The Agenda

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

It’s Not Researchers’ Fault Liberals’ Favorite
Pre-K Study Is Antiquated, But It Still Is


The Carolina Abecedarian Project is one of the few early intervention programs to show cognitive and behavioral gains for participants several decades running (it’s often cited along with the Perry preschool program). The latest results, published in Science last month, show superior adult health outcomes in the treatment group.

But can a small program started way back in 1972 really hold lessons for today’s America? Echoing the sentiment of most preschool advocates, Aaron Carroll at the Incidental Economist answers this way: “Anytime you do a follow-up of 30+ years, by definition the intervention will be old by the time you get results. There’s no other way to do it. It’s such a silly attack.”

It’s not silly at all — research problems shouldn’t be dismissed just because they are unavoidable! Critics are not demanding to see the results of a 30-year study that somehow began yesterday. Their point is that the long-term nature of preschool analysis inevitably complicates its interpretation and calls into question its modern applicability.

Abecedarian was begun during the Nixon administration. Few people would argue that the life of the typical poor family in the U.S. is the same today as it was then. To take one example, nearly all participants in the original Abecedarian project were black, but if we implemented a new Abecedarian today, more Hispanics than blacks would be likely to participate. The socioeconomic challenges facing low-income immigrant families in 2014 are probably quite different than those facing a segregated group of slave descendants in 1972.

For pedagogical clarity, imagine a 75-year follow-up to a small program that served kids born before World War II. Most of us would question how relevant that program is to public policy today. I doubt anyone would respond to that objection with, “Oh, how silly. The program has to be 75 years old if you’re going to do a 75-year follow-up!”

It’s frustrating that ongoing studies become less relevant as time goes by, but they still become less relevant as time goes by. In my view, uncertainty in long-term interventions should be treated much like uncertainty in finance. A guaranteed $100 payment is worth more than an expected $100 payment that might end up being $90 or $110. Similarly, expected gains from preschool evaluations should be devalued as the uncertainty around them increases.

On a side note, Abecedarian’s age is not its only interpretive challenge. Back in the early 1990s, psychologist Herman Spitz pointed out that the treatment group exhibited cognitive advantages as early as six months of age. To supporters, this indicates that Abecedarian works its magic very early in life, and the subsequent pre-K intervention years are necessary to sustain the advantage.

But to skeptics, an early cognitive advantage is evidence that the treatment and control groups were never randomized properly in the first place, invalidating subsequent comparisons. Problems with randomization are not unusual in tiny demonstration projects, and there were some inconsistencies in participation rates between Abecedarian’s treatment and control groups.

Central Planning May Have Helped Modernize China, but It Ruined Africa


On the Corner, Kevin makes an important point about Slate’s idea that authoritarian China ended famines more through subsidizing agricultural inputs and building infrastructure than through liberalization: This isn’t a lesson for the U.S. 

As Slate has it, Chinese government action yanked agriculture out of the 16th century into the 20th; this doesn’t really work if your economy is already in the 20th or 21st century.

But there’s at least one other big problem with this idea: This doesn’t work for lots of other primitive economies. Sub-Saharan African states did basically what China did for decades — in a slightly more liberal way via a system called marketing boards, extracting surplus from the economy to pay for modernizing the economy and subsidizing various agricultural inputs such as fertilizer and irrigation.

This went absolutely terribly, as a former professor of mine, Robert Bates, recounts in a slim but hugely important book that bears, unfortunately, the almost amusingly boring name Markets and States in Tropical Africa.

Rather than modernizing their economies, African countries used subsidies and modernization to extract wealth from the poor and marginalize them politically, to the benefit of a small cadre of politically connected individuals in each country’s capital.

So awful was this system that a country like Sierra Leone, the main agricultural product of which is rice, actually had to start importing rice to feed its soldiers and bureaucrats. (You can imagine what that then did to Sierra Leonean farmers.)

There are other examples on Slate’s side of the ledger — public investment in agricultural research did revolutionize Brazil and made huge swaths of the country arable. But even the limited lesson Slate is trying to draw immiserated hundreds of millions of Africans.


A Mini-Symposium on Taxing the Childless


Earlier this week, I wrote a column for Slate in which I made the case for shifting the tax burden from working parents to childless workers in the top half of the income distribution. I was very pleased to see that the The New York Times devoted a “Room for Debate” to the subject, and that Yuval Levin did such an able job of defending the idea (see “Ease Parents’ Double Burden“). Of course, not everyone embraced the idea. Elaine Maag of the Tax Policy Center argued that rather than spend more on children in the tax code, we ought to spend more on childless workers. Maag might be surprised to learn that raising wage subsidies for childless workers is one of my highest domestic policy priorities, and that I’ve written about the subject on many occasions. There are two reasons I write about politics and policy. The first is that I read Rewarding Work, a book by the economist Edmund Phelps, as an undergraduate, and it led me to think that our country could do a much better job of integrating poor, marginalized people into the cultural and economic mainstream and that a pro-market conservatism that aimed to reform our core economic institutions was the best synthesis for achieving this goal, though Phelps himself is not a man of the right as such. The second is that I’ve always enjoyed reading periodical literature and I came from a family of thinkers and writers who never had the opportunity to make a living as thinkers and writers, and I figured I’d give it a shot. All of this is to say that Maag’s point is well taken. Yet I believe that we can walk and chew gum at the same time, provided we are willing to raise taxes on childless workers in the top half of the income distribution, and I’m entirely amenable to something other than a two-rate structure to make this burden somewhat more progressive, providing the resulting tax code is not too burdensome. Chye-Ching Huang of the Center on Budget and Policy Priorities does not believe that Utah Sen. Mike Lee’s does enough to redistribute income. I assume that Huang and I disagree about what an ideal tax-and-transfer system would look like. Her most convincing point is that childless workers, and workers who are non-custodial parents, ought to receive more generous wage subsidies, which of course is a point I accept. And finally there is a short piece by the head of a group that engages in family-planning advocacy. I’ll just note that if our goal is to make birth control “widely available and affordable,” a good first step would be to embrace Virginia Postrel’s case for making birth control available over the counter. 

Finally, a political thought. You might have noticed that many on the left accuse conservatives of waging a “war on women,” and it really is true that conservative GOP candidates have been known to say inapposite and sometimes offensive things about women and women’s rights, and when these things said, they are amplified, highlighted, and sometimes egregiously mischaracterized by a national news media that finds the rather fascinating case of California State Sen. Leland Yee to be a bona fide snoozefest. The reply to my column suggests to me that there are at least some people of left-liberal inclination who are quick — remarkably quick, really — to express hostility to “breeders,” which is to say people who choose to have children. I’ve encountered much talk of the supposed recklessness and irresponsibility of parents, and the dangers they pose to environmental well-being. It occurs to me that we might be witnessing a “war on parents” that separates a certain kind of ideological true believer (affluent, childless, in the top half of the household income distribution, but eager to raise taxes only on those in the top one-hundredth) from other liberals and moderates, many of whom have children, earn moderate incomes, and can relate to the idea that their decision to have children is not so much an act of recklessness as an investment in the future that ought to be treated as such. It is also true, however, that ideological libertarians tend to be hostile to the idea, and so shifting the tax burden is a wedge issue that might cleave both major party coalitions. This is a risk that should be taken seriously. Our assessment of this risk will depend on how we think a pro-parent tax shift will cleave the coalitions, and which coalition it will leave in a more favorable position. Allahpundit of Hot Air has worthwhile thoughts on the political implications of a Lee-style tax reform. (Not Yee-style tax reform, in which shoulder-fired weapons are given a substantial tax break.)

The White House Explains Why It Repeats the Equal-Pay Factoid: It’s a Noble Lie


Why does the White House repeatedly trot out the claim that women make 77 cents on the dollar men do for performing the same work, when it’s well known to be incredibly misleading or straight-up false? (The difference is almost entirely explained by differences in occupational choices, skills, and experience.)

There are a lot of very smart economists and statisticians in the White House, and the president is supposedly a bit of a wonk himself — surely he knows how misleading it is. They have fact-checkers for this stuff — Keith Hennessy, a Bush economic adviser, once usefully recounted the process they went through for claims in the president’s speeches — why is the president letting this through?

MSNBC’s Irin Carmon asked this of Betsey Stevenson, an accomplished University of Michigan labor economist who’s now on the president’s Council of Economic Advisers, and here’s what she said (note what’s in bold):

Carmon: Every time the president comes out and says, women should have equal pay for equal work, you have folks, including economists, come out and say, that’s a misleading number, that’s not for the same job, that’s year-round full-time wages, and a big part of it is women’s choices. What’s your response to that, and what’s a good way to understand these numbers?

Stevenson: When people come out and say that’s not a fair number, well, what really is a fair number? You brought up “women’s choices.” Well, some women’s choices come about because they’re being discriminated against. Some of women’s choices come because they experience sexism. Some of women’s choices come because they are disproportionately balancing the needs of work and family. Which of these choices should we consider legitimate choices, and which of them should we consider things that we have a societal obligation to try to mitigate, to alleviate some of these constraints so that they can make different choices? A lot of people will say things like, let’s control for occupational choices. But the research is showing us that women are choosing occupations which penalize them the least for taking time out of work.

If there was less discrimination, if there was more flexibility in work, you wouldn’t see women necessarily choosing the same occupations. So why should I take the wage gap holding occupation constant? If we change society, we reduce discrimination, we’re not going to hold occupational choice constant – women are going to choose different occupations.

I agree that the 77 cents on the dollar is not all due to discrimination. No one is trying to say that it is. But you have to point to some number in order for people to understand the facts. And what it represents is the fact that women on average are put in situations every day that for a variety of reasons mean they earn less. Much of what we need to do to close that gap is to change the constraints that women face. And there are things we haven’t tried.

To some extent, this is understandable, though it’s unfortunate that the president is comfortable making such a misleading claim to draw attention to an issue (however important). To take Hennessy at his word, that’s not something the Bush White House would have done.

But there are further problems: Stevenson’s right that people rarely say “women earn 23 percent less than men all because of discrimination.” But the president — and Democrats at all levels — use the number to argue for anti-discrimination legislation. If you’re insisting that it must be easier for women to pursue discrimination claims, you’d better have a mighty good case that legally actionable discrimination is explaining the problem (and also that more discrimination legislation will help prevent it, but that’s a separate issue). Stevenson merely claims that subtle discrimination might be pushing women to make different, less-lucrative choices, which isn’t something that can reasonably be solved through individual lawsuits.

This isn’t to say Stevenson is entirely wrong about discrimination and choices: Obviously, some women who would make great economists or politicians or financiers or whatever are driven away from those paths by sexism, in particular subtly sexist atmospheres and institutions. But whether that’s an acceptable cultural reality, a cultural problem, or a tort that needs to be federally actionable isn’t obvious. The 77 cents on the dollar claim isn’t going to clear that up — especially when, and here I probably differ from Stevenson — some of the divergence in men’s and women’s occupational choices are not due to societal constraints, but fundamental differences.

Thanks to Justin Wolfers, a Michigan economist who happens to be Stevenson’s husband, for pointing to the interview. (Follow him on Twitter for superb analysis of the BLS jobs numbers every month, and other smart things.)

China’s Military Capabilites Are Growing — But How Long Can They Keep It Up?


Chinese military spending, and capabilities, to the extent they can buy them, are increasing rapidly while the U.S.’s are not, Reihan points out below, in the course of explaining why we need to reexamine our trajectory. Another encouraging thought, though: China may not be able to maintain its trajectory for terribly long.

Representative Randy Forbes, whose piece (co-authored with Eldridge Colby of the Center for a New American Security) in The National Interest Reihan refers to, is an expert and eloquent advocate for defense spending and a thoughtful commentator on China. One encouraging note in his piece is his assurances that the U.S. can indeed afford and knows how to counter Chinese power in the western Pacific, something he echoed when he visited the offices of National Review not too long ago. As someone who occasionally feverishly reads a couple articles about China’s anti-ship missile capabilities — part of a system called A2/AD – and wonders how on earth are we going to protect our ships from this, I asked him about just that topic, and he had a much more optimistic answer than I expected.

The DF-21 anti-ship ballistic missile, against which many worry U.S. Navy ships could be defenseless

But he also had another broader point about meeting the challenge presented by China, mentioned in passing in his TNI piece: The Chinese only have a limited economic window for spending whatever they want on the military (and, as Reihan mentions, gettings of bang for their buck). Forbes, in fact, pegged at just about a decade more in which they can afford to continue ramping up their defense spending at the rates they have been. One needn’t subscribe to a seriously skeptical Gordon Chang–esque view of the Chinese economy to agree that it has serious structural and demographic problems that will slow growth dramatically — and permanently — at some point in the short or medium term and drive up government spending on issues besides defense.

The U.S., of course, doesn’t lack for economic and fiscal challenges of its own, but it has a history of politico-economic resilience and adaptability that post-Deng China just doesn’t. The economic situation, in other words, goes to reinforce Representative Forbes’s point that matching China in its littoral zones is feasible — and the benefits are huge.


Obamacare’s Worst Metric by Far: Covering the Uninsured


After its first round of enrollment, the Affordable Care Act has enrolled the number of Americans expected in private insurance coverage and apparently signed a lot of people up for Medicaid. In one major way, the law is working. But the most fundamental task of the law was reducing the number of Americans without health insurance, so it is hardly a cheap attempt to distract from the enrollment success to point out that it seems to be doing a rotten job of signing up the uninsured. Chris Conover, a Duke academic who blogs at Forbes with Avik Roy, has drawn up the below chart, comparing the share of uninsured Americans who’ve gained coverage by this point versus each of the CBO’s projections about the law.

It’s doing absolutely terribly on this metric versus projections, to say nothing of rhetorical claims about vastly expanded coverage):

That is, even after many states rejected the Medicaid expansion and the debacle of last fall, the CBO still expected the law to cover twice as many of the uninsured as it did. Conover makes the right point: If the CBO had projected Obamacare would do this in its first year — disrupt individual markets and raise premiums for millions while covering one in eight uninsured Americans, it’s hard to see how the law would have passed. 

I should note that I consider Conover’s projections pretty conservative: I find it a little hard to believe 1 million people who were paying individual-market premiums before their plans were canceled are now going uninsured (if so, wow, this law is worse than I thought). The estimates about how many of the exchange enrollees were previously uninsured are still unreliable. People may be not becoming uninsured thanks to the ACA even if they had insurance last year. Etc. But Conover doesn’t adjust for enrollees not paying their premiums, and he’s doing careful work, so his basic conclusion is almost surely right: The law isn’t meeting significantly lowered projections of how many insured it would cover.

Here is the disheartening thing: Conservatives can talk all they want about whether Obamacare is covering the uninsured and doing so at a reasonable cost. But now that enrollments are no longer minuscule and because the exchanges, while they will be troubled and more costly than they should be thanks to a number of factors, aren’t going to experience a death spiral, the law is solidifying its position. Americans don’t like their own insurance being disrupted, and they don’t like obviously disastrous government programs. But they aren’t automatically exercised by wasteful government spending or having millions of Americans uninsured — look, for decades, they’ve tolerated spending hundreds of billions of dollars being spent every year on an insurance program (Medicaid) that doesn’t clearly improve health outcomes.

“It’s not covering the uninsured in the way it promised while causing massive disruption to the individual insurance market” is not as persuasive or alarming as “it’s totally unsustainable” or “it’s not expanding insurance coverage as much as it should.”

“It’s still not covering the uninsured the way it promised while imposing huge hidden costs on the health-care market,” which will have to be the Republicans’ line in 2017, is even less automatically persuasive. All of which, of course, is why as Reihan writes, echoing Ramesh, Obamacare won’t defeat itself.

Obamacare Won’t Defeat Itself


Though Patrick has discussed the Obamacare enrollment deadline in detail, I’d like to briefly weigh in by seconding Ramesh Ponnuru’s latest Bloomberg View column, which argues, correctly, that Obamacare won’t simply “implode.” Though the fact that 7 million people have enrolled on the exchanges doesn’t demonstrate that Obamacare is a success in any meaningful sense, particularly if it exacerbates rather than mitigates cost growth and stymies consumer-friendly innovation, it does make repeal and replace a more difficult proposition. Conservatives are boxed in. The goalposts have shifted, and Republicans now need to offer a health-care reform that will cover at least as many people as Obamacare, and that will create attractive and affordable insurance options for Obamacare enrollees. The Coburn bill is a good place to start. But most GOP lawmakers have yet to reconcile themselves to the reality that they need to rally around a meaningful alternative.

And finally, now seems like a good time for Republicans to address the Obamacare risk corridors, which are designed to shield insurers participating in the Obamacare exchanges from cost overruns associated with an imbalanced risk pool. Ramesh has made the case that while there is a case for shielding insurers from some risk, the Obamacare risk corridors go too far — if insurers pay more in claims than 108 percent of the value of the premiums they collect from Obamacare enrollees, the federal government will cover three-quarters of the excess cost. It would be one thing if payments to insurers that exceed 108 percent were covered by fees paid by those that did not exceed 108 percent, thus making the program revenue-neutral. But as Yuval Levin has observed, this is not the case. The risk corridors as currently designed are open-ended, and this has significant political economy implications:

If outgoing payments exceed incoming ones then federal taxpayers, not insurance companies, pay the difference. The risk-corridor provision of the law commits taxpayers to cover insurance-company losses beyond a certain level and places no limit on the taxpayers’ exposure to the risk of such losses. If the balance of risk in the exchange system as a whole ends up being badly out of whack, taxpayers could easily end up turning over billions to cover insurer losses. 

The debate about this in recent weeks has focused on the term “bailout.” Some people argue that putting the taxpayer on the hook to cover major insurer losses isn’t technically a bailout because most insurers wouldn’t be at risk of an actual bankruptcy, or because the injection of taxpayer dollars isn’t ad hoc or after the fact. But I don’t think anyone has denied the basic fact that the risk-corridor provision means that large insurer losses in the Obamacare exchanges would be heavily mitigated by the taxpayer, which means that the insurers don’t bear the full risk and so don’t have to price their products accordingly or withdraw from the exchanges. Losses resulting from an insurer’s failure to rationally price its products would trigger a public payout—and the scope of the payout would grow with the scope of the losses, however large they end up being. The point is to rescue the insurers from the financial distress they might suffer as a result of their participation in the exchanges.

Would participating insurers have hit the target of 7 million enrollees in the absence of the open-ended risk corridors? We’ll never know. But the fact that Republicans in Congress have so far failed to unite in opposition to the risk corridors represents a lost opportunity.

Let the Best Charters Grow, Make the Worst Charters Close


Conor Williams of the New America Foundation laments that charter schools are at best “a mild corrective to inequity,” drawing on his own experience as a parent enrolling his child in the District of Columbia public schools. He observes that because high-quality neighborhood schools are inaccessible to those who can’t afford to live in their catchment areas, middle- and low-income parents have turned to charter schools:

So ambitious parents of modest means have turned to the city’s charter schools as an alternative. These schools offer (some) freedom: 1) from deadening public regulations and union contracts, 2) from staid curricula and pedagogy, and perhaps most importantly, 3) from the ironclad link between zip code and school quality.

And lo and behold, demand for seats in high-performing charter schools has skyrocketed: in 2012, there were more than 35,000 students on charter schools’ waitlists (though some were duplicates). There were only 77,000 students in the city that year.

As [Sam] Chaltain illustrates throughout his book [Our School: Searching for Community in the Era of Choice], this is how you’d expect a choice-driven market to work. This is what markets do. But when the good being transferred and traded is something that should be a baseline public good for all students, the market solution starts to run into trouble. We can’t address the imbalance of supply and demand by allowing others to pay more to squeeze others out of charter seats. That would simply reestablish the hegemony of privilege that made zip code such a strong predictor of school quality. So we use lotteries.

Williams goes on to explain the nature of the District’s lottery system, and how it favors parents with the resources and the time to enroll in several charter lotteries rather than just one:

If each one is neutral, a system of lotteries can still tilt in favor of families with sufficient resources and free time to get around town and apply to as many as possible. A student entered in ten charter school lotteries has a better chance at enrolling at one than a student entered in just one. And while D.C. unified its district and charter pre-K lotteries this year, a handful of high-performing charters stayed outside the system. You’d better believe that my wife and I applied to every one of those within two miles of our house.

On a related note: some charter schools rank their waitlist in terms of the order in which they receive lottery applications. Guess what? Parents line up outside these schools as early as 3:00 am  to be first in line on the day they begin accepting applications.

The problem with Williams’ analysis is that we actually should not expect a choice-driven market to lead to long waitlists. Waitlists are a product of price controls and regulatory constraints on supply. Markets are best understood as decentralized trial-and-error discovery mechanisms. In a well-functioning market, school operators would see waitlists as an opportunity that would lead either to an increase in the number of seats in high-performing schools or new firm entry, i.e., the establishment of new high-performing schools. So why haven’t we seen firms increase supply? One reason is that schools operating in the D.C. charter market don’t have particularly strong incentives to expand. School operators might see long waitlists as a reflection of their desirability, and they might decide that the obstacles to expansion are such that they’re better off resting on their laurels. But we can’t blame waitlists on the existence of a choice-driven market as such. Rather, we ought to see them as a reflection of an imperfect market that hasn’t gone far enough to encourage high-performing charters to achieve scale.

While addressing the imbalance of supply and demand by having parents pay tuition might be objectionable, there are other ways to address the imbalance of supply and demand, as demonstrated by the Recovery School District (RSD) in New Orleans, a district in which the vast majority of students are enrolled in charter schools and the district leadership has devoted considerable effort to increasing the supply of seats in high-performing charter schools while winding down low-performing charter schools. In the District, roughly 43 percent of students are enrolled in charter schools, not all of which high-performing; in New Orleans, 79 percent of public school students are enrolled in charter schools, and the proportion continues to increase. Though not all charters in the RSD are high-performing, the general consensus is that the average quality is improving over time.

It turns out that the RSD has done much to address the problem Williams identifies in the District. Whereas the District has a lightly-regulated enrollment system, New Orleans has a unified enrollment system with transparent rules, and in which various preferences (for siblings, for local students in the lower grades) are formally codified. Parents aren’t obligated to roam around tone signing up for various lotteries, and it wouldn’t help them even if they were inclined to do so. There is no handful of high-performing charters outside the system.

Williams posits that a choice-driven charter market is an alternative to “a school system that provides access to an excellent education for all students.” But this is a peculiar way to frame the issue, as the really hard question policymakers are wrestling with is how to create such a school system in a dynamic world in which the definition of an excellent education, the needs and challenges of the students enrolled in the school system, the teacher talent pool, and the technologies and instructional models available to educate students all change over time. A school system that provides access to an excellent education is not a fixed outcome, as a school system that works well for one population won’t necessarily work very well for another. As Neerav Kingsland of New Schools for New Orleans, a non-profit organization that works to facilitate the growth of high-quality charter networks in New Orleans and to attract and retain effective teachers, has argued, charter districts are proving to be the best way to raise quality over time, and to foster the kind of specialization and innovation that will allow the system as a while to better serve a diverse student population. And while Williams frets about the limits of “procedural justice,” it seems that his most pressing concerns can be addressed pretty straightforwardly by a well-designed unified enrollment system.

Given that the District already has a number of high-performing charters, our goal should be to get them to grow. High-performing charters clearly face bottlenecks in their efforts to grow, and the role of a school district should be to help high-performing schools address them. This isn’t a deep philosophical issue.  As they grow, and as average quality increases, the stakes of enrolling in your first (or second or third) choice school won’t be quite as high.

China’s Military Capabilites Are Growing and We’re Not Keeping Up


In The National Interest, Rep. J. Randy Forbes (R-VA) and Elbridge Colby of the Center for a New American Security warn that the U.S. is losing its military edge over China. I believe they are correct, and that there is an urgent need to rethink the U.S. defense portfolio if we hope to meet the challenge posed by China’s military modernization.

Earlier this month, The Economist reported on China’s fast-growing defense budget. It is important to keep in mind that rising military expenditures are not in themselves the issue. If Chinese military expenditures were growing yet China’s military forces weren’t growing commensurately more effective, the U.S. would have little to worry about. That’s not quite true. Before we discuss China, however, let’s briefly discuss the way we think about U.S. military expenditures.

You’ve probably come across the argument that U.S. military expenditures ought to be cut because they dwarf the military expenditures of other states, or the combined military expenditures of various other states, etc. This argument is confused, as the defense sector, like virtually all labor-intensive service sectors, is subject to Baumol’s cost disease. To attract and retain personnel, the U.S. military must offer higher compensation than militaries in less affluent societies, as the U.S. military has to compete for capable workers with firms in sectors experiencing rapid productivity growth, which are in a position to offer more generous compensation. A similar dynamic obtains in the health and education sectors, where productivity gains have historically been more difficult to achieve than in tradable sectors, like manufacturing, agriculture, and knowledge-intensive services. This is part of why U.S. defense planners have tended to gravitate towards capital- and firepower-intensive military strategies over labor-intensive strategies, like counterinsurgency, which was embraced only reluctantly in Iraq and Afghanistan. American affluence is a great source of strength. Yet unlike conventional business enterprises, the U.S. military is unable to leverage globalization to the fullest extent. That is, the military is limited in its ability to offshore a wide range of labor-intensive tasks to non-U.S. workers, though of course the U.S. does rely on foreign contractors for various non-core functions. Fortunately, the U.S. is at the heart of a network of military alliances, and U.S. allies often specialize in military functions that complement the U.S. military. And U.S allies that host military bases do a great deal to defray the cost of the U.S. military presence, though one can debate the extent to which these transfers properly account for the value of U.S. security guarantees, which now extend to more than 50 countries. U.S. military expenditures both overstate U.S. military power, as rising personnel costs are eroding the extent to which we can turn dollars spent into capabilities, and they understate it, as the U.S. role at the center of a dense web of alliances does much to enhance U.S. military power. America’s “entangling alliances” can also be understood as “enabling alliances,” as they enable the United States to accomplish more of its goals at lower cost.

So when we consider rising Chinese military expenditures, we have to take into account the fact that Chinese wage growth has been outpacing inflation, which has meant that the military has had to spend more to retain and attract skilled workers. The International Institute for Strategic Studies finds that while personnel costs absorb half of the U.S. military budget, they absorb a third of the Chinese budget. But the gap is shrinking over time. The Chinese have done an excellent job of investing in cost-effective technologies that target the weaknesses of the U.S. and its allies. But they have yet to demonstrate that they can knit together different systems together, or that their command structure is up to the task of modern warfare, as China has not been engaged in a serious military conflict since 1979.

These challenges are why Forbes and Colby maintain that maintaining and expanding the U.S. military edge over China is not just desirable but feasible, and not just because of the very real prospect that China’s economic deceleration will continue and even intensify. They argue that the U.S. military continues to take a “fair share” approach that fails to focus resources and energy on the capabilities most central to deterring and if necessary defeating our most technologically adept competitors, and that if we abandoned this highly inefficient approach, we’d be in a much better position:

[A] core element of our defense strategy must be to counter China’s effort to deny our forces the ability to effectively project power into the Western Pacific. This is a daunting task but fortunately a plausibly achievable one. The PRC’s counterintervention strategy does not drop an impenetrable iron dome across the Western Pacific, as some allege. It is permeable. In reality, China’s A2/AD effort more closely resembles a block of Swiss cheese, with holes on its outer edges and greater density towards the center. Beijing’s investments and deployments are closing and narrowing these holes, in turn limiting our options and raising the level of risk to and uncertainty about the efficacy of our power-projection forces. Defending the huge territory China seeks to cover with its A2/AD umbrella is also a titanic challenge, however, and one that we can and must push back on. This means that our task must be to keep open some of these traditional holes through which we have been able to operate and project power, while finding innovative ways to generate new ones.

To achieve the goal of keeping these holes open, Forbes and Colby zero in on investing in the Navy’s undersea-warfare capabilities (increasing the strike power of the existing submarine fleet, stepping up our efforts to develop unmanned underwater vehicles), upgrading the Carrier Air Wing to give it more reach (which will require increased investment in unmanned aircraft), procuring the right munitions (to keep up with the threat posed by the new Chinese surface ships), and next-generation defense technologies, like robotics, directed-energy weapons, next-generation radar, electromagnetics and hypersonics.

Though I can’t speak for Forbes and Colby, I’ll just say that I’m quite comfortable with reducing personnel expenditures by, for example, reducing the size of the active-duty ground force to accommodate the spending increases that will be required to upgrade our ability to project forces in and through the global commons. Conservatives need to lead the way in making the case for making choices — for containing rising personnel expenditures, for rethinking non-core missions to redouble our efforts on core missions, etc.

Paul Ryan’s 2015 Budget: Playing It Safe — and Disciplined


The House Budget Committee released its Fiscal Year 2015 budget today, and it’s a lot like the committee’s 2014 budget — which isn’t terrible, but isn’t great (the PDF is here).

The 2014 budget, due to an agreement reached in early 2013 by House leadership and some members of the conference, had to find a way to balance in ten years, a goal Ryan also set out to accomplish with this year’s budget. That requires huge cuts across all aspects of the federal government, with the exception of Social Security, which the House has not addressed in the last few budgets. It’s an act of huge fiscal discipline: Balancing in ten years may not sound like much, but deficits will drop to under 1 percent of GDP by 2016. (I’ll have more on this issue later.)

This time around, as the budget acknowledges, they had to contend with updated CBO projections of slightly lower economic growth over the next ten years, while still getting to balance.

Even slightly slower economic growth blows a significant hole in the budget, and one they appear to have plugged two ways.

One, significantly steeper cuts to non-defense discretionary spending. While that category was expected to spend $249 billion less over ten years than current policy in the 2014 budget, now it’ll be cut by $460 billion, with all of that and then some coming from domestic programs, since the budget plans to spend slightly more than the Budget Control Act authorizes for defense spending over that time period. Here’s the different between spending planned in this budget versus what’s current policy:

And two, the budget is dynamically scored – that is, the budget reflects what the writers think will be the economic effects of its policies. Usually this is done to reflect the benefits of tax reform, but here the House uses it to bank the benefits of fiscal discipline. Because of lower spending, lower deficits and debt, and lower interest costs, called a “fiscal dividend,” the Ryan budget estimates that deficits will be $186 billion lower over the next ten years than they would be otherwise — a whopping $82 billion lower in 2024 alone (the budget projects a surplus of $5 billion that year; it would have a deficit without dynamic scoring). They score these savings based on some work done by the Congressional Budget Office, which explains more of the issue here; a similar idea was included in the 1997 budget resolution.

Despite the fact that it’s the CBO’s that projects such a “fiscal dividend,” a CBO score of the Ryan budget wouldn’t take it into account. They score statically, and sometimes include macroeconomic consequences as an addendum (they do this with their long-term budget outlooks, which get a lot worse when mounting debt costs are taken into account). President Obama’s budget this year did include a different kind of dynamic scoring, too — the White House banked the economic effects of some stimulus spending and of comprehensive immigration reform.

The Ryan budget’s dynamic-scoring benefits aren’t that great, and they’re backloaded, so they don’t make a big difference in the overall picture, as this chart from the Committee for a Responsible Federal Budget shows:

The other big change in the budget, though it’s not huge, is another tweak to Ryan’s Medicare plan, which is intended to put the program on solid financial footing, promote innovation, and save money. The system will be marginally more generous this time around: For the last few years, Ryan’s proposed to change Medicare into what’s called a “premium support” model, which works like Medicare Part D, with a range of options available that the federal government will pay for part of, depending on how expensive they are.

In 2014, to accommodate political concerns about seniors’ losing access to traditional Medicare, Ryan (in his budget and in a separate but similar joint effort with Democratic senator Ron Wyden) proposed to link the premium support payment to the cost of the second-cheapest private plan available in the program — which has to cover the benefits Medicare does now — or Medicare fee-for-service, whichever is cheaper. Now, in the 2015 budget, the payment will be calculated based on an average of all the plans submitted by private providers. This saves slightly less money than Ryan’s 2014 proposal (though his Medicare savings over the ten-year budget window mostly don’t come from premium support). It will make staying in and paying for traditional Medicare slightly more expensive for seniors than the 2014 plan, while making the other options, which in theory should provide the same coverage, slightly cheaper.

Seven Things You Should Know after Obamacare’s Deadline Day


That’s in honor of the 7 million enrollees in the exchanges — or whatever the number really was.

1. Leading up to the end of open enrollment at midnight, there certainly was a surge: alone (there are 14 other exchanges, including New York’s and California’s) apparently saw 3 million visitors yesterday, and 1 million sign-ups occurred between last Thursday and midnight tonight, and 200,000 on the day of. SEIU of the Bay Area made 20,000 robocalls in Vietnamese, for goodness’ sake — so thanks Big Labor, though the surge almost surely had a lot more to do with people’s procrastination than it did any ultra-effective PR campaign at the last minute.

The AP reported this evening that the number of sign-ups was on track to hit 7 million — which Secretary Sebelius had set out as a reasonable goal last fall for the open-enrollment period. This was all despite the fact that the website was down for maintenance at various times, was still spitting out errors, and couldn’t create new accounts at one point on Monday. All of which means that there will be some surely non-negligible number of people who will be completing their enrollments after the fact, as HHS said a while ago they’d allow them to do. By HHS’s definition of enrollments, it should be over 7 million.

2. This 7 million is definitely not the same thing as the 7 million insured individuals the CBO had projected the exchanges would cover this year, though it’s a convenient coincidence. Whatever Secretary Sebelius’s exactly meant when she mentioned the same number as a metric for success last fall, the actual plan purchases the CBO was projecting seem likely to short of the 7 million number: If 85 percent of sign-ups pay their premiums, to take one estimate, that’s about 6 million people who actually get plans.

Moreover, the CBO’s 7 million projection was for covered individuals over the course of the year — since it’s a budgetary projection, this is an average over the course of the year, and not a specific number of individuals (e.g., it could be 7 million people covered for the whole year, or 6 million covered for the whole year plus 2 million for six months each, etc.). Surely as many people will drop off the exchanges as will join them because they lose a job or other insurance later this year, so we shouldn’t expect too many net new signups. Paid enrollment could even shrink noticeably.

But if HHS continues to count anyone who picks a plan on the exchange as an enrollment — and someone who’s gained insurance thanks to the ACA – we could be seeing a substantially larger enrollment number by the end of the year, a good bit over 7 million. Which will be a meaningless number, since the question should be how many people the program is covering, not how many have ever enrolled, but it’s possible they trot it out. (They’ve certainly been shameless about the Medicaid numbers.)

3. Now that you’ve taken the time to digest that: The CBO’s number is meaningless, it’s just a projection they did with their models. If the law had missed it hugely, it would show that HHS clearly didn’t execute the law as expected — but they did, somehow. We learned last fall that the federal government is incredibly bad at executing IT projects. But we learned this spring that by sheer dint of investment and effort, the feds plus Lebron can indeed get several million people signed up for health insurance. But that isn’t saying a lot, so how should we actually assess the law at this deadline?

4. Perhaps this is obvious, but there’s no one metric or threshold for whether the law “succeeds” or “fails.” For months, the media — and Republicans salivating over slow enrollments — focused on whether the exchanges would see near the number of enrollments the CBO and HHS projected and Sebelius targeted, while Joe Biden scrambled to redefine what a “helluva start” would look like. That wasn’t meaningless: Meeting the projection meant the law had been executed as designed, and it looks like HHS may still fall a bit short of that when and if they ever translate sign-ups into paid enrollments.

But there are plenty of more important questions: Will the law do what it set out to accomplish? Now Democrats are trumpeting having met the arbitrary metric, while Republicans are ignoring it and drawing attention to the number of plans bought by the previously uninsured — we don’t have a good idea of how that’s gone, though survey estimates suggest less than half of enrollees were uninsured last year, maybe something like a third or a quarter. (A note: The exchanges can be increasing insurance coverage otherwise, too — someone could be insured last year while only insured this year because of the ACA. The simpler way to describe this is that insurance is a continuous-time Markov chain — get it?)

If these estimates are correct and the Medicaid expansion turns out as skeptics expect, the number of uninsured will not drop all that substantially. It’s very hard to see it dropping by the 13 million people the CBO projected earlier this year. That would be a substantial miss this year, though, of course, reducing the number of uninsured is a long-term project for the law. Even longer-term, we will see if the ACA’s expansion of insurance makes Americans healthier and help them get health care more efficiently.

There’s also the question of whether the law is doing this at a reasonable cost and in a sustainable economic manner. Expect more focus on those two questions over the next year: Cost estimates will come in, premiums will get set for next year, insurers will have to decide whether to stay in the exchanges or not, etc. The raw number of enrollees and even their ages are only weak proxies for how costly the risk pools will be for insurers — it all depends on how sick enrollees are. Moreover, each state is its own risk pool, so the overall federal metrics don’t determine actuarial success or failure.

Keep reading this post . . .

The IMF Estimates Too Big to Fail Subsidy Is So Big It’s Bigger than Banks’ Profits Most Years


Since the financial crisis, it’s been assumed that big banks in the U.S. and Europe enjoy an implicit government subsidy due to the bailouts firms like them received in 2008. But the size of it is up for debate — and a recent estimate from the IMF, Matthew Klein of Bloomberg View calculates, means that the subsidy for big banks is larger than their profit margins.

“Systemically important” or “too big to fail” institutions borrow at noticeably lower rates than other banks with similar risk profiles, suggesting that an implied government backstop is allowing them to borrow more cheaply and therefore make more money than they would otherwise. The financial-services industry maintains that, while such an advantage was obvious during the worst of the financial crisis, it’s disappeared over time — but it doesn’t seem to have.

Just how big is the subsidy? Estimates range into the tens of billions of dollars every year. The IMF released a new report this week that pegs it at two different values: one, around $10 or 20 billion a year, and the other, much higher — higher, in fact, than the big banks’ profits every year from 2008 to 2012. In 2013, bank profits (thanks to a roaring stock market, in part) just barely exceeded the IMF’s higher subsidy estimate.

Here’s the chart Klein provides, which pairs the banks’ profits (in light blue) against the IMF’s lower-range estimate for the government subsidies (dark blue, about 10 to 20 percent of profits) and the higher-range estimate (gray).

By the higher-range estimate, the banks’ government subsidies have been greater than or almost equal their own profits in every year since the financial crisis, which is seen as one of the major expansions of the too-big-to-fail guarantee. As Klein notes, the IMF believes that its two approaches may both underestimate the true value of the subsidy.

The Dodd-Frank financial-reform law passed in 2010 and the Basel III international capital requirements agreed upon in 2011 were supposed to help reduce this subsidy, but the IMF doesn’t think they’ve done so substantially.

This isn’t a problem unique to the U.S., as you can see, the IMF sees Europe, Japan, and the U.K. providing, in some ways, even bigger backstops than the U.S. does:

It’s Not Just Obama’s New Overtime Rules — OT Laws Don’t Really Explain Time-and-a-Half in the First Place


I wrote last week about President Obama’s decision to apply the time-and-a-half overtime rule to certain white-collar workers who are currently exempt. Based on the best empirical evidence, the new policy probably won’t raise wages or increase available jobs in the long run, as the White House would like to claim. Instead, employers will likely reduce their workers’ base wages (by means of cost-of-living increases that don’t keep up with inflation) to offset the new overtime premium. The end result: a higher administrative burden on employers with little benefit to workers. 

The evidence is based on an oft-overlooked dynamic: Even in the absence of any overtime regulations, employers would be compelled by market forces to pay an overtime premium. That was the main insight gained by BLS economist Anthony Barkume when he analyzed the effect of overtime rules on wages. Like previous researchers, he found that, all else equal, jobs with overtime provisions paid lower base wages than jobs without overtime. But there was a puzzle: The observed reduction in base wages was only about 40 percent of what was needed to offset the added cost of time-and-a-half. How did employers deal with the rest of the cost?

Because the time-and-a-half rule doesn’t really increase overtime wages by 50 cents for every dollar from what they would be otherwise. Since working overtime is generally undesirable, employers naturally need to pay an overtime premium to persuade workers to do it. If that premium is, say, 20 cents for every dollar, then having overtime laws apply to the job adds only 30 cents more to employer cost, not 50 cents. In fact, Barkume cited a study from the U.K. – where there is no time-and-a-half law – that found a market-driven overtime premium of 28 cents per dollar.

Once Barkume understood that overtime laws added less than 50 cents per dollar to the cost of work over 40 hours a week, he realized that the lower base wage he was observing in overtime jobs offsets about 80 percent of the time-and-a-half bonus regulation adds rather than 40 percent. In other words, almost all of the cost of overtime rules gets absorbed in lower base pay.

There’s a broader lesson here about the government claiming credit for market processes. It’s not unusual to hear slogans like, “The weekend—brought to you by labor unions!” The implication is that we’d all be working six or seven days per week if not for union organizing and Labor Department regulations. Perhaps we’d also be putting in 12-hour days in perilous working conditions with no health insurance or pensions were it not for the efforts of Samuel Gompers or whomever. But the truth is that, as productivity increases, market forces improve pay and working conditions.

This is not to say that all workplace regulations are therefore illegitimate, since labor advocates can always maintain that market forces are insufficient to achieve their goals. But giving government (or unions) all the credit for improvements in the life of the American worker is clearly wrong, and it gives regulators an inflated sense of power and importance. Perhaps as a result, we get lots of ineffective and pointless regulations – such as the president’s overtime policy.

Europe Isn’t ‘Debasing Its Currency’ Anymore, and It’s Not Helping


Critics of the Federal Reserve’s relatively loose monetary policies over the last few years have a tricky example to deal with in the euro zone: The European Central Bank, the euro’s equivalent of the Fed, has kept money relatively tighter, and inflation has cratered out — slipping to basically nothing in the past few months:

In case you needed a reminder, here’s how that’s working out for them. GDP growth:

And unemployment:

And European banks are extending less and less credit, while the still-loose Federal Reserve is seeing credit growth in the U.S. So the ECB, which has been committed to inflation restraint (and bailing out periphery countries) above encouraging growth, is now considering ways to loosen its policies in order to avoid deflation, a seriously damaging state to which they’re drawing closer every day.

A Darker Kind of Politics


Last week, I write a short post in which I gave Sen. Patty Murray (D-WA) credit for her new EITC expansion proposal. And though I didn’t endorse the proposal, I’ve noticed that some of Murray’s allies were pleased to see a conservative take her proposal seriously. That’s fair enough. My intention was to give credit where credit is due, and Murray deserves credit for devising an attractive, work-friendly policy that addresses the marriage penalty for low-income households.

The Washington Post columnist E.J. Dionne also praised Murray’s proposal, and he added some thoughts on the political right:

Writing earlier this year in National Affairs magazine, Henry Olsen of the Ethics and Public Policy Center was more biting. “Modern conservatives,” he argued, “have tended to discount the moral value of the average person, focusing instead on extolling the moral superiority of the great.”

Two other conservative thinkers, Reihan Salam and Rich Lowry, say the antidote is for Republicans to become “the party of work.” As they see it, work “stands for a constellation of values and, like education, is universally honored.” The GOP, they said, “should extol work and demand it.”

Yes, that last phrase — “demand it” — could lead to a darker kind of politics involving the demonization of those who simply can’t find jobs. Thus did Rep. Paul Ryan, R-Wis., get into trouble for mourning “this tailspin of culture, in our inner cities in particular, of men not working and just generations of men not even thinking about working.”

No matter what Ryan was trying to say, he seemed to be emphasizing the flaws of the unemployed themselves rather than the cost of economic injustice. My Post colleague Eugene Robinson captured this well: “Blaming poverty on the mysterious influence of ‘culture’ is a convenient excuse for doing nothing to address the problem.”

One way of reading this last paragraph is that it really doesn’t matter what Ryan was trying to say as long as it seemed, to someone somewhere, that he was blaming the unemployed, despite the fact that blaming the unemployed was plainly not his intention. Ryan went so far as to say that he had been “inarticulate” in his remarks. Yet that is immaterial. The first priority of Ryan’s critics is not to engage with his thinking, but rather to delegitimate it. And when Rich Lowry and I argue that public policy ought to have a strong pro-work bias, Dionne states that we point towards “a darker kind of politics.” Keep in mind that we’ve explicitly called for policies designed to fight entrenched poverty and the cultural isolation that comes with it, both in the article in question and in various other articles we’ve written over the years. Moreover, Dionne is convinced that conservatives who oppose imposing the same statutory minimum wage in Connecticut and Mississippi are unserious:

In making their case, Salam and Lowry quoted Abraham Lincoln on the need “to advance the condition of the honest, struggling laboring man.” If conservatives are serious about this (and about the honest, laboring woman, too) they’ll join Murray in raising the minimum wage and in seeking a tax code more in harmony with the dignity of work.

But what if, in the interests of protecting the least of us, Lowry and I take seriously the prospect that a higher statutory minimum might shut people with limited skills and experience out of the formal labor market, or that it will have a negative impact on net job growth? What if we believe that the best antidote for entrenched poverty is not an increase in anti-poverty spending as such but rather a broader effort to combat economic and cultural isolation, which will include an effort to reform labor market measures that expand rather than shrink the ranks of the marginalized and excluded, like occupational licensing requirements and employer taxes that raise the fixed costs of employment? I don’t make a habit of suggesting that those who disagree with me on various public policy questions are unserious, as I am keenly aware of my limitations. I’d be delighted if this attitude became somewhat more widespread.

The Battle of EITC Ideas


Sen. Patty Murray (D-WA), chairman of the Senate Budget Committee, has introduced new legislation to expand the earned-income tax credit. Sahil Kapur of Talking Points Memo reports that Murray’s “21st Century Worker Tax Cut” expands the program’s income eligibility range for childless workers, lowers the eligibility age to 21 from 25, and makes the EITC more generous for dual-earner households. The proposal closely mirrors a recent EITC proposal from the Obama administration, yet the president’s proposal did not include Murray’s dual-earner provision, which helps mitigate the marriage penalty.

A number of conservatives, including Sen. Marco Rubio (R-FL), have called for increasing wage subsidies for low-income childless workers, yet Rubio’s proposal is different in a number of respects. Drawing on Oren Cass’s “The Height of the Net,” Rubio envisions a more ambitious overhaul of anti-poverty programs, including TANF and in-kind programs like SNAP and Medicaid. So while Murray’s proposal has been characterized by some as a more generous version of the Rubio proposal, which speaks to the seriousness of Democratic anti-poverty efforts and the unseriousness of Republican anti-poverty efforts, the proposals are actually quite different, as the Rubio proposal is more far-reaching (and more complex, and destined to be more controversial). It is also worth mentioning that while Rubio opposes a sharp increase in the federal minimum wage to $10.10, Murray favors it. One of the goals of the EITC is to increase labor force participation among workers with modest skills; there is a widely acknowledged that while a minimum wage increase might not have an enormous impact on aggregate employment levels, it might lead to a shift in which semi-skilled workers increase their hours while some nontrivial number of less-skilled workers find themselves priced out of the formal labor market.

Moreover, Rubio calls for a federal wage enhancement designed to reduce the payroll tax burden. This helps address one of the central concerns conservatives have raised about the EITC, which is the danger of improper payments. Murray addresses the improper payment problem by doubling the penalty for tax return preparers. One could argue, however, that the underlying problem is that the complexity of the EITC effectively requires low-income workers to employ tax return preparers while a federal wage enhancement that makes use of the payroll tax system would not.

The pay-fors in Murray’s proposal focus on the corporate tax code: the first changes the tax treatment of stock options; the second changes the status of the foreign income of U.S.-based multinational business enterprises. It is not clear that either tax tweak should be outside of the context of a larger restructuring of the corporate tax.

All that said, Murray’s EITC proposal represents a marked improvement from what we’ve seen from Senate Democrats in recent months. It seems that Marco Rubio has led at least one of his colleagues to step up her game, which is all for the best. And Murray’s decision to take the marriage penalty seriously is particularly promising. The cost, at $144.9 billion over ten years, seems particularly manageable when contrasted with the $175 billion annual cost of the tax benefits for owner-occupied housing. Not surprisingly, I think Rubio is closer to the mark than Murray. But Murray has done us a service by advancing a serious proposal that has the potential to better the lives of a large number of workers.

India’s Thatcher?


Some see Narendra Modi, leader of India’s right-of-center Bharatiya Janata Party (BJP) and one of Asia’s most polarizing politicians, as the second coming of Margaret Thatcher or Ronald Reagan, thanks to his impressive achievements as chief minister of Gujarat, one of India’s most affluent and rapidly modernizing states. Others insist that he is a cryptofascist deeply hostile to India’s large and impoverished Muslim minority, in light of his (alleged) failure to intervene more aggressively to prevent anti-Muslim pogroms that rocked urban Gujarat at the start of his tenure. Ashutosh Varshney, a political scientist at Brown University and a leading expert on communal tensions in India, notes that in this year’s national election campaign, Modi has not just avoided the classic tropes of Hindu chauvinism — he has been making the case for his growth agenda to Muslim and lower-caste constituencies the Hindu right has tended to neglect.

While it is common for socialists, social democrats, and left-liberals across countries to cooperate with each other on developing common approaches, right-of-center political forces tend not to be quite so cosmopolitan, for the obvious reason that parties of the right are often the parties of national self-assertion. That said, I’ve always felt that Americans who favor market-oriented policies, permissionless innovation, and religious freedom ought to cheer on our counterparts in other countries, and to do more than just cheer them on when it’s appropriate. Modi is a controversial figure for a reason, and some of the charges against him are more compelling than others. It is also true, however, that the corruption and incompetence of India’s left-of-center United Progressive Alliance (UPA) coalition government have come at an enormous human cost. Getting policy right in the United States is of course very important. Yet the consequences of Barack Obama’s policy missteps pale in comparison to those of the UPA government, because the U.S. is a country in which democratic norms are firmly entrenched, the economic policy consensus has a strong (by international standards) pro-market orientation, and, most importantly, we don’t have hundreds of millions of citizens living in grinding poverty, for whom higher growth might very well mean the difference between life and death. There is no guarantee that a BJP-led coalition government would do much better than the UPA. But it’s hard to imagine it doing much worse, and all indications suggest that Modi understands how corruption and rigid labor market, land use, other regulations are limiting India’s growth potential.

Will the Future Be Dominated by Immortal Quadrillionaires?


It turns out that Capital in the Twenty-First Century, Thomas Piketty’s magnum opus on the future of wealth accumulation and inequality, has a brilliant fictional counterpart, a 2011 novella by Cory Doctorow titled Chicken Little. Piketty argues that we’ve entered an era of stagnant growth during which we will see a relentless rise in the ratio of capital to income, and so we can expect the largest fortunes to grow and grow — and the political influence of the heirs to the largest fortunes to grow and grow as well, provided we allow this wealth accumulation to go unchecked. Doctorow, a non-fiction writer and policy analyst as well as a science fiction novelist, goes a step further: what if the ultrarich choose not to pass on their wealth to their heirs, but rather to use some small fraction of it to extend their lives indefinitely? That is, what if our societies become dominated by immortal quadrillionaires (that’s right), who “live” in high-tech vats nestled in the seclusion of vast private estates? Doctorow takes the notion of “plutonomy,” in which the outsized spending of the wealthy few drives consumption patterns across entire economies, to its logical extreme:

“It took decades of relationship-building for Ate to sell its first product to a vat-person.”

And we haven’t sold anything else since, Leon thought, but he didn’t say it. No one would say it at Ate. The agency pitched itself as a powerhouse, a success in a field full of successes. It was the go-to agency for servicing the “ultra-high-net-worth individual,” and yet…

One sale.

“And we haven’t sold anything since.” Brautigan said it without a hint of shame. “And yet, this entire building, this entire agency, the salaries and the designers and the consultants: all of it paid for by clipping the toenails of that fortune. Which means that one more sale –”

The novella is exceptionally witty and entertaining, and I recommend it. But it came to mind as I read a recent critique of Piketty’s latest by Dean Baker, who has convinced me that while immortal quadrillionaires might be in our future, it is more likely that we’re in the midst of Peak Inequality.

In the Huffington Post, Baker, an idiosyncratic left-liberal and co-director of the Center for Economic Policy Research, offers a vigorous challenge to the pessimism that pervades Capital in the Twenty-First Century, and the left-liberal intelligentsia more broadly. Specifically, Baker identifies a number of factors that have increased profits and enriched high-earners and he explains how they are changing:

(a) China’s economic opening appears to have reduced the bargaining power of workers in affluent market democracies as Chinese workers were integrated into global supply chains. Yet real wages in China tripled from 2002 to 2012 and they continue to rise rapidly. Other societies will be integrated into global supply chains. Though India and the Philippines have been at the forefront of business process outsourcing, serious infrastructure and human capital deficits have prevented them from taking on more labor-intensive manufacturing work, and that could change. But none of these countries will have anything like China’s impact on global labor markets. Baker believes that the erosion of China’s cost advantage, which also reflects the falling costs of mechanization, will enhance the bargaining power of U.S. and European workers.

(b) In Baker’s view, a large share, if not a majority, of corporate profits flow from rules and regulations that can and ought to be revised. Patent protections, for example, could be weakened, and the telecommunications and financial services sectors could be more stringently regulated. While I’m sympathetic to Baker on the subject of patent protections, my sense is that less regulation, or rather a new approach to regulation, could yield the benefits he attributes to more stringent regulation. Peer-to-peer lending is an excellent example of a financial services innovation that is less dangerous than conventional banking and more consumer-friendly. Equity crowdfunding could make it easier for disruptive new enterprises to challenge profitable incumbents, thus driving down profits. If you believe that America’s dysfunctional financial system is at the heart of what’s wrong with modern American capitalism, as I (and many others on the right) do, the rise of new business models is encouraging.

(c) And Baker is more optimistic about the prospects for improved corporate governance, particularly as the barriers to organizing shareholders to protect their interests continue to fall.

The key to forestalling a future dominated by the dead hand of vat-people is a more open, more decentralized, and more entrepreneurial economy, in which entrenched incumbents fear for their lives while workers benefit from a modernized and more cost-effective safety net. I disagree with Baker on many questions of detail, but his optimism strikes me as well placed. There is a danger in extrapolating present trends indefinitely into the future. (See Ryan Decker for more on Piketty’s “undisciplined speculation,” which is not to say I don’t enjoy engaging in undisciplined speculation myself.) It can make for entertaining fiction, as in Chicken Little. But it can also blind us to the potential of new technologies and business models (Bitcoin, P2P, crowdfunding) that are right in front of us.

(Portrait of Cory Doctorow by Jonathan Worth.)

What if We Put Google in Charge of Teacher Training?


One of the crucial questions in education reform is how to improve teacher quality — it has a large influence on student learning outcomes and lifetime earnings. But it turns out we know remarkably little about how to improve teaching — how to turn bad teachers into average ones, or average ones into excellent ones.

That shouldn’t necessarily limit our ability to succeed in those goals, though. In fact, Google’s innovative approach to improving the quality of its managers suggests there really is a way forward for rigorous, analytical development of a complex skill like teaching or managing. Far be it from us to endorse Jeff Jarvis’s “What Would Google Do?,” but such is the sad state of teacher professional development.

Just how depressing is the state of teacher professional development (PD)? Tom Loveless of Brookings usefully summarized the gory details: A report prepared for the Institute for Education Sciences reviewed 643 studies on teacher PD effectiveness for K–12 math, and concluded that “there is very limited causal evidence to guide districts and schools in selecting a math professional development approach or to support developers’ claims about their approaches.” In lieu of evidence, they basically recommended that schools and districts make their best guess.

All but 32 of the studies identified as relevant were not even conducted in a way could meaningfully contribute to scientific knowledge of PD effectiveness. Of those 32, only five met evidence standards as outlined by the IES’s What Works Clearinghouse (whose work is important but still underfunded and underappreciated). Of those five, just two found positive effects of PD on student math performance. Here’s an illustration from the IES report on the depressing state of our knowledge:

To close followers of education research, these findings are likely unsurprising. But they point to a serious problem with how knowledge is created and used in education.

Which isn’t to say there’s nothing we can do. One can at least imagine what it might look like if schools, districts, or charter networks made regular use of existing empirical (and especially experimental) research, or even institutionalized their own analytical practices — for teacher PD as well as for other aspects of education.

Is that possible? Well, look at what Google does to train and improve its managers. In the December 2013 issue of the Harvard Business Review (free, registration required), David A. Garvin, a professor of business administration at Harvard Business School, explored how Google has tackled a problem similar to that of improving teacher quality: identifying and improving manager quality.

Keep reading this post . . .

The Lessons of Oculus, or Why We Need a Capitalism for the Masses


Recently, I had a brief conversation with a renowned economist and policymaker, at the end of which we briefly discussed the prospects for financial innovation. And to my surprise, he expressed a great deal of skepticism regarding the potential for peer-to-peer (P2P) lending and equity crowdfunding. (We didn’t even get to Bitcoin, but my guess is that he’s not a fan.) Though I couldn’t have disagreed with him more, I held my tongue, in large part because my interlocutor had forgotten more about the financial system than I’ll ever know. Essentially, he was concerned that both P2P lending and crowdfunding, but especially equity crowdfunding, would lend themselves to “crowdfrauding.”

First, this exchange brought to mind the distinction between “permissionless innovation,” in which experimentation with new business models is permitted by default, and the “precautionary principle,” in which innovations are limited or banned outright until those who devise them can prove that they will do no harm. Adam Thierer’s new manifesto on Permissionless Innovation warns of the rise of precautionary principle thinking across the market democracies, and he elaborates on the many ways it stymies our growth potential. The sad irony is that precautionary principle thinking in the financial sector has wound up entrenching business models that have proven to be deeply harmful. Illusory fears of Bitcoin-fueled lawlessness and crowdfrauding are being used to justify a financial system that periodically breaks down, causing untold human suffering.

P2P lending start-ups are already capable of doing much of the work that is currently done rather poorly by incumbent maturity-transforming financial institutions, and early indications are that individual lenders are willing to lend to risky individuals and firms at lower rates than banks, as Ashwin Parameswaran has observed. If Parameswaran is right and P2P lending eventually supplants maturity-transforming banking, we will have a far more stable financial system as well as a more responsive, consumer-friendly one.

Equity crowdfunding, meanwhile, might have an even bigger impact, as it has the potential to greatly increase equity investment in disruptive new enterprises. When Parameswaran wrote about this aspect of crowdfunding last fall, he had yet to see Facebook’s acquisition of Oculus, which is an excellent illustration of his larger point.

Like my economist acquaintance, many fear that allowing small and medium-sized businesses to raise equity capital from ordinary investors will lead to disaster because these investors aren’t in a position to evaluate the quality of the underlying business models. That is, ordinary investors will have no protection against swindlers. The trouble with this argument is that we allow Kickstarter, Indiegogo, and a whole host of other non-equity crowdfunding sites to raise donations worth millions. The ideas and projects financed through Kickstarter donations might be pretty dubious too, but we’re entirely comfortable with letting people put their money where their hearts are as long as we bar them from receiving an ownership stake as part of the deal.

Granted, you could say that the Kickstarter model is acceptable precisely because it offers no hope of a monetary payoff, as if we could draw a bright line between monetary and non-monetary motivations. But we can’t. As Edmund Phelps, Richard Robb, and Deirdre McCloskey have argued, among others, the central virtue of a dynamic market economy is that it activates our creativity and our aspirations. It is certainly true that some people work for the paycheck and nothing more. Most of us work for something more than that — for the respect of our peers, or to learn and to challenge ourselves. Kickstarter-style crowdfunding allows people to become participants in ambitious artistic projects, to “own” a piece of something exciting and new. Equity crowdfunding adds another dimension to this: individuals will make investments for the same non-monetary payoffs, but they will also have a real, if typically quite small, stake in the outcome. This can make participation more meaningful while also giving backers of projects like the Oculus Rift a piece of the upside in the (rare) event a project proves truly successful. Just as importantly, a world in which equity crowdfunding plays a larger role will be a world in which entrepreneurs will have a real alternative to depersonalized, arm’s-length finance, and in which it won’t matter if clubby insiders think you’re too young or too old.

As Larry Downes makes clear in writing about Oculus and combinatorial innovation, Oculus is a perfect example of the good crowdfunding can do. Kickstarter backers weren’t just drawn in by the promise of the technology its founder, Palmer Luckey, had built. They were also compelled by the story of a former community college student who was obsessed with gaming, like more than a few men his age, and the MacGyver-like way he built his prototypes from off-the-shelf parts. Victor Luckerson of Time describes the frustration of some of Oculus’s 9,500 Kickstarter backers, who made $2.4 million in donations to the project in its infancy without receiving any equity in return. Some of the disgruntled backers insist that they appreciated Oculus’s indie spirit, and so they’re disappointed by what they see as the start-up’s decision to sell out. Luckerson quotes one scholar, Anindya Ghose of New York University, who maintains that Kickstarter backers “do not believe in backing projects for financial, commercial reasons. For them it’s a lot about cause or altruism.” Ghose neglects the possibility that Kickstarter backers feel this way because no one but the wealthiest among them are in a position to back projects for financial, commerical reasons and out of altruism or loyalty to a cause. My guess is that had Oculus raised its $2.4 million via equity crowdfunding, it could have attracted just as many backers, and that those backers would have been quite happy to own a small chunk of what is now a very valuable business enterprise. I also assume that most of those who make small equity investments in risky ventures via equity crowdfunding will understand the very real risk that their money might vanish into thin air. And I’d be all for slapping big red warning signs around the “invest” button should we get to that point.

For now, the JOBS Act allows accredited investors — those who earn $200,000 a year (somewhere between 3 and 4 percent of U.S. households) or have a net worth of more than $1 million, excluding their home — to take part in equity crowdfunding, which is progress. A number of new start-ups, like Junction, which gives accredited investors an opportunity to finance films, are taking advantage of this new provision. But Junction’s ultra-cautious business model (the films will be made one way or another, but small-scale investors will be able to step in as other investors pull back or to provide a cushion) speaks to how far we have to go before we get to something like Parameswaran’s “capitalism for the masses.”

If we ever achieve something like Parameswaran’s vision, the main beneficiaries won’t be billion dollar blockbuster businesses. They will be small- and medium-sized businesses that will be able to survive downturns because they won’t be heavily laden with debt, and perhaps a small handful of fast-growing companies that were too weird to be understood by conventional VCs, but which managed to find a constituency of believers. That strikes me as a pretty attractive vision.


Subscribe to National Review