Canadian Exceptionalism

Megan McArdle has a comment on whether a social safety net will spur entrepreneurship:

But when we try to look at the net effect, it's hard to see much dynamism coming out of the places with a generous safety net. Rates of entrepreneurship and labor mobility are far lower in Europe than they are in America--and one of the many factors restraining European labor mobility is thought to be the social safety net, both because of the difficulty of moving between benefit system, and because the benefits lessen the urgency of say, relocating in order to find a job.

I will now speak at the level of personal anecdote; I beg the reader’s indulgence but I think it is a worthy point to make. I have lived in both the United States and Canada (as any reader of this blog will probably have figured out). At a purely personal level I am way more comfortable with economic risk when I am resident in Canada.

Why? Because the cost of a hospitalization is so high here in the United States as compared with elsewhere. There are two factors that I think are key. One is simply that medical care is intrinsically expensive here in the United States. But the second is the bargaining power of groups. Look at what the difference is between the billed price and what private insurance pays.

Now imagine that you feel dizzy one day. Dizziness can be a sign of a stroke or a heart attack. But if you are unemployed and not covered then what do you do? Visiting the hospital is a guarantee of some sort of economic crisis. But many events can be stopped with early treatment (or at least highly mitigated).

If we had the features of an efficient market, that would be different. But has anybody ever tried to shop around for better prices in the midst of a serious health event? Yet the United States links health insurance with employment. Furthermore, rescission tends to happen at the time of the event; in cases of gross fraud that is perfectly understandable but the examples of very minor book-keeping errors leading to rescission make one leery of not having somebody (like a large employer's HR department) around to advocate for you. Courts, while possible, are expensive at a time when you likely have no money.

Now this is not to say anything about elective procedures or non-urgent medicine; things like elective eye surgery can be areas that markets can exist. But we can already see this in Canada with things like diagnostic scans (that are not time sensitive) are increasingly handled by private firms in Canada (often paid out of pocket) for a surprisingly low cost to the consumer. The same with laser eye surgery or some forms of bariatric surgery. So a mixed economy is possible.

So I have been a lot more concerned about being employed in stable position here in the United States. In Canada I have considered (and applied for) short term and unstable positions: many of which were a lot more entrepreneurial.

After all, correlating employment risk (i.e. loss of job) with medical care cost risk (when insurance is linked to your job) seems like a bad decision. As for why we don’t see this in Europe – I have no idea. But it’s not clear that the European example is conclusive.

Industrial Policy

I am a huge believer in mixed economies. But it is hard to prove that they are the best option for exactly the reasons that Ms. McArdle is skeptical about industrial planning in China:

It's not that I didn't understand that the government did this; it's that I didn't understand how pervasive it would be, or how popular this would be, at least with the folks we interview. Everyone--including most of the economists and NGOs--seems to think this is swell. No fiddling around with archaic, unplanned systems; just figure out what the country needs and do it!


Perhaps it is just my ideological blindness that makes me believe that this cannot, in the long run, turn out well. But there's a plausible story that the early boom was mostly a matter of removing distortions (and taking advantage of capital, human and otherwise, accumulated in Hong Kong and China). Now the government is much more directly picking winners and losers. They're not trying to manage growth; they're trying to cause it in places where it shows little sign of happening organically.


It's not that I think that no form of industrial policy can ever have good effect. Can government build infrastructure to good effect? Yes, certainly. Can they manage growth? Can it occasionally pick industrial winners? They have in the past--though on average, I'd say it's abundantly clear that governments have more often picked, and sustained, losers. And the more comprehensive the industrial policy, the worse the economic losses have generally been.

The issue here is that successes can be explained by a lot of different factors (as can failures). And it is pretty clear that people have strong "priors" (in the Bayesian sense) for the approach that they favor. This makes it hard to use the (limited in scope) data to decide between approaches. Add in confounding factors and it gets harder. Add in changes in technology and you guarantee issues.

Just consider, for example, stock market returns. What is the relevant period of interest? Some people claim you can consider returns on stock from 1800 to today based on what records are available. But clearly the information available to stock analysts is different today than in 1960. Now consider that you want to look at long term returns (i.e. saving for retirement) and suddenly the noise threatens to overwhelm the data -- as you really have only a very few (tightly correlated) time trends.

How much worse is that for looking at economic growth?

No wonder these arguments are difficult to make . . .

Context in posts

This post by Megan McArdle was interesting for the context. I am certain that I will say something I regret sooner or later; it's probably a good thing not to be judged by hasty words.

But I also think it is important to remember that all quotes can be made to look bad out of context. In the "sound-bite" environment of the modern world it is already hard enough to discuss complex issues (*cough* education reform *cough*) without adding in misleading quotes.

It is just something to keep in mind . . .

Education Reform

I want to very quickly return to first principles. When Mark and I began discussing tenure reform, it was in the context of a "crisis" in education. This terminology continues to this day.

However, the real impact of recent news is that proposed reforms don’t have the potential to make immediate and dramatic improvements in education outcomes. Why does this matter?

Because if there is an incipient crisis and known strategies can directly address them then it would be grossly unethical not to try and address this in the fastest way possible. However, if there is not an immediate crisis the correct way forward is one that addresses all of the stakeholders and not radical top-down driven reform. In other words, Baltimore and not Washington, DC.

In the long run educational reform may be inevitable and positive. One of our well versed commentators (Stuart Buck) opined about the evidence:

It's consistent with any number of stories, including increased quality of teaching, better curriculum, finding a better fit for each individual students (some do better in a smaller school, for example), and the factors that you mention.

In my view, this suggests that we are going to experiment with news modes of education. After all, many people who I respect are strongly advocating for experimenting further with education reform (Jon Chait, Megan McArdle, Matt Yglesias, Alex Tabarrok come immediately to mind).

So why are there concerns about the process by which educational reform is occurring? Because, the discussion began with a question of where to allocate resources. Seyward Darby was arguing that we needed to accept teacher layoffs as part of the price if educational reform:

The president's beef is with a provision to prevent teacher layoffs, which Democrats tacked onto the bill along with several other domestic priorities. To pay for the measure, the House agreed to cut money from some of the president's key education reform initiatives. Obama isn't happy about it. Nor should he be.

Now, if there is a real and immediate crisis in education than, of course, dramatic measures can make sense. But is this really the time to spark a round of teacher layoffs in order to make slow improvements in who decides to apply for teaching jobs? Maybe, but it seems naive to think that we should fuel the testing of educational reform with layoffs at this precise moment. Readers of Felix Salmon may remember this week's jobs report:

Meanwhile, as the school year begins, we have this:

Employment in local government decreased by 76,000 in September with job losses in both education and noneducation.

As states and municipalities around the nation start running out of money, they’re going to fire people; this is only the beginning. And if October is any indication, the job losses in the local government sector are going to be at least as big as the job gains in the private sector.

So the real issue is whether this is the time for radical teacher employment restructuring -- should we lay off teachers to test educational reform? We do have a duty to the future but we also have a duty to the current students as well. The conversation would be different if the net resources for education were increasing but claiming that education is a priority in the midst of layoffs due to lack of funding seems disingenuous.

My interest in this subject grew from two arguments in the blogosphere. One, that the crisis in educational was so bad that the state should massively break contracts without cause. Notice that in cases like AIG and TARP, we were willing to spend a lot of money as a society to preserve financial contracts. Two, that reform has likely to be so important that teacher lay-offs in the midst of a recession were an acceptable sacrifice as the students would be better off.

If we don't accept that there is an immediate crisis then we can still move forward. But then it becomes an American-style bottom-up reform and not a Soviet-style top down reform. I like the Baltimore example -- specific communities negotiating ways to respond to the crisis and continuing to try ways to create a better future for their children. The result of a thousand experiments with engaged communities could very well result in a far better educational system in the long run.

And I think that is a good outcome.

One more from Megan McArdle

In response to a widely circulated itemized breakdown of where your tax dollars go, McArdle writes:

There seems to be an unspoken assumption that opposition to spending rests on misperception of what the money is spent on; Americans tell pollsters they want to cut spending, but it turns out that what they really want cut is the imaginary fortune they think we spend on foreign aid.

But of course, it seems to me that this could just as easily go the other way: isn't it possible that the widespread support for programs like Social Security and Medicare rests on the fact that most people don't realize just how big a portion of your paycheck those programs consume? I don't know the answer to that, but I will point out that most economists believe that paycheck withholdings enable (among other things) higher taxes; if people had to write out a check for their tax bill every year, resistance to income tax increases would be much fiercer.

This suggests that handing people an itemized invoice for their government programs which shows them the total yearly take might increase support for the Smithsonian, and decrease it for the stuff that appears higher up on the bill.

Whichever way it cuts, I think this is a good idea; more information is generally better. I just think that the emotions this sort of receipt provokes in liberal bloggers may not be the same ones it provokes in the average voter.

I think this is a great idea and I'd like to see it implemented immediately. Is it too late to add boxes to our 2010 W2s for Social Security Tax Withheld and Medicare Tax Withheld?

Airports

It is not everyday that I agree with Megan McArdle over Felix Salmon. But this is an extremely good point:

Still, I think there's quite a lot about American airports that is important, and inadequate. Given the ubiquity of electronic devices, and the importance of airports to business travelers, we could probably enhance national productivity quite a bit if so many airports didn't force travelers to spend their wait times fighting each other for the one electrical socket located behind an out-of-order ATM machine. The ridiculous security theater procedures which have queues stretching out towards the long-term parking lot could be streamlined.

To be blunt, the modern American airport seems designed to make a basically unpleasant activity (flying around in a packed airplane) as unpleasant as possible. Your humble narrator has been doing a lot of travel lately and I remember airports as being more pleasant once. For example, when you did not have to go through a lengthy screening process then you did not have to arrive as early at the airport. As a result, the airport had fewer bored people sitting around competing for limited seating and eating facilities.

So I would also be in favor of finding ways to make it easier for airports to make flying a pleasant experience.