Tag Archives: Will Wilkinson

It Is Ezra Klein Week Here At Around The Sphere

Ezra Klein:

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


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

Klein again:

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

Ezra Klein: Let’s talk about the post.

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

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

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

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

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

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

More Klein here and here

Will Wilkinson at DiA at The Economist:

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

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

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

Mr Klein follows up sanely:

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

To which Mr Vilsack says:

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

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

Ryan Avent at Free Exchange at The Economist:

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

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

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

Andrew Sullivan

Arnold Kling:

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

James Joyner:

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

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

Jonathan Chait at TNR:

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


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Filed under Economics, Food, Go Meta, New Media

Bloggers Contemplate A Door That Revolves

James Fallows:

Last night, on the “Virtually Speaking” discussion about the media with Jay Rosen of NYU, we talked about the phenomenon of things that everyone in the press corp “knows” but that don’t make their way into news stories or broadcasts. One such category involves things that everyone suspects but can’t quite prove — for instance, how involved Dick Cheney and Karl Rove were in the Valerie Plame case. Or, to make it bipartisan, about Bill Clinton’s sexual behavior over the years. But another category, which I think is even more important, involves things that everyone “knows” but has stopped noticing. This is very similar to what is called “Village” behavior in the big time media.

An item in this second category has just come up: the decision of Peter Orszag, until recently the director of the Office of Management and Budget under Barack Obama, to join Citibank in a senior position. Exactly how much it will pay is not clear, but informed guesses are several million dollars per year. Citibank, of course, was one of the institutions most notably dependent on federal help to survive in these past two years.

Objectively this is both damaging and shocking.

– Damaging, in that it epitomizes and personalizes a criticism both left and right have had of the Obama Administration’s “bailout” policy: that it’s been too protective of the financial system’s high-flying leaders, and too reluctant to hold any person or institution accountable. Of course there’s a strong counter argument to be made, in the spirit of Obama’s recent defense of his tax-cut compromise. (Roughly: that it would have been more satisfying to let Citi and others fail, but the results would have been much more damaging to the economy as a whole.) But it’s a harder argument to make when one of your senior officials has moved straight to the (very generous) Citi payroll. Any competent Republican ad-maker is already collecting clips of Orszag for use in the next campaign.

– Shocking, in the structural rather than personal corruption that it illustrates. I believe Orszag (whom I do not know at all) to be a faultlessly honest man, by the letter of the law. I am sorry for his judgment in taking this job,* but I am implying nothing whatsoever “unethical” in a technical sense. But in the grander scheme, his move illustrates something that is just wrong. The idea that someone would help plan, advocate, and carry out an economic policy that played such a crucial role in the survival of a financial institution — and then, less than two years after his Administration took office, would take a job that (a) exemplifies the growing disparities the Administration says it’s trying to correct and (b) unavoidably will call on knowledge and contacts Orszag developed while in recent public service — this says something bad about what is taken for granted in American public life.

More Fallows:

I made a mistake several days ago when lamenting Peter Orszag’s decision to take a senior job with Citibank, reportedly for several million dollars per year, so soon after leaving a senior Obama Administration post. Over the past two-plus years, Obama (and GW Bush) policies played a crucial role in saving Citi — and in not holding its executives (or other senior financial-world figures) accountable for polices that brought on the world financial crisis or reining in top-end pay as profitability has returned. Now a senior member of the Obama team — Orszag was budget director — was going straight to one of those top-end jobs, even as his former colleagues in the administration have their hands full fighting the social, economic, and political effects of the crisis on “ordinary” Americans who can’t find jobs or are losing their homes.

My mistake was not in pointing out this problem, nor in identifying it as the kind of thing that is notable precisely because no one even stops to remark on it any more. It was in the sentence that said, “Objectively this is both damaging and shocking.” That’s the difference between one-draft web postings and many-times-edited print articles. What I meant was, “Politically this is damaging and should be shocking.” Because the real point is that official Washington should notice this instance of structural corruption — but won’t.

If you’re wondering just how taken for granted such arrangements are in today’s Washington/ Versailles, here’s a data point. The Washington Post, still aspiring to be official journal of politics, has not published a single story about Orszag’s new job. Here is what its search function shows just now:

“Please try another search” indeed. How about “things that are depressing”? To their credit, the Post’s Ezra Klein and Ed O’Keefe each had one-line links on their sites, pointing to (respectively) the NYT “Dealbook” and Reuters stories on Orszag. (And those links come up if you search the Post’s site for “Orszag Citigroup.” Otherwise there appears to have been no “news” coverage by the Post. Klein also had this follow-up link to an item called “Our Peter Orszag Problem” on the Economist’s site.) The gap between the things the Post considers “scandals,” and a development like this, so taken for granted as not to merit mention, says too much about our politics.

More Fallows

Will Wilkinson at DiA at The Economist:

Mr Fallows hits the nail on the head, but what this structural injustice means, politically and ideologically, remains unclear. In my opinion, the seeming inevitability of Orszag-like migrations points to a potentially fatal tension within the progressive strand of liberal thought. Progressives laudably seek to oppose injustice by deploying government power as a countervailing force against the imagined opressive and exploitative tendencies of market institutions. Yet it seems that time and again market institutions find ways to use the government’s regulatory and insurer-of-last-resort functions as countervailing forces against their competitors and, in the end, against the very public these functions were meant to protect.

We are constantly exploited by the tools meant to foil our exploitation. For a progressive to acknowledge as much is tantamount to abandoning progressivism. So it’s no surprise that progressives would rather worry over trivialities such as campaign finance reform than dwell on the paradoxes of political power. But it really isn’t the Citizens United decision that’s about to make Peter Orszag a minor Midas. It’s the vast power of a handful of Washington players, with whom Mr Orszag has become relatively intimate, to make or destroy great fortunes more or less at whim. Well-connected wonks can get rich on Wall Street only because Washington power is now so unconstrained. Washington is so unconstrained in no small part because progressives and New Dealers and Keynesians and neo-cons and neo-liberals for various good and bad reasons wanted it that way. So, what is to be done? Summon a self-bottling genie-bottling genie?

The classically liberal answer is to make government less powerful. The monstrous offspring of entangled markets and states can be defeated only by the most thorough possible separation. But public self-protection through market-state divorce can work only if libertarians are right that unfettered markets are not by nature unstable, that they do not lead to opressive concentrations of power, that we would do better without a central bank, and so on. Most of us don’t believe that. Until more of us do, we’re not going far in that direction. And maybe that’s just as well. Maybe it’s true that markets hum along smoothly only with relatively active government intervention and it’s also true that relatively active government intervention is eventually inevitably co-opted, exacerbating rather than mitigating capitalism’s injustices. Perhaps the best we can hope ever to achieve is a fleeting state of grace when fundamentally unstable forces are temporarily held in balance by an evanescent combination of complementary cultural currents. This is increasingly my fear: that there is no principled alternative to muddling through; that every ideologue’s op-ed is wrong, except the ones serendipitously right. But muddle we must.

So what is to be done about the structural injustice spotlighted by Peter Orszag’s passage through the revolving golden door? How exactly do we tweak the unjust structure? If the system is rigged, how exactly do we unrig it? In which direction can we muddle without making matters worse?

Ezra Klein:

But reading the coverage, I’ve been struck by a few things.

1. I’m not nearly so sure it’s about the money as other people seem to be. Orszag is fairly wealthy already (my understanding is he sold off an economic consulting firm when he became director of the Congressional Budget Office), and his lifetime of public service positions does not suggest a man particularly motivated by income. Rather, I think people are underestimating the lure of the job itself.

Orszag has gone as high as he’s likely to go in government, and he’s 41 years old. The guy isn’t done, but there’s not much more for him in Washington. So what is left for him?

Well, he could do academia or a think tank. But that’s a pretty sedate, low-stress existence compared with the tempo he’s kept up over the past few decades. Let’s say he doesn’t want to move into a wiseman or advisory role. New York Times columnist didn’t seem like a bad gig to me, but then, I’ve chosen to devote my life to similar pursuits. I’m not really sure why anyone would want to be a university president. You sometimes hear people say that he should’ve sat around and been fairly rich and respected, but I imagine that gets boring after the first decade or so.

Citigroup is a really big, really powerful institution. Orszag’s position in it is the sort of position that could one day lead to being president of Citigroup. If you’re him, and you’re trying to figure out an interesting and high-impact way to spend the next 40 years, I can see why it’s appealing. But it’s the power and the job and the opportunity, more than the money, that make it appealing.

2. The problem is less why Orszag wanted to go to Citigroup than why Citigroup wanted to hire Orszag. In Citigroup, you’re dealing with a bank that’s simply much more reliant than other banks are on connections with the American government, and other governments. Bank of America has similar needs, and so too do a couple of others, but it’s a short list.

Whether Orszag was a smart hire on these grounds is hard to say. It’s difficult to overstate how much bad will has developed between Orszag and the White House he used to serve. Some of that comes from perceived disloyalty in Orszag’s public statements — like his first New York Times column, which called for a short-term extension of all the tax cuts when the White House was arguing for the permanent extension of most of the cuts and the expiration of the cuts for the rich — but this move, which many in the administration consider politically problematic and personally distasteful, added considerably to the anger.

What Citigroup gets in Orszag is a brilliant policy mind and a deep understanding of government, not to mention a thick rolodex that certainly still has some friendly names on it. The reasons those things are valuable to Citigroup make most of us uncomfortable, and that goes double after the government bailed Citigroup out during the financial crisis. I highly doubt that the meetings between Orszag and Citigroup left him with the impression that he was getting hired to help with governmental affairs. His portfolio, in fact, is explicitly international. But I don’t know anyone who believes that it will stay that way.

Brad DeLong:

Look: Peter Orszag believes–as do I–that the most basic principles of good governance mandate that the American government have a long-term plan in place to match its long-term projected expenditures with its long-term projected revenues. Peter Orszag believes–as do I–that requiring that every policy initiative be paid-for in the long-term so that it does not increase the projected debt, say, ten years out into the future is the minimum low bar that policy should be able to clear.

Barack Obama has not taken Peter Orszag’s advice: he has not proposed only initiatives that are paid-for in the long-term. He has not pledged to veto bills that raise the projected debt ten years hence.

Peter Orszag is no longer in the government.

Does he now have a duty to tell those who read his New York Times columns the same things that he told Obama when he was in government?

Or does he have a duty to tell lies to his readers about what he thinks good policy is in order to advance the interests of an administration that he is no longer part of?

I would say he has the first duty.

Matthew Yglesias:

As I understand it, the concern is that the the job itself is a bribe. In a super-crass version of this, Firm A says to Regulator Z “you won’t be in this job forever, but if you make a lot of decisions favorable to Firm A then we’ll hire you after you quit.” In a more realistic version what happens is that Regulator Z observes that many of his predecessors have gone on to lucrative careers in Industry A and that they probably couldn’t have had if they’d pissed off all the Industry A CEOs. This biases his decision-making in a problematic way.

Sometimes I think this problem is more apparent than real. Any conceivable set of decisions that the FCC makes is going to be favorable to some set of large corporations. So being in the pocket of “big business” as such isn’t a big problem. But sometimes the problem is very real. The entire financial reform debate, for example, has featured a lot of ideas that put the interests of the financial sector as such at stake. Many observers, including Ezra Klein, have posited that shrinking the size of the financial sector overall should be a goal of reform. Obviously, though, people with an ambition to go get jobs in the financial sector are unlikely to espouse such goals.

Will at The League:

Peter Orszag’s new job at Citigroup is one of those under-discussed stories that makes me glad I read blogs. It also makes me depressed because I’m struggling to envision a plausible solution to the problems of regulatory capture and the revolving door between government and the financial services industry. You can imagine better policies arising in a lot of areas – farm subsidies, for example – if we magically removed certain political constraints, but even if you were given free reign to remake the United States’ political system, the problem of regulating an incredibly complicated financial sector would still be pretty tough to figure out.

If you’ll permit me to simplify things for the sake of brevity, the standard progressive view of the financial sector is that we need more and better regulators. This is complicated by the fact that regulation – particularly regulation that involves opaque financial practices – is complex and therefore vulnerable to companies gaming the system. Former high-level Administration officials accepting jobs at financial institutions that were just bailed out basically exemplifies these concerns.

The libertarian/conservative rejoinder is that less regulation equals less opportunities for politically-connected firms to hijack the system. As a safeguard against future financial meltdowns, I find this unsatisfying for a number of reasons: First, attempts to describe the roots of the financial crisis solely through the lens of government intervention sound pretty silly. And second, if the regulatory and administrative superstructure of government is fatally compromised by insiders and corporate lobbyists, are we sure we  can successfully deconstruct that system from within? I think this is part of what liberals are getting at when they suggest the conservative movement is basically a front group for rich people and big business: sure, you might make election year noises about limited government, but genuinely populist conservative impulses take a backseat to corporate interests in a political and regulatory environment dominated by insiders. In other words, the Tea Party will never beat Goldman Sachs at its own game.

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Filed under Political Figures

The Washington Wizards Drink Our Milkshake

Tyler Cowen in The American Interest:

[…] All that said, income inequality does matter—for both politics and the economy. To see how, we must distinguish between inequality itself and what causes it. But first let’s review the trends in more detail.

The numbers are clear: Income inequality has been rising in the United States, especially at the very top. The data show a big difference between two quite separate issues, namely income growth at the very top of the distribution and greater inequality throughout the distribution. The first trend is much more pronounced than the second, although the two are often confused.

When it comes to the first trend, the share of pre-tax income earned by the richest 1 percent of earners has increased from about 8 percent in 1974 to more than 18 percent in 2007. Furthermore, the richest 0.01 percent (the 15,000 or so richest families) had a share of less than 1 percent in 1974 but more than 6 percent of national income in 2007. As noted, those figures are from pre-tax income, so don’t look to the George W. Bush tax cuts to explain the pattern. Furthermore, these gains have been sustained and have evolved over many years, rather than coming in one or two small bursts between 1974 and today.1

These numbers have been challenged on the grounds that, since various tax reforms have kicked in, individuals now receive their incomes in different and harder to measure ways, namely through corporate forms, stock options and fringe benefits. Caution is in order, but the overall trend seems robust. Similar broad patterns are indicated by different sources, such as studies of executive compensation. Anecdotal observation suggests extreme and unprecedented returns earned by investment bankers, fired CEOs, J.K. Rowling and Tiger Woods.

At the same time, wage growth for the median earner has slowed since 1973. But that slower wage growth has afflicted large numbers of Americans, and it is conceptually distinct from the higher relative share of top income earners. For instance, if you take the 1979–2005 period, the average incomes of the bottom fifth of households increased only 6 percent while the incomes of the middle quintile rose by 21 percent. That’s a widening of the spread of incomes, but it’s not so drastic compared to the explosive gains at the very top.

The broader change in income distribution, the one occurring beneath the very top earners, can be deconstructed in a manner that makes nearly all of it look harmless. For instance, there is usually greater inequality of income among both older people and the more highly educated, if only because there is more time and more room for fortunes to vary. Since America is becoming both older and more highly educated, our measured income inequality will increase pretty much by demographic fiat. Economist Thomas Lemieux at the University of British Columbia estimates that these demographic effects explain three-quarters of the observed rise in income inequality for men, and even more for women.2

Attacking the problem from a different angle, other economists are challenging whether there is much growth in inequality at all below the super-rich. For instance, real incomes are measured using a common price index, yet poorer people are more likely to shop at discount outlets like Wal-Mart, which have seen big price drops over the past twenty years.3 Once we take this behavior into account, it is unclear whether the real income gaps between the poor and middle class have been widening much at all. Robert J. Gordon, an economist from Northwestern University who is hardly known as a right-wing apologist, wrote in a recent paper that “there was no increase of inequality after 1993 in the bottom 99 percent of the population”, and that whatever overall change there was “can be entirely explained by the behavior of income in the top 1 percent.”4

And so we come again to the gains of the top earners, clearly the big story told by the data. It’s worth noting that over this same period of time, inequality of work hours increased too. The top earners worked a lot more and most other Americans worked somewhat less. That’s another reason why high earners don’t occasion more resentment: Many people understand how hard they have to work to get there. It also seems that most of the income gains of the top earners were related to performance pay—bonuses, in other words—and not wildly out-of-whack yearly salaries.5

It is also the case that any society with a lot of “threshold earners” is likely to experience growing income inequality. A threshold earner is someone who seeks to earn a certain amount of money and no more. If wages go up, that person will respond by seeking less work or by working less hard or less often. That person simply wants to “get by” in terms of absolute earning power in order to experience other gains in the form of leisure—whether spending time with friends and family, walking in the woods and so on. Luck aside, that person’s income will never rise much above the threshold.

It’s not obvious what causes the percentage of threshold earners to rise or fall, but it seems reasonable to suppose that the more single-occupancy households there are, the more threshold earners there will be, since a major incentive for earning money is to use it to take care of other people with whom one lives. For a variety of reasons, single-occupancy households in the United States are at an all-time high. There are also a growing number of late odyssey years graduate students who try to cover their own expenses but otherwise devote their time to study. If the percentage of threshold earners rises for whatever reasons, however, the aggregate gap between them and the more financially ambitious will widen. There is nothing morally or practically wrong with an increase in inequality from a source such as that.


If we are looking for objectionable problems in the top 1 percent of income earners, much of it boils down to finance and activities related to financial markets. And to be sure, the high incomes in finance should give us all pause.

The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices. Most of the time investors will do well by this strategy, since big, unexpected moves are outliers by definition. Traders will earn above-average returns in good times. In bad times they won’t suffer fully when catastrophic returns come in, as sooner or later is bound to happen, because the downside of these bets is partly socialized onto the Treasury, the Federal Reserve and, of course, the taxpayers and the unemployed.

To understand how this strategy works, consider an example from sports betting. The NBA’s Washington Wizards are a perennially hapless team that rarely gets beyond the first round of the playoffs, if they make the playoffs at all. This year the odds of the Wizards winning the NBA title will likely clock in at longer than a hundred to one. I could, as a gambling strategy, bet against the Wizards and other low-quality teams each year. Most years I would earn a decent profit, and it would feel like I was earning money for virtually nothing. The Los Angeles Lakers or Boston Celtics or some other quality team would win the title again and I would collect some surplus from my bets. For many years I would earn excess returns relative to the market as a whole.

Yet such bets are not wise over the long run. Every now and then a surprise team does win the title and in those years I would lose a huge amount of money. Even the Washington Wizards (under their previous name, the Capital Bullets) won the title in 1977–78 despite compiling a so-so 44–38 record during the regular season, by marching through the playoffs in spectacular fashion. So if you bet against unlikely events, most of the time you will look smart and have the money to validate the appearance. Periodically, however, you will look very bad. Does that kind of pattern sound familiar? It happens in finance, too. Betting against a big decline in home prices is analogous to betting against the Wizards. Every now and then such a bet will blow up in your face, though in most years that trading activity will generate above-average profits and big bonuses for the traders and CEOs.

To this mix we can add the fact that many money managers are investing other people’s money. If you plan to stay with an investment bank for ten years or less, most of the people playing this investing strategy will make out very well most of the time. Everyone’s time horizon is a bit limited and you will bring in some nice years of extra returns and reap nice bonuses. And let’s say the whole thing does blow up in your face? What’s the worst that can happen? Your bosses fire you, but you will still have millions in the bank and that MBA from Harvard or Wharton. For the people actually investing the money, there’s barely any downside risk other than having to quit the party early. Furthermore, if everyone else made more or less the same mistake (very surprising major events, such as a busted housing market, affect virtually everybody), you’re hardly disgraced. You might even get rehired at another investment bank, or maybe a hedge fund, within months or even weeks.

Moreover, smart shareholders will acquiesce to or even encourage these gambles. They gain on the upside, while the downside, past the point of bankruptcy, is borne by the firm’s creditors. And will the bondholders object? Well, they might have a difficult time monitoring the internal trading operations of financial institutions. Of course, the firm’s trading book cannot be open to competitors, and that means it cannot be open to bondholders (or even most shareholders) either. So what, exactly, will they have in hand to object to?

Perhaps more important, government bailouts minimize the damage to creditors on the downside. Neither the Treasury nor the Fed allowed creditors to take any losses from the collapse of the major banks during the financial crisis. The U.S. government guaranteed these loans, either explicitly or implicitly.

Guaranteeing the debt also encourages equity holders to take more risk. While current bailouts have not in general maintained equity values, and while share prices have often fallen to near zero following the bust of a major bank, the bailouts still give the bank a lifeline. Instead of the bank being destroyed, sometimes those equity prices do climb back out of the hole. This is true of the major surviving banks in the United States, and even AIG is paying back its bailout. For better or worse, we’re handing out free options on recovery, and that encourages banks to take more risk in the first place.

In short, there is an unholy dynamic of short-term trading and investing, backed up by bailouts and risk reduction from the government and the Federal Reserve. This is not good. “Going short on volatility” is a dangerous strategy from a social point of view. For one thing, in so-called normal times, the finance sector attracts a big chunk of the smartest, most hard-working and most talented individuals. That represents a huge human capital opportunity cost to society and the economy at large. But more immediate and more important, it means that banks take far too many risks and go way out on a limb, often in correlated fashion. When their bets turn sour, as they did in 2007–09, everyone else pays the price.

Ross Douthat:

But it’s interesting to read it in tandem with Cowen’s earlier piece critiquing the “break up the banks” argument advanced by Simon Johnson and James Kwak, and embraced by the progressive left (along with a few libertarians and conservatives). There, Cowen argued that shrinking the banks would treat the symptoms of the bailout culture, rather than the disease:

There’s a different way to think about the bailouts, namely that the U.S. government stands at the center of a giant nexus of money raising, most of all to finance the U.S. government budget deficit and keep the whole show up and running. The perception at least is that our country requires the dollar as a reserve currency, requires New York City as a major banking center with major banks, and requires fully credible governmental guarantees behind every Treasury auction and requires liquid financial markets more generally. Furthermore the international trade presence of the United States (supposedly) requires the federal government to strongly ally with major commercial interests, just as our government sides with Hollywood in trade and intellectual property disputes. To abandon banks is to send a broader message that we are in commercial and political decline and disarray, and that is hardly an acceptable way to proceed, at least not according to the standards of the real Washington consensus.

… This analysis bears on one of the main policy recommendations of Johnson and Kwak, namely to break up the big banks so they cannot soil Washington with such powerful lobbying and privileges. I believe this recommendation will not achieve its stated ends and that Washington would find another way to assemble privileged financial institutions — no matter what their exact form — within its ruling coalition. Breaking up the large banks would be striking at symptoms rather than at root causes, namely the ongoing growth of political power and the reliance of that power upon an ongoing inflow of capital.

If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take. It would mean that our government no longer needs to worry so much about financing its activities.

This, too, seems plausible to me. But what if you wove both a balanced budget and the Johnson-Kwak bank break-up into the same agenda (as, arguably, Tom Coburn tried to do this year), simultaneously downsizing the national debt and downsizing the too-big-to-fail banks that effectively fund it? I understand that this is not the most politically realistic conceit, since it would require some sort of progressive-conservative alliance in the service of policies that (as Cowen notes) most voters reject in favor of the more appealing combination of “high government spending and relatively low taxes.” But it seems like the approach that’s implied by his arguments. And I wonder if it’s better to advance politically unrealistic solutions, in the hopes of making them more realistic, than to give up and accept a system that’s all-too-likely, in Cowen’s words, to “again bring our economy to its knees” as “the price of modern society.”

Will Wilkinson at DiA at The Economist:

I’ve long had the sense that folks in finance are getting spectacularly rich by somehow gaming the system, but the nature of the system is too inscrutable for me to formulate a sufficiently informed hypothesis on my own. But it’s not so inscrutable to Mr Cowen. He offers what sounds to me a quite plausible story about the way the financial-regulatory-political system has been, and continues to be exploited and destabilized. “It’s as if the major banks have tapped a hole in the social till and they are drinking from it with a straw,” Mr Cowen writes. His account of the way strategies of “going short on volatility” both increase inequality and threaten the stability of our entire market system is too detailed to summarise here, but merits close attention. I strongly sense that some story like this one largely explains the top 1%’s dramatic separation from the rest of the income distribution. Here’s Mr Cowen’s bottom line:

For the time being, we need to accept the possibility that the financial sector has learned how to game the American (and UK-based) system of state capitalism. It’s no longer obvious that the system is stable at a macro level, and extreme income inequality at the top has been one result of that imbalance. Income inequality is a symptom, however, rather than a cause of the real problem. The root cause of income inequality, viewed in the most general terms, is extreme human ingenuity, albeit of a perverse kind. That is why it is so hard to control.

Surely there is some kind of structural injustice here. But it’s just terrifically hard to say where precisely it lurks and what ought to be done about it. We can easily treat symptomatic inequality through progressive redistribution, but this won’t cure our deeper institutional malady. The deeper problem is that Wall Street can and continues to drink our milkshake—that there is a draining hole in the social till that has already caused our economy to collapse once—not that the banker’s portions of milkshake are growing faster than ours.

Ryan Avent at DiA at The Economist

Ezra Klein

Mike Konczal at Rortybomb:

Tyler Cowen has written an article for the American Interest titled The Inequality That Matters. It’s about inequality, the financial sector and the possibility of reform. I really enjoyed the essay and recommend you check it out; I’m going to write a few critical comments.

1. The essay doesn’t tackle what I think is, in one sense, the most important question – how much did a broken financial system inflate the housing bubble, especially in the United States?  It’s one thing if the financial sector drinks our milkshake a bit;  it’s another if they are creating bubbles to profit on the way up and on the way down, either by choice or by accident.

The Magnetar Trade (given musical treatment above) is instructive here, where you can take informational asymmetries in the private securitization market combined with opaque pricing of CDS to pump hot money into housing that you profit on if it collapses. The analogy used, a correct one, is to the movie The Producers, but this is at the scale of hundreds of billions of dollars.

Research by Adam Levitin and Susan Wachter in their paper Explaining the Housing Bubble finds that mortgage debt prices were dropping in 2004-2006 as volume was rising, which is consistent with a shift of the supply curve outward.   But this supply was through private mortgage-backed securities which were both difficult to price on fundamentals and difficult to cross-compare to other instruments;  the private-financial market for these MBS are thus created as complex, heterogeneity and without regulatory standards.  So it’s not just that finance sits at the center of some profitable things;  it reorganizes the space to its own advantage, and the disadvantage of all other players.

2. The essay talks about how the financial sector goes “short on volatility”, which is a bet that things won’t go crazy in the short term, or a bet that takes on tail risk.  As Kevin Drum mentions someone is on the other side of that bet.  And what do we call a product that pays out in times of high volatility, in times when an event out of the ordinary happens?  One thing to call it is “insurance.”

Speaking at a conceptual level, I think it is fair to say that we regulate the #$@% out of people who hang the sign “insurance” on their door, and do not for those, like AIG did, that provide insurance without hanging the sign. As a result actual insurance agents who hang the sign are kind of how we idealize the boring bankers of times gone past.

There’s good reason we regulate insurance – it needs to pay out exactly at the moment when it is the least likely to get paid. I wrote a post for the Atlantic Business section that asked how should you think of zombie insurance? How would you price a contract that paid $100 if the world turned into The Walking Dead, where cities were overrun with armies of zombies?

The short answer is that you wouldn’t pay anything, since when you need to collect it the person on the other end is probably a zombie. This “who can credibly commit to backstopping bad events” goes towards a notion of the role the government can play in financial markets.

Kevin Drum:

Tyler Cowen has a big piece about income inequality in The American Interest that’s well worth reading. However, it’s not really about the growth of inequality. It’s about Wall Street. In particular, it’s about this question: why do financial professionals make so damn much money?

The answer, of course, is that they work in an industry that’s become ungodly profitable. But how? Tyler attributes it to the practice of “going short on volatility.” That is, modern finance professionals mostly gamble that what happened in the past will keep happening in the future, and disasters will never happen. In most years this makes them a lot of money (because, in fact, disasters rarely happen).

But this is mysterious. After all, not everyone is going short on volatility. In fact, by definition, only half of the punters on Wall Street are doing it. The other half are taking the other side of the bet. Tyler explains this with an analogy to a bet that the Washington Wizards, one of the worst teams in basketball, won’t win the NBA championship. If you make that bet year after year, you’ll keep making money year after year.

This is a useful analogy precisely because it wouldn’t work. After all, to make that bet, you have to find someone willing to take the other side and bet that disaster will strike and the Wizards will win. But they know just how unlikely that is, so they’re going to require very long odds. On a hundred dollar bet, they’ll want $100 if they win but will only be willing to pay off one dollar if you win. That won’t make you rich.

So how can you make money doing this? Answer: find someone who doesn’t know much about basketball and pays off two dollars on this bet instead of one. Additionally, you need to borrow money so you can make lots of bets. So instead of placing a $100 bet and making a dollar, you borrow a million dollars, make lots of bets on lots of teams, and make $20,000. It’s the road to riches.

The questions this raises should be obvious. First, why would anyone be dumb enough to offer you such mistaken odds? Second, shouldn’t the interest on the loan wipe out the profit from such a tiny betting margin? Third, why would anyone loan you this money in the first place, knowing that you have no chance of paying it back if disaster strikes, one of your teams wins, and you lose your entire stake?

As near as I can tell, the answer to #1 is that Wall Street traders are bad at pricing tail risk. The answer to #2 is that Wall Street hedge funds, using techniques pioneered in the mid-90s by Long Term Capital Management, have figured out ways to borrow large sums of money at virtually no cost. And the answer to #3 is that Wall Street lenders are also bad at pricing tail risk.

Or are they? Tyler argues that, in fact, both sides are betting that as long as everyone is doing this, the occasional disasters will be so epically disastrous that central banks will bail them out. They have no choice, after all, if the alternative is the destruction of the global economic system. So the tail risk is smaller than you think. Borrowers will make money in good years and default in bad years. Lenders, meanwhile, will also make money in good years, secure in the knowledge that on the rare occasions when everything goes pear shaped and borrowers can’t pay back their loans, the government will make them whole. As Tyler reminds us, “Neither the Treasury nor the Fed allowed creditors to take any losses from the collapse of the major banks during the financial crisis.”

But I don’t find this persuasive as a behavioral explanation. The problem is that there’s simply no evidence I’m aware of that Wall Street executives ever thought about this or priced it into their models. Sure, they may have been reckless or stupid. However, they weren’t setting prices for financial instruments based on the idea that, yes, they were taking a genuine risk of going bust, but they could price that away because they’d get bailed out by Uncle Sugar when it happened. Rather, they really, truly, believed that they weren’t exposed to very much risk. As near as I can tell, this was true on both the buy side and the sell side.

Tim F. answers Kevin:

To answer Kevin, finance is incredibly profitable because the finance sector has a greater information asymmetry between buyers and the sellers than almost any other sector on Earth. Even today most customers more or less take it on faith that the people selling them financial instruments are dealing on good faith. They do it because from FDR until the 70’s or so that was true. Financial instruments were less complicated and oversight was much stronger. That is to say that it was harder to cheat and more cheaters got caught. They also do it because they have to; if you don’t want to take your bank’s word for it then you can either keep a lawyer on retainer, or else live in a cave on public land. Too bad for us that assumption is no longer remotely true. Computers became a commodity and investors started making more bets on other people’s bets. That is to say, cheating got a lot easier because most people could no longer understand what their banks were up to. At the same time deregulation made it that much harder to catch cheaters and also opened vast new opportunities for semi-legal schemes as well as the nakedly illegal kind.

The lack of any real risk premium (after all, we’re all hostages if they fail) certainly pads the bottom line, but the meat and potatoes for Goldman and BofA is the vast gulf between how well they understand what they’re doing versus how well their customers understand it. They don’t even need to understand their own business that well. The sizable fortune that they made and kept over mortgage derivatives just emphasizes how important it is to know more than your customers, who largely had no idea about the flyblown shit that Goldman and company shoveled into each AAA-rated MBS.

These days Goldman has a supercomputer that sits on the main trading network and jumps everyone else’s bid by milliseconds. Nobody seems to care. If that isn’t a straw comfortably stuck in the social till then I don’t know what is.

Matthew Yglesias

James Joyner

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What DREAMs May Come

John Hudson at The Atlantic with a round-up. Hudson:

In conservative blogging circles, the Democrat’s proposed DREAM Act is causing quite a stir.

Heather MacDonald at The Corner:

An illegal alien who brings his or her child into the country illegally undoubtedly assumes that that child will attend American schools at taxpayer expense.  The parent may also hope that the child will graduate from high school and go on to college. The DREAM Act, newly reintroduced by Sen. Harry Reid to the lame-duck session, puts the official imprimatur on those unofficial intentions, declaring that the U.S. expects and even welcomes such behavior.

Under the DREAM Act, any illegal alien under the age of 35 who entered the country before the age of 16 can apply for legal status if he obtains a GED or graduates from high school and begins post-secondary education. Gang members and those with DUI convictions are not barred from DREAM Act eligibility. The act signals to prospective illegal aliens the world over that if they can just get their child across the border illegally, they have put him on the path towards U.S. citizenship — and, as significant, the child will then be able to apply for legal status for his parents and siblings. And every such student will be granted in-state tuition rates by federal fiat, even if the state in which he resides bans in-state tuition for illegal immigrants.

DREAM Act beneficiaries are certainly the most sympathetic category of amnesty candidates, and opponents of the act have been accused of hard-heartedness. Yet the act indisputably encourages and incentivizes more illegal behavior. It continues to send the message that the U.S. is not serious about its immigration laws, but will always eventually confer the same benefits on people who break the law entering the country as on those immigrants who respected American law. The huge administrative costs of the act — it is conservatively expected to qualify 2.1 million illegal aliens for amnesty — will be borne by U.S. taxpayers and by legal aliens, whose fees fund the citizenship service

Will Wilkinson at Democracy in America at The Economist:

I think it’s useful in this debate to be as clear we can be. We’re mostly talking about Mexicans, so let’s just talk about Mexicans. Lots and lots and lots of Mexicans come across the border to the United States not because they’re a nation of heedless antinomians, but because this is (was?) where the work is. Many come because much of their their family resides here, legally or ilegally. It’s worth noting that the southwestern portion of the United States just was Mexico, once upon a time. There is an undeniable economic and cultural continuity between Mexico and the United States. The border distorts and disrupts it, but it cannot and will never put an end to it. The pattern of traffic between these two countries is not something to choke off, but something sensibly to regulate and rationalise.

“But we do regulate it sensibly!” you may insist. Well, suppose you’re a hardworking and ambitious Mexican with no family legally in the States and not much education, but you’ve got friends there, 50 miles away, and they tell you they’re getting steady, relatively well-paying work. One of the things that’s so attractive to you about America is it’s sound institutions, including its sturdy rule of law. You would very much like to migrate to the United States legally. So what are your options? Zip. Zilch. Zero. You have no options!  There is no way to “get in line” and “wait your turn” because there is no line for you to stand in that leads to the legal right to live and work in the United States. So you pack up one day, take a hair-raising hike through the desert with your young daughter, meet up with your friends in Tucson, and get to work on the American dream. What were you supposed to do? Consign yourself and your daughter to a life on the edge of poverty out of respect for the American rule of law? Please.

The DREAM Act sends the message that although American immigration law in effect tries to make water run uphill, we are not monsters. It says that we will not hobble the prospects of young people raised and schooled in America just because we were so perverse to demand that their parents wait in a line before a door that never opens. It signals that we were once a nation of immigrants, and even if we have become too fearful and small to properly honour that noble legacy, America in some small way remains a land of opportunity.

Yes, the DREAM Act also incentivises illegal activity. But if the activity is not one that ought to be illegal, perhaps we should consider changing the law? Something to consider, anyway. In the meantime, this small reform will make America a somewhat more decent place.

David Frum at The Week:

Well that seems compassionate! And it’s only a small group of people we’re talking about, right? Just 60,000 a year.

Wrong. Hugely wrong.

Let me give some alternative scenarios, all of which would become possible if the DREAM Act were enacted.

Possibility No. 1: You are an illegal alien who entered the country at age 21, too old to qualify for DREAM. You’ve been apprehended and are threatened with deportation. What to do? Simple — using falsified papers, you file an application under DREAM anyway. Filing an application immediately halts deportation proceedings.

Wait a minute, you wonder: won’t using false papers get me in trouble? Not a bit. Just the opposite. Even if the fraud is detected and your application is refused, you simply revert to your previous status. In the process, however, you have gained a new legal advantage: DREAM forbids the Department of Homeland Security from using any information in a DREAM application in deportation proceedings. So now you argue that the deportation proceedings are fatally tainted because you have yourself provided DHS with information that they could now use against you.

The ploy might fail. Still: what a great no-risk option!

Possibility No. 2:. You’re a 40-year-old illegal alien who entered the country as an adult. You have a third-grade education. You are barely literate even in Spanish. Your back is bothering you; you are not sure how long you can continue working. Quite frankly, no country on earth would regard you as a desirable immigrant. Don’t despair. DREAM can offer you too an amnesty and gain you access to a lifetime of taxpayer-funded disability payments.

You have kids don’t you? If they apply successfully under DREAM, they can sponsor you. While some talk about DREAM applicants as “skilled” immigrants, in fact the law’s requirements are so lenient that your kids would have to mess up very seriously to forfeit the law’s benefits. All they need to do is enroll in some institution of higher learning or the military and survive there for two years. Graduation is not required.

Does that sound expensive? Don’t worry: your kids will receive in-state tuition rates and will be eligible for federal student aid.

They’re too young for university? Don’t worry: They can file the papers at age 12. As soon as they give notice of their future intent to attend to college or join the military, they immediately receive safe haven.

They don’t find military life attractive? If they can show “significant hardship,” they can quit before their two years have been fulfilled. Honorable discharge is NOT a requirement under the DREAM law.

They have had a little trouble with the law? Maybe a history of moving violations that put people’s lives at risk? So long as they have not been convicted of a serious crime, they’re okay.

DREAM is an amnesty not only for the people described by The Economist blogger, but also for all their parents and siblings.

Possibility No. 3. I’m still living in Guatemala, but I’d dearly like to come to the United States. Can DREAM help me?

Si se puede.

DREAM sends a message to every teenager on planet Earth: Come to America. If you enter the United States before age 16, and if you can remain here for five years (or can buy papers that purport to show you have lived here for five years), you’re as good as a citizen already. No deportation proceedings. No risk that your application will be used against you. Lenient and subsidized requirements for permanent residency. What’s not to love?

Wilkinson responds:

First, it’s not quite right to think of DREAM, a narrowly tailored provision that offers a relatively small group of young people a path to citizenship only if they are able to clear a number or hurdles, as an “amnesty”. Second, the process by which our notional 40-year-old undocumented immigrant can become a citizen is precisely the same as the process by which Mr Frum’s Canadian father could become a citizen through Mr Frum’s sponsorship. It’s not amnesty, and Mr Frum is simply goading the nativist rabble by choosing to misuse language in this way. Moreover, Mr Frum effectively misrepresents his scenario by conveniently omitting the dispiritng timeline. Let’s fix that.So, you’re Mr Frum’s 40-year-old undocumented immigrant. DREAM, which requires you to be between 12 and 35 at the time of application, does nothing for you, even if you did come into the country as a child. But you have a daughter who does qualifies. Woohoo! You’re in like Flynn, right? Well, no. Probably not.

Suppose DREAM becomes law in 2011. Your kid applies right away and earns status as a “conditional legal resident” (or “CLR”). Now, can you your kid sponsor you for legal permanent residency? No, she cannot. Only citizens can sponsor their parents. Suppose your kid goes to college and stays out of trouble. The earliest she can apply to become an “LPR” or “legal permanent resident” (ie, get a green card) is 5 1/2 years after approval for conditional permament residency. That’s some time in 2016 at the earliest. Now, a green card-holder can apply for citizenship after five years. Under DREAM, as I understand it, once a CLR is approved for a green card, the time spent as a CLR counts toward citizenship. So someone approved for a green card under the auspices of DREAM ought to be able to apply for citizenship right away. Let’s assume miracles from the bureaucracy and say all these applications are processed and approved at the speed of light. So, thanks to DREAM, your daughter will be a citizen no sooner than 2016, at which point she can finally sponsor you (as long as she’s over the age of 21). But don’t get excited yet! You entered the country illegally, and were working illegally before applying for a green card, and that means you aren’t eligible for a green card. ( See question 10 here.) So, sorry, DREAM can’t help you.

Suppose you entered the United States legally on a visa and then left your minor daughter here once your visa expired, or something like that. In that case, she could sponsor you for permanent residency after qualifying for citizenship through DREAM. In this case, you could be an American as soon as 2021, assuming magical bureaucratic efficiency. Of course, among those young people able to work their way to citizenship through DREAM, how many will have parents who qualify for sponsorship? Not many.

Mr Frum ends by spreading a falsehood. He writes:

And best of all: DREAM stands as an ongoing invitation, forever and ever. DREAM’s benefits extend not only to people who happen NOW to be illegally present inside the United States. DREAM’s benefits will be extended to all those who may enter illegally in future.

This is flat-out wrong. Unfortunately, DREAM is a niggardly, one-time affair. According to the text of the bill, DREAM applies only if “the alien has been physically present in the United States for a continuous period of not less than 5 years immediately preceding the date of enactment of this Act…” That is to say, DREAM wouldn’t apply to kids who came to America three years ago, much less to any kids who comes in the future. Mr Frum is sowing confusion when he says that

DREAM sends a message to every teenager on planet Earth: Come to America. If you enter the United States before age 16, and if you can remain here for five years (or can buy papers that purport to show you have lived here for five years), you’re as good as a citizen already.

Were Mr Frum to read the bill, he would see that he has made a serious error. DREAM is a stopgap measure of exceedingly limited scope which would slightly mitigate the injustices wrought by America’s reality-defying immigration and citizenship law. I look forward to his correction.

David Frum here, here and here. Frum:

I’ll answer Will Wilkinson’s specific points, but I first have to say this: Wilkinson’s mode of arguing exemplifies why the immigration debate doesn’t ever seem to go anywhere.

Advocates of more and more immigration habitually use a 4-stage method best identified by Antony Jay and Jonathan Lynn in the Yes Minister series. The stages go as follows:

1) Nothing is going to happen.

2) Something may be about to happen, but we should do nothing about it.

3) Maybe we should do something about it, but there’s nothing we *can* do.

4) Maybe there was something we could have done, but it’s too late now.

Immigration proponents are so convinced that more immigration is good in itself that they do not always worry as much as they should about the way in which they achieve their aims. They sell huge society-changing transformations as small incremental steps.

When the sales pitch proves wrong or hugely exaggerated, they seem untroubled. Wilkinson’s own blitheness perfectly exemplifies the pattern. Running through his first post is a persistent undertone that the very idea of immigration laws is a big mistake. “Yes, the DREAM Act also incentivises illegal activity. But if the activity is not one that ought to be illegal, perhaps we should consider changing the law?”

Then when I point out the various ways in which this incentive operates, he squawks that the law in fact is “narrowly tailored” and applies only to “a relatively small group.”

Is it too Freudian to suspect that the lurid accusation of deceit repeatedly lodged by Will Wilkinson reveal an awareness of the credibility problems on his side of the argument?

Adam Ozimek at Modeled Behavior

Mark Krikorian at The Corner:

The Democrats are trying to tinker with the DREAM Act to make it more palatable. Most notably, they’ve lowered the top age for eligibility from 35 to 30, but that misses the point. As I note in my piece on the homepage, what’s important is the age when they arrived, not how old they are now — someone who’s lived here continuously since they were 12 months old is simply not in the same boat as someone who arrived a month before their 16th birthday and is now 21, but DREAM treats them the same.

And I didn’t even address the cost issue, about which my colleague Steven Camarota writes today. He estimates that the bill’s college-attendance requirements will cost U.S. taxpayers $6.2 billion in subsidies for educating the illegal aliens who are expected to enroll to get a green card. And the roughly 1 million additional illegal-alien students at state universities and community colleges will reduce the educational opportunities that would otherwise have been available to Americans.

Jena McNeill at Heritage:

There is a big reason why the DREAM Act was a campaign promise for Reid, the same reason the White House recently hosted high-level meetings with members of the Hispanic caucus regarding the bill and has expressed so much interest in passing it: The act would be an amnesty for millions of illegal aliens inside the United States. This is something the White House and Reid have been desperately seeking through a comprehensive immigration bill, but has yet to gain traction in Congress.

Amnesty has never been a good way to solve the illegal immigration problem—whether through the DREAM Act or a mass legalization. As we learned in the 1986 amnesty, doing so simply encourages more individuals to break the law and enter the United States illegally. Among several other concerns, the DREAM Act rewards those who violated immigration laws by granting them in-state tuition while state laws deny legal aliens on student visas tuition benefits. The act’s lax standards would make it tough to police for fraudulent applicants, while the government would be prohibited using information submitted to deport anyone who files a DREAM Act application and does not qualify.

If Reid moves forward, the DREAM Act debate will almost certainly be filled with nice anecdotes about college education, military service, and additional tax revenues. Don’t be misled. Despite these seemingly humanitarian aims, the White House and Reid know what the DREAM Act debate it really about—finding a way to avoid the law and legalize illegal immigrants inside the United States. Packing amnesty in pretty paper doesn’t mean it isn’t still an amnesty. Congress and the White House need to focus instead on reforms to the immigration system that will enforce the law, maintain security, and promote the economy. Such a system requires robust enforcement of immigration laws inside the U.S., a secure border, reforms in the visa system, and cooperation with Mexico and other appropriate countries on law enforcement/public safety issues as well as free market initiatives.

David Knowles at AOL:

The Dream Act, legislation designed to give children of undocumented workers who came to the United States under the age 16 a path to citizenship in exchange for a promise to attend college or join the military, will be debated in Congress today.

Alabama Republican Sen. Jeff Sessions, a staunch opponent of the Dream Act, penned an op-ed for CNN in which he stated the following:

Because the Dream Act does not expire, or impose any numerical cap, the scope of the bill’s amnesty program could be enormous. And by rewarding illegality, the legislation will incentivize even more of it — and send the message that future illegal immigrants will be rewarded with amnesty as well.

Meanwhile, one of the bill’s sponsors, Sen. Dick Durbin, D-Ill., pointed out that punishing the children of illegal immigrants who have grown up as Americans is itself un-American.

These brave young men and women, who have all this energy and all this dedication, have no country. They have no legal status in this country. They didn’t have any voice in that decision about whether to come here. They were the kids brought in the back of a car or the back of a truck into the United States. But they grew up here believing America was home.

Gary Locke, President Barack Obama’s commerce secretary, agrees with Durbin, telling reporters:

The American taxpayer has invested in them, and unless we pass the Dream Act, we will keep throwing away this hard-earned investment. Also, a quarter of startup companies that eventually went public in the past 15 years were started by immigrants, he said, meaning some of these students could “develop the next Google or Intel.

The conservative Heritage Foundation, on the other hand, sees little to like about the proposed legislation:

Among several other concerns, the Dream Act rewards those who violated immigration laws by granting them in-state tuition while state laws deny legal aliens on student visas tuition benefits. The act’s lax standards would make it tough to police for fraudulent applicants, while the government would be prohibited using information submitted to deport anyone who files a Dream Act application and does not qualify.


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Filed under Immigration, Legislation Pending

Liberaltarians Are So 2006

Will Wilkinson:

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

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

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

Via the Kauffman Foundation

Brink Lindsey Joins Kauffman Foundation as Senior Scholar

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

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

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

David Weigel:

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

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

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

Ilya Somin:

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

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

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

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

Daniel Foster at The Corner:

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

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

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

Matt Welch at Reason

Alex Pareene at Gawker:

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

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

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

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

Steve Benen:

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

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

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

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

John Quiggin:

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

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

Chris Bodenner at Sully’s place:

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

UPDATE: Heather Hurlburt and Daniel Drezner at Bloggingheads

Arnold Kling

Tim Carney at The Washington Examiner

Tim Lee here and here

James Poulos at Ricochet on Lee

UPDATE #3: David Frum at FrumForum

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“Don’t Trust One-Offs”

Jim Manzi in City Journal:


Another way of putting the problem is that we have no reliable way to measure counterfactuals—that is, to know what would have happened had we not executed some policy—because so many other factors influence the outcome. This seemingly narrow problem is central to our continuing inability to transform social sciences into actual sciences. Unlike physics or biology, the social sciences have not demonstrated the capacity to produce a substantial body of useful, nonobvious, and reliable predictive rules about what they study—that is, human social behavior, including the impact of proposed government programs.

The missing ingredient is controlled experimentation, which is what allows science positively to settle certain kinds of debates. How do we know that our physical theories concerning the wing are true? In the end, not because of equations on blackboards or compelling speeches by famous physicists but because airplanes stay up. Social scientists may make claims as fascinating and counterintuitive as the proposition that a heavy piece of machinery can fly, but these claims are frequently untested by experiment, which means that debates like the one in 2009 will never be settled. For decades to come, we will continue to be lectured by what are, in effect, Keynesian and non-Keynesian economists.

Over many decades, social science has groped toward the goal of applying the experimental method to evaluate its theories for social improvement. Recent developments have made this much more practical, and the experimental revolution is finally reaching social science. The most fundamental lesson that emerges from such experimentation to date is that our scientific ignorance of the human condition remains profound. Despite confidently asserted empirical analysis, persuasive rhetoric, and claims to expertise, very few social-program interventions can be shown in controlled experiments to create real improvement in outcomes of interest.


After reviewing experiments not just in criminology but also in welfare-program design, education, and other fields, I propose that three lessons emerge consistently from them.

First, few programs can be shown to work in properly randomized and replicated trials. Despite complex and impressive-sounding empirical arguments by advocates and analysts, we should be very skeptical of claims for the effectiveness of new, counterintuitive programs and policies, and we should be reluctant to trump the trial-and-error process of social evolution in matters of economics or social policy.

Second, within this universe of programs that are far more likely to fail than succeed, programs that try to change people are even more likely to fail than those that try to change incentives. A litany of program ideas designed to push welfare recipients into the workforce failed when tested in those randomized experiments of the welfare-reform era; only adding mandatory work requirements succeeded in moving people from welfare to work in a humane fashion. And mandatory work-requirement programs that emphasize just getting a job are far more effective than those that emphasize skills-building. Similarly, the list of failed attempts to change people to make them less likely to commit crimes is almost endless—prisoner counseling, transitional aid to prisoners, intensive probation, juvenile boot camps—but the only program concept that tentatively demonstrated reductions in crime rates in replicated RFTs was nuisance abatement, which changes the environment in which criminals operate. (This isn’t to say that direct behavior-improvement programs can never work; one well-known program that sends nurses to visit new or expectant mothers seems to have succeeded in improving various social outcomes in replicated independent RFTs.)

And third, there is no magic. Those rare programs that do work usually lead to improvements that are quite modest, compared with the size of the problems they are meant to address or the dreams of advocates.

Razib Khan at Discover Magazine:

A friend once observed that you can’t have engineering without science, making the whole concept of “social engineering” somewhat farcical. Jim Manzi has an article in City Journal which reviews the checkered history of scientific methods as applied to humanity, What Social Science Does—and Doesn’t—Know: Our scientific ignorance of the human condition remains profound.

The criticisms of a scientific program as applied to humanity are deep, and two pronged. As Manzi notes the “causal density” of human phenomena make teasing causation from correlation very difficult. Additionally, the large scale and humanistic nature of social phenomena make them ethically and practically impossible to apply methods of scientific experimentation. This is why social scientists look for “natural experiments,” or involve extrapolation from “WEIRD” subject pools. But as Manzi notes many of the correlations themselves are highly context sensitive and not amenable to replication.

Arnold Kling:

If David Brooks is going to give out his annual awards for most important essays, I would nominate this one.

One of the lessons that is implicit in the essay (and that I think that Manzi ought to make explicit) is, “Don’t trust one-offs.” That is, do not draw strong conclusions based on a single experiment, no matter how well constructed. Instead, wait until many experiments have been conducted, in a variety of settings and using a variety of techniques. An example of a one-off that generated a lot of recent excitement is the $320,000 kindergarten teacher study.

Mark Kleiman:

I’m sorry, but this is incoherent. What is this magical “trial-and-error process” that does what scientific inquiry can’t do? On what basis are we to determine whether a given trial led to successful or unsuccessful results? Uncontrolled before-and-after analysis, with its vulnerability to regression toward the mean? And where is the mystical “social evolution” that somehow leads fit policies to survive while killing off the unfit?

Without any social-scientific basis at all (unless you count Gary Becker’s speculations) we managed to expand incarceration by 500 percent between 1975 and the present. Is that fact – the resultant of a complicated interplay of political, bureaucratic, and professional forces – to be accepted as evidence that mass incarceration is a good policy, and the “counter-intuitive” finding that, past a given point, expanding incarceration tends, on balance, to increase crime be ignored because it’s merely social science? Should the widespread belief, implemented in policy, that only formal treatment cures substance abuse cause us to ignore the evidence to the contrary provided by both naturalistic studies and the finding of the HOPE randomized controlled trial that consistent sanctions can reliably extinguish drug-using behavior even among chronic criminally-active substance abusers?

For some reason he doesn’t specify, Manzi regards negative trial results as dispositive evidence that social innovators are silly people who don’t understand “causal density.” So he accepts – as well he should – the “counter-intuitive” result that juvenile boot camps were a bad idea. But why are those negative results so much more impressive than the finding that raising offenders’ reading scores tends to reduce their future criminality?

Surely Manzi is right to call for metholological humility and catholicism; social knowledge does not begin and end with regressions and controlled trials. But the notion that prejudices embedded in policies reflect some sort of evolutionary result, and therefore deserve our respect when they conflict with the results of careful study, really can’t be taken seriously.

Manzi responds at The American Scene:

This leads Kleiman to ask:

What is this magical “trial-and-error process” that does what scientific inquiry can’t do? On what basis are we to determine whether a given trial led to successful or unsuccessful results? Uncontrolled before-and-after analysis, with its vulnerability to regression toward the mean? And where is the mystical “social evolution” that somehow leads fit policies to survive while killing off the unfit?

I devoted a lot of time to this related group of questions in the forthcoming book. The shortest answer is that social evolution does not allow us to draw rational conclusions with scientific provenance about the effectiveness of various interventions, for methodological reasons including those that Kleiman cites. Social evolution merely renders (metaphorical) judgments about packages of policy decisions as embedded in actual institutions. This process is glacial, statistical and crude, and we live in the midst of an evolutionary stream that we don’t comprehend. But recognition of ignorance is superior to the unfounded assertion of scientific knowledge.

Kleiman then goes on to ask this:

Without any social-scientific basis at all (unless you count Gary Becker’s speculations) we managed to expand incarceration by 500 percent between 1975 and the present. Is that fact – the resultant of a complicated interplay of political, bureaucratic, and professional forces – to be accepted as evidence that mass incarceration is a good policy, and the “counter-intuitive” finding that, past a given point, expanding incarceration tends, on balance, to increase crime be ignored because it’s merely social science?

My answer is yes, it should be counted as evidence, but that it is not close to dispositive. We can not glibly conclude that we now live in the best of all possible worlds. I devoted several chapters to trying to lay out some principles for evaluating when, why and how we should consider, initiate and retrospectively evaluate reforms to our social institutions.

Kleiman’s last question is:

Should the widespread belief, implemented in policy, that only formal treatment cures substance abuse cause us to ignore the evidence to the contrary provided by both naturalistic studies and the finding of the HOPE RCT that consistent sanctions can reliably extinguish drug-using behavior even among chronic criminally-active substance abusers?

My answer to this is no, and a large fraction of the article (and the book) is devoted to making the case that exactly such randomized trials really are the gold standard for the kind of knowledge that is required to make reliable, non-obvious predictions that rationally outweigh settled practice and even common sense. The major caveat to the evaluation of this specific program (about which Kleiman is deeply expert) is whether or not the experiment has been replicated, as I also make the argument that replication is essential to drawing valid conclusions from such experiments – the principle that Arnold Kling called in a review of the article, “Don’t trust one-offs.”

Steven Pearlstein at WaPo

Steve Sailer:

That all sounds plausible, but I’ve been a social science stats geek since 1972, when the high school debate topic that year was education, so I’m aware that Manzi’s implications are misleading.

First, while experiments are great, correlation studies of naturally occurring data can be extremely useful. Second, a huge number of experiments have been done in the social sciences.

Third, the social sciences have come up with a vast amount of knowledge that is useful, reliable, and nonobvious, at least to our elites.

For example, a few years, Mayor Bloomberg and NYC schools supremo Joel Klein decided to fix the ramshackle admissions process to the gifted schools by imposing a standardized test on all applicants. Blogger Half Sigma immediately predicted that the percentage of Asians and whites admitted would rise at the expense of blacks and Hispanics, which would cause a sizable unexpected political problem for Bloomberg and Klein. All that has come to pass.

This inevitable outcome should have been obvious to Bloomberg and Klein from a century of social science data accumulation, but it clearly was not obvious to them.

No, the biggest problem with social science research is not methodological; it’s that we just don’t like the findings. The elites of America don’t like what the social sciences have uncovered about, say, crime, education, discrimination, immigration, and so forth.

Andrew Sullivan:

But there is a concept in this crucial conservative distinction between theoretical and practical wisdom that has been missing so far: individual judgment. A social change can never be proven in advance to be the right answer to a pressing problem. We can try to understand previous examples; we can examine large randomized trials; but in the end, we have to make a judgment about the timeliness and effectiveness of certain changes. It is the ability to sense when such a moment is ripe that we used to call statesmanship. It is that quality that no wonkery can ever replace.

It is why we elect people and not algorithms.

Will Wilkinson:

In my thinking about the contrasts between Rawlsian and Hayekian liberalism, I’ve begun to think about the former as the “liberalism of respect” and the latter as the “liberalism of discovery.” The liberalism of discovery recognizes the pervasiveness of our ignorance and the necessity of liberty for the emergence of useful knowledge. I would argue that the ideal of a social order embodying respect for persons as free and equal–the ideal of the liberalism of respect–comes to seem appealing only after a society has attained a certain level of economic development and general education, and these are largely consequences of a prior history of the relatively free play of the mechanisms of discovery celebrated by liberals like Hayek and Jim. But liberals of respect have tended to overlook the conditions under which people come to find the their favored ideal worth aspiring to, and so have tended to fail to acknowledge in their theories of justice the role of the institutions of discovery in creating and maintaining a society of mutual respect and fair reciprocity.

Via Sullivan, Kleiman responds to Manzi:

I suppose I’ll have to read Manzi’s book to find out how existing practices constitute “(metaphorical) judgments about packages of policy decisions;” I’m inclined to regard them as mostly mere resultants-of-forces, with little claim to deference. (Thinking that existing arrangements somehow embody tacit knowledge is a different matter from thinking that big changes are likely to have unexpected consequences, mostly bad, though both are arguments for caution about grand projects.)

I’m also less unimpressed than Manzi is with how much non-obvious stuff about humans living together the social sciences have already taught us. That supply and demand will, without regulation, come into equilibrium at some price was a dazzling and radical social-scientific claim when Adam Smith and his friends suggested it. So too for Ricardo’s analysis of comparative advantage, which, while it doesn’t fully support the free-trade religion that has grown up around it, at least creates a reasonable presumption that trade is welfare-increasing.

The superiority of reward to punishment in changing behavior; the importance of cognitive-dissonance and mean-regression effects in (mis)shaping individual and social judgments; the intractable problem of public-goods contributions; the importance of social capital; the problems created by asymmetric information and the signaling processes it supports; the crucial importance of focal points; the distinction between positive-feedback and negative-feedback processes; the distinction between zero-sum and variable-sum games; the pervasiveness of imperfect rationality in the treatment of risk and of time-value, and the consequent possibility that people will, indeed, damage themselves voluntarily: none of these was obvious when proposed, and all of them are now, I claim, sufficiently well-established to allow us to make policy choices based on them, with some confidence about likely results. (So, for that matter, is the Keynesian analysis of insufficient demand and what to do about it.)

But, if I read Manzi’s response correctly, my original comment allowed a merely verbal disagreement to exaggerate the extent of the underlying substantive disagreement. If indeed Manzi can offer some systematic analysis of how to look at existing institutions, figure out which ones might profitably be changed, try out a range of plausible changes, gather careful evidence about the results of those changes, and modify further in light of those results, then Manzi proposes what I would call a “scientific” approach to making public policy.

Manzi responds to Kleiman:

I think that he is reading my response correctly. While I don’t think that “all I meant” was that “you shouldn’t read some random paper in an economics or social-pysch journal” and propose X, I certainly believe that. Most important, I acknowledge enthusiastically his “sauce for the goose is sauce for the gander” point that the recognition of our ignorance should apply to things that I theorize are good ideas, as much as it does to anything else. The law of unintended consequences does not only apply to Democratic proposals.

In fact, I have argued for supporting charter schools instead of school vouchers for exactly this reason. Even if one has the theory (as I do) that we ought to have a much more deregulated market for education, I more strongly hold the view that it is extremely difficult to predict the impacts of such drastic change, and that we should go one step at a time (even if on an experimental basis we are also testing more radical reforms at very small scale). I go into this in detail for the cases of school choice and social security privatization in the book.

Megan McArdle:

I have been reading with great interest the back-and-forth between Mark Kleiman and Jim Manzi on how much more humble we ought to be about new policy changes.  I know and like both men personally, as well as having a healthy respect for two formidable intellects, so I’ve greatly enjoyed the exchange.

Naturally, this has put me in mind of just how hard it is to predict policy outcomes–how easy it is to settle on some intuitively plausible outcome, without considering some harder-to-imagine countervailing force.

Consider the supply-siders.  The thing is intuitively appealling; when we get more money from working, we ought to be willing to.  And it is a mathematical truism that revenue must maximize at some point.  Why couldn’t we be on the right-hand side of the Laffer Curve?

It was entirely possible that we were; unfortunately, it wasn’t true.  And one of the reasons that supply-siders failed was that they were captivated by that one appealing intuition.  In economics, it’s known as the “substitution effect”–as your wages go up, leisure becomes relatively more expensive relative to work, so you tend to do less of the former, more of the latter.

Unfortunately, the supply-siders missed another important effect, known as the “income effect”.  Which is to say that as you get richer, you demand more of some goods, and less of others.  And one of the goods you demand more of as you get richer–a class of goods known as “superior goods”–is leisure.

Of course, some people are so driven that they will simply work until they drop in the traces.  But most people like leisure.  So say you raise the average wage by 10%.  Suddenly people are bringing home 10% more income every hour.  Now, maybe this makes them all excited so they decide to work more.  On the other hand, maybe they decide they were happy at their old income, and now they can enjoy their old income while working 9% fewer hours.  Cutting taxes could actually reduce total output.

(We will not go into the question of how much most people can control their hours–on the one hand, most people can’t, very well, but on the other hand, those who can tend to be the high-earning types who pay most of your taxes.)

Which happens depends on which effect is stronger.  In practice, apparently neither was strong enough to thoroughly dominate, at least not when combined with employers who still demanded 40 hour weeks.  You do probably get a modest boost to GDP from tax cuts.  But you also get falling tax revenue.

Naturally, even-handedness demands that I here expose the wrong-headedness of some liberal scheme.  And as it happens, I have one all ready in the oven here:  the chimera of reducing emergency room use.  The argument that health care reform could somehow at least partially pay for itself by keeping people from using the emergency room was always dubious.  As I, and others argued, there’s not actually that much evidence that people use the emergency room because they are uninsured–rather than because they have to work during normal business hours, are poor planners, or are afraid that immigration may somehow find them at a free clinic.

Moreover, we argued, non-emergent visits to the emergency room mostly use the spare capacity of trauma doctors; the average cost may be hundreds of dollars, but the marginal cost of slotting ear infections in when you don’t happen to have a sucking chest wound, is probably pretty minimal.

But even I was not skeptical enough to predict what actually happened in Massachusetts, which is that emergency room usage went up after they implemented health care reform.

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Number 14… Number 14… Number 14

Heather Horn at The Atlantic with the round-up:

On Monday, Senate Minority Leader Mitch McConnell became the latest Republican to call for a reexamination of the Fourteenth Amendment and the issue of “birthright citizenship.” Senators Lindsey Graham and Jon Kyl have also recently spoken out against the policy of granting automatic citizenship to all born in the U.S., even if they are the children of illegal immigrants. The birthright citizenship issue, though, doesn’t split quite along party lines. In the ensuing debate, several conservatives have come out opposing the proposed revision. Some maintain, though, that the Republican senators have a point.

Alex Altman at Swampland at Time:

The relevant facet of the 14th Amendment, which ensures due process and equal protection, states: “All persons born or naturalized in the United States and subject to the jurisdiction thereof, are citizens of the United States.” While proponents of repeal say the language–specifically the phrase, “subject to the jurisdiction thereof”–is ambiguous, judicial precedent is stacked against them. That’s one reason why the notion of revisiting the citizenship clause may be more of a political gambit than a realistic proposal. Bills challenging the citizenship provision have been proposed multiple times in recent years without success–former Rep. Nathan Deal, who’s running for governor of Georgia, submitted such an idea last year, and Rep. Ron Paul did so in 2007 without success. “Anchor babies,” as critics of birthright citizenship have dubbed children born to illegal immigrants, have long been a subject of scorn for conservatives. But a constitutional amendment requires the backing of two-thirds of both chambers of Congress and ratification by 38 states–which is highly unlikely, to say the least.

It’s unclear how far the party is willing to push the issue, or whether conference members are on the same page. A GOP aide told the Washington Post’s Greg Sargent that “nobody is talking about an all out repeal of the 14th Amendment,” and that McConnell merely supported holding hearings to revisit the concept of birthright citizenship. But the topic has sparked a pitched battle in the Senate, as The Hill reports, and Senators like Graham and James Inhofe seem to have their minds made up.

A majority of Americans support Arizona’s new law, and in the short term a hard-line stance on illegal immigration may give Republicans a boost. As a long-term political strategy, however, attacking birthright citizenship is an easy way to alienate the nation’s largest and fastest-growing minority group. In one recent poll, 49% of respondents supported birthright citizenship, while 46% said the law should be tweaked. But that poll found nearly 80% of Latinos are in favor of the provision–a figure that’s surprising only because it wasn’t greater. Many conservatives have argued the GOP risks kneecapping itself with the Hispanic electorate. “If the Republican Party embraces ending birthright citizenship, then it will be assured losing Latino and ethnic voters — and presidential elections for the foreseeable future,” wrote Cesar Conda, former domestic policy adviser to Vice President Dick Cheney.

Mark Krikorian at The Corner:

Would it be cynical of me to think that McCain’s “little jerk” is just trying to burnish his tough-on-immigration bona fides?:

Sen. Lindsey Graham (R-S.C.) announced Wednesday night that he is considering introducing a constitutional amendment that would change existing law to no longer grant citizenship to the children of immigrants born in the United States.

Yeah, right. So the guy doesn’t want to do what’s necessary to actually stop illegal immigration, but he wants to make sure that the children born to all the illegals he helps bring here become U.S.-born illegal aliens? I’m afraid, though, that his rationale, whether he actually believes it or not, is in fact one shared by a lot of immigration hawks:

“People come here to have babies,” he said. “They come here to drop a child. It’s called ‘drop and leave.’ To have a child in America, they cross the border, they go to the emergency room, have a child, and that child’s automatically an American citizen. That shouldn’t be the case. That attracts people here for all the wrong reasons.”

I don’t like illegals having U.S.-citizen kids any more than anyone else, but there’s no evidence suggesting that this “drop and leave” stuff is true — anything’s possible, I suppose, but it’s just an assertion at this point. My own sense is that most illegal alien women who have kids here (accounting for nearly 10 percent of all children born in the U.S. each year) didn’t come for that purpose; they came for jobs or to join relatives, and one thing led to another, birds-and-bees style, and they had kids. There are no doubt some people who dash across the border illegally to have kids, but they just can’t amount to a large share of the problem. Nor does the problem of “birth tourism” require a change in the Constitution — we just need to permit (and require) our consular officers to reject visa applications from pregnant women, inviting them to re-apply once they’ve given birth in their own countries.

The phenomenon of citizen-children of illegal aliens is a symptom of too much illegal immigration, not a cause. Comprehensive immigration enforcement — abroad, at the borders, and in the interior — plus deep, permanent cuts in future legal immigration (which is the catalyst for illegal immigration) are the solution, because when we have less illegal immigration, we’ll have fewer kids born to illegals and the problem goes away. I’m afraid that if the citizenship issue makes progress, the libertarians will co-opt us, backing the citizenship change as a way of diverting attention from real immigration control.

Krikorian responds to e-mails

Daniel Foster at The Corner:

When I first read this anonymous Huffington Post story suggesting that Sen. Jon Kyl (R., Ariz.) had signed on to the wholesale repeal of the 14th Amendment, I thought it was a gross mis-characterization, sloppy at best, a bold-faced lie at worst:

On Sunday, Sen. John Kyl (R-Ariz.) became the highest-ranking Republican to call for the repeal of the 14th Amendment to the U.S. Constitution. Appearing on CBS’ Face the Nation, Kyl said that he opposes allowing children of undocumented immigrants to be granted U.S. citizenship and wants Congress to hold hearings on the matter.

But it turns out the blogger was just aping CBS News’s write-up of Kyl’s appearance on Face the Nation. That post contains the same non-sense about Kyl wanting to repeal the 14th Amendment:

Sen. John Kyl, R-Ariz., said today that Congress should hold hearings to look into denying citizenship to illegal aliens’ children born in the United States, as the fight over immigration widens into the explosive “birthright” issue.

Kyl told CBS’ “Face the Nation” that he supports a call by fellow Sen. Lindsey Graham, R-S.C., to introduce a new amendment to repeal the 14th Amendment of the Constitution.

This is absurd. Here’s the text of the 14th Amendment, in full:

Section 1. All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.


What Kyl, Graham and others have tentatively embraced is an amendment that would clarify the first sentence of section 1 — and indeed, there is a credible argument that “subject to the jurisdiction thereof” already excludes individuals who are here illegally, meaning that one might be able to end birthright citizenship for the children of illegal aliens by statutory as opposed to constitutional action.

Neither Kyl nor Graham,  nor any other elected Republican I know of, has talked about repealing the Due Process or Equal Protection clauses — which are prime constitutional underwriters of so much legislation favored by progressives. Nor, of course, has anybody talked about reestablishing the 3/5 Compromise or limiting suffrage for African-Americans.

Michael Brendan Dougherty at The American Conservative:

Of course, Graham was one of the most enthusiastic supporters of Comprehensive Immigration Reform in 2007. Back then dropped babies weren’t his concerns, rather he wanted to “tell the bigots to shut-up.”

There is no good reason for immigration restrictionists to soften up to Graham now. Overturning birthright citizenship doesn’t bring order or justice to America’s decades long problem of illegal immigration. There may be good reasons to think that overturning it would do little reverse illegal immigration, and much to prevent assimilation.

In any case, Graham’s re-framing of the immigration issue in one of the silliest and most counter-productive possible and his chosen method signals that he is not serious. Constitutional amendments are almost impossible to pass, especially in this age of gridlock and ideological sorting of parties. In other words, this is a stunt, just as his former denunciation of “bigots” was a stunt.

John Sides:

Everyone knows this controversy by now. Here is the bill. Here is Mitch McConnell yesterday. It’s highly unlikely that this push to end birthright citizenship will go anywhere, but it’s worth probing public opinion on this question and on an underlying question: what should be the boundaries of the American national community?

Some quick searching did not turn up many polls on birthright citizenship per se. Rasmussen recently asked whether children of illegal immigrants should be citizens. In their sample, 58% of respondents said no, and 33% said yes. It would be interesting to know whether this is an objection to birthright citizenship per se or essentially an objection to illegal immigration.

Now to the broader question. In 2004, the General Social Survey asked a battery of questions on potential qualifications for being American. This was the preamble:

Some people say the following things are important for being truly American. Others say they are not important. How important do you think each of the following is…

Here is the average importance that respondents accorded to each qualification.


On average, respondents saw all of these qualifications are more important than unimportant. However, they also saw some qualifications as more important than others. In general, the more important qualifications reflect things that an immigrant can achieve: speaking English, becoming naturalized, respecting American institutions and laws. More exclusive criteria, and ones that immigrants cannot change (or change easily), are less important: being born in America, being Christian, or having American ancestry.

How might we interpret these results in light of the debate over birthright citizenship? Here are two possibilities.

First, Lindsey Graham and other opponents of birthright citizenship could take heart. Look, they might say, the public doesn’t even think being born in America is as important as other things. Given the importance accorded to American citizenship, we could make native-born children of immigrants go through the naturalization process and Americans would still see them as American. No harm done.

Second, some might object to that interpretation as a violation of the “spirit” underlying American public opinion. Americans’ sense of their national community is more inclusive than exclusive. Shifting American law in a more exclusive direction is not in this spirit. Why not recognize that more important than birthplace is speaking English, loyalty to the United States, and respect for its laws? And why not take heart that immigrants do learn English and are no less patriotic than native-born Americans?

Jill Lawrence at Politics Daily:

Senate Republican Leader Mitch McConnell is playing down his party’s new scrutiny of the 14th Amendment, which among other things confers U.S. citizenship on anyone born in the United States. McConnell on Thursday portrayed calls for hearings on the amendment as simply an attempt to examine what he calls the “unseemly” business of foreigners showing up just in time to have their babies, then going back home.

“I’m not aware of anybody who’s come out for altering the 14th Amendment,” McConnell said at a breakfast sponsored by the Christian Science Monitor. He said the push for hearings stems from a Washington Post story about foreign businesses that supply visas to expectant mothers. “This is the kind of thing that irritates Americans quite a lot,” he said. “I don’t think having hearings on an obvious unseemly business is a threat to the 14th Amendment. What’s wrong with looking into this? The Post did.”

McConnell added that “the remedy for it is not yet clear. But I am not advocating revisiting the 14th Amendment and I don’t think any others have. I think the view is, why don’t we take a look at this?”

UPDATE: Doug Mataconis

UPDATE #2: Via Andrew Sullivan,

Will Wilkinson

Tim Lee

More Wilkinson

John J. Miller at The Corner

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