Spend Smarter on R&D Before Spending More

by Reihan Salam

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

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

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

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

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

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

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

The Minimum Wage Referendums

by Reihan Salam

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

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

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

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

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

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

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

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




Defending the On-Demand Economy, Part I

by Reihan Salam

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

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

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

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

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

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

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

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

How David Cameron Became a Reform Conservative

by Reihan Salam

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

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

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

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

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

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

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

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

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

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

by Jason Richwine

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

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

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

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

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

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

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

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

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

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

by Reihan Salam

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

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

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

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

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

The Great Suburbia Debate

by Reihan Salam

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

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

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

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

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

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

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

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

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

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

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

Government Accounting Deceptions Are Everywhere

by Jason Richwine

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

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

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

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

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

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

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

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

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

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

The same problem of disregarding market risk affects public pensions:

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

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