Fiscal responsibility

As we get further into the debt conversation, I think this is worth remembering:

People have largely forgotten about this, but back in the 1999–2001 era instead of complaining about the deficit being too high conservatives were obsessed with the need to prevent the national debt from getting too low. The reason was that they feared that there might not be enough "on-budget" debt for the Social Security Trust Fund to buy, which would lead the Social Security Trust Fund to act like the Canada Pension Plan and start investing in equity and other financial vehicles. This, according to Alan Greenspan and others, would rapidly put us on the road to serfdom.

But as sovereign wealth funds are spreading from Persian Gulf petrodictatorships to oil-free dictatorships (Singapore) and oil-rich democracies (Norway) and now even America's friendly next door neighbor Canada, I think it's time to rethink this opinion.

And also this:

But the larger point here, surely, is that Rehn has let the mask slip. It’s not about fiscal responsibility; it never was. It was always about using hyperbole about the dangers of debt to dismantle the welfare state. How dare the French take the alleged worries about the deficit literally, while declining to remake their society along neoliberal lines? 

In a sense I think we should be mad at the Austerity advocates for hopelessly confusing the debt issue.  Debt is bad but increased taxation is always worse seems to be the argument.  But by trying to confuse the issues they are merging two very different propositions.  High taxation can be bad but the evidence for this is much weaker than for government financial crisis due to debt loads. 

But it becomes impossible to talk about the debt without getting drawn into the quagmire of the appropriate level of taxes.  But it is notable that the argument against running a surplus appears to be bogus (the disaster of paying off the debt seems to not be a disaster elsewhere).  The level of taxes in the United States is low relative to other first world countries -- that makes it hard to argue that small tax increases would immediately lead to disaster. 

This is making me want to be almost dismissive of the deficit.  Not because the debt wouldn't be lower in my ideal world, but because all of the action is about the size and scope of government (and a strange argument about whether government should be intrusive at the federal or state level).  These are interesting arguments, to be sure, but they are only distantly related to the question of fiscal responsibility.

Of outhouses and automobiles

Both Megan McArdle and Matt Yglesias have interesting posts about how important network effects can be to the adoption of new pieces of technology (Megan is talking about indoor plumbing, Matt about automobiles).  An except: 

Saying that people are choosing the a cell phone over an outhouse is not the same as saying they’re choosing a cell phone over an indoor toilet. Maybe that’s the choice they’d make, if they had it—I don’t know! But as Kelly’s own account acknowledges, they don’t actually have that choice, and certainly not at anything like the same cost.

Indoor plumbing requires either electricity to pump the water, and a nearby well to pump it from, or a connection to a public system with enough pressure to force the water high enough to flush your toilet. That’s a lot of power, not a trickle charge off of a small solar cell; I believe my great grandparents used a gasoline generator when they installed indoor plumbing in the mid-thirties. Gasoline generators are fairly expensive, as is the gasoline to run them, and I gather that they were only able to do it because their newly married son (my grandfather) saved up to help pay the installation cost, and then paid them rent that covered the cost of the fuel. Most farmers, I am told, waited until rural electrification brought them grid power.
 

Mark also pointed out just how important these elements of infrastructure were in transforming American society.  It's humbling to think about just how much effort was required to actually do all of these things (and concerning that infrastructure moves much slower today). 

However, I am hoping that the shift to an information based economy will have other benefits.  In some sense, there is a possibility that information, stored as pixels, could be something of real value (think of books or television programs) yet require very little resources to create.  In that sense maybe we could end up being happier (overall) while using less resources.

That being said, I have also used an outhouse and have absolutely no interest in giving up my indoor plumbing.  I am not even all that happy camping, unless there is a rest area in the middle of the campground with flush toilets (essential) and showers (highly desierable). 

Krugman versus Yglesias

Paul Krugman has two explanations for why profits are rising at the expense of workers:

As best as I can tell, there are two plausible explanations, both of which could be true to some extent. One is that technology has taken a turn that places labor at a disadvantage; the other is that we’re looking at the effects of a sharp increase in monopoly power. Think of these two stories as emphasizing robots on one side, robber barons on the other.
 

Matt Yglesias advances what I think is a better explanation:

 To put it nonpolemically, you can see in the chart that not only is there a structural trend in the labor share of output, there's also a strong cyclical trend. The labor share declines during recessions and rises during booms. And the problem of the Federal Reserve is that over the past 30 years, it has a perfect track record of never allowing inflation (which is to say a sustained period in which wages rise faster than productivity), but it doesn't have a perfect track record of never allowing recessions. The inevitable consequence of this asymmetrical success is for the labor share to steadily decline.
 

I like this argument for the simplicity: it is based on a clear policy choice that was made and which continues to this day.  There is no need for an appeal to "the world has changed" over and above the decision to be willing to hold price stability in place at the cost of employment.  This is directly relevant to today as the Federal Reserve has a dual mandate.  On one side of the mandate, they have the requirement to ensure price stability.  On the other side of the mandate they need to encourage full employment.  It's pretty clear that they are doing much better with one piece of this mandate than the other. 

Norms

Worth remembering:

Norms matter. People work for money. But people also work for status, and people work because they take pride in a job well done. Ideas about what kinds of financial success merit high status and what kinds of jobs constitute a job well done are important. A doctor who bragged to you at a party about scoring a great deal on season tickets is doing something very different from a doctor who brags to you at a party about scoring season tickets after swindling a woman out of a bunch of money for unnecessary medical treatments. A doctor isn't supposed to be hustling patients. Everybody knows that.
 

I think that this tendency to neglect the focus on norms has been the major cost of having a very legalistic culture.  I remember this point being brought up in terms of the ability to "discover money" by acquiring a firm and then abandoning all of the previous cultural norms.  If it isn't written down then it doesn't count.  You might have joined ABC chemicals because they had a culture of being understanding when your children were sick.  But the new owners don't care that you took a lower salary because of this -- they ask if you have anything in writing. 

So we now need everything in writing.  But how do you run a culture with such low levels of trust? 

At a higher level, this is also a problem with the Randianism that has infiltrated our culture.  If you use money as a marker of worth, the doctor who swindled a patient (in the exmaple above) is actually morally superior . . . so long as they can't be sued.  How can this be a good way to govern interpersonal interactions? 

Education: Chicago edition

The teacher work action in Chicago is bringing up some strong feelings across many different bloggers.  I think there is a lot to say about this issue (in general) but I want to focus on one angle for the moment.  Here is a comment from Matt Yglesias:

If CTU members get what they want, that's not coming out of the pocket of "the bosses" it's coming out of the pocket of the people who work at charter schools or the people who pay taxes in Chicago.
 

Now, to be fair, Matt has some follow up posts that reflect a more nuanced view of this dispute.  But this point was seized on by Eric Loomis:

It’s these experiences that make me absolutely furious when Dylan Matthews and Matt Yglesias and Jacob Weisberg and other so-called liberals attack Chicago teachers by openly rooting from Rahm Emanuel to crush them or undermine them by warning readers about the effect of paying teachers on taxpayers. I don’t really know any of them personally. But I doubt any of them went to a public school, nor has much of the liberal punditry. And if they have, it’s almost certainly not one serving working-class communities like areas of Chicago or even Springfield. They can sit in their nice New York or Washington offices and attend retreats in baronial mansions like Slate held earlier this week and fret about the taxpayers and shame the teachers into thinking about the children all they want. They would never send their own children to the schools about which they pontificate. They have no idea what they are talking about.
 

No I don't want to discuss whether teacher pay in Chicago is sensible or not (Matt Yglesias defends the current levels here).  What I find a lot more interesting is the whole question of mixed system (with public and private options co-existing).  As a younger person, I often asked the question of why Canada generally made private medical services illegal (they have definitely relaxed the rules since then).  After all, why should be ban a person who wants to spend money on non-evidence based procedure or get faster service from spending cash to do so?  We do not ban pet rocks or other products of limited use. 

The answer was always that if there was a parallel "pay system" then the elite would attack the public option (as they would use the higher end options almost exclusively).  The net result would not just be a two tier system, but a two tier system that was actually worse than a designed one (as the lower tier would be formed by a series of constant cuts and the result would be worse than a planned low service level).  At the time, I did not see this as a likely outcome. 

But linking Chicago teacher pay increases to less resources for charter schools (even implicitly) makes this a much more credible concern. 

Yglesias on the Dangers of Observational Data

Matt Yglesias has a piece on the Dangers of Data that really should be the Dangers of Observational Data!  True randomized or quasi-randomized experiments, when you can do them, have none of these limitations ascribed to the thermostat problem (and, in physics, an experiment is how you would figure out what the thermostat actually does). 

I am also amazed by the different foci that fields put on different methodological issues.  In observational pharmacoepidemiology we are obsessed with the issue of confounding by indication and constantly worry that it is leading to non-trivial amounts of bias.  The concept behind confounding by indication is awfully similar to the problem described by Milton Friedman's thermostat.  But I never hear economists bring that up as a major issue with observational data; perhaps because they lack experiments to tell them how often an observational estimate is wildly inaccurate (whereas in pharmacoepidemiology these experiments are slow and rare rather than non-existent). 

None of this is to say that you cannot do valid inference with observational data -- you most definitely can.  But it does highlight the need to be very, very careful. 

When is a conclusion credible: health care edition

I think that critical thinking skills are needed when discussing health outcomes now more than ever.  Consider this prelude to reporting study results by Matt Yglesias:

Conservatives don't like Medicaid because they believe programs that tax the rich to transfer resources to the poor are bad for long-term economic growth and violate principles of cosmic justice. But since nobody likes to admit to the existence of a tradeoff, conservatives have lately taken to mounting the bizarre argument that giving health care to low-income poor people doesn't improve health outcomes.

 Now, let us consider just what this would likely imply.  If Medicaid, a conservative, inexpensive, and rationed health care system cannot improve outcomes what help is there for any possible level of health care?  After all, this care is focused on the sickest possible patients who have the fewest resources to handle a medical condition on their own.

So one would actually begin to wonder if any health care at all is effective at all.

Now it turns out that more careful studies are showing that Medicaid is a pretty cost effective way of saving lives.  But, if we believed the original (flawed) studies, wouldn't the really exciting take home point be that modern medicine is ineffective at saving lives?  That is a hige area of GDP that we could simply stop and re-allocate to more productive activities.

It really was an odd argument, all around. 

Yglesias on the Apple Store

I wish that I was able to quote the entire by Matt Yglesias, but this portion makes the most important point of the article:

More precisely, the Times says the average hourly base pay is $11.91 an hour, which if you work 40 hours a week for 50 weeks a year comes out to the slightly lower figure of $23,800 per year. That's not very much. But it's a lot more than many people make right now. Currently 15 percent of the population is living below the Federal Poverty Line including a shocking 22 percent of American children. And yet a single mom raising three kids working full time at the Apple Store at an average wage would be above the Federal Poverty Line.
That should tell us something about how dire the conditions facing poor Americans are. But, again, those are the circumstances in which 15 percent of the population and 22 percent of kids find themselves.
And yet at the Apple Store workers get "very good benefits for a retailer, including health care, 401(k) contributions and the chance to buy company stock, as well as Apple products, at a discount." So think about a world in which these kind of jobs were the absolute worst jobs around. You're thinking about a world in which everyone has health insurance, and essentially no full-time workers or children of full-time workers are living in poverty. That would hardly be a world with no problems, but it would be a tremendous achievement. And it seems to me to point to the fact that the really urgent question isn't why aren't Apple Store jobs better, but why are so many jobs worse than this? Why can't we live in that world where people who work hard and play by the rules aren't poor?

One thing that this article really does is answer the question of why do I care so much about inequality.  I write a lot about topics like CEO pay; the truth is that I would stop caring about these issues in a world in which this really was the case.  My issues with wealth redistribution are based on the dire poverty which people find themselves rather than class envy.  If people who worked hard and played by the rules could obtain these types of jobs with ease then I would care a lot less about the wealth of the upper classes.

The other thing that I like about this is that it represents a constructive social vision as to what we could do to actually improve the lives of working class Americans.  It may or may not be the best possible idea, but it at least gives a specific target to aim for.  And that is worth a lot.

Dual Class shares and free markets

Andrew Gelman weighs in on dual class shares: 

Now I’m just confused here. Who’s supposed to be “concerned” here? As a New Yorker subscriber, am I supposed to be concerned that dual-class firms underperformed the market? I just don’t get it. Why should I care? If the shares underperform the market, people can buy a piece of Facebook for less. That’s fine too, no?

I think that Andrew would be completely correct in a perfect market (one in which all of Mark Thoma's issues are not present).  If some financial products give a piece of the return while others give ownership plus return then people could choose which ones to purchase. 

However, the modern American economy has fallen in love with the 401(k) as an investment vehicle.  This leads to two problems.  One, investors are generally not free to switch to a different fund because they dislike the investment decisions of the fund that they are in.  Since the individual investor bears all of the losses of bad decisions but the employer has control of the fund (and has an incentive to cut costs) you have a classic principal agent problem.

This problem is made worse by giving a limited group of people control over a group investment.  One can easily imagine the small group making decisions that benefit them at the expense of the majority of shareholders.  Again, not necessarily a problem in an open market.  But with the constraints that individual investors are under this could be problematic as they lack the freedom to enter or exit the market. 

This is why I wax poetic about Social Security (or the Canada Pension Plan): they shift the risk from small investors (who generally can't bear it) to large entities (that can).  I totally get that there are total social resources constraints, but I would rather that they be dealt with openly.  Instead I see the stock market becoming a worse and worse deal just as a large American cohort (the "Baby Boom") is about to retire. 

I am not sure that this is a good thing. 

See also Matt Ygelasis and Felix Salmon.

Misleading chart of the day

First, consider this chart (as reproduced by Matthew Yglesias):

Now examine Aaron Carroll's great rebuttal!

In general, I think Yglesias is correct that it is difficult to have any real reliability for 75 year cost projections (I wonder what the confidence limits are?).  So much is likely to change over this period of time and the prioirites of the nation may be so different that it is completely unclear how helpful such an exercise will be.  Not only do we have issues with technological and political change, but it would be odd if no future government altered policy priorities or if we could accurately guess economic growth over such a period. 

Unemployment is simply a bad thing

Matt Yglesias nails it:

In the wake of the Great Recession, I think we need another change in regime. We can't continue with an approach that always delivers on price stability but frequent leads to prolonged spells of mass unemployment. But I think to push for that regime change credibly, people need to acknowledge what went wrong in the past and need to explain why it won't happen again. I would say, for example, that one of the great virtues of the more globalized economy of 2012 rather than 1972 is that the freer flow of goods across borders makes inflation much less likely.

There is an old saying that the "heroes of the last war are the villains of the next one". The reason is that wars happen infrequently, are heavily analyzed, and everyone had figured out how to overcome the winning tactics of the previous war (well, at least insofar as the next war involves any sort of parity). There is also a real tendency to overcompensate for the failures of the last approach and, in the process, create an extreme in the other direction. This is especially true if the last approach ended in a crisis.

The current view of fiscal policy is that price stability is really important. As a consequence, people are willing to tolerate a lot of unemployment to ensure it. In some countries that might be okay, but the United States of America runs on the idea that safety nets are disincentives to work. The consequence of a weak safety net is that prolonged periods of high unemployment create an amazing amount of misery. It is past time that we acknowledge this and seek a new approach before a crisis brings another swing that is too extreme.

Government as a business? A continuing exploration

Matt Yglesias makes an important point about how we think about debt:

This does, however, raise the interesting and oft-neglected point that corporate accounting and government accounting operate along very different principles. If I'm running a modestly profitable burrito company and decide I could be making even more money if I opened even more stores and so go sign some leases and spend a bunch of money building out the new kitchens, we don't register this as suddenly "spending" far exceeding "revenue" and freak out about the deficit. What we say is that the balance sheet now contains both more liabilities (debt to someone who loaned me the money) but also more assets (all the kitchen equipment I bought) and then my challenge is to earn a return on my investment in those assets before they depreciate (i.e., break). But a company that thought it had the opportunity to make a lot of high-value low-cost purchases would never avoid doing so simply because it might involve increasing its outstanding stock of debt.

I think that this viewpoint could be really helpful if applied to the United States government.  There is a lot of potential to invest in infrastructure right now, while prices are low.  Sure, not all infrastructure works out and there is a lot of poor decision making in government process.  But businesses make mistakes too.  The trick is to, on average, make more good decisions than bad.

However, in the long run the stock of public goods (roads, bridges, powerlines, canals, and so forth) have been key to the success of a nation from ancient times.  In the modern world, with the focus on human capital, I think education might have the same status as a good long term investment.  Perhaps this is a case where we should think of government more like a business??

Behavioral Economics for Firms

On Friday I read this piece by Karl Smith on Apple and this piece by Matt Yglesias on Barnes and Noble.  I was struck by how both of these examples showed firms actually in the best interest of the executive (who get perks from working at the firm) and not the shareholders (who want to maximize return on investment).

I wonder if there is a limit to how well firms adhere to economic models>  We already have decent evidence that people don't necessarily respond rationally (or else why would they buy Apple shares?).  But the executives in the company create a principal agent problem, which may also cause issues at the level of the company itself.

This is not to knock economic models.  Epidemiology has many of the same limitations and we have to rely on some pretty challenging assumptions.  Rather it is to be careful, with any model, to recall the limitations and exceptions inherent in modeling a complex process.

I think we also need to page Mark Palko

Today's new patent is from Apple, US patent #8,082,523.  It is best described as:

In other words, anything you’d recognize as a smartphone seems to be covered.

Matthew Yglesias asks the smart question:

The issue is that there's just no sound public interest case for granting monopolies over certain features to the first-to-market firms in this industry. Apple has already gained a very large competitive advantage from the fact that they were the first people to deploy a working touchscreen smartphone and even without patents clearly has a strong financial need to continue investing in improving its product lest lower-margin Android-powered phones eat away at its profits.

But the general trend seems worrisome.  Not only does it vastly increase business complexity (searching the patent office for thousands of potentially applicable patents), but it stifles innovation by making new entry into the smartphone field more difficult.

Mark?  

Intellectual property: the story that never ends

More on intellectual property rights from Matt Yglesias, who is worried about Google patenting basic features of driverless cars:

If you look at the cars we have, they're all of course different but they have a lot of really profound similarities. You almost always turn a key in the ignition. You have your gas pedal and your break, and you push them both with your right foot. You steer them with a wheel. There's a spedometer and a fuel indicator in more-or-less the same place. They use mirrors so you can see where you're going without constantly turning your head. Would it be a better world if for twenty years someone had held a patent on a Using Mirrors To Allow Drivers To See Behind Them Without Turning Their Head? I say, no. Absent the inability of new entrants into the automobile market to copy some of the basic concepts of what a usable car looks like, we would have had much less competition and much less innovation around the real cutting edge of the automobile industry.

This was not the most interesting thing that was on Moneybox today, but it fit really well into an an evolving theme that we have been seeing recently about how the patent industry is formalizing rent-seeking.  This cannot be good in the long run.

Now, it is true that I think that the driverless car is an over-rated concept.  Like the jetpack, it is a neat idea that has a lot of very difficult implementation issues.  In the case of the driverless car, the main issues, in my opinion, are rethinking the complex web of liability we have constructed around vehicles and smoothly integrating them into mixed use roadways.

The risk of bicycle commuting has been an extremely favorable development, despite the occasional tension between cars and bikers.  But I wonder if driverless cars will be able to handle treating cyclists as other vehicles or might the smaller profile of the bike make it harder for the car to account for them?  The same concerns come up with pedestrians, especially in large cities.

Model assumptions

Felix Salmon and Matt Yglesias:

The entire debate in congress over taxes is that President Obama wants to restore the top marginal rate to the level that Dimon thinks it already is. Meanwhile, Dimon doesn’t even know what tax rate he pays.

I think that this quote is really, really important. Classical economic models presume that individuals act to maximize their utility. But real people often have limitations, including lack of perfect information about what costs really are. I would be surprised if Mark did not have follow-up thoughts.

But the key point is that if these assumptions about informed persons can't hold for the CEO of JP Morgan Chase (whom you would assume is numerate) then how likely is that these models are going to be good at prediction? After all, we presume Jamie Dimon is maximizing his utility for a 39.6% marginal tax rate; so a change in taxes to what he currently thinks that they already are would alter his incentives how?

Statements that I violently disagree with

From Tyler Cowen via Scott Sumner:

Congratulations to Matt Yglesias on his new gig. He’s arguably the best progressive economist in the blogosphere, which isn’t bad given that he’s not an economist. I said “arguably” because Krugman’s a more talented macroeconomist. But Yglesias can address a much wider variety of policy issues in a very persuasive fashion. So he’s certainly in the top 5. His blog is the best argument for progressive policy that I’ve ever read. (But not quite persuasive enough to convince me.)

Now do not get me wrong: I post a lot about Matt Yglesias because I think that he is a fine thinker and has some really nice points to make. But there is now way he is competitive to be the top progressive economist in the blogosphere. I can't claim to be an expert but, off the top of my head, I have have:

Noah Smith
Paul Krugman
Bradford Delong
Mark Thoma

Plus the Worthwhile Canadian Initiative folks occasionally drift into progressive territory and are always worth reading. And this is just off the top of my head and including blogs I read regularly. Again: the provocative policy thinker with good ideas and a solid grasp of economists label definitely applies to Yglesias. But I find him a very odd choice for #1 given the alternatives. If anything, I find him awfully centrist on economic matters, at times (which, I suppose, could explain the appeal).

A tweet from Matt Yglesias

Seriously amazing how much better digital over the air looks than "HD" cable with compression.

Isn't this the same argument Mark has been trying to make about Broadcast Cable?

UPDATE: See more here

I could not disagree more

One of the things that makes cities tolerable is public land (as private parties cannot possibly own enough land for this effect) where there is green space to visit. Even if it is not always in use, the availability is of great psychological value. But this line of thinking could result in many fewer parks:

That’s not to say we should pave all the parks. But we should be thinking of something to actually do with them. Cities are full of people, and most of the country doesn’t have Southern California weather. There’s limited practical demand for just sitting around outside.

The reason we have to provide public parks is that developers can maximize profits by not including them. But if every developer omits including a park, you end up with no place for children to ever play. I worry that this is looking at a very small problem and risking creating a large one by trying to solve it.

Testing Theory

Matt Yglesias:

Last week I was outside my office and I saw a $5 bill on the ground. Famously, economists say you never see a $5 bill on the ground because someone would pick it up. But instead of picking it up, I stood around watching to see if anyone else would. A bunch of people walked by not noticing it. Then one guy saw it, saw me, and asked if it was mine. I said no it wasn’t, I was just curious what would happen. He laughed and made a joke about economists. Then a second guy came by, picked it up, and said I’d dropped five dollars. I said no, actually it was there before me. He looked around, noticed a homeless guy across the street, said “I think he needs it more than me,” walked over and gave it to him.

While a single test is not proof of anything (expect the strongest of the possible theories), I have certainly had people tell me that I have dropped money. That seems to go against the assumption that rational people will always act to increase their wealth (after all, they could just pick up the bill).

I think that it is worth keeping in mind that the assumptions of economic models are just that. Models can be useful but are rarely ever completely correct.

And Matt's stuff in the same post on the Night Watchman state is simply not to be missed.