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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

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



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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



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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.

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How Avikcare Would Fix Medicaid



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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



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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



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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. 

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Elizabeth Warren Is Still Deceiving People about Student Loans



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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)



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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)



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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)



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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



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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.

Guide to the 2014 Senate Midterms



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There’s a lot of speculation about the chances of Republicans taking the Senate in the November 4 midterm elections. In The New Yorker, John Cassidy recently lamented:

Just in case you haven’t you haven’t had enough bad news, here’s a bit more from the domestic-politics desk. With less than a hundred days until the midterm elections, the Republicans now have a very realistic chance of retaking the Senate, which would leave them in over-all control of Capitol Hill for the next two years.

Forecasts indicate that that Cassidy may have good reason to worry – The Upshot puts the chance of a Republican takeover at 64 percent:

The Washington Post echoes this prediction, reporting a 63 percent chance that the Republicans will be in the majority after the November elections.

The GOP needs six seats to win the Senate, and there are seven currently Democratic seats up for grabs in states that Romney won in 2012. Historically, midterms go poorly for the incumbent party, and President Obama’s rock bottom approval ratings certainly aren’t helping the Democrats. Even so, there are quite a few races that are shaping up to be close.

Over the next several days, The Agenda will provide information and analysis on the candidates and key issues as well as recent polling data for these close races. 

 

Innocents and Skeptics



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Rick Perlstein’s The Invisible Bridge, a sweeping account of the American political scene from Richard Nixon’s 1972 reelection to the presidential campaign of 1976, when Ronald Reagan emerged as the Republican heir apparent, has occasioned two excellent reviews.

The first, by Geoffrey Kabaservice in The National Interest, author of Rule and Ruin, an account of the transformation of the GOP from an ideologically diverse to an ideologically unified party, surprised me. Having scathingly criticized the conservative movement that came to dominate the Republican Party, I had expected Kabaservice to sympathize with Perlstein’s jaundiced take on charlatanism of the modern Republican right. Instead, Kabaservice teases apart what he sees as Perlstein’s too-neat division of American society into those who had grown suspicious of patriotic shibboleths in the wake of Watergate, with whom the author very clearly identifies, and the innocents who clung bitterly to the idea of America as “God’s chosen nation,” and who came to resent liberal critics of mainstream American mores. This neat framework overlooks the “complicated and somewhat contradictory views” held by conservatives and liberals alike, almost all of whom are “both innocents and skeptics in various measures.” According to Kabaservice, “today’s conservatives are simultaneously critics and boosters of America, fearful of its big government and deeply suspicious of its politics and culture while in the same breath maintaining that it is still the envy of the world.” To single them out as uniquely ingenuous is to fail to do them justice, and to give their political rivals more credit than they deserve.

And having closely studied Ronald Reagan’s rise for Rule and Ruin, Kabaservice offers a more complicated portrait of a pragmatic politician who emerged as an unlikely conservative folk hero:

Perlstein fails to grapple with what made Reagan a successful conservative politician in a liberal state, who would use his broad appeal first to come close to toppling Ford in 1976 and then to win the presidency outright in 1980. Perlstein equates Reagan’s early 1960s conservatism with the paranoia of the John Birch Society, but makes little effort to figure out why Reagan was able to campaign as a big-tent Republican or govern as a pragmatist. Perlstein claims that Reagan’s goal was to purify the GOP by kicking out all who did not subscribe to rigid conservative principles, when in fact Reagan opposed this sort of ideological cleansing. Reagan told California’s conservative activists in 1967 that they had an obligation “not to further divide but to lead the way to unity. It is not your duty, responsibility or privilege to tear down or attempt to destroy others in the tent.” He warned that “a narrow sectarian party” would soon disappear “in a blaze of glorious defeat.” The conservatives would have booed anyone else off the stage for offering this diagnosis, but they obeyed Reagan.

It’s still a mystery why a governor who passed the largest tax increase in his state’s history, signed the nation’s most liberal abortion bill and no-fault divorce law, and supported gun control and pioneering environmental legislation could have remained a hero to the conservative movement. It would never happen nowadays, but Reagan somehow threaded the needle. It’s not enough to say, as Perlstein does, that Reagan was merely opportunistic or sought to blame his actions on the liberals in the California legislature, who were “furtive and diabolical in ways unsullied innocents could not comprehend.”

Indeed, Kabaservice reminds his readers that many conservatives only backed Reagan out of a sense of resignation, as their hearts belonged to harder-edged conservatives who, unlike Reagan, were more unyielding in their convictions. Kabaservice also reminds us that whether or not you embrace his critique of the conservative movement, he understands it deeply. 

The second review, by Christopher Caldwell in Bookforum, is interesting throughout, and far more sympathetic to Perlstein than Kabaservice, particularly in its admiring conclusion. Caldwell’s discussion of Reagan as “a protean personality” is as intelligent as you’d expect. Yet I was particularly intrigued by Caldwell’s provocative, and convincing, counterinterpretation of the Watergate scandal. Caldwell argues that while Perlstein believes Nixon to have been both dangerous and ruthless, Perlstein’s narrative offers evidence for another interpretation entirely: “Nixon lost his job because people feared him less than they did his adversaries.” Nixon’s various abuses of power were if anything far surpassed by those of his Democratic predecessors, from whom Nixon and his allies learned a great deal. ”If impeachment was warranted because Nixon was corrupt,” Caldwell writes, ”it was actually carried out because he was weak and trusting and his party upstanding,” as various Republicans refused to close ranks behind him. And so Caldwell suggests that Watergate is perhaps best seen “as a kind of conspiracy or coup.” One hopes that Caldwell will at some point revisit this idea at greater length. 

Common Core Validation Committee Member: ‘Nobody Thought There Was Sufficient Evidence’ for the Standards



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It’s all too common: The backers of a broad-based political movement claim their cause is steeped in evidence, but a perusal of the research reveals more hope than substance. The Common Core education standards are a good example. As I noted last week, George Washington University’s compendium of 60+ research papers on Common Core included just two focused on the standards’ impact on student achievement, and the results were mixed at best.

The people who developed and validated the Common Core have themselves acknowledged its weak evidence base. That’s clear from an article in the November 2013 issue of the American Journal of Education. Written by two UC Santa Barbara professors, Lorraine M. McDonnell and M. Stephen Weatherford, the article features anonymous interviews with Common Core’s leading designers. The article’s purpose is academic — to analyze whether Common Core’s development fits the social-science model for how research affects policy — but it contains a lot of practical information that should inform the ongoing standards debate.

McDonnell and Weatherford are clear that research evidence did play a role in Common Core’s development, but almost all of the evidence was used either to identify problems (such as America’s poor ranking on international tests) or to generate hypotheses (for example, that higher achieving countries have superior standards). When it came time to actually write the standards, the developers could not draw from a large store of empirical evidence on what works and what doesn’t. They had little to go on except the standards of high-performing nations and the “professional judgment” of various stakeholders.

McDonnell and Weatherford give the example of learning trajectories in mathematics. While developmental psychologists have studied how sequencing affects math learning in early childhood, much less is known about learning trajectories in later years. So the standards writers asked for the “best judgments” of people who study math education. Regarding the frequent use of expert judgment in lieu of data, one Common Core developer told the authors, “We wanted to be able to cite non-peer-reviewed research because there’s not enough research available, and often the findings are inconclusive.”

Another developer said that Common Core is, scientifically, merely a work in progress: “If we waited for the perfect research to inform the development of the standards, we would never have the standards today. . . . As we move deeper and deeper into implementation . . . further research will inform future iterations of the standards.”

After the drafting stage, the validation committee also recognized that the standards were informed by intuition as much as real research. According to one committee member:

It was pretty clear from the start that nobody thought there was sufficient evidence for any of the standards. . . . The review process, in short, was inclusive and involved feedback from a lot of different perspectives. This is not ‘sufficient research evidence,’ but it is thoughtful professional judgment, applied systematically. [ellipsis in original]

The Common Core developers were warned by some researchers that the link between standards and achievement was tenuous, and that other reforms (“enabling conditions”) would be necessary to see real progress. But, in the words of McDonnell and Weatherford:

Common Core advocates understood what researchers were telling them about enabling conditions. However, during this stage of the policy process, they chose to downplay them because they would complicate the agenda at a time when a policy window was opening but might not be open for long.

None of this should be taken as evidence of a conspiracy. Common Core proponents believe in their cause and have understandably sought to portray it in the best possible light. And it’s not implausible that the standards could raise student achievement, assuming that strict accountability measures can force public schools to improve. But the truth is that we know little about the connection between standards and achievement, and it will be difficult to justify standards-based reform without knowing more. 

What If GDP Growth Remains Stubbornly Low?



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Robert J. Gordon offers yet another pessimistic assessment of America’s future growth prospects in his latest NBER working paper. While the CBO projects that U.S. GDP will grow at an average annual rate of 2.2 percent over the next decade, Gordon estimates that the economy will instead grow at a rate of 1.6 percent:

Forecasts for the two or three years after mid-2014 have converged on growth rates of real GDP in the range of 3.0 to 3.5 percent, a major stepwise increase from realized growth of 2.1 percent between mid-2009 and mid-2014. However, these forecasts are based on the demand for goods and services. Less attention has been paid to how the accelerated growth of real GDP will be supplied. Will the unemployment rate, which has declined at roughly one percent per year, decline even faster from 6.1 percent in June, 2014 to 3.0 percent or below in 2017? Will the supply-side support for the demand-side optimism be provided instead by a major rebound of productivity growth from the average of 1.2 percent over the past decade and 0.6 percent for the last four years, or perhaps by a reversal of the minus 0.8 percent growth rate since 2007 of the labor-force participation rate?

The paper develops a new and surprisingly simple method of calculating the growth rate of potential GDP over the next decade and concludes that projections of potential output growth for the same decade in the most recent reports of the Congressional Budget Office (CBO) are much too optimistic. If the projections in this paper are close to the mark, the level of potential GDP in 2024 will be almost 10 percent below the CBO’s current forecast. Further, the new potential GDP series implies that the debt/GDP ratio in 2024 will be closer to 87 percent than the CBO’s current forecast of 78 percent.

This paper also has profound implications for the Federal Reserve. The unemployment rate has declined rapidly, particularly within the last year. Faster real GDP growth will accelerate the decline in the unemployment rate and soon reduce it beyond any estimate of the constant-inflation NAIRU, even if productivity growth experiences a rebound and the labor force participation rate stabilizes. The macro economy is on a collision course between demand-side optimism and supply-side pessimism.

Three issues immediately come to mind. 

The first is that Gordon’s pessimistic thesis rests in part on a plausible account of the rate of improvement in labor quality. For much of the twentieth century, the educational attainment of the U.S. workforce steadily increased. It now appears to have plateaued, for a variety of reasons. Gordon’s case is strengthened by the fact that less-skilled immigration appears to have lowered the average skill level of the U.S. workforce. As Mary Alice McCarthy has observed, “one in six U.S. adults lack basic literacy and numeracy skills, compared with one in twenty in Japan.” The presence of less-skilled immigrants in the workforce could allow other workers to invest more in their human capital, by facilitating the outsourcing of household production. But it is not at all clear that this effect fully outweighs the direct impact of less-skilled immigration on average labor quality, and the indirect impact that flows from the fact that the children of less-skilled immigrants tend to have low rates of educational attainment relative to the U.S. average. One obvious way to address concerns about labor quality would be to embrace an immigration policy that increases rather than decreases the average skill level of the U.S. workforce. (Alternatively, one might conclude that the dampening effect of less-skilled immigration on growth in GDP per capita is not reason enough to oppose it as it is fully compatible with growth in “income per natural.”)   

The second is that, as Scott Winship argues in “The Affluent Economy,” even sluggish growth from a high base implies substantial absolute gains. 

The third is the question of “digital dark matter,” which Shane Greenstein and Frank Nagle discuss in a new paper:

Researchers have long hypothesized that research outputs from government, university, and private company R&D contribute to economic growth, but these contributions may be difficult to measure when they take a non-pecuniary form. The growth of networking devices and the Internet in the 1990s and 2000s magnified these challenges, as illustrated by the deployment of the descendent of the NCSA HTTPd server, otherwise known as Apache. This study asks whether this experience could produce measurement issues in standard productivity analysis, specifically, omission and attribution issues, and, if so, whether the magnitude is large enough to matter. The study develops and analyzes a novel data set consisting of a 1% sample of all outward-facing web servers used in the United States. We find that use of Apache potentially accounts for a mismeasurement of somewhere between $2 billion and $12 billion, which equates to between 1.3% and 8.7% of the stock of prepackaged software in private fixed investment in the United States and a very high rate of return to the original federal investment in the Internet. We argue that these findings point to a large potential undercounting of the rate of return from IT spillovers from the invention of the Internet. The findings also suggest a large potential undercounting of “digital dark matter” in general.

Greenstein has also cited Wikipedia, where U.S. households spend more than half of 1 percent of their time online, as another “visible piece of digital dark matter.” Elsewhere, Joel Mokyr offers a closely related argument:

[E]conomists are trained to look at aggregate statistics like GDP per capita and measure for things like “factor productivity.” These measures were designed for a steel-and-wheat economy, not one in which information and data are the most dynamic sectors. They mismeasure the contributions of innovation to the economy.

Many new goods and services are expensive to design, but once they work, they can be copied at very low or zero cost. That means they tend to contribute little to measured output even if their impact on consumer welfare is very large. Economic assessment based on aggregates such as gross domestic product will become increasingly misleading, as innovation accelerates. Dealing with altogether new goods and services was not what these numbers were designed for, despite heroic efforts by Bureau of Labor Statistics statisticians.

The aggregate statistics miss most of what is interesting. Here is one example: If telecommuting or driverless cars were to cut the average time Americans spend commuting in half, it would not show up in the national income accounts—but it would make millions of Americans substantially better off. Technology is not our enemy. It is our best hope. If you think rapid technological change is undesirable, try secular stagnation.

Mokyr’s point is well taken. It could be that Gordon’s pessimistic assessment of U.S. growth potential rests on a failure to fully account for the value created by various new technologies. Yet part of the reason economists are trained to look at aggregate statistics is that these statistics serve as a guide for policymakers. By referencing the fact that cutting the time Americans spend commuting in half would have no impact on GDP, Mokyr is highlighting the limitations of GDP — clearly cutting commutes in half would make Americans better off. Yet unless shorter commutes lead Americans to work commensurately longer hours, shorter commutes will not lead to an increase in taxable income that can then be used to finance, say, military expenditures or redistribution. 

And this is important to understand. Many new technologies make us better off in ways that can’t be taxed away. Consider some of the recent research on “overearning,” which has been ably summarized by Dave Nussbaum:

Are people working too much? A psychological researcher trying to determine the answer would first need to ask, how would we even know? If someone works a lot, she may have perfectly good reasons. Perhaps she wants to save enough money to retire comfortably, to have a cash cushion for emergencies, or to have money to pass on to heirs. To answer the question, [Christopher] Hsee and his colleagues tried to strip away all complicating factors in order to study the underlying psychology.

Doing this is “an advantage rather than a defect or compromise,” says Hsee. His rationale is that if you remove the reasons people have to earn more money and yet still find that they overearn, “that shows the overearning is real.”

Nussbaum goes on to describe the experiment, which is quite clever. Let’s say productive workers across the country decided to stop ”overearning” — what would happen to tax revenues? Nothing good, I suspect. I’m reminded of Eli Dourado’s contrast between technologies of control and technologies of resistance. As governments grow more intrusive, more effort is directed away from the “brute maximization of production” and towards “producing things that we already know how to produce in ways that have ancillary benefits,” like evading control. Or, in a related vein, a person might decide that (say) the interaction of means-tested subsidies and taxes is such that its best to cultivate a preference for non-pecuniary goods, which are arguably more abundant than ever, as Tyler Cowen maintains.

So a few things could be true at the same time: Robert J. Gordon could be right that U.S. GDP growth potential will be quite low for the foreseeable future; growth in GDP per capita could be understating the extent to which quality of life is improving; the federal government’s fiscal capacity could be constrained by sluggish GDP growth, which in turn might limit future increases in redistribution (per Winship, redistribution could still increase in absolute terms, but the scope will be limited all the same); and the key to life might be learning to love things that are free or cheap. When we talk about the importance of education as a policy matter, we generally focus on how educational attainment allows people to become better producers; but perhaps we ought to think more about how it might allow people to become “better” consumers (see Michael Schrage  Who Do You Want Your Customers to Become? for more on a related idea). Eventually, we might come to believe that the chief injury caused by a lackluster education is not so much the way it reduces earning potential but rather the way it limits our ability to appreciate free or cheap stuff, like writing. This sounds rather self-serving, doesn’t it? I’m not totally sure I buy it myself.

Scandinavia’s ‘Right-to-Work’ Unionism



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Though I often disagree with Justin Fox, I’m a fan of his writing. And so I was surprised by his recent discussion of Jake Rosenfeld’s new lament for organized labor’s decline, What Unions No Longer Do. I have yet to read Rosenfeld’s book, and it’s possible that there is a great deal that’s been lost in the translation from the book to Fox’s discussion of it. Just to be clear, I’m reacting to Fox’s brief remarks and not to the book itself. 

The decline of unions in the U.S. has often been painted as inevitable, or at least necessary for American businesses to remain internationally competitive. There are definitely industries where this account seems accurate. Globally, though, the link between unionization and competitiveness is actually pretty tenuous. The most heavily unionized countries in the developed world — Denmark, Finland, and Sweden, where more than 65% of the population belongs to unions — also perennially score high on global competiveness rankings. The U.S. does, too. But France, where only 7.9% of workers now belong to unions (yes, France is less unionized than the U.S.), is a perennial competitiveness laggard.

This is weak tea. While it is true that France is less unionized than the U.S., it is also true, as Richard Yeselson observes in his conversation with Jonathan Cohn in the The New Republic, that “France actually has smaller percentage of union members than the US, but union contracts cover almost the entire workforce.” Given that the critique of unions tends to center on the rigidities associated with union contracts, Fox’s example does not suit his purpose. 

And as for Denmark, Finland, and Sweden, where union density hovers around 70 percent (67.6 percent in Denmark in 2010, 69 percent in Finland in 2011, and 67.7 percent in Sweden as of 2013, the latest numbers available via the OECD for each country), it is important to understand all of them are Ghent system countries. That is, all of them are countries in which the unemployment insurance system is administered by labor unions. In “Paths to Power,” Michael Dimick describes the Ghent system’s distinctive properties, and he argues that ”that collectively-bargained unemployment insurance is efficient and establishes a positive-sum tradeoff between a form of labor-market security for workers and a flexible workplace for employers.” I don’t share Dimick’s enthusiasm for organized labor, but he does an excellent job of explaining the deficiencies of the U.S. approach to labor unions. One of his central points is that labor laws in Denmark and Sweden (he doesn’t specifically address Finland) don’t offer particularly strong protections to unions:

How much better are labor laws in Denmark and Sweden? Both countries have had union densities in the 70 and 80 percents in recent years, much higher than in the US either currently or historically. Given their social-democratic history and politics, one might suppose that these Nordic countries would have untrammeled union-security provisions, effective representation procedures, a strictly-enforced duty to bargain, and high levels of job security, in addition to an elaborate, overarching legal framework for regulating employment relations. In fact, on balance neither Danish nor Swedish labor law is significantly more protective of unions or workers than current labor law in the US. First, in both Denmark and Sweden, union-security agreements are virtually nonexistent. As strange as it sounds, they are essentially “right-to-work” countries.

Dimick describes how the Ghent system approaches resolve some of the problems that U.S. labor law sets out to solve:

First, the Ghent system provides an alternative solution to the free-rider problem. Since it is voluntary and administered by unions, it gives workers an incentive to keep and maintain membership without the need for union-security agreements.

By “union-security agreements,” Dimick means the closed shop, in which union membership is a condition of employment. 

Second, the Ghent system addresses the recognition problem by separating and reprioritizing employees’ decision to join a union from the employer’s decision to recognize it. Danish and Swedish unions are able to constantly recruit new members through their administration of unemployment insurance, and thence mobilize and build membership support among employees for other labor-movement goals, including recognition from employers, without the need for government certification procedures. These two decisions are confounded and their ordering reversed in US labor law and practice: in order for unions to recruit and build membership support, they must first prevail in a government-administered representation election against a typically intransigent employer. Finally, union participation in unemployment-insurance policy also helps sustain more cooperative labor relations. In Denmark in particular, unions and employers are able to achieve a positive-sum tradeoff whereby workers receive income security in exchange for ceding their demands for job security, which gives employers more flexibility in the workplace. Danish success with the policy—termed ―”flexicurity”—has garnered much attention from European policy makers.

Dimick explains the upshot of these differences for productivity and competitiveness, the subject Fox briefly addresses in his post: 

Even defenders of unions usually concede that unions have negative effects on productivity or unemployment, or both. Indeed, I show that when unions and employers bargain over wages and employment- protection rules (such as “just cause”), risk-averse workers will prefer a contract with excessive job security that is production inefficient. However, when unions and employers bargain alternatively over wages and unemployment benefits, leaving to the employer the right to hire and fire, this externality is internalized and the resulting contract causes no loss in productive efficiency compared to the competitive, nonunion benchmark. Understanding these mechanisms can help explain the supportive role that Danish flexicurity plays in solving the adversarial problem. Moreover, as I shall argue, there are good reasons why unions should participate in unemployment-insurance policy in order to make the implementation of flexicurity a success. [Emphasis added]

Dimick concludes by arguing that the U.S. ought to embrace something like the Ghent system, on a state-by-state basis. I haven’t thought very deeply about the idea, but what I can say is that attributing the virtues of Ghent system unions to U.S. unions makes little sense; they are  profoundly different, despite the fact that we call them the same thing

Immigration and the Persistence of Social Status



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Though the title of Gregory Clark’s new Foreign Affairs essay (“The American Dream Is an Illusion“) is regrettable — my guess is that it was written by an editor hostile to Clark’s argument — the essay itself is compelling and important. Those who are familiar with Clark’s The Son Also Rises and A Farewell to Alms will quickly grasp the premise. Drawing on a wide range of data sources, Clark has chronicled the pace of social mobility over centuries across a number of different countries, and his central finding is that “social mobility rates are extremely low” and that “seven to ten generations are required before the descendants of high and low status families achieve average status,” both in egalitarian countries like Sweden and in more laissez-faire countries like the United States. 

In his new essay, Clark applies this insight to immigration policy. Specifically, he posits that the apparent success of immigrant assimilation in earlier eras largely reflects the fact that “immigrants who quickly assimilated to their new society in countries such as the United States were often positively selected from the sending populations.” The poor immigrants who made their way to the U.S. from Scandinavia and central and eastern Europe were generally literate women and men well-equipped for life in a modernizing society. Of course, not all immigrants fell into this category. Clark discusses Americans of French origin, including those descended from French settlers in Louisiana and from more recent French Canadian immigrants. While Irish and Italian Catholic immigrants faced more intense discrimination than people of French origin, he notes that their descendants have achieved more or less average social status while people of French origin have not. According to Clark, this reflects the fact that French who arrived in the United States “were overwhelmingly drawn from the lower classes of Acadia and Quebec, as a result of demographic patterns and selective migration,” and “the effects of this lower social status have persisted across generations,” despite intermarriage. 

And Clark maintains the same pattern is recapitulating itself among more recent immigrants. Visa restrictions helped ensure that immigrants from some regions (sub-Saharan Africa, the Arab world, South Asia, and East Asia) had skills that were of value in the U.S., and this effectively limited immigration to people who were from groups with above average social status in their native countries. Immigrants who did not face these restrictions, because they arrived as refugees or as unauthorized immigrants, “entered the United States with low social status and have struggled to achieve upward mobility since.” A similar pattern obtains in Europe, where the descendants of guest workers drawn from rural populations have found it difficult to climb the economic ladder. 

One of the most persistent myths surrounding the immigration debate is that if the U.S. placed a heavier emphasis on skills in shaping its immigration policy, the share of immigrants from Latin America would plummet. (Mark Krikorian offers a version of this thesis in a recent article for NRO.) Clark illustrates why this isn’t necessarily the case. Clark observes that “migrants from Mexico and Central America tend to be negatively selected from their home populations: they are often the people who found themselves in such desperate economic circumstances at home that they preferred to live as illegal immigrants in the United States,” which helps explain why the social status of descendants of migrants from Latin America tends to be low. 

But a skills-based immigration policy would create more opportunities for skilled Latin American immigrants who have something to lose, and who would not be willing to live as unauthorized immigrants. Consider a recent Pew Global Attitudes Project poll of Mexicans, which found that 34 percent of Mexicans would move to the U.S. if given the opportunity, and half of them (17 percent) would do so without authorization. It seems reasonable to bet that the 17 percent who would not do so without authorization are drawn from Mexico’s more educated classes. Mexico’s educational attainment rate is low by the standards of affluent market democracies, yet it is increasing: while only 12 percent of Mexican 55-64 year-olds have a post-secondary education, 22 percent of 25-34 year-olds have one. There is a fairly large pool of educated Mexican immigrants to draw from, should the U.S. choose to do so. 

Clark, however, offers a different strategy: he calls for increasing the immigration of educated Latin Americans from countries like Argentina, Brazil, Chile, and Peru, as doing so would “bolster the overall social status of the Latino population in future generations, and their representation in higher-status positions in the society.” While this seems like a perfectly sound idea, it’s not clear to me that it would help the U.S. forestall the emergence of “a substantially poorer and less educated Latino underclass,” particularly if, as seems likely, the descendants of skilled immigrants are more likely to intermarry than the descendants of less-skilled immigrants, a phenomenon that reflects the larger rise of assortative mating (in which people choose partners with similar levels of educational attainment) and that contributes to ethnic attrition (in which people cease identifying with a given ethnic group, usually because they are of mixed ancestry and their connection to the group has attenuated). Indeed, a mestizo underclass might come to see itself as racially distinct from Latinos descended from middle- and upper-class social groups, a phenomenon that is arguably already taking hold. 

As for immigrants of Asian origin, it is important to note that the channels for skilled immigration Clark identifies are not the only channels that Asian immigrants use. Many Asian immigrants arrive via family unification visas, and there is a large number that has arrived via the diversity visa lottery. As a general rule, the relatives of skilled Asian immigrants will also tend to be skilled, but this isn’t always or necessarily the case. It is not uncommon for a capable immigrant to invite less-capable relatives to join her in her adopted country. There might in fact be considerable social pressure for her to do so. 

And as David Nakamura of the Washington Post reports, the Obama administration is contemplating an executive action that could dramatically increase legal immigration, despite the fact that large majorities of Americans consistently oppose such an increase:

The proposal outside groups are pushing centers on changing the way the government counts the number of foreigners who are granted green cards, which allow them to live and work in the United States. Under the law, 226,000 green cards are reserved for family reunification and 140,000 for employment in specialized fields, numbers that Congress established in 1990.

The government has traditionally counted each family member against the limit when granting visas to foreign siblings of U.S. citizens. The spouses and children of permanent U.S. residents and foreign workers have counted against the limits as well. Advocates are calling on Obama to count only the principal green-card holder in each case, while allowing the rest of the family members in, which would reduce huge backlogs in both categories.

More than 4.4 million people are waiting for green cards, according to the State Department.

Asian American advocacy organizations have focused on such changes because, other than Mexico, the countries with the longest waiting lists of people trying to join relatives in the United States are the Philippines, India, Vietnam and China — with delays stretching as long as two decades.

This executive action would have a profound effect on the future composition of the U.S. population, and the future composition of the Asian origin population. It likely means that the Asian American population, which now has a median household income higher than that for the U.S. as a whole (partly because this population is concentrated in high-wage, high-cost regions), would grow poorer and less capable of self-support. 

How Many Public Employees Can We Afford?



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In an interview with The New Republic’s Jonathan Cohn, Richard Yeselson, a veteran of the labor movement and well-regarded policy intellectual, offers a mostly sanguine take on the role of public sector unions in American society. Public sector unions outnumber members of private sector unions by a considerable margin, and there is a good reason they’ve become such a lightning rod. Suffice it to say, I don’t agree with Yeselson’s interpretation, but he does offer one observation that I’d like to unpack:

[T]he strongest critique I hear from the right (and some centrist Democrats too) about public sector unions is that their first priority needs to be the excellent provision of services, rather than the job security of public sector workers. And you know what? I agree! Who isn’t in favor of excellent provision of public services? But given how little revenue we raise and how little we spend on public services, relative to other countries, it is easy to imagine public policies that would boost public sector services and end up creating more employees, too.

First, let me stipulate that there are indeed many conservatives for whom the chief problem with public sector unions is that they favor increasing public employment levels. It is not clear to me, however, that this is in fact their main drawback, nor do I think the strongest conservative arguments against public sector unions center on their role in increasing public employment as such. 

In “Government Crowded Out,” Daniel DiSalvo of the Manhattan Institute warns that as state and local governments face rising pension and health benefit costs, they’ve been forced to cut services. And as costs per worker rise, state and local governments are less inclined to maintain high public employment levels. For example, DiSalvo observes that in New York city, a sanitation worker costs $144,000, up from $79,000 a decade ago. Had compensation costs not risen to this extent, the city might be more amenable to expanding the ranks of sanitation workers. Much has been written about the peculiarities of the defined-benefit pensions that are common in the public sector, and which many public employees would happily trade for higher wages, and so I won’t rehearse the matter here. 

Public sector unions have considerable influence over the work rules governing what employees can and can’t do. To be sure, this influence has at times been overstated, as Rick Hess argues in Cage-Busting Leadership, his book on how bureaucratic inertia can be more of an obstacle to reform than work rules as such. But work rules can effectively determine staffing levels in a given job function. In doing so, they limit the ability of state and local governments to embrace new productivity-enhancing technologies and to adapt to changing consumer preferences. In “The Trouble with Public Sector Unions,” DiSalvo discusses how rigid work rules shape the culture of the public sector:

Yet as skilled as the unions may be in drawing on taxpayer dollars, many observers argue that their greater influence is felt in the quality of the government services taxpayers receive in return. In his book The Warping of Government Work, Harvard public-policy scholar John Donahue explains how public-employee unions have reduced government efficiency and responsiveness. With poor prospects in the ultra-competitive private sector, government work is increasingly desirable for those with limited skills; at the opposite end of the spectrum, the wage compression imposed by unions and civil-service rules makes government employment less attractive to those whose abilities are in high demand. Consequently, there is a “brain drain” at the top end of the government work force, as many of the country’s most talented people opt for jobs in the private sector where they can be richly rewarded for their skills (and avoid the intricate work rules, and glacial advancement through big bureaucracies, that are part and parcel of government work). Thus, as New York University professor Paul Light argues, government employment “caters more to the security-craver than the risk-taker.” And because government employs more of the former and fewer of the latter, it is less flexible, less responsive, and less innovative. It is also more expensive: Northeastern University economist Barry Bluestone has shown that, between 2000 and 2008, the price of state and local public services has increased by 41% nationally, compared with 27% for private services.

Yeselson finds it easy to imagine policies that improve the quality of public services while also increasing public employment. I’d suggest that improving the quality of public services might entail increasing public employment in some domains while decreasing it in others. It is this reallocation that public sector unions make extremely difficult, as unions, as democratic organizations, reflect the risk-version of their median members, who believe, correctly for the most part, that unionized public employment helps them secure more favorable terms than they’d be able to secure from private employers. It is not obvious that New York City gains much from the fact that the MTA employs 25 workers for tunnel-boring machine work that Spanish transit agencies need only 9 workers to accomplish. But I don’t doubt that the 16 workers who’d be made redundant by a shift to Spanish-style labor practices would not welcome the change. In aggregate, however, I too can imagine easily a scenario in which rolling back rigid work rules leads to stable or even increased employment levels – New York City could stand to employ more police and more sanitation workers, if they were more affordable. The trouble with public sector unions is not so much that they increase public employment levels as that they make it hard for state and local officials to meet the evolving needs of dynamic communities. 

UPDATE: As if on cue, Kate Zernike of the New York Times reports on encouraging developments in Camden, New Jersey, a depressed, crime-ravaged community where a notoriously ineffective local police force was recently disbanded and replaced by a police force operating under the auspices of the county government:

Dispensing with expensive work rules, the new force hired more officers within the same budget — 411, up from about 250. It hired civilians to use crime-fighting technology it had never had the staff for. And it has tightened alliances with federal agencies to remove one of the largest drug rings from city streets.

The entire article is well worth reading. The old police force was fiercely resistant to change. The new police force is now unionized, yet the sweeping away of the old order has left fresh memories that have prevented backsliding thus far. It remains to be seen if the new police force, and its union, will grow just as hidebound as its predecessor. What we can say is that Camden’s police have grown more efficient by “dispensing with expensive work rules,” which in turn has allowed for the expansion of the workforce. 

The New CBO Report: Medicare Really Is Looking Better, But Not Good Enough



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The Congressional Budget Office released their update to the Budget and Economic Outlook for the next decade Wednesday. Damian Paletta has a summary for the Wall Street Journal, but here are are three big takeaways for thinking about policy choices in the coming years:

1. Deficits are returning to normal levels, but not for long.

According to the CBO, this year’s deficit will fall to 2.9 percent of GDP – smaller than the historical average – and the deficit will shrink again in 2015, too. This reflects the natural fall in spending and increase in revenues one can expect coming out of a major recession, and when considering that mandatory spending (for entitlements like Social Security and Medicare) is up 4 percent this year to $79 billion, the fact that the immediate budget is improving is impressive (though some of the cuts we’re seeing, to the Pentagon, are controversial).

The problem, of course, doesn’t lie in 2014 or 2015, but further down the road when Social Security and health-insurance programs drive our deficits and debt to unsustainable levels. This CBO report shows that climb is set to begin in the next decade, with deficits rising from 2.9 percent of GDP to 4 percent of GDP in 2024, with 85 percent of the increase in outlays coming from Social Security, Medicare and the medical programs, and interest payments on the debt.

2. The CBO projects the labor market to recover, but has its doubts about long-run GDP growth. Obamacare has something to do with it.

One of the most important debates within the Fed and among policy wonks concerns the trajectory of the labor market: Does the combination of demographic shifts, long-term unemployment’s scarring effects, and stagnant wages mean that for the foreseeable future we’re guaranteed lower levels of employment? Or is the low labor-force-participation rate and elevated unemployment rate the result of “slack” in the economy that could be addressed with better economic performance and further monetary stimulus?

In some ways, the CBO takes the latter view — citing a labor-force-participation rate below what demographics would project and a large number of part-time workers who would prefer full-time hours – and expects that faster economic growth will reduce the slack and push the unemployment rate down to 5.7 percent by 2016. But that’s partly because it doesn’t expect the labor-force-participation rate to recover: Increased demand for labor on one side will be outweighed by the continued aging of the population and Obamacare’s work disincentives, resulting in the rate’s dropping another half a percentage point between now and 2017.

In terms of economic growth, the CBO expects this year’s growth number, hampered by a rough first quarter, to be a paltry 1.5 percent. Activity will pick up in 2015 and 2016, returning to over 3 percent growth. But then through 2024, growth subsides to 2.2 percent, an anemic pace well below our historical average. That lower growth rate is in large part due to a smaller labor force, caused by aging and changing work incentives.

3. Medicare’s in better shape for now, but still in trouble down the road.

The CBO projects that Medicare spending will rise from 2.9 percent of GDP to 3.2 percent in 2024. To put this in perspective, the following graph from the Upshot shows revisions the CBO has made in their estimates for projected growth in Medicare spending: They’ve been dropping noticeably and consistently. Medicare is in better fiscal shape than we used to think, at least over the next ten years. (Click through to the piece to see the graphic animated.)

This is unquestionably good news, but it’s important to remember two things” First, to those cheerleading the projections as evidence of the success of Obamacare in bending the cost curve, the data would seem to say that the spending reductions are driven mainly by global trends toward slower health-cost growth – likely a result of the economic slowdown – and, as the NYT’s Margot Sanger-Katz and Kevin Quealy argue, naturally occurring “technical changes” in the health-care profession, e.g., more generic drugs.

Second, the economy will pick back up, inspiring more health spending and the aging of America will continue to age putting more pressure on the program. As Jim Capretta notices, the long-term picture is still bleak: “The program has $28.1 trillion in unfunded liabilities over the next 75 years. Together with Social Security’s $13.3 trillion shortfall, it is clear the federal government has accumulated entitlement spending commitments that far exceed our capacity to pay for them.”

Capretta maintains that the fee-for-service nature of Medicare causes inefficiency and excess spending and that its price controls distort the market while not doing anything to limit the use of services. 

Today’s Policy Agenda: Should Tax Dollars Go to Training Doctors?



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Should tax dollars go to training doctors?

At the Upshot, prominent health-care academic Uwe E. Reinhardt argues that, as an economic matter, new doctors shouldn’t be trained at the expense of taxpayers. The rational for publicly funded medical degrees is that medical training, or individuals with medical training rather, are a public good — an economic concept referring to something everyone can use, without impeding on others’ ability to use it.

But as Reinhardt points out, since medical professionals decide if, when, and where they work, they aren’t equally accessible to everyone:

Medical education and training represents human capital that is fully owned by the trainees. They can deploy it as they wish — on patient care, or even in the financial markets, where quite a few physicians now work. In principle, therefore, the owners of that valuable, purely private human capital should pay themselves for its production.

But according to the American Association of Medical Colleges, the U.S. is already facing a serious doctor shortage that will only get worse:


Even taking the industry’s claims with a few grains of salt, the constrained supply of doctors does suggest that their training needs some form of public support. 

Millions will see their Obamacare subsidies reduced automatically. 

The Associated Press reports that millions of Americans who received subsidies to buy health insurance will receive a smaller amount than they planned on. Since subsidies are linked to income, if individuals make more money in 2014 than they anticipated, their subsidy will be automatically reduced. Subsidies are given as tax credits, so some individuals’ tax refunds will be less than they planned on, but for others, they may end up with an actual tax liability. “More than a third of tax credit recipients will owe some money back, and (that) can lead to some pretty hefty repayment liabilities,” one tax expert told the AP. 

Most affected individuals don’t know they will be receiving less at tax return time. There is a process to report unexpected income and to avoid owing extra at the end of the year, but few consumers have used it because it’s complicated and requires month-to-month income accounting. 

American corporations actually do pay their fair share.

In Forbes, Yevgeniy Feyman argues that, contrary to what President Obama has implied, inversion, when a company moves its headquarters to another country because of differences in tax systems, is not unpatriotic – it just makes sense:

“Restructuring to reduce tax burdens is no more than unpatriotic than corporations incorporating in Delaware to take advantage of the simple incorporation process. More importantly, the idea that companies aren’tt ’paying their fair share’ – at least relative to companies in other countries – is equally disingenuous,” he writes.

The U.S.’s high corporate tax rate and attempts to tax global income of U.S.-based firms, unlike most countries, means that more and more companies are making the move abroad:

Feyman concludes that U.S. companies’ efforts to relocate, a process that is both expensive and difficult, is an indication that something is very wrong with the American taxation system, not the firms themselves.   

Today’s Policy Agenda, August 26: Study Says Globalization Is Harming U.S. Employment



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Work itself is crucial for happiness.

For Arthur Brooks’ new site The Pursuit of Happiness, Andy Quinn examines the literature on unemployment and happiness:

Cristobal Young, a Stanford sociologist, has studied the non-pecuniary effects — that is, effects that aren’t purely financial — that unemployment insurance has on the lives of recipients. Specifically, Young tracked the self-reported happiness (“subjective well-being”) of different groups of people caught up in different economic circumstances. What he found is seriously surprising.

In this graph, Young has calculated the happiness of impacts of losing your job and receiving no unemployment insurance (on the left) and losing your job but receiving the benefit (on the right):

The similarity is remarkable. To hear progressive commentators tell it, job loss in the absence of unemployment insurance is like stepping straight into Hell, and the benefits do a tremendous amount to lift up hard-luck Americans. But here, we see a different story: Unemployment benefits merely take a little bit of the edge off the happiness downdraft from being laid off. To be sure, the financial help cuts back on some stress at the margins. But just as clearly, involuntary idleness brings a massive psychological cost that mere money can hardly touch.

The policy implications of this study stretch far beyond the recent debate over extending emergency unemployment insurance. After all, even if one is convinced by this study of the overwhelming importance of employment, it’s possible that by keeping recipients actively working for jobs, the emergency UI benefits were helping, not hindering, the return to work.

The broader lesson from the study is that orienting social policy towards employment – through work requirements, wage subsidies, and the litany of proposals circulating the Right in recent months – is far from cold-hearted. In fact, given the well-documented benefits of employment ranging from staying healthy to building strong relationships, a push towards work if protected by a safety net, is in the best interests of Americans.

Study: Globalization does slow American employment growth.

Several economists, including David Autor, have a new NBER working paper out investigating the relationship between imports from China and employment:

BL Even before the Great Recession, U.S. employment growth was unimpressive. Between 2000 and 2007, the economy gave back the considerable gains in employment rates it had achieved during the 1990s, with major contractions in manufacturing employment being a prime contributor to the slump. The U.S. employment “sag” of the 2000s is widely recognized but poorly understood. . . . We find that the increase in U.S. imports from China, which accelerated after 2000, was a major force behind recent reductions in U.S. manufacturing employment and that, through input-output linkages and other general equilibrium effects, it appears to have significantly suppressed overall U.S. job growth. BL

While globalization and capitalism have radically reduced global inequality and made the world much better off as a whole, not everyone in the United States benefits uniformly from such transactions. This study suggests that workers in the tradable sector – jobs that can be moved around the world — face job losses and likely wage cuts or stagnation in the new economy. This is not to say that we need to restrict trade or engage in protectionism to insulate these workers from new economic realities — too many lives are being radically improved across the globe. It’s just important to remember that absent any intervention, a sizable portion of the American population (particularly in, say, North Carolina,
Michigan, and Alabama
) are going to struggle in this new reality, and we ought to bear it in mind policy-wise.

For the Storyline, Howard Schneider explains this trend from a personal point of view.

Is immigration why Scott Brown now has a race on his hands?

With a new poll from the University of New Hampshire showing Scott Brown pulling into a statistical tie after trailing significantly most of the race, could it be that the elevation of immigration in the national conversation has helped him?

From TV ads to op-eds, Brown has driven home his opposition to “comprehensive immigration reform.” We’ve talked recently about how elite consensus on that issue isn’t really in line with public opinion, and the fact that Brown is getting traction in a northeastern swing state by taking a strong stance on the against it is certainly interesting.

In a recent issue of National Review, Reihan and Yuval Levin outlined an alternative to the big-business driven proposals that have been circulating of late — they argue their alternative is superior on the political and policy merits.

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