The Agenda

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

Quick Thought on Job Destruction and Job Creation


Are we being too pessimistic about the future labor market prospects of human workers in a world in which the pace of automation is accelerating? I tend to think that the answer is yes, provided we allow for the emergence of new business models that give rise to new modes of consumption, which in turn will create new opportunities for human endeavor. This is why, as Brink Lindsey often argues, most recently in an interview with Jim Pethokoukis, deregulation is more important than ever: regulatory accumulation stymies the trial-and-error emergence of new business models, which in turn drives productivity growth as successful new business models spread and older models either adapt to successfully compete or fade away. The classic example of job-creating innovation is the rise of the automobile. Though automobiles displaced a wide array of other transportation technologies, it gave rise to a new universe of economic opportunities as new business models emerged around it. The rise of the smartphone has stimulated new business models and new modes of consumption, and as software eats the world, the pace of small-scale, incremental improvements to the consumer experience has picked up considerably. To some extent, however, software-enabled services are able to improve the consumer experience at a rapid clip because they are spared the friction of having to constantly train and retrain a less- or semi-skilled consumer-facing workforce, hence the anxieties about the future of work.

Farhad Manjoo offered an illuminating discussion of these larger issues in a column on Instacart, a new grocery delivery service that eschews warehouses and fleets of trucks (think of AmazonFresh, FreshDirect, and Peapod) in favor of a peer-to-peer model in which customers hire “personal shoppers” to shop for them at local grocery stores and then deliver the groceries to their home with their own automobiles. Brilliantly, Instacart doesn’t pit itself against existing brick-and-mortar grocery stores. If anything, it is their ally in their efforts to compete with services like AmazonFresh, which aim to displace brick-and-mortar grocery stores by offering lower prices or greater convenience, and which cut their costs by locating their warehouses in relatively low-cost areas, spending less on lighting than grocery stores that aim to create an inviting environment, etc. The Instacart insight is that there is a large market of affluent, price-insensitive customers who are disinclined to wait several hours for their AmazonFresh delivery, and who are happy to pay a substantial mark-up for speed, convenience, and variety. And the fact that Instacart doesn’t have the same upfront start-up costs as AmazonFresh et al. means that it can spread to new markets faster, bringing to mind the concept of “big-bang disruption.” It could be that what we thought was the wave of the future — all groceries will be delivered from huge warehouses on the outskirts of cities — will wind up as just one of many niches in a diverse grocery economy. This in turn has implications for the labor market, as Manjoo writes:

Instacart’s success suggests that rather than simply automate workers out of their jobs, technology might create new labor opportunities for people who haven’t acquired formal credentials or skills in an economy where low- and medium-skilled workers face a bleak outlook. Like the ride-sharing service Uber, Instacart creates work by connecting affluent customers who have more money than time with part-time workers who have the opposite problem — lots of time, not enough money.

To his credit, Manjoo provides a contrary view, and he coaxes a telling observation from Instacart’s 27-year-old founder, Apoorva Mehta:

Lawrence F. Katz, an economist at Harvard who studies technology and labor, offered a few reasons to stifle excessive optimism about Instacart’s model. First, technology may yet one day render Instacart’s shoppers obsolete. Drones could pick our groceries, after all.

Another possibility, he said, is that wages will be bid down as more people compete to become Instacart shoppers. Or, as the company’s software becomes more sophisticated, it could squeeze more efficiency out of workers; they may end up doing more work and not earn any more money for it.

A third problem is the lack of job security and benefits, which were once considered standard features of middle-class jobs. But Mr. Mehta says he doesn’t see that shifting. “The advantage to this model is that you choose your own hours,” he said. More corporate control over work habits “is something that would drive a lot of people away. The independent contractor model — I’m not sure that’s going to change.”

Katz raises the familiar anxiety, which is that the jobs created by innovative technologies will soon fall to the next round of innovative technologies. It is also true, however, that Katz’s scenario implies a world in which the cost of drone technology has plummeted, thus reducing the cost of a wide array of goods and services that now depend on expensive infrastructure and labor. If excessive optimism about Instacart’s model is misplaced, it is misplaced because we’re not being optimistic enough about future advances in drone technology, which have the potential to greatly increase real or effective income even as they depress wages for those who compete with drones. (The deeper concern is that wealth in this world will accrue to the owners of the drones, or the underlying intellectual property embedded within them.)

Mehta, meanwhile, speaks to how workers might adapt to this new environment. Many of Instacart’s personal shoppers are, according to Manjoo, college students and middle-aged mothers looking for flexible work. One wonders if jobs like being a personal shopper for Instacart might work because they are compatible with a lifelong learning, in which people continuously upgrade their skills.

Elsewhere, Matt MacFarland reports that, according to data provided by Uber, the median wage for UberX drivers working at least 40 hours a week in is $90,766 a year in New York city and $74,191 in San Francisco $74,191. The problem, however, is that as MacFarland goes on to observe in the next paragraph, the numbers provided by Uber don’t factor in the costs of owning and operating a vehicle, including fuel costs. Among the UberX drivers I’ve encountered, I’m told of the ways in which Uber’s consumer-friendly practices, including its openness to steady increases in the supply of drivers, have squeezed net income over time, and so my sense is that MacFarland is offering too sanguine a picture, at least with regards to take-home pay. In New York city, UberX has a minimum fare of $12, a base fare of $6, and a charge of $0.75 per minute at speeds of less than 11 miles per hour and $3 per mile at speeds above 11 miles per hour. The vehicles Uber has approved for use for its UberX program tend to be fairly fuel efficient, yet one assumes that drivers are driving quite a lot to earn a substantial amount, and much of this driving is between pick-ups. One of the many reasons some drivers prefer to drive for Uber than for traditional taxi companies is that payment is guaranteed, and so drivers don’t face the risk of being stiffed after traveling to a peripheral locale. Yet this also means that there is an increased risk that you’ll be driving with an empty vehicle for some stretch of time. None of this is to suggest that driving for UberX is a bad deal. Yet if the median wage reported by Uber for its New York city and San Francisco UberX drivers were close to their net income, I suspect that we’d see a much larger and faster exodus of workers from traditional taxi services to UberX.

It has been widely-reported that Uber intends to move to self-driving vehicles as quickly as it can, which tends to reinforce Katz’s point. As Stephen Smith of Next City has observed, however, it will be a long time before self-driving cars can successfully navigate densely-populated cities, as the very fact that they are safe for pedestrians suggests that they will be crippled by routine jaywalking. And just as Instacart demonstrated that AmazonFresh wasn’t the last word in business model innovation in the grocery space, one can imagine new labor-intensive business models emerging as drivers are let go. In his New York Times Magazine article on the use of technology in public spaces, Mark Oppenheimer reported “that people like hanging out in public more than they used to, and those who most like hanging out are people using their phones.” Technology appears to have made public spaces more inviting, which in turn has created new opportunities for vendors, buskers, and others who make money by attracting a crowd.

In the latest issue of City Journal, John McGinnis, a professor at Northwestern Law School, describes how advances in machine intelligence “will create new competition in the legal profession and reduce the incomes of many lawyers.” And his conclusion tentatively suggests that the ultimate result of this development might be “a decline in lawyers’ social influence”:

Since the birth of the modern regulatory state and social democracy, lawyers have had incentives to increase and revise legislative mandates; they became the technocrats of regulation and redistribution. The more a nation intervenes in the free market, the more in compliance costs and transfer payments that lawyers can expect to receive. As a result, lawyers don’t tend to be strong proponents of economic liberty or even of a stable rule of law. Their interest frequently lies in legal complexity and the uncertainty it brings.

The decline of lawyers may therefore prove a boon to the rule of law and to market norms. Computational innovators benefit from capitalism’s process of creative destruction; their new applications transform industry after industry. Their success lies with a stable rule of law and relatively light regulation. True, once successful, innovators become incumbents and may seek to use government to hamstring new entrants. But the dynamism of technological acceleration will make it difficult even for big government to hold back waves of new “disruptions.”

So we come full circle. If, as Brink Lindsey suggests, regulatory accumulation limits our ability to respond creatively to technological change, the wave of creative destruction that is already transforming the legal industry might make us better able to navigate the larger current.


Bill de Blasio’s War on Welfare Reform


Heather Mac Donald reports on how the de Blasio administration is dismantling welfare reform in New York city. Steve Banks, the new head of the Human Resources Administration, has, among other things, eliminated the requirement that able-bodied adults without children look for work in exchange for SNAP benefits, allowed welfare recipients to count college attendance as work for the purposes of meeting federal welfare requirements, and abandoned the city’s efforts to ensure that immigrants don’t become dependent on welfare. While most observers believe that New York city has been one of America’s welfare reform success stories, Banks believes that the city’s enforcement of work requirements has artificially limited the number of welfare recipients, and so he is looking to relax work requirements in various ways. He is also allowing applicants for SNAP benefits to “self-attest” to their housing expenses, thus making it easier for households to defraud the government.

Last month, Robert Doar, Banks’ predecessor as head of New York city’s Human Resources Administration and now a fellow at the American Enterprise Institute, shared ten welfare reform lessons drawn from his experience. And it seems that Banks is violating almost all of Doar’s tenets. Among other things, Doar warned that people will always try “to get over”:

“To get over” is a very New York expression meaning to steal – usually from government and usually to obtain benefits that one isn’t entitled to. There’s no better opportunity for it than welfare programs. Turning a blind eye to the potential for fraud and abuse is naïve. An agency like HRA can have the most capable and unimpeachable top leaders, but these welfare programs are huge and involve millions of transactions and thousands of workers and recipients. The opportunities to take a little here and a little there are all over the place. During my seven years at HRA, we had scandals involving child-care centers that had no children, welfare workers who gave themselves food-stamp benefits, nonprofit employment-services providers who billed for phony job placements, and health-care programs that never filled out required paperwork for thousands of clients. I recruited and hired a former federal prosecutor and nationally renowned expert in Medicaid fraud to serve as our agency’s chief integrity officer and gave him wide latitude to improve all of our protections against abuse, and I was still worried.

The vast majority of expenditures in welfare programs are consistent with program rules and not fraudulent. But the overall size of the spending is so great that even a 5 percent error rate is significant. And, more important, taxpayers have a right to expect that spending on programs be managed properly. To be sure that our entire agency was focused on fraud detection, we set an annual goal of more than $600 million in cost avoidance and recoveries from anti-fraud efforts.

Rather interestingly, Banks seems to think that making it easier “to get over” is a noble cause. Whether or not you believe that fraud is pervasive, the perception that fraud is pervasive undermines support for welfare, wage subsidies, and work supports. Moreover, New York city is a diverse jurisdiction, in which the foreign-born share of the population is 37 percent. Not all immigrants, including lawful immigrants, are socialized into believing that local government is “us” rather than “them.” Implicit in Banks’ philosophy is the notion that we create a sense of “us” by, for example, being more generous and permissive. Another view, however, is that for many immigrants, it seems harmless “to get over” when the consequences aren’t clear and visible. If you know that underreporting income will mean that you will secure a benefit for your own family members, why wouldn’t you do it? You wouldn’t do it out of a sense of obligation to abide by the rules. Yet this sense of obligation is created when those who set the policies in question project that they too are serious about enforcing the rules. By making it difficult “to get over,” you are teaching beneficiaries that the local government takes the logic of conditional reciprocity seriously, and you are also teaching taxpayers that their contributions are being taken seriously as well. This focus on enforcement is central to the legitimacy of the welfare system, and it is deeply unwise to undermine it.

With this in mind, Doar explained why Bloomberg’s HRA sought to keep immigrants from becoming “public charges”:

There is one aspect of the immigration process that was intended to discourage welfare use by non-citizens. It is known as the “sponsor recovery” process. Many legal immigrants seeking citizenship are required to submit a form signed by an American citizen who is sponsoring them, and that form clearly states that should the person being sponsored receive welfare benefits, the government agency providing those benefits may recover the cost of assistance from the sponsor. I know of very few welfare agencies that have actually enforced this provision — except New York City’s.

During 2013, we sought to recover expenditures from sponsors of immigrants who had received cash welfare as single adults, a form of welfare that is mostly paid for using city funds. In less than a year, we collected more than $600,000 from sponsors just by asking that they make good on their promise.

According to Mac Donald, the de Blasio administration is literally returning this money to sponsors, as if asking them to take responsibility for sponsoring immigrants who can’t support themselves was a grave injustice.

Under Rudy Giuliani and Michael Bloomberg, for all their faults, New York city’s government made a real effort to encourage work, even when doing so meant making substantial investments in support services. The de Blasio administration seems determined to reverse this progress, and all New Yorkers will suffer as a result.


The Shrinking Economy


It appears that the economy shrank in the first quarter of 2014. When we measure the size of the economy by tallying up expenditures, i.e., when the Bureau of Economic Analysis (BEA) calculates GDP(E), the usual method, we find that the economy shrank at a 1 percent annual rate. When we measure its size by tallying up all of the income earned by workers, etc., i.e., when the BEA calculates GDP(I), we find that it shrank at a 2.3 percent annual rate. And as Matt Yglesias reminds us, GDP(I) has a better track record when it comes to measuring short-term fluctuations.

There are many reasons as to why the economy fared so poorly, the bitterly cold winter among them. The BEA, per Matt Zeitlin of BuzzFeed, cited “lower exports, a decrease in new inventories of goods made by private companies, a decrease in new nonresidential buildings, and less state and local government spending” as the culprits. Lower exports can be attributed to sluggish growth outside of the U.S., yet it has at least something to do with our dysfunctional corporate tax system, as is the case with depressed business investment that (presumably) contributed to the decrease in new nonresidential buildings. Less state and local spending, meanwhile, reflects the ongoing weakness of local economies, and perhaps, if we’re lucky, a sober assessment of the long-term liabilities facing state and local governments. The federal government is not directly responsible for the overall growth rate of the American economy, regardless of what politicians claim. It does, however, play a large role in creating the conditions for business enterprises to invest and grow. And it’s not doing its job well.

Accusations of Ideological Reasoning For Thee But Not For Me


Linda Greenhouse accuses the conservative Justices of pursuing an ideological agenda. I leave the Supreme Court beat to Ed Whelan and Ramesh Ponnuru, but I’ll briefly share a thought from a smart friend, which he kindly sent over email:

Suppose there’s a universe of judicial candidates who don’t care about politics at all, and just want to pursue their high-minded philosophies on the bench. And suppose that Presidents and Senators are increasingly polarized, with judicial nominations an increasingly important area of political commitment. Would it be any wonder that these polarized Presidents and Senators would end up picking the candidates whose high-minded philosophies produce outcomes they like? So how can we infer that the judges are the ones who are too political, simply because we don’t like the outcomes they produce?”

He also adds that if you really want to accuse to the conservative Justices of being “political,” the more plausible claim would be that they have been insufficiently extreme in applying their originalism, as they are allowing their political preference for the status quo trump their ideological convictions. There is more to say about Greenhouse’s op-ed, but I will leave that to my better-informed colleagues.

New AEI Paper: Almost Every State Pays Its Employees More than the Private Sector Does


Are state workers overpaid or underpaid? Andrew Biggs and I have been asked that question a lot in the years since we started analyzing public-sector compensation. But the truth is that there is no single answer to the question. States vary enormously in how they pay their workers, so giving aggregate estimates hides more information than it reveals. That’s why Andrew and I just released a new American Enterprise Institute working paper that measures the generosity of public-sector compensation in each of the 50 states.

The chart below compares the combined wages and benefits of state (not local) employees with comparable private-sector workers. The most generous state is Connecticut, which pays its public employees 42 percent more than private-sector workers who have similar skills. The stingiest state is Virginia, where public employees are paid 6 percent less.

An obvious take-away from the chart is that most states do pay a compensation premium to their workers, although only a minority have what we classify as a “large” (11 percent to 20 percent premium) or “very large” (20+ percent) premium. The premiums tend to be highest in northeastern states such as Connecticut, New York, and Pennsylvania, as well as in public-sector-union strongholds such as California and Illinois. States paying a tiny premium or penalty tend to be clustered in the South and Midwest, though there are several individual exceptions. Perhaps not surprisingly, the states where public-sector compensation became a major political issue — Ohio, Wisconsin, California, Rhode Island, etc. — pay some of the highest premiums.

There’s much, much more in the working paper for those who are interested in the details. The paper is 87 pages long, and the appendix is probably the most comprehensive discussion of technical and corollary issues ever put together on this topic.

One of these related issues is the need for “compensating differentials” in jobs that are especially stressful or demanding. A coal miner, for example, commands a higher salary than a similarly educated worker with a desk job. But the compensation differences in the chart above are based strictly on wages and benefits for workers with comparable skills. Could there be systematic differences in work conditions between the public and private sectors that affect the comparison? More specifically, could state government jobs be more unpleasant in some way that justifies the generally greater compensation they offer?

The short answer is no. The single most important difference in public and private job characteristics is job security. We found that, after controlling for skills, government employees had greater job security than their private-sector counterparts in every state. There is no state in the union where employment with the government does not confer extra protection from being fired or laid off. That protection has a value, and we attempted to quantify it in one section of the paper.

What about other work conditions? We could not detect any major differences. The chart below displays results from a survey conducted by the International Social Survey Program (ISSP). Reponses are expressed on a one-to-five scale, with five designating strong agreement with the statement:

U.S. public employees are more likely to state that their jobs are secure, interesting, helpful to other people and to society, not physically arduous, and skill-building. However, public employees also say that their jobs offer fewer opportunities to work independently and involve greater stress. There is no statistical difference between sectors in the reported danger of jobs.

Together with other evidence we discuss in the paper, the ISSP data indicate that we should not expect work conditions other than job security to play a major role, positive or negative, in setting pay for government employees. We hope this is the kind of evidence that will be useful to state policymakers as they consider how to set compensation for public employees. 


Room to Grow Is About Creating Room to Grow: A Reply to William Galston


William Galston has written one of the better, more thoughtful replies to Room to Grow, the new collection from the YG Network, and he views the larger conservative reform project sympathetically, having been “a member of the gang of insurgents who prepared the way for Bill Clinton’s presidency.” Yet Galston concludes that Room to Grow doesn’t go far enough in challenging conservative orthodoxy. (In a similar vein, E.J. Dionne, writing for Democracy Journal, essentially argues that reform conservatives ought to embrace the power of prescriptive, centralizing, technocratic administration, and that reform conservatives are unserious to the extent that they do not embrace liberal assumptions regarding income and wealth inequality.) Galston sees a symmetry between the orthodox liberalism he and other Democratic centrists confronted in the 1970s and 1980s, and which he argued against in favor of a more market-oriented, but still fundamentally technocratic and broadly egalitarian, politics.

Reform conservatives, in contrast, don’t see conservative orthodoxy in the same unfavorable light. The problem is not that conservatives are wrong about the economic damage that can be done by excessively high marginal tax rates or burdensome regulation. Rather, it is that conservatives have tended to neglect new issues that have arisen as our economy has struggled to adapt to technological progress and a globalized division of labor, and as family patterns have changed in response to growing gaps in labor market and educational outcomes between women and men, particularly among those raised in the bottom half of the household income distribution. We’ve been sticking to the same intellectual turf, leaving other domains largely untouched. The major ideological coalitions can either contest a given policy domain or they can concede it, leaving one of the ideological coalitions to take ownership. Conservatives have tended to gravitate to “hard” policy areas, like taxes and regulation and defense and national security policy, while neglecting “soft” policy areas, like the governance of community colleges or teacher compensation of long-term care. Yet as Arnold Kling and Nick Schulz have argued, health and education are “the new commanding heights.” These domains are absolutely central to the workings of the affluent market economies, and ceding the argument about how the health and education sectp should work is to cede the domains that matter most. This is the reason why the Room to Grow chapters by James Capretta on expanding access to affordable coverage, Rick Hess on expanding educational choices and raising school quality, and Andrew Kelly on providing all students with high-quality post-secondary educational options, have drawn so much attention in conservative circles. These are areas that conservative policymakers have tended to neglect, and these chapters offer an attractive roadmap.

To some extent, I think that Galston simply misunderstands what Room to Grow is trying to accomplish. It does not represent a comprehensive diagnosis of the challenges facing low- and middle-income U.S. households or of the sources of our labor market challenges. According to Galston, James Pethokoukis’s arguments concerning the declining “competitive intensity” of the American private sector fail to explain why “today’s innovations produce a small number of high-skill jobs in the headquarters of U.S. firms, millions of assembly jobs overseas and very little in between for the American middle class.” And it’s true that Pethokoukis didn’t center his analysis on this point. He did, however, draw on and cite the work of Clayton Christensen, who has explicitly argued that declining business formation accounts for much of the decline in job creation as it has limited the rise of new “empowering innovations,” which create new consumption and give rise to new economic ecosystems. He also cites Ashwin Parameswaran, who has offered a compelling theory of how declining competitive intensity, a product of excessive cronyist regulation and a broken financial system, contributes to technological unemployment. While Pethokoukis leaves the diagnosis to Christensen and Parameswaran, he calls for a new approach to regulation and intellectual property and a revamped financial system designed to facilitate the rise of new business models. That is, Pethokoukis doesn’t offer a chapter-and-verse guide to the job-creating innovations we need. He offers thoughts on how lawmakers can create “room to grow” by reforming a dysfunctional regulatory landscape that limits it.

One thing that is missing in Room to Grow is a clear statement on the importance of its title. We’ve all heard politicians reference “growing the economy,” or “growing the pie.” But this is the wrong metaphor. As Keith Hennessey has argued, the pie metaphor brings to mind a central decision-maker that determines the size of the pie and even growth that can be sliced up in zero-sum fashion. A flower garden, in contrast, contains many different flowers with different individual characteristics and different needs. The responsibility of the gardener is to ensure that all flowers are well-watered, that pests are contained, and that some flowers aren’t growing at the expense of others, but not to guarantee that all flowers, regardless of individual characteristics, grow at the same rate. Drawing on the flower garden metaphor, Hennessey writes:

The principal economic challenges are to maximize the growth potential of the entire economy/garden and to maximize the opportunities for those individuals/flowers struggling to succeed/grow. And just as a gardener should spend more time tending to the parts of his garden that are struggling, policymakers should devote greater effort to maximizing opportunities for those at the bottom of the income distribution to improve their lot. In the long run this means things like improving elementary and secondary education, expanding free trade, and reducing the growth burden of regulations, government spending, and debt. In the short run it means getting the incentives right so that those on means-tested government assistance don’t face exorbitant marginal effective tax rates from poorly designed income phase-outs.

The reform conservative thesis is not that federal government isn’t solving the economic problems facing the middle class, as Galston might put it, because conservatives don’t believe that the federal government can solve the problems facing the middle class. Rather, reform conservatives believe that government is failing to give the institutions between individuals and the federal government the room they need to grow, to flourish, and to solve problems as they arise. The economic problems facing the middle class in 2014 are different from those the middle class faced in 1984, yet they are also different from the problems the middle class faced five years ago and the problems the middle class will face in five years. If we left it to federal lawmakers to solve these changing and evolving problems, many of which are problems created by affluence and past success, our society would be crippled. We need to cultivate the problem-solving capacities of all of these institutions, and we need to facilitate the rise of new institutional forms, including new private enterprises offering innovative business models, new schools offering new instructional models, and new medical providers that can better meet the needs of a diverse population. Yuval Levin’s essay on the conservative governing vision lays this idea out very clearly, and it is the idea that liberal critics have the hardest time grasping. The “solutions” are not going to be created by people like the wonks who’ve contributed chapters to Room to Grow. They’re going to be created at the ground-level, in tune with the needs of living, breathing, changing communities. In Rick Hess’s chapter, he quotes Tennessee Senator Lamar Alexander:

Senator Alexander, a former U.S. Secretary of Education, has observed that “Washington can’t create good jobs, and Washington can’t create good schools. What Washington can do, though, is shape an environment in which businesses and entrepreneurs can create jobs. It can do the same thing in education, by creating an environment in which teachers, parents, and communities can build better schools.”

That is, Washington can help create room to grow. Suffice it to say, if you believe that the family and religious and civic organizations are oppressive institutions, that business model innovation is more of a threat than an opportunity, that state and local governments are incorrigibly racist, and that only the power of the federal government can save us from ourselves, you won’t find this vision attractive. But reform conservatives, like all conservatives, have faith in these intermediate institutions, and they believe that freeing and empowering them, and allowing for the creation of new institutions to address to new problems, is far better than mandating centralized solutions informed by a top-down view.

The Detroit Demolition Report Needs to Be Demolished


Bulldozed by 1950s/1960s urban-renewal nostalgia, the Detroit Blight Removal Task Force’s demolition report proposes spending $850 million to demolish more than 40,000 dilapidated buildings and, later on, another billion dollars to demolish abandoned factories. The planners, having failed with the Great Society’s utopian Detroit Model Cities program a half-century ago, seek a Sheldon Silver–style scraped landscape, a grim urban-renewal variation on Henry Ford’s Greenfield Village.

The plan is all about spending money without making choices. Its map (click to enlarge above), outlines in black the areas targeted as highest priority for blight intervention — but these are nowhere near the areas that are hanging on or coming back. Despite the city’s many troubles, the vibrant Woodward Avenue corridor (subject of a New York Times 36 Hours travel piece) has a concentration of great early-20th-century architecture and amenities, including the Detroit Institute of Arts (better known as a pawn in the city’s bankruptcy than for its first-rate collections), nationally respected Wayne State University, and sports stadiums. Dan Gilbert has moved his Quicken Loans company downtown and is investing heavily in the corridor.

The Woodward Avenue corridor and downtown are shown in gray on the map, as are the attractive neighborhoods running south of East Jefferson Avenue to the Detroit River, and some neighborhoods along Eight Mile Road of Eminem fame, which is the city’s northern border adjoining prosperous Oakland County. Removing blight on either side of the Woodward Avenue corridor, in the neighborhoods surrounding Wayne State, and east of the Chrysler Freeway (I-75) off Eight Mile Road would cut land-assemblage costs adjacent to places where people want to be right now, encouraging private investment. This would also permit housing construction for people trapped in the prairies off East Jefferson, allowing them to relocate closer to shopping and jobs.

The Detroit Blight Removal Task Force is having none of it. The Task Force itself is a form of urban blight, and needs to be demolished.

The Missing Case Against Reparations


I must admit that when I picked up Ta-Nehisi Coates’s piece on reparations, I expected to read a defense of reparations. Reparations, for the uninitiated, are payments made to compensate black Americans for slavery and related crimes. West Germany paid some form of reparations to Jewish victims of the Holocaust, and Coates wants America to implement something similar today.

Yet Coates scarcely reaches the question of reparations in his long, emotionally harrowing essay. His piece is less an affirmative case for a single policy than it is a survey of American racism. There’s talk of slavery and Jim Crow, of semi-recent policies that forced people into ghettos, and of very recent predatory lending practices. There’s no talk, however, of what to do now, how reparations would help, or why we ought to focus on settling an old score instead of charting a new course. Read his essay, and your heart will certainly break for the victims of our nation’s greatest sins. But it must be said: breaking hearts is far easier than healing them.

Part of the problem is that Coates cherry-picks data to score emotional points instead of carefully building an argument for reparations. Take his discussion of the importance of slave labor to the American economy. Here, Coates emphasizes that our national wealth was built on the backs of slaves: Cotton was the nation’s biggest export, he writes, and slaves—worth more than $3 billion—were the wealthy’s most valuable capital good. Coates’s numbers aren’t exactly wrong (though the $3 billion figure is certainly controversial), but their selective use obscures the very complicated role of slavery in the American economy. Yes, cotton was America’s primary export before the Civil War, but America wasn’t an export-driven economy in the mid-nineteenth century—it was an industrialization-driven economy. Last year, “automotive vehicles, parts, and engines” was the largest category of American exports, yet I’m sure this hardly consoles the good people of Detroit. Now, as in 1850, America’s largest export says little about the industries that drive its economy. This is why macroeconomists focus so much on GDP: it’s actually useful.

The truth is considerably more complicated than Coates is willing to acknowledge. He makes no mention of the 75 percent of the southern white population that didn’t own slaves, their wages so depressed by slave labor that they lived in arguably the most unequal society in world history—with slave owners earning a median of $23,000 per year while other whites fetched about $1,500. Nor does he cite the North’s two-to-one advantage in per capita income, evidence of its superiority in every economic pursuit that didn’t require enslaved workers. There’s no mention of the literature showing that slave labor sustained the Southern economy but also retarded it. How can we decide whether reparations are due, or which portion of American society should pay them, without untangling this economic story?

Yet there’s a bigger problem here than selective use of data: Coates’s economic point, even if rock-solid, doesn’t actually advance his thesis. If reparations must be paid, the imperative to do so changes little if slaves contributed a little less (or more) to GDP. Coates’s one-sided foray into economic history accomplishes nothing save, perhaps, inducing an emotional response: slavery was even worse than the reader thought.

His last paragraph makes the same move. After considering the victims of predatory lending (people who, by the way, later won a lawsuit), Coates notes that of all the recently vacant houses in Baltimore, 71 percent are in majority-black neighborhoods. The implication here is that banks unfairly targeted black people for foreclosure. Baltimore is 63 percent black, though. So this is largely demographics, not racism, at work. Coates again scores an emotional point. But if his goal is to show America owes reparations, then barely disproportionate vacancy statistics and a successful multimillion-dollar lawsuit by black homeowners don’t support his argument.

The great tragedy here is that Coates has no apparent interest in discussing what black America needs most—a next step. Coates passes on the difficult practical questions: “But if the practicalities, not the justice, of reparations are the true sticking point, there has for some time been the beginnings of a solution.” Pushing reparations without considering logistics is a bit like pushing space flight without considering engineering, but even if you allow Coates this evasion on the specifics, he leaves you grasping: what might actually help people?

When the piece does venture in this direction, the analysis falters. Coates considers the possibility that culture might play some role only to dismiss it out of hand: “[this] thread is as old as black politics itself. It is also wrong.” Never mind that Nigerian-Americans consistently outperform both non-immigrant blacks and whites on a host of measures; racism is the only thing that matters. Then Coates assails “the myth … that fatherhood is the great antidote to all that ails black people.” Few think that fatherhood is a panacea, but the objective evidence tells us that it certainly helps. Instead of engaging this evidence, Coates retreats to more anecdotes.

His essay, of course, still has value as a reminder of the lingering effects of discrimination. For instance, given what we know about concentrated poverty—that it breeds hopelessness and isolation—the existence of state-sanctioned ghettos should inspire new ways of thinking about integrating America’s inner-cities. Perhaps we could limit the number of Section 8 vouchers awarded for a given geographic region to ensure that the urban poor don’t cluster, or perhaps we should think even more seriously about the relocation voucher, a brainchild of Michael Strain. And since we’re living in a world where fatherhood does matter, perhaps it’s time for conservatives to get serious about the fact that black fathers are more likely than white ones to be ripped from their families for marijuana possession.

I don’t think I’d call these measures reparations. They’re just good ideas—ideas that might promote the equal opportunity that forms the bedrock of our social contract. I could go for a lot more of those ideas. Maybe the next essay I read about reparations will have them.

Salon Gets Mike Lee’s Tax Plan Very Wrong


Matt Bruenig, a writer for Salonthinks that Senator Mike Lee’s tax plan, which is given prominent billing in Robert Stein’s tax chapter of the YG Network’s new policy book, Room to Grow, is a “horror show” because it’s just another giveaway to the rich. I don’t doubt that he would find a way to call it a horror show whatever the facts of the plan are, but he either misunderstands the way its proposals for the expansion of tax benefits for parents work or he simply doesn’t care and wants to mislead his audience about them. His characterization of a key aspect of the plan is just wrong.

Besides what it does to the formal tax rate structure, Bruenig writes, Lee’s plan does the following: “It massively expands the American welfare state by dramatically increasing the cash transfers parents of children receive. Well, it increases the cash transfers some parents will receive, namely middle- and upper-class parents, while totally neglecting the rest.” This isn’t true — it will increase benefits for all parents.

How? Bruenig explains that there are two big ways the tax system currently compensates parents for the cost of raising children: a $1,000 per-child tax credit and a $3,900 tax exemption per child. He’s right to note that both are, in theory, worth more to high-income households than low-income ones: Tax exemptions, because rich people pay higher tax rates than poor people, are basically always worth more to people who earn more, and generally tax credits, while they reduce one’s tax bill dollar-for-dollar regardless of one’s tax rate, may not be worth their full value to low-income people because they have no income-tax liability at all or have less than their tax credits are worth. (This doesn’t really even apply to the existing child credit, though, as I explain below.)

What he gets entirely wrong is that Lee’s tax plan helps fix this. Lee’s plan will create a new tax credit worth $2,500 per child, and allow taxpayers to use it to reduce payroll-tax liability in addition to income-tax liability. Almost anyone who has a job pays payroll taxes, and their formal liability is about 6 or 7 percent of income — Lee wants to allow people to use the child-tax-credit expansion to erase that.

The existing $1,000 per child tax credit leaves one’s payroll-tax liability intact. Bruenig seems to imply that existing credit isn’t useful for people who have no income-tax liability, like any old tax credit, but it is (though his characterization of it at one point as “semi-refundable” hints that he knows it is useful to low-income workers). They basically can get a check from the government equal to 15 percent of earnings over $3,000, up to the $1,000 per child value. But this doesn’t erase the substantial payroll taxes they owe — Lee’s plan would. (That tax credit also phases out starting around $70–100,000 in income, making it less valuable to upper-income earners, which Bruenig doesn’t explain. Lee’s new additional credit, though, would not phase out.)

In any case, Bruenig writes:

The net affect [sic] of all of this is that, under the proposal, a family making $70,000 per year who had twins would receive more than $7,000 per year in child welfare payments via the tax code. A family making $10,000 or $15,000 per year who had twins might receive a few hundred dollars in child welfare payments, if any at all. 

This isn’t correct: The family making that amount of income would receive the benefits they get from the existing child credit (which is a couple hundred dollars, on average, according to the Tax Policy Center) and see their entire payroll-tax liability erased. For a family making $15,000, that’s probably about $1,000 in new benefits. In addition, of course, Lee’s proposal preserves the earned-income tax credit, which also provides benefits to low-income households with children, further increasing the child welfare payments they get beyond the “few hundred dollars, if any at all” Bruenig claims. And lastly, Bruenig writes that that poor family would “also have the pleasure of seeing their current federal income tax rate of 10 percent bump up to 15 percent.” Well, yes, but his entire piece is premised on the idea that they don’t owe any federal income taxes in the first place, and aren’t close to doing so.

Meanwhile, people earning upper-middle-class incomes that Bruenig thinks will be the new reformocon welfare queens would see their taxes rise in other ways, though if they’re parents, they would see an increase in compensation for the cost of raising children. They currently don’t get very much help in that regard at all, except in terms of saving for college, while low-income households already get a great deal of benefits tied to having children. Moreover, Lee has talked about limiting the mortgage-interest deduction and eliminating the deduction for state and local income taxes — which should raise taxes on the people Bruenig is trying to claim are the big beneficiaries here, middle- and upper-income earners — and the plan would raise the statutory rate on most of them, too.

Bruenig sums up his view of Lee’s plan: “Although a massive expansion in child-related welfare spending is a great idea, the restrictions the reform conservatism plan places on who can claim these benefits leaves poor families totally out in the cold.” Maybe Lee’s plan isn’t generous enough to the very-poor for Bruenig’s liking, but this description is simply wrong.

The import of this isn’t just that Bruenig is carelessly criticizing the plan without having read it — it’s also that the Left apparently thinks it can repeat the same arguments against Lee’s plan and other conservative-reform ideas as if they didn’t represent innovative policy thinking. They can’t, and they do.

As an aside, it’s important to think about a more generous child tax credit as something other than ”a massive expansion in child-related welfare spending” — Stein explains well in Room to Grow why it’s actually removing distortions created by the old-age welfare system we have (and are more or less stuck with).

Am I Stupid or Dangerously Insane to Believe That America’s Public Schools Aren’t Being Run Efficiently?


Recently, I wrote a column suggesting that U.S. K-12 public schools spend more than is strictly necessary, and that public school administrators, and policymakers more broadly, need to be more mindful of cost-effectiveness. The response has been overwhelmingly negative, and more than one critic has accused me of being, well, stupid. Two issues have come up more than once.

First, I referenced the extraordinary success of the Recovery School District (RSD) in New Orleans, where student outcomes have improved dramatically without a substantial increase in per-pupil expenditures. I’ve literally heard that it is silly to use the RSD as an example, as the reason the RSD has fared so well is that its composition is whiter and more affluent than it was before Hurricane Katrina. Since 2005, the share of New Orleans public school students eligible for free or reduced price lunch (FRL) increase by 7 percentage points, to 84 percent as of February 2014, yet performance has increased by 41 percent. The FRL share in the New Orleans public schools is quite high even for a large urban school district. It is higher than it is in Newark, a school district that I briefly discuss in my column, where performance hasn’t increased by much. It is true that African-American share of the student population has declined, from 93 percent pre-Katrina to 86 percent in 2011. It is also true, however, that it is black students who have made the most dramatic gains. As David Osborne reports in “Born on the Bayou,” if one only counts black students, New Orleans had the lowest test scores in the state before Katrina, while in 2011 it was above the state average. Is this because it was only the most affluent black families that remained in New Orleans? This is hard to square with the fact that the share of FRL-eligible students increased substantially in the post-Katrina period.

So what exactly happened in New Orleans, and is my enthusiasm for the RSD model an indication of hatred for teachers? Those of you who read my column carefully will notice that I don’t posit teachers as villains. Rather, I explicitly call for giving school leaders more autonomy so that they can “figure out what works best for their teachers and their students.” I chose to reference both teachers and students for a reason: if you have unhappy teachers, you’re likely to have ineffective teachers. The reason I am so enthusiastic about New Orleans is that the RSD has found an approach that appears to be benefit teachers as well as students.

Neerav Kingsland, the outgoing CEO of New Schools for New Orleans, attributes the success of the RSD to its success in attracting high-quality charter networks to the city and facilitating their expansion. Kingsland differentiates between “reformers,” district leaders who seek to improve system-wide performance by leveraging the power of centralized, top-down management, and “relinquishers,” who cede control over the day-to-day management of schools and networks of schools, yet who invest time and energy in monitoring outcomes, ensuring transparency, and helping good school grows and bad schools either improve or go out of business, all without causing too much disruption. The former role is a familiar one, albeit it an extremely difficult one, particularly in the context of large urban school districts, which serve diverse constituencies with varied needs. The latter role is in many respects a more manageable one, as it draws on the decentralized knowledge of a wider array of educators, yet it is also less familiar and thus more politically fraught, and threatening to those who’ve grown accustomed to the current way of doing business. Many teachers, for example, rightly see collective bargaining as their chief defense against the irrational, inconsistent, and often politicized demands of district leaders. Yet as Kingsland argues, teachers in a well-functioning charter market might find their labor conditions improve not because of their political clout, but because schools and networks of schools are actively competing for their services. Unionization is a natural response to monopsony in the labor market. But if teachers find that they don’t have to move to the suburbs or to another city to find a public school willing to offer them more favorable terms, they are in a much stronger negotiating position. Instead of just demonizing teachers unions, those of us who favor charter districts and more flexible labor markets for educators need to address the underlying demand for them. And the demand is driven in no small part by the compliance costs and the bureaucratic rigidities that plague traditional public school systems.

Second, many of my detractors focused on the rise of special needs students. Let’s start with a conceptual question. What exactly is a special needs student, and is the concept an immutable one? I’d suggest that it is not. Rather, I’d suggest that incentives shape this landscape. Consider, for example, Alan Schwarz’s reporting on attention deficit hyperactivity disorder for the New York Times. Recent data from the CDC reveals that 15 percent of high school-age children have been diagnosed with ADHD, and the number of children medicated for the disorder has increased from 600,000 in 1990 to 3.5 million. Is it necessarily true that that the prevalence of the underling disorder has increased by a factor of 6, or could it be that the interaction between a pressure campaign by pharmaceutical campaigns to “raise awareness” of ADHD by preying on the anxieties of parents and educators, a desire on the part of parents to improve the performance of their students, and (well-intentioned) publicly-sponsored coverage expansion efforts that helped medical providers expand their customer base? Moreover, federal and state governments have increased funding for students with special needs, which creates an incentive for school districts to designate more and more students as special needs students. What we’ve seen over the years isn’t so much an increase in the number of students with “hard” disabilities, but rather an increase in the number of students with “soft” disabilities, where diagnosis is often a non-obvious call. If you’re on the fence as to whether or not a student ought to be designated as having special needs, is it possible that you will choose to do so if there is a financial incentive attached?

This is not to say that there aren’t students with profound disabilities who need special attention. There are indeed special needs students who are expensive to serve. But does this reflect some intrinsic cost, or does it reflect laws, regulations, and staffing requirements that prevent the emergence of innovative instructional models that might allow educators to meet the needs of students with special needs at lower cost?

Regardless, the point my critics are making is that my fixation on high per-pupil spending is silly because special education students are driving the increases. There is some truth to this: one of the leading experts on the subject, Thomas B. Parrish, has observed that the ratio of total spending per special education and general education student appears to have remained fairly constant over time at about two to one and that special education students represent a rising share of enrollment. (The data on special education expenditures is terrible, by the way. Something tells me this reflects the incompetence and mismanagement of K-12 administrators — not teachers — that is the focus of my column.) Yet Parrish he’s also noted that “while the costs of educating special education students have increased substantially over time, the cost per general education student has increased at a comparable rate.” That is, no, it is not the case that all cost growth, or even most cost growth, can be attributed to the rising prevalence of special education students: the cost per general education student has been increasing substantially over time.

How should we think about special education in the context of Milwaukee’s school choice program, which I also referenced in my column? In 2012, Patrick J. Wolf, John F. Witte, and David J. Fleming released a report on precisely this subject. They found that while the Milwaukee choice schools (MPCP) served a smaller share of disabled students than public schools (MPS) — between two-fifths and three-quarters the rate of MPS — the MPCP schools were far less likely to classify students as having disabilities than MPS:

[W]e conducted site visits of 13 MPCP schools in part to learn about how they serve students with disabilities. What we observed during those visits confirmed claims in the research and policy literature that most private schools lack the incentives, personnel, protocols, and organizational culture that lead public school systems to label students with disabilities as requiring special education services. In many cases, private school personnel hesitate to count a student as having a disability, even if public school personnel would recognize the student as such. However, that does not mean that private schools do not enroll students who would be formally designated as students with special needs if they were in the public schools.

Though I doubt that any of this analysis will convince those who believe that U.S. K-12 public schools don’t spend nearly enough, and that they currently deploy their resources efficiently and responsibly, of anything at all. But I enjoy beating my head against a wall. I think of it as a kind of aerobic exercise.

And finally, I was very pleased to see Pat Brennan and Justus Myers weigh in on the question of how public schools compensate teachers. If you’re interested in the subject, I recommend reading Stretching the School Dollar, and particularly Marguerite Roza on per-unit costs in education and Steven F. Wilson on “the efficient use of teachers.” Containing costs doesn’t have to mean layoffs. It can also mean deploying teaching resources more efficiently by, say, increasing class sizes for the most effective teaches, or making capital investments that seem expensive when viewed in absolute terms but which seem quite reasonable when you factor in labor cost savings over time.

Targeting Targeted Benefits


Robert VerBruggen draws on a new Mercatus Center working paper (“The Political Economy of State-Provided Targeted Benefits“) to make the case against state and local efforts to lure businesses to their jurisdictions. States and cities tend to exaggerate the value of targeted benefits, as it is difficult to discern which share of economic activity was generated by the benefit in question and which share would have been generated even in its absence, or under some policy regime that was neutral across firms. Moreover, targeted benefits contribute to the misallocation of resources, as firms would base their decisions on economic fundamentals in their absence rather than on the extent to which they can extract subsidies. The authors of the Mercatus paper, Christopher Coyne and Lotta Moberg, conclude by calling for a generality norm, in which “no company or industry receives preferential treatment over others.” I agree with them on all counts.

David Schleicher has addressed the tension between sorting, in which households and firms choose among competing jurisdictions, based on the quality of public services and taxes, the gains from agglomeration, i.e., the tendency of households and firms to locate themselves near other households firms to take advantage of the lower transportation costs, intellectual spillovers, and labor market depth afforded by dense living. Defenders of high-tax state and local governments will often observe that high taxes in California, New York, and New Jersey haven’t led to a mass exodus of high-earning households and productive business enterprises. But of course this reflects that, as Schleicher argues, “the existence of agglomerative gains means that individuals are making location decisions for reasons other than matching their preferences for public policies.” Conversely, if all jurisdictions across the country imposed the same taxes and regulations, it is easy to imagine that many households that have left densely-populated coastal metropolitan areas in search of affordable housing, and many firms that have left these regions in search of a less burdensome tax and regulatory climate, might have remained in these regions.

Suffice it to say, we’re not about to impose the same policies across all state and local governments, nor should we do so. We can, as Coyne and Moberg suggest, move towards a world in which state and local governments compete not by offering targeted benefits, and thus allowing large business enterprises making location decisions to essentially prey on vulnerable jurisdictions, but rather by offering a more attractive business climate to all firms. Agglomerative gains will still mean that regions that aren’t already dense hubs of activity will have to try harder than those that are, but that’s not new, and it might even be a good thing insofar as it stimulates policy creativity. And though agglomerations are durable, new ones do emerge from time to time. Texas’s attractive tax and regulatory climate has contributed to rapid expansion of metropolitan areas like Austin, Dallas, and Houston, which are increasingly able to compete with other dense regions for talent. This puts constructive pressure on the dominant regions. No, there is no single tax hike that will cause New York city or Los Angeles’s advantages to vanish overnight, but over time, bad policy takes a toll and creates an opportunity for competitors.

So how do we see to it that jurisdictions compete constructively (by offering a more attractive tax and regulatory climate for all households and firms) and not destructively (by engaging in a beggar-thy-neighbor competition to offer targeted benefits)? There have been some efforts to limit targeted benefits on the grounds that they cut against the dormant Commerce Clause, i.e., they interfere with the free flow of interstate commerce, but these arguments haven’t gained much traction. Edward Alden of the Council on Foreign Relations offers a series of recommendations for curtailing what he calls the “subsidy war” within the U.S., including: (a) having the federal government require that state and local governments report all subsidies to a federal data warehouse; (b) having state governments require cost-benefit analyses for all business subsidies above a threshold; and (c) encouraging states to form compacts to limit subsidies, starting at the regional level.

I’d love to see conservative governors and lawmakers take the lead in forming regional anti-subsidy compacts, particularly in regions like the Deep South and the Mountain West. Elected officials in these regions can make a credible case for creating business-friendly climates while swearing off targeted tax breaks, and a willingness to avoid targeted tax breaks would demonstrate their pro-market, as opposed to pro-business, bona fides.

How the European Union Corrupted Eastern Europe


Editor’s note: The results of the European Union elections are in, and parties opposed to further European integration or the eurozone or the European Union membership full-stop made stunning gains at the expense of the established political forces. One of the more intriguing examples is the Alternative for Germany, a new center-right political party that narrowly missed making it into Germany’s Bundestag in the last elections, yet which secured 7 percent of the vote in the E.U. elections held this weekend. The Alternative has been characterized as an “out-of-the-mainstream” party, yet it makes the simple, and obviously sound, claim that Europe’s common currency has proven to be a terrible mistake, which has ravaged the economies of the European economy and which has proven a millstone around Germany’s neck as well, not least because of the pressure on German taxpayers to contribute to successive rounds of bailouts. Just in time for the results, Perry Anderson has published a survey of the contemporary Italian political scene in the London Review of Books, which opens with a denunciation of the European Union. Among other things, Anderson points to the work of the economists Andrea Boltho and Barry Eichengreen to suggest that the economic impact of European integration have been smaller than advertised, and outweighed by the devastation caused by the financial crisis and its aftermath and exacerbated by the rigidities imposed by monetary and fiscal union.

But perhaps this isn’t a strong enough case against the European Union for your taste. One of the chief achievements of European integration, or so we’ve been told, is the consolidation of liberal-democratic norms in Europe, and in particularly in Europe’s periphery, including in the new member states of central and eastern Europe. The trouble is that as Jan-Werner Mueller recently argued in Foreign Affairs, liberal-democratic norms appear to be collapsing in central and eastern Europe, with Poland standing as a (perhaps fragile) exception. Mueller, being a good liberal, is convinced that if the European Union only been a bit more aggressive about enforcing its rules, and if only western European politicians had been more welcoming towards eastern European migrants, this democratic decay might have been avoided. Mueller is an excellent intellectual historian, but his reading of contemporary European affairs neglects the central importance of political economy. What were the incentives created by membership in the European Union, and how did these incentives shape the political culture of the new member states. Mueller’s internationalist orientation leads him to frown upon the fact that electorates in Britain and elsewhere have been skeptical about the wisdom of opening their borders to large numbers of Bulgarian and Romanian migrants, partly because of their experience with the first wave of migration from the new central European member states. Yet is it at least possible that the “escape valve” of migration has reduced the political pressure on eastern European elites to follow a reformist path?

Or, more broadly, might the enormous transfers to the new member states have led to a more corrupt politics in the region? There is a longstanding view, rooted in the rise of the centralized fiscal state in early modern Europe and, more recently, in the rise to affluence and power of states like South Korea, that states often adopt growth-enhancing policies when they’ve run out of other options, e.g., when they face a formidable military threat and find themselves unable to extract aid, or enough aid, from allied states, thus forcing them to rely on internal resources. (Nicholas Eubank’s work on Somaliland offers a distillation of some of this literature.) Yet when states have an easily-accessible resource at their disposal, like point-source natural resources (oil and gas) or government-to-government transfers, they don’t necessarily have to adopt growth-enhancing policies, as political elites can take the easy root of just turning on the spigot and skimming off their cut.

Dalibor Rohac, a policy analyst at the Cato Institute, has thought deeply about this question, and when I asked him to write something for The Agenda on the subject, he kindly agreed to do so. If Dalibor is right, the European Union hasn’t just failed to prevent the deterioration of liberal-democratic norms in central and eastern Europe. It has exacerbated the problem. Dalibor calls this “the curse of European structural funds,” and I think he makes a rock-solid case. You’ll find his essay below.


Thanks to the funding from the European Union (EU), the countries of Eastern Europe are an increasingly attractive destination for cyclists. In the Czech Republic, hundreds of millions of Euros, predominantly from EU’s structural funds, have been used to create a network of some 25 thousand miles of cycling trails. In Slovakia’s Northern region of Orava, a brand new network of 155 miles of cycling trails set in a picturesque countryside connect the local villages with those in neighboring Poland.

While a boon for cyclists, the inflow of EU money into Eastern Europe is playing a more questionable role in narrowing the gap that new member states in Eastern Europe and the more affluent parts of the EU. Critics of development aid, such as William Easterly of New York University, have long argued that foreign aid directed to badly governed countries in the developing world can worsen corruption and cronyism, and foster authoritarian rule. Although the magnitude of the problem is different, EU funds are exercising a similarly nefarious effect on governance and politics in Eastern Europe.

Between 2014 and 2020, the EU is planning to spend over €350 billion to help narrow the disparities between member states. It does so through several ‘funds’: the European Regional Development Fund, which is the largest of them and which supports the building of infrastructure and job-creation; the European Social Fund, which purports to help the unemployed and the disadvantaged, mostly by providing training programs; and the Cohesion Fund, which was set up in 1994 to provide funding to the poorest member states.

The inflow of EU money into new member states has been estimated at around 4 percent of their GDP. It is not a free lunch, however. European countries are co-financing the projects and provide the bulk of the administrative support to the program. Slovakia’s Institute of Economic and Social Analyses (INESS) estimated in 2011 that each euro coming from EU’s structural funds is matched by up to 90 cents coming from the national budget.

The economic effects of such aid are not obvious. Even if one believes that the inflow of funds helps stimulate aggregate demand, “it is unclear whether the EU funds are crowding out or augmenting domestic spending,” as an IMF study put it. Crowding out is a serious concern in areas of transport and logistics, where private companies that have been doing profitable business without any government support suddenly face competition from new, EU-funded firms.

Many of the EU-funded projects seem to be of marginal value and are overpriced. With €16 million spent on each mile, the short, just 12-mile Lyulin highway connecting the Bulgarian capital Sofia with the nearby city of Pernik counts as one of the most expensive roads on the continent. The construction of the road – which required digging numerous tunnels because of the inauspicious terrain – was delayed and marked by corruption allegations. At some point, the European Commission temporarily froze the funds because it suspected embezzlement.

Or, as CEE Bankwatch, a public watchdog, reported, in the city of Kolín in the Czech Republic the EU provided support to the reconstruction of a railway bridge in order to facilitate water navigation on the river Elbe. According to the watchdog, “too little water transport is expected to justify the project, construction costs are prohibitively high, and the sole company participating in the tender procedure was awarded the contract.”

Last year, Slovakia’s Ministry of Social Affairs spent €100 thousand of an EU grant to combat unemployment for the purchases of pens and disposable raincoats. While relatively trivial in size, it seems representative of the waste that has been unearthed by journalists.

The inflow of EU funds into countries with weak institutions does not mean just wasteful spending but also breeds corruption. The impact may be hard to quantify but is very visible. Before joining the EU, Eastern European countries had made significant progress in reducing cronyism and corruption – mainly because of the numerous reforms they had to adopt in order to qualify for EU membership in the first place. After the accession, not only did the progress come to a halt but some measures of corruption actually deteriorated.

Slovakia, for example, ranked 57th on the 2004 edition of Transparency International’s Corruption Perception Index. By 2013, it moved down to 61st place. The Czech Republic, in turn, fell from 51st to 57th place. The situation is even worse in Romania and Bulgaria, where checks on corruption and outright theft are weaker. In 2008, the European Commission had to suspend the disbursement of any aid because of the extent of corruption and organized crime that surrounded the inflow of EU funds.

Identifying and proving specific instances of corruption and embezzlement of EU funds is often difficult, yet the anecdotal evidence is telling. According to a report by a group of Eastern European think tanks, in the Czech Republic, companies with bearer documentary securities – in which ownership is anonymous – tend to be 23-70 percent more profitable than other joint-stock companies. Between 2008-2013, such companies were awarded public procurement contracts worth at least € 5.6 billion, including EU funds. Also, around € 7.3 billion were awarded to companies in jurisdictions with high levels of privacy protection – so-called ‘tax havens’ – some of which had traceable connections to local politicians.

While Aleš Řebíček was the Czech Minister of Transport from 2006-2009, the construction company Viamont, which he had founded, received over € 500 million from the EU structural funds to improve railway infrastructure around the country. Viamont’s shares are anonymous and the Minister did nothing to refute the allegations that he had a stake in the company at the time when the tender was awarded. Similar cases – involving politically connected companies, botched procurement tenders, or sometimes outright fraud – can be found throughout the region.

Eastern European politicians say that they are determined to fight corruption surrounding the disbursement of EU funds. Such statements often strain credulity, as the region has made little progress in improving the mechanisms of control that would be independent of political control. With an inflow of money that can be used for patronage, governing politicians in member states are the biggest beneficiaries of the status quo. That is consistent with the observed degree of politicization of the EU funds. Instead of permanent secretaries, the disbursement funds are typically controlled by political appointees who are replaced after every election.

Cynics say that the status quo also benefits those who advocate tighter forms of European integration. Richard Sulík, former Speaker of Parliament in Slovakia and a vocal euroskeptic, does not mince words. According to him, “[political elites are] being corrupted by the EU funds in order to shut them up and make sure they pass any stupid piece of legislation that comes here from Brussels.”

Whether the funds are a plot to buy loyalty to the European project in Eastern Europe or just a well-intentioned but mismanaged program, they do not seem to be working. The funds neither seem to be creating economic prosperity nor are they effective at fostering popular support for the European idea. Public confidence in the EU is at historical lows in many Eastern countries and, throughout the continent, anti-EU populists are expected to make significant gains in the forthcoming European election. Maybe it is time for a rethink.

(Dalibor Rohac is a policy analyst at the Center for Global Liberty and Prosperity at the Cato Institute. He tweets at @daliborrohac.)

Are There Problems with Piketty’s Data? Of Course


The Financial Times published a stunning claim today: French economist Thomas Piketty made serious mistakes in the research undergirding his book Capital in the Twenty-First Century, and not necessarily just inadvertent ones, but ones that suggest he may have cherrypicked data to uphold his argument.

A refresher on his theory, since I assume the bestselling book is now sitting underneath other unopened books on most people’s desks: Capitalist societies, with rare exceptions, see ever-increasing concentrations of wealth. We’re in a destructive self-reinforcing trend back toward 18th- and 19th-century levels of inequality, he argues using data and economic theory, and we need 80 percent income tax rates and a global tax on wealth to stop it.

Piketty — unlike plenty of economists — made the data underlying his book publicly available so that people far smarter than I can poke at it, and Chris Giles, an economics editor of the FT, is one of the first to do so in depth. Has he gutted Piketty’s empirical argument?

No, but there are real problems here. Piketty’s empirical work is both clearly impressive and ultimately unreliable. And when Giles looks at Piketty’s source data, he doesn’t see much evidence for the idea that wealth inequality has been rising in the rich world over the past several decades.

This is important to Piketty’s thesis. He thinks that the natural tendency of capitalist societies is toward ever-growing wealth inequality, because the returns to capital typically remain higher than economic growth overall. Wealth inequality shrunk in the first half of the 20th century or so, he says, because of high taxation, nationalization movements, and highly destructive wars. His argument relies on both empirical research and theoretical work — what if the evidence that huge inequality is returning simply isn’t there?

Giles takes the biggest issue with the historical British wealth data Piketty cites. Here’s a chart he created, with the wealth-inequality data from Piketty’s sources in red and the trend Piketty calculated to back up his argument in blue (all English charts have fog-colored backgrounds, I’m told):

As Giles explains in this video, the sources of the data that fit Piketty’s line, according to the British government, are supposedly not apt for these kinds of comparisons, while the data that has wealth concentration well below the trend he’s claiming — the two little dashes below the blue lines — are the right numbers. And British wealth data isn’t the only serious issue the FT raises.

In fact, Giles writes, “the combined result of all the problems is to make wealth concentration among the richest in the past 50 years rise artificially.”

This is a big problem — if Giles has found unexplained mistakes or distortions. All academics have to make adjustments to data, especially historical economic data. Piketty has to select from unreliable and incomplete sources of data, interpolate some data further back in the past, and had to decide how to weight it all. The fundamental problem is that this is such a tough task it’s not entirely clear Piketty should mount his grand conclusions (a global wealth tax, an 80 percent income tax) on its empirical result, ever — more on this below.

Giles mounts a convincing case that Piketty has at least weighted Europe wrong. He weighted Sweden, the U.K., and France equally when the latter two are seven times the size of the first — this doesn’t look defensible the way RR’s weighting was. Here is Piketty’s calculation of the Europe inequality trend in blue, and Giles’s in red:

The most dramatic comparison comes together here. Piketty’s key chart shows rich-world wealth inequality rising since 1970:

Keep reading this post . . .

There’s Room to Grow the African-American Right


The Slate columnist Jamelle Bouie often argues that conservatives should make more of an effort to secure the votes of African Americans. He makes a strong case. In 2008 and 2012, Republican presidential candidates secured 4 percent and 6 percent of the black vote. From 1980 until the rise of Barack Obama, the GOP had managed to win between 8 and 12 percent of the black vote in presidential elections. Had Mitt Romney matched this pre-Obama-era performance among black voters, there is a decent chance that he would have been elected president, as African Americans are overrepresented in competitive states in the South and the Great Lakes region. Bouie cites Florida, North Carolina, Virginia, and Ohio as states where the black vote is particularly important, and of course these states are among the “swingiest” in the country. Though Bouie is very much an egalitarian liberal, he offers advice to Republicans hoping to secure a larger share of the black vote. Specifically, he observes that because residential integration is one of the largest obstacles to upward mobility among African Americans, the right ought to “merge relocation assistance and direct income support—ideas endorsed by conservative thinkers and Republican politicians—with an aggressive commitment to anti-discrimination enforcement in housing, and deregulation of residential land use” as part of a broader strategy to (and here he quotes sociologist Mary Pattillo) “open the door for low-income blacks to move to predominantly white neighborhoods, where jobs and resources are unfairly clustered.” This embrace of more rigorous desegregation laws, coupled with existing conservative support for vouchers and charter schools and a push for criminal justice reform, would, in Bouie’s view, make for a compelling alternative to the center-left.

Bouie allows that there is room to tinker and disagree with his proposed agenda. While the relaxation of stringent local land-use regulation is an excellent idea, and it would go a long way towards making high-productivity regions more inclusive, it’s not clear to me that stricter desegregation laws as such are the best way forward. I am sympathetic to the notion that in-group favoritism on the part of non-black Americans is a barrier to black progress, yet it is striking that, as Patrick Bayer, Hanming Fang, and Robert McMillan have found, residential segregation appears to increase as income differences across groups become more equal. It is quite possible that creating the conditions for greater upward mobility among African Americans, a goal that we ought to pursue to regardless of the political implications, might lead to more majority-black middle-income and upper-middle-income neighborhoods as opposed to more integrated neighborhoods. Should conservatives limit their appeal to African American voters who see the persistence of majority-black neighborhoods as necessarily a sign of blocked racial progress, or should they also seek the support of black voters who find the idea of living in a majority-black neighborhood appealing, possibly out of a benign in-group favoritism or a desire to preserve the cultural character of their communities? The ongoing migration of African Americans to sprawling metropolitan Atlanta, Dallas, and Houston, and to the South more broadly, reflects a number of things, including the relatively low cost of high-quality housing, the opportunity to build wealth and reduce commute times afforded by it, and (perhaps) the desire on the part of black migrants from high-cost metropolitan areas in the northeastern United States and California to improve their relative position. This suggests that relaxing local land-use regulation might be best pursued on its own, and not as part of a more legalistic approach to desegregation. Part of the attractiveness of metropolitan Atlanta to upwardly-mobile African-American strivers is that it has become a mecca of black culture and black entrepreneurship. Could conservatism align itself with a politics of black cultural distinctiveness as well as a politics of integration and inclusion, and could a larger politics of upward mobility co-exist with both? I don’t see any reason to rule out this possibility.

Moreover, there are many different ways to pursue criminal justice reform. One strategy is to focus primarily on reducing incarceration in light of its deleterious impact on the incarcerated, ex-offenders, and their families and networks. Another is to reduce incarceration as part of a broader effort to make the criminal justice system more efficient. That is, we might reduce incarceration and reduce crime by embracing parole reform that would, in effect, make parole more paternalistic, on the understanding that swift and certain sanctions are a better fit for people with impulse control problems than slow and uncertain sanctions. Advocates of criminal justice reform often emphasize the benefits of reform to those caught up in the criminal justice system. This paternalistic approach would instead emphasize the benefits to those most likely to be victimized, a disproportionately large share of whom are black.

In a similar vein, calls for the expansion of the EITC have indeed gained ground in the conservative intelligentsia, in part out of a desire to address the underlying concerns that are motivating the push for an increase in the federal hourly minimum wage. Yet in Expanding Work Programs for Poor Men, NYU political scientist Lawrence Mead argues that making work more attractive is not enough to address the challenge of worklessness in high-poverty neighborhoods. Rather, he calls for more stringent work requirements. Mead’s idea, as I understand it, is that while the EITC helps retain people in work, it’s often not enough to get people to shift from nonparticipation in the formal labor market to participation on its own, hence the need for caseworkers and others to play a role. Though this is an idea that might meet with resistance in some quarters, it resonates with the idea of “conditional reciprocity” that is so central to the worldview of conservative voters.

And finally, I believe that the best way for conservatives to appeal to African Americans is not to pursue policies that are racially-specific, whether in regards to housing policy or criminal justice reform, but rather to pursue a middle-class-centric politics like that outlined in the YG Network’s Room to Grow effort. Though the conservative reform agenda aims to reduce the intrusiveness of government and its tendency towards excessive centralization and technocratic micro-management, it recognizes the importance of making safety net and public sector institutions more broadly work for Americans looking to climb the economic ladder. Policies like an expanded child credit, a K-12 agenda that aims to expand educational choices for the middle class as well as school choice for the poor, student loan reform designed to reduce debt burdens and improve the quality of post-secondary options for all students, will be at least as attractive to African American parents and young adults as they are to non-blacks, if not somewhat more so.

Julián Castro and the Political Legacy of the Housing Bust


President Obama has nominated Julián Castro, the mayor of San Antonio, to serve as his next HUD secretary. Karen Tumulty and Katie Zezima of the Washington Post report that a cabinet appointment represents a political Plan B for Castro, as Plan A was for a Texas gubernatorial bid in 2018 that now seems like a longshot and, more to the point, would come too late to enhance Castro’s national stature in time for the 2016 presidential election, when a young Latino Democratic politician might prove an attractive vice-presidential candidate. Castro’s decision speaks to a larger dilemma facing Democrats in the post-Obama era. National Journal’s Josh Kraushaar has observed that while the Democratic coalition is more racially diverse than the GOP coalition, Republicans have done a somewhat better job of promoting black and Latino candidates to statewide office. Moreover, while nonwhite Democratic elected officials tend to represent majority-minority constituencies, where local electorates are to the left of the national electorate, and indeed to the Democratic primary electorate, and where incomes are lower than the national average and families are more fragmented. Nonwhite Republicans, in contrast, generally represent multiethnic constituencies. This in turn means that Republicans, in theory, have more black and Latino candidates who might plausibly run for national office in the near future.

Yet there is another reason Castro’s nomination is worthy of note. The housing portfolio is extremely politically important, not least because of its impact on Latinos.

Among conservatives, there is a widespread belief that the GOP position on immigration policy is central to the party’s lackluster performance among Latino voters. That is, many on the right, and in particular many influential Republican donors and lawmakers, are convinced that if Republicans were perceived as friendlier to immigrants and comprehensive immigration reform that would grant legal status to unauthorized immigrants, Latinos would be more likely to back GOP candidates. Sean Trende has cast doubt on this thesis. His basic argument is that Latino voters are less Republican than white voters because they tend to have lower incomes than white voters. “Ultimately,” Trende writes, ” the GOP doesn’t need more Republican Hispanics so much as it needs more middle-class Hispanics,” which seems like a good guide to policy — and a political reason, as opposed to a substantive policy reason, for why conservatives ought to favor an immigration policy designed to shield low-income foreign-born Latino citizens and their children from labor market competition from new immigrants with similar skill levels.

The right has, however, neglected an issue that really does matter to a large number of winnable Latino voters, namely the lingering after-effects of the housing bust. In 2011, the Pew Hispanic Center found that median household wealth among Latino households fell by 66 percent from 2005 to 2009, a median that masks the fact that some Latino families, concentrated in states like California, Arizona, Nevada, and Florida, saw their accumulated housing wealth wiped out completely. Though we are in the midst of a modest housing market recovery, there are many households, and indeed many Latino-heavy regions, that have yet to fully bounce back. The scarring effects of the bust will be with us for some time. Glenn Hubbard was one of relatively few conservative policy thinkers to embrace the idea of leveraging the federal takeover of the GSEs (a takeover that, incidentally, he opposed) to reduce the debt burdens facing responsible borrowers seriously, and a major political opportunity was lost. Latino voters burdened by underwater mortgages have found it harder to climb into the middle class and to stay there, and one assumes that they’ve been more receptive to calls for a larger government and more redistribution as a result. I can’t say whether Castro is attuned to this opportunity, as he hails from Texas, where the impact of the housing bust was muted. But one hopes that conservatives will come to recognize that the politics of housing wealth are at least as important, if not more important, to America’s political future as the politics of immigration.

How to Fix the FBI: It Shouldn’t Be an Intelligence Agency


Less than a year after taking charge at the Federal Bureau of Investigation, Director James Comey has turned to the pages of the New York Times to stoke public anxiety about a “metastasized” al-Qaeda threat. Clearly, terrorism has been a good issue for the FBI, helping it obtain vastly expanding authorities and resources since the 9/11 attacks, and a thicker wall of secrecy to prevent the public from seeing how it uses them. Comey’s new fear-mongering is part of his continuing effort to transform the FBI into a full-fledged domestic intelligence agency. For anyone concerned about unchecked government power, this is a bad idea. And for anyone only concerned with effective security, it is even worse.

The FBI is the most powerful agency in the federal government, as it has the legitimate tools and authorities necessary to investigate allegations of criminal activity. As the nation’s predominant law-enforcement agency it can probe federal, state. and local government officials, members of Congress, and even the president (not to mention the rest of us). An FBI agent merely asking questions about a political candidate, a religious leader, or a community activist can start rumors that destroy reputations and alter destinies, without ever leveling charges that could be defended. The Founders recognized this threat to individual liberty and democratic governance, which is why fully half of the amendments in the Bill of Rights are designed to restrict the government’s police powers and force public accountability over their use.

By transforming itself into a domestic intelligence agency, however, the FBI slips these constitutional restraints. Intelligence agencies by their nature operate in near-impenetrable secrecy, mask their sources and methods, and collect information against people not even suspected of wrongdoing. They use deception as a primary tool and seek to disrupt the activities of those they perceive as enemies of the state, rather than prosecute them. Often their victims never know how their fortunes changed and, even if they suspect government interference, don’t have a legal means to challenge it.

The FBI has a long history of abusing its claimed intelligence authorities to impede Americans’ First Amendment rights. And a 2010 Inspector General audit revealed this inclination to view political activism as a potential threat has recently resurfaced in today’s FBI. Indeed, FBI training materials state that “the FBI has the ability to bend or suspend the law and impinge on freedoms of others” when using its intelligence authorities.

Keep reading this post . . .

We Could Also Pay Teachers More if We Didn’t Discriminate Against Young Ones


Justus Myers discusses below the big ways in which teacher compensation is distorted away from teacher quality and toward rewarding certain cohorts in ways encouraged by collective-bargaining agreements. I couldn’t say it much better than his title did: “We could pay teachers more if we didn’t pay them so foolishly.”

The most obvious (and, in some sense, easily fixed) way in which this is the case is teachers’ extremely generous defined-benefit plans. The Vox piece to which Justus is responding, by the way, doesn’t even wrestle with this issue: It concludes teachers are underpaid just be looking at BLS earnings data, which doesn’t, so far as I can tell, take into account the huge amounts of wealth teachers are effectively given via their pension plans.  

The Manhattan Institute, always a superb source on these issues, published a report last fall that touched on these issues, and looked at how bizarrely defined-benefit plans compensate teachers.

It contains charts analyzing the compensation systems of ten different school districts. As an example, here’s New York City:

“Pension wealth” is their calculation of the value of the annuity that teachers will receive as their pension in retirement. As you can see, while teachers receive basically no compensation in pension benefits for the first ten or so years of their career, it then slopes up dramatically, expending a great deal of money to tie them to their jobs in the later years of their career. (The sheer size of this wealth and the rate at which it appreciates later in life, by the way — $20,000 a year in some cases — is a good reason to dismiss Vox’s analysis on this out of hand, and evidence of why looking at teachers’ salaries is almost meaningless.)

Anyway, the rapid appreciation of pension wealth in the final years of a teacher’s career: As Justus points out, there’s no justification for it. There’s a pretty clear research consensus that teachers get better with experience, but that this happens in the first five or so years, after which teachers don’t get much better. In other words, there’s no justification for paying teachers with lots of experience dramatically more. And yet that’s what we do.

What if we didn’t? We could pay lots of teachers substantially more. In two ways: For one, if teacher compensation were weighted between salary and retirement benefits the way the private sector does so, most teachers could receive an across-the-board salary raise: In New York City, MI calculates that it’d be 3.6 percent; in Los Angeles County it’d be 7 percent.

But more important, if we shifted to a system in which pension wealth accrued smoothly rather than the backloaded way almost all systems do it, compensation would be noticeably higher for younger teachers and those earlier in their careers than it is now. Here’s the percentage change in annual compensation for a teacher who starts working at age 25, if we moved just to a smooth accrual pension system (this does assume that the composition of teachers by age and experience remains static, which of course it wouldn’t):

That’s with a system that preserves step raises at various points rewarding teachers for service all the way up to 22 years — and preserves the current, exceptionally pension-heavy breakdown of salaries versus pension benefits, and the current, exceptionally health-care-heavy breakdown of cash compensation versus health-care benefits. There are a lot of distortions here, none of which, so far as I can tell, make the system work better for teachers or students. A system with smoother compensation would do a much better job of attracting younger or older individuals who don’t want a 30-year career in teaching, who are more risk-friendly and value cash salaries much more than they value the automatic accumulation of pension wealth, etc. 

Obviously we ought to have a discussion about how important it is to retain senior teachers — even if they don’t improve in quality, they probably do bring something to the system that’s worth rewarding them for.

On the other hand, given the incredible importance of having quality teachers — which, as TFA shows, can sometimes be inexperienced twentysomethings — we need to think a lot harder about how compensation can be structured to accomplish this goal. In a world of scarce resources and beleaguered city governments, this doesn’t have to mean more total compensation for teachers. It might just mean better executed compensation.

All of this is could be done without getting into the thorny, though important, question of how to pay effective teachers more. For now, the typical compensation system basically assumes that teachers grow exponentially more effective from years 20 to 30 of their career. Since there’s no reason to think that’s the case (and lots of evidence to think big improvements happen at other points), stopping that practice is a great way to move toward a system that’s, relatively speaking, more closely tied to effectiveness.

Lastly, as concerns the feasibility of this all: It’s very difficult to tweak teacher compensation to affect the benefits of teachers currently in the workforce, but it’s doable. (The legal challenges tend to come up regarding the protection of already-earned benefits, not benefits that current teachers are set to earn.) And of course, because cities have so underfunded their pension plans and done so with such unrealistic actuarial assumptions, tweaks to teacher compensation in the coming years may have to focus on closing those gaps rather than rewarding new teachers. However, all of the above is a way forward for a positive agenda about fiscally sensible teacher compensation. Green eyeshades really can mean more green for teachers, in other words. This doesn’t make the politics of it easy, of course, but the legal and policy cases are clear.

Drug Testing, Signaling, and Labor Market Reform


Notre Dame economist Abigail Wozniak finds that the rise of employer drug testing appears to have benefited African American workers:

I use variation in the timing and nature of drug testing regulation to identify the impacts of testing on black hiring. Black employment in the testing sector is suppressed in the absence of testing, a finding which is consistent with ex ante discrimination on the basis of drug use perceptions. Adoption of pro-testing legislation increases black employment in the testing sector by 7-30% and relative wages by 1.4-13.0%, with the largest shifts among low skilled black men. Results further suggest that employers substitute white women for blacks in the absence of testing.

Though Wozniak’s work won’t be the last word on the subject, it raises an interesting possibility. If employer drug testing increases black male employment by reassuring employers than specific black male applicants aren’t habitual drug users, a fact that might serve as a proxy for other desirable noncognitive attributes, like impulse control and reliability, one wonders if proposals to “ban the box” might backfire. “Ban the Box” is an effort to improve the labor market prospects of black and Latino men by barring employers from asking applicants whether or not they have a criminal record. Bloomberg View endorsed the proposal in 2011, and there is (modest) evidence that it might have its intended effect. Yet one wonders if, like limits on employer drug testing, banning the box might lead employers to discriminate against all black and Latino men, regardless of criminal record, for fear of hiring someone who might prove disruptive, and who might prove difficult to fire should the need arise. (As Pat points out, however, employer drug testing is about current behavior while asking about an applicant’s criminal record is about past behavior. One could argue that allowing employer drug testing while banning the box allows employers to address their concerns about reliability, etc., without punishing applicants for past misdeeds.)

During a recent conversation about Room to Grow, the new collection from the YG Network (where I’m an advisor), one of the contributors, Rick Hess, offered a different approach that might prove more constructive. Many employers insist that applicants have a college degree not because they are hiring for a job that requires higher education, but rather because a college degree is a signaling device; among other things, it helps demonstrate that the applicant has the patience and fortitude to complete a course of study, or, frankly, the resources to do so (economic, social, and cultural capital), and all that entails (the ability to withstand shocks and disruptions, which might reduce absenteeism and make you a more reliable employee). College as signaling device represents a huge barrier to entry for non-college-educated workers, many of whom possess the qualities that a college education is meant to signal. And so Rick has tentatively suggested that public-private partnerships offer high school graduates a battery of tests and interviews designed to evaluate whether or not they possess the non-cognitive skills that are central to being job-ready. For this certification process to be deemed worthwhile by employers, it would have to be rigorous and selective. That is, not every high school graduate would pass muster. But a certification along this lines could be a huge boon to ex-offenders and others who might otherwise be perceived as risky hires.

* This post has been updated.

We Could Pay Teachers More If We Didn’t Pay Them So Foolishly


Vox’s Matt Yglesias thinks that we undervalue teachers, and we’d be better off if teachers got paid more. He’s right. Excellent teachers in particular lead to huge benefits for students and society (see here and here, for example). Conversely, bad teachers do the opposite. We would all benefit if great teachers were well compensated.

So what are the barriers to compensating teachers commensurate with their value to society? There are many, but collective-bargaining agreements — which govern compensation schemes for about half of all K–12 teachers in the U.S. — are one of the main reasons our best teachers don’t get paid as much as they should, and why so many poor and mediocre teachers get paid much more than they should.

Take a look, for example, at the recently proposed teacher’s contract in New York City.

You might think that a sensible compensation scheme would pay teachers, for the most part, based on how much they help kids learn. Yes, measuring teacher effectiveness — like measuring manager effectiveness — is notoriously hard. But it is also possible. It is not a large leap from there to suggest that teacher pay should be related in a meaningful way to teacher effectiveness.

What you will not find in the proposed NYC teacher’s contract is anything resembling that idea. Instead, you’ll find on the United Federation of Teacher (UFT)’s website an updated salary schedule for 2009–2018 (explanation here) — one that rigidly determines pay down to the dollar on the basis of highest degree obtained, number of years taught, as well as for any credits earned beyond college.

If there were a close relationship between these factors and student achievement, such a scheme might be warranted. But there’s not. Based on the proposed salary schedule for 2014, an NYC teacher with a master’s degree will get paid about $6,000 (or 12 percent) more than a teacher without one, even though there is scant evidence that having a master’s degree leads to increased student learning. Why not use that money to pay a teacher who’s actually more effective?

Worse yet, even though numerous studies find that teaching experience effects tend to plateau just a few years into teaching (see link above), teacher pay increases deterministically year after year, decade after decade. For example, again based on the proposed salary schedule for 2014, an NYC elementary school teacher with a B.A. and 15 years of experience would get paid about $21,000/year (40 percent) more than a similarly educated teacher with six years of experience — even though we have very little reason to believe that the 15-year teacher is any better at helping kids learn than the six-year teacher. Given that, you might do a double take at the roughly $8,800 (≈12 percent) pay jump between 18 and 20 years of experience. Compensating teachers like this is totally unsupported by the best available research.

What about the newly proposed teacher leadership positions, for which extra pay, of up to $20,000, is available? At a glance, you might get the impression that this initiative is something like merit pay. It isn’t.

First, the positions and associated pay bumps are for one year only. Second, they are only available for tenured teachers. Third, for all three leadership positions the selection criteria are looser than is implied. For example, teachers would be eligible if they had been designated in the prior year as “highly effective,” “effective,” or in some cases only “satisfactory.” Although New York City does not yet have a full year of data on teacher effectiveness, all teachers outside of New York City have been evaluated and fully 91.5 percent of them were rated as “effective” or “highly effective” — not a terribly high bar. Finally, even if the statewide teacher-evaluation system were more discerning, the existing evaluation system relies more heavily on subjective criteria than on measured student learning outcomes.

Perhaps the least sensible aspect of teacher compensation is the defined-benefit pension. The central problem with this scheme is fittingly described by the UFT’s own website: “And remember, there’s no limit on the total amount you collect. Once you retire, those monthly pension checks will keep coming for the rest of your life.” New York has so far avoided the massive pension shortfalls of other states, but in large part because they have made a variety of changes to pension rules for new teachers — drastically reducing future benefits — in order to preserve benefits for veteran teachers (see p. 41, for example, here). A better way would be to simply shift to a defined-contribution pension plan, which would allow higher levels of compensation for existing teachers (who would thus not have to shoulder the burden of retirees).

Does the recently proposed NYC teacher contract make any changes along these lines? No. In fact, no changes to pensions were proposed at all.

We could (and should) pay excellent teachers a lot on the basis of how much they contribute to student learning. But that will be very hard to do while unions — a major part of the education iron triangle — are the main driver of teacher-compensation schemes in New York City and elsewhere.

David Koch’s 1980 Veep Campaign Wasn’t Quixotic, It Won a Big Policy Victory


The New York Times ran a story this past weekend, “Quixotic ’80 Campaign Gave Birth to Kochs’ Powerful Network,” that spins David Koch’s 1980 Libertarian-party run for the vice presidency as a losing political horse race, ignoring a lightning-fast policy success that it won.

The Kochs — then as now wealthy energy entrepreneurs — were drawn into political activism by the Nixon-Ford-Carter era energy crisis. During the 1970s, brother Charles had denounced subsidies and special treatment demanded by corporations as well as the Nixon Administration’s price controls. In that decade, Koch Industries, the family business, ran into legal trouble for violating federal energy price controls. 

When the Kochs plunged into politics, brother David, taking advantage of a campaign-finance loophole, exercised his First Amendment right to spend unlimited amounts of money on his vice-presidential campaign. While he ran as a thoroughgoing libertarian (demanding full legalization of abortion and the repeal of laws that criminalized drug use, prostitution, and homosexuality), he used his soapbox to emphasize energy issues. The Times’ Nicholas Confessore reports that David Koch denounced “an ‘Alice in Wonderland’ energy policy [that was] a mix of subsidies and price controls that had stymied market forces and caused high prices and shortages,” but Confessore fails to note that this was essentially fact, not Koch’s ideological worldview. Bad policy had resulted in rationing, disincentives for new production, and hours-long gas station lines.

According to Confessore, the campaign failed because mainstream press coverage was minimal and the Kochs’ hopes for 3 percent of the vote were crushed — the Libertarian Party only drew about 1 percent. But third parties in American politics aren’t properly measured by polling results. Successful ones, such as the Populists of 1892 and Socialists of 1932, see much of their policy agenda become law. By that standard, the Libertarian-party crusade against the Carter administration’s energy policy was an immediate success. It drew the attention of opinion writers, and Ronald Reagan ended oil price controls on January 28, 1981, just eight days after his inauguration. As David Koch had predicted, prices immediately crashed. By June 1981, the mainstream media was talking about an oil glut.

Far from being quixotic, the Kochs’ key policy prescription triumphed. Deregulation ultimately helped the Kochs greatly increase their fortune, while all Americans benefited from the end of 1970s stagflation and the resulting 1980s boom.


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