Not the most scintillating title, perhaps, but Michael Cannon of the Cato Institute offers an analysis that is well worth your time.

Paul Krugman is very good at not linking to the argument he “takes on,” in part, I have to assume, because it would complicate his narrative. Today he’s written a post in which he “takes on” a mysterious and amorphous group of people.

It seems that more and more Serious People (and Fox News) are rallying around the idea that if Obama really wants to create jobs, he should cut the minimum wage.

Let’s find an actual person who has been talking about the effect of the minimum wage on employment, like Casey Mulligan of the University of Chicago. Note that most of the “Serious People” who are talking about the minimum wage make note of the following:

In July 2007, the federal minimum hourly wage was increased for the first time in 10 years, to $5.85 from $5.15. It was increased again a year later to $6.55, and increased yet again this July to $7.25.

So let me repeat a point I made a number of times back when the usual suspects were declaring that FDR prolonged the Depression by raising wages: the belief that lower wages would raise overall employment rests on a fallacy of composition. In reality, reducing wages would at best do nothing for employment; more likely it would actually be contractionary.

Here’s how the fallacy works: if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.

But if everyone takes a pay cut, that logic no longer applies. The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that?

Who exactly is suggesting that we mandate an across-the-board wage cut? Krugman is obviously presenting a stylized example here, and that’s fine. The real question is whether suspending or rolling back the last minimum wage increase might prove beneficial to teenagers, ex-offenders, and other workers with marginal attachment to the labor force. The answer isn’t obvious, but there is good reason to believe that lowering the cost of employing these workers might increase their level of attachment, and that would have all kinds of salutary consequences. There are a variety of ways to lower the cost of employing these workers, including payroll tax cuts and wage subsidies. But giving states more discretion to set their own wage floors is one straightforward approach.

 Then again, we can just hurl random insults and oversimplifications. Why not?

Without a mandate, a “nondiscrimination” rule would lead to a situation in which no one would buy health insurance until it became clear that they needed it, thus destroying the viability of the industry as we know it. One could argue that a mandate would create powerful political pressures to restrain growth in insurance premiums. But would the end of health insurance as know create powerful market pressures to restrain growth in the cost of various medical procedures, and create a market for true insurance policies that cover unforeseen, catastrophic expenditures? 

This is not a politically attractive scenario for the obvious reason that no one likes change. But it’s not obvious to me that it wouldn’t, after an awkward and difficult transition, represent a marked improvement. 

Now, alas, I have to leave the fantasyland in which things actually make sense.

In the summer of 2002, Jonathan Chait wrote a brilliant anti-Delaware jeremiad that came to mind when I read Neil King Jr.’s incredible article on America’s new energy-driven industrial policy in the Wall Street Journal. As King tells the story, the Department of Energy has one of the country’s leading venture capitalists.

The DOE hopes to lend or give out more than $40 billion to businesses working on “clean technology,” everything from electric cars and novel batteries to wind turbines and solar panels. In the first nine months of 2009, the DOE doled out $13 billion in loans and grants to such firms. By contrast, venture-capital firms — which have long been the chief funders of fledgling tech firms, taking equity stakes in the start-ups that will pay off if they go public — poured just $2.68 billion into the sector in that time, according to data tracker Cleantech Group.

Inevitably, this massive infusion of taxpayer dollars is transforming the marketplace. King recounts the many ways in which the DOE led an innovative automotive start-up to change its product mix. The company had intended to build a high-end hybrid vehicle in Finland, and they sought federal funds to scale up their efforts. 

By late spring, DOE was pushing ahead briskly on the Karma loan, say people involved in the deal. But the Karma presented a political challenge: It was already being assembled, under contract, at a plant in Finland. Though it used mainly U.S.-made components, so a federal loan would help U.S. parts makers, the boost for U.S. workers would be limited.

DOE then came to Fisker with a surprising proposal: Find a U.S. site to build the Kx, and DOE would agree to fund both projects together. Fisker could then start gearing up to make the Kx even before the Karma hit the market. Close advisers to Fisker said the issue of job creation had become key to officials within the administration.

“The government’s interest sped it all up,” said David Anderson, a partner at the Palo Alto Investors venture-capital firm, who followed the DOE process closely. “The government basically said, ‘Let’s make this happen sooner rather than later.’”

Part of the impetus for speeding up the process came from the closure of a Delaware-based GM plant. Various Delaware loyalists, led by Vice President Joe Biden, lobbied Fisker Automotive to reopen the plant to manufacture the Kx. Delaware is very fortunate to have a native son in a position of such influence. Of course, the deal will cost Delaware taxpayer a considerable sum, as King notes.

In early September, Gov. Markell told Fisker that if it occupied the shuttered GM plant it would get an array of state incentives worth up to $22 million, including $9 million in cash for utilities. He promised to buy the first car off the line.

These “incentives” are par for the course. They are part of a beggar-thy-neighbor dynamic that has led to massive transfers from taxpayers to corporate coffers over the past few decades.

I don’t actually think that the vice president did anything untoward. He used his influence on behalf of a community he has represented for decades, and that is perfectly understandable if not admirable in some sense. But it’s worth keeping in mind where the push for industrial policy is really taking us. The largess that the DOE and Biden are dispensing isn’t really theirs to give away.

For Biden, the reopening of Delaware’s Boxwood Road plant is “a metaphor for the rebirth of the country.” There ought to be a second half to that sentence: “a metaphor for the rebirth of the country as a haven for crony capitalism.” That’s a little harsh. But this is really bad, guys. 

For context, I urge you to check out Robert Litan’s lecture on “Innovation and the World Economy.” As Litan explains, the last 18 months have seen the United States increasingly take on the characteristics of a state-guided economy. The trouble with state-guided economies is simple: 

Once you’re at or close to the technological frontier, you can’t rely on government bureaucrats to figure out what the next “great big thing” is. You eventually run out of creativity — and thus rapid growth — if your economy is going to be dominated by state guidance.

When you’re dealing with brute force economics, state guidance can work reasonably well. As Paul Krugman noted in his brilliant Foreign Affairs essay on “The Myth of Asia’s Miracle,” Eastern Europe saw explosive growth in the 1960s thanks to the crude application of inputs. Yet the level of capital productivity remained very low.

While the growth of communist economics was the subject of innumerable alarmist books and polemical articles in the 1950s, Some economists who looked seriously at the roots of that growth were putting together a picture that differed substantially from most popular assumptions. Communist growth rates were certainly impressive, but not magical. The rapid growth in output could be fully explained by rapid growth in inputs: expansion of employment, increases in education levels, and, above all, massive investment in physical capital. Once those inputs were taken into account, the growth in output was unsurprising–or, to put it differently, the big surprise about Soviet growth was that when closely examined it posed no mystery.

This economic analysis had two crucial implications. First, most of the speculation about the superiority of the communist system including the popular view that Western economics could painlessly accelerate their own growth by borrowing some aspects of that system–was off base. Rapid Soviet economic growth was based entirely on one attribute: the willingness to save, to sacrifice current consumption for the sake of future production. The communist example offered no hint of a free lunch.

Krugman may have changed his mind about this in the years since. (Perhaps the Soviets were baldly misrepresented by neo-Confederate reactionary economists based in flyover country. I kid.) But this certainly sounds right. State guidance might work for a brief time in follower countries, but it doesn’t work for economic leaders. The implication is that the innovations that actually expand the technological frontier are driven by entrepreneurship. 

Imagine what we might accomplish if we abandoned targeted giveaways in favor of, say, a lower corporate income tax, better schools, and better roads. That, alas, sounds rather mundane. 

In light of the controversy over “death panels,” my understanding had been that American political rhetoric is more than sufficiently sharp-edged. But Jonathan Cohn, an always insightful reporter who has focused on health reform advocacy for the better part of the last decade, seems to disagree.

Although it’s become strangely unfashionable in elite political circles to frame health care reform as an effort to curb human misery, health care reform is, in fact, an effort to curb human misery. Numerous studies have suggested that thousands of people die every year because they cannot pay for the medical care they need. And that’s to say nothing of the many more who endure severe financial hardship.

My sense is that the commitment to health reform on the activist left derives from the strong conviction that even a very compromised proposal, one that is arguably more generous to private insurers than to cash-strapped families, nevertheless represents a dramatic moral advance over a status quo that tends to be described in very harsh terms. And while the Obama administration has not advocated health reform on social democratic grounds, the president has not been averse to using moralistic language on behalf of the reform effort. Moreover, the explicit claim made by congressional Democrats on behalf of the House health bill and the Reid bill is that it offers considerable gains to middle class families. The word “human misery” doesn’t come in to play, but the idea that reform represents a real material improvement is pretty central. Granted, a lot of this turns on what we mean by “elite political circles.”

Because Jonathan is a fair-minded person, he acknowledges that decent people can disagree.

It is certainly possible to oppose health care reform on principled, moral grounds. If you sincerely believe that even modest, incremental reforms will destroy innovation, crush the economy, create nightmarish bureaucracies, and spark harsh rationing for the sick and elderly, then opposing health care reform isn’t putting lives at risk–it’s saving lives, not to mention a way of living. And if you don’t believe any of those things but do believe that, overall, health care reform will be a net negative to society, then opposing health care reform is less a matter of high principle but very much a matter of sound judgment.

This certainly reflects my view, and I think it reflects the view of most of those who oppose the reform model offered by the White House. I also think that Senator Lieberman may have changed his mind about the substance of the issue, though that is a question that we might never be able to answer. 

I’m reminded of David Frum’s excellent book Dead Right, in which he argued that big-government conservatism represented a real danger to our civic health because it changed the nature of political debate: rather than an argument between more and less government control, politics becomes a struggle between two statist visions that turn on rival moralities. And so a health system that increases abortion access is pitted against one that discourages it, and each election empowers one clique of ex-lobbyists and activists or another. The stakes become so high for a small group of would-be political appointees that politics becomes an unending war, in which the stakes are always life or death.

You’ll forgive me for thinking that we could use less moralistic language rather than more.  

I wrote this week’s Forbes.com column with an old post for The Agenda in mind. I offered the case for federalizing Medicaid. What I didn’t do is make the case for how it would transform American politics for the better. That’ll come. I also briefly and inadequately touch on one of my newer obsessions, namely the dormant Commerce Clause. 

That’s the theory advanced by reporter-blogger Ezra Klein, and it’s an interesting view. 

In reality, people don’t like to talk about health-care reform in terms of lives because it seems, on some level, unfair. It sounds almost like an accusation of murder. That’s common rhetoric when talking about wars but not social policy.

But it isn’t an accusation of murder. It’s a statement of benefits. And there are iterations in which the costs could outweigh the benefits: The money could do much more good elsewhere, say, or the regulations would thoroughly impede medical innovation. That’s an argument worth having, but it should be had. As it is, we talk about the costs in very specific terms and the benefits in very abstract terms. That biases the discussion toward the opposition and against, well, the 150,000 or so people whose lives would be saved by by this bill.

Which is a bit strange, in the scheme of things. Medicare saved lives. Medicaid saved lives. The health-care coverage that costs the average worker more than $13,000 saves lives. That’s why we shoulder these expenses. And health-care reform will save lives, too. That’s why we’re doing it. That’s why we’re thinking of spending $900 billion on it. 

I really like using these stark terms. It clarifies the debate. The first question that leaps to mind is whether or not the insured population have different characteristics. Of course, the Institute of Medicine paid careful attention to this fact. Nevertheless, it’s important to keep in mind that in Britain, where the NHS has been in place for sixty years, mortality levels vary considerably by income, though of course the dispersion is lower than what you see in the United States. 

Another obvious rejoinder is that there may well be lower cost ways of saving the same or indeed a larger number of lives. If we really did argue the issue in this terrain of number of lives saved, I have to say — I’m pretty confident that we could do much better than $900 billion for 150,000 lives, particularly if we are entirely indifferent to the impact on total employment, economic growth, and personal freedom.

Raising the tax on alcohol is one straightforward measure that would be revenue positive and would save a nontrivial number of lives. Sharply raising the requirements for getting a driver’s license and increasing the gas tax could serve as another low-hanging fruit, win-win measure, as would low-cost traffic calming initiatives. 

Other mortality-improving measures: delaying the age of eligibility for Social Security, investing $3 billion in biogerontological research, expanding the network of community health clinics, facilitating the rise of Minute Clinics and other low-cost alternatives to traditional primary care physicians. Reducing the rate of medical errors could involve discouraging the consumption, or rather the overconsumption, of medical care. 

With a budget of $300 billion, could you save 150,000 lives over ten years through a combination of these and other measures? Because so many of these programs represent revenue enhancements, I suspect that we could get there.  

Apart from being the essential, go-to guide to the health reform debate, Ezra is a reliable guide to the thinking of sober progressives on a wide range of issues. I highly recommend reading him regularly. 

Jonathan Chait offers one reason why Joe Lieberman might be opposing the Democratic health reform effort.

I think one answer here is that Lieberman isn’t actually all that smart. He speaks, and seems to think, exclusively in terms of generalities and broad statements of principle. But there’s little evidence that he’s a sharp or clear thinker, and certainly no evidence that he knows or cares about the details of health care reform. At one point during the 2000 recount, the Gore campaign explained to Lieberman why lowering standards for military ballots would be totally unfair and illegal, and Lieberman proceeded to go on television and subvert the campaign’s position. Gore loyalists interpreted this as a sellout, but perhaps the more plausible explanation was that Lieberman — who, after all, badly wanted to be vice-President — just didn’t understand the details of the Gore position well enough to defend it. The guy was taken apart by Dick Cheney in the 2000 veep debate.

My sense is that Lieberman is not the only prominent elected Democrat with a law degree from an elite institution who has been given tremendous credit for his intellect yet who speaks, and seems to think, exclusively in terms of generalities and broad statements of principle. The Democrat I have in mind has explicitly said that he’d prefer a single-payer model of reform, yet he has dedicated his prestige and political capital to a reform model that, as a number of serious policy thinkers, will prove almost impossible to administer. Like Lieberman, this Democrat has an appealingly cerebral personal style, which involves rejecting false dichotomies and seeking common ground between right and left. His clumsiness in office and frequent political miscalculations have never been treated as signs of a lack of intelligence, however. The parallels go on and on.

Of course, I happen to think that Lieberman is very intelligent. Granted, his opposition to the public option hasn’t been entirely coherent, as the cost and structure of the subsidies and the resulting implicit marginal tax rates are a far bigger problem. I’m pretty sure that the Democrat I have in mind is intelligent too. But I could be wrong. 

Howard Wial of Brookings doesn’t think David Brooks goes far enough in his agenda for promoting innovation, and he offers a critique of what he calls “textbook economics.”

Brooks  seems so obsessed with avoiding the perennial bugaboo of an industrial policy in which the government “picks winners” that he can’t take the next logical steps from his innovation advocacy: The federal government needs to support the process of innovation, not just the inputs to innovation and the market environment. To take the needed steps, Brooks should advocate more federal spending on programs like the Manufacturing Extension Partnership Program and the Advanced Technology program. He might even go further and support Rob Atkinson’s and my proposal for a National Innovation Foundation, a federal agency whose purpose would be to promote innovation. That would be a huge step.

The Economist offered a sober critique of the Wial-Atkinson approach last year.

Messrs Atkinson and Wial cite statistics that show the country’s share of worldwide total domestic R&D spending fell from 46% in 1986 to 37% in 2003 as evidence that the nation’s leadership is under threat. And they bemoan the shifting of American R&D overseas: in the last ten years, they claim, the percentage of US corporate R&D sites within America fell from 59% to 52%, while the number in China and India rose from 8% to 18%.

Yet by many traditional measures, such as the number of patents registered and levels of venture-capital funding, America remains ahead of the global pack. And its research is still widely recognised as being top-notch: the 2006 science Nobels all went to Americans. As for “offshoring” R&D, this reflects US firms’ desire to tap into huge markets abroad and to understand the potential of ideas being developed there.

Wial argues that he is offering a “real-world” perspective, yet scholars who have dedicated years of their life to understanding entrepreneurial firms have drawn very different conclusions. My main concern is that Wial hasn’t seriously reckoned with the arguments made by Amar Bhide, one of the leading scholars of innovative entrepreneurship, in The Venturesome Economy. This interview with Inc. offers a rough summary of Bhide’s views. This excerpt in The American is even better at explaining the central role of “venturesome consumption” in promoting innovation. A review of Bhide’s book, also in The Economist, noted the following insight.

First, he argues that the obsession with the number of doctorates and technical graduates is misplaced because the “high-level” inventions and ideas such boffins come up with travel easily across national borders. Even if China spends a fortune to train more scientists, it cannot prevent America from capitalising on their inventions with better business models.

That points to his next insight, that the commercialisation, diffusion and use of inventions is of more value to companies and societies than the initial bright spark. America’s sophisticated marketing, distribution, sales and customer-service systems have long given it a decisive advantage over rivals, such as Japan in the 1980s, that began to catch up with its technological prowess. For America to retain this sort of edge, then, what the country needs is better MBAs, not more PhDs.

That is, business-model innovation is key. Bhide is basing his conclusions on a decade-long, extensive, ground-level survey of innovative firms. He doesn’t rely solely on “textbook economics” — quite the contrary.

Indeed, Wial’s post suggests that the idea of a government-led innovation policy is a new-fangled idea recognized by “a growing number of economists.” One could easily argue that it is in fact a very old idea that has lost traction in recent years, and that a growing number of economists give greater due to what William Easterly has called “the anarchy of success.” In evaluating government-led innovation policies, my sense is that some scholars are suffering from a serious case of confirmation bias: choose a metric that fits your favored narrative and emphasize it at the expense of others.  

It could be that taxpayers want to spend more money subsidizing the activities of for-profit firms, and if so their wish will almost certainly be granted. It’s by no means obvious, however, that this is a better way to encourage business-model innovation than Brooks’s input-driven approach. Indeed, I actually think that Brooks goes too far in emphasizing a target level of R&D spending, but that’s another question. Some support for technology monitoring and technology transfer might make sense, but my guess is that we could finance it by cutting spending on programs that don’t work or have proven counterproductive rather than simply spending more. 

Feaver has written the take closest to my own:

But these weaknesses are mainly editorial and do not erase its many strengths, which are in the more important domain of substance and theme/frame. It avoids the simplistic dualities that characterize his usual rhetoric — the crafting of straw-man “false choices” that don’t take seriously the profound objections that the best critics raise about whatever policy he is proposing. It has to be his least partisan major speech ever, with the barest of cheap shots at his predecessor or partisan opponents. While not exactly brimming with humility, it does begin with a forthright admission that others deserve the award more than he does. And while it does not quite dedicate the peace prize to the men and women of the American armed forces (and the American people who supported them for decades), it does concede that these men and women have contributed to the goals of the peace prize. It is a more honest and balanced treatment of America’s role in the world than he has given in earlier foreign policy speeches.

Had the president dedicated the peace prize to the men and women of the American armed forces, I would have been forced to completely change my assessment of the man and his virtues. What President Obama has done is persuade a not inconsiderable number of liberals who could never have been convinced by the same words coming from the mouth of President Bush or, say, a President Romney. Whether or not that reflects well on them is immaterial — the speech has strengthened the political coalition for the war in Afghanistan, thus giving the Obama administration more breathing room to make its plan work. That’s a good thing. 

One of the central reasons liberals have been pressing for aggressive regulation of consumer financial products is that they are rightly concerned about the state of financial literacy among Americans. John Carney wrote a terrific backgrounder on financial literacy for Clusterstock last month, and his basic argument is that investments in improving financial literacy haven’t been terribly successful. 

Lisa Fairfax at the Conglomerate blog dug up a 2008 studythat shows that our efforts to invest in financial literacy have a grim rate of return. Eleven years ago the Jump$tart program began measuring financial literacy and discovered the average financial literacy score for high school students was 57.3%, which is frighteningly low. After a decade of effort to improve financial literacy, including hundreds of efforts at the state and federal level, the average score declined to 48.3%.Jump$start notes that high school students who take financial literacy courses do not fare any better than those who don’t.

Low levels of financial literacy are rooted in low levels of literacy and numeracy. Rather than focus on financial literacy per se, Carney suggests that we should instead emphasize broader and perhaps easier-to-implement policies aimed at creating wealth. This will, in a virtuous circle, contribute to higher levels of literacy and numeracy. 

Another approach is to allow private actors to facilitate the emergence of new and innovative financial products that are simpler and more transparent. Felix Salmon has blogged about a very promising development. Yodlee.com, a company that handles online transactions for most major banks, is creating a platform for developers to create new services designed to help consumers manage their money. 

[Anil Arora, CEO of Yodlee] talked about the rate of uptake of personal computers from the mid-1980s to the mid-1990s: although the technology improved enormously over that time, the rate of growth of the user base never really took off. And then the internet arrived, and suddenly PC penetration skyrocketed. Maybe the advent of easy and transparent collaborative tools will be the precipitating factor which finally brings US banking out of the era of checks-in-the-mail and into the 21st Century — especially if the stick of improved customer satisfaction is combined with the carrot of a Consumer Financial Protection Agency cracking down on fee income. In fact, the CFPA might even build its own widgets designed to set off a red flag whenever a bank tried to offer a non-compliant product. Yodlee has all that information right now; it’s just that no one’s really using it. With the release of a set of APIs in January, all that will change. Almost certainly for the better.

I really like Arora’s point regarding the uptake of personal computers, and historian Robert Wiebe made a similar point on the rise of literacy levels in the United States during the first half of the nineteenth century: without an extensive network of well-funded schools, vast numbers of Americans became literate as universal white manhood suffrage and a changing economy gave people an incentive to become literate. This is turn led to an explosion of business-model innovation, as well as art and culture. And it all happened “spontaneously.”

The danger of a top-down approach to “consumer financial product safety” is, as Carney writes, that it will work to the advantage of politically-connected insiders rather than consumers.

The behavioral economics types want the government to craft rules that would nudge the illiterate to make smart choices. Unfortunately, this program is hobbled by the reality of government operations. Instead of nudging the illiterate toward wise financial decisions, any paternalistic program will likely nudge people toward decisions that benefit influential special interest groups. 

Incredibly, many liberals believe that we can avoid this problem by putting Elizabeth Warren, clearly a smart and well-intentioned person, in charge. If you believe that, I have a bridge I’d like to sell you. 

I’m struggling to find something interesting or worthwhile to say about President Obama’s address at the Brookings Institution. My main impression is that it was not nearly as bad as it could have been.

Those who believed that the president would shift to a strong emphasis on deficit reduction will be disappointed. The White House is doubling down on temporary spending as the solution to what many of us consider a structural crisis. To be sure, this temporary spending is being framed as a means of addressing the structural crisis, though that doesn’t take into account a near-catastrophic revenue shortfall that the president blames on the previous president, as though that’s terribly constructive.

That said, one way of thinking about stimulus spending is this: if there are projects that the federal government should undertake, e.g., building a particular road, a recession means that said projects are “on sale.” Of course, this begs the question of which projects are actually worthwhile. Sustaining bloated bureaucracies without demanding restructuring doesn’t seem like a good idea. But renewing our infrastructure could be a good idea.

Some of the ideas are reasonable in theory, including further infrastructure investments and more money for home weatherization. Conservatives have raised hackles about home weatherization, but there is, as Kevin Hassett argued at the start of this year, a solid case for it.

More than a decade ago, Gilbert Metcalf of Tufts University and I set out to study the rate of return that homeowners receive on energy conservation investments. The study was published in the Harvard University- edited Review of Economics and Statistics.

We obtained data that provided intricate details about thousands of houses that allowed us to identify which ones had made home-improvement investments, such as putting so-called Pink Panther insulation in the attic. We also tracked weather conditions and utility bills to estimate the reduction in heating costs associated with the improvements.

Our findings suggested that the positive rate of return of these investments wasn’t much different from the returns available on other assets. That is, investing in energy savings provides a solid, though not extraordinary, net profit.

But will congressional Democrats back a plan that works well? It’s far from clear. The British Conservatives have, as we’ve discussed, advanced a promising idea on this front. My worry is that a poorly designed weatherization program could easily become a boondoggle. As far as I can tell, we don’t have any publicly-available data regarding the weatherization funds disbursed under the stimulus package. Is the money being used wisely or has it vanished into thin air? 

The president’s biggest announcement is that he wants to introduce a tax credit for small businesses to encourage hiring.

Building on the tax cuts in the Recovery Act, we’re proposing a complete elimination of capital gains taxes on small business investment along with an extension of write-offs to encourage small businesses to expand in the coming year. And I believe it’s worthwhile to create a tax incentive to encourage small businesses to add and keep employees and I’m going to work with Congress to pass one.

The good news here is that the president did not announce a “new jobs tax credit.” If he’s proposing a proposal designed to encourage small firms to “add and keep employees,” this could be a broader low-wage employment subsidy, which could be a good thing. The Obama administration reached out to skeptical economists on the question of a new jobs tax credit, and they received a withering response. My assumption had been that this effort to take soundings was pro forma — that is, that they intended to get a “preview” of the most effective criticisms in order to counter them, rather than to actually listen to and absorb criticism. It seems that I might have been wrong, which is good news. Alas, the contours of the program are now in the hands of the Democratic Congress and not Larry Summers.

Naturally, I found the president’s efforts to mimic a television pundit unpleasant. As Michael Tomasky observes, the president was pugnacious.

He dinged the Bush administration for assembling the TARP program in a way that was “understandably” hasty but not well thought out and noted (cough cough) that his administration had fixed those implementation problems. He took other little jibes at conservative critics.

I actually think that President Obama would make an excellent left-of-center writer and thinker, and it may be the role for which he is best suited.

Paul Krugman begins a post on James Hansen the way that I’d normally begin a post on Paul Krugman.

James Hansen is a great climate scientist. He was the first to warn about the climate crisis; I take what he says about coal, in particular, very seriously.

Unfortunately, while I defer to him on all matters climate, today’s op-ed article suggests that he really hasn’t made any effort to understand the economics of emissions control.

Paul Krugman is a great economist. And while I’m guessing that he has made an effort to understand the economics of emissions control, he offers a political argument that is tendentious in the extreme, if not more than a little obtuse. Basically, Hansen has sensibly come out against cap-and-trade, recognizing that it is vastly inferior to a more transparent carbon tax. Krugman than “explains” that cap-and-trade and a carbon tax are functionally equivalent in the frictionless world that exists entirely in the imagination of economists. (This is the same very useful frictionless world that non-economists attack in the guise of the efficient-market hypothesis.)

But of course no serious critics of cap-and-trade deny that this is true. Rather, they raise the not-so-remote possibility that the federal government is not very good at doing the hard work of designing a marketplace. This requires a high level of institutional sophistication that we don’t necessarily possess. Recall that this is one reason why the Obama administration was reluctant to engage in large-scale nationalization of the major bank holding companies. Interestingly, Krugman also criticized this decision — it could be that he genuinely doesn’t understand that while American federal bureaucrats might be very smart and well-intentioned, they are not omnipotent.

Krugman goes on to argue that cap-and-trade works because it worked for the far smaller sulfur dioxide cap. I could argue that a single-rate tax “works” because it has performed admirably in Estonia and Hong Kong. My guess is that Krugman would object, and for good reason. There are “confounding variables” at work in all of these cases.

Hilariously, Krugman now assumes that a government-created marketplace would not be exploited by privileged insiders.

Oh, and the argument that if you create a market, you’re opening the door for Wall Street evildoers, is bizarre. Emissions permits aren’t subprime mortgages, let alone complex derivatives based on subprime; they’re straightforward rights to do a specific thing. It will truly be a tragedy if people generalize from the financial crisis to block crucially needed environmental policy.

At first I was struck by the fact that Krugman employed such a narrow example. Note the use of “Wall Street evildoers” rather than the broader notion of “access capitalists,” e.g., rich, politically-connected actors gaming the regulatory regime to strengthen themselves relative to new entrants. Why? Krugman presumably knows that he’d embarrass himself by arguing that access capitalists have not and would never use the cap-and-trade regime to their advantage. Tim Carney has made this case to great effect in Obamanomics, a book that is well worth your time.

Krugman and other cap-and-trade advocates airily dismiss the notion that cap-and-trade is more susceptible to rent-seeking than a carbon tax the way that Iraq hawks like myself airily dismissed the idea that Iraq was a divided society that would make post-conflict stabilization expensive and time-consuming.

For here’s the way it is: we have a real chance of getting a serious cap and trade program in place within a year or two. We have no chance of getting a carbon tax for the foreseeable future. It’s just destructive to denounce the program we can actually get — a program that won’t be perfect, won’t be enough, but can be made increasingly effective over time — in favor of something that can’t possibly happen in time to avoid disaster.

In a similar vein, one could argue that in 2001, we had a real chance of reforming the tax code. But because Democrats did not want steep tax cuts, they refused to play ball and improve the tax cut that was eventually passed by pressing for the closing of various loopholes. “But tax cuts are terrible and destructive,” progressives will object. “We had to stop them or stand against them.” Believe it or not, some of us believe that pervasive rent-seeking is terrible and destructive, and we are not eager to help the process along. And we don’t think rent-seeking is wrong because it constitutes a complex financial instrument. Massively subsidizing FutureGen is not all that complex, and that’s exactly what we’ll see more of.

Krugman writes that “hard-science guys tend to assume that we’re [i.e., economists] witch doctors with nothing to tell them.” Interestingly, it is Krugman who has engaged in this kind of character assassination against economists — that is, people who are still producing economic research — calling them witch doctors and worse, questioning their motives. It’s nice to see him wrestle with Hansen. Though I disagree with Hansen at least as much as I disagree with Krugman, I do get the sense that Hansen is a man with ironclad integrity. The debate highlights the extent of Krugman’s efforts to deliberately misrepresent, and condescend to, those who disagree with him.

Honestly, I think Paul Krugman is the best columnist in America. If conservatives and libertarians had a polemicist of his caliber, with his clarity and reach, the country would be a better place. He deserves some respect for that.

President Obama has referred to “casual dishonesty” in the budget debate, and he’s on to something. There has been a tremendous amount of dishonesty on the subject of spending from both Democrats and Republicans. But I’m not sure that his administration is entirely innocent. Consider the following remarks from the president’s jobs summit:

We have a structural deficit that is real and growing, apart from the financial crisis.

We inherited it. We’re spending about 23 percent of GDP and we take in 18 percent of GDP and that gap is growing because health care costs, Medicare and Medicaid in particular, are growing. And we’ve got to do something about that.

You then layer on top of that the huge loss of tax revenue as a consequence of the financial crisis and the greater demands for unemployment insurance and so forth. That’s another layer. Probably the smallest layer is actually what we did in terms of the Recovery Act. I mean, I think there’s a misperception out there that somehow the Recovery Act caused these deficits.

No, I mean, we had — we’ve got a 9-point-something trillion- dollar deficit, maybe a trillion dollars of it can be attributed to both the Recovery Act as well as the cleanup work that we had to do in terms of the banks. In turns out actually TARP, as wildly unpopular as it has been, has been much cheaper than any of us anticipated.

But where does the $9 trillion figure come from? Keith Hennessey has scrutinized the $9 trillion figure and found it highly misleading.

Catherine Rampell blogs on the large number of American households without bank accounts. It should go without saying that lack of a bank account keeps millions of families on the margins of economic life, with little in the way of savings that can be drawn on in times of distress, to buy a home, or to create a business. But what exactly is driving the problem? 

The most common reason survey respondents gave for not having a bank account is that they didn’t have enough money to think they needed one.

I’m sure that’s true. But of course many means-tested programs have asset tests. The average asset limit among states is $2,000 to $3,000. Isn’t it obvious that many if not most of the unbanked don’t want to jeopardize the various state and federal benefits they receive? This strikes me as an entirely rational response to a screwy system. Short of eliminating asset limits, I can’t see how we will “solve” this problem. Plenty of voters will object to giving aid to families that have accumulated tens of thousands in assets, so perhaps the best solution is to raise asset limits.

A deeper problem is that social service bureaucracies aim to assist as many people as possible, and so, as Jason DeParle and Robert Gebeloff noted in an incredible article in the New York Times on the spread of food stamps, they’ve worked mightily to eliminate the stigma associated with receiving said assistance. Interestingly, the Bush administration took the lead on this front.

While the numbers have soared during the recession, the path was cleared in better times when the Bush administration led a campaign to erase the program’s stigma, calling food stamps “nutritional aid” instead of welfare, and made it easier to apply. That bipartisan effort capped an extraordinary reversal from the 1990s, when some conservatives tried to abolish the program, Congress enacted large cuts and bureaucratic hurdles chased many needy people away.

It should go without saying that many Americans believe that there should be a stigma associated with food stamps, to drive home the point that they should be used sparingly and only under extraordinary circumstances. What we have is an unstable cultural equilibrium. Razib Khan noted the following:  

The variance in utilization rates of the program by region (50% in California vs. 98% in Missouri) of those eligible, as well as the near saturation of utilization in much of the Black Belt and highland South (the Appalachians and the Ozarks), implies to me that while in some American subcultures the program is seen as a stop-gap in others it is a background condition of life. 

One wonders where this process of destigmatizing the use of public assistance will end. An obvious solution is to introduce or strengthen work requirements for assistance, but that could very well cost money rather than save money. 

Ezra Klein interviews Jim Horney of the liberal Center on Budget and Policy Priorities on the key question about health reform. I’m skeptical, but Horney is clearly well-informed. My central objection is this:

I think people are contradicting themselves when they say the deficit reduction in here isn’t big enough, and it won’t stick because Congress won’t do it. But they also just haven‘t looked at the record. When there’s been political will, and there has been in the past, Congress has done significant deficit reduction. 

I actually think that Horney is right: there have been moments of fiscal sanity. The issue, however, is whether the health reform package really reflects a turn towards spending discipline. The model I find plausible is that the political will for deficit reduction is tied to a willingness to endure economic restraint across the board. Spending cuts and tax increases tend to go together, as in the early 1990s, and tax cuts and spending increases tend to go together, as we saw during the 2000s. It should go without saying that all conservatives want both spending cuts and tax cuts, but historically these things don’t go together, at least in the modern American context. William Niskanen of Cato made this argument in 2006, and it strikes me as basically sound. That’s why I think doing the hard work of slashing spending should be central focus of conservatives, not slashing taxes while leaving spending intact. 

If this health reform package were, as Douglas Holtz-Eakin recommended, built solely on entitlement and delivery system reform, it would reflect a very different gestalt, and it might have attracted bipartisan support as a response to a bona fide economic and fiscal crisis. Of course, Democrats and Republicans have no confidence in the willingness of the other party to adhere to hard spending limits, which is why it occasionally feels as though our country is at risk of becoming a banana republic.   

Paul Kedrosky and Brad Feld published a WSJ op-ed calling for a “start-up visa” earlier this week, echoing a call that’s gained considerable traction in Silicon Valley. Tim Lee explained why the idea is more than a little problematic, and I actually think Tim isn’t cynical enough about creating an enormous new profit center for so-called “diploma mills.”

I’d much rather focus on promoting Brad Feld’s proposal to grant permanent resident status to anyone who graduates from an accredited college with a bachelor’s degree or better. (He wants to limit it to computer science, while I’d like to see it applied more broadly) This would affect vastly more people, would be harder to game (creating a sham four-year college in the US is a lot more work than creating a sham startup), and I think it would still be a relatively easy sell politically, since I think voters have an intuitive sense that it’s stupid to educate a bunch of foreign students here and then force them to go be productive, tax-paying citizens in their home countries.

Note, however, that college administrators and professors will then be in a very powerful position to decide the fate of foreign students, e.g., “If I fail this course, I won’t receive my bachelor’s degree and thus I will be expelled from the United States and doomed to a life of senseless drudgery.” That is a pretty compelling story, leaving aside scenarios involving deep-pocketed students engaging in outright bribery.

Granted, this won’t happen in most cases, but it could very well corrupt the process at the edges. Like Tim, I think the basic idea is extremely appealing. Economic agglomerations are vitally important to fostering innovation and entrepreneurial growth, and the idea of concentrating talent in American regions and cities should hold an obvious appeal for American policymakers. And perhaps decentralizing this decision-making authority among college administrators and professors rather than just bureaucrats in Washington is a good idea. But it does create risks. Tim’s gut instinct is that a sharp increase in the number of immigrants is far from a bad thing. I’m more concerned about seeing to it that the laws on the books are laws that we can realistically enforce. 

Rita Koganzon has written a tremendously astute essay on the elitism of Glee, one of the year’s critical television favorites.

“Glee,” Fox’s hot new musical comedy, is set in a small town in western Ohio, and that is the source of everyone’s woes. Viewers should, of course, know better than to ask what specifically is wrong with small towns in western Ohio. What isn’t wrong with them? They’re bleak, boring, intolerant dead-end streets. The inhabitants of such places love football, marry their high school sweethearts, carry their teenage pregnancies to term, and while away their adult lives as assistant managers at “Sheets ’N Things,” or, worse yet, as high school Spanish teachers. The only thing for thinking people to look forward to in these prisons is finally escaping them for someplace where their talents will finally be appreciated and Glenn Beck won’t be blaring from the living room. And such thinking people, sometimes embodied as TV critics, have found in “Glee”’s cloying combination of underdog elitism and progressive cynicism a ballad that speaks right to their hearts.

This perception of Middle America plays a powerful role in our culture and our politics more broadly, and I often wonder about the outsized role played by Americans who “fled” these more rooted environments and continue to harbor an intense hostility towards them. Then again, I could be taking this too seriously.

Ross has made compelling arguments against the president’s July 2011 timetable for winding down the U.S. effort in Afghanistan. I tend to agree with Sonny Bunch.

The supposed timeline that Obama has laid out is no such thing. He said that troops will “begin” to withdraw in 18 months if conditions allow. If you can’t see the wiggle room dripping off the teleprompter, then you’re a blind man.

If we on the right can’t get behind this plan, there’s nothing that Obama could have said last night that we could have gotten behind. Those of us who have been arguing that Afghanistan is NOT a lost cause — is NOT a backwoods we abandon to terrorists — have a duty to say “President Obama, we are with you on this.”

That doesn’t mean, of course, that we shouldn’t offer constructive criticism. The public conversation is presumably influencing the political calculations made by the White House.

Stray thoughts:

(1) A number of friends have noted that Afghanistan may prove less politically salient than many of us, myself included, have come to believe. As the major news organizations shrink, expensive bureaus in Kabul and Baghdad will likely suffer. And so it’s very possible that news from the front won’t have much impact. That isn’t true, of course, of rising U.S. casualties, which creates a strong incentive for an emphasis on force protection as opposed to counterinsurgency approaches that offer greater security to the civilian population while exposing U.S. forces to greater risk.

(2) The military itself engages in “Train and Equip,” essentially tactical efforts to improve the competence fo a foreign military force. But it doesn’t generally build up foreign security forces, i.e., create a cadre of NCOs, a working defense ministry, etc. The nuts and bolts of building foreign security forces is usually left to private military companies. And PMCs have raised hackles from the left, sometimes for good reasons. A surge strategy in Afghanistan will require a civilian surge, but it will also require a PMC surge. It’s not clear that we have an adequate regulatory framework for dealing with PMCs. One small thing to keep in mind, for skinflints like me, is that PMCs, like all contractors, are strongly inclined to, well, keep getting new contracts. We want them to do their jobs cheaply and quickly. They want to do their jobs expensively and over a long period of time. This isn’t an insurmountable problem, but it’s one we need to think about.

Now, we could say that the Pentagon should develop this capacity to build up foreign security forces on its own — this is a typical response from people who are allergic to the very idea of PMCs. This may or may not be a good idea, but we sure as heck can’t do it in the next 18 months, and that’s the timetable we’re dealing with.

Daniel Drezner says yes.

The thing is, Afghanistan is very, very different from Iraq.  As tough a nut as state-building is in Iraq, it’s a country with fewer ethnic and linguistic divisions, better infrastructure, a better educated citizenry, more natural endowments, and a longer history of relative “stability” than Afghanistan.  Whatever you think about the surge strategy, the odds of success in Afghanistan are lower than in Iraq.

I’m a huge fan of Drezner, but I strongly disagree. While Afghanistan has ethnic and linguistic divisions, it also has a fairly long history as a coherent state. And as Steve Coll has argued, the Soviets came very close to succeeding in Afghanistan by “Afghan-izing” the conflict and building on a shared sense of national identity. Iraq, in contrast, saw the subjugation of the majority Shia Arabs by Sunni Arabs, genocidal warfare against the Kurds, a deliberate policy of “retribalization,” deliberate Stalin-like settlement of impoverished Shia Arabs from urban centers in the south to urban centers in historically Kurdish territory, and much else besides. One can make a strong case that Iraq’s political culture has been thoroughly poisoned, whereas support for the Afghan central government remains fairly broad-based — they key issue is that the central government can’t provide security. Meanwhile, Iraq risks unraveling as a revanchist Shia majority strengthens the grip of a central government that is increasingly not seen as legitimate by members of the Sunni minority.

In his testimony to the Senate Armed Services Committee in February, Marin Strmecki, who has worked on Afghanistan policy for the last two decades, noted the following:

As we approach this challenge, it is vital to understand what conditions produced stability in Afghanistan in recent history and what dynamics underlie the instability of recent decades. Too often, commentators mistakenly take the view that Afghanistan has been either ungovernable throughout history or has lacked a central government whose reach extended throughout its territory. In fact, until the late 1970s, Afghanistan had been a relatively stable developing country for much of the twentieth century. It was a poor country, to be sure, but one with a state that carried out basic governmental functions and that enabled gradual political and economic progress.

Strmecki goes on to observe that Afghanistan’s stability was undergirded by the perception that its government was legitimate, particularly during the reign of Zahir Shah; the relative strength of Afghan security institutions; and the tacit agreement among regional powers that Afghanistan be preserved as a buffer state. The goal of U.S. policy over the long-term is to restore these conditions, and that is not a goal that’s out of reach.

And as John Robb argued in the New York Times in 2005, Iraq’s relatively advanced infrastructure actually enhanced the lethality of what he called “the open-source insurgency.”   

New technologies and tactics move rapidly from one end of the insurgency to the other, aided by Iraq’s relatively advanced communications and transportation grid – demonstrated by the rapid increases in the sophistication of the insurgents’ homemade bombs. This implies that the insurgency’s innovation cycles are faster than the American military’s slower bureaucratic processes (for example: its inability to deliver sufficient body and vehicle armor to our troops in Iraq).

Counterinsurgency is extremely difficult under any circumstances. It is by no means obvious that it is easier in societies that are heavily urbanized than in rural societies, like postwar Malaya. 

But I take Daniel’s broader point, which is that we should avoid lazy analogies. Afghanistan is definitely not Iraq and thus our strategy will have to be very different. I just think we actually have more to work with in Afghanistan than in Iraq.

I’ll also add that it is insane to conduct a counterinsurgency campaign for kicks. I understated the case when I said counterinsurgency is “extremely difficult”: it is extremely, extremely, extremely difficult, and we should only do it if the alternative is miserably, nightmarishly bad. I happen to think it is, but smart people can disagree on this.