I had the great pleasure of reading William Easterly’s review of Ha-Joon Chang’s Bad Samaritans, an often frustrating anti-trade jeremiad. Part of Easterly’s broader argument is that we’re all subject to confirmation bias, i.e., to seeing the evidence that we want to see. This is true of pro-market enthusiasts like myself and, I’m guessing, most readers of National Review as well as pro-intervention enthusiasts like Chang.

I was particularly amused by the following passage, in which Easterly teases apart one of Chang’s central arguments against the much-maligned Washington Consensus:

His main piece of evidence for the superiority of heterodox policies, which he repeats over and over throughout the book, is that developing countries grew during the “heterodox” period of the 1960s and 1970s “on average, at double the rate” they have since the 1980s, when “neo liberal” free trade policies became orthodoxy. The big question is, what year should we pick as the breaking point between the protectionist era and the free-trade era? It is easy to manipulate breakpoints to confirm your beliefs.

Chang picks 1980 as the big turning point, allowing him to calculate a 3 percent average per capita growth in developing countries between 1960 and 1979, with 1.7 percent average growth in the same countries from 1980 to 2002.[2] But Chang elsewhere suggests that the change in policy occurred around 1983. The developing countries, he writes, were “first pushed by the IMF and the World Bank” to liberalize trade “in the aftermath of the Third World debt crisis of 1982.” But if we take 1983 as the breaking point, the change in growth rates is less dramatic: 2.6 percent between 1960 and 1982 as compared to 1.8 percent between 1983 and 2002. (There was a big recession in 1980–1982, so it’s a little suspicious that Chang includes this bad time in the free-market period even though he says the policy change wasn’t until 1983.)

Another classic way to check before-and-after claims is to find some new data. We now have data up through 2008. If we include this most recent data and use Chang’s own policy breaking point of 1983, there is virtually no change: growth in developing countries was 2.6 percent between 1960 and 1982 and 2.7 percent between 1983 and 2008. Chang’s key piece of evidence goes up in smoke once we correct for confirmation bias.

The essay, which appears in the latest issue of The New York Review of Books, is a pleasure to read. Their version is gated, but you can find a preview at this link.

In the past, I’ve supported a compromise on labor legislation. Though I think workers should retain the right to a secret ballot — a very good reason to oppose the “card-check” provision — I also think that there should be rigorous enforcement of labor laws. As he fights for reelection, Senator Arlen Specter has moved sharply to the left, not least on labor legislation. Despite having received the strong support of the AFL-CIO as a Republican, Specter briefly broke with the labor movement by opposing card-check, presumably in an effort to shore up support among conservative voters. Having join the Democrats, he’s now feeling different pressures. And so he’s called for a card-check compromise, one that economist Diana Furchtgott-Roth has sharply criticized in RealClearMarkets:

Instead of card check, Mr. Specter would limit the time between the announcement of a union election by the National Labor Relations Board and the workers’ vote. In addition, employers would have to allow union organizers to attend company-sponsored meetings held to tell employees why they should not join the union. The object, according to the senator, is to make it more difficult for employers to pressure workers to reject union membership.

In addition, Mr. Specter proposes to modify the mandatory arbitration provision. Rather than giving the arbitrators the power to start from a clean slate, they would use “baseball arbitration” and pick one of the last offers from one of the two parties.

Furchtgott-Roth is convinced that limiting the time between the announcement of a union election and the vote is wrong-headed.

Take the limits on timing of elections. On average, 42 days-six weeks-elapse before workers vote whether to join unions. Say the time is cut to seven days, as anticipated by Stewart Acuff, the AFL-CIO’s organizing director. This means that unions will need to lobby workers intensively for one week to make the case for union representation. As a practical matter, employees will not be permitted to hear both sides of the issue and will be rushed into decisions without receiving full information.

I tend to think that shortening the window is a good idea, insofar as it could reduce the disruption caused by organizing and counter-organizing campaigns, not to mention the potential for abuses by labor and management.

On “baseball arbitration,” however, Furchtgott-Roth is absolutely right to be concerned.

And take baseball arbitration. In Major League baseball, with neutral arbitrators required to choose an offer by either a club or a player, both sides have incentives to be reasonable. If one side makes an outrageous proposal, the arbitrators likely will choose the other side’s proposal.

But if the arbitrators are political appointees, chosen by the director of the mediation service, himself a presidential appointee, neutrality may be compromised. Unions will know that the arbitrators are more likely to take their side in a Democratic administration, and employers will know that their offer is more likely to be picked in a Republican administration. Neither case encourages true compromise.

We’ll see how this plays out.  

Mickey Kaus has an interesting — and persuasive —  theory.

The more I think about it, the more the townhall anti-Obama anger isn’t explained completely by the issues (sorry, Frank ). There’s also something about Obama himself-. But that something (or the main something) isn’t his race. It’s that he’s a relative newcomer, as Presidents go–an unknown quantity, an enigma, with a short track record and patches of that record left fuzzy. That means opponents can fill in the blanks with ominous possibilities. It makes paranoia more rational, if you will.

In Kaus’s view, this accounts for the strength of the anti-Obama backlash from the right.

The uncertainty about Obama made it wildly important that he not do things that would give the most common ominous speculation–that he’s way on the left of the possible envelope–any traction. Obviously, Obama’s White House understands this. Larry Summers is not a lighnting rod for the right. But the Obama-ites apparently failed to internalize this imperative sufficiently to allow them to exclude the Van Joneses and Yosi Sergants from government with the ruthlessness required in a year when they were asking taxpayers to trust them with administering an unprecedent stimulus package and restructuring Detroit and the financial system–all before transforming the nation’s health care system.

Kaus also describes Obama’s stance on card-check, the subject of my next post.

Dana Goldstein has an interesting left-of-center take on the Obama White House’s effort to convince David Paterson to stay out of next year’s gubernatorial race. But first, some scene-setting: The main danger for Democrats is that Paterson might polarize the party’s primary electorate. In 2002, Democrats were divided between Carl McCall, the state comptroller and an African American with strong ties to Harlem’s political establishment, and Andrew Cuomo, son of former governor Mario Cuomo and HUD secretary during President Clinton’s second term. To put it bluntly, Cuomo, a prodigious fundraiser, forced McCall to draw down his war chest well before the general election. And once McCall won the primary, the DNC, led by Clinton ally Terry McAuliffe, refused to provide him with the resources he needed to mount a serious challenge to George Pataki. Though Pataki first won office as a budget-cutting conservative, he neutralized the Democrats by spending massive sums to curry favor with the most left-of-center public sector unions, most prominently Dennis Rivera’s Local 1199.  

It is easy to see why the Harlem political establishment, and African American primary voters more broadly, might not have the warmest feelings towards Andrew Cuomo. Now, of course, Cuomo is New York’s popular state attorney general, and it is all but certain that he will run for the Democratic gubernatorial nomination against Paterson, New York’s first African American governor who, like McCall, has his power base in Harlem. 

Further complicating this byzantine picture is the looming specter of Rudy Giuliani, which, per Goldstein, has caused considerable anxiety in the White House:

Paterson’s refusal to cede the office, though, allows for the reemergence on the national scene of Rudy Giuliani, who remains popular among upstate conservatives and suburban moderates. Giuliani has shown a real facility for exploiting conservative populist moments like the one we’re in right now, with the grassroots revolt against Obama’s health plan and the racial animus bubbling over throughout the country. As New York City mayor, his approach to crime, police violence, and public hiring alienated the black community.

Equally important from the White House’s perspective, Giuliani could energize Republican voters, increase turnout, and help down-ticket races, leading to New York Democrats losing their weak hold over the State Senate. Why is dysfunctional Albany of interest to Obama? Because it controls the congressional redistricting process, and the administration, looking ahead to even its second term policy priorities, does not want to lose a single Democratic House seat.

As Goldstein goes on to note, the Obama campaign was far-sighted enough to invest considerable resources in Texas to influence state legislative races to that same end. Goldstein also identifies Patrick Gaspard, the publicity-shy director of the White House Office of Political Affairs, as the architect of Obama’s New York strategy.

The key administration player on the New York story is White House Director of the Office of Political Affairs Patrick Gaspard, a former New York union operative and veteran of the David Dinkins and Jesse Jackson campaigns. Gaspard has Karl Rove’s old job. And there’s no love lost between Gaspard’s former employer, the SEIU 1199 Health Care Workers East, and Gov. Paterson. The union has marched against Paterson’s proposed $3.5 billion in health care budget cuts, even as he opposed raising taxes on the super-rich.

Lest we forget, 1199 endorsed Pataki in 2002. Though it is possible that Gaspard objected to this decision at the time, it is certainly worthy of note. More interesting still, Goldstein ends her post with a reference to the great admiration that New York pols have for Gaspard’s organizing prowess.

PolitickerNY writer Jason Horowitz reported that Al Sharpton has told members of the Obama administration, “It’s hard for me to march against you if I ever get mad, because you’ve got our best organizer.” Sharpton was referring to Gaspard.

Late last year, Sam Stein of The Huffington Post wrote a detailed profile of Gaspard, who is, despite his low profile, clearly one of the most impressive political operatives of his generation. One of his most successful efforts was a multi-pronged campaign launched on behalf of Amadou Diallo.

By 1999, Gaspard was working as the chief of staff for councilmember Margarita Lopez, when a 23-year-old immigrant from Guinea was shot and killed by four New York City Police Department plain-clothed officers. Amadou Diallo would become a symbolic crest to the anything-goes, oftentimes brutal police work that personified the Rudy Giuliani administration. Unarmed at the time of the shooting, Diallo’s body was riddled with 19 bullets (out of 41 shots fired). When the four officers were acquitted of charges of second-degree murder, demonstrations erupted across New York.

One of the city’s most powerful unions, SEIU’s 1199, needed someone to coordinate their Diallo efforts. And the group’s political director, Bill Lynch, turned to his old aide for the task. “[Patrick] took the lead on that,” he recalled. “He helped organize city-wide efforts and was instrumental in bringing leadership together.”

The protests were massive in their scope, with multiple elected and religious officials as well as a scattering of celebrities taking to the streets. And while they did not result in legal vindication, in March 2004 Diallo’s family did receive a $3 million settlement from the government. Gaspard had his entrance into union life. Over the next few years he would help augment 1199 as a political force in the city and nationally. His work took him from Florida — to help with the 2000 presidential recount — to the streets of New York. And he took to the task with his usual vigor.

There was some dispute as to whether the Diallo incident was a mark of structural racism and police brutality, the view shared by Sharpton and Gaspard, or a tragic accident that can be traced in part to the training police officers receive. We can’t settle the issue here. But one can safely assume that Gaspard is not an admirer of Rudy Giuliani. Gaspard’s later successes in building effective coalitions can be traced in part to his remarkable ability to unite New York’s fractious Democrats.

What I find most striking about Gaspard is his ability to compartmentalize: during the 1990s, he was an ally of Al Sharpton, who continues to praise him, yet his union also played a prominent role in keeping George Pataki in office. Now, as a White House political strategist, he is orchestrating what you might call the defenestration of David Paterson, a Democrat who, unlike the Republican Pataki, has called for fiscal discipline. This is about to get interesting.

Buiter delivers some real talk to the American public:

According to my back-of-the-envelope calculations there is about a 10 percent of GDP gap between the medium and longer-term spending plans of the Obama administration and the taxes the Congress is willing and able to impose.  The reality that you cannot run a West-European welfare state (with decent quality health care, decent pre-school, primary and secondary school education for all), rebuild America’s crumbling infrastructure, invest in the environment and fulfill your post-imperial global strategic ambitions while raising 33 percent of GDP in taxes, has not yet dawned on the Obama administration or on the American people at large.

Unlike some of my friends and colleagues, I don’t think of President Obama as an unusually bad president. Rather, he reflects, as Buiter goes on to argue, the qualities you need to win office. 

Clearly, the qualities one needs to get elected to high office in western democracies are not qualities that are likely to be helpful once you have achieved high office and are expected to govern and lead. To survive the selection process to become president you have to be able to stitch together a coalition of special interests that can provide sufficient financial and sweat equity resources to win this grueling race to the top.  Once you get there, you should shed the unfortunate baggage you accumulated on your way up and govern in the interest of all the people.  Few can do that.  Apparently Obama is not one of them.

Many liberals are deeply disturbed by conservative protesters. The trouble is that this is what an engaged public looks like. The more decision-making is centralized in the hands of elected officials, the more anger will be directed towards elected officials. 

Brad DeLong is a brilliant economist and a gifted writer for broad audiences. He can also be inexplicably harsh in his characterizations of those he sees as political enemies. Most of the time, said enemies are conservatives, in particular anti-tax conservatives. But on Sunday he began a post on President Obama’s decision to slap punitive tariffs on Chinese tires with the following sentence:

Why oh why can’t we have better Democratic presidents?

For anyone who’s ever read DeLong, this is pretty funny stuff. And the post is dead on.

Daniel Drezner has written an indispensable post on the tariff controversy. His conclusion:

With the Obama administration, however, this feels like the tip of the iceberg.  Most of Obama’s core constituencies want greater levels of trade protection for one reason (improving labor standards) or another (protecting union jobs).  This isn’t going to stop.  “Trade enforcement” has been part and parcel of Obama’s trade rhetoric since the campaign.  The idea that better trade enforcement will correct the trade deficit, however, is pure fantasy.  It belongs in the Department of Hoary Political Promises, like, “We’ll balance the budget by cracking down on tax cheats!” or “By cutting taxes I can raise government revenues!”  It.  Can’t.  Happen. 

If I knew this was where the Obama administration would stop with this sort of nonsense, I’d feel a bit queasy but chalk it up to routine trade politics.  When I look at Obama’s base, however, quasiness starts turning into true nausea. 

Developing…. in a very, very scary way. 

One of the new developments Drezner cites is China’s rising economic nationalism. Despite Tom Friedman’s enthusiasm for one-party rule in China, it turns out that even the Politburo of the Chinese Communist Party has to respond to public opinion.

One hopes that the loud and angry chorus of critics of Bush-era unilateralism will now denounce the Obama White House for its reckless disregard of international public opinion and the health of the global trading system on which we all depend. Or something like that. To his credit, Brad DeLong has gotten the ball rolling.

Cowen, no apologist for the Bush administration, notes that the Medicare prescription drug benefit has been strikingly successful. He cites a 2007 paper by Neeraj Sood and Darius Lakdawalla, the abstract of which reads as follows:

In spite of its relatively low benefit levels, the Medicare Part D benefit generate $3.5 billion of annual static deadweight loss reduction, and at least $2.8 billion of annual value from extra innovation. These two components alone cover 87% of the social cost of publicly financing the benefit. The analysis of static and dynamic efficiency also has implications for policies complementary to a drug benefit: in the context of public monopsony power, some degree of price-negotiation by the government is always strictly welfare-improving, but this should often be coupled with extensions in patent length.

Note the wording of the last sentence: price-negotiation can prove valuable provided there is compensation in the form of an extension of patent length. This reminds me of Michael Kremer’s case for patent buyouts, which Alex Tabarrok summarized for the Independent Institute in a longer essay on drug prices:

Harvard economist Michael Kremer explains patent buyouts in his chapter in the new book Entrepreneurial Economics: Bright Ideas from the Dismal Science (Oxford University Press). Kremer argues that the government, or a wealthy non-profit foundation, should buy pharmaceutical patents and turn over the rights to the public for free. Patent buyouts would reduce pharmaceutical prices by 60 to 70 percent because instead of having to wait a decade or more for the patent to expire, generic-drug manufacturers could immediately begin to sell the new drugs in a competitive market.

Patent buyouts would not impede innovation because the innovating firm would be well paid for its research. Indeed, the patent buyer could easily increase the incentive to innovate by raising the buyout price.

But suppose a patent buyer does not know how much the rights to a new drug are worth? What is to stop the patent buyout from becoming a wasteful subsidization of low-quality research? Kremer offers an ingenious solution to this problem: invite patent holders to tender their rights in an open auction. Open and competitive bidding for the rights to the new drug would establish a good estimate of its true value. The government could then use information from the bids to buyout the patent – perhaps with a bid somewhat higher than the top auction bid.

Sadly, I have a hard time imagining an idea like this taking hold, particularly in a climate in which the pharmaceutical industry is seen as sinister.

I can’t say I’m much of a Twitterer, but I did recently Tweet a very interesting paper by Enrico Moretti on how variation in the cost of living across metropolitan areas might change our picture of consumption inequality.

I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I deflate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I find that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages.

Matt Yglesias, a far more prolific blogger than yours truly, than offered his thoughts on Moretti’s findings.

The way I read this research result, if we take a bunch of money away from rich people it will cost them relatively little in welfare since almost half of the excess income of the rich is going to bidding up the price of housing in the kinds of places where rich people can find jobs. If they all had less money, they’d all live in equally good houses; the houses would just be cheaper. But the money acquired through taxation could be used to provide services—better transportation infrastructure, better teachers, healthier food, more medicine—that have real value to the middle class and the poor.

There is, of course, another way to approach the stylized facts: the high cost of housing is to some extent an artifact of severe land-use restrictions. By easing these land-use restrictions, we might lower the price of housing. And in doing so, the affluent will have more resources that they can save and invest, or that they can spend on in-person services. I tend to think that somewhat more public investment on infrastructure and early childhood education and health could be money well spent, but we have to mindful of the need to achieve some kind of balance. (One of the best ways to encourage density, incidentally, would be to embrace a strong form of school choice that would encourage middle-class families to settle in urban jurisdictions.)

Defenders of the Democratic health reform proposals have noted that though a Republican administration and a Republican Congress backed Medicare Part D, the unfunded new prescription drug entitlement, congressional Republicans are reluctant to back a mostly-funded new healthcare entitlement. Did Democrats object to the Republican Medicare proposal on the grounds that it was unfunded, or on the grounds that it wasn’t sufficiently generous? My sense is that the opposition centered on the notion that it was not sufficiently generous and that the Medicare Advantage plans represented a giveaway to private insurers. Democrats who suggested that we should only expand Medicare if we also increased the payroll tax or pursued some other revenue-enhancing measure deserve praise for their consistency. Those who didn’t deserve as much blame as the Republicans who failed to consider the long-term costs. 

Chris Hayes, Washington editor of The Nation and one of my colleagues at the New America Foundation, has written a policy paper calling for a period of moderate, sustained inflation. My guess is that many readers will strenuously object to this idea, but I strongly recommend that you give Hayes’s paper a close read.

Hayes is drawing in part on arguments made by economists like Greg Mankiw and Ken Rogoff, who believe that moderate inflation can facilitate a sustainable recovery. Rogoff has maintained that we need an inflation rate in the 5-6 percent over the next two years to slow the pace of job losses and ease the debt burden. In his view, we’ve simply gone from a financial crisis to a long-term government debt crisis.

We are constantly reassured that governments will not default on their debts. In fact, governments all over the world default with startling regularity, either outright or through inflation. Even the US, for example, significantly inflated down its debt in the 1970’s, and debased the gold value of the dollar from $21 per ounce to $35 in the 1930’s.

For now, the good news is that the crisis will be contained as long as government credit holds up. The bad news is that the rate at which government debt is piling up could easily lead to a second wave of financial crises within a few years.

Most worrisome is America’s huge dependence on foreign borrowing, particularly from China – an imbalance that likely planted the seeds of the current crisis. Asians recognize that if they continue to accumulate paper debt, they risk the same fate that Europeans suffered three decades ago, when they piled up US debt that was dramatically melted down through inflation.

It’s easy to angrily denounce thinkers like Rogoff for contemplating an effort to increase core inflation — but what is the alternative? We could eliminate Medicare, Medicaid, Social Security, and the United States Navy, or we could certainly radically pare back spending on all four programs. This isn’t very likely. We can raises taxes, and we’ll probably need to do so. But raising taxes enough to close the gap and start paying down the debt could threaten the economic recovery. We need some combination of spending cuts and tax increases, and even in that case we might need moderate inflation. Overall, it’s an extremely depressing picture, one that puts the fiscal and monetary policy failures of the past fifteen years in sharp relief.

One concern I have is that generating moderate, sustained might prove extremely difficult. Weak consumer demand and globalization mean that we’re not likely to see wage/price spirals that derive from very tight labor markets, as Hayes explains. We could see a sharp spike in, say, oil prices, but this won’t necessarily increase core inflation. Rather, higher oil prices will just hammer consumers without any of the salutary consequences. What looks like an easy-ish way out is in fact a puzzle.

In dozens of conversations with left-of-center journalists, activists, and politicians, I’ve detected a deep sense that turnabout is fair play. The questions raised by conservatives regarding the costs of the president’s approach to health reform are essentially illegitimate because the previous administration was responsible for tax cuts that were not matched by spending cuts, an unfunded new entitlement program, and two expensive military campaigns. This strikes me as an interesting, coherent, and hilariously irresponsible view.

Arguendo, let’s accept that the left critique of the Bush administration is right in all the particulars. Let’s also assume that the Peterson Foundation and other nonpartisan groups that have noted the gap between likely costs and likely revenues of the president’s reform proposals are not members of a “right-wing noise machine” that actually delights in the prospect of denying Americans access to crucial medical care. Where does that leave us? The centrist opposition to the particular design of the president’s health reform has been largely ignored, for the understandable reason that the centrist opposition doesn’t threaten to dislodge Democratic lawmakers. The Republican opposition is in a sense the only effective opposition, as the Republican party can do what the centrist intelligentsia can’t. It should go without saying that Republicans don’t generally embrace the ideological worldview of the centrist, budget-balancing critics I have in mind, who want spending cuts and tax increases to deal with out long-term fiscal crisis. But there is a real sense in which the budget-balancing center and the right are objective allies insofar as they encourage an emphasis on delivery-system reform and whether or not the cost of premium subsidies will prove sustainable.

Virtually no one believes that we can afford universal coverage without new taxes that will impact the “bottom 95 percent” of the population, yet my left-of-center interlocutors believe that the supposed anti-tax “insanity” of the GOP means that Democrats are obligated to be sparing with the truth.

My own view is different: I think that the party that respects the American public will be rewarded for doing so. If the president openly and honestly explained to the American public that he believes that American workers should trade some disposable income for less risk, and that this tradeoff should happen through taxes and transfers, my guess is that a majority of Americans would, despite conservative objections, embrace the idea. Instead, the White House has emphasized that finding efficiencies through an iterative, centralized series of Medicare reforms as a way to finance coverage. To be sure, this is a matter of emphasis. (Anti-war critics often accused President Bush of selling the Iraq invasion in a misleading manner; this was mostly a matter of emphasis, that is very difficult to prove or disprove to partisans.) This kind of Medicare reform sounds very attractive to me, just as it sounded attractive to Newt Gingrich and the Republican Congress. But should we be surprised that seniors are concerned? Moreover, is it fair to malign for seniors for being concerned?

Left-of-center observers often cite signs — many of them apocryphal, but some of them real — demanding that government keep its hands off of Medicare, a laugh-line for those who essentially believe that most Americans are easily-duped rubes. (I’m not exaggerating.) The conceit is that there are no sincere critics of small government, and that selfishness underlies all opposition to the agenda of the Democratic party circa 2009. Indeed, some observers have concluded that reversals for said agenda constitute a threat to democracy. Note that many of the same observers believed that political success for conservative Republicans in 2002 and 2004 was also a threat to democracy. Political success for liberal Democrats, in contrast, never represents a threat to democracy.    

You might recall that many right-of-center intellectuals found themselves in a similar spot during the early Bush years: convinced that a Republican White House must be defended, many conservatives compromised their core principles, and insisted that the hypocrisy of the Democratic opposition was reason enough to justify any number of misguided policies. I think it’s fair to say that this approach didn’t end well.

It could be that we’re in a poisonous political moment and we have no choice but to throw up our hands. Conveniently, many on the left believe that the only way to break this logjam is to permanently crush the Republican party so that objections to taxes and overspending will be permanently silenced. One popular new notion is that the Democratic party itself represents the full spectrum of responsible opinion, from Blue Dogs who want to spend a corporation-friendly $900 billion to Progressives who want to spend a somewhat-less corporation-friendly $1.4 trillion.

At the risk of coming across as a threat to democracy, this doesn’t sound right to me. I’d rather the Republican opposition take a different approach to countering the president’s health reform effort, one that emphasizes cost-effective alternatives to achieving universal coverage.

Christopher Caldwell’s Reflections on the Revolution in Europe is the best non-fiction book published in 2009. It is also a very reliable Rorshach test. Consider the reviews from Michelle Goldberg, prominent feminist critic of the evangelical right, and Perry Anderson, a brilliant, idiosyncratic left-wing historian, to the frankly embarrassing reviews by NYU law professor Stephen Holmes and Berlin-based author Gal Beckerman. One gets the impression that Beckerman didn’t actually read Caldwell’s book — I’m sure this isn’t literally true, but that’s the impression one gets from lines that accuse the book of lacking nuance or that maintain, bizarrely, that Caldwell’s analysis “drips with disgust” for Europe.

And Holmes’s review is simply tiresome: he objects to Caldwell’s (clever) title, and he claims that views embraced by many in the European center and left are “fringe-conservative.” Oddly, Holmes doesn’t seem to understand that the Christian tradition is diverse and in many respects contradictory:

Readers may be forgiven for feeling lost at this point. Isn’t Christianity one of the cultural sources of humanitarian universalism? After all, Christ allegedly died for all mankind. That is obviously what a secular philosopher such as Jürgen Habermas has in mind when he writes, in a passage cited by Caldwell, that “Christianity, and nothing else, is the ultimate foundation of liberty, conscience, human rights, and democracy, the benchmarks of Western civilization.” So how can Caldwell apotheosize Christianity for its contribution to European culture and then go on to unmask the moral decay and self-loathing that motivates the universalism that is said, in his own book, to be Christianity’s most inspiring legacy?

Actually, readers can’t be forgiven for feeling lost at this point. Like the Islamic tradition, Christianity isn’t monolithic, and its influence manifests itself in essentially post-Christian societies in lots of different ways. Caldwell explains this in impressively lucid language.  

Holmes mischaracterizes Caldwell’s arguments throughout the essay, not least on the subject of the role of women. Goldberg, an authority on the subject of women’s freedom, sees things differently.

Still, he makes a convincing if disturbing case when he argues that immigration is exacting “a steep price in freedom. The multiculturalism that has been Europe’s main way of managing mass immigration requires the sacrifice of liberties that natives had come to think of as rights.” This is in some ways an overly broad generalization, but it deserves more than a knee-jerk response. It is certainly unsettling, for example, to learn that the British Department for Work and Pensions is now giving benefits and recognition to the additional spouses in polygamous marriages. And there is no question that the fear of offending Muslim pieties has impeded freedom of speech in many European countries.

Moreover, Caldwell offers a highly sympathetic take on European social democracy and the anxieties and anger of Europe’s young Muslims, something Holmes fails to appreciate in his rather crude reading. At times, Holmes seems to make things up out of whole cloth, e.g., 

In addition, America has retained the moral fiber that Europe has lost. It is more Christian and more convinced that Christianity is morally superior to Islam. It is also less squeamish about using force to defend itself abroad (Iraq, Afghanistan) or at home. When Caldwell remarks that “a quarter of the prison inmates in the world are held in the United States,” he means this not as criticism but as praise. Reflecting on U.S. “policies that are distasteful to most Europeans,” such as the death penalty, he observes that such toughness means that “American cities and suburbs are extremely inhospitable places for immigrants who are criminally inclined.” This is one of the principal ways in which America, unlike Europe, “exerts Procrustean pressure on its immigrants to conform.” Most important, the United States believes in itself, while “Europeans are confused about whether they are citizens of the world or citizens of their own nations.” No wonder they can neither defend their borders nor distinguish clearly between members and nonmembers of their community.

Far from praising the American outlook, Caldwell is simply making neutral observations. The truth is that Holmes is smuggling in his own assumptions; Caldwell, like many conservatives ranging from evangelical conservatives like Charles Colson to fairly secular Muslims like myself, believes that mass incarceration is deeply problematic — but that’s not the subject at hand. Anyone who has even passing familiarity with Caldwell’s work should know that he is far from a reflexive champion of the use of force; he is, in fact, a sharp critic of what he sees as neoconservative excess. But this doesn’t fit Holmes’s cartoon view of the world.

The embarrassing extrapolations continue:

Not Christ-like concern for the weak and the marginalized but readiness for organized violence is presumably why America’s culture strikes the editors of the Weekly Standard as less drab than Europe’s. America shares nationalist bellicosity with some parts of the Muslim world, and this is a good thing.

At this point, we’re not talking about Caldwell at all; rather, we’re talking about a collectivity that exists mostly in Holmes’s imagination. Believe it or not, Caldwell doesn’t agree with his fellow editors in every regard.

It’s worth noting that Holmes’s critical limitations extend to his work on left-of-center writers as well. Holmes was widely praised for a lacerating review of Roberto Unger, a daringly unconventional thinker who, alas, writes in an elliptical manner that Holmes evidently found difficult to understand.

Anderson, one of my favorite writers, is also very critical of Caldwell’s Reflections. Yet Anderson has a first-rate intellect, and his essay is well worth your time. Whereas Holmes is engaging an imagined neoconservative mafioso, Anderson is familiar with his subject, presumably because Anderson reads widely.

Christopher Caldwell is a white crow among American journalists today, to use a Russian expression. Not merely is his cultural range perhaps without equal – more than just fluent in the major European languages, he is conversant with what is written in them. But in the cast of his intelligence, he is quite unlike most reporters or commentators. Although his background is in literature, it is a philosophical turn of mind that most distinguishes his writing from his peers. What typically attracts his interest are dilemmas – conceptual, moral, social – obscured or passed over in standard discourse about leading, or even marginal, issues of the day. About these, his conclusions are nearly always unconventional – in one way or another, quizzical or unsettling.

This familiarity allows Anderson to actually land some blows, as in this passage:

His characterization of the general historical contrast between post-war immigration in America and Europe is a tour de force of hard-headed pertinence and trenchancy. It is not exhaustive, since Reflections on the Revolution in Europe says little or nothing about the racist discrimination, harassment and animosity so widely meted out to Muslim or other arrivals from overseas, by officials and natives alike. Caldwell explains that his book focusses on “the difficulties immigration poses to European society”, not “the difficulties faced by immigrants”. The two can hardly be separated, however, as if the objective experience of immigrants at the hands of European society were irrelevant to their subjective attitudes towards it, about which Caldwell writes at length. Tacitly, he is certainly aware of this side of the situation, though choosing not to dwell on it. But there is a much larger dimension to which he appears completely blind.

This is a fair point.

I’m amazed by the contrast between the essays by Holmes and Anderson, and you will be too. Remember that Anderson’s case against the Iraq war, made with characteristic intellectual daring in the London Review of Books, rested on his belief that states like Iraq are entitled to develop chemical and biological weapons as a defense against great powers. As for Holmes, it’s not clear to me that he’s ever said anything interesting at all. That’s not a crime, to be sure. Neither is badly misrepresenting Christopher Caldwell’s book. But you’ll forgive me for being disappointed and even a little peeved.

Josh Marshall, the editor of the center-left muckraking site Talking Points Memo, has posted a very astute email from a reader on the likely political impact of a successful Democratic health reform. 

In political terms, such a bill would be a tremendous boost for the Democratic Party. It would leave the present system intact in most of its essentials, thus assuaging the fears of the vast bulk of the electorate. One substantial group of voters – those for whom the subsidies render health insurance more affordable – would be fairly pleased. A smaller group, mandated to buy coverage it can scarcely afford, would be discontent, but mostly because the Republicans had thwarted Democratic efforts to help it – and, in cold political terms, this isn’t a constituency likely to defect. And the public at large would see that Obama had promised health care reform, and then delivered it, with few painful trade-offs or compromises. A fairly clear-cut political victory.

No, the problem is that such an arrangement would deliver a political victory, but fail to achieve most major policy goals. It wouldn’t do much to rein in costs, to improve the quality of care, or to provide a greater sense of security. It’s politically feasible, and a political triumph, precisely because of its modest aims and feeble provisions.

It wouldn’t do much, but it would do something. Most importantly of all, it would firmly establish the provision of universal healthcare as a federal problem. I’d like to see a better package emerge from this debate. But let’s not mistake the ultimate goal, nor the magnitude of the potential victory. Today, paying for health care is a problem for individuals. The day any of the proposed bills passes, it becomes a policy problem for the federal government.

Unsurprisingly, the reader believes that this is a very good thing. 

The policy wonk in me wants to get this right, because the costs of half-way measures are crippling. But the political handicapper in me is whispering that a half-way measure will actually be better than an honest bill come the midterms. It’s a depressing thought, but with a silver lining.

It should be obvious why conservatives might object. As a result, I’m very torn: it seems inevitable that the Democrats in Congress will pass something, and I think it’s at least possible that Republicans can substantially improve the final legislation. Yet there’s also a serious case for disavowing any involvement with the reform proposals.

The Peter G. Peterson Foundation has just released a new report on the long-term costs of H.R. 3200 that is well worth reading. The basic conclusion of the report is that while the new revenue measures would basically pay for the proposal over the first decade, costs start to dramatically outstrip revenue in the second decade. Granted, it is impossible to make reasonable estimates over such long time horizons, and we have to assume that we’d see reforms of health reform in the years that follow passage. Two bullet points leapt out at me:

• Overall, employer health spending would increase by an average of $305 per worker. Employers that currently offer insurance would see an increase in health spending of $123 per worker, while employers that do not now offer coverage would see an increase in health spending by an average of about $813 per worker. (However, most economists believe that employers would eventually offset the increased costs through slower wage growth. As a result, families and individuals would ultimately bear the increases in costs, which is reflected in the bullet above.) Small businesses currently providing insurance would save up to an average of $811 per worker due to a tax credit.
• The number of people covered in employer-sponsored plans (outside of the health insurance exchanges) would fall by 11 million, and overall enrollment in private plans would decline by about 900,000.

Trading off some disposable income for a lower level of risk might be the right decision; but I worry that we’re not acknowledging that there is a tradeoff. And while the decrease in the number of people covered in employer-sponsored coverage might be inevitable — this would be true under the status quo — it helps underline why so many voters have expressed deep doubts about the feasibility of Obama’s health reform effort.

Which is why tonight’s speech is important. My hope is that the president will level with the public and acknowledge that his effort will involve tradeoffs. I’m a little skeptical.

To follow up on my Labor Day column, Nate Silver has written a very useful post plotting pro-union sentiment against the unemployment rate.

The regression line finds that, for every point’s worth of increase in the unemployment rate, approval of labor unions goes down by 2.6 points. Alternatively, we can add a time trend to the regression model, to account for the fact that participation in labor unions has been declining over time. This softens the relationship slightly, but still implies a decrease in approval of 2.1 points for unions for every point increase in unemployment. Both relationships are highly statistically significant.

This makes intuitive sense; during a straitened economic moment, the public is more concerned with retaining their jobs or with job growth than with collective action. Interestingly, Bob McDonnell’s gubernatorial campaign has very effectively used its opposition to card-check as a wedge issue against Democrats in Virginia, one of many reasons why Creigh Deeds is trying to shift the debate towards social issues. 

Via Ezra Klein’s Washington Post blog I’ve just downloaded Max Baucus’s $900 billion healthcare framework, which reflects the thinking of the “Bipartisan Six,” which sounds like the name of a team of superheroes with the power to bore their enemies to death. Below you’ll find some preliminary thoughts. This will be a long post, I’m afraid.

Drug prices

Beginning in 2010, in order to have their drugs covered under Medicare, manufacturers must provide a 50% discount off the negotiated price for brand-name drugs covered on plan formularies when beneficiaries enter the coverage gap.

This proposal will probably backfire. In a 2007 CBO report, Peter Orszag, now President Obama’s OMB director, noted the following:

A vivid example is the Medicaid “best price” provision, which essentially requires manufacturers
to give the Medicaid program rebates that are at least equal to the largest private rebates they
provide. After those provisions were enacted, private purchasers who had been receiving the
largest price concessions saw their rebates decline.

That is, Medicare prices will decline and prices for those insured privately will increase. This is the kind of short-term thinking that led to the unrestrained growth in private insurance premiums after the Balanced Budget Act of 1997. The impetus for this proposal seems to be political: it will go into effect before the midterm congressional elections.

Health insurance exchanges

The proposal calls for state-based health exchanges, as opposed to a national exchange or regional exchanges. Will state-based exchanges have enough scale to work well?

Insurance Reform in the Non-Group Market

Plans will be subject to severe restrictions; premiums can only vary according to age, family composition, region, and, interestingly enough, tobacco use. Many proposals have suggested that insurers be limited to charging premiums only on the basis of regional and demographic factors. But if we include tobacco, one wonders why we don’t also include, say, alcohol use. (As a near-teetotaler, I have a special interest in this subject, as do America’s devout Mormons and Muslims.)

“Young Invincibles”

Young adults will be allowed to purchase catastrophic coverage, which is (mostly) good news.

Health Care Affordability Tax Credits

As expected, the Baucus framework offers somewhat less generous assistance to families; rather than extending to 400 percent of the poverty level, subsidies extend to 300 percent. My main concern is that the structure of subsidies might lead to a high effective marginal tax rate, but we’ll know more soon enough.

Small Business Tax Credits

Speaking of strange incentives, assistance to small business owners works as follows:

Credits are again limited to firms with fewer than 25 employees and average wages below $40,000, and the maximum credit available would be 50%.

So what happens when you give your employees a raise? I have to assume I’m missing something here.

Individual and Employer Mandates

The individual mandate is fairly straightforward; if you can’t demonstrate that you have coverage, you pay a fine. For most individuals, the fine won’t be much of a deterrent in itself. It will, however, swell the size of the IRS and create a massive enforcement headache. Some form of automatic enrollment might actually prove more cost effective.

Employers with more than 50 full-time employees are penalized for not offering coverage, and the fine is tied to the cost of direct taxpayer subsidies to the employees. This is not a very strong employer mandate.

CO-OPs

This aspect of the Baucus framework seems fairly inconsequential; basically, it authorizes start-up funds for state-based non-profit insurers chartered to lower costs and improve benefits relative to the competition. CO-OPs offering integrated care, like Kaiser Permanente or the Mayo Clinic, will receive a strong preference.

Risk Sharing

Rather discouragingly, the framework only includes the following on the vitally important subject of risk.

To protect newly reformed markets against adverse risk selection and facilitate market entry of new plans, the proposal includes three mechanisms to share risk: risk adjustment, reinsurance and risk corridors.

I’m a huge supporter of the reinsurance approach, which has the potential to sharply reduce or even eliminate the need for private insurers to engage in adverse selection. But I haven’t seen any details.

Medicaid

The fundamental problem with Medicaid is that it divides responsibility between the states and the federal government in a manner that encourages the worst kind of buck-passing; James Capretta explains this in great detail in his National Affairs essay on the middle class social contract.

The Medicaid program, meanwhile, fuels growth in health-care costs because it is financed with a flawed system of federal-state matching payments, with no limit on the amount that can be drawn from the Treasury each year. For every dollar of Medicaid cost, the federal government pays, on average, 57 cents; the states pick up the rest. But it’s the states, not the federal government, that call the shots in the program’s management: They determine who is eligible for what, and how much to pay hospitals and doctors for services. Under this arrangement, if governors or state agencies want to reduce Medicaid’s cost to their budgets, they have to cut the program by $2.30 to save $1.00 — because the other $1.30 belongs to the federal government. Paying the full political price for benefit cuts while getting less than half the economic benefit obviously does not appeal to most state politicians. So instead, they spend most of their energy devising ways to maximize what they can get from the federal government while minimizing the state contribution.

The Baucus framework will do nothing to change this.

Revenue

To my chagrin, the Bipartisan Six has embraced John Kerry’s kludgy idea for a “High Cost Insurance Excise Tax.” Because the Obama campaign fiercely attacked John McCain for his proposal to limit the tax subsidy for high-cost employer-provided health plans, Democrats have concluded that they can’t simply adopt the McCain approach. And so they’ve done the next best thing: adopt a crude and ineffective replica. The other revenue measures seem trivial and inadequate.

Unfortunately, there is good reason to believe that this proposal will bear close resemblance to the health reform plan that eventually passes. My rough guess is that costs will continue to grow unabated and that the mandates will prove close to unenforcable. The plan would be greatly improved by jettisoning everything but the individual mandate and adding a publicly-chartered non-profit reinsurer along the lines proposed by Professor Harold Luft.

Today isn’t just the start of the long, cold denouement of 2009 — it is the launch date for National Affairs, which Pete Wehner has plugged on The Corner. Most of you know Yuval Levin, the editor of National Affairs, as one of the country’s brightest lights on domestic policy. I’ve now known Yuval for a few years, and I’m still humbled by his formidable brainpower and also his sharp political instincts. Meghan Clyne, the magazine’s managing editor, is a name you’ll be hearing more of; a veteran of National Review and the White House. Clyne is a brilliant writer, who writes a fantastic, pugnacious column for The New York Post, and a gifted editor. I’m happy to report that I’m serving as a contributing editor along with my friends Matt Continetti of the Weekly Standard and Adam Keiper of The New Atlantis.

The debate around the future of the American economy so far has been arid and dominated by narrowly-focused technocrats who share a number of unexamined assumptions. National Affairs intends to change that.

David Brooks strongly recommends essays by James Capretta and Ron Haskins, and so do I. Read them both at the new National Affairs website, which will feature original writing. (I’ll have an essay there later this week.)

On Monday, I made the case for pro-market labor reform in my Forbes.com column.

A short while ago, I wrote a post defending Bob McDonnell. The truth is that I didn’t think, and I don’t think, McDonnell needs much defending. He’s been lambasted in the press for expressing views in a 1989 master’s thesis that are shared by many conservatives. The most controversial views involved the role of women in the workforce, and more particularly the role of the mothers of young children. Ironically, McDonnell embraced a position taken my many left-of-center critics of welfare reform, namely that children need a mother in the home. In the years since, however, McDonnell has embraced the cause of working women; apart from his employed wife, he is the father of professionally accomplished daughters, one of whom is serving in the military.

More recently, Van Jones, the recently resigned White House green jobs advisor, has been attacked for past statements regarding his radical chic affiliations. David Weigel has described the controversy in detail. Apart from Jones’s baffling decision to sign not one but two petitions sponsored by so-called 9/11 Truthers, one gets the impression that Jones is a fairly conventional urban left-liberal who has moved steadily to the political center. Is this shift a sham designed to increase his power and influence or is it a genuine recognition of the limits and indeed the ultimate uselessness of radical chic? I have to assume it’s both, just as McDonnell has recognized the limits of emphasizing his social conservatism and he’s had a genuine change of heart on the role of mothers in public life.

To be sure, McDonnell and Jones are very different; McDonnell’s views are comfortably in the mainstream while Jones’s early 1990s embrace of black nationalism and, remarkably, communism, are not. It’s worth thinking through the psychology that might be at work — to do his work well, Van Jones has to have credibility not only with business leaders and centrist technocrats; rather, he has to seem authentic to inner-city residents who feel angry and dispossessed. His radical pose was a part of this. So in a sense, Jones is a tragic figure. This isn’t to say that Glenn Beck shouldn’t have gone after him: given his past statements, Jones would have done the White House advisor a favor by staying outside the administration. But Jones’s basic contribution has been valuable: America’s poorest inner-cities are plagued by a culture of worklessness, a problem that is in some sense more destructive and more pervasive than homelessness. Encouraging job growth in these communities will reduce welfare dependency, the central goal of conservative welfare reform efforts. And Jones saw various clean-energy initiatives as a way to do this. There’s a reason this idea has been embraced across the political spectrum: it’s not a bad idea.

In the inaugural issue of National Affairs, Johns Hopkins political scientist offers a fascinating history lesson on the evolution of “compassionate conservatism.” Part of his discussion involves the GOP’s outreach to African Americans from Nixon on.

Especially in competitive non-Southern states, spotting the Democrats the entire black (and, increasingly, Hispanic) vote made it extremely difficult for Republicans to achieve long-term partisan realignment. A segregated party could not be a majority party, something that even Nixon recognized. So while he was openly appealing for Southern segregationist support in his judicial nominations, Nixon experimented with support for “black capitalism” through affirmative action in government contracting and small-business programs. He also sought to attract Hispanic voters by adding a new category to the 1970 census and supporting bilingual education. These measures were unsuccessful in both policy and electoral terms, but they represented an instinct that Republicans would flirt with on and off for the next quarter-century, culminating with the Bush campaign in 2000.

While I oppose vast clean-energy industrial policies, low-cost strategies for dealing with climate change will have to involve revamping urban infrastructure. The right has good reason to take this to heart.

As for the political futures of Van Jones and Bob McDonnell, the Virginia Republican is still polling fairly well, though it remains to be seen if national Democratic muscle will really get behind Deeds in the months to come; Jones will likely return to Oakland, where he’ll find a city in rapid decline. Jones’s past radicalism may well bar him from a place on the national stage, but he is a smart and savvy activist who is far more pro-market than your average member of the Oakland left; one wonders if he’d ever consider running for mayor or for Congress, where he’d represent a distinct improvement over Congresswoman Barbara Lee.  

A final note: in 1976, Jimmy Carter said different things to different audiences so often that he gained a reputation among his Democratic rivals as spectacularly deceitful even for a politician. In front of liberal audiences, he represented himself as a champion of civil rights; among working-class white voters, Carter defended the racial purity of white neighborhoods. Left-of-center critics often claim that Ronald Reagan relied on segregationist appeals; they tend to let Carter off the hook. Carter’s double-game, just barely possible in the 1970s, is now completely impossible. If you want to impress readers of the East Bay Express with your radical past, Glenn Beck will eventually find out. The end result is that young people seeking a career in public life will have to be more cautious than ever. And I’m not sure that’s a good thing.

I wrote a short piece on Jones and McDonnell for The Daily Beast, and I’m afraid they gave it the headline “Leave Van Jones Alone.” Given that I don’t think Jones or McDonnell should be “left alone” — they should face the same scrutiny that all public officials face — I’d much prefer a different title.

Last month, David Rivkin and Lee Casey argued that the individual mandate at the heart of most Democratic reform proposals is unconstitutional. Their argument has been strongly challenged from the left and from the right, and my sense is that the Roberts Court would never dare overturn health reform legislation, regardless of the merits of the originalist argument made by Rivkin and Casey. The op-ed did make me think about what health reform might look like if we put aside achieving the goal of universal or near-universal coverage. In 2006, Katherine Swartz, an economist at the Harvard School of Public Health, published Reinsuring Health, a case for an interim step that would preserve the broad architecture of our current health system, dominated by employer-based coverage, while making coverage far more accessible to those in the small-group and individual markets. 

If you follow the health insurance debate, you know that while the federal government offers generous tax subsidies for employer-based coverage, it does not offer the same subsidies to coverage purchased by individuals. Using numbers from the mid-2000s, Swartz estimated that this subsidy amounts to roughly $850 per person covered. If you are self-employed or if your employer doesn’t offer coverage, you see none of this subsidy, which seems more than a little arbitrary. Part of the reason why small firms tend not to offer coverage is because they don’t have the scale adequate to smooth risk across older, sicker employees and younger, healthier employees. Small-group insurance is tough, and the individual market is in many respects even worse.

To address this problem, Swartz proposed a government reinsurance program, financed by general revenues or a dedicated tax or by trimming the subsidy for employer-based coverage at the high end, that would ease the burden on private insurers who offer small-group and individual insurance policies. The top 1 percent of individuals generate 28 percent of medical expenses,  but it’s very hard to tell who will belong to this 1 percent. Understandably, insurers spend a great deal of time and effort trying to avoid covering people in the top 1 percent. This is very expensive. A government reinsurance program would agree to take on the expenses of these outlier patients and in return it would ask for cost-saving measures and that the private insurers charge lower premiums that reflect their reduced risk. And these lower premiums would sharly reduce the number of uninsured, even without an individual mandate. This is far from a flawless solution, as Swartz would acknowledge, but it does represent a less sweeping and more importantly less expensive alternative.

This is not my preferred approach to reinsurance. For example, I don’t think it does enough to contain costs, as Swartz would readily acknowledge. In a better economic climate, it might serve as a decent stopgap. My worry is that we actually need to do something far more dramatic to slash costs, and that means rejecting the status quo and Obamacare as currently conceived in favor of an approach that (yes) emphasizes delivery system reform.  

Also in today’s WSJ, an excellent, tart missive from Mitch Daniels. I agree with virtually everything Daniels says in the piece. His basic argument is that state governments are facing a structural revenue collapse, and that they need to resize public spending appropriately.

Unlike the aftermath of past recessions, odds are that revenues will take a long time to catch back up to their previous trend lines—if they ever do. Tax payments have fallen so far that it would require a rousing economic rally to restore them. This at a time when the Obama administration’s policies on taxes, spending and more seem designed to produce the opposite result. From 1930 to 2008, our national average annual real GDP growth rate was 3.49%. After crunching the numbers, my team has estimated that it would take GDP growth of at least twice the historical average to return state tax revenues to their previous long-term trend line by 2012.

I doubt even that would suffice to rescue most states. Instead, historical forecasting models need to be revised. One-third of state revenues (over half in seven states) come from sales taxes, but it’s hard to imagine them snapping all the way back up to where they were just a few years ago. Americans are now saving much more then they used to relative to how much they are spending. This sudden shift will mean that even in good economic times to come consumers will likely spend less and therefore pay less in sales taxes than they did during bubble years.

Incredibly, state spending has ballooned over the past decade, growing at a rate of 6 percent a year, far in excess of population growth or wage growth.

I have one small disagreement with Daniels, however.

The “progressive” states that built their enormous public burdens by soaking the wealthy will hit the wall first and hardest. California, which extracts more than half its income taxes from a fraction of 1% of its citizens, is extreme but hardly alone in its overreliance on a few, highly mobile taxpayers. Both individuals and businesses are fleeing soak-the-rich states already. Those who remain in high-tax states will be making few if any capital gains tax payments in the years to come. Even if the stock market comes roaring back to life, the best it could do is speed the deduction of recent losses.

Though think Daniels basic point is right, namely that California doesn’t have a business-friendly climate, I think that this has more to do with regulation than the tax burden on the rich per se. (Interestingly, Daniels proposed a surtax on high earners to close a budget shortfall early in his first term.) Despite high taxes, California’s rich aren’t the most footloose slice of the population. Last week’s issue of The Economist noted the following:

The Public Policy Institute of California (PPIC), a non-partisan think-tank in San Francisco, has examined domestic migration in and out of California, and found that the high personal income taxes that are allegedly driving out the rich cannot be to blame. The poorest Californians, those paying very little in taxes, are the most likely to leave the state: 1.73 households are leaving for every one that arrives. Among the richest, only 1.09 households are leaving for each arrival.

It is true that the top destinations for those leaving include Nevada, Texas and Washington, three states that have no personal income taxes. Oregon, however, is also popular and it has high income taxes. Proximity seems to be a bigger factor than tax rates, says the PPIC.

The rich can afford high taxes. Taxes are a far more potent threat to families that are trying to build wealth than those that already have it. The real problem with California’s economic policy is that it is making life miserable for California’s poor and lower-middle-class, and a lot of this happens not so much through the tax code as through perverse restrictions on job growth and development. In City Journal, Ed Glaeser brilliantly described how development restrictions in coastal California have been a disaster for the environment.

California’s abundant restrictions on new construction don’t do much to deter building across America as a whole. No matter what the Bay Area does, plenty of new households will come into being, and they will need new homes. By restricting local development, California regulators just make sure that construction occurs someplace else. That someplace else tends to be a lot less environmentally friendly than the California coast, blessed as it is with a superbly temperate climate. The net result of this process: land-use restrictions in California increase carbon emissions and raise the risks of global warming.

Glaeser doesn’t add the obvious point that these development restrictions also encourage less-affluent Californians to flee the state in search of cheaper housing. These pressures will presumably ease in the near term, but not enough.

A brief aside: Progressives focus on Proposition 13, the consequences of which have been negative in many respects, e.g., it has undermined local government by centralizing the raising of revenue, it has also undermined “horizontal equity,” i.e., the notion that similar people should pay similar tax rates, etc. But progressives tend to think that centralizing the raising of revenue is a good thing: it leads to a more egalitarian distribution of public goods, it leads to less Tiebout choice, which conservatives like and progressive generally loathe. Again, I don’t think Prop 13 proved to be a great thing in the end. But progressives don’t seem to understand its real flaws. Rather, they use it as a clumsy shorthand for broader anti-tax sentiment, not understanding that the revolt against the property tax began as a movement of the left and the right.

Mitch Daniels is badly needed on the national political scene as a voice of reason.