Tag Archives: Karl Smith

Park Slope and The Rats of NIMBY

Elisabeth Rosenthal at NYT:

Park Slope, Brooklyn. Cape Cod, Mass. Berkeley, Calif. Three famously progressive places, right? The yin to the Tea Party yang. But just try putting a bike lane or some wind turbines in their lines of sight. And the karma can get very different.

Last week, two groups of New Yorkers who live “on or near” Prospect Park West, a prestigious address in Park Slope, filed a suit against the administration of Mayor Michael R. Bloomberg to remove a nine-month-old bike lane that has commandeered a lane previously used by cars.

In Massachusetts, the formidable opponents of Cape Wind, a proposed offshore wind farm in Nantucket Sound, include members of the Kennedy family, whose compound looks out over the body of water. In Berkeley last year, the objections of store owners and residents forced the city to shelve plans for a full bus rapid transit system (B.R.T.), a form of green mass transit in which lanes that formerly served cars are blocked off and usurped by high-capacity buses that resemble above-ground subways.

Critics in New York contend the new Prospect Park bike lane is badly designed, endangering pedestrians and snarling traffic. Cape Wind opponents argue the turbines will defile a pristine body of water. And in Berkeley, store owners worried that reduced traffic flow and parking could hurt their business.

But some supporters of high-profile green projects like these say the problem is just plain old Nimbyism — the opposition by residents to a local development of the sort that they otherwise tend to support.

Ryan Avent:

The Times piece delves into the psychology of this kind of neighborhood opposition, but what it doesn’t say is that as annoying as this is, it has a far smaller impact on net emissions than the far more common anti-development strain of NIMBYism. Bike lanes make New York City a teeny bit greener. But New York is already much, much greener than most American cities, thanks to its dense development pattern and extensive transit network. Net emissions fall a lot more when someone from Houston moves to New York than when someone from New York starts biking.

Happily, lots of people would LOVE to move to New York. This is one huge benefit we don’t need to subsidize to realize. Unhappily, the benefit is nonetheless out of reach because of the huge obstacles to new, dense construction in New York. New York can’t accommodate more people unless it builds more homes, and it can’t build more homes, for the most part, without building taller buildings. And New Yorkers fight new, tall buildings tooth and nail. They fight them on aesthetic grounds, and because they’re worried about parking and traffic, and because they’re worried about their view, and because they just think there’s enough building in New York already, thank you. And many do this while heaping massive scorn on oil executives and the Republican Party over their backward and destructive views on global warming.

Of course, the obstruction of development is offensive for lots of reasons: it makes housing and access to employment unaffordable, it reduces urban job and revenue growth, it tramples on private property rights, and so on. But the environmental hypocrisy is galling, and it’s not limited to New York. My old neighborhood, Brookland, voted overwhelmingly for Obama (about 90-10, as I recall). Many of the locals are vocally supportive of broad, lefty environmental goals. And yet, when a local businessman wants to redevelop his transit-adjacent land into a denser, mixed-use structure, the negative response is overwhelming, and residents fall over themselves to abuse local rules in order to prevent the redevelopment from happening.

This project would bring new retail with it, which would enable more local residents to walk to a retail destination. It would bring new residents, and those residents would be vastly more likely to walk or take transit to destinations than those living farther from Metro. Forget the economic benefits to the city, the people occupying the new housing units would have carbon footprints dramatically below the national average. But this basically does not matter to the NIMBYs however much they profess to care about the environment.

To the extent that public opinion matters and can be shaped, I think it would be a huge boon for humanity for attitudes toward NIMBYism to turn decidedly negative. People should be ashamed of this behavior, which is both selfish and extravagantly dismissive of property rights.

Kevin Drum:

Earlier today, I linked to a Ryan Avent post complaining that although dense cities like New York are much greener than towns and suburbs, his lefty, environmentally-aware neighbors fight against new high-density developments in the city anyway. A little later, I had an email exchange with HW, a lefty, environmentally-aware New Yorker who thinks Ryan has it all wrong. Here’s the exchange:

HW: It is true that people living in NY have much much lower carbon footprints than those who live in lower density areas. It’s also true that it is a highly desirable place to live. So wouldn’t the way to accomplish more people living in high density areas like NY be to replicate it elsewhere? Or should we insist on cramming more people into NY against NYers’ will and make it a less desirable place to live?

Wouldn’t it be better for 8 million people to live in NY and have it serve as a beacon for a great, lower carbon footprint lifestyle? If you cram an extra million people in, sure, you lower their carbon footprints, but you may also make high density urban living far less attractive and less likely to be replicated around the country.

Avent mentions problems with parking and traffic as a throw-away, but I can tell you, the 4-5-6 running up from midtown to the Upper East Side is quite literally crammed wall-to-wall with people every morning. Parking is unlikely to be an option for anyone unwilling to spend several hundred dollars a month. And yes, another ten skyscrapers will result in the city becoming a darker and more depressing place. Not to mention the fact that the last ten high rises that went up on the Upper East Side were creatures of the housing bubble, resulting in massive losses and lots of empty units.

So would it be so terrible if we built up the downtown areas of Jersey City, White Plains and Stamford instead?

My reply: Well, that’s the funny thing. Building new high-density areas is the obvious answer here, but no one ever does it. Why? I assume it’s because it’s next to impossible to get people to move to new high-density developments. You get all the bad aspects of density without any of the good aspects of living in a big, well-established city.

It’s a conundrum. We could use more well established cities, but no one wants to live in the intermediate stages that it takes to build one. And of course, in well-established smaller towns and cities, the residents fight like crazed weasels to prevent the kind of development that they associate with crime and gangs.

I don’t really know what the answer is.

HW again: I’m not sure that’s entirely true. What about all the downtown redevelopment projects that have happened around the country? Or the urban centers that sprout up around the core of big cities like NY. Next time you are in NY, look across the East River and take a gander at Long Island City. It’s as close to midtown as the Upper East Side, easy to build there, far less expensive, and just as dense. And every single one of those luxury high rises went up in the past 12 years; it’s literally a skyline that didn’t exist 12 years ago. Jersey City is a similar story, both for residential and financial (every big bank has moved their IT back office out there). Or look at the gentrification of Brooklyn!

So why obsess on cramming a couple hundred thousand more people on the island of Manhattan, which will push it past the bursting point? It’s just not a smart premise. In fact, I’ll go further: it bears no relationship to reality. No one would stop a luxury high rise in any of the other four boroughs or right across the river in NJ and it’s just as dense and low-carbon to live in those spots. It’s just that Ryan Avent doesn’t WANT to live in those spots. He wants to live in a cheaper high rise in Manhattan (which, by the way, has seen tons of them go up already in the past decade — in the Financial District, Hell’s Kitchen, the Upper East Side). Avent should ride the 4/5/6 at 8 am every morning for a week, come back, and tell us if his article makes any sense. As a 4th generation NYer, I don’t think it even begins to.

I don’t really have a dog in this fight since I’ve lived in the leafy suburbs of Orange County all my life. But I thought this was an instructive response that was worth sharing. Back to you, Ryan.

Avent responds to the e-mail exchange:

I’m just pointing out the obvious here — many more people would like to live in Manhattan, it would be good economically and environmentally if they did, and it’s bad that local neighborhood groups are preventing them from doing so because they’re worried about their view. Further, my guess is that even without a relaxation in development rules Manhattan will cram in a couple hundred thousand more people, and demand will continue to rise; somehow, Manhattan will manage not to burst. Though it might eventually be swamped, if city-dwelling NIMBYs continue to make Houston exurbs ever more affordable relative to walkable density.

The transportation problem can be solved, in part, by better transportation policy. It is a crime that the subways are crammed while drivers use the streets of Manhattan for free, but that’s a policy failure, not a density failure. It’s also worth noting that heights fall off sharply as one moves away from the central business districts of Lower and Midtown Manhattan. If developers could build taller in surrounding neighborhoods and add residential capacity there, then more Manhattan workers could live within easy walking distance of their offices, and fewer would need to commute in by train.

Finally, let me point out that this is not about what I want. I’m not planning a move to New York, and I’m not remotely suggesting that the government should somehow mandate or encourage high-density construction. I’m simply saying that it should be easier for builders to meet market demand. It should be easier for builders to meet market demand in Manhattan, and Brooklyn, and Nassau County, and Washington, and downtown Denver, and so on. People clearly want to live in these places, and it would be really good for our economy and our environment if they were able to do so. And I find it very unfortunate that residents deriving great benefits from the amenities of their dense, urban neighborhoods are determined to deny those benefits to others.

Matthew Yglesias:

I don’t want to say too much about the debate over increased density in Manhattan because, again, ebook proposal. But one reality check on this whole subject is to note that the population of Manhattan 100 years ago at 2,331,542 people. It then hit a low of 1,428,285 in 1980 and has since then risen back up to 1,629,054.

Back in 1910 there were only 92,228,496 people in the United States. Since that time, the population of the country has more than tripled to 308,745,538. And if you look at Manhattan real estate prices, it’s hardly as if population decline in Manhattan has been driven by a lack of demand for Manhattan housing. Back around 1981 when I was born, things were different. The population of the island was shrinking and large swathes of Manhattan were cheap places to live thanks to the large existing housing stock and the high crime.

Karl Smith at Modeled Behavior:

Many years ago I gave a talk entitled, Green Manhattan, where I made the case that Metropolis was the greenest place in America.

Naturally, I got a lot of funny looks but the line that seemed to win a few converts was this: the best way to protect the environment is by keeping people out of it.

I admit I took a few liberties in the talk, not discussing how agriculture would be performed and supported, for example. Nonetheless, I think this framing breaks the intuition that green is about living with nature rather than letting nature live on its on.

Megan McArdle:

New York hasn’t actually been growing steadily; it’s been rebounding to the population of roughly 8 million that it enjoyed in 1950-70 before the population plunged in the 1970s.  It’s really only in the last ten years that the population has grown much beyond where it was in the 1970.

This matters because I think you can argue pretty plausibly that New York’s infrastructure has put some limits on the city’s growth–that by 1970 the city had about grown up to those limits, and that we can push beyond them only slowly.  The rail and bus lines that sustain the business district are pretty much saturated, and the roads and bridges can’t really carry many more cars at peak times.  Adding busses could conceivably help you handle some of the overflow, but unless those busses actually replace cars, they’ll also make traffic slower.
Unless you plan to fill the city entirely with retirees who don’t need to go to work, there’s actually not that much more room to build up New York–you could put the people there, but they wouldn’t be able to move.  And even the retirees would require goods and services that choke already very congested entry and exit points.  There has been peripatetic talk about switching all deliveries to night, but that would disturb the sleep of low-floor apartment dwellers, and be fantastically expensive, forcing every business to add a night shift.
At the very least, the current city dwellers are right that adding more people would add a lot more costs to them–crammed train cars, more expensive goods.  In New York, much more than in other places, the competition for scarce resources like commuting space is extremely stark.
That doesn’t mean it is impossible to add a lot more people to New York.  But doing so requires not just changing zoning rules–as far as I know, there’s already quite a lot of real estate in the outer boroughs that could accommodate more people, but it’s not close to transportation, so it’s not economically viable.  If you want to add a lot more housing units, you also need to add considerable complimentary infrastructure, starting with upgrading the rest of the subway’s Depression-era switching systems (complicated and VERY expensive because unlike other systems, New York’s trains run 24/7).  And ultimately, it’s going to mean adding more subway lines, because short of building double-decker streets, there’s no other way for enough people to move.
Those lines don’t have to go to the central business district; there’s already been some success developing alternate hubs in Queens and Brooklyn.  But they do have to go from residential neighborhoods to somewhere that people work, and they have to add actual extra carrying capacity to the system–line extensions do no good if the trains are already packed to bursting over the high-traffic areas of the route.

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An Apple A Day, Yadda, Yadda, Yadda

Ezra Klein:

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

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

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

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

Arnold Kling:

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

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

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

Tim Carney at The Examiner:

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

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

Klein came back with this:

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

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

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

The main thrust of Klein’s blog post:

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

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

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

Karl Smith at Modeled Behavior:

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

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

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

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

Jim Manzi at The American Scene:

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

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

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

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

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

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

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

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

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

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Staring At Shoes In Regards To The Wall Street Journal Article

Heather Horn at The Atlantic with the round-up

Robert Barro at The Wall Street Journal:

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

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

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

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

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

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

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

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

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

Karl Smith at Modeled Behavior:

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

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


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

Scott Grannis at Seeking Alpha:

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

Robert Reich:

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

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

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

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

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

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

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

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

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

Alex Tabarrok:

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

Barro also argues:

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

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

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

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

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

I call this one on both counts for Josh.

Arnold Kling:

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

Mark Thoma:

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

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We Now Return You To This 24,536th Episode Of “Bloggers Debating Whether The Stimulus Worked”

Megan McArdle:

Today’s earlier post has naturally aroused suspicions that I am simply a knee-jerk stimulus opponent.  This is not true.  I tepidly supported the notion of stimulus, though I also thought that the stimulus we did was not well executed, because Democrats wanted to use it to execute their policy priorities, rather than to provide maximal stimulus.  I said at the time that “shovel-ready” infrastructure projects really weren’t; that’s not how the government procurement process works, and the federal government tends to slow things down, not speed them up.  As it was under George Bush, politicians seemed more interested in using stimulus as an excuse for stuff they already wanted to do, than in actually figuring out what was most stimulative.  (My candidates:  payroll tax cut, more lavish unemployment benefits).

And what do I think now?  Well, protestations aside, the stimulus we ended up doing was huge.  Maybe it wasn’t as huge as some would have liked, but $800 billion dollars is almost 6% of GDP. (2% if you spread it over 3 years, as the stimulus was).  All told, running a deficit of 10+% of GDP ought to have some pretty powerful stimulative effect.

So far, I’ve been underwhelmed.  Maybe we were going to end up so far in a ditch that we wouldn’t even be able to see sky when we looked up, only mud.  On the other hand, maybe simply not repeating the massive, massive monetary mistakes of the 1930s was enough to keep us out of the Great Depression, and the stimulus merely tinkered around the edges.  I find the latter at least as plausible as the former.

When you combine middling and hard-to-prove results with the fact that the stimulus we got was so obviously wrapped up in the political agenda of the Democratic Party, I think that the case for stimulus has gotten weaker.  Stimulus is always going to get wrapped up in the agenda of whatever party is in power–it will concentrate too much on long-term strategic attempts to change the aggregate level of government expenditure; it will be deployed inefficiently; it will be stretched out to maximize electoral rather than economic effectiveness.

I’d much rather see people talking about how best to ease the economic transition.  One way to think of recessions is that they always represent the transition point between two states of the economy:  high inflation to low inflation, overleveraged to under, or what have you.  Those transitions involve a great deal of human suffering, and contra the “work the rot out” school of economic policy, I do not think that this suffering is necessary.

Stephen Stromberg at WaPo:

But the bigger problem is that the argument about the stimulus is basically unwinnable, for now. That’s because, when you look past the gotcha quotes, much of the Obama administration’s justification for the Recovery Act relies on a difficult-to-prove counterfactual — that it created or saved jobs.

So, unemployment could even be going up, and the president could still claim the stimulus was a success, since it could have been worse. Here, the GOP conference ignores this argument entirely, as it so often does, by pointing to negative raw data and ignoring the Democrats’ argument that you have to compare them to a far more catastrophic baseline. Obama’s critics on the left often do the same to conclude that the stimulus was much too small.

I tend to sympathize with the administration on this. It’s shocking how quickly people have forgotten the rank fear that pervaded the country in late 2008 and early 2009. As with the Troubled Assets Relief Program, approving the stimulus was important if only to prove that the government would not let the economy fall off a cliff. At the same time, policymakers had to pay attention to folks worried — without much reason in the short-term, it turned out, but it was hard to know that then — about inflation and the willingness of private capital to finance American government debt at low interest rates. How do you quantify the number of jobs saved from ministering to such psychological preoccupations? It’s hard, but it doesn’t mean they weren’t saved.

Tim Cavanaugh at Reason:

Where do Keynesians go now that even public radio is talking about the failure of one of history’s costliest Keynesian stimulus efforts?

At City Journal, Guy Sorman notes how quickly the managed-market winds have shifted. When the credit unwind started, the papers, the TV and the newsweaklies declared capitalism dead in just a little less time than it took for Kent Brockman to declare his loyalty to the Space Ants. Less than two years later, you can’t buy good press for the stimulus; the economy is frozen solid in August; the nation is rediscovering — despite the herniated efforts of local, state and federal government — the virtues of thrift; and if you search for Keynes on the interwebs, all you turn up are headlines like “How Dr. Keynes killed the patient.”

But here’s the tell: We’re already starting to see the first of the “Today’s Keynesians are misreading Keynes” walk-back arguments.

As an idea, neo-Keynesianism is dead. (As public policy, of course, it will live forever.)

Josef Joffe at TNR:

As the joke goes, this is the reason why there are no one-handed economists; they are always saying: “on the one hand, on the other…” But, in the second year of the stimulus, it has become a lot harder to argue that Keynes is cool, and it is a lot easier to contend that tightfisted Angela Merkel, though a physicist by training, has a better knack for economic management than the Bloomsbury Sage—at least 74 years after he published his General Theory.

OK, it is silly to draw so much conclusion from so little evidence, and, whatever the gainsayers argue, Obama will throw more money at the economy as the midterms draw closer. But think of the issue in the simplest of terms: As a businessperson or consumer, would you now spend your money in the face of a rising deficit that is guaranteed to bring on either inflation or tax hikes or both? Maybe you can find the answer in the Holy Writ that is the General Theory. Confidence matters, and this is what the great man had to say in Book III: “The government program may, through its effect on ‘confidence’, increase liquidity-preference or diminish the marginal efficiency of capital, which may retard other investment…” Translation by Joffe: “The stimulus may lead to cash-hoarding and, by depressing the return on capital, diminish private investment.” Keynes may have been wiser than his disciples.

Jonathan Chait at TNR:

The truth is that you can’t prove whether the stimulus worked or not. You can try to reconstruct the effects of the stimulus (and other government interventions) as Alan Blinder and Mark Zandi did. But you’re still making assumptions on the basis of economic models — mainstream assumptions shared by most economists, but assumptions nonetheless. Actually proving the case would require going back to 2009 and re-running history with everything the same but no stimulus. Since we can’t do that, all we can do is guess.

Of course, Republicans aren’t making a good faith effort to gauge the effects of the stimulus. They’re simply looking for a pseudo-economic argument that allows them to blame Obama for everything that has happened since the economic crisis of 2008. Lindsey’s article is a rationalization for that political strategy.

Jim Manzi at TNR:

Chait is right. The reason we don’t know whether the stimulus has worked in the United States is fundamental. And I believe it has significant implications for how we should approach public policy in the recession.


I believe that recognition of our ignorance should lead us to two important, though tentative and imprecise, conclusions.

First, we should treat anybody who states definitively that the result of stimulus policy X will be economic outcome Y with extreme skepticism. And weaseling about the magnitude of the predicted impact such that all outcomes within the purported range of uncertainty still magically lead to the same policy conclusion doesn’t count; we should recognize that we don’t even know at the most basic level whether stimulus works or not.

Second, “boldness” in the face of ignorance should not be seen in heroic terms. It is a desperate move taken only when other options are exhausted, and with our eyes open to the fact that we are taking a wild risk. Actual science can allow us to act on counterintuitive predictions with confidence–who would think intuitively that it’s a smart idea to get into a heavy metal tube and then go 30,000 feet up into the air? But we don’t have this kind of knowledge about a stimulus policy. We are walking into a casino and putting $800 billion dollars down on a single bet in a game where we don’t even know the rules. In general, in the face of this kind of uncertainty, we ought to seek policy interventions that are as narrowly targeted as is consistent with addressing the problem; tested prior to implementation to whatever extent possible; hedged on multiple dimensions; and designed to be as reversible as is practicable.

What I am trying to describe here is not a policy per se, but an attitude of epistemic humility.

Chait responds to Manzi:

Manzi is a much nicer person then I am, so it’s no surprise that I will return the favor of him saying that I’m right by replying that he’s wrong. Here are a few of the problems with his case. First, and more importantly, I was arguing that the precise effect of the stimulus can’t be measured. That doesn’t mean we have no idea whether it worked. There is a general, though not unanimous, consensus within the economic field that increasing spending or reducing taxes temporarily increases economic growth. Basically, we do know the rules — increasing the deficit in order to pave some roads and cut taxes for middle-income people will increase the size of the economy; the primary debate is just how much.

Now, it’s true that the conservative movement has invested a great deal of time into throwing cold water on this basic consensus. I think this campaign should be viewed as largely political. Private forecasters unanimously believe that fiscal stimulus can temporarily boost growth. They give no credence whatsoever to the various right-wing alternative models in which fiscal stimulus does not boost growth. Moreover, in 2001, when the objective case for fiscal stimulus was much weaker, there was no real debate about the efficacy of fiscal stimulus. The fact that Republicans are fiercely contesting the merits of fiscal stimulus now, while almost nobody was doing so when the case was much weaker in 2001, suggests that the right’s skepticism is a political phenomenon.

Second, we are not really taking a “wild risk” by devoting $800 billion to mitigating the deepest economic crisis since the Great Depression. The long term fiscal cost of the stimulus is quite minimal:

The opposing risk, of allowing an economic free-fall, seems much greater. The risks of a depression are enormous. Of course, one side effect of such an outcome would be massive political gains for the opposition party. No doubt this helps explains the more sanguine attitude Republican elected officials — I am not implicating Manzi here — took toward the 2008 crisis, as opposed to their urgency in the face of the far more shallow 2001 recession.

Third, Manzi suggests that remedies be as narrowly targeted as possible, reversible, and tested prior to implementation. The stimulus was pretty narrowly targetted. It consisted of spending and tax cuts designed to increase consumption. It is completely reversible in the sense that the spending and tax cuts are temporary.

Being “tested,” as I noted, is not possible. But it’s not possible to test very much in macro-economics. We can’t run natural experiments with whole economies without the aid of time travel. Manzi’s analogies of flying in an airplane assume is that there’s some safe, default option — staying on the ground, keeping away from the casino. That isn’t a realistic way to think about economics. Doing nothing in the face of economic catastrophe is a policy choice. To the extent that it’s been “tested,” it’s been shown to produce terrible results. The better attitude than trying to imagine some safe default course of action, I’d suggest, is to hew to precepts generally accepted within the economics field.

Manzi responds to Chait:

Chait begins his reply by claiming that I “oppose any stimulus at all.” This is a position which I did not present in the post, and which I do not hold. In fact, I have consistently advocated stimulus in the face of the current crisis, and generally in venues that are not as hospitable to this idea as The New Republic.

I was arguing in my post that we should approach stimulus with appropriate humility about our knowledge, not that we should never execute such a policy. That’s why the sentence in my post that immediately follows those Chait excerpted, is: “What I am trying to describe here is not a policy per se, but an attitude of epistemic humility.”

Chait then moves on to criticize the reasoning behind my imagined position against any stimulus spending.

His first argument is that he was only saying we can’t measure stimulus precisely, but that we still know enough to act with confidence:

First, and more importantly, I was arguing that the precise effect of the stimulus can’t be measured. That doesn’t mean we have no idea whether it worked. There is a general, though not unanimous, consensus within the economic field that increasing spending or reducing taxes temporarily increases economic growth. Basically, we do know the rules — increasing the deficit in order to pave some roads and cut taxes for middle-income people will increase the size of the economy; the primary debate is just how much.

Now, it’s true that the conservative movement has invested a great deal of time into throwing cold water on this basic consensus. I think this campaign should be viewed as largely political.

Chait correctly identifies this as the most important of his arguments, so I’ll spend the most time replying to it. The problems with this criticism are that: (1) it is false, (2) it is a straw man, and (3) by far most important, it doesn’t address my point.

1. It is false.

Chait is trying to define the position that stimulus will not increase output as intellectually illegitimate. (Though, again, this is not a claim that I have made.)

It is certainly true that a large majority of professional economists accept the view that “increasing spending or reducing taxes temporarily increases economic growth”—but that is very far from claiming that disputing it is largely a political campaign. Robert Barro, Professor of Economics at Harvard, John Cochrane, Professor of Finance at the University of Chicago, and Casey Mulligan, Professor of Economics at the University of Chicago, have each separately argued that it is somewhere between plausible and likely that the multiplier for stimulus spending under relevant conditions is indistinguishable from zero (i.e., that stimulative spending will not materially increase economic output). According to surveys of professional economists reported by Greg Mankiw, about 10 percent of economists do not agree with the statement that “Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy.” Both the Wall Street Journal and the Financial Times have run opinion columns expressing the view that a multiplier of zero is a plausible to likely theory.

I have not been afraid to call out influential conservative activists when I believe they are engaging in crank refusal to accept a scientific finding. But in a genuinely scientific field which has accepted a predictive rule as valid to the point that there is a true consensus—such that the only reason for refusal to accept it is crankery or, in Chait’s terms, “politics”—you don’t usually see: several full professors at the top two departments in the subject, when speaking directly in their area of research expertise, challenge it; 10 percent of all practitioners in the field refuse to accept it; and the two leading global general circulation publications in field running op-eds questioning it.

2. It is a straw man

If the U.S. government were to borrow and spend $1 trillion with the sole result of increasing U.S. GDP in Q4 2010 by $1, it would have “temporarily increased economic growth”—but no sane person would advocate such a policy. It would not be, in either the common-sense meaning of words, or in the terms of my post, a stimulus policy that “worked.” The relevant policy question is whether stimulus spending “temporarily increases economic growth” enough to make such a policy rationally advisable . Economists are all over the place on their estimates for impact of stimulus policy across the range that is relevant to the policy decision.

A great many leading economists may accept the proposition that enough stimulus spending will probably cause at least some increase in output for a short period of time in some circumstances, yet are still uncomfortable with the kind of stimulus spending strategy that is the actual subject of current political debate. In 2009, James Buchanan (1986 Nobel Laureate in Economics), Edward Prescott (2004 Nobel Laureate in Economics), and Vernon Smith (2002 Nobel Laureate in Economics) promulgated this statement:

“Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance.”

3. It doesn’t address my point

It is nerdy-sounding, but I believe critical to this discussion, to distinguish between measurement and knowledge. I made a very strong claim about measurement, and a very specific claim about knowledge.

I claim that we cannot usefully measure the effect of the stimulus program launched in 2009 at all. We can call this a “natural experiment” all day long, but in the absence of a control case, we cannot know what output would have been had we not executed the policy. Econometric models are not sufficient to estimate this counterfactual. Therefore, there is no achievable level of output in the United States in 2010, 2011, and so on that would enable a definitive answer to the question, “What was the effect of stimulus spending on output?” See, for example, in my original post, the response of leading economists when confronted by unemployment with stimulus that turned out to be higher than they projected unemployment would be without stimulus:

Ms. Romer famously projected in January 2009 that without government support, the unemployment rate would reach 9%, but with support the government could keep it under 8%. It’s 9.5% today.

Some Obama administration officials privately acknowledge they set job-creation expectations too high. The economy, they argue, was in fact sicker in 2009 than they and most others realized at the time. But they insist unemployment would have been worse without the stimulus.

All potentially useful predictions made about the output impact of the stimulus program are non-falsifiable. Failure of predictions can be simply justified by this sort of ad hoc explanation after the fact.

Adam Ozimek at Modeled Behavior on Manzi:

Specifically, he cites the fact that the University of Chicago’s Barro, Fama, and Mulligan are stimulus skeptics, and according a survey from Mankiw, so are 10% of all economists. But I don’t think 10% of economists and a handful of high-profile experts disagreeing is sufficient to say there is not a strong consensus.

For economics 90% agreement is a pretty high level of agreement, and I would be surprised to find a consensus much stronger on that on most issues. From a survey of economists by Whaples we can see that ”only” 87.5% of economists agree that the U.S. should remove all remaining tariffs and trade barriers, 90.1% believe that employers should not be restricted from outsourcing jobs, 85% agree that subsidies to agriculture should be removed, and the same percent say it about sports subsidies as well. From another survey of economists, 87.5% agree that the U.S. trade deficit is not primarily due to other nations’ nontariff trade barriers, 83.5% agree or agree with provisos that tax policy can affect the long-run rate of capital formation, 93% agree that pollution taxes or tradeable permits are more efficient than emissions standards, 92.9% agree or agree with provisos that flexible exchange rates are effective, and 92.6% agree that tariffs or import quotes reduce the general welfare of society.

Despite the disagreement by 7% to 17% of economists on these issues I would argue that are all accurately characterized as representing as a strong consensus. Whaples calls the agreement in those examples a “consensus” and “an overwhelming majority”, and Fuller and Geide-Stevenson, the authors of the other paper, explicitly refer to those examples as representing a “strong consensus”.

Yet I’m certain that on each of these issues you could find experts at the top 10 economics departments that agree with the minority position. Stiglitz alone will probably disagree with more than half of them, and you won’t have to look hard to find a half a dozen other Ivy League dissenters.

My point is not to disagree with Manzi that a strong consensus means it is okay to call anyone who disagrees with the consensus a “crank” or “politically motivated”, but just to point out that the bar he’s set for a “true consensus” pretty much means that there’s is no “true consensus” on important issues in economics. Then again, he may very well agree with that point.

Karl Smith at Modeled Behavior:

Jim Manzi and I are kindred spirits on the issue of epistemic humility. Out in the real world – as opposed to the whiteboard – only one thing is for sure and that is that this is all going to end very, very badly. The long run is not your friend.

In the mean time, little is for certain. In particular, we are not clear on exactly what the consequences of economic stimulus were. However, it is important to clarify what some economists may have meant by stimulus skepticism.

I wrote frequently in the weeks leading up to the passage of the stimulus that I was a stimulus skeptic. I signed a letter offered by John Boehner for economists who believe that IIRC, stimulus is not the best way to revive our economy.

At no time, however, did I believe that stimulus would have no effect on output. That is, unlike what I believe to be Mulligan and Fama’s stance, I did not believe that labor markets always clear.

What I did think is that I wanted to take what, even then, seemed like enormous monetary risks. It has been rumored that Tim Geithner suggested securing the assets of all major banks in the United States. While I didn’t formally support that, it did not seem absurd to me. Nor, did massive nationalization of the banking system and certainly not aggressive purchases of government securities.

While taking on all of these risks I didn’t see the need to add the confusion and inevitable political food fight of stimulus on top of it. Moreover, if one was going to do a stimulus it seemed much more sensible to simply slash the payroll tax. The bang for the buck would have been less but you can cram a whole lot more bucks through the payroll tax system than you can through the appropriations mechanism. Additionally, the public choice issues in cutting the payroll tax were much more manageable.

The point of all of this is that I listed myself as a stimulus skeptic but I wasn’t at all skeptical about the stimulating powers of government spending. I was skeptical as to whether that was the ideal course of action. That skepticism was as much rooted in my understanding of American political dynamics and my own tolerance for risk as in any scientific claims about macroeconomics.

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Shave And A Haircut, Two Bits And A Whole Lot Of Red Tape

Karl Smith:

For example, in most jurisdictions cutting hair at home can legally be done with a vacuum cleaner but cutting it for pay requires schooling, examination and a licensing fee.

Matthew Yglesias:

The way I’ve been getting my hair cut for the past six months or so is that I bought a pair of hair clippers and I do it myself. I normally trim about twice a week, and this lets me keep the hair short at an acceptable cost. Once I screwed it up, then my hair looked funny for like a day until I figured out how to fix it.Meanwhile, meet the District of Columbia Board of Barber and Cosmetology:

The DC Board of Barber and Cosmetology (Board) regulates the practice of barbering and cosmetology while working diligently to raise the standards of practice; ensure quality service; establish accepted codes of ethical behavior, and protects the health, safety and welfare of the citizens and visitors of the District of Columbia by upholding the city’s Barber and Cosmetology laws and regulations. The Barber and Cosmetology license law (pdf) is defined in the Barber and Cosmetology Municipal Regulations, which took effect on May 2001.

The Board consists of eleven members appointed by the Mayor. The Board consist of three (3) barbers, three (3) cosmetologists, threes (3) specialists, all license and practicing for at least three (3) years. There are two (2) members (non-license) representing consumers. Six members of the Board constitute a quorum.

Regulation of this sort seems totally unnecessary. People don’t die of bad haircuts, and since hairstyle is a quintessential matter of taste there’s absolutely no reason to think consumers can’t figure out for themselves who has a decent reputation as a cutter of hair. You can cut your own hair perfectly safely in your own house, and if you screw it up all that happens is you need to find a real professional to fix it. But what’s more, even if regulation were somehow a good idea, the composition of the board couldn’t possibly serve a legitimate consumer protection function. It’s overwhelmingly composed of people from the industry whose incentive is to limit competition and raise prices.

Don Suber:

Congratulations, Matthew Yglesias, you have just discovered what my economics professors used to call Barriers To Entry, in much the same way Charlton Heston discovered the secret ingredient for soylent green.

All those business lobbyists in Washington? They are not there to stop legislation. They are there to write legislation. Of course BP endorsed tougher regulations on oil drilling. It helps their side businesses in alternative energy and keeps wildcatters from drilling for oil.

Those tough regulations on Wall Street? Goldman Sachs wrote them. Hey, it paid Obama a million bucks for that seat at the table.

When I get time, I will explain why Bill Gates and other billionaire liberals create tax-free — er, non-profit — foundations. A hint: John D. Rockefeller V was born a millionaire.

James Joyner:

Matt Yglesias figures that, since he’s able to cut his own hair, it’s silly to license barbers.

His commenters point out to him, fairly rudely, that people who handle straight razors probably ought to have some training and prospect of inspection from the authorities for health reasons.  And that beauticians, who handle dyes and other chemicals, really need to be regulated.   Apparently, they’ve explained this to him once or twice before, and hence their irritation.

Mostly, I think the commenters are right.  While the free market would probably regulate simple barber shops — as opposed to beauty shops — with reasonable efficiency, we’d hate to have barbers routinely cutting people with infected implements.   Let’s just say that the signaling mechanisms for that sort of thing are too slow for comfort.

Further, in terms of arguing by analogy, if Matt is an unlicensed barber, I’m an unlicensed taxi driver and restaurateur.  The idea that because people can be trusted to do something for themselves, they should therefore be allowed to do the same things for the public on a professional basis is rather thin.

Kevin Drum:

You’ll be unsurprised to know that I don’t have a lot to add on this subject. But I did get into a conversation about this with my haircutter once, and she pointed out that there’s more to this business than you might think. It’s true that clipping hair — which is the only side of the business that Matt and I ever see — isn’t especially dangerous. But for more complicated jobs, hair professionals handle a lot of dangerous chemicals and they need to know how to use these properly to insure that they don’t do some serious damage to their customers. That, apparently, is part of what they teach you at cosmetology school.

That’s what she said, anyway. Alternatively, maybe it’s all just a big scam. After all, plenty of women give themselves home perms and seem to survive the experience. Hair professionals should feel free to school us in comments.

Alex Massie:

Matt’s critics say that anyone using sharp objects or chemicals such as peroxide needs to be regulated and inspected. This, my friends, is a reminder that the American mania for credentialism (cf journalism) frequently travels well into the realm of the absurd.

Happily, this sceptered isle is a freer place entirely. No surprise then that the British Hairdressing Council is not happy. From their FAQ:

But surely everyone must be qualified before being allowed to practise?
Alas, not so; in fact, quite the opposite. Here in Britain, anyone is free to practise as a hairdresser without registration, without qualification, even without proper training. In short, hairdressing is totally unregulated.So is there no yardstick by which to judge hairdressers?

Yes, there is. In 1964, Parliament passed the Hairdressers Registration Act to give status to hairdressers and assurance to consumers. Under the Act, the Hairdressing Council (HC) was created to establish and maintain a register of qualified hairdressers. Hence, every State Registered Hairdresser (SRH) is officially recognised as qualified to practise hairdressing on the public.

Are most hairdressers registered?

Sadly, they are not. The 1964 law left registration a voluntary option. Only about ten per cent of hairdressers have ever exercised their right to a place on the official register. At the same time, with the industry unregulated, many unregistered operators might not be eligible for inclusion on the register.

Where does this leave the consumer?

In a far from ideal position. Choosing a practitioner in any unregulated industry is tricky; in an industry where part of the human person is being treated, it truly can be a lottery. While many consumers no doubt chance upon good stylists, others stray into the hands of incompetent operators and have experiences ranging from overpriced and unsatisfactory services to damaged hair and even injured scalp and facial tissue.

Surely all hairdressers are accountable for their professional actions? Isn’t this the role of the Hairdressing Council?

Had registration been mandatory, the Hairdressing Council would indeed regulate hairdressing much as the Medical and Dental Councils, for instance, regulate their sectors. However, so long as the Act remains voluntary, the HC has jurisdiction over SRHs only – complaints against whom are very few and far between.

Something must be done! To be sure…

If it can, why won’t Parliament take action?
Action by government ministers, rather than back bench MPs, is what’s needed. For the record, ministers are requested, regularly, to amend the Act. This campaign for a tightening of the law, spearheaded by the Hairdressing Council, is supported by the industry trade bodies, consumer groups, much of the media and, not least, consumers. A great many individual MPs also support the regulation of hairdressing.
And where does government stand on the regulation of hairdressing?
To begin, a few facts: First, no government is going to commit parliamentary time to bringing in legislation it feels to be unnecessary*. Second, no government is going to introduce what it regards as unnecessary regulation. Third, regulation, of pretty well any sort, is increasingly viewed at best with suspicion and at worst with contempt by business interests, including many salon owners.
Fourth, governments tend to be wary of introducing laws viewed unfavourably by large or significant sections of the community. 
As to the stances adopted by recent governments on hairdressing regulation, when in power the Conservatives refused, consistently, to contemplate action. Their argument, repeated many times, was that “market forces are a sufficient regulator”. The current Labour government has listened to and acknowledged the merits of the case for regulation but has, at least so far, declined to act on the matter.
Have other measures been tried, through ordinary MPs in Parliament to bring in regulation?
Since the voluntary registration law was introduced in 1964, initiatives such as Early Day Motions, Ten Minute Rule Bills, Ministerial Questions and Private Members’ Bills have all been tried by helpful and supportive MPs. But lacking government support, none of these has succeeded. However, be sure efforts will continue.

I’m sure they shall! Somehow, however, the country has survived an unregulated hairdressing and barber-shop industry all these years and may yet, with god’s providence, do so in the future.Mind you, Sweeney Todd was a Londoner…

*If only this were true…

More Yglesias:

A number of people, including many commenters here and even alleged conservative James Joyner think you should need a professional license to become a barber because you might hurt someone with a straight razor. Uh huh. At best this would be an argument for regulating people who do shaves with a straight razor, which would be considerably narrower than current comprehensive regulation of hair stylists.

Meanwhile, though “torts and the free market will take care of it” isn’t the answer to everything, it’s surely the answer to some things. Getting some kind of training before you shave a dude with a straight razor is obviously desirable in terms of strict self-interest. If you screw it up in a serious way, you’ll face serious personal consequences and the only way to make money doing it—and we’re talking about a very modest sum of money—is to do it properly. People also ought to try to think twice about whether their views are being driven by pure status quo bias. Barbers are totally unregulated in the United Kingdom, is there some social crisis resulting from this? Barber regulations differ from state to state, are the stricter states experiencing some kind of important public health gains?

Last you really do need to look at how these things play out in practice. If you just assume optimal implementation of regulation, then regulation always looks good. But as I noted in the initial post the way this works in practice is the boards are dominated by incumbent practitioners looking to limit supply. One result is that in Michigan (and perhaps elsewhere) it’s hard for ex-convicts to get barber licenses which harms the public interest not only by raising the cost of haircuts, but by preventing people from making a legitimate living. States generally don’t grant reciprocity to other states’ licensing boards, which limits supply even though no rational person worries about state-to-state variance in barber licensing when they move to a New Place. In New Jersey, you need to take the straight razor shaving test to cut women’s hair because they’re thinking up arbitrary ways to incrementally raise the barrier to entry.

Mike Konczal at Rortybomb:

It’s worth noting that Barack Obama, back when he was a state senator in Illinois, pushed against some of this when it came to jail sentences and prohibitions on getting regulatory licenses:

Town Hall Meetings: On August 15 and 16, 2003 the North Lawndale Employment Network sponsored the annual Town Hall meeting for Congressman Danny Davis at Malcolm X College in Chicago. Brenda Palms Barber was one of the distinguished speakers for the Congressman’s opening address. Ms. Barber and Anthony Burton participated on a panel with State Senator Barack Obama and State Representative Constance Howard to discuss the federally funded Going Home program and several new laws that were passed by the state lawmakers. The lawmakers introduced to the audience several bills that had been passed, including one that would change some of the expungement laws in the State of Illinois and one bill that would allow formerly incarcerated individuals to seek regulatory licenses in several fields including barbering, nail technicians, cosmetology and dead animal removal. Under this bill, the formerly incarcerated individual would have the opportunity to seek a license once they have served their time in prison and have been given a certificate of good standing by the State of Illinois. NLEN also set up a booth at the Town Hall meeting to highlight its program and accomplishments.

Back then if you had a jail record you couldn’t receive most regulatory licenses. So if you were trying to escape from a life of crime, or even if you were tagged with a minor crime during a wayward period in your life, you would automatically have a wide variety of occupations immediately shut off from you. You couldn’t be a barber for instance. (You also probably couldn’t be a licensed fortune teller.) Whatever the idea behind this, in practice it’s going to take people at the edges and shut off a number of crucial options to them. I don’t know if this exists in most states, but it’s an obvious way to begin to push back against the worst excesses of license overkill.

So beyond just being a hassle these licenses can be a major form of explicit job segregation and can have major distributional problems associated with them.


Jonathan Adler

UPDATE #2: More Yglesias

Conor Friedersdorf here and here

Kevin Drum

Adam Serwer at The American Prospect

UPDATE #3: Matt Steinglass at DiA at The Economist


Filed under Economics, Go Meta

Malls, Stores And Distress: What Does An Empty Store Mean?

Five Unit Strip Mall

Forget empty houses… what about empty commercial space?

Justin Fox in Time:

I live in a very prosperous neighborhood of New York City, the Upper West Side, where the main thoroughfare, Broadway, is full of vacant storefronts. Except for a few recent restaurant closings, this isn’t a product of the recession—it was just as true a couple of years ago. I mainly blame the banks, which at the height of their expansionist frenzy were adding branches on every corner, driving out more useful neighborhood businesses and overpaying on rent, thus driving up the expectations of every commercial property owner in the neighborhood. That led to lots of shop and restaurant leases not being renewed, and lots of ground floor commercial space going unused because for all their expansionism the banks were never going to need all the commercial space on Broadway.

Now the banks are retrenching. I imagine rents will eventually sink far enough to reflect this new economic reality, and the storefronts of Broadway will fill up again. But it’s taking absurdly long, and millions (hundreds of millions? billions?) of dollars in economic value is going lost in the process. The Upper West Side commercial real estate market would seem to be spectacularly inefficient.


Marcus’s explanation:

“[M]any of these buildings are worth more as losses, write offs and deductions that as going concerns. The potential rents are so low that few can actually be bothered renting them. The commission for real estate agents are negligible. Commercial leases are by default prohibitively long and often require property owners to meet expensive obligations.”

That, and the cost of complying with regulation can make small businesses and small real estate transactions uneconomic. Marcus came up with a clever partial solution in Newcastle—starting an nonprofit called Renew Newcastle that persuades property owners to let it take over their vacant commercial space on a rolling 30-day basis and then cleans it up and rents it out for use as shops, galleries, studios and a tea house. I don’t know how you make that work in a neighborhood like mine that isn’t in obvious need of rejuvenating but does have a temporarily dysfunctional commercial real estate market (that is, I can’t imagine landlords along Broadway agreeing to participate in Renew Upper West Side). But the common theme—that commercial real estate is prone to market failure—is pretty striking.

Felix Salmon:

Justin is absolutely right about the corrosive effect of bank rents on New York rental rates: all landlords want the kind of rents that only banks can afford, but of course not all landlords can have a bank as a renter. But the bigger picture is that commercial real estate in general often stays empty for extremely long periods of time — something which harms neighborhoods and lets huge amounts of economic value go to waste.

Why is this? I think the answer lies in the fact that commercial leases tend to be very long-term things — so long term, in fact, that the discounted cashflow from any given lease is likely, in a normal (non-bubbly) property market, to be more or less the same as the value of the commercial property itself. Looked at this way, a developer spends a certain amount of money on putting up (or simply buying) a building, and then sells that building, in lease form, for a profit.

If prevailing leases are low, or tenants hard to find, the developer will quite rationally choose to keep the property empty. Leasing at a low rate will lock in a loss, while keeping the property empty has significant option value: at some point in the future, rents might well rise, and the developer can at that point lock in a profit instead. This is why successful property developers generally need very deep pockets: anybody who needs immediate cashflow, in the form of rent today, is in an invidious bargaining position and is likely to lose out over the long term.

Matthew Yglesias:

If you look at suburban strip malls, the same long lease dynamic applies, but widespread strip mall vacancies are normally a sign of specific economic distress. The current recession has less to a lot of them, but in normal economic times you tend not to see this. Instead, even depressed areas reach a low-rent equilibrium. Possibly this is because strip mall property is less speculative in nature than urban property. But I think the specifically urban nature of the problem probably has something to do with the level of regulatory uncertainty surrounding new retail endeavors in most American cities combined with the reluctance of many neighborhoods to play host to the sort of “uncool” national retail chains that could better manage the risks involved.

Megan McArdle:

One guess is that malls are likely to be owned by professionals who are better managers of their retail yield than individual landlords.  First, they are professional retail managers, not just owners of property, and second of all, malls place a very high value on having foot traffic.  Stores in malls benefit greatly from spillover traffic, which is why anchor stores like Macys are big focuses of the industry.  Urban stores do too, but there’s no one landlord in charge of them.  A building on Broadway and 86th Street is not going to lower the rent on its vacant space because the fish store on one block up will see an 8% rise in sales.

The other guess–or perhaps it’s more of a corollary–is that because malls are not so dependant on casual foot traffic, there is less worry about lock-in.  That is, a restaurant in the Paramus Park Mall is not getting any significant number of its customers from the area immediately surrounding the mall.  Any other mall with decent foot traffic of the right demographic is a very good substitute for one they’re already in, so they can leave if the landlord gets too frisky.  Plus, the space they rent very likely is a space specifically designated for a restaurant, allowing them to demand some capital improvements from the landlord that an urban tenant can’t.  In the city, a pizza place that hates its landlord has to worry about finding and building out a new space, and then charming customers away from the 22 other restaurants within a ten block radius.

Karl Smith:

The difference is that a mall has a single owner who internalizes all of the externalites associated with vacant storefronts (and trash and crime, etc). An ugly mall is a less popular mall and thus commands lower rents overall. Typically its worth for the mall owner to take a hit on one store if he can make it up in higher rents for the others. This, of course breaks down when demand for the whole mall declines.

The externality problem means that, in general, communities will be more pleasant, though much more expensive, if one landlord owns the whole shebang. I think this one reason many people find University campuses to be so nice.

More Salmon:

If one landlord owned all the shops on Broadway, she could happily rent a few of them out to banks at high rents, while renting others out to high-prestige, low-profit artisanal shops at much lower rents, all in the interest of maximizing total rental revenue. (I’m reminded that at the Time Warner Center, the landlord actually paid a set of bold-face names like Thomas Keller and Jean-Georges Vongerichten to open up restaurants there: they would never have opened up in the middle of a shopping mall otherwise.) Those cross-subsidies can’t work when there’s a multiplicity of landlords.

So yes, one solution to the problem of empty storefronts would be for a single landlord to take over a large shopping area. But I don’t think many people want that: you invariably end up with something which feels like an outdoor mall.


And of course a mall owner can better internalize positive externalities as well. In general, the whole strip mall is operated as a unit. By the same token, this is why you see whole malls go totally dead which rarely happens on urban retail corridors even in depressed areas. It becomes more of an all-or-nothing thing.

UPDATE: Sommer Mathis at DCist

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It Was One Year Ago Today, Milton Friedman Taught The Band To Play


H/T on the graphic: The Winecommonsewer

How do we feel about the bailouts now? Tyler Cowen:

If another big negative shock comes the government’s liability position still could turn out to be much worse.  But if we stop and click pause and evaluate the policy today — the answer to my question is “yes, the bailouts were a good idea.”

Without the bailouts we would have had many more failed banks, very strong deflationary pressures, a stronger seize-up in credit markets than what we had, and a climate of sheer political and economic panic, leading to greater pressures for bad state interventions than what we now see.  Milton Friedman understood all this quite well, which is why argued bailouts would have been a good idea in the 1929-1931 period.

(By the way, some libertarians like to pretend that Milton Friedman blames the Fed for “contracting” the money supply by one-third in that period but in reality Friedman blames the Fed for having let the money supply fall by one-third and not having run a bank bailout.)

If you are a libertarian, is not our current course more favorable for liberty than would have been a repeat of 1929-1931?  If not, I would be curious to hear your counterfactual version of how matters would have proceeded, without the financial bailouts.  Is it that you think the regional banks would have raised the financing to pick up the entire bag and keep the banking system afloat?  Or is it that natural market forces would have somehow avoided a wrenching surprise deflation?  Or do you think the authorities for some reason would have not nationalized the major banks?  Please let us know.

Maybe you think that the bailouts will have disastrous long-run consequences.  And maybe they will, I worry about this too.  But if anyone should know that modern politics can only stand so much short-run panic, it is libertarians and fans of Bryan Caplan’s book.  If we had not done the bailouts we did, we would, within a few months’ or weeks’ time have received a much worse and costlier bailout run by Congress and Nancy Pelosi.  How does that sound?

Megan McArdle:

Now that we have the benefit of hindsight, what should with think about the bailouts?  A large number of conservatives and libertarians are against them.  I think that a large number of liberals are too, though for different reasons.  Both dislike giving state money to companies, but the right worries about the tax burden and the corrupting influence of government on the market as much as the corrupting influence of companies on the government.  They are also, I think, more worried about moral hazard, while liberals worry more that the money spent on banks can’t be spent on other government programs.

All these concerns are correct.  The bailouts have probably substantially increased moral hazard, and perversely, arguably undermined the political will for regulation that might reign in that moral hazard.  Top investment bankers really do seem to have a worrying about of influence over Treasury and the Fed.  The tax burden is large, and should worry you whether you wish that money had been spent on food stamps, or returned to taxpayers.

That said, they were probably the best thing we could have done.


There are things about the bailouts that could have been done better; I think both Democrats and Republicans demanded too little from the large banks in return for its support.  But the basic strategy seems like the best option in a bad situation.  On the other hand, maybe this is an argument for liberals that we shouldn’t have done the bailout . . .

Matthew Yglesias:

I will admit to not being an expert on the thought of Milton Friedman, but I’ve been surprised by the overwhelming hostility exhibited by the institutional organs of American libertarianism—places like Cato and Reason magazine—to the bailout policies of Hank Paulson, Ben Bernanke, and Tim Geithner. Why surprised? Well, because my understanding of Freidman’s big contention about the Great Depression has always been that he was saying that instead of all this big government and New Deal and so forth, we should have just organized . . . massive bank bailouts. That given adequate bank bailouts, things never would have gotten so bad under Hoover, and FDR never would have come in the way he did, and post-war Keynesianism never would have gotten off the ground.


Of course libertarians are under no compulsion to agree with Friedman about everything, but given that he’s generally acknowledged to be one of their side’s intellectual giants this seems worth wrestling with to a much larger degree than I’ve seen. The ideological problem is clear enough—any form of heavy-handed state intervention into the economy serves to undermine the mythos of free market capitalism and thus legitimize social justice concerns and redistributive claims.

Nevertheless, the fact of the matter is that economic thinkers who the right is normally inclined to revere agree on the point that state intervention in the midst of financial panics is correct policy.

Karl Smith at Seeking Alpha:

There would have been a worse bailout – that’s the defense?

How about the fact that we stopped the second Great Depression. We prevented untold human suffering and a destabilization of governments in developing countries that could have lead to a vastly more dangerous world.

In my mind the entire point of macroeconomics was that when it happened again, when the forces that created the Great Depression materialized again, we would stop it.

It happened again and we stopped it. That’s success.

Arnold Kling:

The Financial Times reports,
“The US government, by contrast, is sitting on a paper profit of almost $11bn on its 34 per cent shareholding in Citigroup…

The government said it had earned an annualised return of 23 per cent from its $10bn investment in Goldman Sachs under Tarp. In June, Goldman returned the $10bn and later paid another $1.1bn to buy back warrants attached to Tarp aid. Morgan Stanley, American Express and other banks have done the same, leaving taxpayers with substantial profits.”

Pointer from Tyler Cowen, who says we should admit that the bailouts were a good idea.

Certainly, profits on the transactions would meet my test of whether the measures were addressing a liquidity crisis or just bailing out insolvent institutions. If AIG, Freddie, Fannie, and FHA all emerge solvent from this, then I absolutely have to shift my position in favor of the “insider” view that this was mostly a liquidity panic. I would probably be willing to make that concession even if AIG, Freddie, Fannie, and FHA together have negative net worth, as long as the deficit is under $100 billion for the four of them.


In the long run it would have been better to allow the entire financial system to burn to the ground then bail out the people who made these mistakes.

If you absolutely positively had to invest a trillion dollars in the financial system, it would have been better to summon solvent banking firms to NYC and hold Dutch auctions for their assets and liabilities. That is, who wants AIG plus a subsidy, and the subsidy increases (price drops) until the bank sells. No reward for failure. One could also have done a massive capital injection into the solvent banks at favorable enough rates that all would want to participate. One way to force the management to put their money where their mouths are is to require management to inject their own (outside) money into the new firms at some leverage ratio. Even if they have to borrow it against everything they have.

You could also try huge quantitative easing. If the federal reserve had done a trillion dollars worth of open market operations and driving real rates negative and injecting massive amounts of liquidity into the system, then I believe that market mechanisms could have been leveraged to restart lending if it failed.

Finally, how about investing in the publicly traded companies directly. Put substantial orders in to buy new equity in the 3000 largest publicly traded firms that can be sold at any time. Make these shares assets of the FDIC or assets deposited as seed capital for privatized social security accounts.

But here is my turnabout for advocates of the banking bailouts:

Have you also noticed that this hasn’t turned out to be much of a great recession? Though unemployment is sharply up, consumption and output have changed little, and we may have already reached the trough. One interpretation of this is that the package of stimulus and bailouts worked. But given what we know about how these were implemented, isn’t at least as likely that the panic wasn’t as bad as it was sold to us?

UPDATE: Julian Sanchez:

I’m not inclined to debate economic policy with Tyler and Megan, so I won’t presume to take a position on the ultimate wisdom of the approach that was taken, but this sounds an awful lot like the old debate trick I’ve previously referred to as the fiat shuffle. Just to refresh: The way the trick works is that, for the purposes of arguing the merits of a given policy, you assume away various real-world political barriers to the policy’s being enacted—in debate lingo, you get to “fiat” the policy and restrict the argument to whether this would be a good thing without fussing over whether you could get the votes in the House (or whatever) to do it. The shuffle comes when you assume the same political constraints back in again as part of an argument that the proposed policy would create pressure for other salutary reforms, or to dismiss alternatives as infeasible.

Now, this isn’t a clear case of fiat shuffle, because it’s easy to imagine that we might have had the political will to resist the bailouts, but that this would not have been sufficient to forestall still more aggressive intervention later assuming things would have gotten far worse. Still, despite a an initial defeat in the house, the bailout ultimately passed by a 3-to-2 margin there, and by an even more lopsided 3-to-1 vote in the Senate. Which is to say, the world in which we didn’t do the bailout is clearly a world with a pretty radically different political culture, presumably populated by legislators with a very different average worldview. When would the inhabitants of that world have given up their resistance to intervention, and how much more dramatic would the intervention have been when they did? Damned if I know, but projections based on the current composition and views of Congress probably don’t apply.

Megan McArdle responds:

I’m not totally sure that’s true.  If so many conservative and libertarian pundits hadn’t caved, I can imagine a world in which the Republicans continued their intransigence, and the Democrats (for understandable political reasons) refused to pass it without them.

But leaving this aside, we actually have some empirical evidence here.  In 1929, the federal government and the federal reserve took little action to bail out the banks.  In 1932, we elected FDR.

That was a long time ago.  But when you look at modern financial crises from Iceland to Argentina, what you see is that they have a tendency to produce some, well, radical changes in the political culture.  Moreover, those trends usually tend towards populism, redistribution, and state control of substantial segments of the economy.  So if we hadn’t had our Pelosis now, we’d have had them by 2012.  To a first approximation, I’d say that the bailouts are the reason that we won’t have a single-payer health system or actual national automakers any time soon.

UPDATE #2: David Henderson

Tyler Cowen

Megan McArdle

UPDATE #3: Steve Verdon

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Filed under Economics, The Crisis