Tag Archives: Arnold Kling

It Is Ezra Klein Week Here At Around The Sphere

Ezra Klein:

There’s lots of interesting stuff in Ed Glaeser’s new book, “The Triumph of the City.” One of Glaeser’s themes, for instance, is the apparent paradox of cities becoming more expensive and more crowded even as the cost of communicating over great distances has fallen dramatically. New York is a good example of this, but Silicon Valley is a better one

[…]

The overarching theme of Glaeser’s book is that cities make us smarter, more productive and more innovative. To put it plainly, they make us richer. And the evidence in favor of this point is very, very strong. But it would of course be political suicide for President Obama to say that part of winning the future is ending the raft of subsidies we devote to sustaining rural living. And the U.S. Senate is literally set up to ensure that such a policy never becomes politically plausible.

Klein again:

Yesterday afternoon, I got an e-mail from a “usda.gov” address. “Secretary Vilsack read your blog post ‘Why we still need cities’ over the weekend, and he has some thoughts and reflections, particularly about the importance of rural America,” it said. A call was set for a little later in the day. I think it’s safe to say Vilsack didn’t like the post. A lightly edited transcript of our discussion about rural America, subsidies and values follows.

Ezra Klein: Let’s talk about the post.

Tom Vilsack: I took it as a slam on rural America. Rural America is a unique and interesting place that I don’t think a lot of folks fully appreciate and understand. They don’t understand that that while it represents 16 percent of America’s population, 44 percent of the military comes from rural America. It’s the source of our food, fiber and feed, and 88 percent of our renewable water resources. One of every 12 jobs in the American economy is connected in some way to what happens in rural America. It’s one of the few parts of our economy that still has a trade surplus. And sometimes people don’t realize that 90 percent of the persistent poverty counties are located in rural America.

EK: Let me stop you there for a moment. Are 90 percent of the people in persistent poverty in rural America? Or just 90 percent of the counties?

TV: Well, I’m sure that more people live in cities who are below the poverty level. In terms of abject poverty and significant poverty, there’s a lot of it in rural America.

The other thing is that people don’t understand is how difficult farming is. There are really three different kinds of farmers. Of the 2.1 million people who counted as farmers, about 1.3 million of them live in a farmstead in rural America. They don’t really make any money from their operation. Then there are 600,000 people who, if you ask them what they do for a living, they’re farmers. They produce more than $10,000 but less than $250,000 in sales. Those folks are good people, they populate rural communities and support good schools and serve important functions. And those are the folks for whom I’m trying to figure out how to diversify income opportunities, help them spread out into renewable fuel sources. And then the balance of farmers, roughly 200,000 to 300,000, are commercial operations, and they do pretty well, particularly when commodity prices are high. But they have a tremendous amount of capital at risk. And they’re aging at a rapid rate, with 37 percent over 65. Who’s going to replace those folks?

EK: You keep saying that rural Americans are good and decent people, that they work hard and participate in their communities. But no one is questioning that. The issue is that people who live in cities are also good people. People who live in exurbs work hard and mow their lawns. So what does the character of rural America have to do with subsidies for rural America?

TV: It is an argument. There is a value system that’s important to support. If there’s not economic opportunity, we can’t utilize the resources of rural America. I think it’s a complicated discussion and it does start with the fact that these are good, hardworking people who feel underappreciated. When you spend 6 or 7 percent of your paycheck for groceries and people in other countries spend 20 percent, that’s partly because of these farmers.

More Klein here and here

Will Wilkinson at DiA at The Economist:

IN THIS chat with Ezra Klein, Tom Vilsack, the secretary of agriculture, offers a pandering defence of agricultural subsidies so thoroughly bereft of substance I began to fear that Mr Vilsack would be sucked into the vacuum of his mouth and disappear.When Mr Klein first raises the subject of subsidies for sugar and corn, Mr Vilsack admirably says, “I admit and acknowledge that over a period of time, those subsidies need to be phased out.” But not yet! Vilsack immediately thereafter scrambles to defend the injurious practice. Ethanol subsidies help to wean us off foreign fuels and dampen price volatility when there is no peace is the Middle East, Mr Vilsack contends. Anyway, he continues, undoing the economic dislocation created by decades of corporate welfare for the likes of ADM and Cargill will create economic dislocation. Neither of these points is entirely lacking in merit, but they at best argue for phasing out subsidies slowly starting now.

Mr Vilsack should have stopped here, since this is as strong as his case is ever going to be, but instead he goes on to argue that these subsidies sustain rural culture, which is a patriotic culture that honours and encourages vital military service:

[S]mall-town folks in rural America don’t feel appreciated. They feel they do a great service for America. They send their children to the military not just because it’s an opportunity, but because they have a value system from the farm: They have to give something back to the land that sustains them.

Mr Klein follows up sanely:

It sounds to me like the policy you’re suggesting here is to subsidize the military by subsidizing rural America. Why not just increase military pay? Do you believe that if there was a substantial shift in geography over the next 15 years, that we wouldn’t be able to furnish a military?

To which Mr Vilsack says:

I think we would have fewer people. There’s a value system there. Service is important for rural folks. Country is important, patriotism is important. And people grow up with that. I wish I could give you all the examples over the last two years as secretary of agriculture, where I hear people in rural America constantly being criticized, without any expression of appreciation for what they do do.

In the end, Mr Vilsack’s argument comes down to the notion that the people of rural America feel that they have lost social status, and that subsidies amount to a form of just compensation for this injury. I don’t think Mr Vilsack really believes that in the absence of welfare for farmers, the armed services would be hard-pressed to find young men and women willing to make war for the American state. He’s using willingness-to-volunteer as proof of superior patriotism, and superior patriotism is the one claim to status left to those who have no other.

Ryan Avent at Free Exchange at The Economist:

I’ll add a few comments. First, it may be that the economists who understand the economic virtues of city life aren’t doing a sufficiently good job explaining that it’s not the people in cities that contribute the extra economic punch; it’s the cities or, more exactly, the interactions between the people cities facilitate. It’s fine to love the peace of rural life. Just understand that the price of peace is isolation, which reduces productivity.

Second, the idea that economically virtuous actors deserve to be rewarded not simply with economic success but with subsidies is remarkably common in America (and elsewhere) and is not by any means a characteristic limited to rural people. I also find it strange how upset Mr Vilsack is by the fact that he “ha[s] a hard time finding journalists who will speak for them”. Agricultural interests are represented by some of the most effective lobbyists in the country, but their feelings are hurt by the fact that journalists aren’t saying how great they are? This reminds me of the argument that business leaders aren’t investing because they’re put off by the president’s populist rhetoric. When did people become so sensitive? When did hurt feelings become a sufficient justification for untold government subsidies?

Finally, what Mr Klein doesn’t mention is that rural voters are purchasing respect or dignity at the price of livelihoods in much poorer places. If Americans truly cared for the values of an urban life and truly wished to address rural poverty, they’d get rid of agricultural policies that primarily punish farmers in developing economies.

Andrew Sullivan

Arnold Kling:

Ezra Klein sounds like my clone when arguing with the Secretary of Agriculture.

James Joyner:

Essentially, Vilsack justifies subsiding farmers on the basis that rural America is the storehouse of our values, for which he has no evidence. And he’s befuddled when confronted with someone who doesn’t take his homilies as obvious facts.

Nobody argues that America’s farmers aren’t a vital part of our economy or denies that rural areas provide a disproportionate number of our soldiers. But the notion that country folks are somehow better people or even better Americans has no basis in reality.

Jonathan Chait at TNR:

Why is it so common to praise the character of rural America? Part of it is doubtless that rural life represents the past, and we think of the past as a simpler and more honest time. But surely another element is simply that rural America is overwhelmingly white and Protestant. And completely aside from the policy ramifications, the deep-seated veneration of rural America reflects, at bottom, a prejudice few would be willing to openly spell out.

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An Apple A Day, Yadda, Yadda, Yadda

Ezra Klein:

File this one under “health care doesn’t work nearly as well as we’d like to believe.” A group of researchers followed almost 15,000 initially healthy Canadians for more than 10 years to see whether universal access to health care meant that the rich and the poor were equally likely to stay healthy. The answer? Not even close.

The researchers ran the data two ways: High-income patients vs. low-income patients, and highly educated patients vs. less educated patients. Over the course of the study, the high-income patients were only 35 percent as likely to die as the low-income patients, and the highly educated patients only 26 percent as likely to die as the low-income patients. And the problem wasn’t that the low-income and low-education patients were hanging back from the health-care system. Because they were getting sick while their richer and better educated counterparts weren’t, they actually used considerable more in health-care services.

The problem, the researchers say, is that the medical system just isn’t that good at keeping people from dying. “Health care services use by itself had little explanatory effect on the income-mortality association (4.3 percent) and no explanatory effect on the education-mortality association,” they conclude.

You don’t want to over-interpret this data. It’s possible that in the absence of insurance, the gap would be much wider. Indeed, there’s good evidence suggesting that’s true. Nevertheless, this should make us very skeptical about a world in which we’re spending almost one out of every five dollars on health-care services. Universal insurance is crucial both for certain forms of health care and for economic security. But as I’ve argued before, it’s probably not the best way to make people healthier. Rather, the best way to make people healthier would be to get health-care costs under control so there’s more money in the budget for things like early-childhood education and efforts to strip lead out of walls, both of which seem to have very large impacts on health even though we don’t think of them as health-care expenditures.

Arnold Kling:

And that is from a study in Canada.3. The Washington Post reports,

A 2006 study by the U.S. Department of Education found that 36 percent of adults have only basic or below-basic skills for dealing with health material. This means that 90 million Americans can understand discharge instructions written only at a fifth-grade level or lower.

My guess is that if you want to improve health outcomes in the United States, ignore health insurance and focus on literacy. Even if it has nothing to do with whether or not they can follow a doctor’s written instructions, my guess is that better literacy has a positive impact on health outcomes. The question is whether educators know enough about how to improve literacy to be able to do so effectively. I hope that is the case.

Tim Carney at The Examiner:

During debate over the health-care debate, liberal blogger Ezra Klein wrote that blocking the legislation would “cause the deaths of hundreds of thousands of people.” The liberals were relying on a study from the Urban Institute saying 20,000 people die a year because they are uninsured. Free-market blogger Megan McArdle read the study and concluded:

when you probe that claim, its accuracy is open to question. Even a rough approximation of how many people die because of lack of health insurance is hard to reach. Quite possibly, lack of health insurance has no more impact on your health than lack of flood insurance.

Klein came back with this:

I don’t want to be too harsh, and I don’t want to imply that anyone is sitting around twirling their mustache thinking up ways to hurt poor people. But opposition to health-care reform (which is different than opposition to the people who would be helped by health-care reform) is leading to some very strange arguments about the worth of health-care insurance — arguments that don’t fit with previous opinions, revealed preferences, or even the evidence the skeptics are citing.

But today, with the fight over ObamaCare behind us, and the President dealing with expectations over what his bill can deliver, Klein has a blog post that goes much farther than McArdle ever did. Klein’s headline:

Health care doesn’t keep people healthy — even in Canada

The main thrust of Klein’s blog post:

The problem, the researchers say, is that the medical system just isn’t that good at keeping people from dying. “Health care services use by itself had little explanatory effect on the income-mortality association (4.3 percent) and no explanatory effect on the education-mortality association,” they conclude.

I don’t want to be too harsh, and I’ve got nothing against what Klein used to call “arguments that don’t fit with previous opinions,” so I’ll just recommend you spend more time reading Megan McArdle.

The same is true, I’ll bet, for folks like Tim Carney who like to argue that medical care is ineffective as a way to argue against subsidizing health insurance for poor people. But for the record, the best evidence we have suggests that health-care coverage does much more for the health of poorer people than it does for the health of well-compensated, highly educated people like Carney. That folks like Carney use that evidence to continue a status quo in which they have health insurance and the poor don’t is, I think, proof of how seriously they take their arguments on this score, and of what this discussion is really about — and the answer isn’t “improving the health of the population.”

Karl Smith at Modeled Behavior:

I suspect we have two things going on.First, education confers status and status is related to health outcomes. For example Oscar winners live longer than those simply nominated. How this link occurs is not totally clear. It seems that the hormones associated with stress and disappointment – cortisol for example – reduce long run health. However, this may not be the mechanism. No one really knows at this point.

Second, for a long list of reasons there is correlation between education and physical attractiveness. Physical attractiveness is by evolutionary design a proxy for health. Which to say, healthier folks are more likely to become well educated.

This makes me doubt that power of health improvements from increasing education.

In general it is just damn hard to improve health outcomes. Our bodies are the product of about 4 billion years of evolution. Just making sense of how they work is hard enough. Making them work better is a herculean task.

Jim Manzi at The American Scene:

There is a debate going on in the blogosphere between Ezra Klein, Arnold Kling, Karl Smith, Tim Carney and others about, to put it crudely, whether health care really affects health that much. This is, in part, a proxy debate for whether it is worth it for the U.S. government to provide generous universal health care financing for all of its citizens (or, I suppose, residents).

Either position can be caricatured. On one hand, no sane person would want to be without the advances of modern medicine. Recently, a little girl I know had scarlet fever. A century ago, this would very possibly have meant burying a small corpse; today, it implies a 10-day cycle of swallowing medicine at breakfast and dinner. There are few people on Earth who have as much reason to be proud of how they spend their work week as pharmaceutical researchers.

On the other hand, the link from alternative methods of health care finance, through the actual differences in provision of medical care these imply in the contemporary U.S., to the actual differences in health outcomes these treatment differences would cause, isn’t nearly so obvious. The net health effect of providing universal health care coverage versus some alternative financing system is an empirical question, not a philosophy debate.

I’ve written a lot about why randomized experiments are so critical to understanding cause-and-effect relationships in social policy. In the case of health care financing, the reason is that what system of health care financing you have (high-quality “go to any doctor” plan; good HMO; catastrophic-only plan; VA; go to an emergency room because you are uninsured, etc.) is bound up with a myriad of other factors that influence health. A randomized experiment allows us to isolate the impact of the system of health care financing.

To my knowledge, the only large-scale randomized experiment in the U.S. that has tested the actual effects on health of providing various kinds of healthcare financing was the RAND Health Insurance Experiment (HIE). In this experiment, thousands of families were randomly assigned to one of five different health insurance plans that ranged from something like a plan that provides free health care, to something like a pure catastrophic-only plan in which consumers pay out-of-pocket for day-to-day healthcare. The study tracked what exact health care services each group used, and how their health varied over a period of 3 – 5 years.

Ezra Klein describes this experiment as “the best evidence we have,” and writes that it “suggests that health-care coverage does much more for the health of poorer people than it does for the health of well-compensated, highly educated people.” His statement is correct, but as a summary of the results of this experiment, seems to me to be radically incomplete. In fact, the experimenters wrote of the findings that “cost sharing reduced the use of nearly all health services,” but “the reduction in services induced by cost sharing had no adverse effect on participants’ health.” Think about that. Providing people coverage of their medical costs caused no average improvement in health.

Klein is correct that there appeared to be a net health benefit for the poorest participants, but this was for a tiny proportion of the population, and for a small subset of medical conditions. According to the study, “The poorest and sickest 6 percent of the sample at the start of the experiment had better outcomes under the free plan for 4 of the 30 conditions measured.” There are technical reasons why conclusions from such a experiment are not reliable for post hoc subgroups in the way that they are for average comparison of a test group versus a control group; but even if we were to accept this finding as valid, it’s not obvious to me that we would want to devise a health care financing system for the United States around helping 6% of the population partially ameliorate about 10% of their potential health problems, as opposed to developing some specific supplementary programs for these issues, if they could be addressed feasibly.

Klein clearly has a very sophisticated take on the issue, and wrote in 2009 that health care reform is not primarily about improving health, but in reducing how much we spend on it. As he put it, “The purpose of health reform, in other words, is to pay for health care — not to improve the health of the population.” Fair enough. But the real debate, then, would be about whether market forces or bureaucratic control would be better at reducing costs, not about which would be better at promoting health for the “poorest and sickest” or anybody else. It wouldn’t be about getting better health outcomes.

A single experiment like the RAND HIE is not definitive. Among other things: it finished in 1982, and we live in a different world; any such experiment requires replication; it might be that the important health effects take much longer than 5 years to materialize, and so on. But as an observer of the health care debates, it always struck me as fascinating that the fact that the “best evidence we have” showed that providing health care coverage doesn’t actually improve average health wasn’t treated as more central.

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The End Of Mubarak And The End Of Fannie and Freddie?

Uri Friedman at The Atlantic:

On Friday, the Obama administration laid the foundation for what is sure to be a fierce debate about the role government should play in supporting homeownership in the United States in the wake of the housing bubble and financial crisis.

The Treasury Department and the Department of Housing and Urban Development issued a report to Congress outlining how government can gradually scale back its involvement in the mortgage market and transfer housing finance to the private sector. The report proposes abolishing the government-backed mortgage providers Fannie Mae and Freddie Mac within ten years and suggests three possible systems to take their place.

Daniel Indiviglio at The Atlantic:

With that said, however, the government’s presence in the housing market will not disappear entirely. In fact, it would certainly remain intact for the affordable housing initiatives through the Federal Housing Authority and other targeted programs, as it had in the past. The big change would be how mortgage funding would be provided for the vast majority of mortgages in the U.S., which have heavily relied on Fannie and Freddie for decades. The Treasury wants the private market to step in and take on most of that funding responsibility and relieve taxpayers of some or almost all of the mortgage market’s risk.

Before getting into the three alternative policy possibilities that it offers, the plan explains how the mortgage market would be weaned off of Fannie and Freddie over a period of time. One change would be to gradually increase the guarantee fees that the GSEs charge, so that private guarantors would be able to better compete. Another change would be to require Fannie and Freddie to obtain more private capital to cover subsequent credit losses. The Treasury also intends to reduce the size of mortgages that qualify for Fannie and Freddie guarantees. Finally, the administration intends to wind down Fannie’s and Freddie’s mortgage portfolios, by at least 10% per year.

The Treasury also provides some guidance on mortgage underwriting and measures to crack down on predatory lending. Perhaps the most surprising assertion was that loans that obtain government backing going forward — excluding those in designated programs specifically targeting lower-income borrowers — should eventually be required to “have at least a ten percent down payment.” The Treasury also stressed the importance of ensuring borrowers have the ability to pay the mortgages they obtain.

Mark Calabria at Cato:

While the report does say a lot of the right things — such as protecting the taxpayer — it is awfully short on any real details.  And in many areas, the report makes clear that the Obama administration intends to keep the taxpayer on the hook for future losses arising from Fannie and Freddie.  For instance, after assuring us that the GSEs will have sufficient capital to meet their obligations, including debt, the report tells us that such capital will not come from investors, but from the taxpayer.  One has to wonder whether this report was written for the benefit of the Chinese Central Bank (one of the largest GSE debtholders) or for the benefit of the U.S. taxpayer.

Equally vague is the discussion of “winding down” Fannie and Freddie.  While that sounds great, how is this to be accomplished? And how long will it take?  Again it seems that this “wind-down” will be financed by the taxpayer.  It is suggested that the GSE guarantee fees will increase.  Again, by how much and when?

Paragraph 2 of Section 1074 of the Dodd-Frank act, which required this study, also requires an “analysis” of various options and impacts.  In all due respect to HUD and Treasury and their efforts, there is nothing in this report that remotely resembles an “analysis” — just vague generalities.

I appreciate the administration’s stated desire to move us closer to a private market solution, but we’ve heard these empty promises before.  Remember that financial reform was going to end “too big to fail” and bailouts?  Health care reform was going to “bend the cost curve”?  It is past the time of fluff.   We need actual details and an actual plan.

Ezra Klein:

Beyond the basically insane structure of Fannie Mae and Freddie Mac — private institutions with lobbyists, profit motives, and the protection of an unarticulated but widely acknowledged government guarantee to cover their big losses — the administration’s diagnosis of what went wrong in the housing market speaks much more to issues dealt with in the financial-regulation law than issues included in their three options for reform of the government’s system of housing finance and insurance.

The story they tell begins in the consumer market, where inadequate protections and incompetent regulatory oversight allowed the brisk trade in bad mortgages to people who couldn’t afford them to take off. It then moves to the opaque and underregulated finance system, where the banks were packaging products they didn’t understand into securitized bonds and selling them off so quickly that they stopped worrying about how risky they were, and where regulators didn’t see what was going on and thus didn’t demand the banks hold enough capital to protect themselves from the inevitable reckoning.

Fannie Mae and Freddie Mac were part of this story, of course. But they were late to the party. They only got into the riskier stuff in 2006, while the rest of the financial industry had been playing in the mud since 2001. Reforming them can help mitigate a housing crisis in the future. But given this chain of events, it can’t prevent it.

The root causes will be fixed — or not — in Dodd-Frank. It’s up to the Consumer Financial Protection Bureau to strengthen the weak consumer protections that allowed these mortgages to be sold in the first place. Regulators will have new powers to force financial players — particularly the megafirms whose failure threatened the whole system — to hold more capital as a buffer against bad times. Banks won’t be able sell off all their risk because the law says they have hold five percent of the risk of any product they originate — though as Bethany McLean notes, that’s not true when the product consists of “qualifying residential mortgages,” and it’s up to the regulators implementing Dodd-Frank to define what a qualifying residential mortgage is.

That’s not to say reforming the way the government structures its presence in the housing market doesn’t matter. It does. But the government isn’t looking to dramatically change the role they play in the housing market. They’re just looking to get away from poorly designed institutions like Fannie and Freddie. The real action — the work that could prevent another crisis — is still in Dodd-Frank, where many of the questions central to how the housing markets works going forward haven’t been answered, and where many of the rules that might stop it from blowing up again have yet to be written.

Arnold Kling:

Incidentally, the more I think about it, the more outraged I am by the sketchiness of their proposal. It takes up only a few paragraphs, and those are quite vague. It is the sort of thing that, if somebody tossed it out at a meeting or in a blog post, you would say, “Might be interesting, but I am not quite sure how you would do it. Do you have a background paper on it somewhere?” In the form that it is presented in the report, I think that it is irresponsible to even call it a proposal. Shame on Treasury for putting something so half-baked at the center of their report.

This puts me in the strange position of defending Freddie and Fannie. My first choice would be for government not to hand out any goodies. But if you are going to have the government hand out goodies, the ability of regulators to control the costs and mitigate the risks will be much greater if we revert to Freddie and Fannie than if we try something new. Under any arrangement, the hard part will be what I call “staying off the booze,” meaning keeping the government from guaranteeing riskier mortgages (second mortgages, cash-out refis, loans on investment properties, loans with low down payments, etc.) when house prices start rising again.

Monica Potts at Tapped:

It’s far to ask whether we’ve been over-promoting homeownership, and, as Alyssa Katzdoes in the latest issue of the Prospect, what we maybe should do instead. Alyssa will have more detail on what happens after Fannie and Freddie on TAP Monday, but for the meantime, I’d like to point out what a symbolic victory this is for conservatives. Whether Fannie and Freddie should have been preserved probably wasn’t considered lightly, but conservatives have been vilifying the agencies as the cause of the crisis since the beginning. They weren’t, they were simply the last to ride a wave that started on Wall Street. That doesn’t mean the weird private/public limbo in which they did business wasn’t also a bad thing, but it does mean that conservatives will point to their demise as proof they were right.

Joseph Lawler at The American Spectator

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Holiday, Celebrate!

Lori Montgomery and Anne Kornblut at WaPo:

With just two months until the November elections, the White House is seriously weighing a package of business tax breaks – potentially worth hundreds of billions of dollars – to spur hiring and combat Republican charges that Democratic tax policies hurt small businesses, according to people with knowledge of the deliberations.

Among the options under consideration are a temporary payroll-tax holiday and a permanent extension of the now-expired research-and-development tax credit, which rewards companies that conduct research into new technologies within the United States.

Administration officials have struggled to develop new economic policies and an effective message to blunt expected Republican gains in Congress and defuse complaints from Democrats that President Obama is fumbling the issue most important to voters. Following Obama’s vacation and focus on foreign policy in recent weeks, White House advisers have arranged a series of economic events for the president next week, including two trips to swing states and a news conference.

David Leonhardt at NYT:

It’s time to start talking about a tax cut.

The economy is struggling mightily. Some 15 million people remain unemployed. The Federal Reserve has been slow to act and still is not doing much. The Senate has been unable to find the 60 votes needed to pass anything but minor bills.

The best hope for a short-term economic plan that can win bipartisan support is a tax cut — and not the permanent extension of George W. Bush’s tax cuts, which have been dominating the debate lately. Such an extension is unlikely to win many Democratic votes. Republicans, meanwhile, are unlikely to support more spending, like the national infrastructure project President Obama has been mentioning.

A well-devised tax cut could be different. Cutting taxes has been the heart of the Republican economic program for 30 years, and last year’s stimulus bill showed that Mr. Obama was open to tax cuts.

The question, then, is what kind of cut can put people back to work quickly.

The last 30 years offer some pretty good answers. For one thing, a permanent reduction in tax rates focused on the affluent — along the lines of those 2001 Bush tax cuts — does little to lift growth in the short term. An across-the-board, one-time cut — like the one that Mr. Bush signed in 2008 or that Mr. Obama signed last year — does more.

But the most effective tax cut for putting people back to work quickly is one that businesses and households get only if they spend money. Last year’s cash-for-clunkers program was an example. So was a recent bipartisan tax credit for businesses that hired workers who had been unemployed for months. Perhaps the broadest example is a temporary cut in the payroll tax for businesses, which reduces the cost of employing people.

Tyler Cowen

Joseph Lawler at The American Spectator:

The Post suggests that the bill would be introduced before the midterm elections. The article quotes William Galston of the Brookings Institution explaining that the timing proves that the decision wouldn’t be motivated by fears about the midterms: “Substantively, there is nothing they could do between now and Election Day that would have any measurable effect on the economy. Nothing.”

If the idea is to make it easier for companies to hire new workers in an attempt to revive the weak labor market, a payroll tax cut would be a good first step. The administration, however, is also toying with a few other policies that would undermine the effect of the payroll tax cut. For example, if the Democrats do allow the Bush tax cuts for top individual earners to expire, the burden will fall onto small business owners — counteracting the effect of the payroll tax cuts mere months after they’re implemented.

Mary Katherine Ham at The Weekly Standard

Jennifer Rubin at Commentary:

When all else fails, Democrats throw in the towel on their loopy economic policies and resort to tax cuts — just like the Republicans wanted in February 2009. We learn:

With just two months until the November elections, the White House is seriously weighing a package of business tax breaks — potentially worth hundreds of billions of dollars — to spur hiring and combat Republican charges that Democratic tax policies hurt small businesses, according to people with knowledge of the deliberations.

Among the options under consideration are a temporary payroll-tax holiday and a permanent extension of the now-expired research-and-development tax credit, which rewards companies that conduct research into new technologies within the United States.

A couple of problems with that. First, it won’t improve the economy before the election. The voice of sanity for the Democrats, William Galston, says: “Substantively, there is nothing they could do between now and Election Day that would have any measurable effect on the economy. Nothing.” Second, this renders the Obama economy policy entirely incoherent. If the economy is worsening and they admit tax cuts are good, why eliminate the Bush tax cuts? What sense does it make to give with one hand and take away with the other?

We’ll see what the Democrats come up with. As Milton Freidman advised, “I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” But conservatives should insist that in addition to any tax cuts Obama proposes, the Bush tax cuts must be retained. Otherwise, we are merely treading water.

Steve Benen:

Given the mixed signals of late, it’s worth noting that Politico has a report similar to the Post‘s, explaining that administration officials are “mulling a raft of emergency fixes to stimulate the economy before the midterms, including an extension of the research and development tax credit and new infrastructure spending.”

It’s hard to evaluate any of these ideas without more details, and for that matter, no matter what the White House recommends, Congress’ inability to function makes progress unlikely for the foreseeable future.

That said, it’s at least somewhat encouraging to see a shift away from “everything’s on track, so just be patient.” Moreover, there’s obviously real political salience to even just having the debate — with two months before the midterms, it’s worth having the two parties fight over how to help the economy grow. If Republicans intend to kill every proposal the White House offers, that should matter to voters, too.

The Post‘s report concluded that President Obama “could roll out additional measures as soon as next week.” Stay tuned.

Megan McArdle:

Thoughts:
1)  Practically, this isn’t going to do anything before the mid-terms.  These sorts of changes take time to roll out, and there’s no way they could get anything into effect soon enough to make an actual difference in peoples’ lives.
2)  Whether you think this works as a campaign tactic depends on whether you think people will think that it is going to work.  On that question, I have no idea.  People do love cash in their pockets, however.
3)  Politically, this has one major drawback:  it’s going to put huge holes in the Social Security and Medicare trust funds.  Since I think those trust funds are meaningless accounting devices, I don’t think this has any practical relevance.  But as you will be able to see in my comment section about twenty minutes after I hit “post,” people have a very deep emotional attachment to the idea of the trust funds, which politicians cannot easily trifle with.
4)  Practically, I think the actual impact will be minimal, at least on employment.  It might help people and companies to rebuild their balance sheets (or let struggling companies ride things out a while longer).  But the main constraint on business hiring is uncertainty, and a payroll tax isn’t going to change that.  Obviously, some workers will get hired at the margin–but if your labor is so marginal that you need a payroll tax holiday to make it economical, then I’d expect that as soon as the payroll tax holiday is over, you’ll probably be fired.  Hence, even if you get the job, you’re going to want to save as much of your wages as possible, blunting the multiplier effect we hope to get out of stimulus.
Really? I have a proposal. Suppose the holiday costs the trust fund $400 billion. Just transfer that $400 billion from the general budget to the trust fund.

In fact, we could immediately put $100 trillion gazillion dollars in the trust funds from the general budget, and then they would have enough money to pay Social Security forever. Supposedly.

The trust fund is a measure of what we are promising to pay future Social Security recipients. To me, it is nothing more than that. But what is going to fund Social Security down the road is not the promises that we pour into it today. It is the taxes that people will pay in the future.

I have tried to explain Social Security for a long time. See here, for example. But Megan is probably right. I honestly thought that among trained economists it was understood that the trust fund has no real significance. I thought that anyone who went to a respectable graduate school learned the overlapping generations model, which sometimes gets taught as a model of money but is most evidently a model of Social Security. However, Paul Krugman at least pretends to act as if he never learned that.

Atrios:

There’s something about working in politics which starts making people think everything is about perception rather than reality. I think a full payroll tax holiday would be fine as long as it wasn’t yet another excuse to try to destroy Social Security, but an employer only one would be truly awful on substance, impact, and message. More help for the overlords, no help for you!

But apparently the geniuses in charge think the problem is that “stimulus” and “bailout” have become scary bad words. The problem is that the economy sucks and people don’t have any money.

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Filed under Economics, The Crisis

Bloggers Make Some Lists And Eat Some Humble Pie

Brad DeLong:

There is a danger in this business. If you don’t mark your beliefs to market occasionally, and throw out worthless intellectual trash, you ossify–you become one of those demented old coots detached from reality ranting unintelligibly at the moon.

[…]

So what major analytical mistakes–errors of either theoretical analysis, of empirical description of reality, or of applying theory to reality–have I made in the past decade?

I can think of three offhand to start the ball rolling. I erred:

  1. In my belief that central banks had the tools, the skill, and the political will to stabilize economies at high levels of employment and low levels of inflation, and thus that fiscal policy and financial institutions policy no longer had any compelling stabilization policy role to play.
  2. In my belief that large, leveraged financial institutions had sufficient caution and sufficient control over their derivatives books that their derivative positions did not pose major systemic risk.
  3. In my belief that the principal threat to the world economy would come from the fact that in a crisis the shaky long-term finances of the U.S. social insurance state might provoke a collapse of confidence in the long-term value of the dollar.

These were three biggies. But surely there were others. What were they?

Tyler Cowen:

I shared in one and two, though not three.  I’m starting to believe in #3 however.

(That said, I would word #1 differently; for instance, I have long believed in automatic stabilizers and still do and I remain more skeptical of “ramp-up” spending than Brad.  I would phrase #2 to focus on the balance sheet more generally and not derivatives per se.)

I also take the data on slow median income growth more seriously than I used to.  I no longer think those numbers are a mere statistical artifact.

What can you all cite as changed beliefs?  Examples like “Person X or Policy X turned out to be even worse than I had thought” do not count.

Megan McArdle:

It’s a Friday in August, with nothing to report but the dismal GDP figures we were all expecting.  So I’ll start with the Iraq War:

1)  I erroneously believed that I could interpret the actions of Saddam Hussein.  He seemed to be acting like I’d act if I had WMD.  Whoops!  I wasn’t an Iraqi dictator, which left huge gaps in my mental model of Hussein.

2)  I erroneously extrapolated the experience of World War II to Iraq.  This took several forms:

a)  I overlooked the fact that Japan and Germany were both stable bourgeois nations with solid industrial bases long before we got into the act.

b)  I overlooked the fact that we completely destroyed this nations before occupying and reconstructing them.

3)  I was insufficiently empathetic in imagining how Iraqis would feel about our invasion.  We liked the French for giving us military help during the Revolution.  Now imagine that France had invaded in order to liberate us from the British.  Even if they really did eventually leave, this would have had much worse results.  Looking back, my confidence in our liberatory powers seems terribly callous, and it doesn’t really do the dead Iraqis much good that I’m sorry for it.

These things led me to underestimate the time and expense of the war (both fiscal and in human lives), and underestimate the benefits.  Maybe history will vindicate the invasion, but I can’t say this seems likely.

Onto the financial crisis, where my erroneous beliefs are probably pretty typical:

1)  I recognized the housing bubble pretty early (the first mention I can find on my old blog is in 2002)–but I had no idea it would have these kinds of broad, devastating effects.  If you had asked me in 2006 what would happen as a result, I would have pictured

a)  a wealth-effect lead recession, as consumers realized they weren’t as rich as they thought
b) a decline in the construction industry
c) some bank failures.

I would not have pictured wholesale runs on the money markets, the collapse of the shadow banking system, and 10+% unemployment.

2)  I believed in the “Great Moderation”.  That is, I believed that the Fed and prudent fiscal policy had, to a large extent, tamed the business cycle.  I did not believe that there was even a small risk of another Great Depression; I believed that the Fed could and would prevent the contagion from spreading.  Arguably they (and the Treasury) did, but I did not imagine anything close to that level of intervention being necessary.

3)  I believed regulators were smarter than they were.  In 2004, when the SEC decided to let the investment banks lever up to 30-to-1 instead of 12-to-1, because after all, the SEC had the tools to quickly identify and stop any contagion, I would have said they were probably right.  (I’m not sure I was aware of it).

4)  I believed bankers were smarter than they were.  Or rather, I believed the system was smarter than it was.  Individual bankers making idiotic mistakes?  Absolutely.  The occasional bank being brought low?  Sure–it happens pretty regularly, in fact.  But the whole banking system taking its entire balance sheet to the roulette table and laying it all down on a single bet? Ridiculous.

5)  I expected any crisis to come from America’s gaping current account balances and its long-term entitlement problems.  Again, arguably this was true, if you believe the “Global Savings Glut” theory (I’m inclined to).  But I expected the problems to come via a currency crisis, not a global meltdown touched off by crappy US mortgage bonds.

6)  I believed that over reasonably long time-frames, modest investments in equities would allow you to retire in comfort.

7)  I believed that securitization mitigated risk by spreading it around, rather than enhancing risk by reducing transparency.

8)  As a corollary, I believed that on the whole, Fannie/Freddie were harmless–not a libertarian ideal, of course, but hardly the worst thing the US government was doing.  I still don’t think they were the worst thing the US government was doing, but I think that their distortions of the market were toxic, and have been especially so in the wake of the crisis*.

9)  I believed we knew a lot more about the Great Depression, and how to fix such a thing, then we turned out to.  I don’t think we know much at all about the various roles of fiscal and monetary policy; I think the only lessons we know for certain are “don’t peg your currency”, and “don’t let the banking system collapse”.

10) I underestimated the danger that new financial instruments pose to a system in which neither the bankers nor the regulators understand their unexpected effects.

Random policy things I was wrong about:

1)  The bankruptcy reform reduced bankruptcies more, and for longer, than I expected.  Still don’t think it was on net good policy, but about this empirical effect Todd Zywicki was right, and I was wrong.

2)  I think it’s possible the Medicare Prescription Drug benefit may actually be saving money in other parts of the system.  (Sorry, George!)

3)  I was too optimistic about Doha; I no longer expect any serious trade liberalization for at least the next decade, maybe more.

On the political side:

1)  I would never have imagined the 21st century United States Government effectively nationalizing an automaker and an insurance company.

2)  I was astonished that Democrats managed to hold their coalition together to pass an incredibly unpopular policy in the odd belief that it would somehow get more popular later. (Oops)

3)  I would never have predicted the emergence of the Tea Parties as an important phenomenon.

Arnold Kling:

1. My way of thinking about the price/rent ratio for housing (see this post from 2003) caused me to think in terms of values that might be reasonable, not historical norms. When the price/rent ratio went above historical norms, I did not consider this in and of itself as an alarming sign. If I had, I would have started worrying much sooner and much more about high house prices.

Until very late in the game, I thought that the biggest threat to the housing market was an increase in the real interest rate, as opposed to a purely internal bubble/collapse.

2. I was sure that the stress tests used by Freddie and Fannie and the capital regulations at bank were sufficient to keep those institutions from taking on excessive credit risk. I thought that the sub-prime crisis would only cause newer, peripheral institutions to go bankrupt.

Incidentally, the Report released yesterday by the regulator overseeing Freddie Mac and Fannie Mae was very disappointing to me in that it says nothing about stress tests. What I would like to know is this: as of December, 2007, how much capital should Freddie and Fannie have been holding in order to conform to the regulatory stress test requirements? Did they have enough? Too little? More than enough? Then, subsequently, how bad was the housing price outcome relative to the stress tests? And what do the stress tests say now?

I strongly suspect that the actual house price outcome was not dramatically worse than what is used in the stress testing methodology. Instead, I suspect that Freddie and Fannie were way under-capitalized all along based on the stress tests, and that the regulator was not aggressive in dealing with the problem. My guess is that the regulator is not terribly eager to bring this to our attention.

3. I thought that the economy had become less susceptible to cyclical downturns. In April of 2003, I wrote The Elastic Economy, which argued that “the private sector has become more chaotic but more robust.” Read the whole thing. I also believed that inventory corrections would be less of a problem, for two reasons. First, the share of GDP represented by automobiles and other durable goods is much lower. Second, computer systems have made inventory management less mistake-prone.

4. I’ll talk about derivatives, not because I was wrong but because Brad and Tyler bring them up. From the late 1990’s until 2008, I was not interested in financial markets, so derivatives were off my radar screen. Back in 1986, the Fed published a book-length staff study on “Financial Futures and Options in the Economy,” and I wrote a chapter called “Futures Markets and Transaction Costs.” My view was that derivatives markets on organized exchanges serve to reduce transaction costs. Then and now, my thinking tended to downplay the role of derivatives as hedging and risk-management tools. So I would probably not have drunk the Kool-Aid that said that these were making financial markets more able to handle risk.

Back in the 1980’s, I got the sense that a lot of financial executives who played around with derivatives had insufficient understanding of option-pricing models. (You should have seen some of the S&Ls that bought “CMO residuals” for yield back in the 1980’s. I had not yet coined the term “suits vs. geeks divide,” but the phenomenon certainly existed.) So the fact that some companies blew up because of derivatives is not a shock to me. And I don’t think that regulated exchanges are the answer. Google for “Arnold Kling credit default swaps exchange” to see why.

I first heard about credit derivatives when my former Freddie Mac colleague Frank Vetrano mentioned them during a break at one of our fantasy baseball auctions one year at Dave Andrukonis’ house. This was some time around 1999 or 2000, after I had left Freddie, and I did not think that credit derivatives made much sense or would amount to anything. Judging by subsequent market volume, I was clearly wrong in thinking they would not amount to anything. As to whether they make sense, I think one could say that is still an open issue.

5. I would say that I have become less of a Keynesian since the crisis took place. Before the crisis, I would have stuck up for Keynesian macro, with the proviso in (3) that I would have thought that Keynesian demand policies would be needed less going forward. I was always a skeptic on monetary policy, and I continue to have a lot of skepticism. But I developed the whole Recalculation Story and related ideas as kind of a delayed, semi-subliminal response to a Tyler Cowen blog post as well as thinking about various empirical phenomena, such as the JOLTS data. However, whether I was most wrong in believing in Keynesian economics before or whether I am most wrong now in believing the Recalculation Story is certainly an open issue.

Daniel Drezner:

Looking back on my eighth (!!) year of blogging, here are the big things I think I got wrong over the past year:

1)  The Green Movement did not cause Iran’s regime to crack upScore one for the Leveretts — Iran’s regime has effectively silenced the Green movement, without any visible internal cost.  Indeed, the regime now seems entrenched enough so that the fundamentalists and conservatives can now ignore reformists and start turning on each other.  I confess, I though the Ashura protests marked an inflection point on Iran.  Nope.  The regime has suffered some serious costs from its internal repression, but Khamenei ain’t going anywhere anytime soon.

2)  Iceland was willing to pay the price of financial isolation.  I knew that Icelanders were outraged at the notion that they had to help bail out Icesave depositors in England and the Netherlands.  I also thought, however, that when the question was put to a referendum, Icelanders would pause for a moment and consider the ramifications of financial isolation.  Um… whoops.

3)  The G-20 was been far less useful than I anticipated.  A year ago at this juncture I was pretty pessimistic about the prospects of G-20 macroeconomic policy coordination.  I was hopeful, however, that the G-20 could function effectively as a mechanism to pressure China into revaluing the yuan.

And… things are worse on both fronts than I anticipated.  At Toronto, the G-20 encouraged contractionary fiscal policies way too early, helping to push the global economy into double3-dip territory.  On the yuan, China has niminally pledged to let the yuan float, but acual movement has been pretty meager.

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Filed under Go Meta, New Media

Staring At Shoes In Regards To The Wall Street Journal Article

Heather Horn at The Atlantic with the round-up

Robert Barro at The Wall Street Journal:

The unemployment-insurance program involves a balance between compassion—providing for persons temporarily without work—and efficiency. The loss in efficiency results partly because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment. A further inefficiency concerns the distortions from the increases in taxes required to pay for the program.

In a recession, it is more likely that individual unemployment reflects weak economic conditions, rather than individual decisions to choose leisure over work. Therefore, it is reasonable during a recession to adopt a more generous unemployment-insurance program. In the past, this change entailed extensions to perhaps 39 weeks of eligibility from 26 weeks, though sometimes a bit more and typically conditioned on the employment situation in a person’s state of residence. However, we have never experienced anything close to the blanket extension of eligibility to nearly two years. We have shifted toward a welfare program that resembles those in many Western European countries.

The administration has argued that the more generous unemployment-insurance program could not have had much impact on the unemployment rate because the recession is so severe that jobs are unavailable for many people. This perspective is odd on its face because, even at the worst of the downturn, the U.S. labor market featured a tremendous amount of turnover in the form of large numbers of persons hired and separated every month.

For example, the Bureau of Labor Statistics reports that, near the worst of the recession in March 2009, 3.9 million people were hired and 4.7 million were separated from jobs. This net loss of 800,000 jobs in one month indicates a very weak economy—but nevertheless one in which 3.9 million people were hired. A program that reduced incentives for people to search for and accept jobs could surely matter a lot here.

Moreover, although the peak unemployment rate (thus far) of 10.1% in October 2009 is very disturbing, the rate was even higher in the 1982 recession (10.8% in November-December 1982). Thus, there is no reason to think that the United States is in a new world in which incentives provided by more generous unemployment-insurance programs do not matter much for unemployment.

Another reason to be skeptical about the administration’s stance is that generous unemployment-insurance programs have been found to raise unemployment in many Western European countries in which unemployment rates have been far higher than the current U.S. rate. In Europe, the influence has worked particularly through increases in long-term unemployment. So the key question is what happened to long-term unemployment in the United States during the current recession?

To begin with a historical perspective, in the 1982 recession the peak unemployment rate of 10.8% in November-December 1982 corresponded to a mean duration of unemployment of 17.6 weeks and a share of long-term unemployment (those unemployed more than 26 weeks) of 20.4%. Long-term unemployment peaked later, in July 1983, when the unemployment rate had fallen to 9.4%. At that point, the mean duration of unemployment reached 21.2 weeks and the share of long-term unemployment was 24.5%. These numbers are the highest observed in the post-World War II period until recently. Thus, we can think of previous recessions (including those in 2001, 1990-91 and before 1982) as featuring a mean duration of unemployment of less than 21 weeks and a share of long-term unemployment of less than 25%.

These numbers provide a stark contrast with joblessness today. The peak unemployment rate of 10.1% in October 2009 corresponded to a mean duration of unemployment of 27.2 weeks and a share of long-term unemployment of 36%. The duration of unemployment peaked (thus far) at 35.2 weeks in June 2010, when the share of long-term unemployment in the total reached a remarkable 46.2%. These numbers are way above the ceilings of 21 weeks and 25% share applicable to previous post-World War II recessions. The dramatic expansion of unemployment-insurance eligibility to 99 weeks is almost surely the culprit.

To get a rough quantitative estimate of the implications for the unemployment rate, suppose that the expansion of unemployment-insurance coverage to 99 weeks had not occurred and—I assume—the share of long-term unemployment had equaled the peak value of 24.5% observed in July 1983. Then, if the number of unemployed 26 weeks or less in June 2010 had still equaled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million. If the labor force still equaled the observed value (153.7 million), the unemployment rate would have been 6.8% rather than 9.5%.

Karl Smith at Modeled Behavior:

Based on Cable News and a notable NYT column one might think that economists are perpetually at one another’s throats. This is far from the truth. The hierarchical nature of the economics profession lends an ecclesiastical air to many of our interactions. Brilliant figures are treated with enormous reverence.

To wit, when an eminent figure like Robert Barro says something that strikes most of as inane the most common reaction is shoe staring

[…]

For better or worse the blogosphere has changed that. Economists of all stripes will descend upon Barro over the next 36 hours. If he replies, which I suspect he will not, this will be an interesting moment.

Scott Grannis at Seeking Alpha:

Robert Barro has a good article in yesterday’s WSJ, titled “The Folly of Subsidizing Unemployment.” In it, he argues reasonably that “the expansion of unemployment-insurance eligibility to as much as 99 weeks from the standard 26 weeks” has made the economy less efficient “because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment.” My chart above helps illustrate the numbers he uses in his article, making it clear that we have never before seen such a large number of people receiving unemployment compensation. The 1981-82 recession saw a higher unemployment rate than we have seen in the recent recession, but one-third fewer people were subsidized for not working. This undoubtedly helps explain why this recovery has proceeded at a very disappointing pace.

Robert Reich:

I have the questionable distinction of appearing on Larry Kudlow’s CNBC program several times a week, arguing with people whose positions under normal circumstances would get no serious attention, and defending policies I would have thought so clearly and obviously defensible they should need no justification. But we are living through strange times. The economy is so bad that the social fabric is coming undone, and what used to be merely weird economic theories have become debatable public policies.

Tonight it was Harvard Professor Robert Barro, who opined in today’s Wall Street Journal that America’s high rate of long-term unemployment is the consequence rather than the cause of today’s extended unemployment insurance benefits.

In theory, Barro is correct. If people who lose their jobs receive generous unemployment benefits they might stay unemployed longer than if they got nothing. But that’s hardly a reason to jettison unemployment benefits or turn our backs on millions of Americans who through no fault of their own remain jobless in the worst economy since the Great Depression.

Yet moral hazard lurks in every conservative brain. It’s also true that if we got rid of lifeguards and let more swimmers drown, fewer people would venture into the water. And if we got rid of fire departments and more houses burnt to the ground, fewer people would use stoves. A civil society is not based on the principle of tough love.

In point of fact, most states provide unemployment benefits that are only a fraction of the wages and benefits people lost when their jobs disappeared. Indeed, fewer than 40 percent of the unemployed in most states are even eligible for benefits, because states require applicants have been in full-time jobs for at least three to five years. This often rules out a majority of those who are jobless – because they’ve moved from job to job, or have held a number of part-time jobs.

So it’s hard to make the case that many of the unemployed have chosen to remain jobless and collect unemployment benefits rather than work.

Anyone who bothered to step into the real world would see the absurdity of Barro’s position. Right now, there are roughly five applicants for every job opening in America. If the job requires relatively few skills, hundreds of applicants line up for it. The Bureau of Labor Statistics says 15 percent of people without college degrees are jobless today; that’s not counting large numbers too discouraged even to look for work.

Barro argues the rate of unemployment in this Great Jobs Recession is comparable to what it was in the 1981-82 recession, but the rate of long-term unemployed then was nowhere as high as it is now. He concludes this is because unemployment benefits didn’t last nearly as long in 1981 and 82 as it they do now.

He fails to see – or disclose – that the 81-82 recession was far more benign than this one, and over far sooner. It was caused by Paul Volcker and the Fed yanking up interest rates to break the back of inflation – and overshooting. When they pulled interest rates down again, the economy shot back to life.

Alex Tabarrok:

It’s not clear to me why we should assume that the share of long-term unemployment in this recession should equal that in 1983.

Barro also argues:

We have shifted toward a welfare program that resembles those in many Western European countries.

In contrast Josh Barro, son of Robert, in How much do UI Extensions Matter for Unemployment, concluded that 0.4% was probably on the high side:

Two Fed studies suggest that [extensions of UI] may have contributed 0.4 to 1.7 percentage points to current unemployment. But a closer look at this research makes me skeptical that the effects have been so large.

…The incentive effects of UI extension must also be weighed against the stimulative effects of paying UI benefits. For some reason it’s become almost taboo to note this on the Right, but UI recipients tend to be highly inclined to spend funds they receive immediately, meaning that more UI payments are likely to increase aggregate demand. UI extension also helps to avoid events like foreclosure, eviction and bankruptcy, which in addition to being personal disasters are also destructive of economic value.

As a result, I am inclined to favor further extension of UI benefits while the job market remains so weak. I am not concerned that this leads us down a slippery slope to permanent, indefinite unemployment benefits (which historically have been one of the drivers of high structural employment in continental Europe) as the United States has gone through many cycles of extending unemployment benefits in recession and then paring them back when the economy improves, under both Republican and Democratic leadership.

I call this one on both counts for Josh.

Arnold Kling:

He claims that the unemployment rate would be much lower now if Congress had not passed any extensions of unemployment benefits. I have not gone through his analysis, but I suspect that I, like Alex Tabarrok, would not find it persuasive. Nonetheless, I think there is a case to be made for allowing people to continue to collect unemployment benefits after they find a new job, until their benefits are scheduled to expire. We can argue about how generous the unemployment benefits should be overall, but for any level of benefits it is possible to reduce the disincentive to find work.

Mark Thoma:

Calling Barro’s claim questionable, as in the title, was probably too generous.

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Filed under Economics, The Crisis

Liberaltarians Are So 2006

Will Wilkinson:

Of Matt Yglesias’s sensible approach to regulation, Conor Friederdorf writes:

Being someone who understands progressives, Mr. Yglesias makes the case for deregulation in terms likely to appeal to his colleagues on the left. What would be nice is if more people on the right could be similarly persuasive. Of course, capitalizing on common ground or winning converts on individual issues requires an accurate understanding of what motivates people with different ideologies, so it isn’t surprising that a Yglesias fan invoked Cato in that Tweet. It’s a place where several staffers are daily deepening our understanding of where liberals and libertarians can work together.

I’m glad Conor recognizes the value of the work some of us at Cato have been doing to make productive liberal-libertarian dialogue and collaboration possible. Alas, all good things must come to an end.

Via the Kauffman Foundation

Brink Lindsey Joins Kauffman Foundation as Senior Scholar

Economic researcher and author to contribute to Kauffman’s growing body of work on firm formation and economic growth

KANSAS CITY, Mo., Aug. 23, 2010 – The Ewing Marion Kauffman Foundation today announced that Brink Lindsey has joined the Foundation as a senior scholar in research and policy. Lindsey will use his expertise in international trade, immigration, globalization and economic development to identify the structural reforms needed to revive entrepreneurial innovation, firm formation and job creation in the wake of the Great Recession.

As for me, my official last day at Cato is September 15. Expect more blogging and sketches.

David Weigel:

The libertarian Cato Institute is parting with two of its most prominent scholars. Brink Lindsey, the institute’s vice president of research and the author of the successful book The Age of Abundance, is departing to take a position at the Kauffman Foundation. Will Wilkinson, a Cato scholar, collaborator with Lindsey, and editor of the online Cato Unbound, is leaving on September 15; he just began blogging politics for the Economist.

I asked for comment on this and was told that the institute does not typically comment on personnel matters. But you have to struggle not to see a political context to this. Lindsey and Wilkinson are among the Cato scholars who most often find common cause with liberals. In 2006, after the GOP lost Congress, Lindsey coined the term “Liberaltarians” to suggest that Libertarians and liberals could work together outside of the conservative movement. Shortly after this, he launched a dinner series where liberals and Libertarians met to discuss big ideas. (Disclosure: I attended some of these dinners.) In 2009 and 2010, as the libertarian movement moved back into the right’s fold, Lindsey remained iconoclastic—just last month he penned a rare, biting criticism of The Battle, a book by AEI President Arthur Brooks which argues that economic theory is at the center of a new American culture war.

Did any of this play a role in the departure of Lindsey and Wilkinson? I’ve asked Lindsey and Wilkinson, and Wilkinson has declined to talk about it, which makes perfect sense. But I’m noticing Libertarians on Twitter starting to deride this move and intimate that Cato is enforcing a sort of orthodoxy. (The title of Wilkinson’s kiss-off post, “The Liberaltarian Diaspora,” certainly hints at something.)

Ilya Somin:

There are two big problems with Weigel’s insinuation. First, Cato has not changed or even deemphasized any of its positions on those issues where they have long differed with conservatives including the war on drugs, immigration, foreign policy, and others. If they were trying to move “back into the right’s fold,” one would think they would pulled back on these positions at least to some noticeable extent. Yet a quick glance at Cato’s website reveals recent attacks on standard conservative policies on Afghanistan, and the “Ground Zero mosque,” among other issues.

Second, it is strange to claim that Cato got rid of Lindsey for promoting a political alliance with the left at the very time when Lindsey himself recently disavowed that very idea, stating that “it’s clear enough that for now and the foreseeable future, the left is no more viable a home for libertarians than is the right.” If Cato objected to Lindsey’s advocacy of an alliance with the left, one would think they would have purged him back when he was actually advocating it, not after he has repudiated it. Wilkinson does still favor liberaltarianism, but apparently only as a philosophical dialogue. He holds out little if any prospect of an actual political coalition between the two groups.

Both Lindsey and Wilkinson have done much important and valuable work, and Cato is the poorer for losing them. At this point, however, there is no evidence that their departure was caused by a “purge” of liberaltarians intended to bring Cato “back into the right’s fold.”

CONFLICT OF INTEREST WATCH: I am a Cato adjunct scholar (an unpaid position). However, I am not an employee of Cato’s, and have no role in any Cato personnel decisions. In this particular case, I didn’t even know it was going to happen until it became public.

Daniel Foster at The Corner:

I won’t speculate on what’s going on at Cato. But, as much as I respect Brink Lindsey, both he and Wilkinson often expressed contempt for conservatism andconservative libertarians — Cato’s base, as it were — that probably didn’t help their causes. In Lindsey’s case, it was tempered by a kind of anthropological aloofness; in Wilkinson’s, less so.

American libertarianism is queer in that it can admit both rationalists and conservatives in the Oakeshottian senses. Reading Wilkinson it becomes clear that he is a classic rationalist. He derives his libertarianism a priori — a set of propositions on a chalkboard. Contrast with, for example, the average tea partier, who gets his as a uniquely American historical inheritance — a full-blooded tradition. Like most rationalists, Wilkinson thinks this is not just silly and sentimental but pernicious (one of his biggest bugaboos is patriotism).

And so, holding the same set of basic principles, but with different reasons, sends these two kinds of libertarians in two very different directions: the rationalists off toward liberaltarianism; the conservatives the classic Buckley-National Review fusionism.

Matt Welch at Reason

Alex Pareene at Gawker:

Various libertarians (and, to a much lesser extent, liberals) have wondered, as Lindsey did in that 2006 piece, why libertarians so often align themselves with conservatives instead of liberals. Considering the number of anti-libertarian policies the conservative movement fights for, it seems slightly odd that libertarians would act as an arm of that movement. But I think the answer is sort of obvious: While some outlets, like those leather jacket-wearing rebels at Reason, just tend to go after whoever’s currently in power, most of the big libertarian institutions are funded by vain rich people. And these vain rich people care a lot more about tax policy (specifically a policy of not having to pay taxes) than they do about legalizing drugs or defunding the military-industrial complex. And if they’re keeping the lights on at Cato and AEI, they want Cato and AEI to produce research that relates more to hating the IRS and the EPA than to hating the NYPD or the FBI.

And Cato was born as a Koch family pet project. As in the Koch family that is bent on the political destruction of Barack Obama.

Anyway, Lindsey and Wilkinson aren’t saying anything about their departures, but, as Dave Weigel writes, it looks for all the world like “Cato is enforcing a sort of orthodoxy.”

A libertarian influence on the Democratic party in the realms of law enforcement, drug policy, and civil liberties would definitely be a good thing. But the big libertarian institutions are not really amenable to working with liberals.

Steve Benen:

But what’s especially interesting to me is how often we’ve seen moves like these in recent years. David Frum was forced out at the American Enterprise Institute after failing to toe the Republican Party line. Bruce Bartlett was shown the door at the National Center for Policy Analysis for having the audacity to criticize George W. Bush’s incoherent economic policies.

In perhaps the most notable example, John Hulsman was a senior foreign policy analyst at the right’s largest think tank, the Heritage Foundation. Hulsman was a conservative in good standing — appearing regularly on Fox News and on the Washington Times‘ op-ed page, blasting Democrats — right up until he expressed his disapproval of the neoconservatives’ approach to foreign policy. At that point, Heritage threw him overboard. Cato’s Chris Preble said at the time, “At Heritage, anything that smacks of criticism of Bush will not be tolerated.”

A few years later, Cato seems to be moving in a very similar direction.

Intellectually, modern conservatism is facing a painfully sad state of affairs.

John Quiggin:

These departures presumably spell the end of any possibility that Cato will leave the Republican tent (or even maintain its tenuous claims to being non-partisan). And Cato was by far the best of the self-described libertarian organizations – the others range from shmibertarian fronts for big business to neo-Confederate loonies.

On the other hand, breaks of this kind often lead to interesting intellectual evolution. There is, I think, room for a version of liberalism/social democracy that is appreciative of the virtues of markets (and market-based policy instruments like emissions trading schemes) as social contrivances, and sceptical of top-down planning and regulation, without accepting normative claims about the income distribution generated by markets. Former libertarians like Jim Henley have had some interesting things to say along these lines, and it would be good to have some similar perspectives

Chris Bodenner at Sully’s place:

With Lindsey and Wilkinson out, perhaps there’s a chance for Nick Newcomen, the Rand fan who drove 12,000 miles with GPS tracking “pen” to scrawl the message above?  If nothing else, his ideological chops are unassailable.

UPDATE: Heather Hurlburt and Daniel Drezner at Bloggingheads

Arnold Kling

Tim Carney at The Washington Examiner

Tim Lee here and here

James Poulos at Ricochet on Lee

UPDATE #3: David Frum at FrumForum

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