Author Archive
Remember When ‘Liberals’ Were Liberal?
Nick Kristof devotes his NYT column today to wishing that American society were organized like the U.S. military. The armed forces “live by an astonishingly liberal ethos,” he gushes, and closes the column by suggesting that ”as the United States armed forces try to pull Iraqi and Afghan societies into the 21st century, maybe they could do the same for America’s.”
(I swear I’m not making this up.)
Kristof looks at the military and sees the ideal United States:
The military helped lead the way in racial desegregation, and even today it does more to provide equal opportunity to working-class families — especially to blacks — than just about any social program. It has been an escalator of social mobility in American society because it invests in soldiers and gives them skills and opportunities.
The United States armed forces knit together whites, blacks, Asians and Hispanics from diverse backgrounds, invests in their education and training, provides them with excellent health care and child care. And it does all this with minimal income gaps: A senior general earns about 10 times what a private makes, while, by my calculation, C.E.O.’s at major companies earn about 300 times as much as those cleaning their offices. That’s right: the military ethos can sound pretty lefty.
…The military is innately hierarchical, yet it nurtures a camaraderie in part because the military looks after its employees. This is a rare enclave of single-payer universal health care, and it continues with a veterans’ health care system that has much lower costs than the American system as a whole.
How times change. Four decades ago, folks like Kristof were marching on the Pentagon and burning their draft cards. Today they want to enlist.
More seriously: Racial equality, social mobility, and freedom from concerns about health care and child care are laudable goals. (Among the virtues of free markets is that they move society toward such goals.) Also, the U.S. armed services have helped improve many people’s lives, giving them careers, skills, education, and other benefits.
But, granting all that and assuming Kristof’s view of the armed forces isn’t romanticized (I know, but assume), he overlooks two important points:
Gas Prices, Speculation, and the Price of Tea in China
With gasoline in the United States moving toward (and in some places, above) $4 a gallon and motorists understandably unhappy, there is a growing desire to blame someone for the high prices.
Previous gas price spikes in 2006 and 2008 brought blame on ”Big Oil” (meaning firms like Exxon-Mobil, BP, Royal Dutch/Shell, et al., which really are just mid-sized oil — but whatever), the Bush administration and Republicans, environmentalists, and the federal government. But 2011 offers a new leader in the blame game: speculators. From Capitol Hill lawmakers, to business columnists, to activist websites, to letters to the editor and hyper-forwarded emails, people are calling out trading in the oil and gasoline futures markets, aka ”speculation,” and demanding that government do something about it.
The problem is, I haven’t seen any of these folks offer a coherent explanation for how speculation drives up the price at the pump. And I doubt any is forthcoming.
The speculation-blamers’ story is simple enough: Investors sign futures contracts in oil and gasoline — traditionally, agreeing to a price today for oil or gas that will be delivered weeks or months in the future (and that probably has yet to be pumped out of the ground or refined). But, speculation-blamers say, the investors are running amok, paying outrageous prices for the futures. Those prices then affect oil and gasoline sales today, driving up prices at the pump.
Worse, they say, many of the futures are just paper transactions: the traders don’t have oil or gas to sell, nor do they intend to take delivery of it. Instead, when the future closes (that is, reaches its end-date), then one of the two counterparties will simply pay the other the difference between the agreement’s price and the actual market price on the closing day. For instance, if Smith Investments and Jones Investments signed a six-month future for one barrel of oil at $100, with Smith taking the “short” position (believing that oil’s price will be less than $100 six months from now) and Jones taking the “long” position (believing the price will be above $100), and six months from now oil is selling for $80, then Jones will pay Smith $20. Vice-versa if oil’s price is $120. (In fact, most futures today are settled in cash, even if one of the counterparties is somehow involved in oil production or use.)
On first blush, the speculation-blamers’ story makes sense: Surely, the price for future delivery of oil or gasoline will affect the price for present-day delivery. And all the paper-transaction stuff just seems devious and dangerous — shrewd Wall Street investors are hosing Main Street again!
But think more carefully about the story, and it begins to unravel.
Pielke’s Problem
I generally admire the work of Roger Pielke Jr., a political scientist in the University of Colorado-Boulder’s Center for Science and Technology Policy Research. His new book on climate change is refreshingly honest and non-ideological, if a bit overly technophilic. His broader work offers the important insight that science alone cannot direct public policy, but rather it can only lay out possible results of different policy choices.
Given the quality of his work, I was disappointed by Pielke’s op-ed in today’s NYT defending Congress’s legislated obsolescence of the incandescent light bulb. He argues that government standard-setting is an important contribution to human welfare, and the light bulb standard is just part of that standard-setting (though he does suggest some minor policy tweaks to allow limited future availability of incandescents).
To justify his argument, Pielke points out the great benefit of government-established standard measures, as well as quality standards:
Indeed, [in the United States of the late 19th century] the lack of standards for everything from weights and measures to electricity — even the gallon, for example, had eight definitions — threatened to overwhelm industry and consumers with a confusing array of incompatible choices.
This wasn’t the case everywhere. Germany’s standards agency, established in 1887, was busy setting rules for everything from the content of dyes to the process for making porcelain; other European countries soon followed suit. Higher-quality products, in turn, helped the growth in Germany’s trade exceed that of the United States in the 1890s.
America finally got its act together in 1894, when Congress standardized the meaning of what are today common scientific measures, including the ohm, the volt, the watt and the henry, in line with international metrics. And, in 1901, the United States became the last major economic power to establish an agency to set technological standards.
Alas, this argument doesn’t support Pielke’s light bulb standard.
Hot Heads and Government Failure
The left-wing blogosphere and left-leaning newspapers have spent the past few days joyously incensed over the story of a Tennessee city fire department that allowed a home to burn because the homeowner hadn’t paid his annual fire fee.
AlterNet’s Jonathan Holland titled-and-teased his post on the fire:
Ayn Rand Conservatism at Work — Firefighters Let Family’s House Burn Down Because Owner Didn’t Pay $75 Fee
Talk of limited government is appealing until you see what it actually means in practice: a society in which it’s every man for himself.
ThinkProgress’s Zaid Jilani thundered that the fire demonstrates that there are two competing visions of American society:
One, the conservative vision, believes in the on-your-own society, and informs a policy agenda that primarily serves the well off and privileged sectors of the country. The other vision, the progressive one, believes in an American Dream that works for all people, regardless of their racial, religious, or economic background. The conservative vision was on full display last week in Obion County, Tennessee.
(An aside: ThinkProgress loves to throw in partisan barbs, so Jilani claims that “every seat” of the Obion County Commission is “filled by a Republican,” a claim that Holland echoes. Nope. But then, ThinkProgress recently harangued Michael Cannon for an opinion that isn’t his, so ya’ know…)
Finally, today the New York Times editorial page chimes in:
In any case, the founding fathers left no message that government can make an object lesson of a neglectful citizen by letting his house burn down. The [homeowners] deserve an apology, even if it won’t come from the candidates peddling dreams of constricted government.
It’s unfortunate that these writers didn’t pause from their fervor to consider the facts. In a nutshell: The firefighters involved were from a city government fire department following a city government policy concerning people who didn’t pay a city government fee for a 20-year-old city government program that was adopted in response to a county government decision.
John Galt in Nomex this ain’t.
Beyond the facts, these writers are confused about basic political theory.
A Birthday Gift from Paul Krugman
I turn 41 this summer (thank you for the condolences). Along with the well wishes of family and friends, I received an unexpected gift from NY Times writer Paul Krugman: this column in which he bashes people who are critical of Social Security in its current form or who worry about its ability to deliver expected benefits.
At first glance, the column hardly seems like a gift: it’s long on pointless insults, short on thoughtful discussion, and misleading. But it offers such a poor defense of the Social Security status quo that I suspect readers will be more skeptical of the program after seeing the column, not less. Hence, Krugman’s gift.
He writes:
Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund. The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 — and there’s a significant chance, according to their estimates, that that day will never come.
OK, 2037 — no worries. Except that, as I said, I turn 41 this summer, which means I’ll turn 67 and qualify for full Social Security benefits in mid-2036. The very next year, the Social Security trust fund will be exhausted, according to the “intermediate” scenario contained in the most recent Social Security Trustees Report, available here (see Section IV-B and Appendix E). The program will still pay out some benefits — but less than 3/4s of what it now promises. So what happens then? That’s not a good question if you’re my age or younger.
But suppose you’re not my age or younger. Suppose you’re 10 years older than me, and will have collected 10 years of benefits by 2037. Don’t feel smug — you’ll be asking “So what happens next?” when you’re 77. That’s not a good question at your age, either.
In fairness to Krugman, the Trustees Report considers different Social Security cost scenarios, the most optimistic of which projects that the trust fund will not be fully exhausted over the 75-year period the report considers. Krugman says there’s “a significant chance” this will be the case, but my (admittedly quick) skim of the report suggests it’s more just “a chance.”
One quick aside about the 2037 exhaustion date: when Krugman wrote this column in 2005, the Trustees’ intermediate scenario projected that the trust fund would last until 2042. In five years’ time, that date has grown 10 years closer. Not good.
Hot Time in the Old Town Tonight
A record-setting heat wave has settled on the Beltway this week, resulting in my thermometer topping the 85°F mark by the time I came into work today.
Did I mention my thermometer is inside my apartment?
“Oh yuck,” you’re probably thinking. “You should get a place with air conditioning.”
But you see, my unit has air conditioning. The problem is that, under Virginia law, it can’t be turned on until May 1.
My apartment is in an older building (1958) with a centralized HVAC system. As a result, the whole building must either be in heating mode or cooling mode. One of the quirks of this system is that it takes a couple of days for it to be converted from one mode to the other.
That physical reality doesn’t jibe well with Virginia law, which requires (in the words of an Arlington County government brochure) that:
Every dwelling unit is … to have heating facilities that are properly maintained and keep all habitable rooms at a temperature of at least 65° during the day and 60° at night during ordinary winter conditions from October 15 – May 1.
The result is that, unless the building superintendent knows for certain that cold-weather conditions have ended for the year, a building with a system like mine (which isn’t uncommon) can only be in compliance with Virginia law if it keeps the air conditioning off until May 1. Hence my 85°F apartment.
No doubt, Virginia regulators will explain that such rules are necessary to protect the comfort and safety of apartment residents. But I wonder what they would say about the comfort and safety of the small children who live in my building and who spent the last few nights trying to sleep in 85°F heat?
Giving Away the Keys to the Kingdom?
The New York Times editorial board must be baffled by this news story about a few dozen present and former corporate executives appealing to Congress to expand public funding of political campaigns.
The appeal comes one day after the Supreme Court re-extended (some) First Amendment rights to corporations in a move the editorial board branded a “blow to democracy” that will lead to corporations “overwhelm[ing] elections and intimidat[ing] elected officials.” But now some corporate executives want to be dispossessed of the keys to the kingdom immediately after SCOTUS returned them — say what?
The executives’ appeal makes sense if you’ve read this article by law professor Robert Sitkoff (then of Northwestern, now the John L. Gray Professor of Law at Harvard ). Sitkoff argues that the 1907 Tillman Act, which placed the first federal limits on corporate involvement in campaigns, was not adopted because elected officials wanted protection from corporations, but because corporations demanded protection from donation-seeking politicians like William McKinley and his bagman Mark Hanna. Now, in the wake of the Citizens United decision, corporations are asking for renewed protection — this time on the taxpayers’ dime.
As others have argued, corporations are subject to federal laws, regulations and taxation, just like citizens, and therefore should have First Amendment rights just like citizens. If corporations are afraid their regained rights will expose them to politicians’ demands for corporation-financed political ads, then corporate officers should follow their duty to shareholders and learn how to say no.
As for the New York Times Company’s concern about corporations having undue influence on democracy, there are a couple of things it can do to reduce that influence. For one, the New York Times Company can stop endorsing candidates for office — a practice that undermines newspapers’ claims of fair and objective reporting. For another, the New York Times Company can stop using its reporters to electioneer.
Why Do You Want to Tax ‘Cadillac’ Health Care Plans?
The battle is intensifying between Democratic leaders and their labor supporters over a proposal to tax higher premium employer-provided health care plans. The proposal, which is contained in the Senate Democrats’ health care bill and supported by President Obama, would add a 40% excise tax to any amount above $8,500 paid for an individual worker’s coverage, or above $23,000 for a worker’s family. Labor leaders claim that a quarter of unionized workers would be subject to the tax, and government analysts estimate that 22 percent of all workers would be subject to it in 10 years.
A reasonable policy argument can be made for taxing employer-provided health coverage (more on this anon). That argument is not the one that the media (uncritically) reports is the chief motivation for President Obama and Senate Democrats. According to the press, the president and Senate Democrats want the tax so as to disincentivize employers from buying more comprehensive and elaborate coverage for their workers, which would mean that insurers would pay less for workers’ care and thus “lower the cost curve.” That thinking does not make for good public policy.
To be sure, the public worries about the rising cost of health care. But that doesn’t mean that we should embrace any policy that lowers that cost; otherwise, we would simply outlaw surgery and cancer treatments. Instead, what people want is to pay no more than they have to for the health care they want. Put more carefully, people want greater efficiency in health care (that is, more bang for their buck), not a cap or threshold tax on the care they receive.
Higher-premium health coverage does not violate this demand for efficiency. A so-called “Cadillac” plan can be broadly comprehensive and elaborate, and still be efficient, while a “Yugo” plan can be horribly inefficient. Just as important, the purchaser of that coverage (the employer, acting in place of the worker) has plenty of motivation and opportunity to consider different levels of coverage at different prices from different providers that compete on efficiency (and other dimensions). If the employer selects an expensive plan as part of its workers’ compensation, what’s the policy issue?
Sharp readers will point out that there is a policy issue in that employer-provided health care is an untaxed benefit, whereas most other forms of compensation — especially wages — are taxed. This brings us to the “anon” from above: The different tax treatments distort worker compensation, resulting in workers receiving more health care benefits and less wages than they would if all forms of compensation were treated equally. But notice that this distortion occurs when any amount of employer-provided health care is untaxed, not just the amount over $8,500 per worker or $23,000 per family.
The distortion problem is seldom mentioned in press coverage of the “Cadillac” tax proposal, and when it is discussed, it’s portrayed as a minor justification for the tax, behind the chief justification of “bending the cost curve.” And it is the latter, bogus justification that President Obama, Senate Democrats, and the press seem to be focused on.
A Double Dip for Housing?
Washington is fretting this week over news that mortgage applications fell dramatically in November. Coupled with earlier indications of renewed softening in the housing market, there is growing fear that housing is headed for a “double-dip downturn” that could further damage the economy. As a result, Federal Reserve policymakers are considering additional stimulus, while the National Association of Realtors is suggesting an(other) extension of the “temporary” homebuyer tax credit.
Remarkably, neither policymakers nor the media are asking the obvious question: Given all of the emergency interventions in housing that government has undertaken, and the fact that the housing market continues to erode, do such interventions do much good?
Since the bursting of the bubble in 2006, the great unknown has been whether housing prices will revert to their historical trend (and possibly to below trend for a short period), or stabilize at some permanently higher level because a portion of the bubble (aided perhaps by public policy) would prove enduring. There is good reason to expect reversion to trend, but the economy can surprise us.
Let’s use an example to understand this better. The graph below depicts the course of house prices for my hometown of Hagerstown, MD, an area within commuting range of suburban DC that was hit particularly hard by the bubble and its deflation. The black line is a house price index computed by the Federal Housing Finance Agency for 1989–2009. The red line is an extended linear trendline drawn using index data from the period 1989–2002. (You can do the same analysis for your area using these FHFA data.) The question, then, is whether house prices will fall all the way back to the trendline or will stabilize at a level above the trendline.
A Want Ad for God
The press is still abuzz over Tim Geithner’s behind-closed-doors tirade against critics of the Obama administration plan to tighten financial regulation. As Mark Calabria writes below, Geithner offered a simple message to Fed chair Ben Bernanke, FDIC chair Sheila Bair, and others: “[Y]ou’ve been heard, so you were ‘included,’ now shut up.”
But while Bernanke, Bair, et al. quibble over details of the Obama plan, Geithner should be more concerned about the glaring flaw at its center: the idea that government can conjure up a “systemic risk monitor” that will identify and avoid future market bubbles.
Many of the great bubbles in financial history grew out of some belief that “everyone” (including financiers, politicians, and regulators) was confident was true, yet it turned out to be wrong (either because it was always wrong, or conditions changed in some unforseen way). Some examples:
- The supply of Dutch admiral tulip bulbs was constrained though they were in heavy demand, so the 17th-century tulip mania was good investing.
- The supply of land in the South Seas and the Mississippi Valley was fixed, so the 18th-century land-buying mania was good investing.
- The emergence of a nationwide U.S. marketplace in the early 20th century was a watershed event, so the post-WWI stock frenzy was good investing.
- The emergence of the Internet marketplace, combined with path dependency and network effects, was another watershed event, so buying “dotcom” stock was good investing.
- And of course, until the last few years,”everyone knew” that investing in real estate and mortgages was “safe as houses.”
That last bullet wasn’t just the belief of “greedy investment banks,” but also of government officials and regulators. My colleagues Peter Van Doren and Jagadeesh Gokhale have a forthcoming paper that notes, in part, that despite the populist rhetoric now being bandied around, banking is heavily regulated under international rules. However, those rules assume that investment in mortgages and mortgage-backed securities is low-risk (and indeed the rules push money toward those investments).
The paper also quotes numerous top-tier economists who claimed the soaring house prices of the past decade were supported by “the fundamentals,” or that a bubble wouldn’t threaten the broader economy. (Their paper doesn’t mention — but could — that Fannie Mae and Freddie Mac, along with their bureaucratic and congressional overseers, believed those firms’ investments in riskier mortgages were “safe as houses.”)
Everyone “knew” housing was a sound investment. It just turned out that everyone was wrong.
The Best Way to Get a Kidney (or Heart, Lung, Liver…)
An op-ed in today’s NYT describes the abysmal organ tranplant situation in the United States, where the demand for healthy organs vastly outstrips the supply. A snippet :
There are 85,000 people biding their time [awaiting kidney transplant]… More than 4,500 of them died last year waiting. On average, that’s 13 people dying each day awaiting a kidney. (Maybe you should hope for liver disease: there are only about 16,000 people on the liver waiting list, and one-third of them get their liver in any one year.)
The column’s author is Daniel Asa Rose, whose new book Larry’s Kidney describes his cousin’s travel to China to receive a transplant (skirting Chinese law).
Rose argues the United States can resolve the transplant organ shortage by adopting three policies:
[B]etter finance stem-cell research so we can start simply growing kidneys; build better mechanical organs; and change the presumed consent option so that people would have to opt out of donating organs rather than opt in.
The first two proposals, unfortunately, are more wishful thinking than serious policy, at least in the near term. Decades of attempts at robotic organs have yielded very disappointing results, and the many advances that we’re promised from stem cell research seem to be many years in the offing. If the United States is to save the lives of most of the people now on organ transplant lists, or who will join the lists in the next decade, it will be because of a dramatic increase in organ transplantation.
One way to accomplish this increase is to adopt Rose’s third policy — hospitals would harvest organs from the recently deceased unless the deceased has explicitly refused to make his organs available for donation. As the op-ed notes, several countries around the world already have this policy.
But this policy should trouble people who care about civil liberties. Should a person have to explicitly state on a legal document that he wants his body to be kept intact after his death? And even if the person has done so, what if the hospital (perhaps conveniently) cannot find the deceased’s documents?
Fortunately, there is an intermediate policy that would be much more respectful to the deceased and to civil liberties, would be easy to implement, would dramatically increase the supply of organs, and would have little cost relative to the other costs of transplantation: Incentivize people to volunteer to be organ donors — perhaps by granting a tax credit to their estate or covering their funeral expenses if, upon their passing, a healthy organ is harvested for transplantation.
Unfortunately, this policy is prohibited by the 1984 National Organ Transplant Act, a law that has cost more U.S. lives than were lost in the Korean and Vietnam wars combined. And this policy is opposed by many bioethicists despite clear empirical evidence that the policy would significantly reduce pain and suffering — which says more about the sorry condition of contemporary applied ethics than about the idea of rewarding organ donors.
Cato has done considerable work advocating this idea. For some examples besides the articles linked in the above paragraph, see this video and these papers.
Oh C’mon, NYT!
C@L readers know that I’m a fan of the NY Times‘s news and business reporting. If you want depth and detail (especially today, when papers increasingly read like Tweets), the NYT‘s news coverage is about as good as it gets.
The opinion page, sadly, is another matter.
Case in point, last Friday’s lead editorial chastising Japan and Europe for not adopting large fiscal stimulus plans. The lede:
The world economy has plunged into what is likely to be the most brutal recession since the 1930s, yet policy makers in Europe and Japan seem to believe there are more important things for them to do than to try to dig the world, including themselves, out.
That’s actually OK — the editorial board is free to believe (and espouse) that massive fiscal stimulus is the best policy for dealing with the current recession. But to use an old saying, they’re entitled to their own opinion, but not their own facts. Ignoring that admonition, the ed led off its final graf with this howler:
In a recent speech, Christina Romer, another of President Obama’s economic advisers, pointed out some lessons [sic] from the Great Depression: fiscal stimulus works.
If you follow the economic history literature, this is a stunner; some of Romer’s most important academic work demonstrates the opposite, namely that fiscal stimulus did little to get the United States out of the Depression [$] and subsequent U.S. recessions [$]. Has she rejected her own findings?
I tracked down the speech transcript and found out that, nope, she hasn’t; in fact, she was explicit that “fiscal policy was not the key engine of recovery in the Depression.”
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