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The Agenda

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

How Much Should We Be Willing to Pay for Homegrown Produce?



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I’m a fan of Stephen Bronars, a senior economist at Welch Consulting who often writes on the state of the U.S. labor market. And I noticed that he is the author of a new report from the Partnership for a New American Economy, an immigration advocacy group funded by former New York Mayor Michael Bloomberg, on how labor shortages have contributed to growing U.S. reliance on imported produce. The following passage is drawn from the report:

Fresh fruits and vegetables are the ideal crops through which to look at the impact of recent U.S. farm labor shortages. For many fresh fruits and vegetables, mechanized harvesting is not feasible, meaning growers are dependent upon less-skilled and semi-skilled workers to pick the crop by hand. This is far different from commodity crops like corn, soybeans, and wheat that can often be harvested by as few as one or two employees using machines, and it means that labor availability—or worries about its availability— play a much greater role in decisions fresh produce growers make about how many acres to plant the following year. Many migrants who begin their careers as farm laborers move on to other sectors of the economy or less-demanding positions after several years, meaning farmers growing particularly labor-intensive crops are often the first to feel trends like decreased border crossings or migrant labor shortages. “Our industry sometimes feels like the canary in the coal mine,” explains Alan Schreiber, executive director of the Washington Asparagus Commission, a group representing a crop that is particularly physically taxing to harvest.

It is worth noting, however, that we continue to see technological advances in mechanized harvesting. What is not feasible today may well be feasible tomorrow. Lettuce was long considered a challenge for mechanized harvesting. Yet a new “lettuce bot“ can thin a field of lettuce in the time that it would take twenty workers to accomplish the same task. 

Moreover, Bronars’ reference to the fact that many migrants begin their careers as farm laborers before moving on to other sectors of the economy raises an important question: where do less-skilled and semi-skilled farm laborers find work after they can no longer work in the fields, and do these jobs pay market wages high enough to afford these workers a reasonable degree of comfort? The fact that farm labor is extremely physically taxing suggests that many of these workers will develop physical maladies that might prove expensive to treat; assuming that these workers are earning relatively low wages, one has to assume that taxpayers will have to bear at least some of the burden of providing them with medical care. And if the market wages these workers command fall below the median, one assumes that federal, state, and local governments will have to provide them with a suite of other transfers to help them, and their children, lead decent lives. This is a price that U.S. taxpayers should be willing to pay for people firmly rooted in U.S. society. But as we decide whether or not to increase the influx of less-skilled workers, we ought to weigh these costs with the benefits that would flow from reducing U.S. reliance on imported produce, and by extension the benefits that would accrue to the growers of produce and workers in allied industries.

Bronars continues:

USDA data provide perspective on how particularly important labor issues are for fresh fruit and vegetable growers. According to the USDA’s Agricultural Resource Management Survey, labor costs account for 48 percent of the variable production costs for fresh fruits and 35 percent of the variable costs for fresh vegetables. In contrast, such figures are in the single digits for corn, soybeans, and wheat. The situation is most acute for delicate berries and easily bruised produce, which often are not only harvested by hand, but processed that way as well. For example, the harvesting costs for strawberries, blackberries and cherries account for about 60% to 66% of total production costs—with labor costs being the primary harvest expense.

Farmers in this space also often have particular difficulty finding U.S.-born or unemployed local workers willing to fill available farm labor jobs. Many of the U.S. workers, otherwise available for employment, may not possess the necessary stamina to perform physically taxing farm work or the specialized skills that develop from years of working in the fields. The seasonal and temporary nature of farm labor positions also makes them unappealing to U.S.-born workers. In 2010, when unemployment remained high, California farmers posted ads for more than 1,160 farm worker positions. Despite that, 233 legal permanent residents or U.S. citizens responded, and few lasted the season. Such recruitment problems are not inherently a wage issue either: The average wage paid to farm workers was $11.10 in 2013, well above the federal minimum wage of $7.25. This report explores how American fresh produce growers have struggled in recent years to hold onto their share of the domestic fresh produce market. It’s important to note that the issue preventing American growers from keeping pace with rising consumer demand is not a lack of natural resources or an inability to expand production on U.S. soil. USDA statistics show that in between the two periods examined in the study, as much as 670,000 acres of land that once supported fresh fruits and vegetables were taken out of production, a 12.8 percent decline in the number of acres used to grow such crops. That land is already known to be able to support fresh fruit and vegetable production, and could, in most cases, be used to grow those products once again. [Emphasis added]

At a bare minimum, it would be interesting to know if physically taxing farm work has lasting health consequences for those who undertake it. Debates over reforming the Social Security program often raise the question of whether it is appropriate to raise the Social Security retirement age when a non-trivial, albeit small and shrinking, number of Americans engage in physically taxing work. If farm workers tend to retire earlier than other workers, or if they are more likely to become disabled at some point before they reach retirement age, their lifetime net tax rate will be somewhat lower than it would be if they retired later than other workers, or if they were less likely to become disabled. It could be that the unwillingness of U.S.-born workers to take on this work is telling us something useful, interesting, and important. 

And in the appendix to the report, Bronars notes the following:

The fact that the average weekly wages of unskilled and semi-skilled farm workers has grown relative to the wages of high school and college graduates is clear evidence of a farm labor shortage instead of a shift to mechanization. A shift to mechanization would have reduced the demand for farm workers and reduced the weekly wages of farm workers relative to other workers in the U.S.

One interpretation of increases in the weekly wages of unskilled and semi-skilled farm workers relative to the wages of high school and college graduates is that we ought to increase farm labor migration to depress wages in this sector. Another interpretation is that unskilled and semi-skilled farm workers are not very well-placed to find remunerative work in other sectors, and so these wage increases can be understood as a positive development.

In 2008, Jack Hedin, a farmer, published an op-ed in the New York Times – ”My Forbidden Fruits (and Vegetables)” — which complained that the federal government, influenced by growers in California and Florida, had hampered his ability to grow fruits and vegetables on his Minnesota farm:

The commodity farm program effectively forbids farmers who usually grow corn or the other four federally subsidized commodity crops (soybeans, rice, wheat and cotton) from trying fruit and vegetables. Because my watermelons and tomatoes had been planted on “corn base” acres, the Farm Service said, my landlords were out of compliance with the commodity program.

I’ve discovered that typically, a farmer who grows the forbidden fruits and vegetables on corn acreage not only has to give up his subsidy for the year on that acreage, he is also penalized the market value of the illicit crop, and runs the risk that those acres will be permanently ineligible for any subsidies in the future. (The penalties apply only to fruits and vegetables — if the farmer decides to grow another commodity crop, or even nothing at all, there’s no problem.)

I’d be curious to know from NR readers in the farm business if Hedin’s complaint has been addressed. If it has, I’d be delighted. If it has not, however, I wonder if a good first step for addressing the (alleged) crisis of rising fruit and vegetable imports would be to make it easier for farmers across the country to grow fruits and vegetables. 

Skilled Immigration and Less-Skilled Immigration Have Different Implications



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To her credit, Emily Badger of Wonkblog seems to acknowledge that the question of whether or not the U.S. should welcome more skilled foreign workers is separate and distinct from the question of whether or not the U.S. ought to pass comprehensive immigration reform legislation that also sharply increases the influx of less-skilled immigrants who are likely to command low wages. She cites a new report from Standard & Poor’s:

“I think people are scared,” says Beth Ann Bovino, the U.S. Chief economist for Standard & Poor’s. “There are a lot of misconceptions about what it means when we have immigrant talent come to the U.S. I completely understand the worries about ‘are we going to bring all of these people over? Are they going to take our jobs?’”

But, she argues, the opposite is actually true: employment-based immigration reform would be a boon for the sluggish U.S. economy, temporarily easing the country’s “skills gap,” driving new innovation, tax receipts, consumer demand, and even job growth for native-born workers. By Bovino’s calculation in a new S&P report, immigration reform targeting skilled foreign workers could add 3.2 percentage points to real GDP in the U.S. over the next 10 years. Over the same time period, it could cut $150 billion from the deficit. Immigrants with employment-based visas, she argues, wouldn’t “take our jobs” – they would complement them.

Badger raises an obvious and important question:

But why wouldn’t the arrival of all these new hypothetical skilled workers come at the expense of workers already here? Bovino points to the gap between businesses looking to fill high-skilled jobs and an education and training system that isn’t producing the right workers to take them. Importing foreign workers to fill the U.S. skills gap obviously isn’t a long-term solution for that imbalance. But it would help in the short term, while also bringing in younger workers to help pay for and offset an aging U.S. population.

There is another way to understand the challenge facing employers — firms are looking to fill high-skilled jobs at a given level of compensation, and the labor market for workers with (for example) strong quantitative skills is very tight. It’s a safe bet that the unemployment rate for women and men who received a top score on the AP Calculus BC exam as high school students is extremely low, and I wouldn’t be surprised if this group has seen its compensation levels grow at a faster rate than the general population. It is not uncommon for STEM students to gravitate towards financial services, software development, and even marketing, even when their initial training was in some “purer” discipline. If I want to find an excellent electrical engineer at a cut-rate price, I have a problem — there is a very good chance she’s decided to transition into financial engineering instead. 

Bovino insists that immigrants with employment-based visas wouldn’t “take our jobs”; rather, they would complement them. There is a lot of truth to this line of argument. But there is no question that immigrants with employment-based visas will compete with some U.S. workers, who will see their compensation levels decrease as a result, while complementing others. 

One could argue that the “gap” Bovino identifies is not really a public policy problem at all. I could just as easily say that there is a gap created by the unwillingness of high human capital people to take a low-wage job as my personal valet. Though there is no question that America’s education and training systems are inadequate in many respects, programs that offer marketable skills, e.g., the various for-profit and non-profit learn-to-code boot camps that are cropping up in U.S. cities, are having no trouble attracting customers. The deeper issue is that a tight labor market for the quantitatively gifted is good news for the quantitatively gifted and bad news for those who employ them.

All that said, I’m an enthusiastic proponent of welcoming a larger number of skilled foreign workers, even though an influx of skilled foreign workers will likely, in the short- to medium-term, depress compensation levels for the domestic workers (foreign-born and native-born) who compete with them. Even so, my sense is that the benefits outweigh the costs. First, skilled workers earning high wages contribute more in taxes than they receive in benefits; this offsets the congestion costs associated with larger populations, and it makes it easier for the public sector to shoulder the burden of providing services to those in need. This is why I would emphasize earning potential — do you have a job offer, and will your compensation be high enough to place you in the top third or the top fifth of the U.S. household income distribution? — over paper credentials. Second, the U.S. benefits from the agglomeration of talent in U.S. metropolitan areas; drawing in skilled foreign workers will deepen our pool of technical talent, and generate knowledge spillovers that will benefit the population at large. Third, an influx of high-wage professionals will stimulate demand for labor-intensive services provided by domestic less-skilled workers (foreign-born and native-born). The upshot will be that we will compete down the wages of U.S. workers earning well above the median income (medical professionals, financial services professionals, software developers) in the short- to medium-term; we will further entrench the dominant position of U.S. economic agglomerations by deepening their pools of talent, raising the likelihood that new intellectual breakthroughs and new business models will emerge in the U.S.; and we will better the lives of the consumers of the services of high-wage professionals (almost everyone) by lowering costs, and we will improve the labor market for domestic workers with complementary skills. 

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The Brookings Report Shouldn’t Kneecap Common Core



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The Brown Center on Education Policy at the Brookings Institution released its annual report this week, highlighting three issues they’d examined before and which remained in the political spotlight. One of them, unsurprisingly, is the Common Core — and one of their findings regarding the new education standards adopted by more than 40 states had standards opponents cheering a little more than they ought to have. “Common Core gets AWFUL review in new study,” the Daily Caller explained.

The Common Core may in fact be awful, but that’s certainly not what the Brookings review said, let alone proved. It had mixed evidence about the effectiveness of the standards: Over the past five years, states with standards most similar to the Common Core standards (as assessed by a 2012 Michigan State paper) saw somewhat weaker improvements in test scores than states with standards more dissimilar from the Common Core. But states that more vigorously implemented the Common Core over the last five years saw their scores rise more than others.

What to make of this evidence? Not much. We really have no idea, in fact, what effect the Common Core will have, or whether it’ll have a positive enough effect to have been worth the effort devoted to it and the diminishing of local control and diversity. It’s self-evidently silly to claim that five years of evidence about test scores based on one way of comparing the new standards with existing standards is going to tell us much about whether the new ones will work.

There is disappointing news here for Common Core supporters, in that Brookings reassesses a key piece of evidence Core and finds it wanting: They analyze a 2012 paper from two Michigan State scholars that argued that states with math standards like the Common Core had higher test scores than those that did not. This finding wasn’t crystal-clear at the time: It was inconclusive until the states were broken down into two groups based on divergent demographics, at which point it looked like there was a significant correlation between having Common Core–like standards and higher test scores (the scores used are from NAEP, a national assessment test).

Between 2009 and 2013, Brookings found, Common Core–like states seem to have underperformed those states with standards least like the Common Core. In addition, they point out that the positive effect the 2012 paper found for Common Core–like standards wouldn’t add up to a very useful boost over time.

But wait — states implementing Common Core less rapidly or not at all performed worse since 2009 than states that are embracing it. Except that it turns out that the data so far on that also won’t add up to impressive gains, either. When undertaking such a massive public-policy effort, it seems like there ought to be a good case for expected benefits, and these data certainly don’t do it. There is evidence that good standards can help learning — and reasons to think more national standards could even boost innovation, an argument Bill Gates made the other day at AEI. But the Brown Center report is right that the evidence for the program isn’t impressive so far.

The Brookings report’s Common Core skepticism, which isn’t new, is based on an argument that good or bad standards can’t have much effect at all, not the idea that the Common Core standards are poor quality, as a lot of conservatives have tried to contend. The standards are certainly rigorous, and set a floor, not a ceiling. People concerned about quality of standards can hardly be satisfied with defeating Common Core: Indiana, which has essentially dropped the standards, is trying out history standards for this year that look to be much worse than what they had before Common Core or when they were moving toward it. Leaving aside the actual state resources spent on raising standards, it’s reasonable to contend that ed-reform political capital may not be best used on standards — the politics of Common Core look to be getting ever more fraught. 

Lest we give the rest of the report short shrift, it had enlightening points about two other issues: They cover the controversy over the fact that the most prominent international standardized-test regime, a test run by the OECD called PISA, allows China to test just its urban residents — Shanghai, specifically – and makes no mention of the fact that the country has a coercive internal passport system that prevents much of the country from accessing Shanghai education in the first place. This comes in for some justified criticism from Brookings (Jason Richwine has made some critiques of PISA on NRO – it’s important to recognize the flaws with it, given the amount of attention and America’s-not-No. 1 handwringing PISA results produce every year).

And second, referring back to Ladies’ Home Journal editor (and grandfather of well-loved Harvard president Derek Bok) Edward Bok’s jeremiad against homework from 1900, Brookings looks at whether American kids are in fact getting more and more homework, as at least the media would have you believe – it turns out the data don’t support this. Statistically, parents are generally happy with the amount of homework their kids get, and are more likely to say it’s too little rather than too much.

Globalized Production Networks and the American Asset-Owning Class



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Last week, Josh Barro of the New York Times observed the following:

Last year, Emanuel Saez — an economist from the University of California, Berkeley — made headlines with the finding that 95 percent of income gains from 2009 to 2012 accrued to the top 1 percent of earners. But this finding was not about the rich doing well; their incomes are actually growing a little more slowly than in the last two economic expansions.

Instead, it reflects the failure of most of America to recover at all, with real market incomes for the 99 percent rising just 0.1 percent a year. Higher corporate profits and higher stock prices have not translated into meaningfully higher wages.

The other trend is a long-term one: For four decades, even in stronger economic times, wage gains have not kept pace with economic growth. Wages and salaries peaked at more than 51 percent of the economy in the late 1960s; they fell to 45 percent by the start of the last recession in 2007 and have since fallen to 42 percent.

When the economy does grow, that growth disproportionately accrues to the owners of capital instead of to wage earners; and in the last few years, weak growth and abundant labor have made that pattern even stronger than normal.

People tell many different stories about why growth disproportionately accrues to the owners of capital instead of to wage earners. One of the stories that I find most compelling is that the past several decades have seen the rise of a globalized production system, and while this globalized production system has greatly improved the productive potential of some Americans, it has intensified the competition facing others. This will strike many of you as pretty obvious, but bear with me.

In 2010, the Wall Street Journal interviewed the Brown University political scientist Edward Steinfeld about his new book, Playing Our Game:

I didn’t write this book to make a statement about Chinese intentions. It’s about the recognition of an industrial revolution that we’re all living under, one by which all of us, including China, are affected. China is growing very rapidly today because it has aggressively embraced this industrial revolution. This kind of revolution favors de-verticalized, networked production. That means the main driver of causation in the world today isn’t the nation state, it’s the multi-firm, multinational production network. And so, I don’t think that China’s rise is about the rise of a self-contained economy. It’s about the enrichment of a country by aggressively embracing pieces of global production.

Some Americans rue the demise of U.S.-based manufacturing, partly—and understandably—because they worry about the Steinfeld, Edward S. (2010-07-08). Playing Our Game: Why China’s Rise Doesn’t Threaten the West (p. 113). Oxford University Press. Kindle Edition.

The follow-on from these new modes of production is that it facilitates certain things in advanced industrial economies. It makes it easier and cheaper for innovators in those economies to get their ideas put into products. They don’t have to go and work for some huge, vertically integrated company.

Secondly, in order for China to have participated so successfully in this revolutionary mode of production, it’s had to give up an awful lot of what we would consider control: control over rules, over people, over who’s staffing the government, over what state-owned entities are doing. So a lot of the surface manifestations of socialism are here, but my argument is that by growing through this phase of networked production, China has ended up gutting the socialist control system.

Steinfeld’s book is brilliant. And though it is focused on China, it sheds light on the dilemmas facing the U.S. and other advanced industrial societies. The following passage is drawn from Steinfeld’s book:

Some Americans rue the demise of U.S.-based manufacturing, partly—and understandably—because they worry about the disappearance of jobs. Partly, though, they worry more existentially that in its shift to a postindustrial economy, the United States is losing know-how, innovative capacity, autonomy, and power. This latter set of concerns for the most part misses the point. Modularity has blurred once-firm distinctions between manufacturing and services. Research and development and design-related activities in the past were inseparable from physical manufacturing. Hence, they were all previously treated as manufacturing. Today, many of these activities are carried out by highly specialized firms that do no physical manufacturing at all. The jobs appear as services, but they in fact claim the bulk of the profitability and power in the broader production chains they feed into. They often end up as the biggest repositories of know-how in the entire manufacturing process.

Those who control the know-how can liberate themselves from the more mundane aspects of production:

Why engage in physical manufacturing—product fabrication—if you can control the high-value rules and design parameters that those doing manufacturing must scramble to meet? Even if those manufacturers reverse engineer your designs—which they may be wary of doing if you are their primary customer—you will have already moved into new products or jumped across into new industries. After all, as a modular player, you have the option of operating on multiple smile curves simultaneously. You are free to do this precisely because you no longer have to invest in all the capital equipment, facilities, and infrastructure associated with product fabrication in any one industry. Somebody else—namely, China-based contract manufacturers—has done that for you.

There is risk involved in outsourcing these seemingly quotidian functions, as Clayton Christensen has warned. Firms that master downstream aspects of the production process can steadily move upstream, just as East Asian firms like South Korea’s Samsung has gone from being a contract manufacturer to one of the world’s more innovative firms. Yet Steinfeld notes that shedding downstream functions can allow elite firms to specialize in the most valuable parts of the production chain:

When producers were vertically integrated—that is, when they had invested in all the facilities and equipment necessary to make a single complete product—their fates effectively became tied to that product. They may have been inclined to innovate, at least in the sense of improving the product to meet evolving consumer preferences, but they would have resisted new technologies or ideas that might unseat the product entirely. To use management scholar Clay Christensen’s terminology, they would have engaged in “sustaining” but not “disruptive” innovation. In the era of modularity, however, everything is about disruption, especially for innovation leaders in places like the United States. As noted previously, a modular producer—a design house, for example—may innovate today in ways that knock out its previous innovation from yesterday. As long as it keeps moving and stays at the cusp of value creation, it remains not just a viable business but a business effectively in the driver’s seat.

As labor costs rise in China, and as firms place greater value on locating production facilities near their consumers, the U.S. manufacturing sector is experiening a modest revival, though not yet a very labor-intensive revival. The globalization of the production system has been a boon to innovators and to those who control the rules that govern production within multi-firm, multinational production networks, as well as to those who hold ownership stakes in the leading multinational business enterprises. Sean Starrs, a Canadian political scientist, recently noted the dominance of U.S.-based multinationals:

Once we analyze the world’s top transnationals, a startling picture of economic power emerges. For one thing, national accounts seriously underestimate American power, and seriously overestimate Chinese power.

So this is what I do in my research, some of which is published in International Studies Quarterly. I analyze the world’s top 2,000 corporations as ranked by the Forbes Global 2000, organize them into 25 broad sectors and then calculate the combined profit shares of each nationality represented. The extent of American dominance is stunning. Of the 25 sectors, American firms have the leading profit share in 18, and dominate (with a profit share of 38 percent or more) in an astounding 13 of these sectors — more than half. No other country even begins to approach this American dominance across such a vast swath of global capitalism. Only one other country, Japan, dominates a single other sector (trading companies), which happens to be one of the smallest of the 25. By contrast, American firms particularly dominate the technological frontier, including a whopping 84 percent of the profit share in computer hardware and software (despite China becoming the largest PC market in the world in 2011), 89 percent of the health care equipment and services sector and 53 percent of pharmaceuticals and biotechnology. Perhaps most surprisingly, American dominance of financial services has actually increased since the 2008 Wall Street crash, from 47 percent in 2007 to an incredible 66 percent profit share in 2013. In short, despite almost seven decades of increasing global competition and the rise of vast regions of the world (most of all East Asia), American transnational corporations continue to dominate the pinnacle of global capitalism, a phenomenon that national accounts miss.

One obvious reply to Starrs is that there mere fact that U.S. multinationals are flourishing means little for American power as such. Starrs insists that it does indeed matter:

Yes, because they are still ultimately owned by American citizens — of the top 100 U.S. transnational companies, on average more than 85 percent of their shares are owned by Americans. Thus, an incredible 42 percent of the world’s millionaires are American (as opposed to 4 percent Chinese), and more than 40 percent of the world’s household net worth is based in America. That the global share of U.S. GDP has declined to less than a quarter since the 2008 crash simply reveals how global American corporate power has become.

But this also drives increasing inequality in the United States, one of the defining issues of our age, from Occupy Wall Street to “The Hunger Games” to President Barack Obama’s 2014 State of the Union address. This is because the top 1 percent own 42 percent of Big Business, and as the latter increases its global power, so too does the wealth of American asset-owners — and thus inequality.

So where does this leave us? As Michael Beckley argues in “China’s Century?,” the emergence of global production and human capital networks concentrates innovative activity in the U.S. All countries that participate from these networks benefit in varying degrees, but the U.S. benefits from them disproportionately. But to say that the U.S. benefits disproportionately is to oversimplify matters, as American asset-owners, for reasons we’ve discussed, benefit far more than other Americans.

Center-left egalitarians generally favor taxing American asset-owners to finance human capital investments and transfer programs to better the lives of those Americans who haven’t gained in relative terms from the advent of globalized production networks. Some critics of this approach fret that while the U.S. has more “market power” than other advanced industrial societies, U.S. multinationals might choose to leave the U.S. for greener pastures if the tax and regulatory climate continues to deteriorate, and so the first priority should be to make the U.S. a more attractive destination for large-scale capital investment. My general view is that the problem facing the public sector is not a lack of resources, but rather institutional sclerosis and barriers to entry that prevent the emergence of innovative service delivery models. Some modest shift in the tax burden might be appropriate, but only in the context of substantial public sector reform. Moreover, it could be that “microeconomic” strategies, like easing zoning restrictions in high-productivity metropolitan areas that are home to large concentrations of asset-owners and easing occupational licensing restrictions, should be emphasized over “macroeconomic” strategies, like tax-financed redistribution, as the former could facilitate a more organic transfer of resources from asset-owners (the consumers of labor-intensive services) to labor (the providers of such services). And to the extent that we should rely on tax-financed redistribution, the case for emphasizing wage subsidies and work supports over in-kind transfers may well prove more politically attractive, leaving normative questions aside, than the alternative.

The New Overtime Rule’s Effect on Wages and Employment Will Be Trivial, and Economists Know It



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The Obama administration announced last week that it would raise the income threshold required to exempt white-collar employees from overtime rules, thus mandating that more workers receive time-and-half when they put in 40+ hours per week. The current income threshold is $455 per week (about $23,000 per year); we won’t know the new number until formal regulations are proposed and finalized.

Might the new regulation increase low-skill wages and create jobs, as former Obama-administration economist Jared Bernstein recently suggested in a New York Times blog post? It’s not likely. In fact, even Bernstein himself seems to have acknowledged the minimal effects of overtime regulation in his more formal work.

As policy changes go, I suspect this announcement is more symbolism than substance. To be affected by the rule change, workers must have incomes that fall between $455 a week and whatever the new threshold is. They must live in a state that does not already have its own higher threshold. They must have both the opportunity and the willingness to work overtime. And, finally, their employers must actually comply with the new overtime rule, which has been an obstacle in the past. So the announcement is probably a symbolic swipe at income inequality more than anything else.

But let’s assume that a large number of workers will be affected. How might businesses respond? The naïve view is that businesses will simply hand over higher overtime pay once it’s mandated, with no change to base wages or employment. But given that employees are currently willing to work for less than what will be mandated, businesses will inevitably try to reduce labor costs in some other way.

Anthony Barkume, an economist with the Bureau of Labor Statistics, analyzed the two leading theories about how employers respond to overtime-pay mandates. The “labor-demand” theory is that businesses will cut back on overtime and perhaps hire more employees to work straight-time. Current employees would not earn more money, but more people would have jobs.

By contrast, the “employment-contract” theory is that employers will simply reduce base pay to make up for the higher overtime wages. There would be no long-term changes in total wages or employment.

Barkume found much more empirical support for the employment-contract theory than for the labor-demand theory. All else equal, working more overtime is associated with a lower wage rate, and the lower base pay is enough to cancel out most of the legally mandated overtime wage premium. Since the employment-contract model seems to prevail, total wages and employment should be only minimally affected by the new overtime rule.

Curiously, Jared Bernstein also cited Barkume in a formal policy proposal, in which he seems to come to the same conclusion that overtime rules have negligible effects on total wages and employment. I’m genuinely confused about why he is still a strong supporter of the reform. In my view, it’s an administrative burden on business with no clear benefit to labor.

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Who Are the Enrolled?



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CNBC health-care reporter Dan Mangan checks out one of the unanswered questions about the Affordable Care Act’s insurance plans so far: How sick are the people who are buying them?

This is a more complicated and important question than examining how many young or old people are buying plans on the exchanges. And it’s a question that the ACA has actually made it woefully difficult to answer, while making it a much more costly issue for insurers. So insurance companies are doing their best to find out:

Insurers are deploying strategies to figure out just who is enrolled. They range from introductory phone calls, mailings, prompts on social media, and even to cash incentives to get customers to disclose details of their health, or to go to the doctor to get checked out. . . .

“The insurance executives understand this is a brand new group of customers they know very little about,” said Ceci Connolly, managing director of the Health Research Institute at PricewaterhouseCoopers. “So they have been devising a number of ways to proactively reach these customers and learn about these customers’ health status.” . . .

“In the first step we are calling new members and inviting them to ask questions about their health plans, and we are also asking a few basic health questions,” [Independence Blue Cross of Pennsylvania spokesman Judimarie] Thomas said. “Over the next few months we will continue to contact new members through mail and email with information on our wellness programs, our online tools and resources, on how to use the medical benefits and prescription coverage, and other important programs or benefits.”

“Where appropriate, we will refer new members to our medical management programs or encourage them to see their primary care doctor,” Thomas said.

There are three reasons they want to do this: One, to get certain types of preventive care in motion for people with particularly acute health problems that may have been ignored, to prevent higher costs down the road. Two, to get a sense of what their claims costs will be this year, a useful financial matter — they’ve already had two-and-a-half months’ worth of enrollment, but people are still enrolling. In fact, some of the sickest customers, though a relatively small number, may not have enrolled yet at all, thanks to the Obama administration’s extension of the federal high-risk pool system through April (more on the issue that presents here). 

But most important, and most interesting, is that the health of the actual enrollees — and therefore what they cost insurers — is what’s going to determine whether predictions about the enrollees were accurate, which determines whether insurers lose a bunch of money on the exchanges this year, and whether they have to raise premiums a lot next year.

Insurers don’t know this at all — before the ACA, in all but a few highly regulated states, insurers asked customers a detailed set of questions on insurance applications about their health, which could help them predict how much the applicants would cost. Now, insurers can’t.

The general public and the media have focused on the mix of young and old enrollees in the Obamacare exchanges. Old people cost a lot more to insure than young people, so this isn’t a bad rule of thumb. The makeup of the exchanges nationally has turned out to be much less favorable in that respect: HHS predicted that about 40 percent of enrollees would be young adults, when more like 25 percent have been so far. (This breakdown could be even worse in certain states, each of which is its own risk pool.)

And the disappointing youth enrollment, if HHS had similar projections to what the Congressional Budget Office had, has real fiscal consequences: Older Americans are more prosperous, but because their premiums are much higher and premiums are capped as a share of income, more older enrollees should mean, ceteris paribus, more money is spent on Obamacare subsidies.

But that isn’t necessarily the biggest issue, because the ACA does allow insurers to charge different premiums based on age, and insurers at least know how old you are. It doesn’t allow any discrimination based on health status, and its requirement that all plans provide comprehensive benefits and offer coverage to any applicant will push sicker customers to enroll and healthier customers to stay away.

The degree to which insurers can charge different premiums for age is limited: The ACA prohibits, through something called an age-rating band, insurers from charging older customers more than three times more than what they charge young customers. But there’s also a limit to which insurers want to discriminate against the old: In a totally free market, insurers say they’d charge about a six-to-one ratio. Interestingly, with our federal health-care regulations as-is, if you allowed insurers to charge what they want based on age, it wouldn’t make a huge difference. Indeed, the Kaiser Foundation has projected that disappointing youth enrollment could cost insurers substantially, but won’t force up premiums dramatically. The age-rating bands and the issues they introduce are not nearly as disruptive to the market as the fact that the much higher cost of plans on the individual market — whether they’re better and available to more people or not — will entice more sick people than it does healthy people. 

Age isn’t a bad proxy for that and plays into it, but it’s not nearly good enough. That’s why insurers want to know how sick their enrollees are — they need to know how much health care enrollees will consume. This is, of course, an issue every year, as regulations reduce the ability insurers have to determine these things before selling plans, and risk-sharing mechanisms with other insurers reduce their incentive to do so. But the massive disruption the ACA has wrought on the individual insurance market made it nearly impossible this year: Insurers, and HHS, did their best to project what would happen, but we don’t know if the people signing up are even more costly than the youth-enrollment numbers indicate. Certainly, the fact that fewer people are enrolling than expected is a bad sign: The marginal customer should be healthier than the one before him.

Besides the fiscal, economic, and political consequences for insurers and the law this year, this matters for the way it functions down the road: Insurers badly need to know what enrollees look like and how much they’ll cost in order to set premiums for next year. That process has to begin in earnest just two months from now, which is partly why some of the Obama administration’s more marginal tweaks to the law represent a real problem. The same problem applies, in the longer term, to the lawless “keep your plan” fixes that the Obama administration has offered for political reasons – now through 2016, insurers still won’t know who’s going to be forced and subsidized into their plans by the law.

(As an aside, a regulation called risk adjustment provides that individual insurers don’t take huge losses because they enroll a particularly sick pool. But it means that all insurers need to set rates that they think are commensurate with expected health costs of the insured — and they don’t know what those costs are.)

Is the Individual Mandate Dead? No. (But It’s Been Ailing for a While)



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As the deadline for purchasing health insurance on the Obamacare exchanges approaches, there’s plenty of talk about who’s been exempt from the requirement to have insurance. A lot of people on the right are arguing that recent decisions about the mandate mean it’s basically dead: Charles Krauthammer said Wednesday that exemptions to the mandate, previously “narrowly defined,” have “now been redefined so that all you have to do is claim that going into the exchange would create a hardship,” “without any documentation.” The Wall Street Journal wrote that “amid the post-rollout political backlash, last week the agency created a new category” of exemption, though it’s not clear what that’s supposed to be, whether it’s an exemption for those who saw their plans canceled or those with “another hardship” in obtaining health insurance.

Neither of these categories is new: They were both on the original list of 14 hardship exemptions to the mandate, released in late December 2013. Two things were announced last week: — as is well known, people can now renew until 2016 plans that aren’t compliant with the ACA and would have been canceled, as long as state insurance commissioners permit it. But less publicized is the fact that people whose plans were canceled now don’t have to pay a penalty in 2014, 2015, or 2016, which will be somewhat disruptive (I explained the problems this can create back in December when it was announced they were exempt for 2014). Those issues will pertain to a lesser extent in 2015 and 2016, but for now that’s a long way away. Both of these pieces of news are weakenings of the mandate, but not for 2014.

There’s no new magically broad exemption that’s shredding the mandate to help out people who become ininsured in the future and the currently uninsured. Now, there is an ambiguous “another hardship” that apparently wasn’t listed in one HealthCare.gov list of the possible hardships for the past few months. CMS just added it this week — which is absolutely a sinister move, but not one that is going to prevent people from streaming out of the law. Why?

The broad-sounding exemption applies to people who claim the following:

14. You experienced another hardship in obtaining health insurance.

Where people receiving other exemptions (such as bankruptcy in the last six months, which requires bankruptcy papers) are told what documentation they have to provide, there’s just a request:

Please submit documentation if possible

Sounds . . . easy, but a lot of people also seem to be under the impression that no further explanation is necessary, which isn’t true. On the exemption application, it says the following:

Unless you’re applying for hardship #12 (Medicaid ineligibility) or #13 (cancellation), please explain how this hardship kept you from getting health coverage for the time period for which you’re requesting an exemption.

So even if this isn’t a new feature, as some are implying, is it broad enough to essentially invalidate the mandate? That’s up to HHS.

“Simply filling out the form does not guarantee an exemption,” a CMS official informed NRO, and the requests will supposedly be reviewed manually. When a person fills out an exemption application, sends it in, and gets approved, he’ll have an exemption number to provide to the IRS when filing their taxes that they shouldn’t be liable for the mandate penalty.

For now, the vague criteria they’re laying out suggests you can’t just offer any old reason: A CMS official says that Exemption #14 allows the regulators “to make sure to account for unique circumstances which may cause individuals to have hardship that are not anticipated in the other categories,” so the explanation would presumably have to rise to the level of the other categories — bankruptcy, homelessness, a pending appeal with CMS, etc. CMS can either grant it or reject it, or ask for documentation and further explanation. “The premiums are really high” or “I’m a regular SoulCycler so I don’t need Obamacare and certainly can’t afford it now” wouldn’t qualify, by those lights. There’s no standard people literally have to meet, but one example granted in Massachusetts that’s not on the ACA form was having a house foreclosed. Whatever explanation they do offer will presumably be under penalty of perjury.

Some conservatives have suggested that the fact that many of the uninsured spurning the exchanges are doing so because premiums are unaffordable means they can get a #14 exemption. Current policy suggests they won’t, since the law has already set a standard for “affordability” (as long as premiums are under 8 percent of income).

This is not to say the mandate will survive: Yuval suggested back in December, when the one-year exemption for those with canceled policies was announced, that the logic of it easily lead to even broader exemptions. He pointed out, quite rightly, that “they are now declaring the direct consequences of Obamacare itself [cancelations of non-comprehensive plans] to be a hardship.” That leaves a wide door for future exemptions (the law lays out a couple and then lets “the secretary” define further “hardship” exemptions, which is what populate the form), but HHS hasn’t opened it yet. Certainly, given the political quandaries created by the fixes so far, HHS may have to do so.

But the genesis of the idea that the mandate is already scrapped is similar to the myth that the IRS lacks much power to enforce it. Sure, it can’t put a tax lien on your house or take you to court over it, so you can refuse to pay it on your taxes. But any year you get a refund, the IRS can charge you the mandate penalty then by reducing your refund, retroactive a few years.

It’s quite possible to see how the mandate will eventually collapse entirely, but for now conservatives needn’t get ahead of the facts, and it’s worth noting just that, even without any more shenanigans, it isn’t that strong:

Already exempted are all of the people who had their plans canceled last year (though most all of them did end up buying insurance), anyone for whom premiums exceed 8 percent of income or whose income would make them eligible under Medicaid expansion but can’t get Medicaid because their state didn’t expand it, etc.

It’s only 95 dollars or 1 percent of income this year, whichever’s more — for many Americans, the latter is a lot more, but 1 percent of income isn’t a huge amount for anyone. Even when the penalty rises in future years, hitting 2.5 percent of income or $295, it’s still going to be a lot less than ACA premiums for most Americans — which makes it weak.

It’s only effective if people are aware of it, and there are indications most people don’t know they’ll be subject to a penalty if they go uninsured and don’t or can’t claim a hardship. Some navigators may be trying to inform them of it, but their politicians certainly aren’t. You’re hearing much more about how the plans are affordable than you do about how they look even more “affordable” when you consider you’d have to pay a not-insubstantial penalty if you don’t buy one. The political reasons for that are clear, but if people hear about the law mostly from their politicians, especially President Obama, it’s a policy problem. Even before politics leads him to weaken the mandate again.

Asian Americans and California’s New Battle Over Racial Preferences



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Something very unusual is happening in California. As Katy Murphy and Jessica Calefati report in the San Jose Mercury News, a new legislative effort to revisit California’s ban on the use of racial preferences in admissions to selective public universities (a ban that has been undermined in recent years, as Richard Sander and Stuart Taylor Jr. recount in Mismatch) has met with new resistance from an unexpected quarter. The partisan composition of the California State Legislature is notably lopsided. The California Senate has 28 Democratic members, 11 Republicans, and 1 vacancy. The California State Assembly has 55 Democrats and 25 Republicans. And so the most interesting and consequential debates in the state are not those between Democrats and Republicans, but rather those that divide Democrats. In January, the state Senate passed legislation that would allow for a new statewide referendum on racial preferences, which was backed by all Democratic members. Yet now, as the bill is about to make its way to the Assembly, three Democratic state senators seem to have had a change of heart:

Over the last several weeks, the three senators who have had second thoughts about the referendum — Leland Yee, D-San Francisco; Ted Lieu, D-Torrance; and Carol Liu, D- La Cañada/Flintridge — said they have received thousands of calls and emails from fearful constituents who believe that any move to favor other ethnic groups could hurt Asian-Americans, who attend many of the state’s best schools in large numbers. A Change.org petition to kill the referendum now has more than 100,000 signatures, and email listservs for Chinese-American parents have been flooded with angry posts.

Three days ago, the senators sent a formal letter to Assembly Speaker John Perez urging him to stop the bill from advancing any further. “As lifelong advocates for the Asian American and other communities, we would never support a policy that we believed would negatively impact our children,” the letter states.

Left-liberals in the state claim that opponents of preferences are misleading the public by claiming that the restoration of preferences will mean formal quotas, and that Asian American students won’t gain admission to elite public universities; but of course this is a misleading way to frame the issue. It seems entirely plausible that preferences for underrepresented minorities will have a material impact on the representation of overrepresented minorities at selective campuses, and that as a result, marginal students from overrepresented minorities will either attend less-selective public universities in-state, or they will leave the state to pursue higher education options that might prove more expensive. Henry Der, a leading left-liberal Asian American activist, and former head of Chinese for Affirmative Action, affirms the importance of rainbow coalition politics:

Der said any debate that pits ethnic minorities against one another serves no one.

“These Chinese families are not looking at the larger picture. We are not making the investments we need in higher education,” he said. “We need to expand opportunities for all students.”

Politically-engaged Asian Americans in California, and increasingly, nationwide, tend to gravitate to the political left. Across the U.S., 73 percent of Asian Americans, a group that represented 3 percent of the electorate voted for Barack Obama in 2012. In California, Asian Americans represented 11 percent of the electorate that year, and they voted for Obama by an even more overwhelming 79 percent. Yet there is at least some reason to believe that Asian American voters tend to be moderate or centrist Democrats rather than liberal Democrats, as reflected in Asian American support for Hillary Clinton over Obama during the 2008 primary.

To understand California’s political future, and the ongoing debate over preferences, it is important to keep in mind that non-Hispanic whites now represent 39.4 percent of the population while Latinos represent 38.2 percent. Asian Americans and African Americans, for comparison, are 13.9 percent and 6.6 percent of California’s population respectively. The composition of the electorate in 2012 was notably different: non-Hispanic whites represented 55 percent of the electorate while Latino voters represented 22 percent.

For much of modern U.S. history, racial polarization between a relatively privileged non-Hispanic white majority and a black minority disproportionately burdened by multigenerational poverty has shaped political discourse. In California, however, there are twice as many Asian Americans as there are African Americans, and while there remains a black population that lives in concentrated poverty, there is also an affluent segment of the population that is integrated into the state’s governing institutions. Moreover, black political influence is disproportionately large, as African Americans represent a higher share of the electorate (8 percent) than of the population (6.6 percent). The Latino population, meanwhile, has grown considerably, due more to natural increase than migration in recent years, and this population is both relatively poor and relatively politically disengaged, as unauthorized immigrants, lawful permanent residents who have chosen not to become naturalized citizens, and children under 18 are overrepresented. A debate over racial preferences doesn’t simply pit non-Hispanic whites against a historically disenfranchised black population.

One interesting development is that California’s Asian American activist class is facing the fact that their Asian American constituents are not nearly as liberal, or as invested in rainbow coalition politics, as they might have hoped. The Asian Americans who have gained political prominence in the state, like Jean Quan, the Chinese American mayor of Oakland, and the state’s attorney general, Kamala Devi Harris, who is of mixed South Asian and African American parentage, have tended to be on the leftmost edge of the state’s Democratic party. (San Francisco’s Mayor Ed Lee is a somewhat ambiguous case.) It seems faintly possible that California’s new ethnocultural landscape might lead at least some Asian Americans to shift to the political right. For this to happen, California Republicans would need to do quite a lot to change entrenched perceptions of the party as the party not only of non-Hispanic whites, but of non-Hispanic whites living in the state’s interior, its rural hinterlands, and in southern Orange County. I’ll have more to say about this in the near future. For now, I’ll observe that California would be an excellent testing ground for a conservative human capital agenda aimed at middle-income and not just low-income households.

Shadow Banking Subtext



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This week, President Obama came to New York City to attend a series of fundraisers, one of which, for the Democratic Senatorial Campaign Committee, was held in the home of Tony James, the president and chief operating officer of the Blackstone Group, a private-equity firm with $248 billion under management as of last fall. James, a Democrat who has been named as a possible future Treasury Secretary, is a prominent political fundraiser and a supporter of a wide array of left-of-center causes and institutions, including the Center for American Progress.

And earlier this month, James wrote an op-ed for the Wall Street Journal on market-based financing, or “the provision of capital by loans or investments to some companies by other companies that are not banks,” a poorly understood but important part of the U.S. financial system that is better known as “shadow banking.” James observes that market-based finance is significantly larger than the banking system by a significant margin, and that it fills a number of needs that the traditional bank financing has failed to meet, e.g., financing small and medium-sized firms and rescuing firms from bankruptcy:

Large banks concentrate risk in relatively few hands, which can pose a risk to the economic system. That is not the case for market-based financing. Risks are safely dispersed across many sophisticated investors who can readily absorb any potential losses. Unlike traditional banks, market-based funds do not borrow from the Federal Reserve, nor do they rely on government-guaranteed deposits. Substantially all their capital comes from well-advised institutional investors who know what they are getting into, and understand the associated risks. Bank depositors (and taxpayers) on the other hand, do not typically know what a bank’s investments are or how risky they may be.

Typically, market-based funds also lack the elements that are sources of systemic instability, including high leverage and interdependence. Each investment within a fund is independent and not cross-collateralized or supporting a common debt structure. Losses in any one fund are without recourse to any other fund or to the manager of the capital.

In addition, investors in many market-based funds, including credit investment funds, hedge funds and private-equity funds often cannot instantly withdraw their capital, unlike depositors in banks. Large, sudden withdrawals can lead to runs on the bank or force “fire sales” of assets. With stable, in-place capital, these funds can provide a critical source of liquidity to trading markets in times of turmoil.

So why bother making the case for market-based financing? Most of the claims James advances are uncontroversial. But the subtext of James’s op-ed seems to be that he wants to head off heavy-handed regulation of the sector:

Some regulation may be appropriate for nonbank entities that present bank-like risks to financial stability or that lend to consumers. But let’s not forget that it was the regulated entities that were the source of almost all the systemic risk in the financial crisis.

Regulations are far from a panacea and would need to be carefully constructed to ensure that the enormous economic benefits of market-based financing are not lost through inappropriate and stifling regulatory policies established for large, deposit-taking banks.

Specifically, a September 2013 report from the Office of Financial Research on “Asset Management and Financial Stability” warned that the activities undertaken by asset management firms could pose a threat to financial stability. The report been criticized by many within the asset management industry. Critics see it as part of an effort on the part of the Financial Stability Oversight Council (FSOC) to exert regulatory authority over the asset management industry on flimsy grounds, including an unrealistic assessment of the supposed similarities between banking finance and market-based finance (despite the fact that investors in the latter sector tend to be more sophisticated about the risks they face as investors).

Yet concerns about the threat the growth of market-based financing might pose to financial stability are pervasive on the political left. In “An Unfinished Mission: Making Wall Street Work for Us,” a report issued by the the Roosevelt Institute, a left-of-center think tank, and Americans for Financial Reform, Marcus Stanley makes the case for extensive regulation of the sector:

The financial fragility created by shadow banking can be contrasted to the situation of commercial banking. Commercial banking can be highly unstable due to depositor runs if there is no government insurance for deposits. When there is such insurance, commercial banking stability is still vulnerable to weak regulatory oversight, since access to government deposit insurance creates incentives for banks to take excessive risks. But the assumption that banks will hold credit to maturity (or at least for a long period) rather than trading it means that accounting valuations are generally based on historical cost, not current market prices. This can be problematic if regulators refuse to force banks to recognize losses on assets that are genuinely and permanently impaired. However, it also means that losses can be managed over a much longer time period, allowing much more time for planning and resolution than if bank stability was immediately threatened by volatility in market prices. Furthermore, in a commercial or a relationship banking system, the full nature of bank liabilities and assets should be much more visible to a supervisor, as there are fewer off balance sheet risk transfers and less dependence on long credit intermediation chains.

At the same time, Stanley touts the benefits of relationship banking:

While relationship banking certainly presents issues of its own, it creates significant benefits that are not present in the market-mediated and transactional relationships that characterize shadow banking. In addition, greater diversity of financial intermediation models could reduce systemic risk. This essay has already touched on some of the transparency and financial fragility issues related to the distinction between commercial banking and market-mediated credit. There is also clear evidence that relationship banking is beneficial to mid-market and smaller real economy businesses. There are a range of ways to expand the role of relationship banking, from the full restoration of an updated version of the Glass-Steagall Act as proposed in “The 21st Century Glass-Steagall Act” introduced by Sen. Elizabeth Warren (D-Mass.) and Sen. John McCain (R-Ariz.), to steps that regulators can easily take without statutory change, such as favoring originate-and-hold lending over originate-and-distribute in prudential rules.

I don’t have the sophistication to weigh the various issues at stake. It is noteworthy, however, that one of the president’s most reliable political allies in the financial sector seems to be trying to preempt a more aggressive regulatory effort. It could be that James and others like him recognize that by backing the president now, when his approval rating is quite low and the Democratic majority in the U.S. Senate is vulnerable, they might tilt the Obama administration against embracing Elizabeth Warren’s calls for a new round of financial regulation. My guess is that James, who is by all accounts a sincere liberal, is not being quite so strategic. (And my ideological bias is that James is probably right on the merits, Stanley’s serious and interesting arguments notwithstanding.) But if I were a Warren–de Blasio class warrior, I might feel differently.

The College Blackout and the Fleecing of U.S. Taxpayers



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The federal government spends a substantial amount on higher education student aid. As of fiscal year 2013, the federal government provided $35.9 billion in grant aid, which doesn’t need to paid back to taxpayers, virtually all of which flows to students from low-income families. The Pell Grant program is the largest and best known of the federal grant aid programs, though there are a number of other grant aid programs as well. Though grant aid programs aren’t perfect, they do have a very attractive feature: because only low-income households are eligible for Pell Grants, these grants shift out the demand curve only for eligible students rather than for all students. Programs that benefit all students, including students from middle- and high-income households, shift out the demand curve for all students. 

Rather remarkably, the federal government spends almost as much to subsidize higher education expenditures by middle- and high-income households through the tax code ($32.6 billion). And then there are subsidized federal student loans, which cost $106.4 billion. Unlike grant aid or tax subsidies, there is an expectation that student loans will at some point be paid back, though of course that doesn’t always happen; moreover, a substantial amount of student loan debt is borne by students who’ve never completed a degree.

By shifting the demand curve, tax subsidies for tuition expenditures actually encourage colleges and universities to charge higher tuition, as Andrew Gillen argues in his paper on what he calls the Bennett Hypothesis 2.0:

For policy makers, the key point is that financial aid that is restricted to low income students is much less likely to be captured by colleges, and will therefore be more likely to succeed in making college more affordable and therefore accessible (for low income students). In contrast, universally available programs are more likely to simply fuel tuition increases and therefore more likely to fail to make college more affordable.

So we know that we spent a lot of money to help students finance higher education. Why do we spend the money? One straightforward reason is that higher education represents an investment in human capital that not only raises lifetime wages (something you’d expect students to be willing to pay for) but that generates spillover benefits captured by the wider community. Having a higher concentration of well-educated people will benefit the U.S. economy in various ways, and if we can help finance higher education for people who wouldn’t be able to finance it otherwise, we can raise labor quality and (perhaps) facilitate the kind of innovation that contributes to productivity growth. 

But if this is our mental model, it seems fairly clear that we don’t want to subsidize higher education in a way that merely results in tuition increases, so we’d want to rethink education tax credits and subsidized federal loans that flow to people who are already in a good position to finance their higher education. Instead, we ought to focus higher education subsidies on people who genuinely would not be able to afford a high-quality college education in the absence of subsidies. Figuring out who belongs in this bucket is easier said than done, but it’s a good starting point. 

There is another piece to the puzzle, however. If we believe that there is a case for using taxpayer subsidies to help young people afford a high-quality college education, we presumably want to know that the young people in question are actually getting a meaningful education — that they are completing degrees at a bare minimum, but also that they have decent labor market outcomes to show for the time and effort and money they’ve put in, and the money that taxpayers have put in as well. 

And it turns out that Congress has made it illegal for the federal government to provide students, parents, and policymakers with meaningful, reliable data on, for example, the number of Pell Grant beneficiaries who graduate within six years from a given school, or how many of them are employed within a year (or two or five) of completing a degree. That is, Congress allows higher education institutions to receive vast amounts of taxpayer money, yet Congress has chosen to shield higher education institutions from accountability. If your guess is that self-dealing higher education institutions used their political influence to stymie serious accountability efforts, you win the door prize. Amy Laitinen and Claire McCann tell the whole sordid story in their new paper, “College Blackout: How the Higher Education Lobby Fought to Keep Students in the Dark.” 

The basic story laid out by Laitinen and McCann is simple: the federal government requires that colleges and universities collect and report data on a wide range of outcomes, yet Congress forbids the government from linking this data and presenting it in an accessible way. Interestingly, state governments are not prevented from doing so, but the higher education market is a national one, and so state-level systems are intrinsically limited in their ability to provide useful information. Moreover, state-level systems tend to be less sophisticated, and so they pose greater privacy risks, particularly when policymakers attempt to knit together different state-level systems. Laitinen and McCann sketch how a federal student unit record system would work:

A federal student unit record system would make use of many existing data points to paint a more accurate picture of how well institutions are serving students. Under such a system, colleges would upload a standardized version of the student-level records they already maintain on enrollment, financial aid, and more to the Department of Education. The Department would compile the data, as many states already do for their public institutions, aligning students who moved in and out of multiple institutions, and connecting the data to other existing information. For example, educational data could be connected to earnings data from the Social Security Administration and de-identified to provide files to the Department of Education, aggregated by program or institution, that exclude students’ names, Social Security numbers, and other identifying information. Information on colleges and programs would then be reported publicly—in the aggregate, so information on particular students’ performances would not be made public.

A student unit record system would account for many more types of students in the federal government’s student outcomes metrics. It would significantly reduce the burden of paperwork placed on institutions by allowing them to upload the individual-level data they already collect, rather than requiring them to fill out numerous and constantly-changing surveys. It would permit institutions and policymakers to examine the results of their budgeting and policy and design better reform strategies. Most importantly, it would enable students, families, colleges and universities, and policymakers to ask and answer fundamental questions about college value.

The beauty of such a system is that by offering students and parents reliable data on educational and labor market outcomes, it would have a powerful impact on higher education institutions. The U.S. News & World Report guide to colleges is notoriously limited in its ability to offer useful information, e.g., it doesn’t offer any information on labor market outcomes. Yet the metrics that U.S. News does use have influenced higher education administrators to, among other things, invest in attracting more applicants so that they can become more selective. If students knew which colleges have the highest four-year completions rates and the highest employment rates for graduates, they’d have a valuable tool for choosing which school to attend — and they’d pressure lagging schools to embrace the best practices of schools that are achieving the most impressive outcomes.

In systematic fashion, Laitinen and McCann address the most common objections to a student unit record system. First, the patchwork of student record systems we have now actually poses more serious privacy problems than a federal system, as the federal government has long collected student data and it has safeguards and stiff penalties in place for privacy breaches. Students who file the Free Application for Federal Student Aid (FAFSA) already agree to disclose private information to determine eligibility for grants and loans, and it seems reasonable to expect that most students and parents would accept some sacrifice of privacy in exchange for gaining access to crucial consumer information.

A number of lawmakers, including Senators Ron Wyden (D-OR) and Marco Rubio (R-FL), have called for overturning the ban on a federal student unit record system, recognizing its central importance to protecting the interests of students preparing to make a substantial investment of time and effort in their futures, and also the interests of taxpayers who are funneling vast sums into higher education. The only higher education institutions that have reason to fear transparency are those that have been wasting taxpayer dollars, and more importantly those that have been wasting the potential of students by enrolling large numbers of ill-prepared students, loading them up with debt, or collecting the grant aid meant to better their lives, and failing to educate them for a changing labor market. And I’m pretty sure I’m not the only one who believes that failing higher education institutions need to shape up or go out of business.

The College Board Is Going after the Wrong Villain



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A thought experiment: Johnny is a poor kid in a Rust Belt neighborhood outside of Pittsburgh. Suzy is a student at a tony private high school in the suburbs of New York City.

Johnny and Suzy were born with the same natural intelligence, but when they take the SAT during their junior year of high school, their results don’t reflect that fact. Johnny scores a respectable 1600; Suzy scores an excellent 1800 — better than 80 percent of other test takers. For Johnny, something has gone wrong, but what? Pay close attention to the way people answer this question and you’ll realize why it’s almost impossible to have the conversation about economic opportunity that we actually need.

Last week, the College Board — the organization that administers the SAT — announced an overhaul of the important college admissions exam. While many of the changes are sensible, their announcement heralded a wave of handwringing about the inequities built into the test. To these critics, Johnny’s relatively poor performance had nothing to do with effort, or knowledge, or even upbringing. Johnny failed because he didn’t have access to expensive test preparation from the likes of Kaplan. Basically, Suzy’s parents bought her score.

At the popular blog Marginal Revolution, Alex Tabarrok effectively demolishes this argument. Research indicates that even the best tutors barely improve student performance — by about 15 points of 800 on the Math section of the SAT, for example. Now, this doesn’t mean that if you pluck two kids at random, one who’s had test coaching and one who hasn’t, their scores will only differ by a few points. In fact, their scores will likely differ a great deal. The point is that the test coaching caused very little of the difference. In the words of education expert Derek Briggs:

Coached students are more likely to be Asian and in the top socioeconomic quartile than their uncoached counterparts. Coached students spend more hours studying outside of school, are more concerned about the reputations of the colleges to which they plan to apply, are more likely to have a private tutor helping them with their schoolwork, and are more likely to be encouraged by their parents to prepare for the SAT or ACT.

Briggs’s research shows that test coaching is little more than a lagging indicator of other things — like parental involvement, prior academic achievement, and student ambition — that produce more gifted kids. It’s easy to focus on test prep, but it’s a very small part of the equation. The more useful question is why low income children lack so much else.

It’s also a more difficult question. We know, for instance, that since the 1970s, the time that college-educated parents spend with their children has skyrocketed relative to that spent by other parents. Unsurprisingly, by the time poor children start school, their vocabulary is thousands of words smaller than that of wealthier kids. But this doesn’t seem to be because the uneducated parents lack the time, as the poor (who are largely uneducated) work significantly fewer hours per year. So you have to look elsewhere for a cause: Maybe the uneducated don’t know about the advantages of reading to their youth. Maybe they’re unsure how to encourage academic pursuits. Or maybe some lack the community pressure so necessary for group success. Low amounts of what economists call social capital in many of these communities suggest that all of these things are true. (Of course, such kids mostly interact with low-vocabulary adults and peers, too.)

This hasn’t stopped the emphasis on test preparation. The U.S. News reported that many of the initiatives instituted by the College Board aim to level a playing field allegedly made unlevel by expensive tutoring services. As the College Board president, David Coleman, said, “Too many feel that the prevalence of test prep and expensive coaching reinforces privilege rather than merit.”

This isn’t so bad per se — test prep may be a false villain, but it’s not especially harmful either. The real problem is what the obsession with test prep reveals about our own biases. Test prep has become another convenient scapegoat in the American debate about upward mobility. Broken communities, from churches to schools? Uninvolved parents? Inadequate information? Poor nutrition? The College Board isn’t talking about these problems, and virtually every news outlet that covered the SAT changes followed suit. Better to focus on test prep during a kid’s 17th year than everything that happened during the first 16.

I’m sure America’s poor children teem with gratitude. After all, if all goes according to plan, they’ll score 15 points higher on their next SAT.

The White House’s Standard for Social Programs: Hints of Success Are Good Enough



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During last week’s unveiling of the president’s budget proposal, the administration touted continued spending on a program called Early Head Start, which offers health and educational services to children ages 0–3 and their parents. As with the traditional Head Start program for preschoolers, Early Head Start has been evaluated using rigorous experimental techniques. And, as with Head Start, Early Head Start shows some initial positive effects that quickly fade to nothing.

So why does the White House not only want to continue funding Early Head Start, but to boast about it as well? One answer is politics, which inevitably affect the way policy is made. But it would be wrong to say that the administration entirely ignores program evaluations. Consider yet another early childhood program, Even Start, which provided funding for parenting classes, literacy programs, and other work for children aged 0–3.

In 2003, a randomized experiment failed to show any first-year gains from Even Start. Program effects could not fade out because there were no effects to begin with! To its credit, the Obama administration called for canceling Even Start, and Congress eventually agreed.

The administration’s position appears to be that ineffective social programs deserve continued federal support as long as they show tantalizing hints of maybe one day working in some other way, shape, or form. Temporary gains could be viewed as one such hint. Positive impacts on certain subgroups — even when the effect on the overall sample is zero — could be another. Even Start showed no hints at all, so it got the axe.


Perhaps Ethan, 4, a Head Start student in Santa Barbara, Calif.,  could help the White House with their program assessments.

Meanwhile, Head Start and Early Head Start continue to receive support, albeit with constant modifications. Although reporters never asked the White House to address the Head Start evaluation that failed to find significant effects, the administration did begin encouraging “high standards” at Head Start centers. The hope — not backed by evidence — is that Head Start’s temporary impacts might become permanent if administrators do things like increase instruction time and hire more college graduates (at a higher cost, of course).

Needless to say, guesses and hope are not enough. If the federal government must be involved in early childhood programs, then they ought to do what David Armor and Sonia Sousa’s suggested in the most recent issue of National Affairs: Take a portion of the money currently spent on pre-K and use it to fund a series of large-scale randomized experiments that will give us more hard evidence as to which programs, if any, are cost-effective for taxpayers.

And here’s one addendum to that suggestion: Do not let HHS oversee any of the experiments. The department politicized the Head Start Impact Study to the point of loosening the standard for statistical significance and insisting on myriad hypothesis tests. HHS then took years to publish the study’s inconvenient truths, before finally burying the release on the Friday before Christmas. Let the more reputable Institute of Education Sciences administer the evaluations.

The Dangers of Spectrum Crunch



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Among other things, Florida Sen. Marco Rubio’s recent address on pro-growth policy measures included a reference to the federal government’s profligate approach to spectrum management, a subject that the management theorist Larry Downes addressed in January. Even as mobile network operators invest in improving the quality of wireless service, new smartphones and tablets, and new consumer applications, keep pushing us towards a “spectrum crunch“:

Former FCC commissioner Robert McDowell underscored that concern, noting that 80 percent of the most useful spectrum is currently in the hands of the federal government users, including the Department of Defense. Their reluctance to part with it, he said, would continue to push product and network designers to achieve better spectral efficiency to preserve network performance.

According to the 2010 NBP, mobile users will require an additional 300MHz of spectrum by 2015, and 500MHz by 2020. Additional data traffic of the Internet of Things, which could someday dwarf current applications, was mentioned only in passing.

But even as current uses have skyrocketed since the publication of the plan, almost no new spectrum has been made available for mobile networks.

If Rubio’s proposal succeeds in relieving spectrum crunch, it will do much to encourage the continued growth of the app economy.

Florida Sen. Marco Rubio’s Regulatory Reform Initiative



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In an address sponsored by the Jack Kemp Foundation, Florida Sen. Marco Rubio outlined a series of new policy initiatives. Michael Memoli of the Los Angeles Times offers an overview

The first track Rubio outlined to drive economic growth was to ensure America remains at the forefront of innovation from the evolution of digital technologies. Access to the Internet was “central to human freedom,” Rubio said, adding that it should be a “national priority” to resist efforts to restrict it. He also called for expanding access to wireless Internet and boosting cooperation between federal research centers and the private sector.

He also called for expanding access to American goods through use of trade promotional authority and boosting energy production. Rubio also said he was working to develop a tax reform plan that would create added incentive for business to invest profits rather than “sitting on uninvested cash.” And he called for the establishment of an independent national board that would enforce a new limit on the economic cost of federal regulations, with the goal of limiting those he said are overly burdensome.

One of Rubio’s proposals, his call for a National Regulatory Budget, stands out as particularly interesting. Avik Roy praises the idea and offers thoughts on how it might be implemented. He also observes that Mitt Romney proposed a “regulatory cap” during his 2012 presidential campaign. Specifically, Romney proposed that agencies would have recognize the costs imposed by their regulations and ”the rate at which agencies could impose new regulations would be capped at zero”; the cost of any new regulation would have to be offset by reforms that would lower the costs associated with the existing regulatory burden, either by streamlining existing regulations or eliminating them. Essentially, the Rubio proposal suggests that this regulatory cap be implemented via a new review board that would have supervisory authority over regulatory agencies. 

Last spring, Michael Mandel of the Progressive Policy Institute called for the establishment of a Regulatory Improvement Commission (RIC), the goal of which would be to address regulatory accumulation, in which new rules are layered on top of old rules, a process that results “in a maze of duplicative and outdated rules companies must comply with.” While new regulations face benefit-cost analysis, old regulations are left on the books despite the fact that their benefits and costs might have changed over time in response to new economic conditions, business models, and institutional practices. Moreover, this regulatory review process tends to focus on new rules in isolation, neglecting the fact that new rules will interact with old rules in ways that could prove problematic. 

Rather than review individual rules, Mandel suggests that a new commission tackle multiple regulations at once and present its final recommendation to Congress for an up-or-down vote, a process modeled after the Defense Base Closure and Realignment Commission (BRAC). Yet Mandel’s RIC wouldn’t require that regulatory costs reach a global target. In 2012, the Mercatus Center offered a proposal closer in spirit to Rubio’s National Regulatory Budget. Drawing on the experience of BRAC and the Dutch Administrative Burden Reduction Programme, Joshua C. Hall and Michael Williams propose a two-step process: in the first phase, Congress would create a new agency devoted to assessing the costs of existing rules in a coherent, standardized fashion; and in the second phase, an independent commission would make recommendations to Congress that would aim to reduce the cost of regulations by 25 percent. And Virginia Sen. Mark Warner, a centrist Democrat, favors an approach almost identical to Romney’s regulatory cap. Mandel writes:

One way to retrospectively review and remove regulations one at a time is through a pay-as-you- go approach. Under this option, agencies would have to eliminate one existing regulation for each new rule it approves. First, agencies would be required to catalog and assign a value for each of its existing regulations. Then for every new rule approved by the agency, one existing rule of equal economic cost deemed outdated or duplicative must be removed.

Championed by Senator Mark Warner, the PayGo approach is seen as a way to correct the missing incentive that agencies encounter under the self- review approach. Because one regulation must be eliminated for each new regulation, agencies would have the incentive to carefully consider the true cost-effectiveness of each new rule, and the incentive to carefully consider the current cost-effectiveness of existing rules. In this sense the PayGo approach to regulatory reform would encourage regulatory balance and discipline going forward.

As Mandel makes clear, the PayGo approach may well prove politically contentious, not least because assessments of regulatory burdens will inevitably be contested. But Regulatory PayGo has potential as a growth-enhancing reform, and as a way to unite pro-growth conservatives and moderates. 

Does the Crimea Crisis Have Anything to Do with President Obama?



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Does the Crimea crisis have anything to do with President Obama’s foreign policy? The president’s defenders find this idea absurd; some (correctly) observe that Russia intervened in Georgia during the Bush presidency, and conservatives weren’t quick to blame the Bush administration for Russia’s transborder aggression. The truth is that there’s no way to definitively answer this question. Much depends on whether or not you believe that states look to U.S. behavior in one set of international crises to to get a sense of how the U.S. will behave in some other instance.

One theory of the Obama administration’s approach to the wider world (and everything that follows is very much speculation on my part) is that it is profoundly shaped by the fact that Barack Obama vaulted to political prominence in no small part due to his early (and articulate) opposition to the Iraq War. In a 2002 address, Obama argued that to oppose the Iraq War was not to be “anti-war” as such, but rather to be opposed to “a dumb war … a rash war.” And in a crowded Democratic Senate primary in 2004, Obama drew on the infrastructure of the Howard Dean’s presidential campaign, which derived much of its strength from the former Vermont governor’s anti-war conviction, to win an unlikely victory. This has informed his reluctance to get too deeply involved in foreign entanglements, a reluctance that manifested itself in, for example, his reluctance to invest nearly as much time in building a relationship with Afghan President Hamid Karzai as his predecessor. The president thinks of himself as a realist in the vein of President George H.W. Bush, who is mindful of the importance of U.S. power in undergirding global stability, yet who is also cognizant of the importance of husbanding U.S. power. As a general rule, he is more invested in his domestic policy initiatives than he is in foreign policy, a bias reflected in his desire to trim military expenditures. He does, however, see value in setting a new tone for America’s role in the world: he prefers a collaborative spirit to one rooted in nationalist self-assertion, and he is a firm believer that U.S. allies ought to share in the burdens of global leadership. 

Having opposed the Iraq War, he was also eager to extricate the U.S. from its involvement in the new Iraqi state; and though he backed a “surge” in Afghanistan (less than enthusiastically), he was also keen to put a firm time limit on the presence of U.S. military forces. The president did support an armed intervention during the Libya crisis, but he did so in a kind of reverse-Suez scenario; because the British and the French had intervened, he felt compelled to follow their lead, hence “leading from behind.” It’s not at all obvious that the Obama administration would have intervened quite so forcefully in the absence of European pressure. The Syria crisis is another interesting case. Critics claim that the president’s failure to invest more resources in Syria during the earliest stages of its civil war meant that the U.S. didn’t have the intelligence assets it needed to make informed decisions as the conflict escalated. Though the president came out in favor of an armed intervention after (contested) allegations of the Assad regime’s use of chemical weapons against opposition forces, he seemed ambivalent about the idea, and he abandoned it relatively quickly. This ambivalence is in keeping with the notion that President Obama’s gut instinct is to avoid a “land war in Asia.” Similarly, the president is very taken with the idea of a rapprochement with Iran, and he has been willing to negotiate directly with the Iranian government without actively consulting U.S. allies in the Arabian Gulf —  a decision that has alienated the Gulf states in varying degrees. 

So what’s the problem here? And what does this have to do with the Crimea crisis? Consider the Obama years through the lens of a state that chafes under America’s benevolent global hegemony. When the Venezuelan government weighs whether or not to engage in violent repression, it considers the likelihood of a forceful U.S. response. The Iranian government is a complex animal that involves an elected component and an unelected deep state, and it a settlement that unfreezes Iranian assets and that effaces the interests of the Arabian Gulf states might give the deep state room to much-needed maneuver. This is despite the fact that the expansion of tight oil and gas development in the U.S. has put the Iranian government under intense fiscal strain, which is to say the U.S. government has more leverage rather than less vis a vis Iran. One might get the impression that the U.S. is eager to offer concessions without expecting much in return. The U.S. decision to disengage from Iraq has arguably empowered sectarian elements to persecute minority communities, and some claim that it has encouraged deeper cooperation between the new Iraqi state and Iran. Libya remains chaotic in the wake of the collapse of the Gaddafi regime, and one gets the impression that the Obama administration has been keen to limit its involvement in the wake of the Benghazi attacks. 

If you’re Vladimir Putin, what do you make of this landscape? Does it make you think that the Obama administration will make military adventurism costly for you? Or do you sense that the potential domestic political and long-term strategic benefits (see Leon Neyfakh’s Boston Globe report on Putin’s Eurasian Union) will outweigh the costs associated with U.S. opposition?

175,000 Jobs Added: America and the Fed Get a Breather



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The Bureau of Labor Statistics reported this morning that 175,000 jobs were added in February, and the unemployment rate remained unchanged, at 6.7 percent. The jobs number is a solid improvement – about 150,000 jobs were expected, and both December and January added around 100,000 jobs. The unemployment rate actually moved in the wrong direction, from 6.6 to 6.7 percent, but that is not necessarily a bad thing: It relieves the Federal Reserve, which had set a 6.5 percent target as its threshold for when it would plan to start increasing interest rates, and suggests that Americans are still looking for work rather than leaving the labor force.

In this sense, the broadest measure of unemployment reported by the BLS, the U-6 number, is actually an important one to look at, and it dropped, from 12.7 percent to 12.6. You hear a lot around CPAC that that’s the “true” measure of unemployment (Donald Trump told conservatives yesterday that’s still too low, that the real unemployment rate is 22 percent), which isn’t really the case. But it is important whether marginally attached workers are staying in the labor force or not, and today’s report is some indication they are.

There’s some evidence that the weak jobs growth of December and January was due to exceptionally bad weather (the jobs numbers are seasonally adjusted), though that probably can’t explain all of it. In that light, February’s numbers could be even better, because the weather certainly hasn’t let up (a point Danny Vinik also makes in his take on today’s report).

The unemployment rate rose because the number of Americans unemployed but in the labor force — they want a job and are looking for one, but don’t have one, in other words — rose. This is a healthy sign, in fact, as it suggests they’re more optimistic about the economy, and not giving up on labor-force participation altogether. One downside to that is that a tragic measure, the number of Americans out of work for more than 27 weeks, rose substantially in February, by more than 200,000 workers, but that isn’t as bad as members of that cohort, who number almost 4 million, leaving the labor force altogether.

UPDATE: Matthew Boesler of Business Insider argues that today’s report and other increasingly solid jobs data are pushing markets to believe the Fed might raise rates somewhat soon. And he’s right, which is good: Markets aren’t seriously concerned that the Fed will feel obligated to do anything when unemployment hits 6.5 percent, even though Ben Bernanke sort of said it would.

That’s a problem for the Fed and the way it articulates monetary policy, but markets are surviving anyway: They understand that the Fed is going to look at broader labor measures, and while the labor-market recovery has real problems, it’s firming up. When that happens, the Fed’s job is to tighten monetary policy.

Is a Minimum Wage Increase the Best Way to Boost Incomes?



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Ask conservatives about how they want to change the U.S. economy and you’ll hear references to reforming the tax code to improve work incentives, the need to curb regulations that stymie business model innovation, and (these days) making our woefully inefficient health and education sectors more productive by making them more competitive. These are all good and important ideas. Yet the inevitable next question is a tougher one to answer: how will these measures impact low- and middle-income families? And there’s an answer to this question. If tax and regulatory reform lead to an increase in work effort and an increase in productivity growth, we will have more growth and higher wages. The trouble is that the increase in work effort and productivity levels won’t be evenly distributed across sectors and firms, and some individuals within firms will capture more of the benefits of growth than others. Workers who are easily replaced by other workers or by machines won’t necessarily see much in the way of compensation gains, even if they work in sectors and firms experiencing big productivity gains; workers who are very hard to replace will generally see much bigger gains in compensation, and these gains will be magnified during an economic expansion. (This is why policymakers on left and right often tout the benefits of tight labor markets, which is to say labor markets in which all workers are hard to replace. As we’ve discussed, however, the U.S. appears to have developed a segmented labor market, part of which is tight and part of which is slack.)

So what can conservatives say to low- and middle-income voters who want to know how a conservative policies will translate into increases in disposable income? They can give the rather unsatisfying, if honest, answer that “it’s complicated.” Liberal Democrats, led by President Obama, have a much more straightforward answer. They want to give Americans a raise by raising the federal minimum wage to $10.10. A number of conservatives have also jumped on the bandwagon. It is worth noting that a minimum wage hike is less an anti-poverty policy than a policy that appears to benefit lower-middle-income households. The following is drawn from the Congressional Budget Office analysis of the president’s minimum wage increase proposal:

The increased earnings for low-wage workers resulting from the higher minimum wage would total $31 billion, by CBO’s estimate. However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold, CBO estimates.

The CBO estimates that the 2016 poverty threshold (in 2013 dollars) will be $18,700 for a family of three and $24,100 for a family of four, so families earning more than three times the poverty threshold would be earning $56,100 for a family of three or $72,300 for a family of four; families earning six times the poverty threshold would be earning $112,200 for a family of three and $144,600 for a family of four.

Moreover, the increased earnings for some workers would be accompanied by reductions in real (inflation-adjusted) income for the people who became jobless because of the minimum-wage increase, for business owners, and for consumers facing higher prices. CBO examined family income overall and for various income groups, reaching the following conclusions:

* Once the increases and decreases in income for all workers are taken into account, overall real income would rise by $2 billion.

* Real income would increase, on net, by $5 billion for families whose income will be below the poverty threshold under current law, boosting their average family income by about 3 percent and moving about 900,000 people, on net, above the poverty threshold (out of the roughly 45 million people who are projected to be below that threshold under current law).

* Families whose income would have been between one and three times the poverty threshold would receive, on net, $12 billion in additional real income. About $2 billion, on net, would go to families whose income would have been between three and six times the poverty threshold.

* Real income would decrease, on net, by $17 billion for families whose income would otherwise have been six times the poverty threshold or more, lowering their average family income by 0.4 percent.

Essentially, the proposed minimum wage increase redistributes income from affluent households (-$17B), who are well-represented in the ranks of business owners and consumers facing higher prices, to households earning between $18,700 ($24,100) and $56,100 ($72,300) (+12B), with another good-sized chunk flowing to households below the poverty-level (+$5B). We can understand the higher prices paid by all households as a kind of tax that finances this transfer. How does the minimum wage increase stack up relative to other forms of tax-financed income redistribution?

Elsewhere in the report, the CBO makes the following observation:

To achieve any given increase in the resources of lower-income families would require a greater shift of resources in the economy if done by increasing the minimum wage than if done by increasing the EITC. The reason is that a minimum-wage increase would add to the resources of most families of low-wage workers regardless of those families’ income; for example, one third of low-wage workers would be in families whose income was more than three times the federal poverty threshold in 2016, and many of those workers would see their earnings rise if the minimum wage rose. By contrast, an increase in the EITC would go almost entirely to lower-income families.

But again, this isn’t a problem if we aim not just to increase the disposable income of poor families, but also middle-income families.

The trouble is that the “tax” that finances these income gains isn’t just paid in the form of higher prices for consumers. It is also paid by workers who are locked out of the labor market. Minimum wage advocates often accuse low-wage employers of exploiting low-wage workers. Note, however, that firms that employ less-skilled workers often make significant human capital investments in these workers. Entry-level jobs often entail imparting noncognitive skills that aren’t specific to the specific job. A young person or an ex-offender or an older person who has been out of the workforce for a long period of time might learn how to interact with customers, or to work effectively as part of a team. The low-wage employer who imparts these skills will retain some of her entry-level employees, who might remain in place, or who will rise through the ranks of the firm; in most cases, however, entry-level employees will find work at other firms, which will benefit from the training offered by that first employer. One can imagine a world in which employers who take the trouble to educate raw recruits in the ways of the workforce capture a share of the income of these employees as they leave to take other, more lucrative jobs. That is not the world we live in. It is thus not unreasonable to assume that firms underinvest in this kind of training, as it can be difficult, expensive, and the employers who undertake it don’t capture the lion’s share of the benefits. This is an important part of the case for wage subsidies: the benefits of entry-level employment, and the training that is an essential part of it, don’t fly exclusively to employers or even employees; there are spillover benefits as well. There is a real danger that we are underestimating the cost of policies that lock out workers from the low end of the formal labor market.

In an ideal world, our efforts to raise the disposable incomes of middle-income families wouldn’t start with a win-lose policy like a minimum wage increase. Rather, we’d start with win-win policies, like better monetary policy and, most intriguingly, corporate tax reform. In 2012, Aparna Mathur of AEI summarized research she conducted with her AEI colleague Kevin Hassett:

When capital flows out of a high tax country, such as the United States, it leads to lower domestic investment, as firms decide against adding a new machine or building a factory. The lower levels of investment affect the productivity of the American worker, because they may not have the best machines or enough machines to work with. This leads to lower wages, as there is a tight link between workers’ productivity and their pay. It could also lead to less demand for workers, since the firms have decided to carry out investment activities elsewhere.

Our paper was one of the first to explore the adverse effect of corporate taxes on worker wages. Using data on more than 100 countries, we found that higher corporate taxes lead to lower wages. In fact, workers shoulder a much larger share of the corporate tax burden (more than 100 percent) than had previously been assumed. The reason the incidence can be higher than 100 percent is neatly explained in a 2006 paper by the famous economist Arnold Harberger. Simply put, when taxes are imposed on a corporation, wages are lowered not only for the workers in that firm, but for all workers in the economy since otherwise competition would drive workers away from the low-wage firms. As a result, a $1 corporate income tax on a firm could lead to a $1 loss in wages for workers in that firm, but could also lead to more than a $1 loss overall when we look at the lower wages across all workers.

Mathur’s policy prescription offers, in theory, a win-win approach to boosting wages, and it does so without excluding workers from the formal labor market. But reading Ashley Parker’s New York Times report on the new Democratic strategy for 2014 brings to mind a political vulnerability:

Democrats say the strategy of spotlighting the Koch brothers’ activities is politically shrewd. The majority leader was particularly struck by a presentation during a recent Senate Democratic retreat, which emphasized that one of the best ways to draw an effective contrast is to pick a villain, one of his aides said. And by scolding the Koch brothers, Mr. Reid is trying to draw them out, both to raise their public profile, and also to help rally the Democratic base.

Minimum wage advocates have a villain — low-wage employers, who have been portrayed as exploiters of low-wage workers rather than as investors in the human capital of workers on the first rungs of the economic ladder. Those who favor the EITC as an alternative to labor market regulation, and corporate tax reform as a way to achieve higher productivity and higher wages, don’t have a readymade villain.

Tight Labor Markets for Me, but Not for Thee



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One of the more intriguing, and dismaying, developments in the U.S. labor market has been the apparent tightening of the labor market for employed workers even as the level of underemployment and long-term unemployment remains high. That is, it appears that employed workers feel more confident about quitting their jobs and switching to other, better jobs, a sign of a tight labor market, even though there remains a large number of workers who’ve been sitting on the sidelines for a long period of time. The most obvious explanation is that we have a segmented labor market, as Evan Soltas has suggested. (It is not at all obvious that an increase in the minimum wage will alleviate this problem of persistent exclusion from the mainstream labor market, a subject we’ll revisit.)

John Cochrane addressed a related issue in a recent comment on the work of Torsten Slok of Deutsche Bank Research:

Lately, there has been a pretty remarkable consensus among macroeconomists that the labor market really is not doing well, despite lower unemployment rate. About 10 million people lost their jobs in the great recession,  and new employment has just about matched new people since then. The employment-population ratio — red line — hasn’t budged. The 10 million aren’t actively looking for work, so they don’t count as “unemployed.” Whether “discouraged” by persistent “lack of demand” or discouraged by high marginal taxes and social program disincentives, or bad match of skills and opportunities, take your pick, the consensus view on all sides has been pretty dim on the labor market.  I’ve seen about the same slide deck from Ed Lazear (Bush CEA chair) and Larry Summers (Obama adviser). Usually, employment and unemployment mirror each other, so it doesn’t matter which measure you use.

In Torsten’s view, there is nothing the Fed can do about this. I agree. The Fed seems to secretly agree too. They talk about the employment-population ratio, but if they thought there were effectively 10 million unemployed and they could do something about it, they would not be even talking about tapering, they’d be talking about buying another $2 trillion of bonds and promising zero rates into the 7th year of the Hilary Clinton administration.

I’m not convinced that there is nothing the Fed can do about low employment levels, and I tend to think the Fed should do more. But whether or not that’s true, the point Cochrane goes on to make is an important one. According to Torsten Slok, large numbers of 55-65 year-olds have exited the workforce because they’ve accumulated substantial wealth and they are choosing to retire early, a finding with dovetails with recent work from Sylvester Scheiber and Andrew Biggs. Cochrane replies that the average net worth cited by Slok ($650,000) is not as encouraging as Slok thinks, as it is an average (most early retirees have accumulated less, if not far less), it reflects accumulated housing wealth, and it won’t be enough to last 30-35 years.

The same numbers can be read dreadfully as a generation whose location, skills, health insurance arrangements, marginal tax rates (social security disability, etc.) and now long-term unemployment history leave them behind, facing a long painful old age, and the economy without their contributions.

In 2012, Andrew Biggs proposed an attractive solution for part of this cohort — the partial or full elimination of Social Security payroll taxes for workers over the age of 62 — and one hopes that this will become part of a broader Social Security reform agenda. The thornier problem is what we ought to do about the younger Americans, many of whom are less-skilled, who find themselves segmented out of work.

Pre-K ‘Deniers’? Actually There’s a Debate, No Thanks to Academics



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Russ Whitehurst of Brookings has emerged as the nation’s leading critic of universal preschool. His latest piece is an informative and dispassionate look at some of the most frequently cited preschool evaluations. I can quibble here and there with the value he assigns to certain studies, but his conclusion is spot-on:

“The best available evidence raises serious doubts that a large public investment in the expansion of pre-k for four-year-olds will have the long-term effects that advocates tout.”

 Whitehurst cited a particularly extreme example of their dismissiveness that I hadn’t heard before: During a congressional hearing on universal preschool last month, Democratic representative George Miller of California said that “because President Obama has suggested this program, we’re developing a class of sort of like, you know, childcare deniers, early learning deniers. The evidence is compelling.”

It would be easy to dismiss the “denier” charge as just over-the-top rhetoric we often hear from politicians. But it’s more troubling than the typical outburst: For one thing, calling someone a “denier” isn’t just staking out a strong position on one side or the other of an issue. It’s an attempt to shut down debate. Those who level the “denier” charge are not responding constructively to their opponents’ arguments. They are unilaterally declaring the debate over and done with. Everyone can go home. No further discussion will be permitted.

And it’s just as troubling to think that Representative Miller really is unaware that a legitimate debate exists about public pre-K. If so, it’s a sign experts are failing to engage constructively with each other rather than just work in their own echo chambers.

When academics cloister themselves within a specialty or sub-specialty that interests them, “groupthink” sometimes emerges. In the case of preschool, the field attracts those who are inclined to support some form of early education, while those who are skeptical tend to focus on other topics. The result is a false consensus that only Whitehurst and a handful of others have been working to dispel.

The problem of groupthink runs deep in academia. For example, economists rarely publish in sociologists’ journals, and vice versa, despite quite a bit of overlap in the subjects they study.

When I dug into the school finance literature a few years ago, I was surprised to discover so many education scholars who feel that spending more money is the key to improving public education. Like many people with an economics background, I think the school finance advocates are seriously mistaken. Of course, they probably think the same thing about economists, so there’s a chance here for a robust debate. But no debate can happen when one side is calling the other “deniers.”

Restricting New Less-Skilled Immigration Will Benefit Current Less-Skilled Immigrants



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In the president’s new fiscal year 2015 budget, comprehensive immigration reform is included as a key strategy for growing the economy and reducing the size of the deficit. This is a new development in the annals of budgeting, which might reflect the fact that the deterioration of medium-term economic forecasts by the Congressional Budget Office has left the Office of Management and Budget in a bind. Had the CBO been right about its 2010 economic forecasts, when it assumed that the economy would grow at something close to its post-1950 historical average, the White House would have a much easier time convincing the American public that its policies could help the federal government achieve fiscal balance in the coming decade. Yet the CBO has downgraded its assessment of America’s medium-term growth potential in light of the sluggish recovery in the years since, creating a problem for the Obama administration.

(I happen to agree that the CBO is understating U.S. growth potential, but that’s because I’m operating under the perhaps overly optimistic assumption that many Obama-era policies will be reversed in the years to come, and that America’s underlying economic strengths will come to the fore.)

Since the president is relying so heavily on immigration reform to make his budget proposal work, I thought I’d make note of a short piece I wrote for the last issue of National Review, in which I address the comprehensive immigration reform debate. My basic points are as follows:

(1) It is more likely than not that we will at some point in the foreseeable future grant legal status to a large share of the current unauthorized immigrant population. This population is extremely poor, and even if we assume that legalization will tend to increase the market wages of its working adult members by a substantial margin, that will continue to be the case. (It’s worth noting male labor force participation in this population is relatively high while female labor force participation is relatively low, and that the children of unauthorized immigrants are concentrated in the poorest households.)

(2) Though less-skilled immigration does not appear to depress the wages of less-skilled natives, there is strong evidence that it tends to depress the wages of less-skilled immigrants currently residing in the United States. The basic reason is that while a new less-skilled immigrant might prove complementary to a less-skilled native – e.g., because the less-skilled native has stronger English language skills than the less-skilled immigrant – a new less-skilled immigrant is more likely to compete with rather than to complement an old less-skilled immigrant.

(3) If we accept the notion that granting legal status to less-skilled unauthorized immigrants means that we as a society are taking some collective responsibility for their well-being, and for that of their children, this is salient information. If less-skilled immigrants have higher earning potential, they will be somewhat more likely to successfully integrate into the social networks that facilitate upward mobility, and their children will be somewhat more likely to succeed in school. We could try to address this concern by increasing transfers to all immigrants, both old and new. Yet it’s not obvious that this should be our first recourse, particularly if we have the alternative of restricting less-skilled immigration while welcoming skilled immigrants who will make larger net fiscal contributions over the course of their lives. This would help increase our fiscal capacity to provide current less-skilled immigrants, as well as less-skilled natives, with the transfers and services we deem necessary.

(4) Moreover, there is reason to believe that while a large-scale less-skilled influx won’t necessarily harm the economic interests of U.S. natives, a more selective, skills-based immigration policy would prove more beneficial to their economic interests, and to those of existing less-skilled immigrants.

If we care about the economic integration and cultural assimilation of the large number of less-skilled immigrants in the U.S., many but certainly not all of whom are currently unauthorized immigrants, we ought to favor restrictions on future less-skilled immigration and an increase in future skilled immigration.

Granted, there is good reason to believe that most less-skilled immigrants living in the U.S. favor a less restrictive policy towards less-skilled immigration, for reasons ranging from the personal (a desire to bring relatives and friends into the country) to the more abstract (a recognition that the U.S. labor market creates enormous opportunities for absolute upward mobility for poor immigrants). Some see this as a good reason to allow for an increase in less-skilled immigration. Of course, many members of high-income households oppose having their taxes raised, and our left-of-center friends nevertheless insist that high earners should face somewhat higher taxes — not out of envy or spite, but because a more steeply progressive tax code would, in their view, serve the common good. I’d suggest that a similar logic ought to apply to the immigration debate.

So by all means, let’s use immigration reform as a strategy for addressing our medium- and long-term fiscal challenges (and for increasing growth in GDP per capita). If that’s what we have in mind, however, we ought to embrace immigration reform that protects the interests of current less-skilled immigrants and that selects immigrants who will pay far more (not slightly more) in taxes than they will receive in benefits over the course of their lives.

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