Spend Smarter on R&D Before Spending More

by Reihan Salam

Brad Plumer of Vox is worried about the fact that large corporations are investing fewer resources in basic research, and then he frets about declining federal spending on research and development:

I’ve written before about the coming decline in federal spending on R&D – it’s set to stagnate in the years ahead thanks to budget caps imposed by Congress. When combined with the decline in corporate-funded science, it points to a potential stagnation in US basic research.

First, I’ll note that while it is literally true federal spending on R&D is set to grow at a more modest rate due to budget caps, these budget caps have been imposed in part because spending on health entitlements is set to rapidly increase as the U.S. population ages, and rising medical expenditures threaten to crowd out not just R&D spending but spending on a wide array of other priorities as well. The budget caps Plumer references didn’t appear out of thin air. Then there is the fact that raw spending totals aren’t really the most pressing issue.

In “The New American System,” Jim Manzi describes his own experiences at Bell Labs, one of those corporate R&D entities that Plumer looks back on so fondly, and he explains why this older model was eventually supplanted by what “trial-and-error innovation”:

The innovations that have driven the greatest economic value have not come from thinking through a chain of logic in a conference room, or simply “listening to our customers,” or taking guidance from analysts far removed from the problem. External analysis can be useful for rapidly coming up to speed on an unfamiliar topic, or for understanding a relatively static business environment. But analysts can only observe problems and solutions after the fact, when they can seek out categories, abstractions, and patterns. Our most successful innovations have come almost without exception from iterative collaboration with our customers to find new solutions to difficult problems that have come up during the course of business. At the creative frontier of the economy, and at the moment of innovation, insight is inseparable from action.

More generally, innovation in our time appears to be built upon the kind of trial-and-error learning that is mediated by markets. It involves producers and providers trying different approaches with relatively few limits on their freedom to experiment and consumers choosing freely among them in search of the best value. And it requires that we allow people to do things that might seem stupid to most informed observers — even though we know that most of these would-be innovators will in fact fail. This is an approach premised on epistemic humility. Because we are not sure we are right about very much, we should not unduly restrain experimentation.

Manzi acknowledges the important contribution of long-term public investment in R&D, which can serve as a foundation for innovative start-ups. Yet he also describes how poorly government-backed research bodies deploy their existing resources, which leads one to believe that simply increasing their budgets isn’t the smartest way to go. There are, thankfully, other ways to square the circle.

The Minimum Wage Referendums

by Reihan Salam

On Election Day, voters in four right-leaning states, Alaska, Arkansas, Nebraska, and South Dakota, will weigh in on whether to raise their state-level minimum wages. The expectation is that these measures will succeed by wide margins. (There will also be a local referendum in monolithically liberal San Francisco to raise the minimum wage to $15 an hour, an effort that, per Steven Greenhouse of the New York Times, a reporter widely considered friendly to organized labor, has attracted little opposition from local business groups.) All four of the states intend to raise their minimum wages above the current federal minimum wage of $7.25, yet they notably intend to keep their minimum wages below the higher $10.10 federal wage floor proposed by President Obama and most of his Democratic allies. 

In February, the Congressional Budget Office concluded that a higher wage floor would have significant disemployment effects while also raising household incomes for those low-wage workers who manage to remain employed. Real incomes would decline for other households, including those obligated to pay higher prices due to rising compensation costs, but the CBO finds that the net impact on real income would be mildly positive, and more positive for low-income households than for households middle- and upper-income households well above it. The CBO was careful to acknowledge that because many low-wage workers are not members of low-income households, a substantial share of the income gains would flow to lower-middle- and middle-income households. 

One issue that merits closer attention, and that ought to have had some bearing on the debates in Alaska, Arkansas, Nebraska, and South Dakota, are the impacts on an increased wage floor on the composition of the low-wage workforce:

Some studies have found large elasticities for particular groups of adults, such as high school dropouts or African Americans in their 20s, but most of the adults who would be affected by the $9.00 and $10.10 options would not fall into those categories. A study that tracked directly affected adults regardless of their education, age, or race suggests that their employment is less sensitive to increases in the minimum wage than that of directly affected teenagers. One explanation for that lower degree of responsiveness is that employers facing an excess of workers or of job applicants tend to favor adults over teenagers. Supporting that explanation is research suggesting that encouraging employment among low-wage parents reduces employment among younger, childless adults.

This discussion strikes me as decidedly incomplete. Yes, it may well be true that elasticities for adults are lower than for teenagers regardless of education, age, or race. Yet when we are assessing the impact of an increased wage floor on the adult population, it is important to determine if adults with lower levels of education are more likely to find themselves locked out of the workforce then those with higher levels of education. Is the claim that the disemployment effect will be identical for those who haven’t completed high school as it will be for those who have? That is, if we assume that an increased wage floor will induce an increase in labor force participation by some workers and a decrease in labor force participation by others, what will be the impact on the less-skilled? The headline number from the CBO analysis was that employment levels would fall by 500,000 on a net basis – it seems reasonable to expect that employment levels would fall further among high school dropouts. 

Granted, these assessments are based on a federal wage floor of $10.10, which would of course be higher than the levels at issue in Alaska, Arkansas, Nebraska, and South Dakota. It is also true, however, that these states depart from the national average in several respects. Alaska has a per capita personal income substantially higher ($46,778 in 2012) than the U.S. as a whole ($42,693); Nebraska ($43,143) and South Dakota are slightly higher ($43,659) than the U.S. as a whole; and Arkansas ($34,723) is one of the poorest states in the country. The share of American adults (25 and older) with at least a high school diploma was 85.3 percent as of 2010. Among the states with minimum wage referendums tomorrow, that share ranges from 91.5 percent in Alaska to 82.5 percent in Arkansas. Nebraska (90.1) and South Dakota (89.9) are clustered closely together on this metric. It’s also true that the demographic composition of the population varies across these states; Alaska has a relatively large indigenous population (14.7 percent) and a very small black population (3.9 percent); Nebraska and South Dakota are among the whitest states in the U.S.; and Arkansas has an above-average (15.6 percent) black population.

So while the discussion of the minimum wage referendums have largely focused on what these states have in common — they’re relatively politically conservative — it hasn’t focused on the fact that among them, Arkansas is unusually poor and that its adult population has an unusually low average skill level. The consequences of a substantial increase in the local wage floor will likely have different consequences in Arkansas, in light of its history of deprivation and isolation, and where higher consumer prices associated with rising compensation costs will have more bite due to its low income levels, than in Alaska, which is considerably more affluent. And while both Nebraska and South Dakota had unemployment rates of 3.6 percent as of August, unemployment in both Alaska (6.8 percent) and Arkansas (6.3 percent) is fairly high. I can’t help but think that Arkansas is making a mistake. But better that Arkansas is making a state-level decision that, as inflation and productivity growth proceeds apace, will be less binding than new federal legislation, which will be less responsive to its particular conditions.

(As Charles Hughes of the Cato Institute observes, only one of these states, Nebraska, has a state-level earned-income tax credit.)




Defending the On-Demand Economy, Part I

by Reihan Salam

Haven’t we said everything that can be said about Uber and Lyft? I’m as enthusiastic about the newish ridesharing services as your next champion of the market economy. But after debating their virtues for some time now, I had assumed the debate had been settled. I was wrong.

Last week, Catherine Rampell of the Washington Post offered a critique of ridesharing services like Uber and Lyft. First, she argued that medallions and other regulations designed to limit the number of taxis can benefit the public by reducing the number of vehicles driving around in search of passengers, as too many vehicles on the road can exacerbate congestion and pollution. Her evidence for this proposition is that Uber drivers will complain from time to time on message boards that they aren’t finding enough customers, and that Uber and Lyft have no incentive to limit the number of drivers who join their networks. Rather, they have a strong incentive to keep the number high, to ensure that customers will have short wait-times.

This strikes me as a very unusual way to approach the problems of congestion and pollution. If we want to tackle the negative externalities that flow from congestion, including pollution, we ought to use congestion pricing, which will apply to all vehicles, not just those making use of ridesharing services. Or we could pursue some other strategy, like auctioning off the right to drive within a given jurisdiction to keep the number of vehicles under some cap, whether these vehicles are operated by cab drivers or other drivers. Limiting the number of taxis makes little sense in itself, especially if it encourages more drivers to use their own vehicles.

Second, Rampell dismissed the notion that the rise of ridesharing services — which, keep in mind, are still in their infancy — has reduced car purchases. She cited a transportation study which finds that while ridesharing services have attracted passengers from traditional taxis, they’ve also attracted them from public transit, among other modes. One thing is certain: if we limit the development of ridesharing services, they will never displace private automobile ownership. But if we allow them to continue to develop, and if we allow prices to fall as, say, lighter, more fuel-efficient vehicles emerge, or as driverless vehicles take hold (at some distant point in the future), ridesharing services could definitely reduce car purchases, particularly in the densest regions. If ridesharing services are taking some number of passengers from other modes of transportation, they are also reducing congestion in these other modes, thus making them more attractive. Leaving that aside, if I choose to use Uber rather than take a twenty minute walk, I presumably had some good reason to do so.

Finally, Rampell argued that Uber and Lyft are becoming bullies themselves, which exploit their drivers and which engage in sharp practices in competing with each other. Yet as Adam Ozimek observes, Uber and Lyft are software platforms that drivers freely choose to use to gain access to consumers. Though it is true that, due to the power of their brands and their technological prowess, they benefit from the network effects associated with having a large consumer base, it isn’t difficult to imagine other firms entering the market if Uber and Lyft prove too burdensome to their drivers. Indeed, though the rise of Uber and Lyft has put pressure on traditional car services, it hasn’t driven them all out of business, presumably because some nontrivial number of drivers prefer to stick with what they know. Just as Facebook displaced MySpace, another business that profited from network effects, and that seemed to have entrenched itself, Uber and Lyft’s work in creating a ridesharing market will allow future competitors to keep them in check should they grow unresponsive to the needs of drivers and passengers alike.

Ozimek emphasizes the fact that the business models of Uber and Lyft demand less regulation, as “users and drivers rate each other in public forums, allowing each to screen each other,” thus addressing the vulnerabilities that older regulations were designed to address. Larry Downes, writing in the Washington Post in March, also touched on this theme. He noted that apart from empowering consumers to rate the quality of vehicles and rides in real time, these services calculate the cost of rides and take payment, minimizing the potential for friction and fraud. Constantly-updated traffic and consumer demand data give drivers valuable information to make decisions about where to go, or indeed whether to bother getting on the road. Crankiness on forums notwithstanding, it seems difficult to deny that the number of Uber and Lyft drivers increases when demand is high, not least because many drivers are part-time drivers who often have other sources of income. Johana Bhuiyan of Buzzfeed adds that while legacy taxi regulators have failed to successfully combat “destination bias,” in which cab drivers refuse to head to certain neighborhoods, Uber and Lyft appear to have greatly reduced it.

But Rampell’s is not the only critique of Uber, or rather of what Katie Benner of Bloomberg View calls “the on-demand economy.” According to Benner, “people are attracted to on-demand gigs because more solid full-time work is still hard to come by in a U.S. economy that has rebounded for everyone but average workers.” This is certainly one reason people are attracted to on-demand gigs. Yet there are other reasons as well. For example, a rising share of young adults are enrolled in higher education, and working part-time as an Uber driver or as an Instacart shopper or as a TaskRabbit errand-runner can be a convenient way to make a modest income while keeping unconventional hours. Similarly, one might want to devote most of one’s time to raising children or caring for an aging parent while still earning some spending money. Even if the labor market continues to tighten, there will be many workers who will prize this kind of flexibility. Almost all of the on-demand employees Benner surveys are people with tragic stories. Almost all of those I’ve encountered have more optimistic ones. This could reflect our respective biases, or the regions in which we live. But it is foolish to deny that workers have a range of experiences with these services, not all of them negative. 

What I find peculiar about Benner’s tone is that she seems to blame the various on-demand start-ups for the fact that there are workers residing in this country who are willing to take on this kind of flexible work. She ends her piece by suggesting that if the economy improves, these firms will find themselves in a bind, as “the on-demand economy is an offshoot and a beneficiary of the fact that many U.S. workers are struggling.” It’s not at all clear that this is true. If the U.S. economy were in better shape, these services would have more and more affluent consumers, who’d be willing to pay more to workers who prefer to maintain flexible schedules to deliver their groceries, drive them to and fro, and much more. These services are drawing on technologies that have been available for some time, yet which have matured in recent years and which can now be recombined in new, more useful ways. Their business models are based not on desperation, but on the fact that we are living in a diverse society defined by rising female labor force participation and, yes, labor market polarization, in which high earners benefit from outsourcing household production and people with limited skills find that their most attractive employment opportunities are in services. This is the same reason, incidentally, that the U.S. has been a magnet for less-skilled workers, for better or for worse. (Interestingly, while 14 percent of U.S.-born adults age 16 to 65 have limited skills according to the OECD’s Survey of Adult Skills, the same is true for 40 percent of foreign-born adults. This is a subject to which we’ll return.) To suggest that there is something morally suspect about helping supply meet demand is a bit much.

How David Cameron Became a Reform Conservative

by Reihan Salam

American conservatives don’t have much respect for David Cameron, the British prime minister whom many see as a squish. But they should. Most of Cameron’s American admirers focus on his support for same-sex civil marriage and his seeming allergy to populist gestures. His real virtue, however, lies in his ability to make a highly ambitious reform agenda seem utterly pragmatic, and even dull. And in his recent address at the annual Conservative Party conference in Birmingham, Cameron hit upon a pair of tax proposals that have much to teach his U.S. counterparts.

Cameron became leader of the Conservative Party in late December 2005, positioning himself as the “heir to Blair.” During his years in opposition, he carefully presented himself as a modernizer in tune with a Britain that was more diverse and more socially liberal than it was under Thatcher. He emphasized his compassion for society’s most marginalized members (“hug a hoodie”) and his keen interest in combating climate change (“hug a husky”), among other causes traditionally associated with the political left. It is easy see why many on the right, not just in the U.S. but in Britain as well, found Cameron’s apparent rush to the left cloying.

Once in office, as the head of a coalition with the left-of-center Liberal Democrats, Cameron has periodically adjusted his message, in keeping with the changing mood of post-crisis Britain: he has spent far less time talking about climate change and far more time talking about restoring the country’s fiscal health and reforming welfare and education. Moreover, his government has had great success in increasing employment levels. While labor force participation for prime-age male workers has declined since 2002 in the United States, it has increased in Britain — indeed, it is now higher in Britain, at 86 percent, in Britain than it is in the U.S., at 81 percent. Credit goes at least in part to the Cameron government’s welfare-to-work initiatives, including a Work Programme that tasked private employment service providers with the long-term unemployed, with the providers compensated primarily on the basis of their success in connecting workers with jobs that stick. Though the WP is still quite young, and though some of the government’s welfare-to-work efforts, like the Universal Credit, haven’t gone smoothly at all, it sent a clear message that Cameron intended to pursue a work-first approach.

Cameron’s welcome shift to the right could reflect the fact that the greatest threat to his government has come not from the left, but rather from UKIP, a once-minor party that has surged on the strength of its opposition to the European Union and its vigorous anti-elitism. Recently, two Conservative MPs, Douglas Carswell and Mark Reckless, have defected to UKIP, an ominous sign that the UKIP challenge is gaining momentum. Though few hold Reckless in high esteem, Carswell is by all accounts a serious thinker, and a frequent collaborator and co-author of Daniel Hannan, a Conservative member of the European Parliament, a favorite among American conservative intellectuals. If the left unites behind Labour while the right fragments, Ed Miliband, Labour’s unreconstructed socialist leader, will almost surely win the next general election. This is despite the fact that, on closer examination, Cameron has been a quite effective conservative reformer, as Adrian Wooldridge recently argued in The Spectator.

“The problem which haunts Britain is not a problem of representation,” Wooldridge writes. “As long as the state continues to overpromise, overcharge and underdeliver, it will continue to provoke mass fury.” Cameron, according to Wooldridge, “is in a surprisingly good position to make this argument,” having “already presided over the biggest reduction in the size of the state since the second world war.” This is no small feat given that Britain’s policymaking elites are well to the left of America’s, and the legitimacy of Britain’s welfare state is more firmly entrenched than it is in the United States. While constantly underscoring his commitment to protecting the NHS, Britain’s socialized health system, and the cornerstone of its postwar civil religion, Cameron has imposed real fiscal discipline on a British state that had grown rapidly during the Blair-Brown years, and his support of the spread of free schools will likely have deep and lasting consequences. Wooldridge wants Cameron to run his 2015 campaign on devolving power not just from London to Britain’s cities and towns, but from the British state to families, civic organizations, and private enterprises.

In his conference address, Cameron spent less time offering a Wooldridgean vision of Britain as a post-bureaucratic utopia, attractive though that vision is, than he did on connecting his reform efforts to a moral vision.

“I’ll tell you who we represent,” said Cameron to the assembled activists. “This party is the union for hardworking parents…the father who reads his children stories at night because he wants them to learn…the mother who works all the hours God sends to give her children the best start.” He called on Conservatives to be the trade union for “the young woman who wants an Apprenticeship” and “the teenagers who want to make something of their lives,” and he insisted that “our young people must know this is a country where if you put in, you will get out.” That is, Cameron offered a vision of conditional reciprocity, in which those who make an effort to better their lives — who work, save, and invest — would have the Conservative Party as an ally. And this served as the emotive basis for his modest but appealing tax proposals: first, he pledged to raise the tax-free personal allowance from £10,500 to £12,500; second, he pledged to raise the threshold for the 40 percent tax rate from £41,900 to £50,000. As Fraser Nelson, editor of The Spectator, has observed, these promises are not quite as impressive as they might seem at first glance, as merely adjusting these numbers for inflation would get you to a £12,300 tax-free personal allowance and a £49,300 threshold for the 40 percent tax rate by 2020. In recent years, however, these figures haven’t been adjusted for inflation to increase revenue, so this does mark a positive change.

What strike me as most attractive about Cameron’s tax promises is that they are both very hard for the left to attack and very hard for the left to mimic. Raising the tax-free personal allowance is not, in my view, a wise tax policy, as it will benefit high-earners without having any positive impact on their work incentives; raising the 40 percent tax rate threshold is similarly unlikely to spur a big increase in work effort. Yet both measures will increase disposable income for low- and middle-income households, if only modestly, and neither can be characterized as a giveaway to the rich. They are, however, tax cuts that will reduce revenue that might otherwise be devoted to expanding government. Labour can’t copy the Conservatives without reinforcing the perception that they are fiscally reckless. The Conservatives under Cameron, meanwhile, have earned a reputation for fiscal probity by restraining spending even when it was unpopular to do so, and so they have at least some leeway on this front.

Cameron’s proposals bear a resemblance to the new Lee-Rubio tax reform proposal, with its expansion of the child credit. Lee and Rubio call for a modest return of the top tax rate to its Bush-era level, but the most visible beneficiaries of their tax reform will be middle-income families with children, a fact that resonates with Cameron’s characterization of conservatives as “the union for hardworking parents.” It should go without saying that Britain’s political environment is very different from America’s. But Cameron has learned not to play on the left’s turf. Instead of expending precious political capital arguing over the top rate for the highest earners, an argument that Labour desperately wants to have, he is making the case for middle-class tax cuts, freedom of choice in public services, and work over welfare. Not bad ground on which to fight.

How Both Sides of the Aisle Have Been Hypocritical on Government Accounting

by Jason Richwine

During the Social Security debates of the late 1990s and early 2000s, some conservatives argued that investing the trust fund (or letting individuals invest their payroll taxes) in stocks would generate a “free lunch” — much greater retirement savings at seemingly no budgetary cost. That’s nonsense, said the Center on Budget and Policy Priorities (CBPP) and other liberal groups at the time, because equity investment increases risk, and risk has a cost.

Today CBPP, along with most of the Democratic party, argues that the federal government can buy up private-sector student loans, disregard the risk that student loans will not be repaid as expected, and thereby book a profit on the transactions even while making the loans more generous to students. Free lunches all around! That’s nonsense, conservatives say, because risk has a cost.

For both parties, market risk is costly except when it’s not. More precisely, market risk adds a cost to government programs that politicians dislike, but it doesn’t add a cost to programs that they like. This is one of the starkest (yet largely unacknowledged) hypocrisies in Washington. Jason Delisle and I tried to call attention to it in our National Affairs article, “The Case for Fair-Value Accounting.”

The “fair value” of an asset is the market price, which is determined both by expectations of its future value and by the risk that those expectations may not be met. The price of risk matters: Millions of knowledgeable investors around the world forgo the higher average return on risky stocks because they prefer the safety of lower-returning bonds.

When pricing government assets, fair-value accounting naturally incorporates both expectations and risk. By contrast, the government’s accounting system is typically based on expectations only, disregarding the cost of market risk. This means that the government could value a dollar of stock more than a dollar of bonds — which calls to mind the old joke about which weighs more, a pound of bricks or a pound of feathers. It also means that the government can claim phantom “profits” simply by purchasing private-sector assets (such as student loan repayments) and assigning them above-market values due to the exclusion of market risk.

In response to our article, the CBPP has acknowledged its inconsistency and officially changed its view of Social Security budgeting. The organization now opposes risk-adjusting any equity investment by the trust fund:

Jason Delisle and Jason Richwine, writing in the latest issue of National Affairs, correctly note that the logic of our argument [against fair-value accounting] is inconsistent with a 2005 CBPP analysis of proposals to invest part of the Social Security trust funds in stocks instead of Treasury bonds. We concur. …[R]isk is an important consideration in assessing the pros and cons of a proposal, but it’s not an actual cost to the government and therefore doesn’t belong in the budget. This conclusion differs from the one CBPP reached in 2005, which, upon further consideration, we now believe was mistaken.

Reacting to CBPP’s change of heart, Andrew Biggs illustrates the absurdity of free-lunch budgeting as applied to Social Security. Imagine that the government sets up private Social Security accounts, guarantees everyone at least the same benefit as the current system, and then takes a portion of any returns above that level. Under CBPP’s revised view, this proposal — in which everyone will receive benefits at least as high as current law provides — would cost less than the present system. That’s something for nothing, the kind of seductive scam that politicians will always find hard to resist without fair-value to rein them in.

Nevertheless, kudos to the CBPP for valuing intellectual consistency and providing an honest clarification. It would be nice if others followed suit. I’m especially interested in hearing from Republicans who hyped the high returns on Social Security equity investments but want fair-value accounting applied to student loans and public pensions. Which position do they consider wrong today?

No, Joni Ernst Is Not an Extremist on the Minimum Wage

by Reihan Salam

To make his case that Joni Ernst, this year’s Republican U.S. Senate nominee, “exists on the radical edge of the Republican Party, with polarizing views on almost everything under the sun,” Jamelle Bouie, a Slate political columnist, draws on her supposed opposition to a national minimum wage. “Ernst is against the national minimum wage,” Bouie writes, “and [she] believes it should be the full responsibility of the states.” It happens that I oppose a national minimum wage, and so I was delighted to see that at least one GOP Senate candidate felt the same way. In June, however, Ernst explicitly stated that she supports a national minimum wage, and indeed she claimed, inaccurately as far as I can tell, that she had never called for its abolition. That is, Ernst seems to have walked back her earlier opposition to a national minimum wage, presumably in an effort to seem mainstream. Ernst’s current position is that above a federal baseline, state governments should take the lead in setting the minimum wage. This is a view that is very much within the mainstream. Indeed, it is so within the mainstream as to be banal. So on this issue, at least, I am more extreme than “far, far outside the mainstream” Joni Ernst.

The findings of the Center for American Progress survey Bouie cites to underline Ernst’s extremism are hard to reconcile with his argument: 53 percent favor raising the national minimum wage to $10.10, a robust majority that nevertheless doesn’t relegate the 47 percent who oppose doing so to fringe status; and while 57 percent favor a national minimum wage, a surprisingly large share of Americans would prefer to do away with a federal wage floor. There are many views held by far fewer Americans that are considered well within the mainstream. Over 70 percent of Americans oppose increasing immigration levels, which tells us that calls for abolishing the national minimum wage are in one important sense less extreme than support for the bipartisan Senate immigration bill, which will dramatically increase immigration levels. But of course support for the Senate bill is seen by many elite policymakers as a sine qua non of mainstreamness.

Bouie’s substantive case against Ernst’s position on the national minimum wage is that by arguing that the current minimum “is a great starter wage for many high school students,” she neglects the important fact that “most minimum wage workers aren’t teenagers, and a substantial number have children of their own,” and that the average annual income of a full-time minimum wage worker “is below the poverty line for a family of four.” It is true that roughly 26 percent of the workers who’d be impacted by the president’s proposed minimum wage hike have children, and that most of these workers need help to make ends meet. To address this problem, the federal government relies on a number of tools, including the earned-income tax credit (EITC), to ensure that workers with low earnings can meet their basic needs. One concern about increasing the minimum wage is that it will price workers with limited skills out of the labor market, which in turn will make it difficult for them to build skills and climb the earnings ladder over time. Bouie is correct that most minimum wage workers aren’t teenagers, yet an increase in the federal wage floor that contains no explicit exemption for teenagers will price out at least some teenagers from the labor market. A similar logic applies to other workers who might need substantial on-the-job training before they can command even a modest wage on the open market, like ex-offenders and the long-term unemployed.

There is plenty of room for disagreement on where exactly a wage floor should be set. One perfectly coherent view is that as long as the federal government is financing wage subsidies and work supports, like the EITC and SNAP, it has a good reason to impose some wage floor, lest low-wage employers in states that choose to go without a wage floor free-ride on federal largesse. Yet there is a broad consensus when minimum wages are set too high relative to average wages, employers are less inclined to hire low-wage workers. Andrew Biggs and Mark Perry have elaborated on how an increase in the national minimum wage will hurt poor regions more than rich regions — the short version is that employers in poor regions won’t simply be able to pass on the cost of higher wages to their consumers, as many of their consumers have low incomes; and so these employers would have little choice but to economize on labor costs by substituting capital for labor.

To be sure, Bouie has other objections to Ernst’s views, some of which I share. (This “Agenda 21″ stuff sounds like nonsense, and calls for impeaching President Obama strike me as unwise.) But on the minimum wage, at least, Ernst isn’t just in the mainstream. She’s in the right.

The Great Suburbia Debate

by Reihan Salam

Are conservatives turning on the suburbs? Joel Kotkin, the prolific author and executive editor of The New Geography, an excellent resource for students of urbanism, warns that anti-suburban sentiment, which has long been firmly entrenched on the environmental left, is spreading to the right. He attacks those he calls the “retro-urbanist conservatives” for “parroting the basic urban legends of the smart-growth crowd and planners,” and for, in effect, “waging a war on middle-class America.” Specifically, he takes the anti-suburban conservatives to task for suggesting that suburbanites have longer commutes than city-dwellers (they don’t) and that they’re less likely to be engaged in civic life (they aren’t).

Though I’m an admirer of Kotkin, and though I can’t speak for every conservative who has made the case for denser development, he gets a number of important things wrong. Or rather I think he gets a number of important things wrong. It’s a bit hard to tell, for while Kotkin singles out the conservative columnist Matt Lewis and the conservative activist Paul Weyrich for criticism, the latter of whom has been dead since 2008, as Kotkin acknowledges, many of his specific charges are directed against unnamed anti-suburban conservatives who are making arguments that don’t make much sense, and are thus very easily knocked down.

For example, Kotkin claims that “some conservatives” (again, no names) have been “lured by their own class prejudice” into turning against market forces. “In reality,” Kotkin writes, “imposing Draconian planning is not even necessary for the growth of density.” Of course, this is exactly the argument that Edward Glaeser makes in The Triumph of the City, a manifesto for the pro-market, pro-density right. “In places that have both liberal planning regimes and economic growth, such as Houston and Dallas,” he observes, “there has been a more rapid increase in multifamily housing than in cities such as Boston, Los Angeles, San Francisco or New York.” Indeed, this is why many conservatives, myself included, have explicitly argued that cities like New York, San Francisco, and Los Angeles should look to the liberal planning regimes of Houston and Dallas as a model. (To be clear, by “liberal” planning regimes, Kotkin means less-restrictive, more market-oriented planning regimes, and so do I.) 

The global cities that manage to be both highly productive and affordable, like Tokyo and Toronto, tend to have liberal planning regimes, which allow for rapid growth of housing stock, and in particular of the multifamily housing stock. These regions are characterized by rapid housing development in the suburbs and in the urban core, and their “suburbs” tend to be more urban than low-density suburbs in the U.S. governed by stringent planning regimes that tightly restrict multifamily development. When Glaeser makes the case for density, he does so not by calling for “imposing draconian planning” on cities and towns. Rather, he explicitly calls for the relaxation of land-use regulation. The economists Joseph Gyourko, Albert Saiz, and Anita A. Summers have carefully documented the extent of land-use regulation across major U.S. cities, and there is clear evidence that Americans are moving to regions with less restrictive planning regimes and thus more affordable housing. It could be that it is not economists like Glaeser and Gyourko that Kotkin has in mind when he takes retro-urbanist conservatives to task, which is fair enough. But if not, he should say so.

Moreover, Kotkin complains about new planning legislation in California and other states “that tends to price single-family homes, the preference of some 70 percent of adults, well beyond the capacity of the vast majority of residents.” Before delving into this claim in more detail, it is worth noting that Kotkin relies on a 2004 survey of Californians from the Public Policy Institute of California. Suffice it to say, much has changed since 2004. But even if we rely on this survey alone, we find that 53 percent of Californians state that “they would choose to live in a small home with a small backyard if it means a shorter commute to work.” When asked if they would be willing to live in a mixed-use neighborhood if it meant more proximity to stores and services, a proxy for density, 48 percent said that they would while 49 percent said that they would still prefer a residential-only neighborhood. What these results tells us is that something on the order of 30 percent of Californians in 2004 favor “walkable urbanism,” yet the supply of walkable urban neighborhoods in California, by any reasonable standard, fails to meet this demand, hence the high cost of market-rate housing in California’s dense urban neighborhoods.

And a more recent 2014 national survey, from the Pew Research Center, finds that while 49 percent of Americans favor living in neighborhoods in which “the houses are larger and farther apart, but schools, stores, and restaurants are several miles away,” 48 percent favor neighborhoods in which “houses are smaller and closer to each other, but schools, stores, and restaurants are in walking distance.” If anything, there is reason to believe that the preference for density would be stronger in California, as California is more liberal than the United States as a whole. The Pew survey finds that 46 percent of self-identified liberals in the U.S. would prefer to live in a city; only 4 percent of conservatives feel the same way. Even if the share of Californians who prefer single-family homes remains fixed at its 2004 level, 30 percent of adults is a very high number and the growth of housing stock in dense urban regions of California has been anemic.

Kotkin relies heavily on the work of Wendell Cox, a transportation consultant who seems to believe that denser development is necessarily a product of central planning. In desirable regions, however, less restrictive planning regimes will naturally lead to higher densities, as property owners will naturally seek to maximize the value of their investments. Restrictive land-use regulations tend to limit density, not impose it on unwilling landowners. When Cox warns that state and regional planners in California “seek to radically restructure urban areas, forcing much of the new hyperdensity development into narrowly confined corridors,” he raises a few questions. Do developers have the option of not building in these corridors and instead investing their money in something else entirely? Yes, they do. If developers were not explicitly required to build at low densities, is there good reason to believe that they would build at high densities to accommodate the fact that there are many people (30 percent of adults is not too shabby) who would happily do so if it meant that they could live in a desirable region or neighborhood? Yes, there is.

And finally, Kotkin neglects one of the most compelling arguments against an excessive reliance on low-density suburbs. Neighborhoods of single-family homes serve the interests of some families very well, particularly middle- and upper-middle-income two-parent families with children. But they serve the interests of other families far less well. Kotkin has correctly observed that the increasing concentration of poverty in suburban neighborhoods can be overstated, and for reminding policymakers that urban and rural poverty are far more entrenched problems than suburban poverty. Yet as I argue in a recent Slate column, a built environment dominated by single-family homes is ill-suited to the needs of single-parent families, not to mention single adults.

Recently, Robert VerBruggen of RealClearPolitics shared a chart that illustrates the transformation of living arrangements for American children from 1960 to 2012. 

Whereas in 1960, 65 percent of children 0-14 lived in households with married parents, in which only the father was employed, that share had fallen to 22 percent by 2012. When we factor in households in which both parents work, the decline doesn’t look quite so dramatic; the share of children raised in these households has risen from 18 percent to 34 percent. Single-family homes are, like all homes, depreciating assets that require maintenance. In the case of multifamily homes, maintenance is generally outsourced to landlords; in the case of single-family homes, maintenance is performed by the owner-occupier. It stands to reason that married couples are as a general rule in a better position to do the work of maintaining a home than a single adult, if only because they are able to pool their resources. Either they can do the work themselves or they can hire others to do it for them. In the case of low- to middle-income single-parent families, however, resources are tightly constrained, including time. As nonmarital child-rearing grows more prevalent, the time that can be devoted to home maintenance and civic life necessarily declines. The effects of this shift are more pronounced in single-family home neighborhoods than in multifamily home or mixed neighborhoods.

And so we come to have come full-circle. Low-rise suburban living was well-suited to the needs of the postwar decades, when the share of married-parent families was far higher, the foreign-born share of the population was far lower, violent crime in the cities was rising, and the cultural gap between low- and high-income families was modest. But the United States has changed, and in some respects we’ve come to more closely resemble the more diverse and unequal society we were in the first decades of the last century. It stands to reason that our built environment will evolve as well. This isn’t about “class prejudice,” as Kotkin would have us believe. There will always be a place for low-rise suburban living. Yet as the share of households that are best-suited for low-rise suburban living shrinks, denser living arrangements are going to have to play a larger role.

Government Accounting Deceptions Are Everywhere

by Jason Richwine

The new issue of National Affairs features my article with Jason Delisle, “The Case for Fair-Value Accounting.” We go into a lot of detail about what fair-value accounting (FVA) is, why it’s needed, and how both parties have hypocritically flip-flopped on it.

I’m not someone who is easily shocked by government misconduct, but when we assembled all  the examples of accounting malfeasance for this article, even I was surprised at how widespread and deceptive it all is.

Some quick background: The “fair value” of an investment is its current market price. Built into the market price of any asset are the expectations of its future value and the risk that those expectations may not be met. Both components of the price are critical. All else equal, investors obviously prefer assets with higher expected returns, but that preference is mediated by the risk involved. Investors may prefer low-returning assets with low risk (such as bonds) over high-return and high-risk assets (such as stocks). FVA cost estimates naturally include both expected returns and the cost of risk.

But most federal credit programs are scored based on expectations only, disregarding the cost of market risk. When the federal government offers student loans, for example, it estimates how much students will pay back and then assumes that its estimate carries no uncertainty. But no private investor would purchase the right to collect student loan repayments for just the expected value. The investor would demand a lower price for such a risky asset.

By placing a greater value on its assets than the market does, the government generates a number of bogus “free lunch” scenarios, and politicians try to exploit them:

For example, in the depths of the recession, Ohio senator Sherrod Brown proposed that the federal government buy up private student loans, convert them to federal loans, and then reduce the interest rates that borrowers pay. Lenders holding the loans would be paid face value for them — that is, the government would pay the lenders the full outstanding balance on the loans. Borrowers would receive new, better terms and repay the remainder of their loans to the Department of Education. The CBO was required under [current law] to show that this transaction would result in an immediate $9.2 billion profit to the government.

Bear in mind that this was a debt swap in which borrowers would pay less interest to the government than they would pay to private lenders. But, miraculously, $9.2 billion in new cash for the government would appear out of thin air as soon as the transaction was made. This money could then promptly be spent on more government programs.

Under FVA, Senator Brown’s scheme would not have generated a profit at all, but rather a cost of $700 million.

Now consider the Federal Housing Administration’s single-family mortgage-insurance program, which provides default guarantees to home-mortgage lenders:

Home buyers secure subsidized mortgages, which are loans with terms better than any private lender would offer without the government guarantee. Because [government accounting] rules exclude a market-risk premium, the program appears to both subsidize homeowners and generate profits for the government, “earning” a $60 billion free lunch for the government over ten years. But once a market-risk premium is added to these tallies, the loan guarantees show a $3 billion annual cost.

The same problem of disregarding market risk affects public pensions:

As discussed earlier, [government] accounting enables the federal government to claim a “profit” simply by purchasing a private-sector loan. In the pension world, the analogous transaction is the “pension-obligation bond,” which allows states to conjure money through an interest-rate arbitrage scheme. In essence, a state sells a government bond that pays, say, a guaranteed 5% interest rate and then places the proceeds from the bond sale into the pension fund. The trick is that the pension fund is assumed to return 8%, so the state nets 3% per year in “free” money. The fallacy, of course, is that the pension fund’s 8% expected return carries risk — which is why investors are willing to buy the (safer) pension-obligation bonds in the first place.

The examples go on and on, and the only way to end this mischief is to apply FVA to all government credit and investment programs.

The Case Against a Maximum Wage

by Reihan Salam

You’re no doubt familiar with the minimum wage debate. Advocates of an increased minimum wage on the left argue that a higher wage floor is essentially a free lunch that will raise low-end household incomes and reduce turnover. Opponents warn that setting the wage floor too high will reduce net job growth and price a nontrivial number of less-skilled workers, including young workers, out of the formal labor market. What is clear is that calls for a higher minimum wage have been a godsend for a left that finds itself intellectually exhausted. Though the public is wary of expanding government, large majorities favor a higher minimum wage as a seemingly straightforward solution to wage stagnation. And liberals have been quite happy to play along with the notion that a higher minimum wage is the cure-all that many Americans believe it to be.

But have you heard about the maximum wage debate? In Vox, Matt Yglesias makes the case for a maximum wage. More precisely, he is making the case for an effective maximum wage, or tax rates that are so high they deter firms from offering high salaries in the first place. Though I don’t find Yglesias’s case very convincing, I suspect we’ll be hearing more arguments like it from liberal thinkers and activists in the years to come. So for that reason alone, Yglesias’s case deserves a closer look.

Rather than call for a hard cap, Yglesias is really calling for tax rates so high as to be confiscatory, and he identifies the ultra-high top marginal tax rates of the years immediately following the Second World War as a model.

“During the 90 percent top income tax rate,” Yglesias writes, “for a firm to put an extra $100 in the pocket of a top executive required them to pay another $1,000 in salary.” And so firms chose to instead “give modest raises to five separate middle managers.” This strategy did not raise much revenue, but it did distribute compensation more evenly within firms. For Yglesias, revenue is not the goal of a “super-tax.” Instead, his goal is to change America’s political economy by, among other things, limiting the influx of talented workers into ultra-high-wage professions, checking the rent-seeking that (allegedly) has driven the increase in executive compensation, and encouraging firms to divvy up their compensation expenditures in a more egalitarian fashion. And as evidence in favor of this approach, Yglesias observes that “the pre-Reagan trend of productivity growth in the American economy was faster than the post-Reagan trend.”

First, Yglesias’s comparison of pre-Reagan productivity growth and post-Reagan productivity growth neglects the possibility that in the absence of tax reform, productivity growth might have been lower still. In his essay on “Frontier Economics,” Brink Lindsey argues that the key difference between the period from 1947 to 1973, when the average annual increase in productivity in the U.S. was 2.9 percent, and the period from 1980 to 2006, when it was only 2 percent, is that the immediate postwar decades offered myriad opportunities for what he calls “imitative growth,” in which existing technologies and business models are deployed across the economy, particularly in underdeveloped regions in the South and West. This is much like the catch-up growth we see in less-affluent societies, where tried-and-true strategies for raising productivity are deployed until the society in question reach middle-income status, at which point growth tends to plateau. The latter period saw “the exhaustion of relatively easy opportunities for imitative growth in the United States and other advanced economies,” and so continued growth has depended on business model innovation, an area in which the U.S. has, in relative terms, at least, excelled. Comparing the growth record of the post-Reagan U.S. to that of the postwar golden age is not unlike comparing the growth record of an advanced market economy with a poor country in the throes of catch-up growth. Even the Soviet bloc economies saw substantial economic growth in the immediate postwar decades as these societies urbanized and as workers shifted from the agricultural to the industrial sector. That, alas, is a trick that can only be pulled off once.

Now let’s consider America’s postwar tax regime in more detail. Last spring, Arpit Gupta revisited the high tax rates of the 1950s. He observed that very few people paid the high-end official rates, a fact that could be attributed to the fact that firms were deterred from offering high compensation, as in Yglesias’s model. Yet Gupta also found that average income-tax rates remained stable from the 1950s to the 2000s. The highest earners of the 1950s, whose marginal dollars were subject to the highest rates, paid average tax rates comparable to those of the highest earners. When we consider the incentives facing the high earners of this era, it is important to take into account the loopholes and deductions that allowed them to shield their income from tax.

It is also true, however, that the tax code of the postwar years imposed much higher corporate and estate taxes. Everyone agrees that the burden of the estate tax was borne primarily by the wealthy. But there is an ongoing debate over how to understand the burden of corporate taxes. Some analysts maintain that the burden of corporate taxes falls entirely on shareholders while others believe that the burden falls at least in part on the employees of firms, for whom corporate taxes translate into lower wages. Yglesias accepts that capital income will have to be shielded from his super-tax, to ensure that the reallocation of capital proceeds apace. So it is worth noting that, according to Thomas Piketty and Emmanuel Saez, at least, the main reason the tax code of the postwar years was so progressive is that it featured much higher taxes on capital income. This isn’t a problem for Yglesias’s argument, as he is convinced that the high rates of the postwar years succeeded in preventing firms from paying high salaries.

It’s not clear to me that Yglesias is thinking about the rise in executive compensation in the right way. While it is true that executive compensation was lower in this era, it is also true that the market capitalization of the largest firms was also much smaller. One possibility is that as the market capitalization of big companies has increased, the stakes associated with finding and retaining an effective CEO have risen. This in turn has contributed to an intensified competition for the best managers, or rather those perceived to be the best managers, which has led to an increase in executive compensation. There are many questions we can’t reliably answer. For example, it is possible that the market capitalization would never have increased as much as it did in the counterfactual world in which tax rates remained at their postwar highs. Or it is possible that loopholes and deductions would have shielded high earners from taxes in this counterfactual world, and the arms race for managerial talent would have played out much as it did in our own world.

Yglesias rejects this benign interpretation of executive compensation growth, noting that “it is now a commonplace of progressive discourse to argue that executive compensation growth largely reflects rent-seeking that could be rolled back without impairing managerial talent.” The paper he cites, by Joshua Bivens and Lawrence Mishel of the Economic Policy Institute, is interesting, and it merits a (forthcoming) discussion of its own. For now, I’ll just note that Jim Manzi scrutinized Piketty’s closely related argument that executive compensation growth, and rising inequality more broadly, can be attributed in to the bargaining power of top executives, and he found it highly implausible.

Going even further, Yglesias cites a recent argument from Benjamin Lockwood, Charles Nathanson, and Glen Weyl that “by increasing the financial incentive for top talent to pursue careers in finance and law rather than teaching and research, the Reagan tax reforms reduced overall economic output while increasing the pre-tax share of income earned by top earners.” Lockwood, Nathanson, and Weyl base their claim on a mechanistic model of the economy. In the absence of the Reagan tax cuts, they posit that many of the workers who went into finance and management would have instead taken up positions in academia, engineering, and teaching; and their model finds that this shift away from research-oriented professions reduced social welfare by 1 to 2 percent. Note that they base this calculation on a generous assessment of the positive externalities associated with research. To their credit, Lockwood, Nathanson, and Weyl note that some of their results strike them as “implausibly large,” and they acknowledge that their reading of the literature is “inevitably partial.” They anticipate that future research will find that “the existing literature overestimates externalities and thus our magnitudes,” and I agree with them. When Yglesias writes “rather than giving the middle class a smaller slice of a bigger pie and making everyone better off, these reforms gave the rich a larger slice of a smaller pie and made only them better off,” he doesn’t make it clear that Lockwood, Nathanson, and Weyl are tentatively suggesting that the reforms in question might have made the pie smaller by 1 to 2 percentage points under assumptions that even they allow strain credulity.

Like Yglesias, I believe that there are serious problems with corporate governance in America. Where we part company is over his apparent conviction that confiscatory taxes are an important part of the solution. I won’t belabor the case against ultra-high marginal tax rates — Arpit Gupta has summarized some of the scholarly research on the impact of high rates on long-run growth. Rather, I’ll just suggest that we focus more directly on how the tax code encourages excessive leverage and how our regulatory regime shields incumbents from competition from the new firms that give rise to new business models. Those are causes that, hopefully, we can all agree on.

How Corporate Tax Reform Can Combat Crony Capitalism

by Reihan Salam

Congressional Republicans are astonishingly unpopular, and they deserve to be astonishingly unpopular. Remarkably, three-fifths of self-identified Republicans disapprove of the job congressional Republicans are doing, which tells you something. The good news is that a small number of elected conservatives, led by Utah Sen. Mike Lee and Florida Sen. Marco Rubio, have been pointing the way towards a GOP worth supporting. Both men have been making the case for a domestic policy agenda that explicitly, and creatively, advances middle-class economic interests. Most recently, in the Wall Street Journal, Lee and Rubio have outlined a new tax proposal that is a much bigger deal than it appears to be at first glance.

Drawing on Lee’s recent call for overhauling the personal income tax, Lee and Rubio create a two-rate structure (15 and 35 percent) that eliminates and revamps various tax expenditures while also adding an expanded child credit. Like Robert Stein, the father of family-friendly tax reform, Lee and Rubio justify this new child credit on the grounds that it represents a corrective to the tax bias against working parents. The political case for an expanded child credit has always struck me as strong, and so this aspect of their plan is very welcome.

Yet it is Lee and Rubio’s approach to overhauling corporate taxes that deserves particularly close attention. The recent controversy over high-profile corporate inversions has given the corporate tax reform conversation new life, and Lee and Rubio are right to weigh in. In the weeks to come, we will learn more about what exactly they have in mind. But for now, it looks as though they are committed to the following big steps: (a) allowing firms to deduct 100 percent of the expenses associated with capital investment in the year the these expenses are incurred; (b) consolidating the taxation of capital income by essentially having corporations pay taxes on behalf of their shareholders so that taxes on corporate income are paid only once at the firm-level rather than twice, at the level of the firm and at the level of the individual investor; (c) eliminating the deductibility of new debt, a measure that will, over time, greatly reduce the pro-debt bias of the tax code; and (d) moving to a territorial tax system.

If Lee and Rubio follow through on all of these steps, they will spark a revolution in the way business is done in America. As important as the fight over the Ex-Im Bank might be, the corporate tax code is where the battle over crony capitalism will be won or lost. The first two steps, 100-percent expensing and single-layer taxation, will make the U.S. a far more attractive destination for capital investment. But curbing the debt bias is potentially an even bigger deal. As Robert Pozen has argued, the debt bias in the tax code encourages firms to take on more leverage than they would under a truly neutral tax code, which in turn raises the risk of bankruptcy and the economic dislocation that follows from it. Curbing the debt bias will also weaken the relative position of incumbent firms, which can borrow cheaply, vis a vis upstarts. California Rep. Devin Nunes has long championed lowering taxes on business investment, and NR’s Ramesh Ponnuru has championed his cause. One challenge, however, is that lowering taxes on business investment creates a revenue hole that has proven hard for tax reformers to fill. Reducing the debt bias is an excellent way to raise revenue while reducing economic distortions, per Pozen. So these elements of Lee and Rubio’s proposal fit together perfectly.

Moving to a territorial tax system is another matter. A territorial tax system would make it far less likely that U.S. multinationals would change their tax domicile, as they’d no longer have to pay U.S. taxes on income generated abroad. In this sense, at least, the corporate inversion problem would be solved. But as the left-of-center Center on Budget and Policy Priorities has warned, a territorial system would make it more attractive for U.S. multinationals to shift economic activity to low-tax jurisdictions, as they wouldn’t have to go through the headache of a corporate inversion to take full advantage of tax havens overseas. Robert Pozen has offered a compromise — U.S. firms would pay one rate on their domestic profits and they would pay a separate “global competitiveness tax” rate on on their foreign profits, the latter of which would be pegged to the rates found in other market democracies. This would, according to Pozen, minimize the incentive for U.S. multinationals to shift economic activity abroad without unduly burdening them. (Moreover, the global competitiveness tax would raise revenue that could then be used to lower taxes on domestic profits, thus shrinking the wedge between these two rates.) It is easy to imagine other affluent countries moving in the same direction, which would be a good thing insofar as it would encourage firms to make location decisions on the basis of economic fundamentals rather than differing tax rates. Merits aside, Pozen’s approach might also prove more politically palatable, as it doesn’t appear to reward U.S. companies for shipping facilities and jobs out of the country.

In their Wall Street Journal op-ed, Lee and Rubio observe that “if we hope to realize a new American Century, many institutions and government programs will need to be updated, reformed, or replaced.” In a few short months, these two lawmakers have gotten off to an excellent start. If congressional Republicans are to ever deserve the support of rank-and-file conservatives across the country, they should follow Lee and Rubio’s lead. 

Boston Fed Paper Gives Bitcoin-as-Payment-System a Thumbs-Up

by Patrick Brennan

In this space, I’ve been following the evolution of the digital currency bitcoin, which has gotten big enough to merit an academic paper on it from two economists affiliated with the Federal Reserve Bank of Boston, essentially asking whether bitcoin has viability or usefulness as a currency. 

In order to answer that question, they lay out what it means to be a viable form of money. There are three purposes of money, as economists generally see it: as a medium of exchange, as a unit of account, and as a store of value.

Bitcoin essentially fails on the last two of these: For one, its price has been and probably will continue to be so volatile that it’s not a good way to hold value (“store of value”) or measure how much value you have (“unit of account”). That’s partly because, as the paper notes, currencies have generally not been viable over very large areas (bitcoin being accepted globally, if only in limited places) and when they depend on some external factors to determine their value (in bitcoin’s example, the actions of digital “miners”), rather than the actions of a central bank. The last objection might be taken by a lot of libertarians and the Paulites who’ve enthused over bitcoin as begging the question — they like bitcoin because it’s not tied to a central bank. But as the Fed economists point out, in both theory and practice, there are good economic reasons, in the modern wealthy world, to prefer central-bank currencies rather than deregulated currencies that have to be tied to some other value. (Rand Paul went so far as to say bitcoin would be better if it were indeed tied to some kind of other asset, which, as I explained, is a bad practical idea whatever the merits are of tying currencies to the value of other assets, since it would have invited much more regulation.)

The good news is that bitcoin is still a nice development for liberty-loving people, because it’s an innovative medium of exchange. It’s already surprisingly widely accepted as payment on a number of e-commerce sites, where customer and vendor get to avoid the non-negligible fees associated with traditional payment systems like credit cards, and transactions can be made so quickly that that bitcoin’s volatile value doesn’t matter. The Fed economists do point out a few problems: For instance, you can’t cancel bitcoin payments like you can, say, a credit-card payment or a wire transfer, so it’s harder to do returns on merchandise.

Yet bitcoin is still useful in this respect, because payment systems, particularly in America, are overregulated and expensive. One of the areas where they impose the highest tariffs is remittances, where the Fed paper is a little skeptical in what I think is kind of a nonsensical way:

Another plausible area of application, because of Bitcoin’s clear cost advantage (at least in terms  of the explicit cost), is remittances, especially across borders. A likely serious impediment to Bitcoin’s  adoption in this case is that the bulk of remittances are to developing countries. One could imagine that the potential users in these markets have neither the specific knowledge nor the digital devices necessary to utilize Bitcoin. This would explain why, to date, Bitcoin has no presence in this market. On the other hand, there is the mitigating factor that most such users have cell phones and many are comfortable with mobile applications. To the extent that a mobile application for international remittances using the Bitcoin network can be developed and accepted by a broad range of providers around the world, it can be possible for Bitcoin to capture a nontrivial share of this market. The crucial, yet difficult to assess, element is whether enough providers in different countries will be willing to adopt the Bitcoin technology, or some variant.

In other words, they’re worried developing economies won’t be tech-savvy enough to take advantage of bitcoin . . . but wait, developing economies are already pretty tech-savvy. As the authors note, there will have to be investment in apps (and wireless networks in these places) for something like bitcoin to become a good way to do remittances, but the potential there is real.

In the end, though, it’s important to qualify that the potential probably lies with “something like bitcoin,” and not bitcoin itself. That’s because, while bitcoin has some interesting innovations that has made it a basically free secure payment system, it has weaknesses, too. (Which are too technical to explain.) But both the technical weaknesses of bitcoin and the deeper problems with this kind of decentralized payment system can probably be overcome — assuming that there isn’t, as the Fed paper worries, a flurry of regulation for digital currencies.

Thanks to Jim Pethokoukis for the pointer.

Why Los Angeles Is Liberating Its Cabs

by Reihan Salam

Something very unusual is happening in Los Angeles. Instead of fighting innovative new businesses in service to deep-pocketed incumbents, local taxi regulators are very tentatively moving towards deregulation. No, they’re not putting themselves out of business outright, but they’re trying to help traditional cab companies change how they do business. Though taxi service is only one small slice of L.A.’s sclerotic economy, the fact that local regulators are adjusting their tactics at all offers lessons for how we might revitalize urban America.

The rise of ride-sharing companies like Uber, Lyft, and Sidecar has greatly improved the quality of local taxi service in L.A. Before the emergence of these smartphone-enabled services, it was often extremely difficult to get a cab, not to mention expensive. Like most large cities, L.A. tightly restricts the number of licensed taxi cabs, and this artificial scarcity shielded incumbent cab companies from competition. But now riders have a wide range of options from services that have effectively lifted the cab on drivers able to accept money in exchange for rides, and they’ve come to find the incumbents wanting.

So why have the traditional cab companies allowed this to happen? One quirk of California’s taxi regulations, as Laura J. Nelson of the Los Angeles Times reports, is that while a local Board of Taxicab Commissioners regulates the traditional licensed cab companies, Uber, Lyft, and Sidecar are regulated by the statewide California Public Utility Commission. The political influence of the cab companies thus counts for less than it might if these services were regulated at the local level, as it has to contend with other powerful interests as well, including a technology sector that keeps California’s state government afloat.

And so, according to Nelson, Eric Garcetii, Los Angeles’s liberal mayor, is pressing the Board of Taxicab Commissioners to take a different approach. Rather than impose new restrictions on the likes Uber, which they can’t do, the Board is being asked to relax rigid regulations that have kept the traditional cab companies from competing effectively. For example, while Uber et al. make use of variable pricing, to attract more drivers during periods of peak demand, traditional cab companies are forced to charge fixed rates and to operate under a cap of 2,300 cabs, parceled out across several different companies. Recognizing that the California Public Utility Commission is not about to clamp down on the ride-sharing companies, L.A.’s local taxi lobby seems to have reconciled itself to the fact that the traditional cab companies will have to evolve.

At the risk of stating the obvious, taxi regulation seems to be one area where it’s good to keep power in the hands of the state government rather than local governments, as the state government is accountable to a more diverse array of constituencies, which in turn makes it less vulnerable to capture by a single interest group. But cabs aren’t the only area where this is true.

Take local land-use regulation, the most important issue that no one in national politics cares about. Cities like Tokyo and Toronto that have seen big increases in housing construction empower higher levels of government — the national government in Japan and the provincial government in Ontario, respectively — to make decisions about land use while in the United States, land use decisions are generally made by cities and towns. That might be appropriate in the case of small communities that want to preserve their character. Large cities are another matter entirely, as large cities are America’s engines of productivity growth and upward mobility. When local voters impose stringent development restrictions in the cities where entrepreneurs gather and build businesses, and where young adults go to make their way in the world, they effectively put the brakes on the entire American economy.

Local control has its virtues. In some areas, however, you need state governments to give local entrepreneurs room to breathe. Just as California’s Public Utility Commission has enabled innovative new ride-sharing services to take hold, and to compete with incumbent cab companies, we need state governments to prise open dysfunctional real estate markets in cities like New York and San Francisco, and to enable aggressive outsiders to take on insider developers who have an interest in keeping housing prices high.

How Avikcare Would Fix Medicaid

by Callie Gable

Medicaid is a mess, and a very expensive one at that — the health-insurance program for low-income Americans is administered by states but has dozens of federal mandates and rules that drive up Medicaid costs. In response, the states cook up creative financing techniques to shift more costs back to the feds. The end result, among other things, is higher taxes for everyone and poorer care for Medicaid patients.

In his new health-care plan, Avik Roy, a fellow at the Manhattan Institute, proposes changes to the Medicaid system that would end the state-federal finance battle, give each entity clear cut responsibilities, and improve Medicaid patients’ access to quality care.

So how did Medicaid become a mess in the first place? In large part, state-federal Medicaid cost sharing.

The federal government pays around 60 percent of states’ traditional Medicaid costs (richer states get a bit less, poorer states a bit more). This creates all kinds of problems, but here’s just one example Avik provides of how this can be distortionary: If a state levies a new tax on Medicaid premiums or providers, which is then passed on in Medicaid payments, the federal government pays 60 percent of the amount of the tax to the state, which pays just 40 percent, essentially to itself. Roy lays out an example of how states can profit from these taxes in his plan:

A $15,000 Medicaid plan, thereby subject to $1,200 in sales and premium taxes, might be 60 percent subsidized by the federal government, leading to $720 in additional federal spending. The state government, by contrast, makes money on this deal: $1,200 in additional tax revenue, and $480 in additional Medicaid spending, for a net gain of $720. BL

Today, the federal government pays about $33 billion dollars more for pre-expansion Medicaid each year than it would if states weren’t using creative financing to shift the costs to the feds:

The tax game is, of course, just one example of how Medicaid is a mess. And states and the federal government are going to a lot of trouble to run and spend an incredible of money on a system that doesn’t work very well. Medicaid’s outcomes are significantly poorer than those of private insurance, and there is some evidence to suggest that uninsured patients even fare better than those with Medicaid.

To improve outcomes, Roy’s plan would give the low-income adults and children who use Medicaid for doctor and hospital visits generous subsidies to purchase private insurance plans on the Obamacare exchanges (which his plan would otherwise deregulate). The subsidies would be fully paid for by the federal government, absolving states of any fiscal responsibility for this part of Medicaid (called “acute care”).

In return, states would eventually take full fiscal responsibility for Medicaid’s long-term care population, the elderly and disabled who receive nursing-home and home-health-care benefits. Because aged and disabled beneficiaries are much more expensive to care for than children and adults, states would be still be responsible for financing much of this program. While long-term-care individuals make up less than a quarter of total Medicaid beneficiaries, they account for about 64 percent of Medicaid spending:

Splitting Medicaid into clear federal and state responsibilities is obviously appealing. But is this the right way to do it? American Enterprise Institute health-policy expert Joe Antos likes Roy’s proposal overall, but isn’t convinced that states are willing to fund long-term care on their own, as it’s an even riskier and more expensive proposition than funding health insurance.

“Long term care is a rapidly growing cost that states already fear,” he tells the Agenda, “and this does not deal with the fiscal consequences to the states. This plan will collapse because states lose.”

The Avikcare arrangement would be fiscally neutral or positive for most states, but some would be big losers in terms of federal Medicaid funding. The Urban Institute estimated that some states like Ohio and Louisiana, which would have to spend $788 million and $452 million more each year respectively, would need to increase Medicaid spending under this arrangement. The chart below (click to enlarge) is an estimate of how a plan like Roy’s would affect each state:

Avik’s proposal would address this specific problem by providing grants to the states that are “losers” to smooth their transition into the program (the total losses to the losers in 2011 would have been $4.5 billion). “In sum, the Medicaid swap and related offsets below would be designed in such a way so as to be modestly fiscally advantageous to every state government, rela- tive to the federal government, in order to encourage states’ participation,” his plan explains.

Another expert, Tevi Troy from the American Health Policy Institute, sees making long-term care a state responsibility as an opportunity for cost savings and efficiency gains (as Roy does), which means that, in theory, everyone could be a winner even after the transitional grants are phased out. While Troy is wary of the government’s ability to adequately deliver long-term care in the first place, he said states are in the best position to do it:

“Changing the paradigm is good,” he says. “This way there is little incentive for fraud or cost shifting. My general predisposition is to give states more flexibility and let them find the answer.”

Moreover, Troy is enthusiastic about the prospect of moving adults and children currently on Medicaid into private insurance via the exchanges. Troy and a colleague recently published a study finding that private insurance is less expensive per capita than governmentally run programs like Medicaid.

Roy’s approach could be a good deal all around: It gives acute-care patients access to a wider range of providers and care, which should result in better outcomes, while leaving states to coordinate care for the elderly and disabled, whose specific needs can best be met with smaller, state-level programs. It gives states and the federal government autonomy over their own programs, which should cut administrative costs and reduce incentives to game the system. However, as with any division of the system, some states will be winners and some states will be losers, so the politics of it won’t necessarily be simple.

How Conservatives Can Win on Social Issues

by Reihan Salam

On Monday, Jonathan Martin of the New York Times reported on how Democratic and Republican candidates have been adapting to a changing cultural landscape. Rising support for same-sex marriage, for example, has transformed what had been a wedge issue for social conservatives on the right into a wedge issue for social liberals on the left. And on a wide range of issues relating to women in the workforce, including the contraception mandate and pay equity, Democrats have exploited GOP flat-footedness to build upon their traditional advantage among women, and in particular unmarried women. Drawing on the work of Ruy Teixeira and Alan Abramowitz, I assume, Martin observes that while white voters without a college degree represented 65 percent of the electorate as recently as 1980, they represented 36 percent as of 2012, and their share continues to shrink. And so, Martin maintains, “a growing presence of liberal millennials, minorities, and a secular, unmarried and educated white voting bloc will most likely force Republicans to recalibrate.”

Ramesh Ponnuru, addressing a similar set of issues in Bloomberg View, sees matters differently. While he recognizes that public attitudes on same-sex marriage and legalized marijuana have changed, and that conservatives will talk less about them as a result, he makes a strong case that abortion is a different matter: first, public opinion has not shifted to the left on abortion; and second, talking less about abortion won’t do conservatives much good. Rather, he argues that conservatives need to identify areas where social conservatives are more closely aligned with the broader public, e.g., on the question of restricting abortions after 20 weeks.

I think that Ponnuru is exactly right. Abortion is a distinctive social issue for many reasons. Recently, J. Alex Kevern and Jeremy Freese, both sociologists at Northwestern University, that differential fertility might play a role:

Differential fertility is frequently overlooked as a meaningful force in longitudinal public opinion change. We examine the effect of fertility on abortion attitudes, a useful case study due to their strong correlation with family size and high parent-child correlation. We test the hypothesis that the comparatively high fertility of pro-life individuals has led to a more pro-life population using 34 years of GSS data (1977-2010). We find evidence that the abortion attitudes have lagged behind a liberalizing trend of other correlated attitudes, and consistent evidence that differential fertility between pro-life and pro-choice individuals has had a significant effect on this pattern.

That is, pro-life adults tend to have more children than pro-choice adults, and the views of children seem to correlate with those of their parents on at least this particular issue. I would argue that we ought to think harder about the political implications of differential fertility as we consider a wide range of policy questions: it is not unreasonable to expect that the children of parents who earn low market wages due to their limited skills and social networks might be more favorably disposed towards redistribution, and so policies that tend to increase labor force participation and average skill levels will have an impact not just on this generation, but also on the next one.

I would go further than Ponnuru. While I agree that abortion is an issue where the Democratic edge on social issues is at best overstated, I tend to think that Republicans are, in theory at least, in a stronger position than Democrats on a variety of other social issues. In his New York Times article, Martin quotes Ben Domenech of The Federalist:

“Just as Democrats had to accept or pretend to accept what was viewed as the cultural center of the country, Republicans are going to have to accept or pretend to accept that the center has shifted,” said Ben Domenech, a conservative writer. “They can respond by pretending it isn’t happening or isn’t a problem. But they have tried that in recent cycles, and it hasn’t really worked. Or they can reorganize around an agenda that favors individual liberty.”

While Domenech and I might disagree on what exactly an agenda that favors individual liberty would look like, I do think that conservatives can and should be the first movers on, for example, creating a more sustainable legislative settlement around the state-level regulation of cannabis. One can easily imagine conservatives arguing that the chief federal concern in regulating cannabis and other controlled substances is in containing the negative interstate spillovers associated with their use, and so if states succeed in containing these spillovers, they ought to be given wide berth to craft their own regulatory regimes — an argument I’ve gleaned from Mark Kleiman of UCLA and Will Baude of the University of Chicago Law School, in somewhat different forms. Similarly, conservatives might try experimenting with, say, empowering states to lower the drinking age, provided (again) they make a convincing case that they can contain negative spillovers. For example, a state might lower its drinking age while also increasing its taxes on alcohol in an effort to control binge use. I can’t confidently say that being the first mover on one of these issues would necessarily redound to the GOP’s advantage. But it would certainly change the conversation, and break the GOP out of its defensive crouch.

Martin cites the recent Republican embrace of allowing for the sale of birth control pills over the counter as a way of parrying liberal attacks. Yet it is actually much more than that — it is an authentically conservative proposal that empowers women, including the many women who will still be uninsured, by choice or otherwise, even if Obamacare, and its Medicaid expansion, firmly takes hold. One hopes that this birth control shift will prefigure a new policy creativity on social issues.

Tesla and the Interstate Subsidy Chase

by Reihan Salam

The Wall Street Journal has published an outstanding editorial on the success of Tesla, the boutique manufacturer of high-end electric automobiles, in extracting $1.3 billion in tax subsidies from Nevada for its new $5 billion ”Gigafactory,” to be built in Reno. Much of the editorial simply details the various provisions of the deal, which will leave crony capitalists everywhere salivating. It is worth noting that, as Kevin Bullis warned in MIT Technology Review last year, there are reasons to doubt the economic viability of Tesla’s new battery factory, not least because sluggish sales for electric vehicles have led to a glut of battery manufacturing capacity. Though I’m sure Tesla will do its best to drum up interests in its vehicles, despite the fact that they’ve been plagued by serious questions about their reliability, and though Tesla is indeed planning to release a mass-market product at a lower price point than its luxury sedans, larger changes in how Americans live and work might be challenging for Tesla’s business model, as they have been for all automobile manufacturers. If Tesla were operating according to the old-fashioned rules of free enterprise, I wouldn’t care in the slightest if the Gigafactory were a boondoggle in the making. Indeed, I might celebrate the company for its daring. But federal subsidies have been crucial to keeping the hothouse flower that is Tesla alive since its inception, which makes the gargantuan scale of the project seem like something other than a triumph of the entrepreneurial spirit. Had Nevada eliminated property and sales taxes for all business enterprises within its borders, or for all of them younger than, say, 15, I’d respect Nevada Gov. Brian Sandoval, a Republican running for reelection, incidentally, for his moxie, if not for his fiscal prudence. Instead, like the Wall Street Journal’s editorial board, I can’t help but think he and his allies have been snowed.

Emily Badger of Wonkblog has zoomed out from the specifics of the Gigafactory to discuss the many ways business enterprises try to pit one jurisdiction against another. Rather than base location decisions on economic fundamentals alone, large firms have taken to shopping around for where they can secure the biggest tax breaks. Even desirable jurisdictions that should have no problem attracting investment have been getting in on the game. And when location decisions are distorted by subsidies, they are often less sticky than they would be otherwise. That is, the firms in question often threaten to pick up stakes and move again, setting off yet another bidding war among desperate state and municipal governments. One possible solution, promoted by Mark Funkhouser, a former mayor of Kansas City and one of Badger’s chief sources for the article, is a federal law designed to limit these zero-sum subsidy wars. In a 2013 column, Funkhouser elaborated on the idea:

We need a national law that prohibits corporations from extracting bribes from state and local governments and bans governments from donating tax dollars to private entities — a sort of domestic equivalent of the Foreign Corrupt Practices Act, which prohibits American companies from bribing foreign governments.

Some will argue that such a law would damage America’s global competitiveness and drive companies to outsource even more of their work abroad. I think that, on balance, this is not so. America is a magnet for global talent because of the quality of life offered here, and current economic trends are damaging to that quality of life.

The governors of the six states that Texas Gov. Rick Perry is targeting, urging their entrepreneurs to pack up and move to the Lone Star State, ought to support such a federal law, and Missouri Gov. Jay Nixon should lead the charge. For years the economy of the Kansas City metropolitan area has been damaged by the “border war” of incentive-fueled competition between Kansas and Missouri. Recently, in response to big tax cuts pushed into law by Kansas Gov. Sam Brownback, the Missouri legislature enacted massive tax cuts of its own. Nixon vetoed the legislation, saying it would gut the state’s ability to deliver services, and he called for an end to the destructive competition between the two states “The competition with the highest stakes … isn’t between Kansas or Missouri, or between Jackson County and Johnson County.” Nixon said. “It’s with Brazil and Russia, South Korea, Germany and India.”

It’s not clear how such a law would work in practice. Congress could attempt to ban firm-specific incentives, for example, but then state and local governments would presumably draft provisions that could only apply to one firm, or to a narrow class of them. Moreover, Funkhouser seems to be confusing different issues. Whether or not the tax cuts backed by Kansas Gov. Sam Brownback have proven wise, they’re quite distinct from the kind of special interest subsidies that the Wall Street Journal rightly condemns. Indeed, I see nothing wrong with Texas Gov. Rick Perry urging entrepreneurs to move to the Lone Star State by touting its attractive economic climate. What I’d find objectionable is if Perry promised individual firms tax breaks and other subsidies, which he has routinely done. But again, as Badger suggests, it’s hard to know where a federal law would begin or end. So as with most of these policy dilemmas, what we really need are vigilant citizens willing to make a stink about corporate giveaways. For conservatives in particular, cronyism has to become a voting issue. 

Elizabeth Warren Is Still Deceiving People about Student Loans

by Jason Richwine

Politico reports that Senator Elizabeth Warren’s student-loan “refinancing” bill, which suffered death-by-filibuster back in June, will be resurrected in the Senate as early as this week. The legislation would drop the interest rate students are paying on older loans from around 7 percent to about 4 percent, which is the rate the government charges for newer loans.

That’s a transfer payment from taxpayers to people who have attended college. But Senator Warren insists her bill merely levels the playing field by granting students the right to refinance. “With interest rates near historic lows, homeowners, businesses and even local governments have refinanced their debts,” she wrote in an op-ed on Tuesday. “But a graduate who took out an unsubsidized loan before July 1 of last year is locked into an interest rate of nearly 7 percent.”

As I noted last spring, students already have the right to refinance their loans. They can go to any private lender and ask for a lower rate, just as homeowners and business can. The reason that few students do, of course, is that they are getting a great deal — a generous government subsidy — on their existing federal-direct or federally guaranteed loans. Private lenders are rarely in a position to offer better terms.

The Warren bill would allow students to refinance with the federal government, but why should taxpayers agree to accept lower interest payments? In the private sector, lenders will allow refinancing only if they fear losing loans to their competitors offering lower rates. But the federal government, which charges below-market interest rates, has no serious competition for student loans.

It’s not unreasonable to believe that student debt is excessive, and lowering the prior interest rate would be one way to relieve the burden. But when Senator Warren says her bill merely puts students on a refinancing par with homeowners and businesses, it does the whole student-loan debate a disservice.

Guide to the Senate Races, Louisiana Edition: Rep. Bill Cassidy (R) v. Mary Landrieu (D)

by Callie Gable

Though Louisiana is generally considered a Republican state for purposes of presidential elections, its politics are famously idiosyncratic, with power alternating between candidates who identify as reformers or populists, tendencies which can be found in both parties in Louisiana. Rep. Bill Cassidy, the Republican candidate, first served in the Louisiana state Legislature before being elected to the U.S. House of Representatives in 2008. Incumbent Sen. Mary Landrieu, the Democratic candidate, held two state government offices before joining the U.S. Senate in 1996. Sen. Landrieu is the chair of the Committee on Energy and Natural Resources. She is also a member of a political dynasty with deep roots in Louisiana, and a strong connection to the state’s African-American population. 


Rep. Bill Cassidy (R) v. Mary Landrieu (D)


Abortion has become a key issue in the race with Gov. Bobby Jindal singed new abortion legislation into law in June. Cassidy will likely use Landrieu’s pro-choice position against her since Louisianans tend to lean right on abortion issues. Landrieu is running on her experience in the Senate and fight against he President to protect energy industry jobs, a large source of employment in the state. Landrieu’s conservative critics have recently attacked Landrieu’s many efforts on behalf of the District of Columbia, the argument being that Landrieu has become a creature of Washington.

Though Landrieu began with a significant lead, the two candidates switched positions at the start of 2014 and the race has been very close since. Now, it is a near perfect tie with both Landrieu and Cassidy holding about 47 percent of the vote:


Guide to the Senate Races, Georgia Edition: David Perdue (R) v. Michelle Nunn (D)

by Callie Gable

Though Georgia is considered a relatively solid Republican state in presidential elections, its changing demographic composition has made it an increasingly attractive target for Democrats. 

The Republican candidate, David Perdue, has been working as a businessman for 40 years, including roles as CEO at both Reebok and Dollar General. He also chaired the National Committee on Workforce and Development. The Democratic candidate, Michelle Nunn is the CEO of Points of Light, a volunteer coordination organization, and was appointed to the President’s Council on Service and Civic Participation under Bush. She considered running for U.S. Senate in 2004, but ultimately decided against it.                                                                                                       

David Perdue (R)      v.     Michelle Nunn (D)


The candidates’ histories in the private sector have driven the debate so far. Nunn has attacked Purdue for job layoffs as the result of mergers he oversaw as a CEO and for outsourcing jobs to exploit foreign labor. You can also expect to hear about Nunn’s salary of $225,000 as the CEO of Points of Light and about the layoffs that occurred when she took over the organization. Nunn’s team also leaked campaign memo outlining Nunn’s weaknesses as a candidate, calling her “too liberal.” It also included offensive fundraising strategies such as listing Jews as key fundraisers.

A typically red state, Georgia hasn’t elected a Democratic Senator in 14 years, and that is seeming less and less likely to change in 2014. Though they started out fairly even, Perdue has been slowing pulling further and further ahead since January and now holds a nearly 4 percent lead:

Remember the Second-Order Consequences of Legislation (and a Less-Conservative Lesson)

by Patrick Brennan

That, of course, won’t be an unfamiliar lesson for many right-of-center policy types, or conservatives in general, but it’s always one worth bearing in mind nonetheless, because sometimes there are things we can do about it. It came to mind when I read this piece in Governing magazine, entitled “Ohio’s Bad Idea for Boosting Welfare-to-Work.” It caught my eye because I was interested in learning why a welfare-reform program with work requirements failed. Here was the program:

[In 2013] Ohio — for the first time in 18 years — started to see [its welfare] rolls climb, a function most likely of the effects of the Great Recession. The reversal got the attention of Republican Senate President Keith Faber, who late in the 2014 session added a provision to the state budget that would give welfare caseworkers bonuses for moving clients from welfare to work. Under the Faber plan, five counties will be chosen to participate (currently it’s not clear how they will be selected).

On its face, this seems like a good, old-fashioned and sensible run-government-like-a-business notion. Not only will it incentivize caseworkers to hustle, but it may illuminate some particularly successful tactics in finding folks jobs. It’s also not an unheard of notion. There are numerous welfare-to-work programs run by nonprofits that operate on a pay-for-performance basis. Providers get a certain amount upon evaluating a client’s skills and needs, a certain amount upon training, some more upon placement, and even further payments for clients who stay in their jobs for six months, a year, two years and so forth.

As the piece notes, there’s a track record of success for a lot of welfare-to-work programs, including ones that pay for performance — Ohio didn’t have a “bad idea” per se at all. But the Ohio plan didn’t quite consider their lessons:

The well-designed pay-for-performance plans run by nonprofits account for some key variables, including the skill level or employability of clients (in order to prevent “creaming”) and the economic environment in which the task is being tackled. It’s one thing to pay bonuses in areas with relatively healthy economies and clients who are pretty much ready to roll, it’s quite another in places where the region is struggling and the clientele is especially challenging. But Ohio’s deal is typical of how way too many state legislators think about “performance”: It starts and ends with the bonus. Legislators didn’t bother to ask whether caseworkers would cream. They didn’t wonder: Will they try to shove clients into the first available, if not altogether appropriate or promising job? Will caseworkers simply reject folks who really do need assistance because their job prospects seem particularly dim?

The Governing piece doesn’t have actual evidence of what’s gone wrong in Ohio, but surely there were some unintended, undesirable consequences for the conduct of caseworkers — and misallocation of bonuses taken out of scarce state resources, because counties were ranked by performance with no way to control for the different challenges they face. These issues may to some extent be intractable, but it seems a number of state and local welfare agencies have in fact devised effective, worthwhile incentive systems for encouraging welfare-to-work — they were just more complex than Ohio’s. For good reasons, conservatives distrust complex programs. They also distrust government interventions because they have unintended consequences.

But unintended consequences aren’t always unpredictable. Many government programs create somewhat predictable distortions, and there is usually precedent for them. There were predictable distortions that would emerge from this incentive program (maybe ones of uncertain magnitude, though), just as there are predictable distortions that come from having means-tested welfare programs in the first place, such as their boosts to implicit marginal tax rates (though again, we can’t be quite sure of that effect’s magnitude). And sometimes, as in Ohio, the best answer to these somewhat predictable second-order problems is a little more complexity — incentives that take into account a county’s economic situation, that enable caseworkers to devote resources as people need without being swayed too much by the chances they will end up in a job, etc. If we want a welfare system, and we want it to encourage work, it’s going to take some tolerance for complexity.

Of course, local governments are best-suited to devise such complex solutions, because of the number of factors involved and the relative ease with which they can fix programs if they failed to consider unintended consequences. Saying Ohio really should have considered lessons from systems elsewhere is not the same as saying Ohio should be forced to do the same thing they did.

Recent College Graduates Are Still Adrift

by Reihan Salam

In 2010, Richard Arum and Josipa Roksa revealed in their book Academically Adrift that of the 2,300 undergraduates they had studied at a wide array of four-year colleges and universities, as many as a third demonstrated almost no progress at all in developing their critical thinking, complex reasoning, and writing skills, and even those who did demonstrate some improvement demonstrated very little. Some critics dismissed their findings, arguing that because the standardized test they used to gauge student learning (the Collegiate Learning Assessment) had no real stakes attached to it, it should come as no surprise that most students performed poorly. 

Now, however, Arum and Roksa have released a follow-up study tracking these students as they entered the brutal mid-2009 labor market, which Kevin Carey summarizes in The Upshot.

Even after statistically controlling for students’ sociodemographic characteristics, college majors and college selectivity, those who finished school with high C.L.A. scores were significantly less likely to be unemployed than those who had low C.L.A. scores. The difference was even larger when it came to success in the workplace. Low-C.L.A. graduates were twice as likely as high-C.L.A. graduates to lose their jobs between 2010 and 2011, suggesting that employers can tell who got a good college education and who didn’t. Low-C.L.A. graduates were also 50 percent more likely to end up in an unskilled occupation, and were less likely to be satisfied with their jobs.

Yet the vast majority of students were convinced that their higher education experiences were worthwhile, including those who’d been essentially weeded out of the labor market by employers. “Through diplomas, increasingly inflated grades and the drumbeat of college self-promotion,” Carey writes, “these students had been told they had received a great education.” This is despite the fact that, as Carey reports by way of Arum and Roksa, “the typical student spent three times as much time socializing and recreating in college as studying.” One is reminded of the indebted students who had rallied around the Occupy movement, who insisted that the problem with the higher education they had received was not that it imparted little in the way of critical thinking skills, but rather that it hadn’t been adequately subsidized by taxpayers. My inclination is less to blame the students themselves than to blame the higher education institutions that mislead them, routinely if not deliberately, into pursuing courses of study that are unlikely to help them meet their academic and professional goals. Meanwhile, as Elizabeth A. Armstrong and Laura T. Hamilton demonstrate in Paying for the Party, many universities focus more on catering to wealthy students for whom college is seen more as an opportunity for recreation than as a means to upward mobility, and that many less affluent students find themselves getting off track as a result.

But after reading Carey, one can’t help but worry about what will happen as these young people age:

Students who were interviewed in depth by Dr. Arum and Dr. Roksa put great stock in collegiate social experiences that often came at the expense of academic work, emphasizing the value of the personal relationships they built. But only 20 percent found their most recent job through personal contacts, and of those, less than half came from college friends. And while the recent graduates were gloomy about the state of the nation, they professed strong belief in their own future success. The vast majority thought their lives would be better than that of their parents. “They learned from the experts that they can do well with little effort,” Mr. Arum told me, “so they’re optimistic.”

This optimism won’t last if these former students continue to struggle and to depend financially on their parents. At some point they’re going to demand answers, or start looking for scapegoats. I should stress that Arum and Roksa devote much of their time to students who’ve actually managed to complete a course of study. The challenges facing those who can’t manage to do so are more daunting still.