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The Agenda

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

Mark Kleiman on the Non-Commercial Legalization of Cannabis



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Mark A. R. Kleiman has written a very insightful post on how to approach the regulation of cannabis, a subject of great interest to me. 

On the cannabis front, my plea is for a “grow-your-own” policy: consumers would be allowed to cultivate pot for their own use, to give it away, or to join small consumer-owned co-ops to produce the stuff for them. No commercial sales.

In Kleiman’s view, commercial sales would create a powerful marketing and lobbying machine that would encourage cannabis consumption. On paternalistic grounds, Kleiman is concerned about the public health consequences of a dramatic expansion of cannabis consumption. Given that decriminalization would already lower the effective price of cannabis, this strikes me as a legitimate concern: 

To the consumer, developing a bad habit is bad news. To the marketing executive, it’s the whole point of the exercise. For any potentially addictive commodity or activity, the minority that gets stuck with a bad habit consumes the majority of the product. So the entire marketing effort is devoted to cultivating and maintaining the people whose use is a problem to them and a gold mine to the industry.Take alcohol, for example. Divide the population into deciles by annual drinking volume. The top decile starts at four drinks a day, averaged year-round. That group consumes half of all the alcohol sold. The next decile does from two to four drinks a day. Those folks sop up the next thirty percent. Casual drinkers – people who have two drinks a day or less – take up only 20% of the total volume. The booze companies cannot afford to have their customers “drink in moderation.” 

Because distillers are dependent on “problem drinkers,” they deploy an effective, well-funded lobby to stymie efforts to reduce alcohol consumption and indeed to permit the emergence of potential substitutes or complements to traditional wines and spirits, hence the ban on breathable alcohol. Though cannabis consumption is less dangerous than binge drinking, the impact of full-blown legalization is unpredictable:

The rate of problem use among cannabis users is lower than the rate of problem drinking among drinkers (lifetime risk of about 10% v. lifetime risk of at least 15%) but that’s under conditions of illegality and high price. The risks of chronic heavy cannabis use aren’t as dramatic as the risks of chronic heavy drinking – the stuff doesn’t kill neurons or rot your liver, and generates less crazy behavior than beer – but that doesn’t make those risks negligible. Ask any parent whose fifteen-year-old has decided that cannabis is more fun than geometry. Of the 10% of cannabis smokers who become heavy daily smokers for a while, the median duration of the first spell of heavy use (not counting the risks of relapse) is 44 months. That’s not a small chunk to take out a lifetime, especially a young lifetime.

Kleiman is a frank paternalist, and his arguments are potentially discomfiting for those of us of a libertarian bent. But as a prudential first step, I think he’s right to prefer non-commercial legalization. 

Clarity



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Rep. Paul Ryan has written the following:

We do not have a choice as to whether Medicare will change from its current structure. It is being driven to insolvency. An honest debate requires a serious discussion of how Medicare will avert its collapse and be made sustainable. Unfortunately, but not surprisingly, the Democrats’ political machine has attacked my contribution to this debate, making the false claim that the only solution put forward to save Medicare would “end Medicare as we know it.”

Given that Rep. Ryan intends to change the way Medicare works, what can he mean? Many on the left suggest that he is lying or at least obfuscating the truth. My sense is that “Medicare as we know it” is a safety net program designed to guarantee that retirees have adequate provision for medical care. In this sense, Rep. Ryan does not intend to “end Medicare as we know it.” Rather, he intends to put it on a sustainable path. Matt Yglesias disagrees:

As Ezra Klein, previously a defender of Ryan’s integrity, observes people are accusing him of wanting to end Medicare as we know it because his plan would end Medicare as we know it. The existing single-payer system would be scrapped. In its place would be a system of means-tested vouchers to buy private insurance whose value would grow more slowly than the cost of health care. Basically Ryan’s idea is that old people should get medical care if they’re rich, and not otherwise. 

Meanwhile, since the non-rich won’t be utilizing health care services as many health care services, per unit treatment costs for should decline. This is a pretty standard view of how things ought to work—people should get stuff if they’re rich enough to pay for it, and not otherwise. And it’s Ryan’s view of how health care should be apportioned among the elderly. But for a guy who’s being widely praised for his honesty and willingness to face up to tough choices, he’s incredibly reluctant to describe his plan with any clarity. [Emphasis added.]

This is an interesting statement. A couple of thoughts come to mind:

(1) Does it make sense to treat “medical care” as a single thing? Or can we make distinctions between medical procedures that are cost-effective and those that aren’t? One of the arguments behind PPACA is that the federal government should play a role in encouraging the use of cost-effective treatment. The rich, presumably, will be allowed to use treatments that aren’t deemed cost-effective, provided they bear the bulk of the costs involved. 

(2) If we do indeed treat medical care as a single thing and we guarantee that old people will be able to consume as much medical care as they’d like regardless of quality or cost-effectiveness, will the program that finances this peculiar arrangement prove sustainable over the long term? I imagine the answer is no. 

 I don’t think Matt is drawing the kind of distinctions we need to understand the underlying debate.

Another way of characterizing Rep. Ryan’s approach is that he wants to encourage insurers and providers to organize medical care in new ways that emphasize cost-effectiveness. Limiting subsidies is a tool for introducing a measure of spending discipline, rewarding the most cost-effective providers. This parallels a number of ideas in PPACA, though Rep. Ryan takes a more decentralized approach. There is plenty of room for disagreement regarding the virtues of centralized vs. decentralized approaches to encouraging innovation and delivering quality care at low cost. One of the things we try to do here is weigh the evidence. 

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On Fiscal Consolidation and the German Recovery



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My colleagues at Economics 21 have written a fascinating editorial on how to think about Germany’s economic recovery:

For months, the conventional wisdom had been that the feckless European governments were risking a double-dip recession by prematurely removing fiscal stimulus. In conjunction with a weak banking sector and overly indebted governments at the periphery (Greece, Spain, Ireland, and Portugal), Europe was supposed to be an anchor on global economic growth, not an engine. Why has the German (and broader European) economy sizzled at the same time as the much touted “Summer of Recovery” in the U.S. has fizzled?

The editorial suggests that the German government has rightly emphasized deep structural reforms to enhance competitiveness:

After enduring nearly a decade of slow growth and low inflation, Germany has disinflated its way to an extremely competitive position thanks to painful labor market reforms. The cost of one hour of labor in Germany is now extremely low relative to the economic value added in that hour. Better coordination of public expenditures is not going to erase Germany’s huge competitive advantage in high-end manufacturing.

Moreover, the editorial makes the case that fiscal consolidation might promote economic expansion:

For more than thirty years, economists have pointed to the “fiscal illusion” on which stimulus depends. Going back to John Cochrane’s formulation, fiscal stimulus depends on households and business being ignorant to, or ignoring the fact that, debt-financed government expenditure eventually requires higher taxes to pay back the borrowing. If businesses and households recognize this and adjust their investment and consumption accordingly, a dollar of stimulus spending could contribute less than a dollar to GDP after accounting for the reduction in private sector consumption and investment. Research has found that as public debt levels increase, the private sector response to additional stimulus is more pronounced. Eventually, the decline in investment and consumption could exceed the positive economic contribution of the stimulus. In these cases, the government can actually increase output by reducing public spending and cutting its budget deficit (see the cases of Denmark, Ireland, Sweden, Canada, and Norway, among others).

To be sure, Denmark, Ireland, Sweden, Canada, and Norway had the advantage of a more favorable global economic climate. The editorial reminded me of The Economist’s special report on Britain’s plans for fiscal consolidation:

 

If boldness is the test, then the strategy for cutting the deficit cannot be faulted. But though fortune may favour the brave, it can trip up the headstrong. Debate rages—not only in Britain—over whether it makes economic sense to tighten fiscal policy so much, so fast. And austerity plans may not be achievable without ripping vital public services to shreds.

The independent Office for Budget Responsibility (OBR), which now oversees Treasury forecasts, delivered an encouraging verdict in June on the probable economic impact of the budget. Though it trimmed GDP growth forecasts made on the basis of Labour’s policies, from 1.3% to 1.2% in 2010 and from 2.6% to 2.3% in 2011, the downward adjustment was surprisingly small given Mr Osborne’s accelerated fiscal consolidation.

By moving decisively the government has gained credibility with investors worried about Britain’s huge deficit, and yields on government debt have fallen. Moreover, growth was surprisingly strong in the second quarter of this year, with GDP rising by 1.1% compared with its level in the first three months. The worry, however, is that firms and households burdened by debt are in no mood to invest or spend more, and the extra budgetary restraint could choke off recovery. Confidence indicators for both businesses and consumers have dropped since the budget, spurring fears of a double-dip recession.

Fundamentally, we’re making a bet on an uncertain future. I happen to think the British government is making the right choice, given the evidence at hand. But humility is appropriate — and we always need a Plan B.

Michael Mandel on Breaking Out of the Great Stagnation



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Neil Irwin, the Washington Post’s indispensable economics reporter, briefly summarized a new report from Goldman Sachs on the state of the economy and it’s likely near-term trajectory:

Activity in each of these areas [housing, capital spending, autos and other durable consumer goods, employment] fell so much during the recession that they just don’t have much more room to fall, even if the recovery continues to disappoint. So while sluggish growth may be with us for a while, it’s unlikely that there would be a return to actual contraction in economic activity.

This leads me to a fascinating July report from Michael Mandel on the case for countercylical regulatory policy [PDF], published by the center-left Progressive Policy Institute. Mandel begins by asking why job growth has proven so disappointing in innovative sectors. 

Certainly there are a wide range of reasons why innovative job growth has fallen so far short of expectations. Offshoring accounts for part of the job loss, especially in the infotech hardwareindustry. Internet-related businesses took yearsto recover after the dot-com crash. In someindustries, notably pharmaceuticals and biotech, important innovations took longer than expectedto get from scientific discovery to commercial products.

But the intensified regulatory regime that followedthe tech bust—notably the Sarbanes-Oxley Actof 2002, which set new accounting standards—clearly has to be part of the explanation for the joblosses in the innovative sector. Congress imposed greater compliance costs on companies, including start-ups, in order to deter the excesses of the tech boom. Studies have produced a wide rangeof estimates for the size of extra costs, but it’s only common sense that such regulations weigh heavier on new companies.

Similarly, over this period, the Food and Drug Administration moved to tighten up approvals of new drugs, especially after the 2004 Vioxx debacle.Once again, the intensified regulatory regime wasdriven by good intentions, but the negative effecton innovation may have been significant.

I think this is tremendously important, and not very well understood. Scott Winship and I have a piece in the new National Review that offers an explanation as to why job growth has taken the pattern it has, and that offers a program of reform designed to help reduce job-lock and other inefficiencies that stifle growth. But there’s much more to say.

For Mandel, the communications sector appears to be an important source of future economic and job growth:

This interconnected and self-reinforcing collection of industries is reminiscent of the early stages of past booms, which were never driven by a singleindustry. In this case, the employment expansion of several communications-related industries, despite the overall weak labor market, is a sign that the broad communications sector is going to be a leader in the coming recovery.

As Mandel goes on to explain, sectors that shrink during a downturn tend not to grow very quickly during a recovery. Sectors that grow through a downturn tend to pick up a head of steam. The policy upshot of Mandel’s paper isn’t terribly dramatic: he proposes, among other things, a pause in the FCC’s efforts to regulate broadband. 

Robert Litan and Hal Singer have made a related case against new net neutrality regulations in Harvard Business Review, which I find convincing. The debate over net neutrality has been too ideological for my tastes, with advocates taking an apocalyptic view of so-called “priority delivery” and opponents accusing proponents of being crypto-Marxists. My instincts are with supporters of open standards and protocols, yet I tend to think that regulation in the wireless — not necessarily the wireline — space is an inferior alternative to competition. 

I’ll soon have more to say on reforming regulatory policy to encourage job growth. For now, I think Mandel makes a solid case for FCC restraint. Mandel has also written a very insightful post on the changing complexion of the journalism profession. His basic take is that the gloom-and-doom narrative about journalism is profoundly wrongheaded, and I tend to agree.

Yonah Freemark on Overselling High-Speed Rail



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Though Yonah Freemark is a believer in the potential of heavy public investment in fixed rail transportation, he worries that Richard Florida is promising too much when he suggests that high-speed rail is the essential tool for kick-starting transformative economic growth in the U.S. I strongly recommend reading Yonah’s entire post. Basically, Florida is suggesting that future growth will be concentrated in “megaregions” that link metropolitan areas together. Richard Wells described the “megaregions” framework in The American Prospect last year, and Alan Ehrenhalt offered gentle skepticism in Governing. My first encounter with the idea came from a National Geographic map of the Boston-to-Washington “megalopolis,” which Paul Krugman has dubbed “Acelaland,” and from the William Gibson novel Neuromancer, set in the “Boston-to-Atlanta Metropolitan Axis,” a superregional authority that governs the vast conurbation that crowds the eastern seaboard in a dystopian near future. Other megaregions include “Cascadia,” which links the major MSAs of the U.S. Pacific Northwest and British Columbia, and the I-35 Corridor that links MSAs in Texas, Oklahoma, Kansas, and Missouri.

Yonah makes a few points. Even if growth is concentrated in these regions, which seems likely given that the capture the vast majority of the U.S population in aggregate, this doesn’t necessary imply greater reliance on rail — indeed, megaregions might be less rail-friendly than dense MSAs that are relatively far from each other: 

Moreover, there is some evidence that the megaregion actually produces relatively higher rates of automobile use than other development patterns. The Boston-Washington corridor has morphed into one continuous band of development — this is the definition of the megaregion — and the result is that people who don’t live in places directly adjacent to rail are likely to drive to get to other places in the area, and this will remain generally true no matter how fast the trains travel. Other development models based around high-speed rail, such as the French scheme which enforces urban cores separated by dozens or hundreds of miles of countryside, seem more likely to produce a switch from automobile use since there is simply put nothing for most people to see or do between the cities, and that’s where fast trains really show their benefits. 

So even if high-speed rail enforces the megaregional form, are we sure that we want it?

And because the vast majority of travel in the U.S. is intraregional rather than interregional, Yonah suggests that the emphasis should be placed on urban and commuter rail rather than intercity HSR:

Without a comprehensive change in the way the entire transportation apparatus is funded in the U.S., high-speed rail will result in few of the “spatial fixes” Florida highlights as his future goal. Indeed, there is no immediate connection between intercity rail use and giving up private cars; I have argued before that fast trains do not automatically mean an increase in public transportation use to and from stations, in the same way as different airports have different percentages of commuters using cars to get to them depending on the travel offerings available.

Yonah raises another important point about HSR and our broader economic prospects:

There is evidence that in some places high-speed rail has led to further dispersal and in some cases increasing suburban sprawl. Faster travel times allow the creation of geographically larger commute markets. Just as important, fast trains have been around for decades in France, Japan, Italy, and Germany; whatever their merits, are those countries “more ready” for the 21st Century than the U.S. and other non-high-speed countries?

For many HSR advocates in the U.S., there is a conviction that France, Japan, Italy, and Germany really are more ready for the 21st century than the U.S. I tend to think that this view is wrongheaded. If we assume, as I do, that the key to economic growth is organizational capital — intangible assets, productivity-enhancing business practices, etc. — then the technological tools that matter are those that facilitate large-scale collaboration. Transportation is certainly a part of this, but it might come in the form of ride-sharing and other forms of paratransit that are greatly facilitated by location-aware smart phones and other leapfrogging technologies that allow us to get more use out of legacy infrastructure.

Rather than raise taxes to fund white elephant projects, I would recommend keeping money in the hands of private citizens who will figure out the best ways to get around — or, in the case of telecommuting, not get around, and spend more time making fewer trips in attractive rural or exurban locales. This isn’t to say that there is no place for HSR. But let’s make new HSR initiatives pay their own way.

I actually agree with Richard Florida and others than megaregions are a good and useful way of thinking about future patterns of growth and settlement. Yet I think this should encourage a polycentric view of travel and commuting, for which the automobile and other personalized forms of transportation are often a better fit than fixed rail.

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Conor Friedersdorf on Reasons for Favoring Mexican Migrants



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Conor Friedersdorf writes:

If we’re concerned with self-interest, the United States should certainly admit more high skill immigrants, but perhaps it should also prefer Mexican immigrants to similarly skilled immigrants from poorer countries. Were I arguing for that proposition, I’d point out that the Mexican diaspora can help future immigrants to transition and flourish more easily than (for example) a French-speaking Haitian.

The Haitian example is not a good one. There is a large and flourishing Haitian community in the United States, defined by relatively high levels of educational attainment and upward mobility. Its cultural distinctiveness is often described as an asset rather than a barrier to assimilation, and English-language proficiency among Haitians in the U.S. is impressively high given Haiti’s unusual linguistic profile and its poverty. The Center for Immigration Studies, a group that advocates restriction, offers the following statistics on education among Haitian-born workers in the U.S. between 25 and 65:

Of Haitian immigrants (ages 25 to 65) 22 percent have not graduated from high school and 18 percent have a college degree. This compares to 9 percent and 30 percent, respectively, for native-born Americans.

Among Mexican immigrants, in contrast, 63 percent of men and 57 percent of women haven’t completed high school and 3 percent of men and 5 percent of women have college degrees. 

One can make a reasonable case that we should give some kind of preference to college-educated Mexican migrants. But college-educated Mexicans tend to prefer living and working in Mexico, in part because the place premium doesn’t outweigh the lure of home.

Conor continues:

Presumably our proximity and similarity in cultures matters too. I’d add that if our immigration policy serves as a release valve in some countries (which countries most benefit from that?), and remittances serve as a kind of indirect foreign aid, then our interest in Mexican stability might also militate in favor of preferring immigrants from our southern neighbor to newcomers from places father afield.

This is entirely fair: there is a strategic case for serving as a “release valve” for young, less-educated Mexican men, a group with a labor market position that is deteriorating in Mexico and the United States. It is not obvious, however, that this is a very attractive proposition for the United States. And it is at least possible that limiting the use of this “release valve” would encourage Mexico to embrace a better mix of social and economic policies that would help families in the impoverished southern and central regions remain intact.

Back to Conor:

And if our concerns are strictly humanitarian, we cannot just consider poverty levels in a prospective immigrant’s country of origin: we must also consider how economically successful immigrants from that country are upon arrival in the US, their pattern of remittances, how efficiently their relatives back home use those remittances, whether there is a brain drain effect, even cultural factors that affect how happy people are moving to a foreign place far away from friends and family… it gets very complicated.

Even by this standard, however, it’s not clear that we’d have as strong a preference for less-skilled migrants from Mexico, as suggested by the Haitian example. It seems that migrants from Haiti and desperately poor countries in sub-Saharan Africa and South Asia fate at least as well as Mexicans, if not far better. And the remittances they send to their home countries go much further than remittances from Mexican migrants to their relatively affluent relatives.

I certainly don’t think this issue is a no-brainer. But by the criteria Conor sets, I’m pretty sure our explicit and implicit immigration policy shouldn’t be quite so biased towards Mexico.

Paul Boutin on Reforming Rule 501



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The latest issue of Wired contains a brilliant and perhaps unintentional defense of the free market from Paul Boutin, one of my favorite technology writers. As Boutin explains, companies that haven’t gone public can engage in pre-IPO equity sales. But, rather perversely, only the very wealthy can take part. The number of shareholders is limited to 500, yet employees can be granted restricted stock units that serve as a proxy for shares. The restricted stock units can then be traded privately. 

 

Pre-IPO sales are limited to “accredited investors,” people with a demonstrated net worth of $1 million or a yearly income of $200,000. It’s been that way since 1982, when Rule 501 of Regulation D of the Securities Act went into effect. The measure was intended to protect less-informed investors—widows and orphans, in Wall Street parlance—from gambling away their savings. So who hasbought pre-IPO Facebook stock? A reported 10 percent of the company went to the Russian investment group Digital Sky Technologies, whose backers include one of that country’s richest oligarchs. In other words, the extremely wealthy.

Today, Rule 501 does less to protect widows and orphans than it does to prevent risk-savvy investors from playing the secondary market. 

Congress tried to make the requirements even more restrictive in the new financial reform bill, but the plan was abandoned after the Angel Capital Association denounced the plan, which would have devastated their ability to raise start-up capital. Boutin ends with the following:

It’s time to lower the bar: The pre-IPO market should let everyone in. Today’s Internet stock rockets are social networks built by the active participation of their members. Preventing Facebook users from buying a stake in the company they helped create is an injustice. These millions of people should be able to take part in the financial ups and downs of Facebook, Zynga, and whatever comes next. I’m not saying it will reverse the recession. But at least the masses could once again play a role in America’s thrillingly adventurous startup economy without having to land a job at Twitter.

My only objection is that Boutin frames his argument too narrowly. He is right to wonder why a person with $800,000 in assets, or for that matter $60,000 in assets, shouldn’t be allowed to make a bet on Zynga. But this logic should extend well beyond investing in firms with a participatory bent. If you have the money, you should be allowed to take the rest. The case for insisting that homeowners make a substantial down payment before receiving a government-backed mortgage, in contrast, is about protecting the interests of taxpayers.

Brief Note Re: the Cordoba House Controversy



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At some point, I, Reihan Salam, intend to weigh in with my thoughts on the controversies surrounding Cordoba House and various mosques across the United States. For now, I’ll just point out that Josh Barro is the author of the last and only post on the subject we’ve run in this space, and I think he raises a number of valuable points. 

A number of readers have shared their thoughts on Cordoba House, and one recurring theme is the notion that Islam is not a religion but rather a kind of martial ideology. I am not an expert on Islam or religion more broadly. My understanding of these issues is limited, and you’re welcome to take my observations with a grain of salt. As far as I can tell, Islam, like Christianity, is a broad term that captures a number of distinctive traditions, practices, and ideas that manifest themselves in a large, and indeed increasingly large, number of sects or denominations. And of course there have been military-political organizations that see themselves as an authentic expression of the one true belief system.

Just as Pentecostalism has experienced explosive growth over the course of the last hundred years or so, there are certain tendencies within Sunni Islam that have grown rapidly in recent decades due to a combination of factors: the oil-driven wealth boom in the Gulf states, globalization that has undermined second-tier lingua francas, the rise of anti-colonialist nationalism, and the rise of market-driven liberal individualism that has undermined traditional patterns of patriarchal authority, the multi-generational household, and settled cultural communities. These “ultra-Orthodox” tendencies in Sunni Islam are very different from conservative Christian practices in the North America, Europe, and Latin America and their cultural offshoots, though there are some parallels to how Christianity and Islam are practiced and deployed in sub-Saharan Africa. The big differences relate, I suspect, to levels of cultural and intellectual and economic development, all of which, of course, are intertwined.

As a historical matter, ultra-Orthodox Sunni Islam, with its origins in the Wahhabi and Deobandi schools, has proven ferociously hostile to traditional Islamic pluralism. Because Islam spread far beyond its Arabic-speaking heartland, it evolved as it encountered new cultural circumstances. In much of South Asia, for example, it was common for practicing Muslims to honor the indigenous religious practices — we now call these diverse religious practices “Hinduism,” as the native religions of India have been increasingly “Abrahamized” in light of the competitive pressures posed by Islam and to a lesser extent Christianity — of their regions and communities, while Hindus would celebrate various Sufi saints. Suffice it to say, this was anathema to the ultra-Orthodox.

I’m simplifying matters here to say the very least, but I think it’s important for people to understand that there really are conflicts within what we call Islam. It is not a single thing. Rather, it is a lot of different things. Some of these things — militaristic, xenophobic, misogynistic Islamism, to name but one example — are by any objective standard noxious forces, and the driver of lethal attacks on Americans and also Israelis, Bengalis, Malays, and many other people. We can all agree on that. 

Islamism, however, is not identical to Islam. Within Islam, there are many other traditions and tendencies, some of which are more compatible with modernity than others.

I’m not sure exactly what’s going on with this new set of controversies over Islam and the role of American Muslims in our public life. I wouldn’t say I’m a very religiously observant person, but the observant Muslims I know best are my parents. Both of my parents have lived in New York city for over thirty years. Both of them worked in the World Trade Center in the 1980s, when I was a kid. Some of my fondest memories of growing up involve visiting them at work, and watching the 4th of July fireworks display from my dad’s office window. They were born in a country (Bangladesh) where Islamist terrorists have killed a large number of people in bomb attacks and acid attacks, and they lived through a savage and mostly forgotten war in which over 1 million Bengali Muslims were tortured and killed in part because they were accused of being “polytheists,” etc. That is, armed cadres of proto-Islamists were killing Muslims who had a different way of seeing the world and practicing their religion.

So that’s part of where I’m coming from: the idea that Islam is one thing or that all Muslims are the same strikes me as highly unlikely. This is part of why I think it is perfectly legitimate for people like Stephen Schwartz to raise questions about what the actual people involved in Cordoba House have said about Hezbollah and U.S. foreign policy. I don’t necessarily agree with Stephen’s conclusions — I don’t know enough to say, but I know the editors of the Weekly Standard well enough to know that they aren’t irrational bigots (as some people suggest) — but I think it is totally fair game to learn about what is motivating the players. 

I do worry, however, that there is a lot of confusion and misunderstanding going on in this controversy. Part of the problem is that this kind of debate lends itself to shouting: one side calls the other side bigots, the other side believes that it is being lied to, etc. I have conflicting impulses in such a debate: on the one hand, I resent it when people I know and trust are called bigots when they are raising objections founded in sincere beliefs that have nothing to do with animosity towards a group. And I also remember when the fight against the supposed threat posed by DP Ports World and CNOOC saw a different group of political entrepreneurs profit from what was essentially a cultural controversy. On the other hand, I find myself confused and disappointed when elected officials argue that Islam — again, a big, unwieldy, diverse category — is best described as a series of cults. 

Ross Douthat has written a wonderful column on Cordoba House that captures my feelings almost perfectly. I’ve talked to Ross and other friends about the controversy, and it’s sharpened my sense that my beliefs reflect the particular circumstances in which I was raised. This is why, in my view, empathy is so important when we engage in this kind of a conversation.

A Very Long Post on Cordoba House



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I complained last week about conservatives urging bureaucrats in New York City to throw up roadblocks to the construction of a mosque at 51 Park Place in the name of “historic preservation.” Landmark preservation schemes like the one that now covers 16% of Manhattan below 96th Street are an affront to property rights and should be used sparingly, if at all. The last thing we should want are new, pretextual landmark designations designed to serve political goals unrelated to preservation.

I disagree with the NR Editors’ conclusion that a boycott of mosque contractors is appropriate (more on that below) but I appreciate their statement that they will “not appeal to the official powers to use the machinery of government to stop this project.” Unfortunately, other conservative figures have continued to push creative ideas to throw red tape at the mosque.

Earlier this week it was discovered that the mosque’s developers do not technically own half the site they plan to develop. Instead, they hold a lease on the property that runs through 2071. They have a right to buy the property at current market value (as determined by an appraisal) and are exercising that right. They also, as I understand it, have the right under their lease to tear down the structure on the property. Development on ground leases, which can be preferable to fee simple ownership for tax or other reasons, is not uncommon in Manhattan.

The developers’ landlord is ConEdison, the power utility serving New York City. While ConEd is a private company, it is subject to regulation by New York’s Public Service Commission. Republican candidate for Governor Rick Lazio has pledged to appoint PSC members who would block the sale of the property.

Of course, a private firm should not ordinarily need approval from political appointees to sell its property. We accept greater regulation for utilities like ConEd because their monopoly position could allow them to exploit consumers—so the PSC is supposed to oversee ConEd with an eye toward protecting ratepayers. The goal is not French-style state capitalism where the regulated firms are used to achieve all kinds of policy goals.

Set aside the fact that ConEd appears to be contractually obligated to sell. A PSC decision to block the sale would not be about protecting ratepayers’ interests. (Indeed, the fact that ConEd agreed to a century-long lease on the property demonstrates that it is not essential to serving customers.)

Meanwhile, the Washington Examiner has run a couple of pieces promoting the idea that the federal government should act to prevent construction of the mosque, for example by “legislation to make Ground Zero a historic preservation site.”

It’s not clear to me exactly what this means. First of all, Ground Zero is a construction site. Four huge office towers are in development there. The general sentiment across the political spectrum seems to be that it’s taken too long to rebuild, not that the area should somehow be “preserved” (other than by construction of a memorial.) Indeed, the government has thrown a ton of money at financing the redevelopment, which had been stalled in part by weak demand for office space Downtown.

Second, the proposed mosque would not be located “at” Ground Zero, but two blocks north of it. So, any federal overlay that restricts development would have to cover not just Ground Zero but an area around it. Again, it is hard to come up with a policy rationale: this area is part of one of America’s busiest office districts, characterized by over a century of high-rise development and redevelopment, which we hope to see continue.

It’s hard to see a justification for “preservation” other than as a pretext to interfere with the mosque. But the use of allegedly broad zoning restrictions to prevent a single project is inconsistent with the rule of law. (Besides which, when zoning or similar restrictions are used as a pretext to block a religious institution, that violates the First Amendment.)

Conservatives rightly bristle at the federal government’s micromanagement of land in the American West, with the highest profile example being the closure of the Arctic National Wildlife Refuge to oil drilling. So why should we invite the feds into land use review in Manhattan? What New York allows to be built in its Financial District is not the federal government’s business.

What I find bizarre about some of the conservative response to Cordoba House is not just the objection to the construction of the mosque, but the conviction that it should be stopped by any means necessary—even if that means violating conservative principles about property rights, rule of law, and federalism.

Part of supporting limited government is understanding that sometimes, things you don’t like will happen, and the government (especially the federal government) won’t do anything about it. Getting to do what you want comes at the price of other people getting to do what they want—including build mosques where you’d prefer they didn’t.

As an aside, I think that some of the concern over this mosque, especially among people who do not live in New York City, is based on a misunderstanding of the geography of Lower Manhattan. This is an area that had significant high-rise development before New York imposed setback requirements and floor-area ratio maximums (limits on how many square feet of building you can put on a lot). As a result, the area is denser and more canyon-like than Midtown.

This means you can be two blocks away from something without any sense that you’re near it. City Hall is four blocks from Ground Zero, but you’d never stand there and think “I’m right near Ground Zero.” There is even a strip club three blocks south of Ground Zero, but nobody seems to have noticed that it is sullying the memory of the place.

In most cities, including Washington, 13 stories constitute a very tall building. But in the environment of Lower Manhattan, Cordoba House will be just another structure—which is not exactly consistent with the view that it is a Towering Monument to Jihad. In short, people are overestimating the extent to which this building will interact with, or be noticeable from, the World Trade Center site.

And this brings us to why I disagree not only with those who would use the power of government to stop the mosque, but also with the NR editors and others who urge private anti-mosque action. In general, my presumption is that it’s OK for people to build what they want on their property, with the burden on opponents to show why that’s such a bad thing. The proper question is not “Why here?” but “Why not here?”

So much of the complaint about the mosque has centered around the idea that, because hijackers acting in the name of Islam attacked the towers, Muslims should maintain a respectful distance. But the developers of Cordoba House (why do I even need to say this?) are not terrorists and did not attack the towers. Placing a burden on all Muslims to keep their institutions out of the Financial District is unfair.

Furthermore, since Islam has 1.2 billion adherents and is not going away, it is important to set reasonable guidelines that promote harmony with Western society—such as, it’s okay to build a mosque in the Financial District, and it’s not okay to blow up buildings in the Financial District. A general policy of exclusion is unworkable.

That said, I would be more open to location-specific objections to the mosque if I believed they were actually location-specific. But opposition to mosque development this year has not been contained to Lower Manhattan. Neighborhood activists in Staten Island were riled this June when they found out the local Catholic diocese planned to sell a vacant convent to a mosque developer.

While some protesters raised the usual pretextual concerns about parking and traffic, others were not so politic. “We just want to leave our neighborhood the way it is—Christian, Catholic,” declared one protester. Another alleged that “mosques breed terrorism” and a third that “the city has had enough terrorism and everything else.”  The protest wrapped up with chants of “USA! USA!” The protesters were successful in convincing the Catholic Church to cancel the sale.

The expansion of a mosque in Murfreesboro, Tennessee became an animating issue in primary elections in that state. The Lieutenant Governor of Tennessee declared that he was unsure whether the First Amendment applies to Islam, which might be a cult or a nationality rather than a religion. Lower-profile mosque controversies have also been seen in California and Wisconsin.

If it were generally the case that Muslims are being welcomed into our communities, and allowed to build their houses of worship without public hostility, then it would be possible to condemn the Cordoba House’s site without worrying about alienating and excluding Muslims generally. But unfortunately the complaints about Cordoba House are just the highest-profile example of a wish that Muslims would stay out of our neighborhoods—the trouble being that everywhere is somebody’s neighborhood.

In addition to being morally objectionable, undermining the integration and acceptance of Muslims in American society is a huge strategic error. Newt Gingrich doesn’t want mosques in Lower Manhattan until churches are allowed in Mecca—making the bizarre case that our level of religious liberty is fine so long as it is no worse than in Saudi Arabia. But Cordoba House presents an opportunity to show how we are better than Saudis—and that it is no skin off our back when mosques are built in America, even in the Financial District of Manhattan.

Demand Media and Monetizing the Cognitive Surplus



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Daniel Roth’s 2009 Wired article on Demand Media is utterly fascinating. And Byrne Hobart has an interesting take on the wider implications of Demand’s business model:

Demand Media’s content business has solved a huge labor market inefficiency: there are millions of people who can write reasonably well, but who can’t efficiently get a full-time job. Think of students, housewives, retirees—and ignore anyone below the 90th percentile. It’s a gigantic population of people who are unlikely to get full-time jobs, but who can’t effectively spend their time doing piecework or freelance writing.Thanks to Demand Media, they can do incremental writing work. If they can’t work full-time and it’s hard to judge them part-time, their labor is massively undervalued; in fact, if you look at the rise of blogging, tweeting, Wiki-ing, Q&A sites, etc., you could assume that the median price of their time is zero. By paying more than zero, at a huge scale, Demand Media may be able to buy and judge more hours of decent writing than any other company.

Byrne’s description reflects what you might call a broader disaggregation of work. Declining transaction costs have encouraged the outsourcing of non-core functions in business enterprises, and we see something similar happen in households. But for individuals, there is a countertrend: microjobs are giving at least some workers more independence and variety than they’d have otherwise. One wonders if the Demand Media model is a good way to capitalize on the talents of those of us with attention deficits.

Byrne continues with his celebration of Demand:

Now, compare that to the value of the potential labor everyone in the 90th percentile of writing or movie-making skill, who doesn’t have or doesn’t want a full-time job, but would like some extra income. Figure $30/hr times two hours per week times population times (1 – labor force participation rate) times 10%, and you get a total value of $29 billion per year. That’s the amount of money left on the table if the top 10% of the 30% of people in the US who are not members of the labor force could have each written four articles for eHow.

But that’s just the price. If Demand Media earns even a small positive return on those otherwise unused hours of labor, the value could go up even more.

It gets better. Demand can afford to target the top 10%, but what about the top 1% or the top .1%? Once they have a system for ranking everyone’s quality, they can also start selling off premium talent at a premium price.

Suffice it to say, this step will encourage wage dispersion. Developing a finer-grained sense of who attracts eyeballs and who does not will raise the stakes of the tournament. This reinforces my belief that the explosion in upper-tail inequality is here to stay. 

Byrne could be totally wrong about Demand. But I think he’s right that there’s a massive opportunity here to monetize the cognitive surplusAnd one important issue is that the value the Demand business model creates is hard to capture through conventional statistics. The consumer surplus generated by search engines is vast, yet all we see is the advertising revenue. In a similar vein, micropayments might enable people to lead lives that facilitate breakthrough creativity. Granted, it might also help people laze around. But consider that some people who need flexible work schedules are highly educated and highly engaged parents, the kind who, according to the logic of superstar kindergarten teachers, are worth vast sums in present value terms. That is one of the reasons why firms like LiveOps are so exciting and so important. 

Of course, there are many people who are trying to make our labor market regulations more rigid, in part because they see the Demand model and the LiveOps model as exploitative, not recognizing that many people are embracing flexibility rather than fearfully succumbing to it. And when we make our labor markets more rigid, these opportunities start to dry up.

Stray Links for 12 August 2010



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* The latest David Wessel column is a doozy — a useful riff on demographics inspired by a conversation with Dominique Strauss-Kahn, head of the IMF, which ends on an optimistic note.

* Ross Douthat has been writing a fascinating series of follow-up posts on same-sex marriage.

* Randall Kennedy of Harvard Law School has written a fascinating, honest, and in many respects rather peculiar defense of racial preferences and the “diversity rationale“:

The diversity rationale also facilitates the evasion of prickly subjects — for instance, the fact that racial minorities selected for valued positions sometimes have records that, according to certain criteria such as standardized tests, are inferior to those of white competitors. The diversity rationale moves the spotlight from the perceived deficiencies of racial minorities to their perceived strengths. Unlike other justifications for affirmative action that seek to make exceptions to meritocracy, the diversity rationale is consistent with meritocratic premises. This is the most striking and historically significant aspect of affirmative action: It enables racial-minority status for the first time in American history to be seen as a valuable credential. Instead of the presence of blacks and other racial minorities constituting an expiation of past sins, the diversity rationale makes their presence a welcome and positive good. [Emphasis added.]

The trouble here, of course, is that the diversity rationale seems to operate in a very arbitrary manner, i.e., it’s not clear why we should value color diversity over other kinds of diversity. Compensatory justice strikes me as more compelling than the diversity rationale, though of course it a compensatory logic wouldn’t extend preferences to immigrants and the children of immigrants. Rather, it would focus preferences on the descendants of enslaved African Americans, Puerto Ricans, American Indians, and members of other groups that at least have a plausible claim to some kind of recompense, rather than the first and second generation Americans of Afro-Caribbean and African descent who disproportionately benefit from preference programs.

I was surprised to see that Kennedy didn’t address this issue.

* Richard Florida has written a terrific piece in The New Republic on how to approach reshaping the U.S. economy, with an emphasis on subtly encouraging the reordering of our metropolitan geography:

In fact, the key to understanding America’s historic ability to respond to great economic crises lies in what economic geographers call the “spatial fix”—the creation of new development patterns, new ways of living and working, and new economic landscapes that simultaneously expand space and intensify our use of it. Our rebound after the panic of 1873 and long downturn was forged by the transition from an agricultural nation to an urban-industrial one organized around great cities. Our recovery from the Great Depression saw the rise of massive metropolitan complexes of cities and suburbs, which again intensified and expanded our use of space. Renewed prosperity hinges on the rise of yet another even more massive and more intensive geographic pattern—the mega-region. These new geographic entities are larger than the sum of their parts; they not only produce but consume, spurring further demand.

Unfortunately, Florida ends his piece with a pitch for high-speed rail, an idea that, in my view, is very much in tension with his broader vision of a more flexible, dynamic economy. Density yes, but fixed-rail rather than low-cost leapfrogging technologies? 

* Felix Salmon has a post on the housing market and the GSEs, including an assessment of three op-eds on the GSEs that appeared in today’s NYT. Felix and I both like John Carney’s proposal (and we’re both skeptical about Katherine Stone’s proposal):

So let’s embrace Carney’s idea of forcing lenders to retain 5% of whatever they originate, even when they sell their loans to the FHA or Frannie. And let’s try to get these state-owned behmoths out of the mortgage business in a controlled and non-chaotic manner. But let’s not do anything drastic. The last thing we need is another housing crisis, before the current one has even finished playing out.

I was delighted to see Carney in the NYT, hopefully not for the last time.

Millionaire’s Taxes



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James Surowiecki recently made the case for a more progressive tax code, featuring a larger number of brackets designed to impose higher marginal tax rates on those making more than, say, $1 million or $5 million a year, and so on. Rather depressingly, a central part of Surowiecki’s case is that more brackets would fragment the upper class into a “lower upper class” of affluent professionals that resents the “upper upper class,” thus making the culturally influential lower upper class “a powerful force for reforming the way we deal with inequality.” Given how powerfully the populism of Al Gore and Howard Dean resonated with upper-middle-class voters, I’m guessing Surowiecki is right. 

But leaving the politics aside, Surowiecki’s proposal strikes me as unwise. Much depends, of course, on what kind of a hike we have in mind. Factoring in new taxes under PPACA and the expiration of the Bush tax cuts, we’re already increasing marginal rates on top earners, and that’s leaving aside the state and local tax burden in the regions where high earners tend to concentrate. Like Megan McArdle, I think we’re reaching a danger zone for work incentives when the government at all levels starts taking more than half. 

Another issue, arguably more important, is revenue volatility. As Josh Barro of the Manhattan Institute notes in his latest RealClearMarkets column, the federal government can borrow to hedge against revenue volatility. Yet I think his arguments on highly progressive taxes at the state level nevertheless have resonance for the national scene:

Personal income tax receipts have also been far more volatile than GDP — off by 14% over the last two years. This is partly because of progressivity — high-income people have incomes that move more with the economy, and they are taxed at a higher rate. And it’s also partly because interest, dividends and capital gains — which are not components of GDP — have been hit hard in the recession.

While most income tax on labor income is collected through withholding, tax on investment income and self-employment income is largely remitted as quarterly estimated tax payments. For the 2009 tax year, these payments to state governments were off 26.8% from 2008, reflecting extreme weakness in investment income. The bleeding hasn’t stopped — even as the economy grows, April 2010 estimated tax payments were off 10% from April 2009.

To that end, I wish that we could rely more heavily, as Josh suggests, on property taxes. On a tangential note, Josh’s column includes this extraordinary fact:

This would be an especially good idea in southern and western states with low baseline property taxes — like California, whose biggest challenge is not high taxes per capita but extremely high income and sales tax rates. If California raised property taxes to a level typical in the northeast, it could repeal its state and local sales taxes entirely without revenue loss, and the state’s budget swings would be less severe.

FYI, California’s state sales tax in 8.25 percent, and it is 9.75 percent in the city of Los Angeles. 

The Durable Googlenet



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Recently, Google has been accused of abandoning the cause of net neutrality. The New York Times hosted an excellent “Room for Debate” on the subject earlier this week, which featured a number of apocalyptic pronouncements as well as wise words from Princeton’s Ed Felten:

The question is not whether we want to keep this open, neutral Internet — we do, or should — but whether government rulemaking can give us the result we want. “Neutrality” is easy to envision but difficult to define precisely. Network operators need reasonable leeway to manage their networks. We don’t want to mistake their complex but neutral network management practices for actual discrimination; nor do we want to enable subtle discrimination cloaked in network jargon. Whether government can police this boundary effectively is a question we can’t hope to resolve here.

I’ll just note that Google official line on wireless net neutrality, as stated by Richard Whitt, sounds fairly persuasive. Why insist on net neutrality regulations for wireline but not for wireless services?

First, the wireless market is more competitive than the wireline market, given that consumers typically have more than just two providers to choose from. Second, because wireless networks employ airwaves, rather than wires, and share constrained capacity among many users, these carriers need to manage their networks more actively. Third, network and device openness is now beginning to take off as a significant business model in this space.In our proposal, we agreed that the best first step is for wireless providers to be fully transparent with users about how network traffic is managed to avoid congestion, or prioritized for certain applications and content.

It is the prospect of a broader retreat from the public Internet that I find more worrisome.

At Epicenter, Eliot Van Buskirk offered a different approach to net neutrality:

The Google-Verizon approach purports to keep the current internet “open” and, in fact, would codify in law, for the first time, the notion that all bits on the wired internet should be treated equally, regardless of their origin or destination. Exceptions to those non-discrimination rules would include spam, malware, viruses — and wireless data networks, where net neutrality would not apply under the Google-Verizon proposal.

That proposal’s legion of detractors say building a second, faster internet to deliver premium services would ghetto-ize the current internet. That, they charge, will freeze innovation and, over time, render the “open” internet slow, irrelevant and old by comparison — good only for painstakingly researching pre-2010 culture.

The answer to all of this could be simple: let ISPs prioritize content where doing so makes its customers happy — just don’t let them charge when they do it. Removing financial incentives to mess with the internet could help mitigate the unseen consequences of whatever tampering is soon to happen, like it or not.

I’m eager to hear what Tim Lee, author of “The Durable Internet,” thinks. Unfortunately, Tim is working for one of the major players for the summer, so I imagine we’ll have to wait.

TED as the New Harvard?



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Anya Kamenetz, author of the excellent DIY U, has written a wonderful article on TED for Fast Company. She argues that TED, a conference founded by publishing veteran Chris Anderson, is best understood as a more enlightened version of the Ivy League, a web-savvy educational institution that manages to be prestigious and accessible at the same time. 

Still, if you were starting a top university today, what would it look like? You would start by gathering the very best minds from around the world, from every discipline. Since we’re living in an age of abundant, not scarce, information, you’d curate the lectures carefully, with a focus on the new and original, rather than offer a course on every possible topic. You’d create a sustainable economic model by focusing on technological rather than physical infrastructure, and by getting people of means to pay for a specialized experience. You’d also construct a robust network so people could access resources whenever and from wherever they like, and you’d give them the tools to collaborate beyond the lecture hall. Why not fulfill the university’s millennium-old mission by sharing ideas as freely and as widely as possible?

The success of TED doesn’t mean that traditional elite institutions don’t have a place. But it provides a very constructive kind of competition. As TED’s “mindshare” expands, we will hopefully see more efforts like MIT’s OpenCourseWare, if only because elite schools don’t want to lose their relevance and their influence. Eventually, the mission of these schools, with their vast resources, will focus more on the wider public than on their own enrolled students, thus delivering more educational bang-for-the-buck. TED is, in a small but important way, teaching educators how to solve the problem of scalability.

Brief Post on Immigration



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The Pew Research Center has a new report on the children of unauthorized immigrants:

Unauthorized immigrants comprise slightly more than 4% of the adult population of the U.S., but because they are relatively young and have high birthrates, their children make up a much larger share of both the newborn population (8%) and the child population (7% of those younger than age 18) in this country.

I’ve noticed that defenders of the birthright citizenship status quo are emphasizing that unauthorized immigrants can’t immediately obtain citizenship by virtue of giving birth to U.S. citizens, and that is of course true. But is that the relevant issue? Recall that the place premium of working in the United States is very high, particularly for less-skilled workers. It is safe to say that deporting the parents of U.S. citizens is a politically delicate matter, regardless of their citizenship status. Other note that it is rare for parents to “drop-and-leave,” i.e., to give birth in the United States before returning home. Again, it’s not clear that this is the policy challenge that matters. Borjas and Katz give us a better sense of the real issues at stake:

Although native-born workers of Mexican ancestry have levels of human capital andearnings that far exceed those of Mexican immigrants, the economic performance of these native-born workers lags behind that of native workers who are not of Mexican ancestry. Muchof the wage gap between the two groups of native-born workers can be explained by the large difference in educational attainment between the two groups. 

and 

Mexican immigrants have much less educational attainment than either native-born workers or non-Mexican immigrants. These differences in human capital account for nearlythree-quarters of the very large wage disadvantage suffered by Mexican immigrants in recentdecades.

As Jason Richwine argued in National Review last year, this creates challenges and complications that might prove difficult to manage:

The consequences of a large ethno-cultural group’s lagging behind the majority in education and income are significant. In strictly economic terms, perpetually poor immigrants and their descendants will be a major strain on social spending and infrastructure. Health care, public education, welfare payments, the criminal justice system, and programs for affordable housing will all require more tax dollars. 

In light of the enduring gap in educational attainment, Richwine then suggests a potential cultural problem:

Even if economics were not a concern, the lack of Hispanic assimilation is likely to create ethnic tensions that threaten our cultural core. Human beings are a tribal species, and this makes ethnicity a natural fault line in any society. Intra-European ethnic divisions have been largely overcome through economic assimilation–Irish and Italian immigrants may have looked a bit different from natives, but by the third generation their socioeconomic profiles were similar. Hispanic Americans do not have that benefit.

My guess is that the United States could successfully manage this transition. We are a wealthy country with a vibrant culture. If our immigration policy is motivated by humanitarian concerns, we obviously wouldn’t focus on Mexico as opposed to the world’s poorest countries. And if our immigration policy is not motivated by humanitarian concerns, we’d presumably want to place a greater emphasis on drawing skilled migrants rather than less-skilled migrants, as Richwine and many others recommend. In either case, we’d need a very different immigration system. The main case for the status quo, or for a comprehensive immigration reform that entrenches existing patterns, seems to rest on interest group politics.

The Long-Run and Short-Run Impacts of Taxation



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As you might already know, Dylan Matthews of the Washington Post has written a very helpful post on how to think about the Laffer Curve. No one disputes that there is a point at which higher tax rates will yield diminishing revenue. Yet there is considerable disagreement as to where the Laffer Curve bends. Dylan asked a number of economists and political commentators for their views. The most insightful comments, to my mind, were from Joel Slemrod and Greg Mankiw, who said different versions of the same thing. First, Slemrod, a noted tax economist at the University of Michigan and editor of Does Atlas Shrug?:

I would venture that the answer is 60% or higher…. The idea that we’re on the wrong side has almost no support among academics who have looked at this. Evidence doesn’t suggest we’re anywhere near the other end of the Laffer curve…. The elasticity of response, which is the key parameter here, isn’t some absolute parameter that we just have to deal with. It depends on policies. Let me be specific. There’s an article about how the IRS has reorganized itself to crack down on tax evasion of high-income people and corporations moving their operations or assets offshore. That’s the kind of policy initiative that can affect the elasticity of response by closing up a loophole. ÐEmphasis added.Ò

Mankiw said the following:

My guess is that that the short-run answer and the long-run answer are quite different. For example, if you raised the top rate from 35 to, say, 60 percent, you might raise revenue in the short run. Over time, however, you would get lower economic growth, so the additional revenues would fall off and eventually decline below what they would have been at the lower rate…. I will pass on offering a specific number, as it would require more time and thought than I can offer just now, but I will opine that I think the long-run answer is actually more important for policy purposes than the short-run answer.

So why are these comments related? Arpit Gupta touched on this in a recent Economics 21 commentary. As recent research by Raj Chetty suggests

micro estimates rely on instantaneous adjustment to higher tax rates, and typically focus on short durations after law changes. However, a variety of factors may combine to make the behavior responses to tax cuts a more long-run effect. People face costs in switching jobs or entering the job force. They may simply be unaware of tax changes or lazy. Any of these plausible frictions are compatible with large long-term effects of tax cuts that are difficult to capture in micro data.

The paper by Saez, Slemrod, and Giertz acknowledges these difficulties:

An important question is whether the clearly visible short-term responses persist over time. In particular, how should we interpret the continuing rise in top incomes after 1994? If one thinks that this surge is evidence of diverging trends between high-income individuals and the rest of the population that are independent of tax policy, then the long-term response to the tax change is less than estimated. Alternatively, one could argue that the surge in top incomes since the mid-1990s was the long-term consequence of the decrease in tax rates in the 1980s, and that such a surge would not have occurred had high-income tax rates remained as high as they were in the 1960s and 1970s. It is, though, very difficult to disentangle those various scenarios with a single time series of top incomes and top tax rates. As mentioned above, cross-country time-series analysis might be a fruitful area to make progress, taking advantage of varying time patterns of tax rate changes. ÐEmphasis added.Ò

Edward Prescott has argued that cross-country differences in hours worked can be traced to durable differences in marginal tax rates [PDF]. I highlighted the passage about diverging trends because I think there are many good reasons to believe that upper-tail wage gains have been driven by forces independent of tax policy, including the rise of “digital organizations.” Labor market polarization in the United States has been driven in large part by the explosion in upper-tail inequality, i.e., the very top has been pulling away from everyone else, and we’ve seen this happen in virtually all of the advanced countries before taxes and transfers are factored in. (I’ll have more to say on this in the future. Briefly, younger cohorts in Europe have caught up with and surpassed younger cohorts in the U.S. in educational attainment. Older European cohorts, however, were well behind older U.S. cohorts. And higher levels of education tend to mean higher levels of wage dispersion.) 

And so it seems likely that the experience of the 1993 tax increase has proven misleading. Because it is so difficult to isolate the impact of tax changes from other factors, many are convinced that the increases in marginal tax rates were costless when in fact overall growth would likely have been higher in their absence. A more interesting debate is over which kinds of taxes will do the least amount of harm.

Matt Yglesias wrote a good post on a related subject that I recommend, as did Karl Smith.

Matthias Trabandt and Harald Uhlig have offered valuable comparative perspective on the Laffer Curve:

We characterize the Laffer curves for labor taxation and capital income taxation quantitatively for the US, the EU-14 and individual European countries by comparing the balanced growth paths of a neoclassical growth model featuring ”constant Frisch elasticity” (CFE) preferences. We derive properties of CFE preferences. We provide new tax rate data. For benchmark parameters, we find that the US can increase tax revenues by 30% by raising labor taxes and 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Denmark and Sweden are on the wrong side of the Laffer curve for capital income taxation.

Lest you interpret this as a case for higher U.S. taxes, the co-authors end their paper with the following note:

We therefore conclude that there rarely is a free lunch due to tax cuts. However, a substantial fraction of the lunch will be paid for by the efficiency gains in the economy due to tax cuts.

So yes, we could increase revenue by raising taxes. But this means sacrificing potential efficiency gains — and this sacrifice, per Prescott, helps explain why the United States is the world’s wealthiest major economy, assuming you accept that Luxembourg, Macao, the UAE, Norway, Singapore, and Brunei Darussalam are not major. 

It’s not obvious that maximizing tax revenue should be our only goal, or even a very important one. There is definitely a reasonable case for slightly increasing the tax burden, provided we also make strenuous efforts to discipline spending. But doing so will make our economy smaller, and poorer, than it could be. That is the reason those of us on the right are so allergic to tax increases.

To be sure, if our goal is only to maximize the well-being of the bottom 10 or 20 percent of the population, a high tax strategy might make sense. As Scott Winship recently observed:

Tim Smeeding’s research based on the Luxembourg Income Study shows that in general Americans have higher incomes than their European counterparts as long as they are in the top 80 to 90 percent of the income distribution. Below that, incomes are more comparable across countries, and the living standards of Americans look less impressive.

My normative instincts tell me that this outcome is perfectly acceptable. Tim Worstall had an interesting take on this way back in 2006:

How we’re supposed to read this is that the USA has a very uneven income distribution, that the poorest 10% only get 39% of the median income, that the richest 10% get 210%. Compare and contrast that with the most egalitarian society amongst those studied, Finland, where the rich get 111% and the poor get 38%. Shown this undoubted fact we are therefore to don sackcloth and ashes, promise to do better and tax the heck out of everybody to rectify this appalling situation.

But hang on a minute, that’s not quite what is being shown. In the USA the poor get 39% of the US median income and in Finland (and Sweden) the poor get 38% of the US median income. It’s not worth quibbling over 1% so let’s take it as read that the poor in America have exactly the same standard of living as the poor in Finland (and Sweden). Which is really a rather revealing number don’t you think? All those punitive tax rates, all that redistribution, that blessed egalitarianism, the flatter distribution of income, leads to a change in the living standards of the poor of precisely … nothing. 

There are, of course, other considerations, including the quality of public goods and how wealth concentration shapes institutions and political outcomes, etc. But overall, I’d say I’m with Worstall.

Thoughts on Epic Win



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As social gaming emerges as a major industry, I’ve been intrigued by the notion that we might apply practices pioneered in alternate reality games as an educational tool, and more to the point as a means of helping young people develop noncognitive skills. Rexbox, a visual design shop, and Mr. FungFung, a well-regarded video game developer, are giving us an early indication of what such a tool might look like with their forthcoming iPhone app Epic Win. The game will be released on August 19th. Last month, Brian Barrett of Gizmodo describes Epic Win as follows:

 

This might actually get me to cross some items off of my ever-growing to-do list: an app called Epic Win that turns chores into quests, and rewards completion with experience points, loot, and leveling up. And it looks great.

That’s probably not surprising, given that one of the minds behind Epic Win was also Little Big Planet’s visual designer. And even though it doesn’t look like there’s anything to stop you from cheating—other than the realization you’d be cheating at a productivity RPG app, which would be a unique level of sad—it looks as though Epic Win’s brand of focused fun might be the perfect spoonful of sugar for the iPhone generation. 

The cheating question had been the stumbling block for me. Harvard economist Roland Fryer has been working for years on finding incentive systems that would encourage learning among inner-city children, including cash payments tied to reading books, etc.. The fact that Epic Win can be so easily gamed means that it won’t be terribly useful in that context. But of course this is just the start. A tool that is first used by affluent, productivity-obsessed consumers might eventually spread to the wider public, in a pattern familiar to students of baby names, like Levitt and Dubner:

Many people assume that naming trends are driven by celebrities. But how many Madonnas do you know? Or, considering all the Brittanys, Britneys, Brittanis, Brittanies, Brittneys, and Brittnis you encounter these days, you might think of Britney Spears; but she is in fact a symptom, not a cause, of the Brittany/Britney/Brittani/Brittanie/Brittney/Brittni explosion—and hers is a name that began on the high end and has since fallen to the low. Most families don’t shop for baby names in Hollywood. They look to the family just a few blocks over, the one with the bigger house and newer car. The kind of families that were the first to call their daughters Amber or Heather, and are now calling them Alexandra or Katherine. The kind of families that used to name their sons Justin or Brandon and are now calling them Alexander or Benjamin. Parents are reluctant to poach a name from someone too near—family members or close friends—but many parents, whether they realize it or not, like the sound of names that sound “successful.”

We’ll see. For now, I’m excited. My sense is that scalable, for-profit tools that capitalize on our “addictions” will prove more effective at imparting noncognitive skills than slow-moving public efforts that involve training an army of social service providers, for whom the incentives aren’t always well-aligned.  

Matt Yglesias on Impossible Deals



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Matt writes:

My bottom line is that I’m not particularly interested in purely hypothetical compromises. If immigration restrictionists really feel so strongly about the injustice and immorality of granting citizenship to the US-born children of undocumented migrants that’s they’re willing to make concessions on other fronts, that’s definitely something I would encourage members of congress to explore. But as best I can tell, they’re not even coming close to offering anything like that. So what are we even talking about? There are a lot of different moving pieces to the immigration debate, but it’s impossible to move any of them forward as long as such a large political bloc is basically against anything other than wall-building and deportation. What’s more, since modifying the 14th Amendment would require a constitutional amendment, it’s always going to be one of the least politically viable potential points of compromise.

Matt is making a reasonable point. While I do think reforming birthright citizenship would contribute to a better immigration debate, I don’t think it would necessarily lead to the kind of immigration policy I believe Matt and Will Wilkinson favor, namely a policy that that facilitates the influx of less-skilled Mexican workers into the U.S. labor market. We should support reforming birthright citizenship if we support reforming birthright citizenship on its own terms.

I’ll briefly note that I disagree with this view. Addressing Robert Rector’s arguments about how the influx of less-skilled workers increases poverty levels in the United States, Matt writes:

Rector seems to think the upshot of this is that we should kick all these people out, so they can be even poorer in developing countries, and then make our poverty statistics look better. That’s nuts. The real upshot of this is that things aren’t as bad as they sometimes seem—that many of the worst-off people in America are in fact engaged in upward mobility relative to where they started in life. That doesn’t mean we should be complacent about the education, health care, nutrition, and infrastructure needs of poor people.

I don’t think this is about making our poverty statistics look better. Rather, it is rooted in what Will Wilkinson has called “solidaristic nationalism.” As I’ve argued in this space, it’s not obvious that we should care more about somewhat poor people from Mexico rather than desperately poor people from the Central African Republic or Mali or Laos. If we care about them more because they had the moxie or the means to cross the border into the United States illegally or to overstay their visas, well, we’re creating a slightly quirky set of incentives. 

But Matt’s argument reminds me of the case for a carbon pricing regime in the United States. My understanding is that advocates of a domestic carbon pricing regime believe that it will prompt other states, including China, India, and other high-growth, carbon-intensive economies, to embrace a similar regime, thus leading to the international coordination we’d need to reduce carbon emissions.

Another possibility, of course, is that carbon-intensive manufacturing and other activities would leave the United States, a process that’s been happening for years. All evidence suggests that China and India will continue building coal-fired plants at a furious pace, regardless of what the United States does. And as Randall Parker observed earlier this year, China and India are also displacing oil consumption in the OECD economies. Parker also includes a fascinating quote from Gregor McDonald:

Those who would propose a successful energy transition over the next 20 years have failed, on a number of fronts, to produce a holistic model that pays respect to both the history of previous energy transtions, and to all (not just some) of the hurdles that lay before us. For example, one group of transitionists will lay out the technical feasibility of running the world exclusively on clean power. But they ignore the construction phase, or the energy required to fund it. Other transitionists will appear to address the construction phase, but instead will elide over crucial engineering details by invoking historical examples of national will–like the space program, or the retooling of Detroit during WW II. Most neglected however is the history of previous energy transitions. And here we find the largest hurdle of all. For, in humanity’s last two transitions, from wood to coal and then coal to oil, the trajectory each time was to a higher power density energy source. Energy transition is disruptive enough, but much less so when you are gaining energy density. And how do you suppose transition will be this time, going in the opposite direction, to lower density sources?

The deal that carbon pricing advocates are proposing is highly implausible at best. The barriers to a transition to clean power are extremely high, which is why, in my view, we should focus on funding basic research into cheaper-than-coal technologies and supporting win-win concepts like biochar

Lev Grossman and Yours Truly on E-books, Sci-Fi, and the Apps Revolution



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I had the pleasure of covering a range of non-political subjects with Lev Grossman, chief critic at Time and author of The Magicians, a terrific modern fantasy novel that I enthusiastically recommend, in a recent Bloggingheads. We briefly touched on some of the economic matters we often talk about in this space: digital organizations, measuring consumption, and a few other things.

Paul Krugman on the Ryan Roadmap



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Paul Krugman has written a column centered on Rep. Paul Ryan’s “Roadmap for America’s Future.” It is a peculiar column, and I’m sorry to say that it is somewhat misleading. Josh Barro and I wrote an article on the Roadmap for National Review, and we were careful to highlight its deficiencies as well as its strengths in order to give a balanced portrait. Krugman, for whatever reason, has chosen to take a different approach. 

Krugman highlights one important flaw in the original version of the Roadmap, namely its optimistic revenue projections. And he highlights an analysis from the Tax Policy Center, which Josh and I also referenced in our article.

 

The nonpartisan Tax Policy Center has, however, stepped into the breach. Its numbers indicate that the Ryan plan would reduce revenue by almost $4 trillion over the next decade. If you add these revenue losses to the numbers The Post cites, you get a much larger deficit in 2020, roughly $1.3 trillion.

And that’s about the same as the budget office’s estimate of the 2020 deficit under the Obama administration’s plans. That is, Mr. Ryan may speak about the deficit in apocalyptic terms, but even if you believe that his proposed spending cuts are feasible — which you shouldn’t — the Roadmap wouldn’t reduce the deficit. All it would do is cut benefits for the middle class while slashing taxes on the rich.

And I do mean slash. The Tax Policy Center finds that the Ryan plan would cut taxes on the richest 1 percent of the population in half, giving them 117 percent of the plan’s total tax cuts. That’s not a misprint. Even as it slashed taxes at the top, the plan would raise taxes for 95 percent of the population. [Emphasis added.]

Disappointingly, the column does not link to the source material from the TPC. Fortunately, Howard Gleckman wrote a helpful post on the subject in March:

CBO’s most realistic projection of revenues (assuming  most Bush tax cuts are extended and many middle-class families continue to be exempted from the Alternative Minimum Tax)  figures the existing tax system would raise about $4.2 trillion in 2020. By contrast, Ryan’s plan would generate about $3.7 trillion, or $500 billion less in that year alone.

Rep. Ryan has acknowledged that this is a problem, and he has explicitly stated that he is “open to adjustments in specified rates under his tax reforms”:

Congressman Ryan stands by his numbers, and of course would be open to adjustments in the specified rates under his tax reforms if in fact TPC’s estimates are closer to reality than Ryan’s estimates.  We clearly cannot chase our unsustainable growth in spending with ever-higher levels of taxes – and the purpose of the Roadmap is to get spending in line with revenue – not the other way around.

And Gleckman offers more insight into the distributional consequences of the tax reforms:

 

Top-bracket taxpayers would overwhelmingly benefit from Ryan’s tax cuts. By 2014 people making in excess of $1 million-a-year would enjoy an average tax cut of more than $600,000. To put it another way, their after-tax income would rise by nearly 30 percent.

By contrast, the average taxpayer making $75,000 or less would pay higher taxes if they chose Ryan’s two-rate alternative. If they chose the tax plan more favorable to them, they’d do a bit better. For instance, people making between $50,000 and $75,000 would typically get a tax cut of $157 in 2014, while those making between $40,000 and $50,000 would pay $128 more on average.

These estimates are subject to lots of uncertainty. For instance, we assumed Ryan’s 8.5 percent VAT—the new business tax—would generate about 4.3 percent of GDP in revenues. TPC’s Joe Rosenberg, who modeled the Ryan plan, believes that estimate is generous. But since no such tax currently exists, it is hard to know for sure. [Emphasis added.]

Moreover, the Ryan tax reforms would reduce the overall tax burden on earners in the bottom quintile. The following sentence from Krugman’s column

Even as it slashed taxes at the top, the plan would raise taxes for 95 percent of the population.

and this sentence

Even as it slashed taxes at the top and for the bottom quintile, the plan would raise taxes for middle-income households.

are both true. Krugman is relying on the power of aggregation, and one can’t help but admire his polemical skill. (Note that at least some of the rhetorical power of Krugman’s statement rests on the false impression that the poor would face a heavier tax burden.) It is also true, however, that almost any shift towards consumption taxes would have the same impact. Households at the top tend to save and invest more than households in the middle. A VAT or progressive consumed-income tax would both place a heavier burden on less-affluent households than on more-affluent households for that reason. Yet consumption taxes have other virtues.

So it seems that Krugman’s basic problem is with consumption taxes. And that’s perfectly respectable. This, however, places him at odds with many tax policy experts, who believe that we need to shift to consumption taxes that are less damaging to U.S. growth prospects than income taxes at the same level. 

Krugman’s claims regarding Medicare care reform are more misleading still. James Capretta has explained the logic behind the Ryan model:

 

As I argued in a Galen Institute white paper released last month, the Ryan Roadmap is the answer. What’s desperately needed in health care today is a new dynamic in which efficiency and productivity are rewarded rather than punished. The Ryan program would do just that by converting millions of passive insurance enrollees (both in Medicare and in employer plans) into active, cost-conscious consumers. As more and more of these consumers received their federal support in the form of a defined-contribution payment, they would have strong incentives to get the best value possible from both the insurance they select and the “delivery system” they use to access services.

Orszag contends that the Ryan plan is based on a flawed premise — the notion that consumers facing more cost-sharing for services can do something about the high cost of care. He points out that most Medicare spending is concentrated in a relatively small number of high-cost cases with expenses that far exceed the up-front costs of even a high deductible plan. But the benefits of the Ryan plan would extend well beyond moving people into high-deductible insurance products. In a vibrant health-care marketplace, consumers would be able to pick from among competing delivery systems too, well in advance of needing expensive care. Hospitals and physicians would have strong incentives to reorganize and offer their services in ways that are less costly and more patient-focused in order to maximize enrollment in their networks. That’s the way to bring about genuine “delivery-system reform.”

Krugman posits that the Ryan model would have baleful consequences:

The only way the Ryan plan could save money would be by making those vouchers too small to pay for adequate coverage. Wealthy older Americans would be able to supplement their vouchers, and get the care they need; everyone else would be out in the cold.

That is, in fact, a reasonable description of the likely trajectory of planned cuts to Medicare FFS, a program that’s proven highly resistant to the kind of delivery-system reform that Capretta has described. Yet Krugman has praised the planned cuts to Medicare FFS. Krugman suggests that there will be no business-model innovation in response to the Ryan reforms, which is implausible. 

Josh and I were cautious on Ryan’s proposed Medicare reforms:

Many on the left have attacked the Ryan plan for “privatizing” and “gutting” Medicare. Again, what the plan actually does is to voucherize Medicare, giving seniors money to buy insurance on the private market. The vouchers grow slightly more slowly than medical costs do, a gap the plan hopes to make up with cost-saving health reforms. We are enthusiastic about these reforms, which include efforts to introduce more-effective price signals in the health-care market, along with tort reform and modification of health-insurance mandates. But a clearer picture of the likely cost savings will be needed — along with a willingness to adjust if sufficient savings do not materialize.

My guess is that Rep. Ryan would agree that adjustments might be necessary. 

So is Rep. Ryan’s plan a “fraud,” as Paul Krugman describes? It is only a “fraud” insofar as, like any broad reform plan, it rests on contested assumptions about the future. If anything, Rep. Ryan’s openness to revision is a refreshing departure from the norm. At the heart of the plan is a serious effort to restrain growth in entitlement spending, an effort that will prove difficult and, almost by definition, surprising as the economy continues to evolve. What is clear, however, is that either spending burden has to be tackled or the tax burden — for all households — will have to increase.

I’m personally skeptical about Rep. Ryan’s particular vision for tax reform. The structure strikes me as unwieldy. I do, however, like its emphasis on simplifying deductions and shifting the burden from income to consumption. But there is room for disagreement. 

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