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The Agenda

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

How Expanding the Child Credit Can Help Conservatives Achieve Their Goals



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What might the ongoing intra-conservative tax policy debate prompted by the release of Room to Grow tell us about the future of the conservative coalition? One thing it tells us is that conservatives are fixated on tax policy despite the fact that as Michael R. Strain of the American Enterprise Institute, a contributor to Room to Grow, reminds us, taxes aren’t the biggest policy challenge facing the right. The modest gains we might yield from even the most well-designed tax reform proposal are outweighed by, among other things, the benefits of labor market policies that get the long-term unemployed back to work and health entitlement reforms that put the federal government on the road to fiscal health. But like it or not, we’re in the middle of a serious tax policy debate that could have a huge impact on where the right goes next. The discussion so far has been very abstract. I’d like to focus on how an expanded child credit might shape the political terrain as the baby boomers continue to retire in large numbers, entitlement programs come under heavy strain, and liberals and conservatives jockey for position. 

It is actually a non-conservative, Matt Yglesias of Vox who sees the political potential of an expanded child credit most clearly. Shifting the tax policy debate between Democrats and Republicans from a debate over the merits of cutting the top marginal tax rate to the merits of expanding the child credit would, according to Yglesias, have a big impact on the partisan landscape:

Right now when Democrats propose a big new program for the poor and the middle class — whether it’s Obamacare or future universal preschool benefit or what have you — Republicans counter by complaining about excessive spending and government waste. But the GOP alternate to spending money is tax cuts for a small number of very rich people. That in many ways sets the bar for a liberal proposal very low. Democrats don’t need to convince voters that their programs are cost-effective, just that they are in some sense useful.

A reorientation of the tax cut debate around bigger tax credits for middle class parents rather than lower tax rates for hedge fund managers would change that. Republicans would be able to offer people more money in their pockets as the alternative to more public services — a potentially much more compelling offer.

I’ve made something like this case myself, so I’m inclined to agree with him. There are, to be sure, aspects of Yglesias’s analysis that I reject. Yglesias says that Robert Stein and Sen. Mike Lee (R-UT) want to “abandon supply-side tax policy.” That’s incorrect. He is right, however, to underline the fact that Stein and Lee aren’t putting all of their eggs in the basket of improving work incentives for the highest earners. Stein recognizes the importance of seeing to it that work incentives for the highest earners remain strong. Yet in light of the steady deterioration of the fiscal position of the federal government, he believes that tax relief should be focused elsewhere. While the political costs associated with a substantial cut to the top marginal tax rate are considerable, the economic benefits would be relatively modest, particularly when compared to Reagan’s 1981 tax cut, which cut the top rate from 70 percent to 50 percent. Thomas Piketty and François Hollande might welcome a return to pre-Reagan-era top tax rate in the U.S. Mainstream Democrats, who need to manage an economically diverse coalition, recognize that such stratospheric marginal tax rates are both economically destructive and politically unthinkable. This is a debate that conservatives have essentially won. The key supply-side issues now surround the tax treatment of capital income, where conservatives are more inclined to favor measures like progressive consumption taxes and sweeping corporate tax reform. These efforts are, for obvious reasons, less politically salient. Even if we accept that the corporate tax burden is borne not just by the owners of capital assets but also by wage-earners, its impact is largely invisible, and so calls for a consumption tax or for corporate tax reform aren’t likely to prove compelling on the campaign trail. Family-friendly tax reform is best understood as a complement to pro-growth tax reform focused on the encouraging savings and investment, as Pethokoukis has argued

Yglesias does recognize that family-friendly tax reform represents a departure from earlier conservative approaches that have failed to resonate, including the Romney campaign’s call for a revenue-neutral tax reform that would eliminate various tax expenditures to finance a reduction in marginal tax rates. There is a danger that such an approach would lead to higher tax on middle-income households, a charge that the Romney campaign had a difficult time fending off. What better way to address this danger than to expand the child credit for middle-income households? 

Moreover, an expanded child credit that concentrates its benefits on middle-income households offers another potential benefit to conservatives that Yglesias misses: as Ramesh Ponnuru ventured in the Weekly Standard in January of 2013, middle-class tax cuts are the most effective way to constrain the growth of federal spending, or “starve the beast.” The Bush-era tax cuts did little to restrain the growth of government, in part because (a) the highest earners are not as tax-sensitive as middle earners, at least when it comes to the difference between Bush-era and Clinton-era top tax rates (this is particularly true of those who choose to live in high-tax jurisdictions); (b) the highest earners aren’t a large electoral constituency, and they tend not to be swing voters; and (c) Clinton-era top tax rates were a non-scary counterfactual for the electorate as a whole. The result is that raising revenue by raising taxes on the highest earners has been fairly politically popular, as the left has demonstrated on more than one occasion. 

Of course, there are limits to hiking taxes on the rich as the sum total of your fiscal policy: the revenue that can be gained from sharply increasing taxes on affluent households won’t be enough to contain rising deficits, even if we assume that higher tax rates have no impact on work incentives, which seems unlikely. To finance future spending levels on a business-as-usual course, taxes on middle-income households would have to rise. The trouble for those who oppose large-scale entitlement reform, and indeed for those who favor expanding federal social programs, is that raising taxes on middle-income households is extremely unpopular, as middle earners are more tax-sensitive than the rich, they constitute a large swing constituency, and there are no recent precedents for a huge, painless middle-income tax hike. The threat of substantial tax increases on middle-income households would greatly improve the political prospects of reforms designed to contain the rising cost of (in particular) health entitlements. 

The politics of an expanded child credit look even more attractive when we consider how big an impact it would have an after-tax incomes for middle-income households in swing states and districts, and it might create an opportunity for conservatives to appeal to Latino and Asian households, which are far more likely to consist of married couples with children under the age of 18 than is the case among other U.S. households. The YG Network, where I serve as an advisor, recently conducted a survey of American women, which found overwhelming (78 percent) support for “expanding the child tax credit to allow parents to keep more of their own money.” I realize that many conservatives find the idea of an expanded child credit discomfiting. But its political potential is undeniable. If you want to ease the way for tax reforms that would encourage savings and investment, restrain the future growth of government, and broaden the conservative coalition, the child credit appears to be what you’ve been looking for.

Room to Grow, Parenting, and Human Capital Investment



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Room to Grow has sparked a constructive intra-conservative debate on a number of questions, but the most controversial essay in the collection has proven to be Robert Stein’s call for family-friendly tax reform, which has been the object of sustained criticism from Kim Strassel in the Wall Street Journal, Stephen Moore, also of the Wall Street Journal, here at National Review (see Ramesh Ponnuru’s reply to Moore), and Scott Lincicome and Ben Domenech of The Federalist. As an advisor to the YG Network, the group responsible for Room to Grow, it should come as no surprise that I’m on Stein’s side in the dispute, though I believe that some of his critics, particularly Domenech, have raised coherent, thoughtful objections that deserve to be taken seriously. So I’d like to think through the proposal one more time. 

Debating taxes is catnip for conservatives. Speaking for myself, there are few things I find more engaging, and more important, than debating the contours of the tax code, as it is the chief instrument through which we shape the economy. It serves as a synecdoche for the larger debate over the role of government in society. Those of us on the right favor tax policy that is less prescriptive and less discriminatory across different economic decisions made by individuals, households, and firms than the tax policy favored by champions of a more interventionist state. Departures from this ideal of a neutral code must pass a high bar to be deemed acceptable on the right. When Stein calls for an expanded child credit, he emphasizes the “parent tax penalty” that unfairly discriminates against the human capital investment parents make in their children. This notion that parenting represents an investment in the human capital of the next generation and that this investment ought to be reflected in the tax treatment of parents is not, suffice it to say, universally embraced. Many others believe that, from the perspective of the tax code, at least, the decision to have and to raise a child ought to be treated as akin to the decision to purchase and maintain any other consumer durable, as the late Gary Becker famously put it in his groundbreaking 1960 essay on fertility:

For most parents, children are a source of psychic income and satisfaction, and,in the economist’s terminology, children would be considered a consumption good. Children may sometimes provide money income and are then a production good as well. Moreover,neither the outlays on children or the income yielded by them are fixed but vary in amount with the child’s age, making children a durable consumption and production good. It may seem strained, artificial, and perhaps even immoral to classify children with cars, houses, and machinery. This classification does not imply, however, that the satisfactions or costs associated with children are morally the same as those associated with other durables. The satisfaction provided by housing, a “necessity,” is often distinguished from that provided by cars, a “luxury,” yet both are treated as consumer durables in demand analysis. Abstracting from the kind of satisfaction provided by children makes it possible to relate the “demand” for children to a well-developed body of economic theory.

Becker’s treatment of children as a consumption and production good was useful in many respects. Yet Becker was also keenly interested in the relationship between human capital investment and what we tend to understand as labor income, an idea that he explored in “The Upside of Income Inequality,” a 2007 essay for The American that he co-authored with Kevin Murphy. Becker and Murphy argue that just as higher rates of return on capital reflect greater productivity in the economy, the initial impact of higher returns to human capital is wider earnings inequality. The best way to redress this wider earnings inequality is, in their view, to foster greater investment in human capital across all families with children. The chief barrier to greater investment along these lines, in their view, is the breakdown of the American family: 

The answers to these and related questions lie partly in the breakdown of the American family, and the resulting low skill levels acquired by many children in elementary and secondary school—particularly individuals from broken households. Cognitive skills tend to get developed at very early ages while, as our colleague James Heckman has shown, noncognitive skills—such as study hab­its, getting to appointments on time, and attitudes toward work—get fixed at later, although still rel­atively young, ages. Most high school dropouts certainly appear to be seriously deficient in the noncognitive skills that would enable them to take advantage of the higher rates of return to education and other human capital.

So instead of lamenting the increased earnings gap caused by education, policymakers and the pub­lic should focus attention on how to raise the fraction of American youth who complete high school and then go on for a college education. Solutions are not cheap or easy. But it will be a disaster if the focus remains so much on the earnings inequality itself that Congress tries to interfere directly with this inequality rather than trying to raise the education levels of those who are now being left behind. [Emphasis added]

Becker and Murphy conclude their essay by calling for policymakers not to raise taxes on high-earners, but rather to encourage more human capital investment, as attempts to raise taxes on the higher earnings that flow from greater skills could dampen productivity growth in the U.S. “by dis­couraging investments in its most productive and precious form of capital—human capital.”

Suffice it to say, I doubt that Becker and Murphy would embrace Stein’s specific proposal. It is clear, however, that Stein’s logic adheres closely to that of Becker and Murphy. Stein’s proposal lowers, albeit slightly, the top marginal tax rate while also recognizing that the most important human capital investments are those that take place early in life, when parents are imparting noncognitive skills to their progeny. If you embrace the skills beget skills idea, i.e., that the skills we master as small children enable us to acquire greater skills as we reach maturity, it becomes clear that the incentives that matter are not just those we face as individuals entering the labor market, but also those facing parents as they make decisions about the early education of their children.

One strategy for fostering human capital investment in the young is to socialize early childhood education. That is, if parents aren’t doing an adequate job of providing their children with noncognitive skills, the public sector ought to take on this role. This is the premise behind calls for universal preschool. An alternative view is that while children raised in the poorest, most chaotic households might require state intervention of this kind, many other households would benefit more from a reduction in the payroll tax burden, which would allow them to either increase spending on their children (to purchase a higher-equality education, for example), to purchase or rent a home that entails a shorter commute (to increase the time spent with a child), or to reduce work hours (also to increase the time spent with a child). There is a suite of in-kind transfer programs that reduce the burdens of raising children for low-income parents, but these programs are ill-suited to the needs of lower-middle-income and middle-income households. In-kind transfers, like SNAP, Medicaid, and housing vouchers, reflect a belief that while adults with very low incomes deserve some measure of assistance, they should not receive no-strings-attached cash in lieu of these transfers, as a widespread conviction is that these adults might not purchase medical care and other essential services for themselves. There are, of course, many people who find this approach needlessly paternalistic. But when it comes to wage-earners earning somewhat higher incomes, the case for paternalism is weaker still, particularly in the case of two-parent families. These are households that earn enough and that have the human capital they need to provide their children with noncognitive skills, yet a relatively modest increase in after-tax income would make it somewhat easier for them to do so.

This argument obviously won’t satisfy those who believe that private property rights merit little respect, or who believe that middle-income two-parent families and low-income single-parent families are identical in every relevant sense, and that the same policy solutions apply to both. To those who agree with Becker and Murphy that the main challenge we as a society face is not income inequality but rather underinvestment in the human capital of the next generation, however, an expanded child credit holds considerable appeal. 

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Today’s Policy Agenda, June 20



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Editor’s note: Andrew Smith is an undergraduate at Furman University; he’ll be contributing to the Agenda on a semi-regular basis in the coming months. This will be a regular feature recapping the big policy news and stories of a given day, and what they mean for a conservative audience.

The human costs of unemployment are huge. It’s why conservatives care so much about encouraging work.

Ben Casselman has a piece in FiveThirtyEight comparing the lives of the employed to the unemployed — how they spend their time, the degree of social isolation they experience, etc. The huge disparities are a good reminder why, on issues from the minimum wage to Obamacare, conservatives care about “inclusion” and often have labor-market outcomes at the front of their minds. Not only is having a job essential to staying out of poverty and to developing the skills needed to rise up the income ladder, work helps connect individuals to new social networks and provides an opportunity to gain what Arthur Brooks calls “earned success,” two building blocks of a fulfilling life. 

Casselman:

The unemployed have higher rates of depression, obesity and suicide. In interviews, they frequently report that the social and emotional impacts of joblessness — isolation from friends, the loss of a daily routine, feelings of uselessness — can be as hard as the financial toll. Overall, the unemployed spent more time sleeping, watching television and taking classes than the employed, and less time eating out and going to parties. . . . Other activities show the isolation of unemployment: Unemployed single moms talked to friends and family on the phone less often than those with jobs, and they spent 15 fewer minutes per day socializing and going to parties.

Cutting tax rates: good idea, not conservatives’ top priority.

Responding to Kimberly Strassel’s criticism of the Room to Grow agenda, Michael Strain of AEI argues in the Washington Post that Strassel’s emphasis on “pro-growth tax reform” may be misplaced because in 2014, unlike 1986, large cuts in the income tax’s top rate won’t necessarily mean a big boost to the economy. This shouldn’t be misinterpreted as Strain dismissing the value of tax cuts – in politics, you have to set priorities. The better use of the Right’s political capital and budget space, in Strain’s view, is to pursue growth-friendly, micro-type policies targeted at our most pressing problems: long-term unemployment and the struggles of low-skilled, single males in the labor force.

Both the human and moral costs described in the Casselman piece above and what we know about the economic costs of long-term unemployment compel policymakers to focus their attention on the labor market crisis for at least as long as the labor force participation rate graph looks like this:

Expanding the EITC, enacting relocation vouchers, reforming the disability program, cutting the payroll tax, and replacing Obamacare with a work-friendly alternative all seem like policy initiatives that could better address our immediate challenges than further reducing top tax rates that are about half the 70 percent they were when Reagan took office.

The geography of economic growth: Some parts of the country are booming.

Tom Gray and Robert Scardamalia of the Manhattan Institute have released an interesting study comparing the twenty best and worst-performing cities during this recovery. On one level, it was just fascinating to read which metropolitan areas, like San Jose and Nashville, had experienced tremendous growth after the recession and which industries and characteristics were key to their success. For example, the leading cities are home to more large companies and college graduates, while struggling cities were hit particularly hard by the housing crash and have economies that depend much more on government spending. It’s also worth emphasizing that different areas experience the economy in such widely different ways, which we often lose sight of in national debates like the federal minimum wage.

Further, Strain’s idea of relocation vouchers that help struggling workers move from high unemployment areas to low unemployment areas makes sense in the abstract, but when you see the huge gap between how an average worker experiences economic life in Las Vegas and in booming Houston, the case seems stronger on the grounds of both fairness and economic efficiency.

Why deregulating health care is a good idea, Voxsplained.

This video from Vox presents one of the few policy proposals that could unify Matt Yglesias and libertarian populists: ending restrictions that insulate doctors from the competition of nurse practitioners. These rules are the epitome of what’s wrong with a massive regulatory state. They drive up the costs of medical services for everyone in order to protect the interests of a politically powerful constituency. It’s generally accepted that one of our biggest challenges in the coming decades will be controlling health-care costs; we can’t afford to ignore the low-hanging fruit of supply-side reforms.

When Democrats Love Hedge Funds



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The Manhattan Institute’s Public Sector Inc. notes that the New York state legislature is likely going to lift the cap on the share of the state’s public pension funds that can be devoted to alternative asset classes — a fairly broad term but one that mostly comprises hedge funds and private-equity firms. The idea is pretty simple: Legislators don’t want to make the contributions they need to make to fund public-employee pensions and health care, so they boost their investments in alternative assets, which in theory have higher returns than other asset classes. Ambitious universities have done the same thing with their endowments.

Whether this is a prudent financial decision or not is kind of a complicated question: Such investments often do see higher returns than other asset classes and offer diversification (i.e., they don’t necessarily go down when the stock market does, etc.)  One problem with the temptations of alternative assets, the fact that they’re highly illiquid, isn’t that big a deal for public pension funds in the way it can be for, say, universities.

And legislatures micromanaging public-pension funds isn’t a great idea, so a higher cap may well make sense in that light. But the policy change reflects the constant efforts by legislators to game the system and reduce the contributions they have to make to public pension funds. In some instances, politicians have used a bigger allocation for alternative assets to justify raising their expected return rate — which is already way too high — reducing the contributions they have to make. ​That doesn’t appear to be part of the New York bill, so future contributions aren’t going to be automatically smaller. But lawmakers certainly hope that returns will increase, nearing the 7 percent or so they assume — whether that’s going to happen or not. And as the author of the piece about New York, Ilya Atanasov, points out, it’s often exceedingly difficult to value alternative assets, so this opens up another way to game contributions to the system and avoid paying the bills that are eventually going to come due. 

For these reasons, and because pension funds have tended not to hit their expected returns (since they’re too high — corporations are required by law to assume returns something like 4 percent, public funds get to use around 7 percent), more and more public funds are flocking to alternative assets. The share of public-pension dollars in alternative assets has gone from 11 percent in 2006 to 23 percent in 2012. Alternative assets have gotten bigger as a share of the whole investing world over that time, but not that much bigger.

The New York state senate, which is controlled by a coalition of Republicans and conservative Democrats, has already passed the bill, and the solidly Democratic house is expected to pass it too. New York’s pension situation isn’t quite as dire as many states: Government accounting is optimistic, but at least by that metric, the state’s pension funds are close to 100 percent covered. Expect other blue states, including those in more dire straits, to start making their fund management more Mitt Romney–friendly in the future.

What Jonathan Chait Gets Wrong about the Innovation Approach to Climate Change



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Editor’s note: Sam Thernstrom of the Energy Innovation Reform Project kindly agreed to write for us on how a better, more innovation-friendly energy policy would also represent a better approach to climate policy. 

Usually the best response to the name-calling that so often passes for public discourse over climate policy is to ignore it, but Jonathan Chait’s June 17 piece in New York deserves discussion because it unintentionally illustrates the most underappreciated source of climate gridlock today: the partisan groupthink that often prevents liberals from engaging in any kind of conversation about creative ways to finesse the barriers to progress.

Given the daily chorus of complaints from liberals that the only obstacle to climate solutions is conservative obstructionism, it’s ironic that conservatives who do offer constructive ideas about how to move forward are so often dismissed by defenders of the conventional climate wisdom. Nothing that conservatives offer is good enough; no alternative to traditional targets-and-timetables for emissions limits can be given any credence.

Chait is outraged by proponents of a so-called “technology-first” approach to climate — that is, one that emphasizes the need for further research, development, and demonstration of clean energy technologies before attempting to deploy them on a large scale. This approach, Chait acknowledges, may be a “genuine differentiation from the mindless scientific denialism and reflexive sneering at green energy that is the mainstream Republican position,” but he is quick to assure his readers that this is hardly a step in the right direction. The technology-firsters, Chait tells us, “don’t want to watch the world burn, but don’t want to do much to stop it from burning.”

Chait focuses his ire on Jim Manzi, who recently wrote an excellent essay on this concept for National Affairs. But it takes nothing away from Manzi’s accomplishment to note that he is hardly the only conservative who has taken this position — and it’s not only conservatives who have taken this position either. But Chait presents this idea as though it were the work of a lone lunatic, albeit one who has attracted a few foolish followers.

Chait argues the technology-first approach “remains well short of grappling with reality” because it assumes that the research offers “something close to a miracle cure” in thinking that it can avoid paying the full cost of emissions reductions. This is an absurd straw man. No innovation proponent thinks it’s a miracle cure — but there is every reason to believe that a technology push is indispensible to any pragmatic decarbonization effort.

The question of what sort of climate policy would be most effective in the long run is not nearly as simple as Chait and conventional environmentalists would have us believe. The value of an innovation-first approach depends in part on the question of what it is compared with: Without innovation, are we on track to solve the climate problem? No.

Keep reading this post . . .

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No, There Really Isn’t a Case for Teacher Tenure



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Last week, a hard-fought legal case brought on behalf of nine California public-school students resulted in a stunning and, for many, exciting decision: A number of the state’s teacher-tenure violate the state constitution by depriving California students of the equal opportunity for a quality education. The decision, Vergara v. State of California, enjoined the statutes — meaning they can’t be enforced and are void — but pending an appeal, so this fight will continue.

There isn’t one specific provision in the California constitution that’s violated, exactly: Rather, the court identifies three “pertinent” clauses in the constitution: a guarantee of equal protection under the law, a provision ordering the legislature to encourage “intellectual [and] scientific improvement,” and a requirement that the legislature “provide for a system of common schools.” There is precedent, according to the Los Angeles County Superior Court judge Rolf Treu, that these three provisions combine to make the state constitution “the ultimate guarantor of a meaningful, basically equal educational opportunity” for the state’s students.

I’ll leave aside most of the debate of whether this was correctly decided as a legal matter. There are a few interesting policy questions here: Was the court right that the state’s teacher-employment policies are a significant impediment in students’ getting a quality education? And would education reformers of a conservative stripe be wise to try this strategy in other states, many of which have constitutional provisions that can be construed like California’s?

I think the answers are, roughly, (1) yes and (2) no. I’ll tackle the first question here, and the second in another post.

Three key aspects to the state’s teacher policies were challenged: the way tenure (“permanent employment”) is granted, the process for firing teachers, and the last-in-first-out method of laying off teachers when it’s financially necessary. (Technically these issues comprise five specific statute in the California teachers’ code.)

The problems with these policies are, on their face, relatively obvious: Tenure is granted after just two years, when there’s not going to be enough evidence to determine whether a teacher is effective (this is lower than the national standard — three to five years). The “due process” for firing teachers takes an incredibly long amount of time, dozens of individual steps, and can cost hundreds of thousands of dollars — such that the firing rate among California teachers with tenure is 0.002 percent in a given year. The LIFO method of layoffs, especially when teachers, after a certain point relatively early on in their careers, don’t really improve with experience, means that the layoff decisions schools do have to make have nothing to do with teacher quality and may scare away teachers who are considering starting the career.

But are there benefits to these laws that outweigh the fact that they protect some bad teachers? Teachers’ unions would certainly argue yes: Job security could improve the quality of education teachers provide, for instance. The L.A. judge doesn’t appear to confront this question in detail, which is probably a weakness in his legal reasoning, but there isn’t much reputable evidence that I know of finding that this effect is very useful.

Catherine Rampell of the Washington Post suggests there’s another defense of these policies: Yes, the protections afforded to teachers seem insensible, she argues, but giving school districts the ability to fire bad teachers won’t help much when we can’t afford to attract good teachers to replace them. And, in fact, the job security given to teachers is an appealing, cheap way we compensate them for the fact that their cash salaries aren’t terribly generous.

Keep reading this post . . .

Room to Grow on the Right



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The conversation about Room to Grow, the new essay collection from the YG Network, where I’m an advisor, continues to spark discussion. Yuval Levin and Ramesh Ponnuru have done an able job of addressing criticisms of the collection from all comers, most recently yesterday here at National Review. Because Room to Grow has been received so warmly on the right, I’ll focus on a few of the more trenchant criticisms.

Ben Domenech seems broadly sympathetic to Room to Grow, yet he sees Robert Stein’s call for an expanded child credit as a step in the wrong direction on substantive (it is better to lower the tax burden on everyone than on a discrete group) and political grounds (delayed marriage and child-rearing suggest a revealed preference against traditional family life, and the right needs to offer something more compelling to the young, the childless, and the unmarried). Rather than create a larger child credit, Domenech calls for eliminating the Social Security payroll tax. This brings to mind a 2007 proposal from Kenneth F. Scheve and Matthew J. Slaughter to eliminate the payroll tax for all workers earning below the national median, replacing the lost revenue by raising or lifting the cap on earnings subject to the payroll tax and making it as steeply progressive as the income tax. Others have proposed eliminating the payroll tax and funding Social Security through general revenues raised by an expanded income tax. Such an approach might be compatible with transitioning Social Security to a flat universal benefit. New Zealand is one example of a market democracy that has adopted a flat, non-contributory “universal pension” to eliminate poverty among retirees, and it appears to have been a success. This universal pension would serve as a foundation for retirement income while a second, earnings-related component would do the rest. As Levin and Ponnuru make clear, the political obstacles to such a dramatic reform would be considerable. Moreover, they believe, correctly in my view, that the political advantages of the child credit are greater than Domenech allows, not least because of its salience to lower-middle-income households with children, many of whom are skeptical about conservative intentions. But I think the reform effort would be well-served if thinkers like Domenech, and lawmakers who oppose child credit expansion, were to develop and champion detailed proposals for replacing the payroll tax. The goal of Room to Grow is not so much to offer a fully-formed manifesto as it is to spark discussion of the institutional barriers to upward mobility in America and how we might address them more constructively. Domenech is engaging Room to Grow in exactly the right spirit.

Kim Strassel, meanwhile, sees Room to Grow as “a capitulation to the left’s inequality and middle-class talking points,” which is curious insofar as the contributors to Room to Grow are united by the conviction that it is a low level of absolute upward mobility for young people raised in chaotic households, and not income or wealth inequality, that is the central challenge facing American society.

It is true that the contributors are somewhat more concerned about the fate of the 85 percent of Americans who identify as middle class and, she might have added, those who identify as poor than they are about those who feel as though they’ve managed to join or remain in the ranks of the upper class in recent years, despite the housing bust, the financial panic, and an economy stymied by excessive regulation, among other maladies. This doesn’t strike me as a sign of contempt for those who’ve proven successful, but rather as a recognition that we as a society would be better off if more Americans were on their way to the economic independence that comes with wealth. We wouldn’t need to worry quite so much about reforming our institutions if more Americans felt prosperous enough to identify as members of the upper class. In Singapore, for example, 15 percent of households have $1 million or more in non-housing assets, thanks in part to policies designed to facilitate wealth accumulation. The same is true of only 4.5 percent of U.S. households. One mark of the success of the reform project would be a dramatic expansion in the share of households with such substantial holdings, and the view of Room to Grow’s contributors is that the best way to achieve this goal is to increase productivity growth by fostering a more open, competitive economy in which incumbent firms are unable to build regulatory moats to defend themselves from entrepreneurs bearing new business models. James Pethokoukis describes this vision in detail in his essay on regulatory and financial reform.

That said, it is not obvious that this mass affluent class should ever be the chief focus of policymakers, if only because they (generally) reflect the institutions in society that are working well, and not that those that are in need of reform and renewal. There is a reason why Frederick Hess chooses to focus on expanding educational choices for low- and middle-income parents, and not for students attending selective independent schools with large endowments. The parents who are sending their children to selective independent schools with large endowments by and large have the resources and the social networks to provide their children with a high-quality education, or an education that is most suitable to their needs in the broadest sense. Similarly, Andrew P. Kelly does not focus on the overhauling elite research universities. Rather, his analysis centers on how we might foster more business model innovation in post-secondary education by attacking the higher education cartel, and how we might reduce the waste of taxpayer resources by low-quality higher education institutions that fail to meet the needs of their students.

Strassel, like Domenech, centers the substance of her critique on the Stein plan, to which the Wall Street Journal editorial page has taken exception on more than one occasion. One minor point of information is that while Strassel believes that Stein is calling on Republicans to “embrace redistribution and lard the tax code with special, conservative-approved handouts for said middle class,” Stein in fact calls for eliminating a wide array of tax expenditures. That is, he explicitly calls (on page 36) for a tax overhaul that will result in a much simpler tax code. It is true that other contributors offer tax tweaks of their own, not all of which strike me as well-advised, but I think it’s unfair to overlook Stein’s explicit emphasis on simplification. Regardless, Strassel’s critique is a welcome breath of fresh air. Though she seems to have misunderstood some of the larger goals of the Room to Grow effort, she clearly read the volume carefully and she has introduced version, albeit an at times hard to recognize version, of the ideas contained within to a wide audience, for which we should all be grateful. Spirited disagreement is a good thing.

And finally, David Brooks takes Room to Grow to task for neglecting some of the more vexing questions raised by a society that is denser, more diverse, and more tightly-integrated into the global economy:

We are moving from a world dominated by big cross-class organizations, like public bureaucracies, corporations and unions, toward a world dominated by clusters of networked power. These clusters — Wall Street, Washington, big agriculture, big energy, big universities — are dominated by interlocking elites who create self-serving arrangements for themselves. Society is split between those bred into these networks and those who are not. Moreover, the U.S. economy is increasingly competing against autocratic economies, which play by their own self-serving rules.

Sometimes government is going to have to be active to disrupt local oligarchies and global autocracies by fomenting creative destruction — by insisting on dynamic immigration policies, by pumping money into research, by creating urban environments that nurture innovation, by spending money to give those outside the clusters new paths to rise.

I don’t disagree with the general thrust of Brooks’ argument, though I imagine we would disagree on the particular steps we ought to take. My recent column on energy policy reflects this broad sensibility, and I see it as fully compatible with the Room to Grow framework as articulated by Yuval Levin.

Quick Iraq Note



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I recently wrote a short column on Iraq, which draws on Kimberly Kagan and Frederick Kagan’s detailed analysis, published in National Review of September of 2012, of the negotiations surrounding an extension of the U.S. military presence in Iraq.

Elsewhere, in The National, Hassan Hassan provides context for the rise of the Islamic State of Iraq and the Levant (ISIL):

In Iraq, the revival of the group since it was essentially wiped out in the wake of the country’s civil war in 2006 and 2007 was made possible in large part due the imprudent policies of prime minister Nouri Al Maliki. The biased anti-terror laws as well as the tendency to employ sectarian rhetoric in military campaigns against militancy in Sunni areas, as he did in his speech in December, have estranged the Sunni population, which has played into ISIL’s hands.

These policies lead Sunnis, even while they dislike ISIL, to feel they have no stake in fighting ISIL or resisting its presence because the government is just as bad. Additionally, there is a growing sense among Shiites that they have no stake in fighting in Sunni areas and leaving their areas exposed to danger. That leaves the Iraqi government forces with little appetite to face a brutal and resilient militia.

The Washington Post aggregates content relating to ISIL’s ill-gotten gains. The rebels have reportedly stolen large sums of cash and gold bullion. Daniel Drezner tentatively suggests that as the threat from ISIL grows, the U.S. ought to at least consider cooperating with Iran to address it. And Keith Johnson, writing for Foreign Policy, describes how Iraqi Kurds are capitalizing on the growing chaos in northern and western Iraq.

Bob Corker, Ron Johnson, and Jeff Sessions Were Right about the VA



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The Senate passed a bill yesterday to reform the Veterans Health Administration: It would fund the opening of new hospitals and the hiring of new doctors, offer more ways to keep VA bureaucrats accountable, do some other random grab-bag spending (in-state tuition for vets!), and, lastly, expand coverage for vets to get care outside the VA when necessary.

Congress could reasonably expect that the bill they were voting on would be very expensive, but they didn’t know just how expensive until . . . the Senate was basically already voting on the bill. Yesterday, the Congressional Budget Office announced that it believes the bill will cost $35 billion over three years, ramping up to as much as $50 billion a year if its programs are made permanent. As, of course, they will be, meaning that this is an absolutely gigantic expansion of the VA. The Committee for a Responsible Federal Budget points out that over ten years of full implementation, the VA expansion, by the CBO’s numbers, could be even bigger than the system’s current budget:


Now, as the CBO noted, their score of the VA bill is highly uncertain. All budget projections are unreliable, of course. And this one is especially so: The CBO admits they have little idea how vets will respond to the policy changes (one of the big increases in costs, they predict, will come from vets getting care at VA hospitals for which they used to go elsewhere because of supply constraints and wait times). The score is also just of the “give vets more access to non-VA care” portion of the bill, not its other spending — though that’s less of a problem since the Republican House should plan to strip out basically everything except for that.

But the fact that this gigantic price tag was delivered around 4 p.m. yesterday, when the Senate voted around 4:30, is reason enough to slow down and reconsider just what they’re about to pass. Only three senators agreed, unfortunately, all Republicans: Bob Corker of Tennessee, Ron Johnson of Wisconsin, and Jeff Sessions of Alabama.

They deserve great credit for questioning the wisdom of passing what could become a gigantic new entitlement — that wasn’t paid for in any way, because it was passed as an “emergency” budgetary measure. The VA scandals demand an immediate response, of course, but the Senate bill isn’t necessary to execute it: President Obama has already ordered that the VA expand the coverage it offers outside the system for vets waiting for care. No program like this should be passed as an emergency measure. Fixing the VA’s problems, such as they are, may require lots and lots of money — and maybe the Senate wasn’t voting to spend quite as much money as the CBO just said. But any congressman with any respect whatsoever for the concept of fiscal responsibility — not deficit hawks, just anyone concerned with how much we spend and on what — should want Congress to take time to study this issue (as, indeed, the House is planning to).

Yet Corker, Johnson, and Sessions are getting blasted anyway by the traditional vets’ groups, who have never met a VA spending or expansion bill they didn’t like. The VFW:

As encouraging as the pending legislation is came [sic] three no votes from Republican Sens. Bob Corker (Tenn.), Ron Johnson (Wis.) and Jeff Sessions (Ala.), because they put dollars and cents above the interests of the nation’s veterans.

“There is a cost of going to war that includes taking care of those who come home wounded, ill and injured, and if these three senators have determined that we can’t afford to properly care for our veterans, then they should seek employment elsewhere!” exclaimed VFW National Commander William A. Thien.

“This is a national crisis that must be fixed, period,” he said. “This is about saving lives, restoring faith, and honoring a nations’ commitment to her veterans, and the VFW fully expects every member of Congress to support the final bill, because I can guarantee you that the price veterans paid in their own blood far exceeds any price tag some members of Congress want to proclaim is too high.

This kind of outrage, for one, ignores the senators opposing the bill weren’t even necessarily proclaiming the price to be too high — they were primarily objecting that it was irresponsible to pass it quickly and without paying for it. Of course, the price might in fact be too high: The sacrifices vets have made are incalculable but the benefits we provide to them aren’t, and shouldn’t be, unlimited. They deserve the care they’re promised, but the price at which that comes isn’t irrelevant. Almost every member of Congress, bowing to the political pressure on this issue, is basically pretending it is.

The VFW expressed hope that the House and Senate will go to conference on the bills they’ve passed, iron out the differences, and send the legislation to the president’s desk immediately. This isn’t good policy, but it’s par for the course with the VA, as Yuval has explained: Groups that represent vets, like almost any special-interest group, can be quite well-intentioned but can’t reliably distinguish between their institutional interests and the actual best interests of the people they’re supposed to represent.

Representative Jeff Miller (R., Fla.), chairman of the un-glamorous Veterans Affairs Committee, has suggested he’s not going to bow to vets’ groups – the House will, at the very least, find a way to pay for the provisions they want to pass. In doing so, as NR’s editors recommend today, they should strip out a lot of the unnecessary spending in the Senate bill, do further study on whether this is going to encourage vets to get more care from the VA, and focus solely on fixing the system, not expanding it. (Indeed, if we want the system to work well, there’s actually a case for curtailing eligibility so that vets get the very best care for their service-related injuries. Democrats, the VFW, etc. consistently want to expand eligibility.)

Here Are the States Whose Economies Grew and Shrunk in 2013



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The Bureau of Economic Analysis released the following chart showing how the size of each state’s economy changed in 2013 — winners in blue, losers in yellow:

Now, this isn’t per-capita income growth — a lot of the changes in the size of various states’ economies is due to shifts in population. Nonetheless, in part, people move where the jobs are. And it’s fairly clear where the U.S. economic recovery is really happening, viewed on a regional basis: western natural-resource states (note the Angola of the Great Plains, North Dakota, growing at a 9.7 percent clip for the whole year). Meanwhile, the West Coast isn’t doing as badly as some might have you believe, say, California is doing. And a few innovative red states are also looking good: Indiana compares well with neighbor Illinois, and North Carolina, in the midst of a conservative-governance revolution, is one of the brighest spots in the southeast. (Another, West Virginia, is home to some natural-gas development.)

 

If College Is a Great Investment, There Wouldn’t Be a Student Debt Crisis



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Calling the situation an “outrage,” President Obama announced on Monday that the student-debt burden is too high, and he proposed new regulations that would cap payments on older loans at 10 percent of income.

In the same speech, the president called higher education “the single best investment that you can make in yourselves and your future,” and later referred to it twice as “a smart investment.” But how that can be true if students are now drowning in debt?

There appear to be two incompatible narratives about higher education in the U.S. We are told that it is vital to encourage young people to attend college because the lifetime payoff far exceeds the cost of tuition and lost work years. At the same time, we are also told that students are struggling to service the loans they took out to pay for college, and they desperately need debt relief if they ever hope to get above water. These claims cannot both be true. If college had been a good investment for the students who took out loans, then there would be no student-debt crisis. Student-loan recipients would be paying off their loans with the income from their well-paying jobs.

Perhaps the debt problem is exaggerated, as most “outrages” in politics tend to be. But it’s another indication that the college-for-all mentality is not a harmless fantasy — real damage can occur, in the form of financial distress, when young people are encouraged to pursue higher education that doesn’t fit their abilities and interests.

The president’s actions implicitly acknowledge that college has not been a good investment for many people. Federal student loans are already subsidized with billions of taxpayer dollars every year. In addition to proposing new regulations, the president also endorsed Senator Elizabeth Warren’s bill that would allow students to refinance their federal loans at lower rates, at a cost of an additional $58 billion over ten years. If college is such a great deal, why are all of these new subsidies necessary?

Fortunately, it’s no longer just curmudgeons on the libertarian right who are arguing against college-for-all. Dean Baker of the left-leaning Center for Economic and Policy Research has pointed out that skipping college can be a reasonable decision for young people who do not anticipate a payoff. And when a recent piece at the New York Times’ Upshot highlighted the income gap between college grads and non-grads, Vox’s Matt Yglesias took the journalist to task for not adequately considering the underlying differences between each group. If this represents a new current of rational thinking about higher education, the president is swimming against it.

The Top Issue for Hispanic Voters Is Not Immigration



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There is no conservative consensus on immigration policy. Among reform conservatives, however, there is a shared conviction that embracing comprehensive immigration reform is not a political panacea for the right. Last week, Ramesh Ponnuru observed that while “the establishment assumes that the party’s most fundamental problem is its position on immigration and social issues, and the resulting perception that it is intolerant,” reform conservatives believe that the fundamental problem is a domestic policy agenda that is not sufficiently responsive to the interests and concerns of low- and middle-income households, and the resulting perception that the GOP is the party of the rich. A more narrowly-tailored version of the establishment view on immigration is that conservatives must embrace comprehensive immigration reform to appeal to achieve political succes as Latino voters come to represent a larger share of the electorate. This is a widely-held belief that Sean Trende of RealClearPolitics has thoroughly dismantled, on the grounds that Republicans could fare well politically even if they win only a modest share of the Latino vote, provided they win a larger share of the non-Hispanic white vote, and that the chief determinant of Latino political preferences will be the socioeconomic standing of Latino voters. Using the Partisan Voting Index (PVI), a measure of the extent to which a given constituency varies from the national average, Trende finds that Latino voters were more Republican relative to the country as a whole in the presidential election of 2012 than they were in the presidential elections of 1972, 1976, 1984, 1988, and 1996.

None of this is to suggest that conservatives can’t or shouldn’t do more to woo Latino voters. Yet in pursuit of this goal, they’d be wise to follow the course laid out by the reformists and not the establishment. The Pew Research Center has found that core domestic policy issues like education and jobs and the economy are considerably more important to Latino voters than immigration policy:

In 2013, some 57% of Hispanic registered voters called education an “extremely important” issue facing the nation today. That’s compared with jobs and the economy (52%) and health care (43%). Just 32% said immigration.

Since 2007, about one-third of Hispanic registered voters have called immigration an “extremely important” issue to them personally. Even among Hispanic immigrants, the share was 35% in 2012.

While about seven-in-ten of all Latinos in 2013 said it was important for Congress to pass significant new immigration legislation that year, the share who said so was higher among immigrants (80%) than among the U.S. born (57%). Among the general public, 49% of U.S. adults said so when asked the same question in February.

In some respects, Hispanics’ focus on education as a top issue makes sense. In 2010, Hispanics had the highest birth rates—80 births per 1,000 women of childbearing age, compared with 64 for blacks, 59 for whites and 56 for Asians. Fully one-in-three (33%) Hispanics are school age (under 18), compared with one-in-five (20%) whites.

The economy has been another top issue among Hispanics, who said the recession hit them harder than other groups. Among Hispanics in 2012, the economy and jobs (54%) ranked about as high as education (55%) as an issue “extremely important” to them personally. The unemployment rate among Hispanics peaked at 12.3% in 2010, compared with 8.9% among non-Hispanics. The unemployment rate for Hispanics has steadily fallen since then (8.9% in 2013), but remains above pre-recession levels (4.9% in 2006).

While reform conservatives tend not to emphasize the ways in which their prescriptions might appeal to various ethnocultural constituencies, their emphasis on improving the quality and the productivity of K-12 and higher education and on easing the economic burdens associated with child-rearing seem to be tailor-made for Latino voters with children in the home.

Re: Vox-splaining the VA



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A few weeks ago, I criticized Vox for doing a poor job of reporting on the Veterans Affairs scandal — not explaining that the issues were clearly systemic and missing the point that the clear problem with the VA, the crucial context, is that it’s very hard to align incentives in a government bureaucracy and avoid a situation where patients’ needs are ignored in favor of bureaucratic interests. I do think their coverage of the scandal remained woeful for a while — which is a big disappointment, since this was a perfect example of a complicated story where people need help understanding the underlying issues and policy details so they don’t have to rely on politicians’ posturing comments — but reporter German Lopez finally has explained that, yes, the problems with the VA are system (as was obvious from the very first investigative reporting on the topic) and they can largely be blamed on bad incentives (as was obvious immediately to anyone with an understanding of public-choice economics). 

How did Vox finally figure this out? Well, the conclusion became inescapable when the department’s audit of itself, a new version of which was released Monday, reached it. Thousands of vets, with victims almost everywhere in the system, are kept waiting for care because the department, rather than responding to their needs, invented ways to game its metrics and make it harder for vets to access or even schedule care.

Are Poor Countries and Rich Countries Exactly Alike? No, They’re Not.



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Earlier this week, I wrote a column for Slate making the case for work requirements for able-bodied recipients of cash welfare, and more broadly for making a distinction between those women and men who do what they can, consistent with their skill level and life circumstances, to support themselves and those who do not. My premise, drawing on Amy Wax’s work on “conditional reciprocity,” is that while society ought to do everything it can to help those who are doing what they can close the gap between what they are capable of earning and what they need to maintain a decent standard of living, society’s obligation is not as great for those who choose not to work despite having the ability to do so. I believe in this idea of conditional reciprocity even if it entails devoting more resources to anti-poverty efforts than if we simply disbursed funds to all individuals, regardless of whether or not they work or are seeking work consistent with their abilities. Suffice it to say, my moralistic argument was not universally embraced.

Yet I should note that there is an evidence-based case for what I call “no-strings-attached” money. It happens that this case rests upon outcomes in the world’s most impoverished countries. Dylan Matthews of Vox helpfully brings this evidence to light, yet he also conflates two quite different issues:

As solutions to global poverty go, “just give poor people money” is pretty rock solid. A recent randomized trial found that Kenyans who received no-strings attached cash from the charity GiveDirectly built more assets, bought more goods, were less hungry, and were all-around happier than those who didn’t get cash.

But voters and politicians generally prefer giving people specific goods — like housing, food, or health care — rather than plain old cash, for fear that the cash might get misused by unscrupulous poor people. Maybe the recipients will just blow the cash drinking! This particular concern comes up both in domestic and global poverty conversations; Fox News is obsessed with the possibility of people using federal government benefits like food stamps to buy fancy seafood or hang out at strip clubs, but mainstream global development experts often express these concerns too. As Paul Niehaus, the founder of GiveDirectly, once put it, “It is pretty ironic the number of conversations I have had with development people about the poor and their drinking—over drinks.”

The trouble is that there is a big difference between the conditions that give rise to poverty in a domestic context, where brute survival is not generally at stake, and in a global context, where it is. My argument rested in large part on the legitimacy of the welfare state. Work requirements for the able-bodied poor help ensure that the beneficiaries of public assistance are perceived as deserving. This matters in societies in which a broad base of employed middle-income taxpayers help finance transfers. It matters less in societies in which transfers are largely funded by outsiders, via government-to-government transfers from affluent countries, or through the exploitation of point-source natural resources, like oil and gas. As Nicholas Eubank has observed, historians of state formation in early modern Europe have long seen the rise of the representative state as the result of a compromise between autocratic governments that needs tax revenues to finance military conflict and other endeavors and citizens who were only willing to consent to taxation in exchange for greater responsiveness from the state. The government of Somaliland, a state that is not recognized as sovereign by the international community, is, unlike many extremely poor countries, almost entirely dependent on local tax revenues, and so, according to Eubank, it has had little choice but to develop inclusive, representative, and accountable political institutions.

In weak states that aren’t funded by local tax revenues, the “legitimacy” question doesn’t arise in the same way, particularly when it comes to the disbursement of public assistance. The communities that benefit from direct assistance aren’t divided between those who fund direct assistance, and who work, and those who benefit from it, and who might or might not work. Rather, it is more common that the funds are coming from outside of the community, and virtually everyone “works,” albeit in the informal sector. That said, norms around “conditional reciprocity” do indeed obtain in many poor societies — but these norms operate through the kin-based social networks that the dominant mode of social organization in traditional societies. Modern societies, in contrast, are dominated by non-kin-based social networks, and the most successful states, or rather the states that do the best job of cultivating solidarity among citizens, appear to be, and this is my subjective judgment, those that build in norms of conditional reciprocity into their institutions.

Why Energy Innovation Needs Room to Grow



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It’s been gratifying to see lots of people engage with Room to Grow, the new collection of policy essays from the YG Network, where I’m an advisor. Recently, there’s been some discussion of Adam J. White’s chapter on energy policy. A number of critics, including Matt Yglesias of the new liberal news site Vox, have taken White to task for failing to address climate change in his discussion of energy policy. Yglesias writes:

They don’t mount an argument that the scientific consensus on anthropogenic global warming is mistaken. They don’t mount an argument that despite the scientific consensus, inaction is nonetheless the right policy. They don’t mention it at all. Not even as something their political opponents wrongly care about.

The thought process that ended with this approach is easy enough to understand. Whether climate change is a massive conspiracy orchestrated by Al Gore, 99 percent of scientists, and a dazzling array of foreign governments or a genuine problem is hotly debated inside the conservative movement. Whether or not fossil-fuel producers should be hampered in their activities by regulatory concern about pollution, by contrast, is not controversial. For smart, up-and-coming conservatives to mention climate change, they would have to pick a side on the controversial issue. Do they sound like rubes by siding with the conspiracy theorists, or do they alienate the rubes by acknowledging the basic facts and the coming up with some other reason to favor inaction?

The optimal choice is not to choose.

This is all very stimulating. But as White points out, he does address climate change, albeit briefly:

My paper highlights the most contentious greenhouse gas issue in the fracking debate: fugitive methane emissions. On that point I discuss the recent study, in the Proceedings of the National Academy of Sciences, putting the methane debate in context and finding that it does not pose a great risk of exacerbating climate change. And I also quote White House energy and climate adviser John Podesta, who urges that natural gas development is key to the Administration’s goal of “moving toward a clean-energy future.”

White acknowledges, however, that he doesn’t center his discussion on climate change, as his chapter was first and foremost about how energy policy impacts the well-being of middle-income U.S. households. Why might that be the case? It helps to understand that from the beginning, the reform conservative project has rested on the idea that conservative elected officials, particularly at the national level, haven’t been sufficiently responsive to the interests and concerns of their constituents, including their conservative constituents. And so we have called for crafting an agenda that is more responsive, as Ramesh Ponnuru, who played an important part in the Room to Grow effort, explains:

The establishment assumes that the party’s most fundamental problem is its position on immigration and social issues, and the resulting perception that it is intolerant. The reformists believe that the deeper problem is the party’s economic agenda, and the resulting perception that it is indifferent to the interests of most people. And so while some of us want to enact the kind of immigration legislation that has passed the Senate and some of us do not, none of us believe that enactment would go a long way toward fixing what ails the Republican party.

At least some members of the establishment also believe that GOP opposition to cap-and-trade makes Republicans look short-sighted and foolish, and the wince at the criticism that it represents nothing more than crass political opportunism. (A related argument is that conservative skepticism about whether or not anthropogenic climate change is a real phenomenon is damaging to the right, and in this regard, I’m far more sympathetic to the establishment view.) But Republican opposition to cap-and-trade, and support for the vigorous development of domestic hydrocarbon resources, is actually very responsive to the views of the constituents represented by conservative lawmakers. As of last September, for example, 84 percent of self-identified Republicans supported building the Keystone XL pipeline, a proxy for some of the larger issues surrounding energy policy.

Yglesias’s critique reflects a misunderstanding of what Room to Grow is trying to accomplish. There is plenty of room for conservatives to address climate change. Room to Grow, however, seeks to craft a new, more responsive approach to domestic policy, and White’s (correct) assessment is that middle-income voters are primarily concerned with energy prices, and so measures designed to address rising energy prices, via supply-side reforms, were the focus of his chapter.

As it happens, I think there is plenty for conservatives to say about energy policy as it relates to climate change. My new column for Reuters Opinion does just that, and I draw on Jim Manzi’s recent analysis of the EPA’s new power plant regulation proposal. Jim, along with Oren Cass and Samuel Thernstrom of the indispensable Energy Innovation Reform Project, is one of the most articulate conservative proponents of what I call a “technology-first” strategy, and I channel them both in the column. Jim reminds readers that in 2007, he called on conservatives to both embrace the scientific consensus that anthropogenic climate change is a real phenomenon (a view still held by only a minority of GOP voters) and to strongly oppose new carbon taxes in favor of public investment in basic technological research designed to deliver energy breakthroughs that private entrepreneurs could then exploit. And in the years that followed, it is this playbook that has helped decarbonize the U.S. economy:

Suppose I told you that I believed that America could within a decade develop a new green-energy technology that could lead us to have the fastest rate of reduction in CO2 emissions of any major country in the world, and permanently reduce absolute emissions such that we never again emitted what we did in the 2005 baseline year? And further, instead of this requiring us to trade-off emissions reductions against the costs of lower economic growth, that this technology would increase economic growth, and add jobs, because of greater productivity? And it was able to radically reduce our reliance on overseas sources of energy so much that North America could be practically self-sufficient for energy? And it was a proprietary American technology that would provide competitive advantage to our manufacturing industries, and would itself become a significant source of exports?

This sounds like a fairy tale. But in fact, this is precisely what has happened in the seven years since I wrote that article. America has created a technology-driven energy revolution, in a manner that has been orthogonal to the whole policy debate in Washington. It is the classic entrepreneurial response to the question “Do you want A or B?”  Invent C. 

It was not done through some Ayn Randish Private Sector Good, Government Bad morality tale. But the story of how this happened (which I reviewed in National Affairs this spring) should make clear that the role of the government in this area should be very different than what the Obama administration and its allies believe. 

There are many, many issues that Room to Grow doesn’t address, the most important of which, in my view, are housing policy and immigration, areas where there is considerable disagreement among conservatives. Yet Room to Grow is best understood as the start of an ongoing effort to craft policies that are responsive to the interests of low- and middle-income voters and that will help revitalize the American economy. Energy policy is going to be an important part of this effort, and we will have more to say about it.

One of the energy policy ideas I’m most excited about is Robert Zubrin’s call for shifting America’s transportation system from its current reliance on gasoline as a fuel to methanol. William Ahlgren has similarly touted the benefits of a “dual-fuel strategy,” in which methanol would play a crucial role. The “methanol solution,” as Zubrin calls it, offers economic, strategic, and environmental benefits, and it appears to be a good example of the kind of win-win, technology-first strategy we ought to pursue. If methanol is such an attractive fuel, why haven’t entrepreneurs driven a shift from gasoline to methanol? As Zubrin explains, one of the biggest obstacles has been the EPA. Eliminating the regulatory hurdles would in itself do much to fuel a methanol boom. The goal is not to dictate choices regarding energy choices. Rather, it is to invest in basic research and to allow commercially competitive technologies the “room to grow” they need to flourish.

Are Immigrants Really More Likely to Become Silicon Valley Tycoons?



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Over at the AEI blog last week, James Pethokoukis extolled immigrant entrepreneurship by referencing the following chart:

But does the chart really demonstrate “the importance of immigration to the U.S. economy,” as Pethokoukis writes? Not exactly.

To start, a more accurate headline for the chart would be “60% of Top 25 Tech Companies Have a 1st or 2nd Generation Co-founder.” Since most of the companies listed have multiple founders, that’s not especially impressive. Facebook, for example, had five co-founders by most accounts, but the chart lists only one (Eduardo Saverin) as an immigrant. There are lots of immigrants and children of immigrants living in the U.S. — we’d expect many to be involved in the tech industry even if their average skill level was no different from the native population’s.

To assess immigrant entrepreneurship, it would be better to know the percentage of all the co-founders in the companies listed above who were first- or second-generation immigrants. After spending some time with Wikipedia, I came up with a rough estimate of 36 percent.** For context, about 25 percent of all adults in the U.S. are first- or second-generation immigrants. So there’s probably a greater likelihood for immigrants and their children to be successful entrepreneurs, but it’s not the vast over-representation implied by the chart.

And even to the extent that brilliant, tech-savvy immigrants and their children are boosting our economy, that is a case for high-skill immigration, not for immigration in general. Unfortunately, it’s common practice for immigration enthusiasts to cite the contributions of high-skill immigrants as justification for the mass immigration of primarily low-skill workers.

Exhibit A: One of the chart’s data sources is a corporate group called “Partnership for a New American Economy.” Its list of principles includes an amnesty for illegal immigrants and easier recruitment of “seasonal” workers. How many of those immigrants will become Silicon Valley entrepreneurs? The chart’s other data source is the National Foundation for American Policy, a think tank that supports amnesty, guest workers, birthright citizenship, and extended-family reunification — all policies that bring substantial numbers of low-skill immigrants, but not many captains of industry.

Immigration of all types carries both benefits and costs, but the policy trade-offs are much different for high-skill workers than for low-skill ones. Confounding the two leads to a less informed discussion.

** Obviously, this twenty-minutes-with-Wikipedia methodology is going to be imprecise, and educated guesses were sometimes employed when a co-founder’s immigration status could not be verified. I did detect some irregularities in the chart — it’s quite a stretch, for example, to call Jeff Bezos a second-generation Cuban. His stepfather was a Cuban immigrant.

Student Debt Reform vs. Higher Education Reform



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I very much enjoyed Amir Sufi and Atif Mian’s new book House of Debt, and I’ve been meaning to write about it at greater length. In conversations with friends and colleagues, however, I’ve encountered many objections to their central thesis concerning the central role of household indebtedness to the weakness of the current U.S. economic recovery, which Daniel Akst ably summarizes in his Wall Street Journal review, and to the practicality of some of their forward-looking prescriptions. Yet many of their prescriptions strike me as enormously appealing, including their call for indexing student debt obligations to the state of the labor market, which they’ve discussed in the Washington Post:

Inflexible student-debt contracts place an unfair burden on young Americans. This flaw could be addressed by indexing federal student loans to the unemployment rate new graduates face.

For example, the government might use the average unemployment rate of recent graduates in normal, non-recessionary years — which a variety of estimates suggest is around 6 percent — as a benchmark. In any year when that average is higher, the government could automatically and permanently lower graduating students’ principal balance by, say, 5 percent for every percentage point that the average is above the benchmark. In this example, a student who owed $10,000 upon graduation in 2009 — when the average unemployment rate for recent graduates was 18 percent — would see a reduction in the principal balance of $6,000. A formula like this would ensure that students who graduate into the worst job markets would get the most debt relief.

This kind of contract is better because it shares the risk associated with economic downturns. And because it gives these graduates more buying power, it would address the government’s charge to stabilize the economy.

One virtue of this approach is that unlike debt reforms that peg interest payments contingent to income, like those proposed by the Obama administration, it eliminates the risk that graduates will seek to minimize their interest payments by taking lower-paying jobs. The thornier question is how interest payments would vary. As Sufi and Mian note, the deterioration of the labor market for recent graduates deteriorated dramatically between the fall of 2007 and 2009, with the unemployment rate among the previous spring’s college graduates rising from 8.5 percent to almost 18 percent. It seems reasonable to reduce interest payments for members of the class of 2009. But what if the magnitude of the deterioration in the labor market were smaller, and how might members of the class of 2007 react — particularly if they find themselves unemployed or underemployed?

Ultimately, the best way forward on student loan reform is to improve the productivity and quality of post-secondary education through greater competition and transparency, as Andrew Kelly recommends, to restrain cost growth, and perhaps even to drive cost reductions. Similarly, Kelly suggests that higher education institutions bear some responsibility for student loan defaults. Defenders of the status quo often insist that this will lead higher education institutions to become more selective, thus expanding the ranks of the underserved. Given the costs of pursuing this more selective strategy (the share of students who need remedial education is quite high and those who don’t need it are relatively well-served already), it seems more likely that higher education institutions will be forced to improve their advising, to steer undergraduates away from programs they are unlikely to successfully complete, and which are unlikely to lead to remunerative employment. While Kelly’s playbook doesn’t speak directly to the specific problem Mian and Sufi identify (inflexible debt contracts), it speaks to a larger problem: if graduates are struggling to bear their student debt obligations, they’ve been failed by their higher education institutions, which turned out to be more expensive than they were worth. Rather than “solve” the debt problem by subsidizing student loan debt more generously, we’d do well to solve it by increasing the value of higher education. The appalling lack of transparency around the educational and labor market outcomes for graduates of specific higher education institutions is a big part of the problem.

All of this is to say that while I’m not opposed to Sufi and Mian’s proposal, and while it is certainly superior to recent proposals from President Obama and Sen. Elizabeth Warren, I think we can do better.

Instead of Spending More Federal Money on Roads, Let’s Spend Less



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According to Joshua Schank, president and chief executive of the Eno Center for Transportation, the chief barrier to improving the quality of the U.S. transportation system is a lack of federal funding, and so Schank calls for reducing reliance on user fees and instead devoting a larger share of federal revenues to transportation and transportation planning. Though it’s not fair to say that this is the worst idea I’ve ever heard, I do think it’s a pretty bad one, for a variety of reasons.

First, federal transportation funding is already moving away from reliance on user fees to general revenues, as Schank acknowledges. His real concern is that the federal government doesn’t spend enough on infrastructure. But U.S. public investment in infrastructure (averaging 3.3 percent of GDP from 2001 to 2011) is at the higher end of the range for affluent market democracies (from 2 percent to 3.5 percent), and the Federal Highway Administration has found that the quality of U.S. highways has been improving since 2007. This is not to suggest that the quality of the U.S. transportation can’t be improved, or that we surpass other developed countries on that front. Rather, it is not obvious that a substantial increase in federal funding should be our option of first resort.

Second, the U.S. is notorious for overspending on infrastructure. Schank correctly observes that total driving has stagnated and that more than 80 percent of Americans live in metropolitan regions, and he frets that overreliance on the gas tax, a declining revenue source, locks us into an overemphasis on highways at the expense of other transportation modes, which is entirely reasonable. Yet U.S. construction costs, for large-scale road and mass transit projects, are far higher than in developed Europe and Asia, including in countries with stringent labor market and environmental regulations. There is good reason to believe that simply embracing international best practices would greatly reduce the need for increased expenditures.

Fourth, Schank makes reference to the “economically beneficial concept of congestion pricing,” yet he neglects to add that if the U.S. were to embrace congestion pricing in a meaningful way, infrastructure maintenance costs would fall, as the CBO found in 2009. Instead of focusing on the need for more federal funding, Schank ought to instead focus on encouraging the use of value-based pricing throughout the transportation system, as Tyler Duvall and Clifford Winston have argued. Vehicles miled traveled taxes (VMT), for example, can ensure that even as vehicles grow more fuel-efficient, user fees can still capture the extent to which vehicles cause wear-and-tear on roads. Robert Atkinson has proposed requiring heavy trucks to pay a new VMT, which would replace all other taxes paid by trucks.

Fifth, relying on general revenues and not user fees undermines spending discipline. Matthew Kahn and David Levinson have proposed directing existing gas tax revenues to maintaining existing roads and bridges while funding new highway infrastructure through a Federal Highway Bank (FHB), which would offer loans to state governments that propose projects that meet demanding performance criteria and that demonstrate their ability to repay the loan through the use of value-based pricing and new tax revenues deriving from increased land values and economic activity. As an alternative, the U.S. could embrace the strategy outlined by Rohit Aggarwalla, who has called for ending the federal gas tax and greatly reducing the federal role in surface transportation, giving state governments the autonomy they need to pursue the transportation projects best suited to their needs.

Sixth, there are strong precedents for improving transportation quality by depoliticizing the financing of transportation by handing over authority to public road enterprises. In Australia and New Zealand, transportation is managed by publicly regulated, self-financing corporate entities. And according to David Levinson, the result is a higher level of customer satisfaction and productivity-enhancing innovation than we see in the U.S., despite our relatively high level of spending.

Before we leap to spending more money — Schank actually suggests devoting 10 percent of income tax revenue at a time when the population is aging, revenue levels remain depressed, and a new health entitlement has been established — we ought to at least consider proven methods of delivering better infrastructure for less money.

A Response to Michael Hiltzik on Reforming SSI



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I recently participated in a vitally important project that produced the YG Network’s new reformocon policy book, Room to Grow. I contributed a chapter on antipoverty policy, in which I made the case for work-promoting reforms to means-tested programs and a voucher-based early childhood program. My not-so-secret agenda is encouraging conservatives to develop a robust upward mobility program. Indeed, all of the reformocons in the book have the not-so-secret agenda of moving conservative policy in a direction that offers more help to the poor and middle class without abandoning conservative principles and while promoting market-leveraging solutions.

But L.A. Times columnist Michael Hiltzik can see right through all that to the “contempt for the underprivileged — especially the disabled” that my co-contributors and I bear. He uses his latest column not only to shine a light on my cruelty, but to expose Robert Stein’s nefarious plan to give middle-class families tax cuts for its real goal: making people have kids to support their retirement, so that senior entitlements can be abolished, or something. Even The New Republic’s Danny Vinik is exposed as “desperate” for thinking the book has “valid” ideas. Oooo . . . kayyyy . . .

Let me take a moment to defend my own contribution against Hiltzik’s unhinged critique, which substitutes righteous indignation for solid evidence. I’ll stick to the Supplemental Security Income (SSI) program here and save the rest for another post. SSI serves poor elderly, blind, and disabled children and adults. I argue in my essay that families have increasingly tried to receive SSI benefits for their children rather than the less generous and less open-ended benefits from the main cash assistance program for poor families with kids. States have encouraged these efforts for their own reasons, as I will discuss below. The result is that the beneficial work-promoting reforms to welfare that have been implemented over the last 20 years have failed to help these families. In fact, many of these SSI kids graduate right onto the adult SSI rolls when they become adults, which will hamper their upward mobility as young adults and beyond.

Hiltzik says my claim that “[i]ncreasingly, families seek and obtain disability status for children with comparatively minor (and often dubious) learning disabilities or behavioral problems” in order to receive SSI benefits is a “fact-free assertion retailed by a succession of appallingly lazy new reporters and repeatedly debunked by disability experts.” Well, glad it’s not just me!

He concedes that I actually cite some research, specifically a book by Cornell economist Richard Burkhauser and Federal Reserve Bank of San Francisco economist Mary Daly, both of them “disability experts.” The problem, Hiltzik says, is that he “couldn’t find any statement in that study that children on disability characteristically had only ‘minor’ or ‘dubious’ impairments.” A Google Books search confirms that “dubious” does not appear in the book, while “minor” appears once on page 33 in an unrelated context. Of course, those words are mine, not the book’s, which is why there are no quotation marks around them in my essay. But the point I make and attribute to Burkhauser and Daly is theirs in Chapter 6 of the book. I’d encourage Hiltzik to reach out to Burkhauser, who I count as a friend, if he thinks I’m misattributing the point. And I’d encourage him to review the chapter if he wants their empirical case.

Hiltzik says that by themselves, learning disabilities and behavioral problems don’t qualify kids for SSI “as any expert” could have told me. That would be a devastating rebuttal had I argued that they did. In theory, parents of children with these problems have to show “marked and severe” functional limitations and that the condition is likely to persist for at least a year (or to kill them, and of course, there are income and asset requirements). The questions for anyone interested in SSI policy — as opposed to feeling good about one’s pure-heartedness — are these: (1) whether the share of children with learning disabilities and behavioral problems has increased in a way that suggests that children with relatively minor impairments increasingly receive SSI instead of less generous cash assistance, and (2) whether this is a problem for those children.

Here is a chart that took me about 15 minutes to create, using data from the Social Security Administration’s SSI Annual Statistical Report and U.S. Department of Health and Human Services data compiled by the respected nonpartisan group Child Trends:

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In 1990 there was one child on SSI for every 25 on Aid to Families with Dependent Children (AFDC), the primary welfare program for poor families. By 2010, there was one child on SSI for every 2.7 children on Temporary Assistance for Needy Families (TANF), the post-1996 version of AFDC.

Keep reading this post . . .

What America Can Learn from Japanese Housing Policy



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Recently, Stephen Smith highlighted the permissiveness of local land-use regulation in Japan, and particularly in Tokyo, where builders in the city’s 23 innermost wards began construction on almost 110,000 new housing units in 2012. By way of contrast, England, home to 53 million of Britain’s 23 million people, had a mere 115,000 housing starts that same year. The New York metropolitan area, with a population more than twice as high as inner Tokyo, issued a mere 27,000 housing units, and the number of housing starts was smaller still. While the Japanese economy is heavily-regulated in some domains, like retail and agriculture, it takes a laissez-faire approach to urban land use. Smith attributes Japan’s free urban housing markets to the fact that land use is regulated at the national level rather than the local level. “The general rule in land use politics,” according to Smith, “seems to be that the more local the level of decision-making, the less density is allowed.” In the U.S., where zoning is primarily a local responsibility, there is “a deep-seated antipathy toward density” while in Toronto, where urban land use is primarily controlled by the provincial government of Ontario, cities are under pressure to allow more growth in the center of town. One consequence of Tokyo’s bias in favor of building is that while rents in New York city have soared over the last decade, rents in Tokyo have actually fallen, albeit slightly, over the same interval.

Is there any American city that is getting housing right? Houston, a sprawling city that’s been getting denser as development restrictions limiting multi-unit apartment buildings have come crashing down, appears to be getting there.

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