Are The Borrowers At Fault?

Ryan Avent argues that, though some loan officers may have been unscrupulous, the real cause of the housing crash was stupid, greedy, borrowers, who wanted more loan in order to buy more house. This, Ryan says, is why so many ended up in the subprime market when they qualified for fixed rate mortgages. And maybe so.

Neither Ryan nor I have any data on how these conversations actually went. But whether it was the loan officer pushing the borrower off the variable-rate cliff or the borrower begging for a bit more rope with which to hang herself or, most likely, a bit of both, doesn't much matter. It is perfectly well understood that borrowers, by and large, know nothing of loans. It's a market that operates with a huge asymmetry of information. And though we know that loan officers are, in fact, loan salesmen, they are not presented that way -- instead, they're offered up as helpful experts waiting to guide you to a safe and secure financial solution. They're presented, in other words, like loan doctors.

What's supposed to govern their behavior isn't merely basic morals and business ethics, but a sense of concern for their company. If too many individuals enter into loans they can't afford, defaults will rise and the bank will suffer. Which is exactly what's happened. The loan officers, and above them, the banks, and above them, the regulators, were the ones with the knowledge, power, and authority to head off this mess. This market works, it exists, because we trust them to run it in such a way that does not massively exploit the ignorance of individuals, and does not put the entire economy at risk. They failed. But, unlike with the individual borrowers, they failed when their whole mission in life was to not fail, when they were paid to have the tools and information to not fail, and now, in reconstructing this market, we need to figure out what regulations will keep them from failing again. The behavior of the borrowers, financially stupid though it may have been, is simply not equivalent. This whole banking superstructure has supposedly evolved to help them -- to suddenly turn and say that it was a self-interested enterprise they had to outthink the whole time is quite strange.

What Happened?

Speaking of Stiglitz's article in Vanity Fair, his scoring of the last few decades is about as concise a summary of the liberal's take on recent economic history as I've seen:

The Clinton years were not an economic Nirvana; as chairman of the president’s Council of Economic Advisers during part of this time, I’m all too aware of mistakes and lost opportunities. The global-trade agreements we pushed through were often unfair to developing countries. We should have invested more in infrastructure, tightened regulation of the securities markets, and taken additional steps to promote energy conservation. We fell short because of politics and lack of money—and also, frankly, because special interests sometimes shaped the agenda more than they should have. But these boom years were the first time since Jimmy Carter that the deficit was under control. And they were the first time since the 1970s that incomes at the bottom grew faster than those at the top—a benchmark worth celebrating.

By the time George W. Bush was sworn in, parts of this bright picture had begun to dim. The tech boom was over. The nasdaq fell 15 percent in the single month of April 2000, and no one knew for sure what effect the collapse of the Internet bubble would have on the real economy. It was a moment ripe for Keynesian economics, a time to prime the pump by spending more money on education, technology, and infrastructure—all of which America desperately needed, and still does, but which the Clinton administration had postponed in its relentless drive to eliminate the deficit. Bill Clinton had left President Bush in an ideal position to pursue such policies. Remember the presidential debates in 2000 between Al Gore and George Bush, and how the two men argued over how to spend America’s anticipated $2.2 trillion budget surplus? The country could well have afforded to ramp up domestic investment in key areas. In fact, doing so would have staved off recession in the short run while spurring growth in the long run.

But the Bush administration had its own ideas.

Stiglitz, as you might imagine, goes on to detail what those were, and why they might have fallen short of the optimal policy path open to the country. But then, you wouldn't want to read such spurious slanders of this administration's wise economic management, would you?

The Dangers of Performance Pay

James Surowiecki lays it out:    

a recent study of almost a thousand companies by the management professors W. Gerard Sanders and Donald Hambrick found that C.E.O.s whose compensation was made up mostly of stock options tended to “swing for the fences,” making investments and acquisitions that were riskier than those made by other executives. As a result, the performance of the companies run by the risk-takers was far more volatile, and not for the good of the companies: the risky strategies were more likely to end in a big failure than a big gain. Generous options grants may also encourage fraud; the business professors Jared Harris and Philip Bromiley, who have made a study of hundreds of firms forced to restate earnings after accounting irregularities, found that companies that paid out most of their compensation in stock options were far more likely to end up restating earnings. And, as with hedge funds, the perverse effects of performance pay are exacerbated by the fact that big bonuses are often based on short-term performance. Stanley O’Neal, who was recently forced to resign as the C.E.O. of Merrill Lynch, made eighty-four million dollars in 2005 and 2006, a figure based in part on the huge profits that Merrill booked as a result of its forays into the subprime market. This gets to larger issues with so-called "performance pay." 

Depending on what metrics you're using to evaluate performance (and thus dictate pay), you risk distorting a worker's incentives to approach their job in a balanced, prudent, way.  If a teacher's whole compensation is based on test scores, for instance, you'll not only have a lot of teaching to the test, you may simply see the test -- or at least past versions of it -- being taught.  That may make for comfortingly high test scores, but it may also lead to less actual learning, less critical thinking, less adaptive educations, etc.  If a CEO's pay is based on stock options, amping up the price of the stock -- even in the short-term -- becomes more attractive.  If a journalist were to be paid on a per word rate, you'd get a lot of block quoting and very few contractions.  And so on, and so forth.  This stuff isn't as easy as people would like it to be.

Towards a Better Globalization

Does big government actually act as a facilitator of globalization, free trade, and open economies? The answer on this one is supposed to be no, of course not. Government mucks everything up, and burns your money in their big money chimney, and blah blah blah. But Denmark, Sweden, and other Nordic countries have, in recent times, acted as contrary evidence to this thesis. Their model, where an expansive social safety net reduces economic insecurity and thus reduces public fear of a dynamic economic system, has acted as a useful social democratic alternative to our system, where the losers of globalization are unprotected and uncompensated, and globalization is kept politically viable mainly through the support of elites. Among these two alternatives, the Nordic model has been painted as quirky and unsustainable. New research, however, suggests that the Nordic model is actually the historic norm for globalizing countries, while our approach is actually something of an aberration.

Which makes sense. Individuals are risk averse. When offered a new economic system which will increase their risk, but offer random and concentrated economic gains to people who likely aren't them, they're not generally terribly interested in switching over. If those economic gains however, were channeled into programs or institutions that protected them, and even made their lives better, things might be a bit different. That's what the Nordic countries have found, where social spending creates the political environment that facilitates a dynamic economy. America's found that elite support can trump popular anxiety, and so globalization can be furthered that way. But it' sprobably not the most sustainable approach.

Of Markets and Tomatoes

Far be it for me to argue with Brad DeLong about economics, but his response to a commenter bemoaning the absence of fresh, taste-driven produce during his childhood seems a bit off-base. Rubber tomatoes, the commenter writes, were all the stores carried, because they were all that would survive the trip, all that would endure throughout the entire year, all that seemed profitable. In reply, Brad says, "Why didn't you taste a tomato worth eating for the first twenty years of your life? What stopped you? Was some commissar standing over your parents waving a kalishnikov? Or did your parents just not think it was worth the extra money?"

Or maybe there weren't any around. As I said above, I would never argue with Brad about economics. But I will let Joel Waldfogel do so, by way of his new book The Tyranny of the Market. As he argues, the market often makes decisions much as a crude central planner would make them, advantaging majority preferences to the point that minority products just about vanish from the market. So it may well be that in the days of the rubber tomato's hegemony, in the place where Brad's commenter lived, there simply weren't any delicious, flavorful, tomatoes. There wasn't a farmer's market, or a specialty produce store. There was just the type of tomato that the local grocery thought would make them the most money. And that was a rubbery tomato. In recent years, Whole Foods and others have shown that consumers will pay for better produce, and eating seasonally has come into vogue, so minority preferences in food have grown large enough to give most urban and upscale customers access to finer products. But that's hardly a universal situation even now, and it certainly wasn't then. You could go through life never tasting a good tomato because you simply didn't know there was any type of tomato beyond what you bought at Safeway.

What Makes An Economist?

David Kennedy, reviewing Paul Krugman's book, framed his essay with an old quote from Francis Amasa Walker:

maybe Krugman is not really an economist — at least not according to the definition offered more than a century ago by Francis Amasa Walker, the first president of the American Economic Association, who wrote that laissez-faire “was not made the test of economic orthodoxy, merely. It was used to decide whether a man were an economist at all.”

Sadly, particularly for a historian who later accuses Krugman of getting his history wrong, Kennedy botches it. Walker was mocking that view, asserting its hollowness and bankruptcy, just as Krugman does. But Krugman/Kennedy contretemps aside, the Walker speech is worth excerpting, and marveling at how current it sounds for an address given in 1888:

Yet, while Laissez-Faire was asserted, in great breadth, in England, the writers for the reviews exaggerating the utterances of the professors in the universities, that doctrine was carefully qualified by some economists, and was by none held with such strictness as was given to it in the United States. Here it was not made the test of economic orthodoxy, merely. It was used to decide whether a man were an economist at all. I don't think that I exaggerate when I say that, among those who deemed themselves the guardians of the true faith, it was considered far better that a man should know nothing about economic literature, and have no interest whatever in the subject, than that, with any amount of learning and any degree of holiest purpose, he should have adopted views varying from the standard that was set up....

The abandonment of Laissaz-Faire, as a principle of universal application, however strongly individuals may still maintain it as a general rule of conduct, at once makes communion and cooperation, not merely possible. but desirable among economists. When it is confessed that exceptions, not few or small, are to be admitted, every thinking man has a part to take in the discussion; every interested and intelligent person becomes a possible contributor; every class of men, whether divided from others by social or by industrial lines, have something to say on this subject, which no other class can say for them, and which no other class can afford not to hear from them. The characteristic institutions of every nation, the experiences of eyery distinct coinmunity not only become pertinent to the subject, but constitute a proper part of the evidence which is to be gathered, sifted and weighed.

How Bad Is The Wall Street Journal?

Will Wilkinson takes unsurprising issue with my characterization of The Wall Street Journal editorial page as "mendacious, extremist, and intellectually sloppy." So let's look into it: On August 24th, they published an editorial entitled "How To Raise Revenue." In it, they promised to defend further tax cuts on grounds of equity. They did so by arguing that "The supply-side revenue effects on the rich are remarkable: Tax rates on higher incomes have been halved, but the federal tax share of the top 1% has nearly doubled." They even produced a helpful graphic:

Can't argue with a graphic. But you can mention what it leaves out. According to the Pikkety and Saez data, in 1980, the income share of the Top 1% was 8.18% of the national total. In 2004, it was 16.08%. For those playing along at home, that's a 96% increase.

During the same period, their share of federal income taxes went from 19% to 36% -- a 89% increase. So controlling for the increase in income, the tax burden on the rich fell. That's some remarkable supply side effect: As the incomes of the rich go up, their tax liability goes down. And it didn't just drop a few percentile points: Because we have progressive tax rates, as more income pooled at the top, their tax liability should have increased substantially, as they'd pay more on that income than less wealthy families would.

The Wall Street Journal editorial page either couldn't figure this out -- in which case they're innumerate -- or they didn't want to tell their readers, in which case they're mendacious. Either way, why does Will believe this is an institution worth supporting?

Should Economists Rule The World?

In stark contradiction to Bryan Caplan's thesis that we should all slowly back away from our government and let trained economists take over, a new paper by Anil Hira examines leaders from across the world and admits that "we cannot conclude that leadership training in economics leads to better economic outcomes." I chalk it up to the fifth and most deadly type of anti-market bias: Anti-economist-bias...

Update: Speaking of anti-economist bias, Matt suggests I have some. I don't! Honest! Some of my best friends are economists! Rather, I appropriate the Rick Perlstein line on conservatism and say: Economics cannot fail. It is only failed. A lot. For instance: Matt writes:

The ideas the Bush administration, The Wall Street Journal, and all the rest are working with are marginal, crackpot notions that are being mainstreamed through relentless message discipline. There isn't some army of orthodox neoclassical economists out there who think that returning to Clinton-era levels of taxation would wreck the economy, that retirement security can best be provided to all by expanding tax breaks for rich people, that health care can best be improved by expanding tax breaks for rich people, that sound education policy requires expended tax breaks for rich people etc.

That's correct. But nor is there some army of orthodox economists out there saying that. Indeed, highly respected orthodox economists like Greg Mankiw, who knows the supply siders are peddling quackery and said so in his textbook, happily contributed his voice and legitimacy to the quackery in 2003.

Jon Chait is right that the supply siders are maniacs, but they aren't marginalized maniacs, and that's in part because that economics profession hasn't seen fit to marginalize them. Mankiw may say, in his textbooks, that they're charlatans, but when push came to shove he joined their cause, disagreeing, he says, with some of their nuttier claims, but nevertheless lending them and their claims -- which included, in the Bush administration, such ideas as "returning to Clinton-era levels of taxation would wreck the economy, that retirement security can best be provided to all by expanding tax breaks for rich people, that health care can best be improved by expanding tax breaks for rich people," etc -- his name and credibility. And it wasn't a one-off: Mankiw is now a prominent advisor to Mitt Romney, who says discredited things like "“If you lower taxes enough, you create more growth."

Meanwhile, there's no outlet in the world that publishes as many economists -- and good ones, too, Nobel Prize winners -- as The Wall Street Journal editorial page. We know, and many of those economists know, that that editorial page is mendacious, extremist, and intellectually sloppy. But they nevertheless publish there, lending their titles and credibility to an outlet that continually promotes a fundamentally poisonous and empirically laughable ideology. This is, in large part, how supply-siderism survives. Not because economists believe it. But because the Right is very good at setting up incentives so it's good for the careers of otherwise credible individuals to seem like they're promoting it. And it's a shell game many economist happily participate in, and that grievously harms the country.

Fed Cuts the Discount Rate to 5.75%

By Deborah Newell Tornello
a.k.a. litbrit

Not that this was entirely unexpected (though I read plenty of self-assured speculation that Bernanke would hold out--for a while, at least).  But still.

With risks to the economy from financial market turbulence rising "appreciably," the Federal Reserve on Friday lowered the rate it charges banks on loans they receive from the Fed's discount window, though it opted not to cut its primary policy tool, the federal funds rate.

The Fed's decision to lower the discount rate and ease the terms of discount borrowing but not to cut the fed funds target suggests that for now it believes the problems in the markets are mostly related to the availability of cash, not the price of cash. (Read the Fed's statement.)

One wonders if (and when) the interest rate might be treated similarly, and how long it will be before the nasty I-word fully rears its head.  Economic reporters may be great looking--some even earn nicknames like The Money Honey--but economic realities tend to be rather less attractive, at least in the opinion of this observer.

Government and Markets Sitting in a Tree...

The New York Times editorial page gives in to its inner progressive today:

You would think that we were living in the lap of the Nanny State. One of the most puzzling facts of the political debate is how much traction Republicans still get from their calls to cut taxes and public spending, and how timorous Democrats are in arguing against them.

The United States has long had one of the most meager tax takes in the industrial world. America’s social spending — on programs ranging from Medicare and Social Security to food stamps — is almost the stingiest among industrial nations. Among the 30 industrialized countries grouped in the Organization for Economic Cooperation and Development, only four — Turkey, Mexico, South Korea and Ireland — spend less on social programs as a share of their economy.

Long a moral outrage, this tightfisted approach to public needs is becoming an economic handicap. Shortchanging public health impairs America’s competitiveness. If the United States is to reap the rewards of globalization, the government must provide a much more robust safety net — to ensure public support for an open economy and protect vulnerable workers.

This is sort of the point my Richardson article hinges on: More social spending can actually be a growth-accelerant. There are certain things the market can't provide efficiently, and many things the government can't provide efficiently. Only a few of those are in the overlapping part of the venn diagram. And you improve your economy -- not to mention the lives of your citizenry -- when you move goods that could be better provided by the government out of the market's grasp. In the Joseph Stiglitz talk I reference in the Richardson piece, Stiglitz said:

Yesterday, I was talking to the former Finance Minister of Sweden. And Sweden has been one of the countries that has been most successful in facing the challenges of globalization. It’s a small economy, very open, with a significant manufacturing sector. In terms of some of the rhetoric that you hear in Washington and elsewhere, it should have been a disaster case. They have one of the highest tax rates. And it’s not only true in Sweden: Finland and all the other Scandinavian also have very high tax rates. If you only looked at tax rates, you would say these countries would be a disaster. And we had a discussion in which the view was that their success was in spite of. No, it’s not only in spite of, it was because of the high tax rates.

Why is that? It sounds counterintuitive. Well, the answer is it’s how the money is spent. Again, looking at both sides of the balance sheet. It was spent in ways that led to a stronger economy, enabling the economy to face some of the challenges of globalization. The net result of this is that, for instance, Sweden and the other Scandinavian countries do much better than the United States on broader measures of success like human development indicators that look at not just GDP per capita, but also look at health and longevity in terms of labor force participation. They’re doing very well.

The government can complement and enhance the market. The Right's desire to set the two in constant opposition actually holds us back.

Dani Rodrik is Constructive

You don't hear this every day:

the shortcomings of governments should not be taken as a given. Just as economists think about how to improve market institutions, they can devote their talent to improving the institutions of government. The informational and rent-seeking costs of government intervention can be ameliorated through appropriate institutional design.

It's bizarre, actually, how much time is spent lamenting the failures of government versus considering how to improve its functioning, and then on the other side, how much time is spent lamenting the failures of the market versus offering policy ideas to ameliorate its shortcomings.

If President Bush, all his cabinet members, and ever head of a government agency were seeing their salaries accelerate into the tens of millions of dollars for no apparent reason, people would be very, very upset, and it would be yet more evidence that bureaucrats are inherently untrustworthy and incapable. When it happens to CEOs, it's either justified as the market's inscrutable wisdom at work, or folks think about how to reorder Boards of Directors so it stops happening. In the one case, we try to fix it. In the the other case, it' would be used as evidence that the institution can't be fixed.

Can We Treat The Poor Like The Rich?

Charles Karelis, the former head of Colgate University, says no. Rather, he argues we've been approaching poverty reduction bass-ackwards because we've been employing strategies that would work on poor people with the attitudes and incentives of non-poor people, but that fundamentally misunderstand the incentives of the folks who actually make up the impoverished. I haven't read the book, but Tyler Cowen summarizes some of its arguments this way:

if pains and troubles are high enough, extra pain and trouble just isn't so bad. You hardly notice it. But that overturns standard economic assumptions of diminishing marginal uitliity, and the rest of Karelis's model follows directly.

Poor enough people will accept risk in the downward direction rather than smoothing consumption, so they buy lots of lottery tickets. They also commit more crime, so they can have at least some joyous times, and they take lots of "stupid" chances. Yet the poor are not irrational or necessarily dysfunctional in terms of procedural rationality, but rather they are optimizing given constraints. [...]

The more the poor regard themselves as lagging the rich (rather than doing better than, say, their peers back home in Gujarat), the more stupid risks they will take. That's why poor immigrants are more value-maximizing than the poor that have lived in America a long time and adapted to American norms and expectations. The immigrants don't regard their burdens as insuperable and they are on standard downward-sloping marginal utility curves.

I think the issue of lagging the rich is less important than an individual's confidence in their own mobility. An immigrant from Gujarat is experiencing economic mobility in a very real and tangible way. Therefore, it's perfectly consonant with their experience that they can enjoy yet more economic mobility, and they should act accordingly. If you're convinced you can move up, you'll be willing to make more short-term sacrifices in order to assure your long-term trajectory.

Grow up in an inner-city ghetto surrounded by a lot of sticky poverty, however, and the odds for economic uplift might seem rather smaller. If you don't believe you can move up, then it's not necessarily worth engaging in the unpleasant short-term tasks necessary for economic advancement. People make sacrifices when they're convinced that they'll pay off. Without that assurance, why make the sacrifice?

Keynes on First-Best Economists

As follow-up to the previous post, Dani Rodrik also points us to this exquisite commentary by Keynes:

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

Or, as John Kenneth Galbraith put it:

In economics, hope and faith coexist with great scientific pretension and also a deep desire for respectability.

A Taxonomy of Economists

Dani Rodrik breaks down the two types of economists:

I call them "first-best economists" and "second-best economists." Here is my guide to them.

You can tell what kind of an economist someone is by the nature of the response s/he offers when confronted with a policy issue. The gut instinct of the members of the first group is to apply a simple supply-demand framework to the question at hand. In this world, every tax has an economic deadweight loss, every restriction on individual behavior reduces the size of the economic pie, distribution and efficiency can be neatly separated, market failures are presumed non-existent unless proved otherwise (and to be addressed only by the appropriate Pigovian tax or subsidy), people are rational and forward-looking to the first order of approximation, demand curves always slope down (and supply curves up), and general-equilibrium interactions do not overturn partial-equilibrium logic. The First Fundamental Theorem of Welfare Economics is proof that unfettered markets work best. No matter how technical, complex, and full of surprises these economists' own research might be, their take on the issues of the day are driven by a straightforward, almost knee-jerk logic.

Those in the second group are inclined to see all kinds of complications, which make the textbook answers inappropriate. In their world, the economy is full of market imperfections (going well beyond environmental spillovers), distribution and efficiency cannot be neatly separated, people do not always behave rationally and they over-discount the future, some otherwise undesirable policy interventions can generate positive outcomes, and general-equilibrium complications render partial-equilibrium reasoning suspect. The First Fundamental Theorem of Welfare Economics is proof, in view of its long list of prerequisites, that market outcome can be improved by well-designed interventions. Since they have given up on the textbook model, members of this group have an almost-infinite variety of "models" to choose from as they think of public-policy issues.

That's a useful taxonomy, actually, and it cuts across ideological lines. Rodrik identifies not only libertarians like Greg Mankiw, but left-of-center types like Brad DeLong, as first-best economists. Folks like Paul Krugman, Joe Stiglitz, and the EPI-types are second-best economists. So far as dabblers go, most of my libertarian friends are first-best types. Im a second-best types. And this isn't surprising. As Rodrik puts it, "these disagreements are often grounded not in economics per se, but in strongly held prior views about the world in which we live in." Of course, we all think our views are grounded in economics and evidence, but which evidence you find most compelling, and which assumptions you're willing to make (can consumers be rational and wise health care purchasers), matter greatly.

Is CEO Pay a Positional Good? (or Money Talks)

Costco CEO James Sinegal certainly thinks so:

“I think that most of the people running companies today are motivated and pay is a small portion of the motivation,” Mr. Sinegal said. So why so much pressure for ever higher pay?

“Because everyone else is getting it,” he said. “It is as simple as that. If somehow a proclamation were made that C.E.O.’s could only make a maximum of $300,000 a year, you would not have any shortage of very qualified men and women seeking the jobs.”

If all the other CEOs are making $10 million, and you're making $5 million, it's not that your salary is insufficient, but that the status it confers is insufficient. If your income is supposed to speak to your value, then it can, at a point, cease being about the money and begin being about what the money says. Hence skyrocketing CEO pay: You can't go to a new job, even a better new job, if the specifics of the deal (your salary and options) will harm your status. So CEO's constantly need better deals in order to retain their relative position, which means all the other CEOs need better deals to retain their relative position, and so on, until the pay is utterly obscene and, in fact, completely beside the point.

Update: In comments, Tyro adds three important points:

Note that many corporations also probably regard their own status as being insufficient if they are paying their CEO less. Who wants to be the one to say, "yes, our CEO is worth less than the average for the industry" ?

Also, in an environment full of hostile takeovers and cut-throat competition, ever-escalating salaries for CEOs are regarded as signals of corporate strength. Paying them less then their competitors could be regarded as an outward sign of weakness.

If CEOs were paid more based on their managerial added value, we'd see salaries for executive vice presidents spiraling upwards at the same rate, but we don't. The only difference between the two is their public profile, and the public profile for CEOs is much higher than for the people directly under him.

I've not seen data for lower-level executives, but it would be interesting to examine how it tracks changes in CEO pay. As for the other points, Tyro is right on: CEO pay is not merely positional among CEOs, but among firms.

Smart For One, Dumb For All Problems

"The heat is bad, yes, but it's also the humidity," complains Matt. "I'll always remember this July 12 breakfast with Chuck Schumer from last summer for exactly how uncomfortable everyone (the Senator included) looked in our jackets and ties and remembering who, exactly, we were all trying to impress by dressing like that?"

This is what the economist Robert Frank calls a "smart for one, dumb for all" problem. Given that Matt is having breakfast with a major politician, and everyone in the room will be wearing jackets and ties, it's very smart for him to adopt a blazer and some neckwear. Same goes for every other individual in the room. But if Schumer (or someone of significant enough standing) had sent out an e-mail suggesting that Weather.com said July 12th will be 472 degrees, and everyone should wear shorts and a T-shirt, everyone would have been better off. You can't unilaterally opt-out of the dress code, but communal welfare would be improved if a collective decision to dress down was made. Life, in fact, has a lot of problems where the group incentives point in the opposite direction as the individual incentives. This may or may not have broad policy implications. And I may or may not be writing about them for this weekend's LA Times.

Net Estimates

Responding to news that air planes are later and more crowded than ever, Dean Baker makes an interesting point:

I remember back in the days when there was a debate over the accuracy of the consumer price index (CPI), all the big honchos in the profession argued that the CPI overstated inflation because it didn't fully pick up improvements in quality. I was arguing the other side, pointing out that there were also cases where the CPI missed deteriorations in quality. Air travel was one of my main examples.

One of the reasons that air travel has come down in price is that airplanes are almost completely filled. This is obviously efficient from the standpoint of the airlines, because the marginal cost of carrying an additional passenger is close to zero as long as there are empty seats.

However, it makes a big difference to the passengers whether a plane is filled or one third empty. On a plane that is one-third empty, everyone has a vacant seat next to them (or a window/aisle seat). How much more would you pay to be guaranteed a vacant seat next to you?

Air travel, of course, is not the biggest deal in the world. But thinking about economic changes in terms of their net impact, rather than merely their basic cost differential, is important. For instance: (many) Americans are getting richer. To do this, they are working far more hours -- many more than anyone else in the world, and many more than their parents worked. Is this good? Maybe. Part of the change is that women have high labor force participation now. But maybe not. Part of the change is that it's harder for families to get by, and many jobs expect for more than a 40-hour workweek. Either way, the costs of creating a culture that expects ever more hours on the job should be taken into account when discussing rising incomes. It almost never is.

Sebastian Mallaby is More Serious Than You

It's rare that I both agree with the basic thrust of an op-ed, and simultaneously find it utterly infuriating. So someone give Sebastian Mallaby the shiny new toaster oven and paisley luggage set, as he's penned just such a column. The actual points are, basically, good. Republicans engage in demagoguery on immigration and health care. Indeed they do. But the writing. Oh, the writing.

"It isn't just Democrats who flunk Globalization 101," says Mallaby. A sentence later: "Anyone who understands Globalization 101..." Who, exactly, is teaching Globalization 101? Is it Sebastian Mallaby? Greg Mankiw? Thomas Friedman? Dani Rodrik? Joe Stiglitz? Alan Blinder? What's on the syllabus? We're never told. But Mallaby, from his perch atop an op-ed page, is perfectly confident assuming shared knowledge in something called globalization 101.

Later we get, "the Republican Party, which prides itself on understanding globalization when it comes to capital flows or trade..." No it doesn't. The Republican Party doesn't wander around modeling currency movement. It advocates for corporate interests who derive economic benefit from unfettered capital flows and unlimited access to foreign markets. They may be right to do, they may be wrong to do, but there's no team of econometricians cranking out policy prescriptions deep in the RNC headquarters. Instead, there are corporate donors, and their checks, and their policy preferences.

And in closing, Mallaby gives us this gem: "In the 2004 election, the Kerry-Edwards ticket forfeited its claim to economic seriousness by opposing trade deals such as the Central American Free Trade Agreement." The medal of economic seriousness is, presumably, awarded by Sebastian Mallaby, in consultation with the editors of The Economist, Thomas Friedman, and the first three hours of an Economics 101 textbook on tape. I was not aware, however, that so much of the judging relied on support for a trade deal that retained American tariffs on sugar and textiles, reinforces pharmaceutical patents, and protects the MPAA. I guess that's why I've never been invited to the awards ceremony.

If A, Then A Goldfish

Brian catches this gem of socio-economic analysis from everyone's favorite conservative Deep Thinker, George Will:

How do you exclaim, as Hillary Clinton does, that today's economy is "like going back to the era of the robber barons" and insist that the nation urgently needs substantial tax increases, in the face of these facts:

In the 102 quarters since Ronald Reagan's tax cuts went into effect more than 25 years ago, there have been 96 quarters of growth. Since the Bush tax cuts and the current expansion began, the economy's growth has averaged 3 percent per quarter, and more than 8 million jobs have been created. The deficit as a percentage of gross domestic product is below the post-World War II average.

Yes, how do you exclaim that we're going back to the days of the robber barons when residents of Iowa still exhibit a healthy appetite for potatoes? Or, put another way, we've now got at least one Republican columnist auditioning for the honor of teaching Mitt Romney what a non sequitur is -- with examples!

Meanwhile, the Gilded Age wasn't defined by an absence of growth -- the robber barons, after all, brought us massive increases in efficiency through heightened energy production, railroad linkage, etc -- but by a lopsided distribution of wealth and income. And as the graph below decisively proves, the current era in no way resembles the Gilded Age's concentrations of cash. In no way. Not even a little bit. Just ignore the red line.

But hey! The deficit as a percentage of GDP is around its post-WWII average! Of course, that high average is mainly a function of Ronald Reagan, but shush now. Context does nothing but cause trouble...

More on Heterodox Economists

A commenter writes:

I am an Econ prof and the I think the answer to the question depends on the topic. The reaction of my colleagues to Blinder's WSJ editorial was: "isn't that just what we teach our students?" And it is. But it isn't what Economists typically say in the paper because there is this idea that "the public" can't be trusted with a subtle argument and therefore the old "classical" verities, which are often counter-intuitive, need to be emphasized even though "we" understand their limitations.

Recall that Aklerlof, Stiglitz, etc. all got published very easily. And it would be hard today to publish a paper on true classical trade theory, whereas in the "new" standard theories it is easy to show problems with trade. So, the problem is about "public statements", not research.

On the other hand, a lot of self-labeled "Heterodox Economists" are folks who don't want to learn math and who want to lecture folks on the moral correctness of left-wing politics, without doing much research. When journals don't publish their op-ed pieces, they say there is a conspiracy against them. Bah.

That distinction between public statements and research is, i think, an important one. This conversation is often marred by conflations between the two. There is much remarkable work going on within economics, even as there's an odd homogeneity in the profession's public representation. This is partially because its most enthusiastic public outlets are hack shops like The Wall Street Journal editorial page, and half because, as the commenter writes, "there is this idea that "the public" can't be trusted with a subtle argument and therefore the old "classical" verities, which are often counter-intuitive, need to be emphasized even though [economists] understand their limitations."

Forgetting The Neoclassics

The TPM Cafe discussion of Chris Hayes' article on heterodox economist is very interesting, but seems to be conflating a few different things. There's one question as to whether herd-think and job pressures and social influences subtly suppress heterodox work and lead to a misleading impression of the general findings of economists. And then there's another, which Chris went into in his article, as to whether the neoclassical model is a proven failure, and must now be replaced by something different.

That's a much sharper critique, and one that requires more evidentiary support than I'm currently seeing. Indeed, I find myself in line with Tyler Cowen's request "to see a simple list [of failures and rejected, but correct, theses] and start the debate there." There's no doubt that economics, like any other profession, has its sacraments, protects it orthodoxies, and exhibits group-think -- but those tendencies have, in my read, manifested more in the emphasis of certain conclusions over others (free trade boosterism over Dani Rodrik and Alan Blinder style concerns) than in the entire profession hewing to an outdated and insufficient intellectual framework. I'd be willing to believe differently, but I'm not seeing the proof. The profession actually seems quite flexible and adaptive when you dig into it. It's the public face which is somewhat less expressive.

Vacations, Holidays, and Sick Days, Oh My!

I tend to think it's easier to not see the lack of mandatory paid vacation and holiday as much of a problem if you're a highly educated, white collar worker, and even easier if you're a stay-at-home, freelance writer. It will simply never be true for you that the minimum is your reality.

But that doesn't mean it's not true for others. According to the CEPR study (pdf), about a quarter of workers don't get any paid vacation or holidays. If you make less than $15 an hour, that number jumps to 31%. If you do get paid vacation, on average, you get 12 days of it a year. That's less than the statutory minimum in every advanced country save Japan and Canada, and I'd bet the average in both countries well outpaces the average here.

And it's not just vacation days. Nearly half of all private sector workers get no paid sick days. In the bottom quarter of US workers, 80% are deprived -- and this is exactly the group that can't afford to take an unpaid sick day. And so far as family values go, only one in three workers has paid sick days they can use to care for ill children.

But really, unpaid is a bit misleading here: The employer isn't paying for worker illness, to be sure. But we are. As Bob Herbert reports:

I recently spoke with Bertha Brown, a home health aide who lives in Philadelphia and has two young daughters. She makes $7 an hour caring for people who are ill or disabled. “I feed them and dress them,” she said. “And if they have to be changed, I do all that.”

She has worked for the better part of two decades without ever being paid for a sick day. And her wages are so low she can’t afford to lose even a day’s pay. “If I get sick, I work sick,” she said. “I cover my nose and my mouth with a mask to keep my clients from getting sick.”

Food service workers are among those least likely to get paid sick days. Eighty-six percent get no sick days at all. They show up in the restaurants coughing and sneezing and feverish, and they start preparing and serving meals. You won’t see many of them wearing masks.

If you don't want your fries coming with a side of influenza, incidentally, there's some good legislation kicking around Congress that would mandate paid sick days. You can support it here.

Vacation In The US

Speaking of our inability to focus the conversation on non-economic goods like vacation days, this new report from the Center for Economic and Policy Research is upsetting stuff.  After reviewing the paid vacation and holiday policies of every advanced country you can think of and a couple you can't, they find that we're the only industrialized naton not to legislate any paid time off and holidays to our workforce.  And these aren't small differences: Austria gives workers 4 weeks paid vacation (5 for shift workers), the UK gives 4 weeks, Denmark gives 30 work days, Switzerland gives 5 weeks for young workers (which is an interesting distinction), and so on.  We give...none. 

Wait...what's that?  You want to see it represented visually?  Well I got just the thing!

It took me a moment to figure out this graph, as the final two values are a bit confusing.  That last line, the one marked 10?  That's Japan.  There's no line for the United States because we don't legislate any vacation.  That's our country.  Aren't you proud?

Why Americans Hate Economists; Cont'd

Dean Baker has a guess.  And so long as we're talking offshoring, remember that the practice exists as much as a threat as it does an action.  The specter of offshoring helps keep wages down, justifies cutbacks, forces longer hours, and all the rest.  Indeed, I was talking to a Chicago community activist the other day who was recounting the story of Brach candy company.  Brach was a commodity candy producer located in Chicago's Cook County.  It was eventually purchased by an oddball Swiss billionaire who instantly set about crushing the unions, forcing down wages, and all the rest.  For the first few years, he did this by threatening to move the company.  This worked until some Chicago community activists commissioned a study on where the company actually could be moved.  The study found that, at the time (this in the early-90s), no nations with cheap labor had the requisite talent base to run an advanced confectionary plant.  The study was passed on to the city of Chicago, and folks stopped listening to the threats.  But offshoring doesn't exist solely when jobs are actually flung across the world; it exists as a way to control labor domestically.

Postscript: Talent bases in other countries improved, of course, and in 2004, Brach moved to Mexico.

Econ-Speak

Preach it, Brother Atrios. Something has happened to the public discourse in this country that has left us unable to talk about anything save in terms of quantifiable GDP benefits. If you want to sell more vacation time, better do it on grounds of productivity -- even though the actual reason is that it would be nice if people could take vacations. Want to sell environmentalism? Better do it based on the possible job creation benefits of green energy. Health care? Administrative efficiencies. High wages? Lower turnover. Flex time? Productivity, again.

There's no conversation over the optimal type of society, or public goods, or the benefits of leisure. You see this in our odd discussions over the French system, in which the French are inexplicably hamstringing their own economy, possibly in order to annoy us. You see this in the Right's schizophrenic approach to family values, where they know perfectly well that kids are shortchanged because businesses don't have to offer paid maternity leave, paid time off, flex-time, serious vacations, or a thousand other things that advantage the family, but they can't bring themselves to advocate for anything that would make a difference, because it's so damned difficult to advocate for anything that doesn't clearly increase GDP.

This isn't, incidentally, the fault of any individual economists; it's more the outsized respect we accord the profession, our cultural subservience to whatever we've been convinced the economy wants (more tax cuts!), and the capture of economic rhetoric and argument by right wingers. That, I think, is the elephant in the room here: It's not that the TV is filled with academic economists spouting off myopic platitudes. It's filled with business types and corporate flacks and industry shills who are very, very skilled at spinning basic economic concepts and perceived societal wisdom (government is inefficient!) to set the terms of the debate.

Why People Hate Economists; Cont'd

From Bruce Webb in comments:

Economics does not have good answers about equitable solutions because that is not the question they are asking themselves. If efficiency is the starting point then Free Trade based on Ricardian Comparative Advantage becomes a slam dunk winner. Once you define efficiency as GDP without attention to distribution. And if you combine this approach from efficiency with the belief that labor is always and everywhere fully compensated at its level of marginal production then it is no wonder economists shake their heads at being so misunderstood. Given the problem they have set themselves out to solve and given their assumptions on compensation the rest follows.

Which is fine but also a reason to keep these guys far away from the policy shop, the real world has a power component that their models simply don't accomodate, pricing power exists in many forms and arguing for a particular trade policy from within a framework that does not fundamentally acknowledge that is simply to play into the hands of the people who in fact exercise that pricing power.

...[Economists] start from the premise that there is no fundamental struggle between workers and capital, they assume that markets will somehow deliver equitable solutions or worse not even consider that a useful question. Whereas if you start from the position of equity, of rationally dividing returns on productivity by actual contribution to production you may not in fact reach the most efficient result.

Bruce's point on power is particularly important. One reason many political observers dismiss certain strains of economic thought is that too much else is held equal, including political, social, and financial power. I had dinner with a prominent economist recently, and I brought up Krugman's line that economists haven't yet figured out how to incorporate power into their models. My friend smiled, and said, "when someone models it, I'll take it into account." Well, great, but people are listening to you now.

Why Do People Hate Economists?

Mark Thoma's meditation on why people dislike economists is an interesting read.  My sense is that it's simpler than all that: Folks don't appreciate having their pain dismissed as meaningless static that muddles a more important aggregate picture.  That doesn't mean their pain isn't mere noise, but no one likes blithe dismissals predicated on impenetrable models.  Economists who express great confidence in their answers are going to be unpopular among populations that don't like those answers.  It's to be expected.  There are, of course, more serious critiques of contemporary economics, many of them made by renegade economists and observers frustrated by the discipline's inattention to political realities, but I think they're different than what Mark is talking about.

Also, Mark's wrong to suggest that the economics profession has been speaking with one voice, or anything like it, in favor of a seriously expanded social safety net.  Mark Thoma has certainly advocated for such redistribution, as have Paul Krugman, Lawrence Summers, and many others.  Glenn Hubbard, Gregory Mankiw, and quite a number in their conservative cohort have done no such thing, however.  And economists often react with fear and suspicion when their colleagues turn attention towards the downsides of globalization. 

That said, I don't think economists are poorly treated by the public at large.  I think they are better treated than any single profession I can think of.

Economist Groupthink

In recent months, the eminent economist Alan Blinder has been making waves with article arguing that offshoring represents a serious economic threat that may genuinely degrade the conditions of the American workforce. Blinder reprised those arguments in a Washington Post op-ed this weekend, where he complained that "lately, I'm being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades."

Reading this, Kevin says,"I'm squinting to detect any apostasy here, but I just can't find it. In fact, this sounds like very standard mainstream liberal economic advice. Is Blinder seriously suggesting that it's apostasy in the economics profession merely to point out that some people will be hurt by offshoring, and that we ought to think about helping them? That's hard to believe."

But true nonetheless. It's not that such ideas are an empirical apostasy, that mentioning them at lunch with some economists will cause your tablemates to scarf down their ham-and-cheese sandwiches and dash back to the safety of office hours. It's that making a public issue out of the dark side of globalization puts you on the wrong team.

This is, in fact, one of the things I found irritating about Jon Chait's article on the blogosphere, which sought to set bloggers apart as some sort of new phenomenon wherein speech is evaluated for impact rather than platonic Truth. Every group operates from an internal consensus that, consciously or unconsciously, it seeks to protect. This goes for activist writers of both stripes, of course, but it also holds true for journalists, who protect certain conceptions of their professions and conventional judgments as to the essential characters of politicians and events, and even for economists, many of whom conceive of themselves as locked in some epic battle against rising tides of protectionism.

For some of Blinder's colleagues, the emphases in his recent work, and the public way in which he's presenting his conclusions, offers protectionist scare-mongering a patina of intellectual legitimacy that could embolden "free trade" opponents. And so, common though his conclusions may be, his attention to the underbelly of globalization is at odds with the ideological ends that many economists, consciously or unconsciously, are pursuing. This may not make him a heretic, as such, but it makes him unhelpful to the cause.

Update: This, however, is a smart critique of Blinder.

Phased Recessions

Matt gives a quick primer on the Employment-to-Population measure, an important metric that indicates how much of the population is participating in the workforce, either by working or looking for work (folks forget that our unemployment data doesn't count those who've given up on the job market and ceased searching). Brad DeLong, for his part, notes that "the employment-to-population ratio is usually a lagging indicator--it doesn't start to decline significantly until after a recession is well under way," and, as you may have guessed, we're all talking about this because it's been declining.

So is there a recession underway? Sort of. As a labor economist I was listening to on the radio the other day put it, low-income workers have been experiencing what looks like a recession for awhile now, middle income workers are beginning to, and high income workers simply aren't. This is, in other words, a phased recession, and one reason you don't hear that much about it is it's not something you see if you're, say, an affluent journalist, television personality, or newspaper columnist and mainly know others within your class.

This is, it should be noted, a direct effect of inequality. Think of the income distribution as a long staircase. Income inequality lengthens it, not only by adding more steps, but by increasing the horizontal plane between steps. And in this case, the implicit imagery of trickle down economics -- money as water -- is helpful. Economic growth starts at the top, and the longer it has to travel, the more likely it runs out of momentum fairly high up. That's why you see gains pooling in the top few percent, while the bottom four quintiles get next to nothing, and in fact have seen some losses.

Recessions (particularly those not based in stock market bubbles) start at the bottom and travel upwards. And inequality does its magic again, this time concentrating their effects at the base and making it harder and slower for them to travel all the way up to the top. This is very good for the rich, but very bad for the poor, who'll not only suffer more, but will have to wait longer for any national action, as those who control the agenda won't feel the effects for quite some time.

Pepe Le Awesome

Was listening to a report on the French presidential debate this morning and was struck by how hilariously opposite their politics are. The framing of election pits the Reaganite, free market reformer Nikolas Sarkozy against the staid, socialist, Segolene Royal. But among the policy positions clarified in the debate was Sarkozy's promise not to change the 35-hour workweek. That's how you unlock the magic of the free market! This is par for the course, though: In America, when progressives talk about the need for government protections, they're really talking about sanding the roughest, farthest edges of unchecked capitalism. In France, when conservatives talk about unleashing free market principles on the country, they're really talking about some tweaks on the margins of the welfare state.

The apparent popularity of the 35-hour workweek, though, deserves some attention -- as does the French mandate of 5 weeks of vacation. The French like not working incessantly. They are consciously sacrificing a bit of economic growth in order to devote more time to leisure. It's a perfectly legitimate choice for a society to make. But it's never represented that way in domestic punditry, as we exclusively evaluate policy decisions based on their effects on measurable economic indicators.
It's that society/economy distinction I'm always going on about; in contemporary American discourse, it's almost impossible to justify any policy that won't plausibly increase economic growth. Yet the French seem rather enamored with just the opposite:

On top of the five weeks [vacation], there are another dozen public holidays, and a maximum 35-hour work week, with no paid overtime allowed. Managers like Marchand, who work more than 35 hours a week, get more time off.

"The so-called 35-hour work week gives us 22 more days a year," says Marchand.[...]

Normally busy streets in Paris empty out in July and August, when most locals take their annual holiday. Shops and businesses are often deserted for a month, sometimes longer. Whole apartment buildings are shuttered when Parisians flee the city.

The French are so passionate about their vacations, they put pleasure before profit. As tourists throng the streets and summer temperatures hit their peak, Paris’ most popular ice-cream parlor is closed for a whole six weeks. It’s the kind of business bonanza that would be seized upon by Americans, but the French don’t seem to care.

I'd give up a lot for a guaranteed five weeks of vacation. That's time enough to vacation with friends, and regularly see my family, and take the occasional long weekend. Indeed, I'd love to see an economist model what that would cost us. It would have to be an almost unimaginably high number to dissuade me from taking the deal. And, in any case, I'd love to see some better reporting on the French elections, wherein it's actually explained that the French keep choosing these policies, and that their effect isn't simply to drive down economic indicators, but to order society in a way that emphasizes leisure.

Your World In Quotes: Economics Edition

Jamie Galbraith, in the forward to the new edition of John Kenneth Galbraith's "The New Industrial State":

Large business firms often even replace the market altogether. This they do by integration: Replacing activity previously mediated by open purchase and sale with activity either internal to the corporation, or between a large, stable enterprise and its small, specialized suppliers, to whom risk is transferred. People reduce uncertainty neither through clairvoyance ("perfect foresight"), nor by confident exploitation of probabilities ("portfolio diversification"). They do it by forming up into structured groups large enough to forge the future for themselves. In politics these are countries and parties; in economics, corporations.

Once control passes to the organization, Galbraith wrote, it passes completely; the economics developed to describe the small firm and its owner-entrepreneur become obsolete. That form of economics celebrates the rational act of maximization, which consists of finding the shortest path to a given destination. But organizations do not have destinations. They have members, participants, stakeholders, all with a diversity of interests, talents, and purposes. Decisions are made by committees; the leadership of those on top is circumscribed by the need to get the underlings to go along. Individuals, the very focal point of traditional economics, no longer matter very much. Power in the firm belongs to what Galbraith called the "technostructure."

It's always worth saying that "economics," as a discipline, has thought about many of these issues in great depth, and developed cunning and complex models to express some, if not all, of these developments. But economics as it's deployed in common discourse -- often by self-interested interlocutors -- tends towards simplistic neoclassical arguments, which are in fact quite poor at describing the behavior of an economy as complex as ours.

Update: On a slightly less dry note, you gotta love the Galbraith style. He argues that profits aren't maximized merely for shareholder gain, as the shareholders are abstractions rather than voices around the table, and the natural inclination of individuals is to wrest gains for themselves. To think otherwise, Galbraith writes, "one must imagine a man of vigorous, lusty, and reassuringly heterosexual inclination eschews the lovely and available women by whom he is intimately surrounded in order to maximize the opportunities of other men whose existence he only knows through hearsay." This, incidentally, is exactly what's going on with the skyrocketing CEO pay approved by comfy, nepotistic boards of directors. They're advantaging those at the table, not the nameless masses known as "shareholders."

Numbers vs. Proportions

Dean Baker points out a pet peeve of mine: The tendency of reporters to frame economic facts in terms of absolute values versus proportions. Hearing that France's Nicholas Sarkozy wants to cut taxes by $90 billion over the next ten years would probably leave you thinking Sarkozy wanted to cut taxes by a lot. Hearing a reporter emphasize his desire to cut taxes at all, in fact, would similarly suggest substantial cuts, as the policy wouldn't be worth reporting otherwise.

But you'd be wrong. These cuts equal out to four-tenth of one percent of France's GDP. In other words, an essentially insignificant amount -- which is not what $90 billion sounds like.

I tend to make this point in terms of campaign finance, but let's put it here: The sums most individuals are accustomed to dealing with are very small. $1 million dollars is a lot of money. But when talking about federal budgets, $1 million is virtually unnoticeable. So to report economic matters in terms of absolute values is to accidentally mislead by tripping into the reader's insufficiently large sense of scale.

Similarly, it's never clear to me why reporters buy into the "X over Y years" formulation. It would be more illuminating to say Sarkozy wants to cut taxes by an average of $9 billion a year for the next decade. Lumping the whole number together -- even as you give the time frame -- offers an impression of size that's not quite correct.

The Great Society Revisited

It's axiomatic among conservatives that Lyndon Johnson's tenure was a historic failure, while Ronald Reagan's was a remarkable success. But for whom? For all the talk of the Great Society's failures, it's striking how much poverty actually did decrease, and how many of the period's programs remain in vibrant operation today. This graph, from a recent TAP article by William Spriggs, is particularly illuminative:

At the start of Johnson's tenure, two-thirds of America's African-American children were impoverished. By the end of his term, that number had plummeted by 25%, to 39%. This is what Reagan was talking about when he said, "The federal government declared war on poverty, and poverty won." What he didn't mention was that it was grievously wounded.

By contrast, in 1980, 42.1 percent of black children lived below the poverty line. By 1988, Reagan had reduced that share to...42.8 percent. Some record.

Or there's this: "In 1962, on the eve of the March on Washington for Jobs and Justice in 1963, the median income of black men was below the poverty threshold for a family of three, but by 1967 it was above that level (not until 1995 did it get above the poverty level for a family of four)." But we've become fairly uninterested in helping the poor. It's disheartening, for instance, that Social Security has grown along with the economy over the past few decades, while welfare benefits have contracted.

Those are our priorities. Not to mention war, tax cuts, corporate breaks, and all the rest. It's irrelevant to wonder whether poverty won; the real issue is that we've ceased fighting it.

Back to the 70s

Really interesting comment thread over at Mark Thoma's place on supply-side economics. Bruce bartlett, one of the original supply-siders, and Paul Krugman, both get in on the action. Bartlett, in fact, makes a fairly good point in response to Thoma's critique of the supply-siders, and one that requires a certain amount of humility to advance:

think Mark misses the historical context of my analysis. In the 1970s, we were unaware of real business cycle theory or New Keynesian theory. We were confronting Old Keynesian theory. What Mark has basically done is take a current theoretical debate and superimposed it on the 1970s. That's fine if one's goal is to understand how the economy really worked in the 1970s or what the actual effects of policies taken at that time were. But as a matter of history, it is misleading. We didn't know any of this stuff because it didn't exist then. We were dealing with a far different situation in terms of what people knew about the economy (or thought they knew) and that's one reason why I believe that terms like "supply-side economics" have outlived their usefulness. The context in which the term had meaning no longer exists and therefore it has become a barrier to communication rather than a facilitator.

From there the debate goes into the true nature of the Keynesians during the 70s, how Congressional economic policy making differs from academic economic theorizing, and much more. Fascinating stuff if you're at all interested in economic history, and props to both Paul and Bruce for mixing it up a bit.

Net Neutrality, Competition, and Pizza

Over at the Lounge, Julian takes issue with a pro-net neutrality metaphor from Craig Newmark, of Craigslist fame. Newmark compares the possible consequences of bandwidth discrimination to a situation wherein "you call Joe's Pizza and the first thing you hear is a message saying you'll be connected in a minute or two, but if you want, you can be connected to Pizza Hut right away." This, Newmark suggests, is a Bad Thing.  Julian, smartly, snarks, "what a topsy-turvy, dystopian sci-fi world this is, where large companies pay for what we might call "additional phone lines" while customers of a small business might attempt to call in, only to encounter some kind of "busy signal." Clearly an existential threat to democracy."

Well, democracy will probably survive. But Julian's acceptance of this situation is...odd. What market interest is being served by the increased accessibility of Pizza Hut? After all, we want our pizza places competing on a variety of metrics, from deliciousness to delivery speed to courtesy. How much bandwidth they can purchase, however, is not one of them. Indeed, a preventable situation in which subpar pies are propagating because Luigi is purchasing more tube space than Mario is...a bad situation.

Now, maybe it's a less bad situation than the one that would result were you to impose net neutrality, or phone line equality, or whatever. But then that's the argument that should be made. Otherwise, it's perfectly possible that government should step in and create the conditions for more beneficial competition. In other areas of commerce, we've already made that judgment, and thus most roads are built by the government, and you don't have to decide which pizza place to go to based on how much money they mustered for pavement. That, most of us agree, is a good thing.  As Brad DeLong says in his fascinating essay on Milton Friedman, "Sometimes government failures are greater than the market failures for which they purport to compensate. Sometimes they are not." The question is whether bandwidth should be treated similarly, and a sort of equality imposed to force competition onto more relevant grounds.

The "Mystery" of Growth-Challenged Wages

This sort of thing needs to be said more often.  Changes in the economy ranging from deunionization to the switch towards service sector jobs to foreign competition to regulatory policy to inequality have significantly increased the level of labor market tautness needed for average wages to grow.  Used to be that relatively moderate levels of growth would translate into benefits fairly far down the income ladder.  Now you need sustained, high growth to do the same thing.  If the economy is an orange, it now needs to be squeezed much harder for the median American to get any juice. 

Of course, you're not seeing particularly different levels of growth, and it's not as if the economy no longer has money in it, so where's all the cash going?  Why, to the top, my friends, to the top.  As I like to mention, in 2004, 53 cents of every dollar in salary increases went to the top one percent.  The other 297 million or so of us had to split the remaining 47 cents.  And federal policy isn't blameless either.  In 2006, folks in the bottom fifth got an average of $20 in tax cuts, raising their incomes by 0.3%.  Those in the middle fifth received average cut of $740, boosting their incomes by 2.5%.  And those in the top one percent received average tax cuts of $44,000, boosting their incomes by more than 5%.  And the rich grow richer grow richer grow richer...

Prizes

This is a good David Leonhardt column on using prize money to spur technological innovation that takes an unnecessary turn into demonizing government grants. "Grants," Loenhardt writes, "also became popular for a less worthy reason: they made life easier for the government bureaucrats who oversaw them and for the scientists who received them...Bureaucracies like a steady flow of money, not uncertainty". Only a fool or a naif would actually suggest replacing the grant system with a prize system, rather than using prizes as a supplemental incentive. Indeed, the causality there is rather reversed, as governments could easily appropriate a steady amount of prize money, but scientists like steady incomes -- supporting your family off uncertain prize winnings isn't terribly responsible. As my editor Bob Kuttner would say, prizes and grants are a both/and, not an either/or.

Who Was Milton Friedman?

By Ezra

Paul Krugman's assessment of Milton Friedman's work in this week's New York Review of Books is a true must-read, affirming once-again Krugman's status as the greatest living communicator of economic thought and history. Friedman's death was followed by a flood of underwhelming obituaries, impenetrably technical arguments, and conservative hagiographies. So Krugman's piece, which capably disentangles Friedman's careful economic work from his substantially less-cautious political advocacy is a welcome antidote:

Milton Friedman played three roles in the intellectual life of the twentieth century. There was Friedman the economist's economist, who wrote technical, more or less apolitical analyses of consumer behavior and inflation. There was Friedman the policy entrepreneur, who spent decades campaigning on behalf of the policy known as monetarism—finally seeing the Federal Reserve and the Bank of England adopt his doctrine at the end of the 1970s, only to abandon it as unworkable a few years later. Finally, there was Friedman the ideologue, the great popularizer of free-market doctrine.

Did the same man play all these roles? Yes and no. All three roles were informed by Friedman's faith in the classical verities of free-market economics. Moreover, Friedman's effectiveness as a popularizer and propagandist rested in part on his well-deserved reputation as a profound economic theorist. But there's an important difference between the rigor of his work as a professional economist and the looser, sometimes questionable logic of his pronouncements as a public intellectual. While Friedman's theoretical work is universally admired by professional economists, there's much more ambivalence about his policy pronouncements and especially his popularizing. And it must be said that there were some serious questions about his intellectual honesty when he was speaking to the mass public.[...]

During the first half of that fifty-eight-year stretch, from 1947 to 1976, Milton Friedman was a voice crying in the wilderness, his ideas ignored by policymakers. But the economy, for all the inefficiencies he decried, delivered dramatic improvements in the standard of living of most Americans: median real income more than doubled. By contrast, the period since 1976 has been one of increasing acceptance of Friedman's ideas; although there remained plenty of government intervention for him to complain about, there was no question that free-market policies became much more widespread. Yet gains in living standards have been far less robust than they were during the previous period: median real income was only about 23 percent higher in 2005 than in 1976.[...]

In the aftermath of the Great Depression, there were many people saying that markets can never work. Friedman had the intellectual courage to say that markets can too work, and his showman's flair combined with his ability to marshal evidence made him the best spokesman for the virtues of free markets since Adam Smith. But he slipped all too easily into claiming both that markets always work and that only markets work. It's extremely hard to find cases in which Friedman acknowledged the possibility that markets could go wrong, or that government intervention could serve a useful purpose.

Read the whole thing, which is not merely a remember of Milton Friedman, but a guide to some of the most contentious economic debates and questions of the post-war era.

Even The Minimum Wage's Opponents Support It

Dean Baker:

David Neumark, an economist who has devoted much of his career to research that is intended to show why the minimum wage is bad, was quoted in an NYT article as saying that the proposed minimum wage hike would reduce employment among the least skilled workers by 4 percent.

Okay, it's fun with numbers time. The minimum wage hike to $7.25 an hour will increase the wage for the those at the very bottom by 40.8 percent. Mr. Neumark believes that it will result in a 4 percent decline in employment, according to the article. That means that these least skilled workers will on average end up with 35.1 percent higher wages after the minimum wage hike than they do now (0.96*140.8 percent). That sounds like a pretty good deal for those at the bottom.

For more on this, Will Wilkinson and I had a long argument about the minimum wage yesterday's BloggingHeads. The Wilkinson rejoinder, as I understand it, is that while employment dislocation may not be so bad, businesses will compensate by lowering their air conditioning, or putting less food in the break room, or raising prices. Frankly, to give the country's 13 million lowest paid workers a 35.1% raise, I'll take a bit less AC. It's also worth remembering that pushing up the floor raises the house: Many businesses that now pay $7.25 will raise their wages in order to keep attracting better applicants. And as for our concerns over teenagers getting the money too, they're a) not the majority and it's b) never been clear to me why working teenagers, many of whom come from poorer families and are saving for college, deserve low pay.

In any case, as I was telling Will yesterday, if you raise the wage and enormous dislocation follows, or every business in California shuts off their AC, you can undo the legislation. I think the degraded bargaining position of American workers has rendered the demand for labor considerably less elastic than many conservatives believe, and so businesses will absorb this wage increase, as they've absorbed past increases, with relative ease. If that's wrong, we can walk it back. But cautiously erring on the side of American workers strikes me as perfectly prudent.

History Lesson

I very genuinely do not understand this sort of rationalizing:

The Haves: Almost every living American born after 1920

The Have-Nots: Almost anyone born anywhere before 1920.

As David Henderson once pointed out to me, if you consider the universe of people ever born, even a poor person in America today lives better than most people who have ever lived, putting almost all living Americans' standard of living in the top 1%.

This strikes me as comparable in usefulness to telling a poor person, "well, at least you've got good skin!" Yes, we're better off than we were a hundred years ago. No, that's not a sufficient answer, or even relevant comment, to questions of distribution and justice. If you don't think inequality is a problem or the current distribution of wealth is troubling, that's a position. If you're going to respond to the impoverished or the laid-off by explaining that thing sure were tough in 1912, that's not even an anecdote -- it's an utterly meaningless digression. And yet you hear it and its ilk occasionally (remember?) from the libertarian end of the spectrum. Why? Is it to comfort the speaker's conscience?

It's perfectly fair to reject distributional concerns or hold that most of America's poor are only relatively poor, not in states of extreme material deprivation. But then make that case. This idea that the working class should accept wage stagnation and the underclass should comfort themselves with the existence of modernity is about as useful as me asking my bosses for a $75,000 raise because I wasn't born in the future, and am thus comparatively deprived.

Corporate Responsibility Must End!

I've given Democracy (a journal of ideas!) a bit of a hard time in recent months, but their latest issue is genuinely fantastic. It contains a couple of articles I want to talk about, but the most important is Aaron Chatterji and Siona Listokin's ferocious critique of the corporate social responsibility (CSR) movement. As they argue, liberals have largely abandoned attempts to change the economy through government regulation and action and begun seeking instead to convince individual corporations, by way of PR campaigns and lobbying efforts, to become better economic citizens. This is foolish, in addition to being ineffective.

As Chatterji and Listokin document, corporations have become scarily adept at using the atmospherics of CSR to escape real regulation or public outrage. Here's how it works:

Imagine a world with one voluntary code of conduct governing the operation of apparel factories. Let’s call it the Golden Code of Conduct (GCC). This is a strong code that calls for the provision of a living wage, recognition of unions, and limits on working hours. Now suppose another set of companies who do not want to abide by the code, but still care about consumer perceptions, creates their own code, called the Super Code of Conduct (SCC). Their code lacks many of detailed provisions of the GCC, but it has some vague language about treating workers with respect. Companies must decide which code to adopt, and the SCC is clearly cheaper to institute. For high-minded companies that want to live by the more stringent code, the high costs could make them uncompetitive in supplying retailers. Meanwhile, the benefits are only significant if consumers can tell the difference between the two codes. If a company can retain the benefits of an improved image but not incur the cost of improved working conditions, there is no reason to expect them to choose the less stringent code.

Meanwhile, the willingness of progressives to accept corporate self-policing diminishes demand for government action that could impose standards not just on a few individual businesses, but on whole industries. That's a far more sustainable strategy. CSR, after all, means that those who choose virtue will become almost instantly less competitive, while their competitors will see no similar change. Indeed, part of Wal-Mart's rise was exploiting the higher labor costs of older retailers who'd emerged at a moment when they were expected to compensate employees fairly and generously. By ignoring such voluntary restrictions, Wal-Mart undercut, and out-competed, an array of retailers who'd made the mistake of demonstrating some CSR. And if the shaming campaigns of Wal-Mart Watch and Wake Up Wal-Mart miraculously succeed at forcing a similar moral epiphany in Bentonville, some currently unknown retailer will emerge in a few years to start the process all over again.

The essential problem here is that liberals are trying to fix market failures by asking market creatures to ignore, well, the market. Corporations are damn good at making profits. The market is damn good at encouraging profits. If society decides, however, that the drive for profit is creating unwelcome externalities, or somehow harming the common good, it has government to step in and set limits on the market. And that's the right order of things. Corporations should do what they do best -- seek profit -- and society should set, if needed, universal and fair limits across industries, enabling useful competition, ensuring a floor of wages and labor standards, and safeguarding the environment. The progressive insistence on CSR promises a whack-a-mole future, where one battle necessitates the next, as other corporations seek to take advantage of the self-imposed standards of their competitors. Government regulation, which is both more effective and far-reaching, is a much better way to go, and progressives should rediscover that.

Update: It's worth being clear here that the critique is about using CSR as a way to regulate economic activity, it's not against using it as an organizing technique that could, for instance, shame corporations into allowing government regulation, or universal health care.

At Tapped, too.

No Wage Growth For You!

It's always nice to see the Fed flipping out in fear over slight increases in wages. Sort of clarifies things, you know? Given that the late-90s saw lower-than-we-thought-possible unemployment combined with rapid wage growth and a surprising absence of inflationary pressure, you'd think some wage growth after five years of stagnation would be warmly greeted by the Fed -- instead, they're ready to slam on the brakes. The absurdity of it is almost too rich to convey, but the Federal Reserve literally takes wage growth for the median American as a warning sign of a sick economy.

Meanwhile, as Matt notes, it's a nice coincidence that we're supposed to believe that a quarter century of this sort of Fed policy had no effect on income inequality, which was, of course, entirely caused by skills-biased technological change. That Europe also saw the same change without the corresponding increase in inequality must not be mentioned. Also, don't mention any of this. That's not to say it's all, or even mostly, Fed policy -- Ben Bernanke isn't advantaging the top .1% above the top 1% in any serious way -- but a basket of things which have rapidly enhanced the capabilities of the rich to get richer, and heavily impeded everyone below them.

As a sort of general comment on the why-is-inequality-bad argument, inequality is symptomatic of bad things, like an economy where the rich-gets-richer effect has accelerated, social mobility has declined, and the median worker has lost bargaining power and thus compensation. These may not be economic bad things, but they can be contrary to the way we believe our society should work. Hell, we can simply decide the median worker deserves more than he's getting -- that is, after all, a judgment society can make. That doesn't mean we have to muck with an economy that may indeed be running at high efficiency. Ramping up the marginal progressivity of the tax code, as Robert Shiller suggests, would take care of this nicely.

I, For One, Do Not Welcome Our Economist Overlords. But I Like Reading Their Papers.

I'm sort of baffled by all this talk that economists are poorly treated by the public at large. Robin Hanson wants the credulity he imagines physicists have. On the other hand, Robin Hanson also wants to restructure health care and economic policy, while physicists tend to just tell me the universe is cool, so the increased skepticism Hanson is sensing may just be the natural tension engaged when he tries to screw with people's lives.

Physicists aside, economists strike me as the best treated of all the sciences engaging with the public realm. When's the last time you saw a major paper quote a sociologist's views on a serious matter of public policy? That some scientists are treated with a credulous curiosity as they theorize about alternative universes is not the same thing. If physicists ever deploy string theory to try and eliminate the minimum wage, you'll see a rather more hostile reaction.

Meanwhile, the fact that this stuff is coming from Hanson proves why economists don't get to simply pronounce on matters of public policy. Hanson is a sort of self-styled, contrarian genius whose website pronounces that "I have a passion, a sacred quest, to understand everything, and to save the world. I am addicted to "viewquakes", insights which dramatically change my world view." All of which is well and good, but it means his career has been based on arguing that everyone else -- economists included -- are going about things all wrong. In other words, economists disagree with each other and routinely turn out to be wrong. That their disputes are empirical and their mistakes rigorously implemented isn't much comfort.

More: self-described "recovering economist" Echidne has more on the silliness of all this and Megan (rapidly becoming one of my favorite, self-critical economists) has more on the "white-collar welfare" that is modeling.

Economics As Religion

Mark Thoma approvingly quotes a Stephen Gordon arguing that laymen don't understand economics in precisely the same way the don't understand evolution -- they're too quick to believe in an intelligent designer.

Intelligent Design as applied to economics takes pretty much the same form as it does with biology: "What we observe couldn't have just happened; it's obviously the work of some Greater Power." When it comes to evolution, the Greater Power generally takes the form of an omnipotent diety. The counterpart in economics is the 'economic elite': the existence of inequality is interpreted as evidence that those who have done well did so by design.

This seems almost indescribably bizarre. What does the last sentence even mean? That those who've done well have done so by accident? That wealthy elites -- yes, there are such people -- don't work to influence public policy in such a way that they become richer? And that wealthy elites are thus not rational economic actors who work to maximize their utility? That marginal tax rates, Fed policy, and distributionary decisions are set according to natural law? How does Gordon respond to the work of economists like Saez and Piketty? Robert Gordan and Ian Dew-Becker?

There are few disciplines I find one-tenth so valuable as economics. But this is theological thinking, not empirical exploration. And it's done to shut down, not open up, discussion. Gordon is angry that non-economists don't understand him. Reading this, it would appear that "non-economists" don't agree with his assumptions. And so he's arguing his interlocutors are little more than savages. It reminds me of this article (and the ensuing debate) between Bob Kuttner and Paul Krugman, which dealt with Krugman's tendency to argue -- and dismiss -- solely through expertise. Well worth a read, particularly given that the last decade has proved Kuttner rather prescient, and many top economists -- Krugman included -- now profess significant agreement with Kuttner's labor-liberal critique, a critique they once derided as nothing more than "economist-bashing."

Neoclassical Indoctrination

I'm glad to see the terrific Mark Thoma take notice of my friend Chris Hayes' article chronicling his observations from an introductory economics course at U of Chicago. I'm actually writing this from Hyde Park, center of the U of Chicago conspiracy, where wandering around pass under flapping posters from the Ayn Rand Institute blaring "A GREEDY CAPITALIST IS A POOR MAN'S BEST FRIEND."

It's a fun place. Hayes' article is about how economics is taught here, given that the school hosts the most famed economics department in the nation. There's a nonpartisan, empiricist aesthetic that offers the theories a sense of certainty they don't possess. I've known many kids to enter Econ 101 and come out merrily explaining why the minimum wage is a travesty, only to get through a few upper-division courses and turn on a dime. But since the vast majority of folks who take any economics will only take it once, the vastly simplified, misleadingly clean concepts of the introductory courses, offered with an assuredness the theories' don't deserve, stands. And thus a market worship, driven by the belief that theoretical efficiency has been proven to translate into actual equity, permeates.

It's massively destructive, not least because it's not true -- not even in economics, where the elegant models of the lower levels give way to all manner of caveats and market failures up the ladder. My friend sat in on a grad level course yesterday. The topic? Externalities. Only grad students, apparently, can be trusted to hear that the world isn't quite so simple as Econ 101 predicts. As for the rest of us? Too dangerous. It's a pedagogical decision with a heavy ideological effect, and it deserves more examination than it's received. Chris's article is a crisply written, deeply necessary response. Your must-read of the day.

Update: It is worth noting, as Tim puts in comments, that the profiled economics instructor explicitly mentions possible tradeoffs between efficiency and equity. The point of the piece, however, is that the posture of chin-stroking evenhandedness is purposefully deployed in service of an ideology that entirely eschews such considerations. And the megapoint of the article, as pointed out above, isn't that economics as a discipline ignores these concerns, it's that the superficial brush with the discipline tends to downplay them, overemphasize the virtues of the market, and thus turn out unwitting ideologues.

The Pareto Fallacy

For no reason I can really understand, various technocrats on both ends of the aisles have convinced themselves that the relative rarity of their political preferences in the electorate is attributable to a simple lack of technical expertise among voters. Matt attributes this to what I'll call the Pareto-fallacy (named for the concept of Pareto optimality): The idea that because a certain policy could enhance widespread well-being through progressive and equitable distribution of its ben