bankruptcy and possible malfeasance. Caithness Energy and GE Energy Financial Services are unlikely to go bankrupt and malfeasance is not at issue. As a result, this loan guarantee and the hundreds of millions of dollars in other subsidies that made this project possible are unlikely to create an uproar. Nevertheless, the real scandal is not what happens when everything goes wrong but how these programs work when everything goes right.
From the comments (ouch!)
E. Barandiaran passes along to us:
On the substantive issues of how to solve U.S. fiscal crisis, I suggest to read Ray Fair’s latest paper http://cowles.econ.yale.edu/P/cd/d18a/d1807.pdf
ABSTRACT: This paper estimates how large fiscal-policy changes have to be to solve the U.S. government deficit problem. This question is complicated in part because of endogeneity issues. A fiscal-policy change designed to decrease the deficit has effects on the macro economy, which in turn affects the deficit. Any analysis of fiscal-policy proposals must take these effects into account: one needs a model of the economy. This paper uses a macroeconometric model of the world economy to examine the deficit problem. A base run is first obtained in which there are no major changes in U.S. fiscal policy. This results in an ever increasing debt/GDP ratio. Then net taxes (taxes minus transfers) are increased by an amount sufficient to stabilize the long-run debt/GDP ratio. The increases are linearly phased in over a three-year period beginning in the first quarter of 2012. The estimates of the needed net tax increases are large. Compared to values in the base run, net taxes after the phase in need to be about $650 billion higher each year in 2011 dollars. In percentage terms this translates into about 45 percent of personal income taxes, 51 percent of social security taxes, 24 percent of transfer payments to state and local governments and to persons, 44 percent of purchases of goods and services, and 176 percent of corporate profit taxes. The output loss is 1.38 percent of real GDP over the 9 years analyzed.
Indeed, Ray shows that your crisis it’s not a laughing matter.
I’m more skeptical about macro models than is Ray Fair, and that includes more skepticism toward the Fair model. Still, I don’t think there is any kind of free lunch available which renders this general mode of reasoning invalid. Ouch!
File under “We’re not as wealthy as were thought we were.”
A defense of Hungarian economic policies and prospects
It seems that Hungary has climbed out of its slump and it is now growing at 2.5 percent a year, at least during the last quarter. This interesting but self-serving editorial serves up a few reasons why:
We are increasing small- and medium-size businesses’ access to capital through grants and loan programs for product development, and reducing corporate-income taxes for these firms to 10% from 19%—among the lowest in Europe. These businesses are vital to Hungary’s export-driven recovery. As they continue to grow, so will private-sector employment, which in turn will reduce the heavy burden on our welfare system.
We would rather receive the same total tax revenues from a larger number of employers—each paying less tax—and have more employed Hungarians spending their wages and driving consumption. We’ve significantly lifted the tax burden off consumers by slashing the personal income-tax levy to a flat rate of 16%, from a tiered system where the highest rate was 32%.
We are also tackling welfare reform. Our government-run system has been plagued by spiralling costs, systemic abuse and inefficiencies that were exposed by the deteriorating economic conditions after the financial crisis. We believe that any welfare cuts should aim to boost employment and embed a work ethic among Hungarians. So we have reduced unemployment and disability benefits and pharmaceutical subsidies, and are in the process of reducing back the red tape that makes employing workers complicated and expensive.
I would stress caution is interpreting these arguments and note they are from a member of the current government. Luck, positive real shocks (agriculture), and mean reversion are also at work. Still, it is interesting to see that the Hungarian recovery is far outpacing that of the PIIGS countries; Hungary of course is not on the euro and it has avoided wrenching deflation, instead experiencing mild inflation. Furthermore the Hungarians seem to be putting a spending freeze into operation and they are addressing pension liability problems. It is unlikely that is the cause of their recent turnaround, but it hasn’t hindered it either.
All this is true:
Our economy has grown for six consecutive quarters, unemployment levels are falling and the Hungarian forint is one of the world’s strongest-performing currencies this year.
Budapest is now an expensive city, and it no longer makes for a good cheap vacation.
Scott Sumner, from the comments
This is on “The People’s Budget“:
Matt Yglesias has a much better solution for progressives; a progressive consumption tax.
This capital gains proposal is especially silly. I’m 99% sure they won’t allow unlimited write-offs of capital losses, which means the effective cap gains rate would be even higher, and risk-taking would be discouraged. And why even have a corporate income tax system? Even from a progressive perspective it makes no sense at all.
This proposal taxes rich guys who live a hedonistic lifestyle at a much lower rates than equally rich guys who are thrifty, and leave something for others. That’s progressive?
A progressive consumption tax system composed of a mixture of modestly progressive VAT and steeply progressive payroll taxes and carbon taxes and land taxes. That’s all you need. K.I.S.S.
“The People’s Budget”
It is endorsed by Paul Krugman and also Jeffrey Sachs, so I thought I would give it a look. It is from the Congressional Progressive Caucus. One simple question is to ask how the rich are taxed:
1. There are separate rates in the mid- to high forties for millionaires, with strict limits on itemized deductions.
2. “Raise the taxable maximum on the employee side to 90% of earnings and eliminate the taxable maximum on the employer side.” With volatile incomes, it’s tricky to translate that into an expected marginal rate or to figure out how much is infra-marginal. See the technical appendix, p.8, for more details, though I find the entire proposal here poorly explicated. In any case, it’s a big tax increase.
3. Tax capital gains and dividends at the normal income rates. (I am not sure how loss offsets are to be treated, though it could make a big difference and significantly boost the demand for volatile stocks.)
4. I’m not sure what happens with state-level income tax rates but there’s certainly, in the proposal, no talk of them going down. And since they’re probably not free market deregulators at the state and local level, I suppose I expect those taxes to go up, given Medicaid burdens, pension problems, ailing educational systems, and so on.
5. Estate taxes would be raised significantly (sock it to Boy Mankiw!), as would corporate income taxes, there would be new financial transactions taxes, there would be a new bank tax, and tax enforcement would be stiffer.
6. There are, by the way, no proposed cuts in benefits.
What is the final net income and also capital gains rate for wealthy taxpayers? It’s hard to say exactly, but north of seventy percent for income rates (including state and local rates), and near fifty percent for capital gains rates, is not hard to believe.
Quick quiz #1: What are the capital gains tax rates in the European social democracies?
Quick quiz #2: From the climate change debates we learn the value of scientific consensus; what percentage of Democratic public finance economists would favor top income and capital gains rates in the neighborhood of seventy and fifty percent? Some of them have read and digested, for instance, this paper by the impressive Raj Chetty.
Quick quiz #3: Does the technical report offer estimated labor supply and investment elasticities in response to these higher tax rates? (p.s. the answer is “no.”)
I can tell you this: in the technical appendix; the assumption is that the net effect on growth, from investment changes, after all the new public sector investment is called into place, is a positive [sic] 0.3%.
There have been some good criticisms of the funny assumptions behind the Ryan plan, but actually this budget isn’t better, either in terms of its final conclusions, its adherence to best scientific practices, or its transparency in getting to its results. Should we not apply equally high standards to both the Ryan budget and this? There are plenty of good arguments that taxes have to go up, but this particular proposal isn’t one of them. INSERT SNARKY CLOSING OF YOUR CHOICE I WON’T DO IT FOR YOU.
The Paul Ryan budget plan
I’ve now read it and here are a few comments:
1. The macro projections are very weak, not worth the time of criticism (more here).
2. Ryan nails our dysfunctional, “who is really responsible for paying for Medicaid?” structure. That said, I’ve long preferred the federalization of Medicaid. Block grants to the states may be better than the status quo, however (the size of those grants is a logically distinct question). Within state budgets, police and education are often the alternative to Medicaid costs. Are we so sure that Medicaid produces the maximum benefit for the money? Low-quality moralizing about the poor is not an answer to this question.
3. That said, Medicaid should be one of the last parts of the health care budget to cut. More of our health care aid should be like Medicaid, which is relatively cheap and also targeted at those who really need the assistance. The correct Medicaid decisions depend on other budget choices, but ideally Medicaid is low on the list of recommended cuts, even if it may require some cuts.
4. With either the block grants or the Medicare vouchers, I would urge maximum transparency. Health care costs are increasing by about five percent a year. That means a fixed value voucher loses about half its real value, in terms of command over health care resources, within fourteen years. (It’s a bit more complicated than that, since not all health care costs are proportional price increases to currently available services.) If that is the decision we are going to make, let us understand it as such. I would add that Ryan’s opponents don’t avoid this kind of dilemma nearly as much as they think they do.
5. It would be nice to have a scientific estimate of how much fixed value vouchers would lower the rate of growth of health care costs. I’m not convinced the effect here is large, but I’d like to see it studied more closely.
6. Ryan’s budget repeals ACA and thus in the semi-short run it could considerably increase Medicare costs. There is no reason why Ryan’s plan shouldn’t keep the most fiscally responsible aspects of ACA. Ryan exempts the current elderly from any Medicare cuts at all, see David Leonhardt’s remarks.
7. Over a ten-year time horizon, the Ryan plan increases the debt rather than decreasing it. Take that as a sign of how hard fiscal reform is going to be.
8. As I’ve already blogged, the vouchers idea won’t help cut health care costs. Let’s create some multiple public options within Medicare, some of which would allow people to trade health care benefits for cash. Democrats are supposed to be “pro-choice,” right? Or is that only for abortion?
9. I’m all for cutting the corporate income tax, but 35 to 25 percent isn’t impressive. Let’s eliminate it altogether.
10. There’s not nearly enough on reforming the dysfunctional supply-side of our health care institutions. Nor does science or basic research receive much discussion.
11. The plan does some strange things, such as repeal Dodd-Frank resolution authority, which most people, even Dodd-Frank critics, think is a good idea. Ezra summarizes the entire list of budget changes.
12. The more the Democrats criticize this plan, the more it helps Ryan and the more it hurts the Democrats. It reframes sticker shock, and the entire debate, simply to argue about $6 trillion in budget cuts.
13. #12 is the bottom line here, since the plan is not intended to be enacted into law. Points #1-11 pale in comparison to #12-13.
Here is Reihan, and Megan, and Ezra on the CBO.
Common mistakes of left-wing economists?
T., a loyal MR reader, asked for a compendium. This is my off-the-cuff list, but in the interests of fairness I'm doing one on market-oriented economists as well. What are some of the common views found on the left which I consider not just disagreements but more along the lines of a mistake?
By no means is everyone is guilty of these mistakes, nor does it have to mean that the associated conclusions are wrong. Still I see these frequently:
1. Suggesting that money matters in politics far more than the peer-reviewed evidence indicates.
2. Evaluating government spending on a program-by-program basis, rather than viewing the budget as a series of integrated accounts. Cross check with the phrase "Social Security," or for use to take many discretionary spending cuts off the table.
3. A reluctance to incorporate sophisticated "public choice" theories into the analysis of favored programs.
4. Sins of omission: there are plenty of bad policies, such as occupational licensing, which fail to come under much attack from the left. Sometimes this is because the critique would run counter to the narrative of needing more government or needing more regulation.
5. Significantly overestimating the quality of the political economy of an America with more powerful labor unions and underestimating the history of labor unions as racist, corrupt, protectionist, and obstructions to positive change.
6. Overestimating the efficacy of fiscal policy, underestimating the power of monetary policy, and sometimes ignoring or neglecting how the two interact ("the monetary authority moves last").
7. Citing weak versions of structural unemployment theories and dismissing them with a single sentence or graph, while relying on stronger versions of structural theories in other, non-cyclical contexts.
8. Lack of interest in discussing ethnicity and IQ as relevant for social policy, except in preferred contexts.
9. Overly optimistic views of the fiscal positions of state governments. Since the states don't have the same tax-raising powers that the feds do, and since state government spending is favored, there is a tendency to see these fiscal crises as not so severe, or as caused by mere obstructionists who will not raise taxes to the required levels.
10. A willingness to think that one has "done one's best" in the realm of policy, and to blame subsequent policy failures on Republican implementation, rather than admitting that a policy which cannot be implemented by both political parties is perhaps not a good policy in the first place.
11. Use of a strong moral argument for universal health care coverage, combined with a fairly practical, hard-headed approach to the scope of the mandate, and not realizing the tension between the two. Failure to indicate where the "bleeding heart" argument actually should stop and at what margins we should (and will) let non-elderly people die, if only stochastically.
12. Implicitly constructing a two-stage moral theory, which first cordons off the sphere of the nation-state (public goods provision, etc.) and then pushing cosmopolitan questions off the agenda in the interests of expanding a social welfare state. (In fairness, many individuals on the right don't give cosmopolitan considerations even this much consideration, although right-oriented economists tend to be quite cosmopolitan.)
13. What about countries? Classical liberals are increasingly facing up to the enduring successes of the Nordic nations. There is not always a similar reckoning with the successes of Chile and Hong Kong and Singapore; often this is a sin of omission. (Addendum: comment from Matt here.)
14. Reluctance to admit how hard the climate change problem will be to solve, for fear of wrecking any emerging political consensus on taking action.
In most cases you can find evidence and links by searching back through the MR archives.
How do Maryland and Virginia differ?
From Jared Sylvester, a loyal TCEDG reader:
I was reading through your dining guide, looking for a place to go with my father this weekend. In your write up of Crisfields [http://tylercowensethnicdiningguide.com/?p=561] you said "The accompanying visit to Silver Spring is an object lesson in how Maryland and Virginia differ." I was wondering if you would mind blogging on that topic.
Let's restrict (most of) this to the adjacent parts of each state. The food says a lot: Maryland has kosher food and Caribbean food. Virginia has better Bolivian, Vietnamese, Korean, Afghan, Ethiopian, and Persian food. (Here is a new piece on minorities in Virginia.) Both have excellent Sichuan food. Both have very good El Salvadoran and Thai food. Neither has real barbecue. Maryland used to have better Indian food, now Virginia has much better Indian food, including dosas. Apart from Bethesda, Maryland has virtually no "fine dining." Maryland has many more Russians, albeit without a decent restaurant.
Virginia has Tysons Corner, Tysons Mall I and II, The Palm, and a Ritz-Carlton, or in other words a lot of tacky, revenue-generating corporate assets. Virginia has better and more consistent school systems. Virginia has better Beltway on- and off-ramps.
Bethesda is better integrated into DC than is any part of Virginia, with Arlington playing catch-up. Virginia has the airports, the Pentagon, a better business climate, and lower taxes.
The Pentagon and the military are central to my theory of why Virginia is such a well-run state. Virginia has a major cash cow, to provide employment and taxable incomes, yet unlike Alaska's oil revenue, it is not one that the state government can get its hands on beyond general sources of tax revenue. The Pentagon, as a natural asset, does not foster corruption or complacency in the Virginia state government. It is politically untouchable. It makes Virginia a conservative yet interventionist and technocratic state. Maryland has more inherited blight.
Virginia has more ugly colonial houses, and more arches and pillars, Maryland has more tacky old American box houses. I dislike ugly colonial.
Virginia feels more like an assortment of minorities working within an essentially Protestant framework. Maryland was originally founded as a Catholic colony.
Looking to the state as a whole, Virginia doesn't have a proper city; Norfolk and Virginia Beach are agglomerations based around what are traditionally non-urban rationales. I bet people in California, or for that matter Shenzhen, don't even know they are cities at all. The third largest city, Chesapeake, no one has heard of, or cares about, if not for the nearby Bay. Other parts of Maryland, such as you find along the Susquehanna, were long integrated into more northerly and westerly trade routes. Virginia's major waterways lead to the sea.
I've long lived in Virginia, and never wanted to live in Maryland, even if I could equalize the commute.
Have the rich caused middle class wage stagnation?
I don't always agree with Kevin Drum, but usually I find that he has good arguments. In this passage, however, I think he is overreaching:
Still, I don't think that a plausible story of causation [the gains of the wealthy to the stagnation of other incomes] is really all that hard. First, take a look at middle class income stagnation. What caused that? Matt already pointed to one cause: monetary policy since the late 70s that's kept inflation low at the cost of keeping labor markets persistently loose. To that, I'd add several other trends that have marked the past three decades: trade policies that accelerated the decline of U.S. manufacturing; domestic deregulation policies that squeezed workers; stagnation in the minimum wage; immigration policies that reduced wages at the low end; and a 30-year war against labor that devastated unions and reduced the bargaining power of the working class.
First, money matters in the short-run most of all. Tight money (unless maybe it is radical deflation, but even then the U.S. resumed growth out of the GD fairly quickly and furthermore the median worker was not unemployed) is not a plausible cause of median income stagnation over decades. The link between trade and wage stagnation does not find support in the data. Deregulation hurt the wages of air traffic controllers, but how many other groups? Enough to shift the median? Stagnation in the real minimum wage shouldn't much hurt median wage growth over a forty year period. Unions fell mostly because of the shift to services, and furthermore the "union wage premium" in the data is a one-time ten to fifteen percent gap, not an ongoing change in rates over decades, and it is reaped by some not all workers.
In my view the gains of the top one percent and the stagnation at the median are largely separate phenomena; note that the top gains so dramatically only in the Anglosphere, whereas growth stagnation affects most of the OECD after the early 1970s.
How then might rent-seeking in the top income brackets damage ordinary Americans, as I have myself suggested? The most plausible mechanism is this: gains of the wealthy through capital markets come at the expense of other individuals in capital markets. Some kinds of capital — for instance finance capital – had been profiting more and implicitly taxing other kinds of capital, often through "trading," broadly not narrowly construed. The taxed capital "retreats" and this has adverse affects on labor, much as an increase in the corporate income tax falls partially on labor and partially on consumers (which also shows up as lower real wages).
The labor which is "subsidized" by this change in capital returns is smaller in number and more concentrated, sectorally, than the labor which is taxed.
I wouldn't say there is massively firm evidence for this hypothesis, but rather it is the major contender by process of elimination. If you are wondering, many of the years of wage stagnation have shown relatively low shares of investment in gdp; see the new McKinsey report "Farewell to cheap capital?".
So there we have one factor connecting the gains at the top to losses at the median but still I do not think it is the major factor behind median stagnation. I will be writing more on this.