Marginal Revolution points me to Mark Whitehouse’s excellent Wall Street Journal article on Yale economist John Geanakoplos. Apart from Whitehouse’s problematic oversimplification of rational expectations, it is well worth your time.

In a 2000 academic paper, Mr. Geanakoplos offered a theory. He said that when banks set margins very low, lending more against a given amount of collateral, they have a powerful effect on a specific group of investors. These are buyers, whether hedge funds or aspiring homeowners, who for various reasons place a higher value on a given type of collateral. He called them “natural buyers.”

Using large amounts of borrowed money, or leverage, these buyers push up prices to extreme levels. Because those prices are far above what would make sense for investors using less borrowed money, they violate the idea of efficient markets. But if a jolt of bad news makes lenders uncertain about the immediate future, they raise margins, forcing the leveraged optimists to sell. That triggers a downward spiral as falling prices and rising margins reinforce one another. Banks can stifle the economy as they become wary of lending under any circumstances.

The policy upshot dovetails with calls by Nicole Gelinas in her excellent After the Fall for demanding uniform capital requirements.

This idea had big implications for policy makers. For decades, they thought of interest rates as the most important indicator of supply and demand in credit markets, and the only variable they needed to adjust to achieve a desired economic result. Now, Mr. Geanakoplos was saying that something else — lenders’ collateral or margin demands — could be even more important.

Edmund Phelps is, along with Robert Fogel, is one of my intellectual heroes. In Rewarding Work and Designing Inclusion, Phelps pioneered an innovative approach to fighting poverty by encouraging greater work effort through the use of graduated employment subsidies. And he’s also brilliantly described how the virtues of entrepreneurial or dynamic capitalism as opposed to the state-directed alternatives that scar lives by actually reducing economic inclusion.

So when Paul Krugman writes a derisive blog post about Phelps, one that acknowledges that he stopped reading a characteristically smart and incisive Phelps column in the FT because he didn’t like the first few sentences, you can guess what I make of it.

Krugman’s rhetorical strategy increasingly relies on bullying. He is a brilliant thinker with a legion of decidedly less-brilliant epigones who has turned a large swathe of the economics blogosphere into a “slagosphere” not unlike the lit blogs that punish and torment fiction writers and essayists who dare to say anything provocative or interesting. Interestingly, Krugman sees himself as a voice of reason braying against a conservative movement he sees as full of racists, reactionaries, and economic Luddites. This from a writer and thinker who proudly writes a lacerating post about a column he refuses to read.

I still think that Krugman has made many valuable contributions not only to economics as a discipline — that is obvious — but also to our public discourse: he brings a valuable, informed perspective to bear on vitally important debates. I welcome that. But his intolerance and his near-constant mischaracterizations of his interlocutors are having a coarsening effect. Moreover, Krugman has enabled the rise of an unthinking, reflexive interventionism that is, in my view, doing real damage to our economy and our democracy by creating unreasonable expectations of what bright, well-intentioned planners can realistically accomplish.

What’s even more embarrassing is that the rest of Phelps’s column offers a nuanced, troubling account of our medium-term economic future, one that is actually less optimistic about the self-correcting marketplace than Krugman. Rather than attacking the Keynesians, Phelps is making the case for profound uncertainty.

The gravest error of the phony debate between two non-starters is that their superficial and mechanical character – the clockwork of the neoclassical system and the hydraulics of the Keynesian one – operate to distract policymakers from asking basic questions about the dynamism of the US and UK economies. Economics has paid a terrible price for its dalliances with the Keynesian and neoclassical theories. Now policymakers are being misled by the siren call of these same, hopelessly inadequate views.

For all Krugman’s insistence that he is the rigorous empiricist and his opponents are rigid ideologues, one doesn’t get a lot of epistemic humility in his scathing polemics.

I should add, by the way, that Krugman’s caricature of Phelps is worse than it looks: describing Phelps as a crude stimulus opponent, Krugman seems to miss the fact that Phelps has long advocated the aforementioned subsidies designed to increase work effort, and he’s championed stimulus efforts in France and Singapore modeled on those lines.

I’m here as a tourist, so I won’t be blogging about my trip. I do, however, plan on sharing some thoughts and observations once I return home. For now, I’ll fire off some policy missives.

I recently wrote a post suggesting that some of New Jersey’s structural fiscal problems could be solved by Corzine’s proposed consolidation plan. I tend to like smaller local governments, however, and I’m very glad to report that Jim Manzi has suggested that consolidation is being oversold.

If one were to make the heroic assumptions that these costs differences are caused entirely by town size, and that every town below about 6,000 people could find a nearby town or towns to merge with to get to about 10,000 people (but not more than 15,000, at which point costs would start to rise), and that therefore all small towns could get to the same per capita local government costs as the lowest-cost towns, then you could get some costs out of the system. How much? Under the unrealistic assumptions provided above, about $0.3 billion per year. In comparison, New Jersey’s 2008 state level budget is about $33.3 billion. This is up about $2.2 billion over 2007. So, this – again, totally unrealistic – benefit could be achieved simply by increasing spending from $31.1 billion last year to $33.0 billion this year instead of increasing it to $33.3 billion. Of course when you add in local spending, total state plus local spending is much higher than this in New Jersey. New Jersey’s 2005 total state and local spending was the eight-highest in America, at about $8,900 per capita. Nearby Connecticut had the tenth-highest level of state and local spending, at about $8,550 per person. Simply spending at Connecticut’s level (which isn’t exactly like saying “become Alabama”) would reduce total state and local spending by about $3 billion per year. Finally, under the same set of assumptions that lead us to think we can get $0.3 billion by forcing the consolidation of hundreds of towns, we would presumably want to break up the large towns into smaller towns of 6,000 – 15,000 people each, since this is the lowest-cost town size. That would, under the same assumptions, save more like $1.5 billion per year. Don’t hold your breath.

One way of looking at this is that Corzine chose to pursue a near-impossible strategy that would yield modest gains at best to reduce the burden of state and local taxes rather than take the more straightforward step of reducing spending to Connecticut levels.

While Jim isn’t exactly advocating this idea of consolidation microtowns and breaking up macrotowns, I rather like the idea, particularly the breaking up macrotowns part. This is one reason why I was very disappointed when the San Fernando Valley secession movement failed.

The current issue of NR features an editorial opposing cap-and-trade, and I agree with it. Public support for cap-and-trade is dwindling as voters learn more about the costs involved. I am somewhat more sympathetic to Lindsey Graham than the editors, in part because I think Graham is right to back policies that would encourage the expansion of nuclear power. But it’s not clear to me that cap-and-trade legislation larded with subsidies is the right way to achieve this goal.

One of the strongest objections to creating a carbon market is that it would not make a dent in global temperatures thanks to the massive expansion of coal electric facilities in East and South Asia that is already underway. I wonder, however, if there might nevertheless be a case for a very small carbon tax designed to reduce the mercury, particulates, and other conventional pollution emitted by coal plants, which have a negative — and expensive — impact on public health. Keith Johnson of the Wall Street Journal recently discussed a report from the National Research Council on “Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use.”  

The upshot? America’s current energy mix carries a “hidden cost” of about $120 billion a year, the report found. And that number doesn’t include any tally for the cost of greenhouse-gas emissions or climate change—estimates for climate costs range from $1 to $100 a ton of carbon dioxide emissions, but are so variable the report didn’t quantify them. The figure also doesn’t include other hidden costs, such as the portion of the U.S. military expenditure needed to protect global oil production and transport.

The $120 billion figure boils down to coal and cars. Transport costs the country $56 billion. Coal-fired electricity costs the country $62 billion per year, largely in health impacts from particulate matter. Natural gas for power generation, in contrast, adds about $740 million a year in hidden costs.

Looked at another way, coal’s hidden pricetag adds up to 3.2 cents per kilowatt hour. Compare that to the 2 cents-per-kilowatt hour that wind power gets from the government—that’s less a subsidy than a partial attempt to level the playing field.

This kind of analysis is far from flawless, and it should be obvious that no central planner will be able to determine an “appropriate” price that reflects all of the imaginable externalities, negative and positive. Yet I’m struck by the idea, advanced by Randall Parker among others, that a modest carbon tax could make nuclear power far more competitive with coal electric — so much so that, Parker suggests, we’d immediately stop building coal electric plants. 

Again, I believe that climate change is a serious problem, a stance that not all conservatives accept. But if burning coal is also causing serious health problems, that strikes me as a decent argument for slapping the equivalent of a sin tax on its use. 

Last week, Nate Silver argued that financial sector reform will be the domestic policy issue that dominates the first half of 2010. After making the case for why this issue will take precedence over cap-and-trade or immigration reform or gay rights, Silver suggests that the debate will be between those advocating structural reform and those advocating incremental reform. 

From a 30,000-foot view, the debate will be between the Volckerists and the Summersists, with the Volckerists arguing that large financial institutions need to be broken up — probably through something resembling a modern Glass-Steagall Act – and the Summersists arguing instead for more extensive regulations.

The ‘hard’, online left will almost certainly take the Volckerist position. In fact, I expect this to be the “public option” of 2010, the badge of pride that “movement progressives” will use to distinguish themselves from “kleptocrats”. Like the public option, the Volckerist position (“break up the banks”) is easy and intuitive to understand. Also as in the case of the public option, I suspect the Volckerists will ultimately have the preponderance of polling evidence to show in their favor (although no polling has yet been conducted on the issue). In contrast to the public option, opinion among policy wonks is likely to be a little bit more evenly divided — see for example the difference of opinion between Yves Smith and Simon Johnson, neither of whom have any inherent sympathy whatsoever for the banks.

And Silver offers an astute diagnosis of the dilemma facing the right.

How the right will respond is less predictable, but this may become the issue that tests whether the “tea party” movement is ultimately more libertarian or populist in character. While on the one hand, the zeitgeist within the movement is to bemoan any government intervention in the economy, on the other hand, much of the impetus for the movement was the bailout bill and the deference that both the Obama and Bush administrations have shown toward Wall Street. I really don’t know how they’ll come down on this issue (initially, perhaps, they’ll take whatever position that the White House doesn’t), but it could be a defining one for the movement.

Ultimately, I think there is more political upside than downside for the White House here, although there is plenty of both. I don’t think the Republican Party as a whole can afford to take an anti-regulation stance.

When the House Financial Services Committee voted on a proposal to regulate derivatives trading, only one Republican, Walter Jones of North Carolina, joined with the Democrats. According to the Wall Street Journal,

Republicans on the panel said the agency would amount to a new government bureaucracy intruding on the financial decisions made by Americans. The banking industry has lobbied aggressively to kill or weaken the agency, and Democrats have agreed to curtail some of its powers.

This, however, doesn’t seem like an entirely sound characterization of what this regulation is designed to achieve. One could argue that a ban on insider trading involves intruding on the financial decision made by Americans, yet there is a broad consensus that this regulation helps preserve the integrity of financial markets. Similarly, efforts to shift most derivatives trading to exchanges and clearinghouses is designed to encourage transparency and to establish clear, non-discretionary limits on risk-taking.

Nicole Gelinas of the Manhattan Institute has been writing very persuasively on the need for financial regulation to strengthen free markets. She has made a conservative case for going beyond the Obama administration’s flawed approach.

The Obama administration has taken some positive steps here, with Treasury Secretary Tim Geithner’s reasonable, if imperfect, proposal to set borrowing limits on currently unregulated derivatives. The plan also urges regulators to “reduce their use of credit ratings in regulations and supervisory practices, wherever possible.”

But the White House has delayed taking action on the most obvious way to limit borrowing—new, consistent capital requirements for financial firms and all their investments—directing the Treasury to issue a report by the end of the year. The creation of a systemic-risk regulator in the absence of clear boundaries on risk-taking at financial firms could encourage yet more hubris and complacency in financial markets. A regulatory council that the government thinks smart enough to manage any and all risk might encourage market participants and their lenders to continue to act recklessly, confident that someone is looking out for them.

Clear and simple regulations that apply to all players will help curb the political favoritism that the American public rightly resents. Gelinas’s central view is that we need to revamp our financial system so that even the largest banks can safely fail, thus bringing an end to the cycle of hubris and bailouts that began in the mid-1980s. Ironically, what looks like a laissez-faire approach is actually one that guarantees a steady government takeover of the financial system. I strongly recommend Gelinas’s forthcoming book After the Fall to get a sense of why this is so pernicious.

City Journal also published a wonderful essay by Luigi Zingales on why Republicans need to channel populist anger to what he calls a pro-market politics. 

A pro-market strategy aims to encourage the best conditions for doing business, for everyone. Large banks, for instance, benefit from trading derivatives (such as credit default swaps) over the counter, rather than in an organized exchange: they can charge wider spreads that way, and they can afford to post less collateral by using their credit ratings. For this reason, they oppose moving such trades to organized exchanges, where transactions would be conducted with greater transparency, liquidity, and collateralization—and so with greater financial stability. This is where a pro-market party needs the courage to take on the financial industry on behalf of everyone else.

A pro-market strategy rejects subsidies not only because they’re a waste of taxpayers’ money but also because they prop up inefficient firms, delaying the entry of new and more efficient competitors. For every “zombie” firm that survives because of government assistance, several innovative start-ups don’t get the chance to be born. Subsidies, then, hurt taxpayers twice. A genuinely pro-market party would have resisted more vigorously the Wall Street bailouts, in line with popular sentiment.

Zingales is one of the good guys. He is one of those Chicago economists that Paul Krugman condemns. And in this case he is directly at odds with congressional Republicans, who are surrendering the playing field to the Democrats on the pretty darn important question of whether or not we’re going to be a market economy or a government-dominated economy. This is insane. Politics and principle are pushing in the same direction.

I’m not a fan of Charlie Crist, and I’m on record as an admirer of Marco Rubio. One thing that has frustrated me about the coverage of Florida’s Republican Senate primary is that observers insist on characterizing Crist as a “moderate.” In a column for Forbes.com, I argue that he’s more accurately seen as the candidate of free-lunchism. 

Ta-Nehisi Coates does not like Aaron Renn’s New Geography essay on “The White City.”

There’s a thorough discussion of this piece claiming to expose the lack of “diversity” (read: Negroes) in progressive cities in the Open Thread. I find the piece to be pretty ill-considered, and insulting to Latinos and Asians, in particular. But more than that it repeats an unfortunate trope among writers tackling race–it treats African-Americans as agency-less automatons, awaiting the right programming from white policy-makers.

After quoting from Renn’s piece, Coates continues:

There is so much wrong here. But leaving aside the fact that the author starts out by disqualifying New York, L.A., and Chicago, leaving aside the blinding whiteness of dubbing Atlanta “un-progressive,” leaving aside that most of these “progressive” cities have more black people than their surrounding states, I think the implicit argument that these cities should be “doing more” to assure that their black population meets the national average is odious.

This strikes me as a valuable argument. But of course it represents a powerful case against virtually all race-conscious public policy.

Some argue that the fact that African American are less inclined to accumulate housing wealth than other Americans reflects a legitimate preference and should not be cause for alarm. Europeans tend to accumulate less housing wealth than Americans, and we tend not to consider this a disparity that reflects poorly on the European way of life. Indeed, there is a reasonable case to be made that Americans have overinvested in housing relative to other goods. To what extent are different consumption patterns an issue of public concern? Part of the issue with the African American housing wealth disparity, which contributes to a broader wealth disparity, is that it is arguably a reflection of discriminatory patterns that emerged in the distant past.

In When Affirmative Action Was White, political scientist Ira Katznelson argues that a number of New Deal-Fair Deal policies designed to encourage homeownership were implemented in a manner that exacerbated the relative economic disadvantage of African Americans, and this effect has, for obvious reasons of integenerational wealth transmission, compounded over time.

So yes, we could say that legitimate preferences are at work; we could also say that we are dealing with a legacy of injustice.

What does this have to do with patterns of internal migration? Attorney General Eric Holder gave a speech to Justice Department employees in which he argued that Americans are “a nation of cowards” when it comes to race, and he referenced enduring patterns of self-segregation. There has been a marked tendency of native-born non-Hispanic whites to “flee diversity,” i.e., to leave so-called immigrant magnet states in favor of states with higher proportions of native-born non-Hispanic whites. There has been a parallel tendency of college-educated African Americans to cluster with other college-educated African Americans, and also to migrate from northern cities to Sunbelt cities with large African American populations. One can imagine many reasons for “fleeing diversity.” Parents of young children might want to settle in neighborhoods defined by a high level of cultural consensus. Lower levels of diversity, whether racial or class diversity, might serve as proxies for low levels of crime or high-quality schools. Or the individuals in question might simply dislike living near people who are different from themselves. It’s by no means obvious that this is a pressing problem, and it is clearly based on private, voluntary choices. So why highlight the issue at all?

Well, one anxiety is that we’re seeing a split between “the beige and the black,” to use Michael Lind’s phrase — while non-Hispanic whites, Latinos, and East Asians are intermarrying at high and rising rates, the number of marriages between blacks and nonblacks is also increasing but remains very low in absolute number. The cities Renn cites are heavily nonblack and some, like Austin, Texas, are becoming increasingly nonblack. Could this reflect choices that are perfectly symmetrical?

Coates doesn’t like the idea that African Americans are “agency-less automatons,” which is very fair. But I think we can agree that the relatively poor and the relatively rich face a different context. Both have agency, yet those with more wealth have a far wider set of choices. So when one hears that “smart growth” policies are making housing so expensive that members of aspirational working and middle class are being driven out of some metropolitan areas, I think that ought to be a source of concern — at least as great a source of concern as the environmental impact of low-density living.

Coates writes:

Man listen–Negroes like Atlanta. Negroes like Chicago. Negroes like Houston. Negroes like Raleigh-Durham (another area that doesn’t make the cut, for some reason.) Negroes like Oakland. Negroes have the right to like where they live, independent of Massa, for their own particular, native, independent reasons (family? great barbecue? housing stock?) Just like Jewish-Americans have the right to like New York–or not. Just like Japanese-Americans have the right to like Cali–or not.

And while this is no doubt true, some Bangladeshi Americans don’t like living in regions defined by high concentrations of crime and poverty. Yet for those who are not affluent, moving to “smart growth” regions is less of an option than moving to “sprawling” regions. For Bangladeshi Americans who arrived in the United States without college educations or considerable savings, options are more constrained than for Bangladeshi Americans who have both. Because there is no sense in which the fate of Bangladeshi Americans, an immigrant community that has mushroomed in size only since the mid-1980s, it is absurd to consider this a matter of historical injustice.

But if it is also absurd — and indeed insulting — to consider the same set of concerns applied to African Americans to be a matter of historical injustice, and that could be right, then I think our entire conversation on race will be very different. Daniel Patrick Moynihan memorably and controversially recommended a policy of “benign neglect” of race, sensing that contentious discussion of the issue in a time of economic and social turmoil was not the most constructive way of promoting the interests of the poorest and most vulnerable citizens, a disproportionately large number of whom were African Americans. If one believes that different patterns of earnings, wealth accumulation, settlement, assortative mating, and incarceration all reflect legitimate differences in preferences, or that even if they don’t reflect legitimate differences we won’t do much good by talking about them, then perhaps “benign neglect” is the right way to go. I’d argue that some of these patterns are more problematic than others, and that the racial lens is a very useful way of seeing some issues.

I get the impression, however, that some people think it is only appropriate to use the racial lens when this advances left-of-center policy goals, like redistribution, rather than right-of-center policy goals, like deregulation. (I don’t think that this is true of Coates, incidentally.)

To be honest, I found Renn’s essay most interesting not because it focuses on race but rather because it draws attention to the uneven class impact of “smart growth” policies and “high-road” strategies for economic development. Regions that embrace tough land-use regulations and high taxes are praised for their “progressivism,” and they are cited as models for other cities, like Atlanta and Houston. But by noting these racial disparities, Renn is suggesting that there are serious downsides to this model, namely that they stifle economic opportunities for the less well-off. Renn’s use of the racial lens is a way of complicating the moralistic language that tends to define this debate.

Dave Weigel of The Washington Independent suggests that Republicans are undermining the effectiveness of their case against the Obama White House and congressional Democrats by focusing on the controversial views of staffers and left-wing pressure groups rather than massive job losses and lingering outrage over the Wall Street bailouts.  

This isn’t to say Republicans have been distracted or unsuccessful in Congress. They’ve certainly scored victories during this period. And by paying attention to these conservative witch hunts, they’ve definitely kept their base revved up. But in the current political context, it seems like they’re missing the forest for some shrubs. It’s as if Democrats tried to press their advantages in 2005 not by going after the Iraq War or the mishandling of Hurricane Katrina, but by spending weeks attacking mid-ranking members of his administration and claiming that President George W. Bush was driving the nation toward fascism. And remember, one of the huge political mistakes of 2005 was the Republican decision to do a full-court press on an issue that had come from conservative activists and pundits: the fate of Terri Schiavo.

Because Weigel is a reporter for The Independent, a left-of-center media outlet, my guess is that many conservatives will be inclined to dismiss Weigel’s analysis. That’s a shame. It parallels David Brooks’s argument that conservative news anchors and radio hosts don’t always reflect the concerns of Republicans and right-leaning independents, and it makes a great deal of sense. This isn’t to say that Glenn Beck doesn’t have the right to speak his mind, or that he doesn’t raise very important philosophical questions about the progressive legacy and much else. But it’s not obvious that voters are more interested in these questions than job creation. 

In this week’s New York Times Magazine, Matt Bai has a very sympathetic profile of Jon Corzine. Bai makes a number of very good points, including the following:

To bring about reform now, politicians need to be not just good campaigners and public stewards but civics teachers too, able communicators who can reassert a connection in the public mind between costs and services, between the policies that Congress and state governments pursue and the money you end up paying your town for garbage collection and the local library. Corzine and Daggett are both trying to do this, in their own ways, though neither is the ideal vehicle; Corzine is a cautious reformer with little talent for explanation, and Daggett’s campaign is too hard up for cash to communicate much of anything. Christie’s campaign, on the other hand, seems lifted from the days before last year’s economic collapse, when it seemed possible to have everything, and all at once. Those fellow governors who sympathize with Corzine are watching his campaign play out, hoping to find out whether the case for painful choices, as they see it, is any easier to make in this era than it was in the last. “If Jon wins, and I believe he deserves to, I think a lot of other governors will say, It’s O.K. to tell people the truth; it’s O.K. to give out some tough medicine,” Ed Rendell, the Democratic governor in neighboring Pennsylvania, told me. “And I think more governors will be inspired to do that. If he loses, I think it will have a chilling effect.”

But I have to say, I find Rendell’s remarks extremely self-serving. And I’m struck by the fact that Bai never mentions Mitch Daniels of Indiana, a governor who has done an excellent job of being frank with the public about the tradeoffs involved in tax and spending decisions.

I’ll add that Republican gubernatorial candidates, particularly those running in liberal states, often suffer from free-lunchism, i.e., an ideology based on tax cuts and spending hikes in boom years. That certainly seems to be true of Christie. Consider the following from Bai’s article:

This history probably explains why Christie has avoided offering details of a plan to bring down property taxes or reform the state’s dire finances, instead running a campaign that is almost a caricature of the modern, tax-slashing conservative pitch. He says he would repeal all the sales taxes, toll hikes and surcharges imposed by Corzine and cut income taxes as well, while at the same time somehow offering more property-tax rebates — a feat that would seem to defy the laws of economics, if not physics. Christie has also said he would decline any federal money that imposed restrictions on the state. To replace all of this revenue, Christie says he will rein in wasteful spending. Only about a fifth of New Jersey’s budget, however, goes to pay for the actual bureaucracy of government; all the rest pays for sacrosanct programs like Medicaid and school aid. As his opponents never tire of pointing out, Christie could fire every single one of the 66,000 employees in state government, and still he wouldn’t make up for the revenue he says he wants to eliminate.

When asked how he intended to pull this off, Christie offered a bizarre reply.

New Jersey has had a string of politicians, Jon Corzine the latest, who made all types of specific promises that they knew they couldn’t keep,” Christie told me. “New Jerseyans want to know what direction are you going to take the state in, what philosophy are you going to pursue. They’re not looking for specific promises that can’t be kept.” Hai-yah! Christie was turning the traditional notion of political accountability on its head: not only was it not unprincipled to make a bunch of vague campaign promises that had almost no chance of becoming reality, but in fact it was also the only truly principled thing to do, because politicians never followed through on the details of their proposals, anyway. When he gets to Trenton, Christie assured me, “We’ll get in there and make it work.”

It is easy to see why conservatives oppose Corzine. Bai offers a persuasive narrative of how New Jersey fell into a death-spiral of excessive government spending, rooted in the extreme fragmentation of local government. I tend to think that there’s a real risk of local governments becoming too large, as diseconomies of scale emerge in large, anonymous cities governed by an unresponsive political class. Yet it’s clear that many of New Jersey’s microgovernments aren’t delivering real value or meaningful Tiebout choice; rather, they are entities solely devoted to rent-extraction. To his credit, Corzine has proposed local government consolidation, an idea New Jersey voters have resoundingly rejected. Though Corzine has tried to restrain spending and address the state’s revenue shortfall, this failure to solve the structural problem begs the question of why he’s running for reelection at all.

Given that Corzine lacks the political acumen to tackle New Jersey’s problems and Christie is offering wildly unrealistic promises, does Daggett represent an alternative for conservative voters in the state? I can’t say. I do get the impression that his fiscal proposal, essentially to use a wider revenue base for the sales tax to fund property tax relief, is better that what the other candidates are offering. Yet it’s not clear that Daggett is willing to make the deep cuts in spending that New Jersey needs.

I like Michael Bloomberg. Conservatives in New York and across the country tend not to like Bloomberg because he is, despite his brief stint as a Republican, a liberal. But he is also a liberal who created a large and successful business, and that’s framed the way he approaches local government. Phil Koesterer very kindly emailed me a link to a New York Times article by Steve Lohr on a recent meeting that focused on local government innovation. Under Bloomberg, New York city has been a leader.

In 2002, the city began its “311” telephone number for answering questions about government services and to report problems down to missing manhole covers. The service receives 50,000 calls a day, and earlier this year began operating on the Web as well. Complaints, response times and resolved problems are tracked and measured to improve performance.

In 2006, the city began an online service, NYC Business Express, to make it easier and faster to start a business. The average time to obtain a building permit, for example, has been cut to 7 days from 40. Such seemingly mundane improvements can add up to big gains in the efficiency of government service systems, experts say, nurturing productivity and growth in local economies. The process, they say, is similar to “lean manufacturing,” a system first mastered by Toyota in which step-by-step changes on the factory floor, made repeatedly, translate into major advances in quality and productivity.

It actually gets even better: New York is starting to use sophisticated data analysis to improve firefighting efforts, among many other things. And innovations that have taken off in New York city are spreading throughout the country.

I’m a great believer in federalism, which is one reason why I’m comfortable with local governments embracing policies that I’d fight tooth and nail were they to be embraced by the federal government. One big problem in America’s biggest cities is that partisan elections give Democrats an effective political monopoly. Because voters rely on partisan affiliation to determine their votes, they tend to vote for Democrats in both national and local elections, despite the fact that the mix of issues at the local level is very different by definition. That’s a shame. Cities like New York and Los Angeles would be far better off if you had a coalition of public-sector unions and liberal activists competing against a coalition of led by small business owners and homeowners, with both coalitions consisting primarily of voters who backed Barack Obama in 2008. 

I’m in a small minority among conservatives in that I think President George H.W. Bush was right to raise taxes when he was in office. It was a tremendously difficult decision, but I think he recognized that the fiscal picture was in danger of deteriorating to such an extent that it would damage America’s long-term economic prospects. Yet Bush also pledged not to raise taxes during his 1988 presidential campaign, and many voters, particularly conservative voters, felt betrayed. This contributed directly to President Bush’s 1992 defeat. 

During the 2008 presidential campaign, Barack Obama pledged to not raise taxes on families earning less than $250,000. And now, as Kevin Hassett explains, it seems very likely that he will support a health reform proposal that will do exactly that.

The [Joint Committee on Taxation] report projected that the excise tax would raise about $52 billion in 2019. Of that, about $8.9 billion would come from taxpayers with incomes of less than $50,000; about $19.4 billion from taxpayers with incomes between $50,000 and $100,000; and about $17.4 billion from taxpayers with incomes between $100,000 and $200,000.

Add those up, and you see that about 87 percent of the revenue in the original Baucus proposal to finance Obamacare would come from individuals with incomes of less than $200,000.

Baucus and the Senate committee have since upped the proposed tax to 40 percent, and the trigger thresholds to $9,850 and $26,000, tweaks that shouldn’t change the basic thrust of the story. The Democrats’ plan is a moving target–and given who will pay the tab, that is probably on purpose.

The remarkable thing is that this revenue comes from low- and middle-income people who already have insurance. Many members of organized labor have these “gold-plated” plans. And they would be worse off, not better, because of Obamacare.

During the campaign, I was convinced that the Democratic candidate would break his pledge rather than abandon his various spending proposals. I also believed, and still believe, that we need to reform the tax code in a way that might raise taxes on some families earning less than $250,000, including families with so-called gold-plated coverage.  

So does this mean it’s right to let President Obama and the Democrats off the hook? I think the difference — and I’m sure supporters of the health reform proposal would disagree with me — is that the first President Bush raised taxes to improve the long-term fiscal position of the United States government, whereas this health reform proposal, even when you factor in the new revenue, will create new work disincentives while in all likelihood exacerbating cost growth. Note that a more expensive and centralized health reform might not have these deficiencies, just as a more laissez-faire reform, the kind of reform I’d much prefer, might also not have these deficiencies.  

Among Democrats and liberals, there is a belief that Republican opposition to the various Democratic proposals represents a kind of “nihilism,” and that because Baucuscare resembles proposals offered by liberal and moderate Republicans in the 1990s, today’s opposition is obviously unprincipled if not insane. My sense is that we’ve learned a great deal about health reform over the intervening period, and that, as Christensen, Grossman, and Hwang have argued, it is disruptive competition that promises substantial improvement in the cost and quality of medical services over time. I’m increasingly convinced that the only way to move in this direction is to create a system of universal catastrophic coverage and universal health savings accounts, as proposed by Martin Feldstein and a number of others. The emerging consensus among congressional Democrats moves us in a very different direction, towards a highly centralized, highly regulated system that will give entrepreneurs very little room to dramatically improve care. With that in mind, I don’t think opposition is “nihlistic”; rather, I think it’s responsible.

If you’d like to understand the pathologies of America’s health system, you need to read The Innovator’s Prescription, a brilliant book by Clayton Christensen, Jerome Grossman, and Jason Hwang. I’ll be referencing the book very frequently in future posts.

Shirin Ebadi, the Iranian human rights activist who won the Nobel Peace Prize in 2003, was a staunch critic of the Bush White House. Yet she has also spent decades working tirelessly on behalf of women and vulnerable minorities, all while leading a pretty modest life as a working mother. Though I can’t say I see eye to eye with the Nobel Peace Prize Committee on much, I do think she was an excellent choice. Now, of course, the Committee has chosen President Barack Obama.

One thing I find extraordinary about this decision is that the president was chosen ahead of two Chinese dissidents, a Congolese doctor who has dedicated his life to aiding victims of sexual assault, an Afghan activist who, like Ebadi, has fought to defend the rights of women, and many other worthy nominees. More remarkably still, the president recently decided against meeting the Dalai Lama in deference to Chinese sensibilities. Then there is the president’s outreach to the State Peace and Development Council. Anwar Ibrahim, Malaysia’s fearless opposition leader, who has faced down political thuggery of the worst kind from racial chauvinists devoted to his destruction, said the following in an interview with Christopher Rhoads of The Wall Street Journal.

“With constructive engagement…what you find is countries going for construction projects and no engagement,” said Malaysian opposition leader Anwar Ibrahim, in an interview in New York on Thursday. Mr. Anwar said “constructive intervention” was required.

Mr. Anwar said the U.S. is still the only country that can stand up to many countries on issues such as the fate of Aung San Suu Kyi, the Myanmar opposition leader and Nobel laureate who has been under house arrest for much of the past two decades. 

There is an upside to all of this: perhaps the president will decide that he is obligated to defend the interests of fellow Nobel Peace Laureates, given that they belong to the same club. That will mean defending the rights of Aung San Suu Kyi and the Dalai Lama and Shirin Ebadi. 

Seen through that lens, perhaps the president will decide that the Prize is more trouble than it’s worth …

P.S. Roger Bate has identified a very worthy candidate for the Prize.

In today’s Washington Post, Martin Feldstein offers a way out of the health reform impasse.

Let’s scrap the $220 billion annual health insurance tax subsidy, which is often used to buy the wrong kind of insurance, and use those budget dollars to provide insurance that protects American families from health costs that exceed 15 percent of their income.

Remarkably, Feldstein’s proposal would dramatically expand access to health insurance, eliminate a distortion in the tax code that exacerbates cost growth, and there would be money to spare.

My calculations, based on the government’s Medical Expenditure Panel Survey, indicate that the budget cost of providing these insurance vouchers could be more than fully financed by ending the exclusion of employer health insurance payments from income and payroll taxes. The net budget savings could be used to subsidize critical types of preventive care. And unlike the proposals before Congress, this approach could leave Medicare and Medicaid as they are today.

Feldstein identifies two potential flaws and he identifies solutions for them.

First, how would families find the cash to pay for large medical and hospital bills that fall under the 15 percent limit? While it would be reasonable for a family that earns $50,000 a year to save to be prepared to pay a health bill of, say, $5,000, what if a family without savings is suddenly hit with such a large hospital bill? Second, how would doctors and hospitals be confident that patients with the new high deductibles will pay their bills?

The simplest solution would be for the government to issue a health-care credit card to every family along with the insurance voucher. The credit card would allow the family to charge any medical expenses below the deductible limit, or 15 percent of adjusted gross income. (With its information on card holders, the government is in a good position to be repaid or garnish wages if necessary.) No one would be required to use such a credit card. Individuals could pay cash at the time of care, could use a personal credit card or could arrange credit directly from the provider. But the government-issued credit card would be a back-up to reassure patients and providers that they would always be able to pay.

One potential pitfall of this approach is that household income is volatile. Just as the various Democratic reform proposals recall new enforcement resources for the IRS, this approach will pose a serious challenge to tax collectors. Moreover, the 15 percent threshold creates an implicit marginal tax, though the effect is less egregious than with sliding scale subsidies.

Overall, I like this idea, though there are many questions that remain. Feldstein makes no mention of a mandate or coverage for pre-existing conditions or purchasing pools. What happens if a family doesn’t actually purchase health insurance coverage with the voucher? We could imagine a Nudge-like decision to default all households into a high-deductible plan.

And cost control is still an issue. While the deductible would provide some spending discipline, it doesn’t have much effect on big-ticket expenditures. I’d like to see Feldstein’s approach combined with a publicly-chartered reinsurance program designed to foster delivery-system reform.

I can imagine that some will consider Feldstein’s proposal insufficiently generous. But what it does it distribute the $220 billion annual health insurance tax subsidy more equitably. It’s certainly true that some families will continue face high costs, but no families will face bankruptcy over medical expenditures.

I’d love it if we could get some actual elected officials behind this. Scrapping the tax subsidy is, I realize, a political non-starter, and the transition would be difficult. But this is the kind of reform we need.

Donald Marron offers a useful reminder:

So let me once again implore everyone commenting on the health debate: There is a difference between the cost of the Baucus bill ($904 billion) and the cost of its provisions to expand coverage ($829 billion). It is understandable that most commentary focuses on the health insurance provisions. But we should not forget the other $75 billion in spending on other initiatives. Dollar-for-dollar they deserve as much scrutiny as the coverage expansions.

This is not a trivial difference. Yet I think the more open question is whether this spending will deliver a better health system overall. Keith Hennessey offers a number of reasons to believe that it won’t.

In 2016 a family with a worker worth about $48,000 in total annual compensation would get about $9,000 of subsidies for the purchase of health insurance, if their employer does not offer them coverage.  If your employer offers you coverage, you are not eligible for these subsidies.  The bills create a firewall intended to prevent employers from “dumping” their employees onto the subsidized system.  This firewall creates an enormous inequity.

Imagine two families in the year 2016, each with an identical worker whose total compensation is worth about $48,000.  Both families are required to buy health insurance.

Family A is offered health insurance through an employer.  A “silver plan” will cost about $14,000 in 2016, squeezing out $14,000 of family A’s income and leaving $34,000 in wages.

Family B is not offered health insurance through an employer, and therefore qualifies for about $9,000 in subsidies to buy health insurance.  Family B thus has $48,000 in wages plus $9,000 in subsidies, minus $14,000 in health insurance and roughly $4,000 in higher taxes, leaving about $39,000 in wages after buying the same silver plan.

Family B ends up roughly $5,000 better off than Family A, even though the workers are worth the same in total compensation.  The family that does not get health insurance through employment is better off because it gets a big subsidy.

So while the legislation ostensibly “bans” the shifting families from one side of the firewall to the other, the incentives will be very large. Hennessey suggests that Congress will be under intense pressure to extend the subsidies from Family B to Family A, which would dramatically increase costs.

Congressional Republicans have been accused of trying to derail health reform through constant delays, and that is an understandable charge. It’s natural for opponents to want to slow down the process. But there are solid, substantive reasons for wanting to slow the process down, namely that there is still a great deal that we don’t understand — and further study could give us a better, more accurate picture of the choices we’re facing. The breakneck pace is all about the political cycle.

Brad Plumer of The New Republic has written a shocking report on how federal and state regulations lead to perverse environmental outcomes.

Casten’s original plan was to sell one-third of the recycled power to Cabot’s plant, and the rest to an industrial facility just down the road for around $45 per megawatt-hour–cheaper than the $55/MWh that electricity cost in the area, yet still high enough for the project to be profitable. But, in Louisiana, as in most of the United States, state law forbids anyone from stringing up private wires across a public street. Casten couldn’t market his power directly–he could only sell it to the local electric utility. And, because the utility, due to state rules, chiefly earned a profit from the power plants it built and ran itself, it refused to offer anything more than rock-bottom prices for Casten’s recycled power–prices too stingy for the project to work. After many months of bitter wrangling, Cabot gave up entirely. As a final insult, the utility later won approval from regulators to build a brand new fossil-fuel plant, a pricier way to generate electricity that would also add more carbon to the air.

The Louisiana utility wasn’t doing anything evil–it was just responding rationally to the rules laid down–but the end result was perverse. “It’s like we’re forcing citizens to pay extra to heat the planet,” Casten bristles. And similar roadblocks stand in the way of recycling across the country, with jaw-dropping consequences: One study for the EPA found that harnessing industrial waste energy had the potential to meet 19 percent of the country’s electricity needs–equal to 95 nuclear plants–while slashing fossil-fuel use in the power sector by one-quarter.

Plumer offers a number of recommendations, including the elimination of barriers to local generation. One wonders how far we could get in promoting energy efficiency and curbing carbon emissions by simply eliminating counterproductive regulations rather than creating new regulations.

Matt Yglesias has been blogging from northern Europe, and he’s written a post that captures the differences between the social democratic left and the free market right unusually well. After describing Denmark’s high-quality public services and extremely heavy tax burden, he writes the following:

There’s no way to have a progressive renaissance in the United States unless progressives find some politically feasible way of directly making the case that higher taxes for better services can be a good trade. And it’s worth trying to be honest about this. The other American journalists I’m traveling with, all lefty environmentalist types, can’t stop complaining about how expensive basic consumer goods are here. And it’s true, stuff’s expensive! But college and preschool and doctors and hospitals are all free, and the carbon emissions are low. This is, I think, a good trade but it really is a trade. Low taxes plus cheap dirty energy and large numbers of poor people will give you cheaper restaurants.

My sense is that Matt is overestimating the average material standard of living in Denmark. Moreover, the differences in poverty between northern Europe and the United States can be traced in no small part to family structure. It is true, however, that tax-and-transfer policies make an enormous difference. Via Will Wilkinson, this chart shows that pre-tax inequality in Denmark is not that far from pre-tax inequality in the United States — but the Danes do far more to redistribute wealth. One has to assume that regional diversity of the United States contributes to our decision to redistribute less, e.g., the cost of living varies dramatically from New York city to Houston to Marfa, whereas the band is far narrower in Denmark.

I’d say that my main objection to what you might call the Danish settlement is that the sacrifices made in terms of disposable income are also sacrifices in terms of choice: the Danes live in what Keith Joseph, one of the architects of the Thatcher Revolution, called a “pocket-money society,” in which the state makes the big decisions — about housing and education and health — while individuals were left with “pocket-money” from their wages. And as citizens cede control over these larger life decisions, there is the twin danger of dependence and a stultifying lack of innovation.

It helps, however, that center-right governments in Denmark and Sweden have helped revive the Scandinavian social model by introducing market competition into education and other public services, as well as notional accounts in public pensions and a variety of other ideas that many U.S. Democrats would consider dangerously right-wing.

Ezra Klein writes:

This morning, I was on MSNBC with Sen. John Barrasso (R-Wyo.), who argued against the public plan by asserting that Medicare was too expensive and bankrupting the country. When I pointed out that CBO projected $110 billion in savings for a public plan attached to Medicare rates, he didn’t miss a beat: That’s because Medicare underpays, he explained, and is subsidized by private insurance.

Only one of those two arguments can be true. As compared with private insurance, Medicare can either be unaffordably expensive, or it can be underpaying for services and saving money. It can’t be both.

I’m not so sure it can’t be both. For example, if Medicare were designed to encourage the creation of efficient provider networks, it would facilitate rather than undermine efforts on the part of private insurers to move away from highly inefficient fee-for-service medicine. Because Medicare represents so large a share of overall medical spending, it’s reliance on fee-for-service shapes the entire landscape.

At The New Atlantis, James Capretta has identified a crucial flaw in the Baucus bill.

A family with an income at twice the poverty line, or $48,000 in 2016, would get $9,072 in federal assistance for coverage — still a substantial sum. But it’s $7,400 less than the family would get if they earned half as much. The Baucus plan thus imposes an implicit marginal tax rate of about 30 percent ($7,400/$24,000) on wages earned by families in this income range.

And that would come on top of the high implicit taxes already built into current law. Low-wage families with children also get the Earned Income Tax Credit (EITC). The EITC boosts incomes for those with the very lowest wages, but it is also phased-out as incomes rise. Past a certain threshold (about $21,400 in 2016), the EITC is reduced by $0.21 for every additional $1 earned. Throw in the individual income tax rate (15 percent) and payroll taxes (7.65 percent), and the effective, implicit tax rate for workers between 100 and 200 percent of the federal poverty line would quickly approach 70 percent — not even counting food stamps and housing vouchers.

Greg Mankiw followed up, suggesting that Capretta was underestimating the implicit marginal tax rate.

Indeed, Jim seems to understate matters, as he includes only the employee half of the payroll tax. Including both the employee and employer halves, as economic theory says is appropriate, appears to give a marginal tax rate closer to 80 percent. And, of course, many states impose income and sales taxes as well, and these would further raise the overall marginal tax rate.

If we pursued Mankiw’s proposed stimulus and halved the payroll tax and paid for it with an increase in the gas tax, we’d ease the burden on less affluent workers, who are far less likely to commute by automobile.