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
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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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.”
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 Obamahas 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.
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.
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.
Given the mixed signals of late, it’s worth noting that Politicohas 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.
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.
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.
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:
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.
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.
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?
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.
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.
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.
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.
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 up. Score 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.
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%.
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.
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.
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.
…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.
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.
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.
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.
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.)
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.
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.
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.
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.
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
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.
IN our society, cars receive considerable attention and study — whether the subject is buying and selling them, the traffic congestion they cause or the dangerous things we do in them, like texting and talking on cellphones while driving. But we haven’t devoted nearly enough thought to how cars are usually deployed — namely, by sitting in parking spaces.
Is this a serious economic issue? In fact, it’s a classic tale of how subsidies, use restrictions, and price controls can steer an economy in wrong directions. Car owners may not want to hear this, but we have way too much free parking.
Higher charges for parking spaces would limit our trips by car. That would cut emissions, alleviate congestion and, as a side effect, improve land use. Donald C. Shoup, professor of urban planning at the University of California, Los Angeles, has made this idea a cause, as presented in his 733-page book, “The High Cost of Free Parking.”
Many suburbanites take free parking for granted, whether it’s in the lot of a big-box store or at home in the driveway. Yet the presence of so many parking spaces is an artifact of regulation and serves as a powerful subsidy to cars and car trips. Legally mandated parking lowers the market price of parking spaces, often to zero. Zoning and development restrictions often require a large number of parking spaces attached to a store or a smaller number of spaces attached to a house or apartment block.
If developers were allowed to face directly the high land costs of providing so much parking, the number of spaces would be a result of a careful economic calculation rather than a matter of satisfying a legal requirement. Parking would be scarcer, and more likely to have a price — or a higher one than it does now — and people would be more careful about when and where they drove.
The subsidies are largely invisible to drivers who park their cars — and thus free or cheap parking spaces feel like natural outcomes of the market, or perhaps even an entitlement. Yet the law is allocating this land rather than letting market prices adjudicate whether we need more parking, and whether that parking should be free. We end up overusing land for cars — and overusing cars too. You don’t have to hate sprawl, or automobiles, to want to stop subsidizing that way of life.
As Professor Shoup wrote, “Minimum parking requirements act like a fertility drug for cars.”
Under a more sensible policy, a parking space that is currently free could cost at least $100 a month — and maybe much more — in many American cities and suburbs. At the bottom end of that estimate, if a commuter drives to work 20 days a month, current parking policy offers a subsidy of $5 a day — which is more than the gas and wear-and-tear costs of many round-trip commutes. In essence, the parking subsidy outweighs many of the other costs of driving, including the gasoline tax.
In densely populated cities like New York, people are accustomed to paying high prices for parking, which has helped to encourage a relatively efficient, high-density use of space. Yet even New York is reluctant to enact the full social cost of the automobile into policy. Proposals to impose congestion fees have failed politically, and on-street parking is priced artificially low.
I am not sure that the argument is correct. I worry that there is a lot of confusion between fixed costs and marginal costs. Creating a parking place carries fixed costs. However, the marginal cost of using a parking space is often zero.
The marginal cost of using a cell phone network is often zero, so your cell phone company tries to offer you a plan that makes the marginal cost feel like zero to you. It could be that free parking emerges for the same reason.
If we abolished free parking, would parking spaces be scarcer? Keep in mind that if the price of parking went up, this would cause movement along the supply curve as well as along the demand curve. Maybe the total number of parking places would decline (it depends on elasticities), but the one result you can predict with certainty is that the number of unused parking places would go up. Is that necessarily welfare-improving?
Suppose I have a piece of land that could be used for parking or for other purposes. You might argue that having a price for parking would send me a clearer signal about the best use.
However, the cost of converting that land from one use to another is very high, so I have to choose one purpose or the other and stick with it. One exception to high conversion cost is lanes that change from parking lanes to traffic lanes during rush hour. There, the price of parking during rush hour is very high (you get ticketed and towed), and that seems to work.
Once I have decided to use land as a parking place (say, land in front of a store), then there is no reason for me to want to deter people from parking in empty spaces. That suggests charging a price of zero other than at peak times.
The problem is one of congestion pricing. You need paid lots to charge people to park at peak times, such as concerts or sporting events.
The key is not to “abolish” free parking, but to a) abolish minimum parking requirements, and b) put prices or higher prices on congested municipal-owned parking spaces. Both a) and b) will lower the demand for parking and a) will lower the supply of parking, so why should the number of unused parking spaces necessarily go up? If you treat something as an appropriately scarce resource, it should be used more effectively.
There are plenty of DC restaurants which don’t have their own parking lots, but they use paid valet parking and find ingenious ways to store cars more effectively. The parking fee means that some people walk there or use the Metro, rather than driving and parking. No one finds this arrangement especially objectionable and while valet parking is at a discount to market still it is priced. At lunch time valet parking is less likely but still people pay to park, usually in nearby lots. No one would suggest that these restaurants be forced to put in minimum parking. Nor would anyone suggest that mandated minimums would be neutral with respect to parking efficiency.
I’m simply asking for the same switch in reverse, namely to do away with minimum parking requirements. Very likely, such a change will have a bigger impact on future developments than on past developments (it can be hard to reconfigure a parking lot), although some malls might sell off or rent their now-liberated parking spots to other commercial ventures.
I don’t have much to say about this in particular, just a general point about moving to market based allocations of some goods and services, particularly those controlled by government.
As the price of a good or service rises, it begins to price some people out of the market. I don’t mean that they choose to consume other things instead, I mean that no matter how much they want it, they can never have it. It’s not a matter of desire, or willingness to pay, they simply cannot raise the needed funds — it’s just not possible to afford the good or service in question.
Because of this there are some goods and services controlled by government, national parks come to mind, where we choose to allocate goods by other means than the price system, lotteries, waiting time, random draws, that sort of thing. It generally occurs when we think equity is a primary consideration, i.e. that everyone should have a relatively equal shot at consuming a good or service.
For example, suppose we believe that everyone should at least have a chance to swim in the ocean. Willingness to wait indicates desire for the good in the same way that willingness to pay does, and this can be used to allocate the good or service. That is, willingness to circle for a period of time looking for a parking place so you can go to the beach — which varies with demand for parking in that area — indicates the depth of desire to do this activity and thus has desirable allocative properties — and we can eliminate the externalities Tyler is worried about through a tax on carbon and congestion at the pump. The supply of parking, which is controlled by government, could be determined by the carrying capacity of the beach, which is itself influenced by considerations such as habitat protection that private markets may not handle well in any case. And, of course, public transportation could be provided as an alternative, but that’s not available to everyone so some parking would likely be needed. Perhaps parking wouldn’t be all that expensive, or maybe it would given the prices Tyler cites in the article for places like California, but the example is intended mainly to illustrate that prices aren’t the only allocation mechanism available, and that sometimes other alternatives are desirable. There are certainly cases where price is a barrier and we choose to allocate goods by other means.
Re Mark Thoma, if we were concerned about overall equity of utility, we’d just give the poor more money and let them buy what beach trips they wanted. If we paternalistically thought poor folk irrationally buy too few beach trips (why?!), we might give them beach travel vouchers. But surely the vast majority of free parking is not well explained by our thinking the poor irrationally take too few car trips.
Re Arnold Kling, I didn’t see Tyler saying to force prices above marginal cost; he just opposed laws requiring excess supply. Why should we treat parking spots much different than thousands of other familiar products whose average costs are often above marginal costs? Should we require every mall to have enough movie theaters seats to handle the premier of a record blockbuster, all because since theatres are rarely full their marginal cost is near zero? How about similarly requiring a vast supply of restaurant tables which would then rarely be full?
Sometimes good economic analysis says that the world should be different than it is. Yes you should wonder if such an analysis is missing something important. But you shouldn’t strain too much just to justify the status quo. We require the creation of way too much parking, and we’d be better off to coordinate to stop it.
a. How much land should be devoted to parking spaces?
b. Given the answer to (a), what should be the price for parking?
I argue that for (b) the answer is often zero. A higher price would simply result in unused parking places, which does not increase welfare. Robin is falling back on issue (a), and here the thinking is that the state provides, either directly or through regulation, more parking spaces than are optimal.
Suppose there were no state provision of parking places. What would the equilibrium look like? Some possibilities:
1. You get Berlin, where the public transit is highly efficient and lots of people ride bicycles, even in the rain.
2. Individual housing developments and businesses undersupply parking. The thinking is that if parking runs out in front of your business, your customers will use the parking spaces in front of the business next door. This leads to stores putting up warning signs that say, “unless you patronize my store, your car will be towed.” Neighborhoods put up signs that say, “unless you have a residential permit, your car will be towed.” This imposes all sorts of enforcement costs as well as inefficient use of space. The warning signs often deter people from parking in places where they impose no cost at that particular time.
3. Land use responds, but not toward the Berlin scenario. On the contrary, businesses relocate farther away from cities, to locations where parking is cheap to supply and you don’t get into fights with other businesses about towing rules. Housing developments are built without street parking but instead with large driveways–in effect, each household requires its own oversized parking lot to accomodate its peak demand . As a result of these sorts of adaptations, it takes more parking places to accommodate the same number of cars.
4. After a lot of Coasian bargaining, businesses agree to each provide a minimum number of parking places and housing developers agree to provide streets wide enough to allow parking.
The point is, you don’t necessarily get (1). And you might get (4).
In response to Robin Hanson, I think Arnold Kling makes some good points about why government intervention in parking may be necessary to resolve externality problems. Arnold doesn’t say that government intervention is necessary, and he would likely resist that interpretation, a Coasian bargaining solution is the outcome in his scenario. But the usual sorts of considerations, i.e. transactions costs, unclear property rights regarding street parking in front of residences — some people, for example, use cones and other devices to save parking spots — and other barriers may prevent the Coasian bargaining outcome. (Robin Hanson doesn’t like what I wrote either, though, again, I was trying to make a general point about equity versus efficiency and probably should have chosen another example besides parking near the ocean to make that point
I am disappointed that the distinguished George Mason University economist, TylerCowen, has fallen for the “high-cost-of-free-parking” arguments of UCLA urban planner Donald Shoup. Shoup is an excellent scholar, but like many scholars, he has the parochial view that the city that he lives in is a representative example of what is happening everywhere else.
Shoup’s work is biased by his residency in Los Angeles, the nation’s densest urban area. One way L.A. copes with that density is by requiring builders of offices, shopping malls, and multi-family residences to provide parking. Shoup assumes that every municipality in the country has such parking requirements, even though many do not, and that without such requirements there would be less free parking. This last assumption is extremely unlikely, as entrepreneurs everywhere know that (outside of New York City) 90 percent of all urban travel is by car, and businesses that don’t offer parking are going to lose customers to ones that do.
Shoup portrays such free parking as a “subsidy” because not all people drive and so the ones who don’t drive end up subsidizing the ones who do. But any business offers a variety of services to its customers and employees, and no one frets about subsidies just because they don’t take advantage of every single service. How often do you actually swim in the swimming pools or work out in the exercise rooms of the hotels you stay at?
Shoup also supposes (and Cowen accepts) that universal parking fees would greatly reduce the amount of driving people do. “Minimum parking requirements act like a fertility drug for cars,” Cowen quotes Shoup as saying. Metro, Portland’s regional planning agency, submitted this question to its transportation model and concluded that requiring all offices, shopping malls, and multi-family residences to charge for parking would reduce driving by about 2 percent. The model showed that charging for parking has a greater effect on driving than spending billions on light rail, building scores of transit-oriented developments, or increasing the urban area’s population density by 20 percent. But 2 percent still isn’t going to do much to relieve congestion or solve any of the other problems Cowen associates with driving. Plus he never really explains why he thinks reducing mobility is a good idea in the first place.
A key point to emphasize here is that parking mandates aren’t just a subsidy to car ownership, they’re also a burden on pedestrians, who must trek across parking lots to get to almost any building. So not only does walking mean giving up the state-mandated subsidy of free parking, but it also means walking significantly further than you’d have to in a city where the availability of parking was determined by market forces.
And this results in the opposite of the virtuous cycle I wrote about a few weeks ago: as density falls, you get fewer pedestrians, which depletes the market for small, pedestrian-friendly establishments. And fewer pedestrian-friendly businesses establishments means that even fewer people walk. The result is the situation in most cities in the Midwest and the Sun Belt, where even people who strongly prefer to live in a “walkable” neighborhood find there are few if any neighborhoods that cater to that preference.
First, this is a very difficult conversation to have because of the radical differences in reference frames of the two sides. Aside from economists, anti-free parking types are invariably urban dwellers where parking is difficult and the demand for every square foot of space is high. People who live in suburbs, especially those that don’t regularly drive into the handful of dense urban centers where any of this matters, are befuddled. Nobody would pay to park at the Hamilton Place mall on the outskirts of Chattanooga. At the Pentagon City mall, nobody thinks twice.
Second, while ordinances requiring the allocation of parking spots for apartment buildings, storefronts, and the like are doubtless a boon to car owners, they are mostly an attempt to limit negative externalities. If I build an apartment complex in a major downtown center and provide no parking, I’m obviously less competitive than those who do. But, at the same time, those who live in my building who own cars are going to have to park somewhere, and they’ll therefore occupy spaces — often for hours and days on end — that could otherwise be used by short-term parkers who want to patronize the local merchants, taverns, and restaurants. Similarly, if I run a downtown business that caters to clients who don’t need to come to my storefront, I’d never pay to construct parking spaces for my employees, as it’d be cheaper to subsidize their parking elsewhere. But, again, that means my employees, who arrive before the shops open, are taking up spots that could be used by customers of service-oriented businesses.
Taking both of these into consideration, then, it seems to me that the key good to control is street parking in crowded downtown areas at peak hours. We want residents of apartment buildings and houses and employees of businesses to be out of the way to accommodate short-term parking that allows commerce to take place. So, in places where street parking is scarce, charge variable rates at meters and limit the number of hours that can be parked there. (A tangentially related pet peeve: And delivery vehicles can’t be allowed to take up these spaces, much less double park, which means that those activities have to be time-shifted to the early morning or late evening hours.)
These regulations would be anathema in most of the United States, which simply isn’t crowded enough to have that kind of government intervention in the lives of citizens. But it makes sense in New York, Boston, DC, San Francisco, and a handful of other metro areas long since accustomed to the need for state to smooth over daily interactions.
But the main point is that it’s very difficult to make a positive case for government provision of parking spaces or mandated parking minimums. Given the existence of government provided spaces, it’s harder still to argue against market parking pricing. We have many examples of private firms building and operating parking lots or decks, charging positive prices, and doing a lovely business that seems to work well for operator and driver alike. How does one justify government intervention?
Now you might argue that there are public good considerations involved; that parking spots are like other bits of transportation infrastructure in that there is a role for government provision. Personally, I think parking spots are more like gas stations than roads, and meanwhile roads should be congestion priced (as many transit systems already are — and then some, in some cases). You’d think that libertarians making the public good argument would have no problem defending government provision of and subsidy for transit, but of course they don’t. They get around this by arguing that people want to drive and they don’t want to ride transit. This is strange in that in few other cases would a libertarian claim to know what markets want, and while they might refer to mode shares, those shares are themselves determined by decades of heavy subsidies for all things auto.
But the phrasing at the end of Cowen’s column is unfortunate, as it seems to imply that someone out there should be raising fees: “Imposing higher fees for parking may make further changes more palatable by helping to promote higher residential density and support for mass transit.” It’s clear from the beginning of the article that Cowen is speaking of removing the zoning laws and street parking procedures that keep the cost of parking artificially low in places, but I could see how a too-quick reader might wrongly infer that the column argues for high parking costs as a policy goal regardless of market prices.
Weirdly, several libertarians have taken issue with Cowen’s article. Randal O’Toole is pretty sure that “free parking is a free-market choice,” and thinks Cowen should support it. Well, I’m sure there are plenty of places where it will make a lot of sense for businesses to build large parking lots, but it’s strange to me that a libertarian would be all right with regulations that make this decision for the businessmen. Perhaps he sniffs out an urbanist agenda behind the argument…
Arnold Kling suspects that if we didn’t like state-mandated free parking, we won’t necessarily get the low-driving paradise we desire. Perhaps the American people, accustomed to driving, will simply embrace further sprawl as businesses relocate to exurbs where land is cheap. Or maybe local governments will be faced with skyrocketing enforcement costs as people cheat aggressively on parking. (Cowen thinks Kling’s microeconomic logic is a little bit off.)
Neither of Kling’s scenarios seems particularly likely to me, but then again I don’t study this stuff and I don’t really have the first clue what would happen if cities aimed at more robust markets for parking. All I can really provide is one lonely data point: having arranged my life so I can do most of what I want to do without having to drive, I can say for sure that if parking prices went up in Baltimore, I’d sell my car. At any rate, I am a huge fan of sidewalk cafes and not having to walk through parking lots to get to stores, so I’d love it if more city businesses were given the opportunity to do without parking lots.
Germany has sparred with its European partners over how to respond to the financial crisis, argued with the United States over the benefits of stimulus versus austerity, and defiantly pursued its own vision of how to keep its economy strong.
Statistics released Friday buttress Germany’s view that it had the formula right all along. The government on Friday announced quarter-on-quarter economic growth of 2.2 percent, Germany’s best performance since reunification 20 years ago — and equivalent to a nearly 9 percent annual rate if growth were that robust all year.
The strong growth figures will also bolster the conviction here that German workers and companies in recent years made the short-term sacrifices necessary for long-term success that Germany’s European partners did not. And it will reinforce the widespread conviction among policy makers that they handled the financial crisis and the painful recession that followed it far better than the United States, which, they never hesitate to remind, brought the world into this crisis.
Germany is absolutely on a tear. The economy grew at an annualized rate of nearly 9 percent last quarter, stoked by huge export growth. In a weird way, the debt crisis has helped, at least temporarily. A weak Euro is making German products more affordable outside the Eurozone, just as the developing world emerges from the recession with income to buy the cheaper cars, machines and equipment that Germany is selling.
The question is whether or not this kind of growth is sustainable for a country whose largest export partner, the EU, is undergoing spending cuts and tax increases that will freeze some consumer demand. As the continent’s economy slows down in the second half of this year, there’s simply no way for Germany to keep up 9 percent growth all year.
Unemployment in Germany has been steadily falling, in contrast to the trend in the rest of the euro zone—and America. Firms used a short-time working scheme and flexible hours to keep hold of workers when demand was weak. Many of the workers whose hours were cut have been drawn back into full-time work far more quickly than firms had dared hope. Unemployment in Germany is now lower than it was when the crisis began.
It seems almost strange that the euro-area economy was so strong at a time when a sovereign-debt crisis and regional imbalances seemed to threaten the single currency’s very existence. The GDP figures show that the latter problem has not gone away. Countries with strong ties to Germany’s export machine, such as Austria and the Netherlands, posted strong growth. The figures from France were solid, too (if based more on consumer spending than exports). But in Spain and Portugal GDP rose by a feeble 0.2% in the second quarter. Greece’s economy shrank by 1.5% (see chart).
That will not worry the German firms whose focus is increasingly Asia and Latin America. Nor will American complaints that Germany is living off the spending of others and adding little to global demand have much impact. There are some signs that Germany’s recovery is leading to more spending at home. The German statistical office said that consumer spending made a positive contribution to GDP. Some firms are already reporting skill shortages, which ought to be good for jobs, wages and (eventually) consumption. Even so, a more balanced recovery in Germany may yet be thwarted by fragile banks and by the inherent thrift of consumers. It is telling that Germany is one of the few places where sales of Mercedes cars have fallen this year.
The renewed hope in Europe contrasts with anxiety in America, where the economy is faltering and jobs growth is scarce. But just as these concerns are a warning to Europeans that the global recovery is not secure, the joy in Germany should comfort Americans. The fortunes of both economies are as tightly bound as ever. If German exporters are thriving, it means that someone out there in the world economy is still spending freely.
The plan, which Christian Democrats and Social Democrats hammered out late Monday, includes €17-18bn in infrastructure investments for education and highways, and tax cuts for firms and individuals.
It also grants families a one-off extra child benefit payment, cuts health insurance costs, simplifies rules for creating temporary jobs, and provides subsidies to encourage purchases of environmentally friendly cars.
Dean Baker at The Center For Economic and Policy Research:
It would have been worth noting that it is not possible for every country to follow Germany’s path of relying on a large trade surplus (someone must have a corresponding deficit). Germany and some number of other nations can create domestic demand through trade surpluses, but this strategy cannot be followed everywhere.
It also would have been helpful if this article reported economic data that would have been meaningful to its readers. For example, GDP is always reported as an annual growth rate, not a quarterly rate. Also, it would have been more useful to present the OECD harmonized unemployment rate for Germany (7.0 percent), which is measured in the same way as the U.S. rate, rather than the German official rate, which counts part-time workers as part of the unemployed.
There is much more of interest here. I would describe this as a major, still uninternalized lesson of the recent crisis, with its roller coaster-rapid dips. In a highly specialized modern economy, it is much easier to prevent jobs from being destroyed than to create them again, at least assuming those are “good” jobs in the first place. (Yes, people thought they knew this but it’s an even stronger difference than had been believed.) The U.S. auto bailout, for instance, worked better than did most of the stimulus program. Most of the Austrians would disown this point, but you can pull it right out of Lachmann’s Capital and its Structure.
We should have cut the payroll tax as soon as possible, an idea which I might add Alex was promoting quite early on.
Tyler strikes me as engaging in Krugmanesque intellectual combat here. First of all, he pulls a quote out of context, giving only the first sentence of a paragraph from the New York Times article that reads
A vast expansion of a program paying to keep workers employed, rather than dealing with them once they lost their jobs, was the most direct step taken in the heat of the crisis. But the roots of Germany’s export-driven success reach back to the painful restructuring under the previous government of Chancellor Gerhard Schröder.
Second, he says that the auto bailout “worked better than did most of the stimulus program,” which leaves him plenty of wiggle room to say, “I did not say that the auto bailout was a success.” Finally, when he says “assuming those were ‘good’ jobs in the first place,” he leaves himself room to wiggle out of being accused of advocating keeping unsustainable jobs around.On the larger point, keep in mind that in an ordinary non-recession month 4 million jobs are destroyed and about 4.2 million jobs are created. Suppose that in a bad month of a recession, 4.0 million jobs are created and 4.5 million jobs are destroyed. Which of those 4.5 million jobs ought to be saved, because they might come back in a stronger economy? No one in Washington knows.
Trying to save existing jobs is a fool’s errand, comparable to trying to keep defaulting mortgage borrowers in their homes. When a firm lets an employee go, it is making a cost-benefit calculation that takes into account the cost of rehiring for that position when the economy turns up. The firm is unlikely to be making such a large mistake that government should try to change the decision.
For many of these long-term unemployed, the financial and psychological damage will last for years. For most other workers, however, the situation has had a perverse, and mostly overlooked, silver lining.
Unemployment has been concentrated among a surprisingly small number of people, given how deep the recession has been. The nation’s pool of jobless workers has not been constantly changing. Instead, it’s been relatively stable — mostly because the hiring rate of new workers plunged in 2008 and still has not recovered. The drop in hiring has actually been steeper than the rise in layoffs.
Compare the current slump with that of the early 1980s, which was similar in severity. Over the course of 1980, 18.1 percent of the labor force was unemployed at some point. In 2008, the first year of this slump, only 13.2 percent was, according to the Labor Department’s most up-to-date data. That number surely rose in 2009, but it is unlikely to have come close to the 1982 peak of 22 percent.
If anything, the slowdown of the recovery in the last few months has made the recession even more concentrated. It has put off the day when the job market will be strong enough to re-employ many of the long-term jobless. But inflation has fallen to zero, which helps the purchasing power of everyone fortunate enough to have a job.
Given that the economy seems to have entered this new phase — a new slog — I wanted to use this week’s column to sketch an updated portrait of the economy. The highlights follow. More detailed information is posted on the Economix blog.
David Leonhardt’s latest column is full of interesting employment datapoints. Among them:
In 2008, only 13.2% of the labor force was unemployed at some point. That compares to 18.1% in 1980, and 22% in 1982.
Real wages, which normally fall during recessions, have risen in this one. Even nominal wages are up.
The mancession is over: “male employment has risen by almost one million this year, while female employment has fallen by 300,000″.
The overriding impression is of most Americans actually doing OK, with an unemployable underclass bearing the brunt of the recession. Maybe we really are all middle class now: there’s the unemployed at the bottom of the pile, and the plutocratic elite at the top, with the overwhelming majority sitting in between, doing OK but hardly great.
The problem is that persistent unemployment at or around 10% is unacceptable in the U.S., especially with the social safety net being much weaker here than it is in Europe. Leonhardt is right that Euro-style safety nets aren’t particularly innovative, but they do at least keep people housed and clothed and fed and living outside poverty — reasonable expectations for anybody to have, I think, in the richest country in the world.
I am struck by two things. The first is a question of why the Democrats are under so much electoral pressure when so many people are doing fine in this economy, indeed enjoying hefty wage increases in an era of very low inflation. Of course, I’m not arguing for selfishness, but it’s odd to me empirically that so many are complaining when such a discrete and relatively small section of the country is in such economic pain. People are pretty good at ignoring the plight of others in assessing their own situation. Have the employed seen such a boost in their living standards since the 1990s?
The second thing that strikes me is the comparison with the war. Just as in the economy, a relatively small and socially segregated segment of America bears the real burden – of their loved ones facing and meeting death and injury day after day. Why do we seem more indifferent to them than to the long-term unemployed?
What allows us to compartmentalize in some areas and not in others? Or will, in fact, the popular discontent with the economy fail to materialize as profoundly as we expect in the elections ahead? And will the resistance to the wars begin to rise?
Those facts, in a nutshell, are why I am not AD-obsessed when it comes to explaining the current economy.
Furthermore, I don’t buy the idea that so many of the unemployed are stupidly and stubbornly holding out for a higher wage than they can get, while at the same time they can be reemployed by a mere bit of money illusion. There are so many blog posts written to the Fed, to Bernanke, etc. “Hey guys, goose up the money supply! Bernanke, read your old writings!”
Yet I have seen not one such post to the unemployed: “Hey guys, lower your wage demands! It’s good for you! You’ll get a job and avoid the soul-sucking ravages of idleness. It’s good for the country! It’s good for Bernanke, you’ll get those regional Fed presidents off his back! Why not? The best you can hope for is to get tricked by money illusion anyway! Show up those elites and get to that equilibrium on your own! Take control!” and so on. If such posts would seem patently absurd, we should ask what that implies for our underlying theory of current unemployment.
I sooner think of these unemployed individuals as having gone down economic corridors which are no longer promising and not facing any easy adjustment to set things right again. Furthermore I consider that portrait of their troubles to be more consistent with the general tenor of liberal, left-wing, and progressive thought, not to mention plain common sense.
I understand the thinking behind Mr Leonhardt’s point. The most recent recession was fairly unusual in that the rate at which workers entered unemployment never got that high; instead, unemployment rates soared because the rate at which workers exited unemployment was unusually low. As a result, fewer workers have moved through unemployment than one might expect given the 10.1% peak rate, and the ones that did enter unemployment have remained without a job for an unusually long time. But there are two points to make about this. First, as Brad DeLong notes:
Unemployment in 1980 averaged 7.2%–and affected 18.1% of the labor force. Unemployment in 1982 averaged 9.7%–and affected 22% of the labor force Unemployment in 2008 averaged 5.8%–and affected 13.2% of the labor force. In those three cases the total number of those affected by unemployment at some time during the year was 2.3, 2.5, and 2.3 times the average unemployment rate.
In 2010 the unemployment rate will average 9.5% of the labor force, and 2.3 times that will be… 22% of the labor force.
Second, unemployment isn’t the only category of labour market suffering there is. U-6, which includes workers marginally attached to the workforce and employed part-time for economic reasons (that is, not by choice) peaked at 17.4%. Nearly one in five workers in or marginally attached to the labour force were underemployed as a result of the recession. Not captured in that statistic are the workers who faced across the board salary freezes or cuts in order to reduce firm layoffs. And as Mr DeLong notes, the rise of two-worker, two-income household means that a given level of unemployment affects a larger share of the country’s households. The number of people directly affected by under- or unemployment may not have constituted a majority, but it was probably close.
Meanwhile, those not directly affected may nonetheless be feeling the pain of recession. The severity of the downturn has meant a loss of opportunity around the country. Employed workers stay in jobs they hate because of the paucity of other openings, and households remain in cities they’d like to leave thanks to negative equity. As the mobility has fallen in association with the recession, workers have been less able to maximise the return to their skills or their own utility. Mr Leonhardt says that the employed have enjoyed real wage increases. That’s nice, but the improvements have been smaller than they should have been, and much smaller than workers likely anticipated five or ten years ago (or, say, back when they were deciding how much to invest in their own human capital).
If the “most America is doing ok” notion seems not to pass the smell test, it’s because it doesn’t reflect reality.
Dean Baker at the Center For Economic and Policy Research:
David Leonhardt tells readers that the Great Recession has had some silver linings for many workers. High on his list is continued wage growth. This is misleading. All the real wage growth in this downturn occurred in the months of November and December of 2008. This was due to a plunge in the price of oil and other commodities. Since December of 2008 real wages have stagnated.
The wage growth in those two months also followed 6 years of wage stagnation. Essentially, nominal wage growth was eaten up by rising commodity prices during the upturn. These gains were then realized when prices crashed, but it is misleading to imply a pattern of consistent wage growth during the downturn.
The piece also correctly notes that unemployment has been concentrated among a smaller segment of the workforce than was true in the 1981-82 recession. This is a direct implication of the high levels of long-term unemployment. However, it is also worth noting that part of the reason that unemployment is more concentrated is that the workforce is much older today.
Unemployment in 1980 averaged 7.2%–and affected 18.1% of the labor force. Unemployment in 1982 averaged 9.7%–and affected 22% of the labor force Unemployment in 2008 averaged 5.8%–and affected 13.2% of the labor force. In those three cases the total number of those affected by unemployment at some time during the year was 2.3, 2.5, and 2.3 times the average unemployment rate.
In 2010 the unemployment rate will average 9.5% of the labor force, and 2.3 times that will be… 22% of the labor force.
And, as Bob Reich pointed out at coffee at Brewed Awakening yesterday afternoon, there are many more two-earner households than there were in 1982: the share of households affected by an unemployment spell is thus likely to be significantly higher than it was back in 1982.
Health care now approaches 20 percent of the economy. With health insurance included in compensation, that means that 20 percent of compensation is determined not by your skill level, but by the median cost of health insurance. If the value of your skills has been rising faster than the median, then maybe that is not a problem. However, if the value of your skills has been rising more slowly than the median, then your skill level is no longer enough to overcome the health insurance hurdle.
Let the worker’s subjective valuation of health insurance equal V. Let the cost of health insurance equal C. Let the marginal product of labor equal M. Let the opportunity cost of the worker’s time equal W. Then we have:
M – C ?= W – V
The worker takes the job if and only if the left-hand side exceeds the right-hand side. If the excess of the worker’s marginal product over the cost of health insurance is not greater than the worker’s take-home wage requirement less the worker’s subjective valuation of health insurance, then the worker will not be employed. That may be what we are seeing today.
For example, suppose that your marginal product is $25,000, but the cost of employer-paid health insurance is $15,000. The means that the employer can only afford to give you pay net of health insurance costs of $10,000. Suppose that you would not pay more than $5,000 for health insurance if you paid for it yourself. Then the value of the job to you is $10,000 + $5,000 = $15,000. If you value your time at more than $15,000, then you will not take the job.
It is not that the marginal product of workers is close to zero. It is that the marginal product of workers is close to the median cost of health insurance, and workers do not value health insurance that highly
Around The Sphere 
Holiday, Celebrate!
Lori Montgomery and Anne Kornblut at WaPo:
David Leonhardt at NYT:
Tyler Cowen
Joseph Lawler at The American Spectator:
Mary Katherine Ham at The Weekly Standard
Jennifer Rubin at Commentary:
Steve Benen:
Megan McArdle:
Atrios:
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