The Case Against a Maximum Wage

by Reihan Salam

You’re no doubt familiar with the minimum wage debate. Advocates of an increased minimum wage on the left argue that a higher wage floor is essentially a free lunch that will raise low-end household incomes and reduce turnover. Opponents warn that setting the wage floor too high will reduce net job growth and price a nontrivial number of less-skilled workers, including young workers, out of the formal labor market. What is clear is that calls for a higher minimum wage have been a godsend for a left that finds itself intellectually exhausted. Though the public is wary of expanding government, large majorities favor a higher minimum wage as a seemingly straightforward solution to wage stagnation. And liberals have been quite happy to play along with the notion that a higher minimum wage is the cure-all that many Americans believe it to be.

But have you heard about the maximum wage debate? In Vox, Matt Yglesias makes the case for a maximum wage. More precisely, he is making the case for an effective maximum wage, or tax rates that are so high they deter firms from offering high salaries in the first place. Though I don’t find Yglesias’s case very convincing, I suspect we’ll be hearing more arguments like it from liberal thinkers and activists in the years to come. So for that reason alone, Yglesias’s case deserves a closer look.

Rather than call for a hard cap, Yglesias is really calling for tax rates so high as to be confiscatory, and he identifies the ultra-high top marginal tax rates of the years immediately following the Second World War as a model.

“During the 90 percent top income tax rate,” Yglesias writes, “for a firm to put an extra $100 in the pocket of a top executive required them to pay another $1,000 in salary.” And so firms chose to instead “give modest raises to five separate middle managers.” This strategy did not raise much revenue, but it did distribute compensation more evenly within firms. For Yglesias, revenue is not the goal of a “super-tax.” Instead, his goal is to change America’s political economy by, among other things, limiting the influx of talented workers into ultra-high-wage professions, checking the rent-seeking that (allegedly) has driven the increase in executive compensation, and encouraging firms to divvy up their compensation expenditures in a more egalitarian fashion. And as evidence in favor of this approach, Yglesias observes that “the pre-Reagan trend of productivity growth in the American economy was faster than the post-Reagan trend.”

First, Yglesias’s comparison of pre-Reagan productivity growth and post-Reagan productivity growth neglects the possibility that in the absence of tax reform, productivity growth might have been lower still. In his essay on “Frontier Economics,” Brink Lindsey argues that the key difference between the period from 1947 to 1973, when the average annual increase in productivity in the U.S. was 2.9 percent, and the period from 1980 to 2006, when it was only 2 percent, is that the immediate postwar decades offered myriad opportunities for what he calls “imitative growth,” in which existing technologies and business models are deployed across the economy, particularly in underdeveloped regions in the South and West. This is much like the catch-up growth we see in less-affluent societies, where tried-and-true strategies for raising productivity are deployed until the society in question reach middle-income status, at which point growth tends to plateau. The latter period saw “the exhaustion of relatively easy opportunities for imitative growth in the United States and other advanced economies,” and so continued growth has depended on business model innovation, an area in which the U.S. has, in relative terms, at least, excelled. Comparing the growth record of the post-Reagan U.S. to that of the postwar golden age is not unlike comparing the growth record of an advanced market economy with a poor country in the throes of catch-up growth. Even the Soviet bloc economies saw substantial economic growth in the immediate postwar decades as these societies urbanized and as workers shifted from the agricultural to the industrial sector. That, alas, is a trick that can only be pulled off once.

Now let’s consider America’s postwar tax regime in more detail. Last spring, Arpit Gupta revisited the high tax rates of the 1950s. He observed that very few people paid the high-end official rates, a fact that could be attributed to the fact that firms were deterred from offering high compensation, as in Yglesias’s model. Yet Gupta also found that average income-tax rates remained stable from the 1950s to the 2000s. The highest earners of the 1950s, whose marginal dollars were subject to the highest rates, paid average tax rates comparable to those of the highest earners. When we consider the incentives facing the high earners of this era, it is important to take into account the loopholes and deductions that allowed them to shield their income from tax.

It is also true, however, that the tax code of the postwar years imposed much higher corporate and estate taxes. Everyone agrees that the burden of the estate tax was borne primarily by the wealthy. But there is an ongoing debate over how to understand the burden of corporate taxes. Some analysts maintain that the burden of corporate taxes falls entirely on shareholders while others believe that the burden falls at least in part on the employees of firms, for whom corporate taxes translate into lower wages. Yglesias accepts that capital income will have to be shielded from his super-tax, to ensure that the reallocation of capital proceeds apace. So it is worth noting that, according to Thomas Piketty and Emmanuel Saez, at least, the main reason the tax code of the postwar years was so progressive is that it featured much higher taxes on capital income. This isn’t a problem for Yglesias’s argument, as he is convinced that the high rates of the postwar years succeeded in preventing firms from paying high salaries.

It’s not clear to me that Yglesias is thinking about the rise in executive compensation in the right way. While it is true that executive compensation was lower in this era, it is also true that the market capitalization of the largest firms was also much smaller. One possibility is that as the market capitalization of big companies has increased, the stakes associated with finding and retaining an effective CEO have risen. This in turn has contributed to an intensified competition for the best managers, or rather those perceived to be the best managers, which has led to an increase in executive compensation. There are many questions we can’t reliably answer. For example, it is possible that the market capitalization would never have increased as much as it did in the counterfactual world in which tax rates remained at their postwar highs. Or it is possible that loopholes and deductions would have shielded high earners from taxes in this counterfactual world, and the arms race for managerial talent would have played out much as it did in our own world.

Yglesias rejects this benign interpretation of executive compensation growth, noting that “it is now a commonplace of progressive discourse to argue that executive compensation growth largely reflects rent-seeking that could be rolled back without impairing managerial talent.” The paper he cites, by Joshua Bivens and Lawrence Mishel of the Economic Policy Institute, is interesting, and it merits a (forthcoming) discussion of its own. For now, I’ll just note that Jim Manzi scrutinized Piketty’s closely related argument that executive compensation growth, and rising inequality more broadly, can be attributed in to the bargaining power of top executives, and he found it highly implausible.

Going even further, Yglesias cites a recent argument from Benjamin Lockwood, Charles Nathanson, and Glen Weyl that “by increasing the financial incentive for top talent to pursue careers in finance and law rather than teaching and research, the Reagan tax reforms reduced overall economic output while increasing the pre-tax share of income earned by top earners.” Lockwood, Nathanson, and Weyl base their claim on a mechanistic model of the economy. In the absence of the Reagan tax cuts, they posit that many of the workers who went into finance and management would have instead taken up positions in academia, engineering, and teaching; and their model finds that this shift away from research-oriented professions reduced social welfare by 1 to 2 percent. Note that they base this calculation on a generous assessment of the positive externalities associated with research. To their credit, Lockwood, Nathanson, and Weyl note that some of their results strike them as “implausibly large,” and they acknowledge that their reading of the literature is “inevitably partial.” They anticipate that future research will find that “the existing literature overestimates externalities and thus our magnitudes,” and I agree with them. When Yglesias writes “rather than giving the middle class a smaller slice of a bigger pie and making everyone better off, these reforms gave the rich a larger slice of a smaller pie and made only them better off,” he doesn’t make it clear that Lockwood, Nathanson, and Weyl are tentatively suggesting that the reforms in question might have made the pie smaller by 1 to 2 percentage points under assumptions that even they allow strain credulity.

Like Yglesias, I believe that there are serious problems with corporate governance in America. Where we part company is over his apparent conviction that confiscatory taxes are an important part of the solution. I won’t belabor the case against ultra-high marginal tax rates — Arpit Gupta has summarized some of the scholarly research on the impact of high rates on long-run growth. Rather, I’ll just suggest that we focus more directly on how the tax code encourages excessive leverage and how our regulatory regime shields incumbents from competition from the new firms that give rise to new business models. Those are causes that, hopefully, we can all agree on.

How Corporate Tax Reform Can Combat Crony Capitalism

by Reihan Salam

Congressional Republicans are astonishingly unpopular, and they deserve to be astonishingly unpopular. Remarkably, three-fifths of self-identified Republicans disapprove of the job congressional Republicans are doing, which tells you something. The good news is that a small number of elected conservatives, led by Utah Sen. Mike Lee and Florida Sen. Marco Rubio, have been pointing the way towards a GOP worth supporting. Both men have been making the case for a domestic policy agenda that explicitly, and creatively, advances middle-class economic interests. Most recently, in the Wall Street Journal, Lee and Rubio have outlined a new tax proposal that is a much bigger deal than it appears to be at first glance.

Drawing on Lee’s recent call for overhauling the personal income tax, Lee and Rubio create a two-rate structure (15 and 35 percent) that eliminates and revamps various tax expenditures while also adding an expanded child credit. Like Robert Stein, the father of family-friendly tax reform, Lee and Rubio justify this new child credit on the grounds that it represents a corrective to the tax bias against working parents. The political case for an expanded child credit has always struck me as strong, and so this aspect of their plan is very welcome.

Yet it is Lee and Rubio’s approach to overhauling corporate taxes that deserves particularly close attention. The recent controversy over high-profile corporate inversions has given the corporate tax reform conversation new life, and Lee and Rubio are right to weigh in. In the weeks to come, we will learn more about what exactly they have in mind. But for now, it looks as though they are committed to the following big steps: (a) allowing firms to deduct 100 percent of the expenses associated with capital investment in the year the these expenses are incurred; (b) consolidating the taxation of capital income by essentially having corporations pay taxes on behalf of their shareholders so that taxes on corporate income are paid only once at the firm-level rather than twice, at the level of the firm and at the level of the individual investor; (c) eliminating the deductibility of new debt, a measure that will, over time, greatly reduce the pro-debt bias of the tax code; and (d) moving to a territorial tax system.

If Lee and Rubio follow through on all of these steps, they will spark a revolution in the way business is done in America. As important as the fight over the Ex-Im Bank might be, the corporate tax code is where the battle over crony capitalism will be won or lost. The first two steps, 100-percent expensing and single-layer taxation, will make the U.S. a far more attractive destination for capital investment. But curbing the debt bias is potentially an even bigger deal. As Robert Pozen has argued, the debt bias in the tax code encourages firms to take on more leverage than they would under a truly neutral tax code, which in turn raises the risk of bankruptcy and the economic dislocation that follows from it. Curbing the debt bias will also weaken the relative position of incumbent firms, which can borrow cheaply, vis a vis upstarts. California Rep. Devin Nunes has long championed lowering taxes on business investment, and NR’s Ramesh Ponnuru has championed his cause. One challenge, however, is that lowering taxes on business investment creates a revenue hole that has proven hard for tax reformers to fill. Reducing the debt bias is an excellent way to raise revenue while reducing economic distortions, per Pozen. So these elements of Lee and Rubio’s proposal fit together perfectly.

Moving to a territorial tax system is another matter. A territorial tax system would make it far less likely that U.S. multinationals would change their tax domicile, as they’d no longer have to pay U.S. taxes on income generated abroad. In this sense, at least, the corporate inversion problem would be solved. But as the left-of-center Center on Budget and Policy Priorities has warned, a territorial system would make it more attractive for U.S. multinationals to shift economic activity to low-tax jurisdictions, as they wouldn’t have to go through the headache of a corporate inversion to take full advantage of tax havens overseas. Robert Pozen has offered a compromise — U.S. firms would pay one rate on their domestic profits and they would pay a separate “global competitiveness tax” rate on on their foreign profits, the latter of which would be pegged to the rates found in other market democracies. This would, according to Pozen, minimize the incentive for U.S. multinationals to shift economic activity abroad without unduly burdening them. (Moreover, the global competitiveness tax would raise revenue that could then be used to lower taxes on domestic profits, thus shrinking the wedge between these two rates.) It is easy to imagine other affluent countries moving in the same direction, which would be a good thing insofar as it would encourage firms to make location decisions on the basis of economic fundamentals rather than differing tax rates. Merits aside, Pozen’s approach might also prove more politically palatable, as it doesn’t appear to reward U.S. companies for shipping facilities and jobs out of the country.

In their Wall Street Journal op-ed, Lee and Rubio observe that “if we hope to realize a new American Century, many institutions and government programs will need to be updated, reformed, or replaced.” In a few short months, these two lawmakers have gotten off to an excellent start. If congressional Republicans are to ever deserve the support of rank-and-file conservatives across the country, they should follow Lee and Rubio’s lead. 

Boston Fed Paper Gives Bitcoin-as-Payment-System a Thumbs-Up

by Patrick Brennan

In this space, I’ve been following the evolution of the digital currency bitcoin, which has gotten big enough to merit an academic paper on it from two economists affiliated with the Federal Reserve Bank of Boston, essentially asking whether bitcoin has viability or usefulness as a currency. 

In order to answer that question, they lay out what it means to be a viable form of money. There are three purposes of money, as economists generally see it: as a medium of exchange, as a unit of account, and as a store of value.

Bitcoin essentially fails on the last two of these: For one, its price has been and probably will continue to be so volatile that it’s not a good way to hold value (“store of value”) or measure how much value you have (“unit of account”). That’s partly because, as the paper notes, currencies have generally not been viable over very large areas (bitcoin being accepted globally, if only in limited places) and when they depend on some external factors to determine their value (in bitcoin’s example, the actions of digital “miners”), rather than the actions of a central bank. The last objection might be taken by a lot of libertarians and the Paulites who’ve enthused over bitcoin as begging the question — they like bitcoin because it’s not tied to a central bank. But as the Fed economists point out, in both theory and practice, there are good economic reasons, in the modern wealthy world, to prefer central-bank currencies rather than deregulated currencies that have to be tied to some other value. (Rand Paul went so far as to say bitcoin would be better if it were indeed tied to some kind of other asset, which, as I explained, is a bad practical idea whatever the merits are of tying currencies to the value of other assets, since it would have invited much more regulation.)

The good news is that bitcoin is still a nice development for liberty-loving people, because it’s an innovative medium of exchange. It’s already surprisingly widely accepted as payment on a number of e-commerce sites, where customer and vendor get to avoid the non-negligible fees associated with traditional payment systems like credit cards, and transactions can be made so quickly that that bitcoin’s volatile value doesn’t matter. The Fed economists do point out a few problems: For instance, you can’t cancel bitcoin payments like you can, say, a credit-card payment or a wire transfer, so it’s harder to do returns on merchandise.

Yet bitcoin is still useful in this respect, because payment systems, particularly in America, are overregulated and expensive. One of the areas where they impose the highest tariffs is remittances, where the Fed paper is a little skeptical in what I think is kind of a nonsensical way:

Another plausible area of application, because of Bitcoin’s clear cost advantage (at least in terms  of the explicit cost), is remittances, especially across borders. A likely serious impediment to Bitcoin’s  adoption in this case is that the bulk of remittances are to developing countries. One could imagine that the potential users in these markets have neither the specific knowledge nor the digital devices necessary to utilize Bitcoin. This would explain why, to date, Bitcoin has no presence in this market. On the other hand, there is the mitigating factor that most such users have cell phones and many are comfortable with mobile applications. To the extent that a mobile application for international remittances using the Bitcoin network can be developed and accepted by a broad range of providers around the world, it can be possible for Bitcoin to capture a nontrivial share of this market. The crucial, yet difficult to assess, element is whether enough providers in different countries will be willing to adopt the Bitcoin technology, or some variant.

In other words, they’re worried developing economies won’t be tech-savvy enough to take advantage of bitcoin . . . but wait, developing economies are already pretty tech-savvy. As the authors note, there will have to be investment in apps (and wireless networks in these places) for something like bitcoin to become a good way to do remittances, but the potential there is real.

In the end, though, it’s important to qualify that the potential probably lies with “something like bitcoin,” and not bitcoin itself. That’s because, while bitcoin has some interesting innovations that has made it a basically free secure payment system, it has weaknesses, too. (Which are too technical to explain.) But both the technical weaknesses of bitcoin and the deeper problems with this kind of decentralized payment system can probably be overcome — assuming that there isn’t, as the Fed paper worries, a flurry of regulation for digital currencies.

Thanks to Jim Pethokoukis for the pointer.

Why Los Angeles Is Liberating Its Cabs

by Reihan Salam

Something very unusual is happening in Los Angeles. Instead of fighting innovative new businesses in service to deep-pocketed incumbents, local taxi regulators are very tentatively moving towards deregulation. No, they’re not putting themselves out of business outright, but they’re trying to help traditional cab companies change how they do business. Though taxi service is only one small slice of L.A.’s sclerotic economy, the fact that local regulators are adjusting their tactics at all offers lessons for how we might revitalize urban America.

The rise of ride-sharing companies like Uber, Lyft, and Sidecar has greatly improved the quality of local taxi service in L.A. Before the emergence of these smartphone-enabled services, it was often extremely difficult to get a cab, not to mention expensive. Like most large cities, L.A. tightly restricts the number of licensed taxi cabs, and this artificial scarcity shielded incumbent cab companies from competition. But now riders have a wide range of options from services that have effectively lifted the cab on drivers able to accept money in exchange for rides, and they’ve come to find the incumbents wanting.

So why have the traditional cab companies allowed this to happen? One quirk of California’s taxi regulations, as Laura J. Nelson of the Los Angeles Times reports, is that while a local Board of Taxicab Commissioners regulates the traditional licensed cab companies, Uber, Lyft, and Sidecar are regulated by the statewide California Public Utility Commission. The political influence of the cab companies thus counts for less than it might if these services were regulated at the local level, as it has to contend with other powerful interests as well, including a technology sector that keeps California’s state government afloat.

And so, according to Nelson, Eric Garcetii, Los Angeles’s liberal mayor, is pressing the Board of Taxicab Commissioners to take a different approach. Rather than impose new restrictions on the likes Uber, which they can’t do, the Board is being asked to relax rigid regulations that have kept the traditional cab companies from competing effectively. For example, while Uber et al. make use of variable pricing, to attract more drivers during periods of peak demand, traditional cab companies are forced to charge fixed rates and to operate under a cap of 2,300 cabs, parceled out across several different companies. Recognizing that the California Public Utility Commission is not about to clamp down on the ride-sharing companies, L.A.’s local taxi lobby seems to have reconciled itself to the fact that the traditional cab companies will have to evolve.

At the risk of stating the obvious, taxi regulation seems to be one area where it’s good to keep power in the hands of the state government rather than local governments, as the state government is accountable to a more diverse array of constituencies, which in turn makes it less vulnerable to capture by a single interest group. But cabs aren’t the only area where this is true.

Take local land-use regulation, the most important issue that no one in national politics cares about. Cities like Tokyo and Toronto that have seen big increases in housing construction empower higher levels of government — the national government in Japan and the provincial government in Ontario, respectively — to make decisions about land use while in the United States, land use decisions are generally made by cities and towns. That might be appropriate in the case of small communities that want to preserve their character. Large cities are another matter entirely, as large cities are America’s engines of productivity growth and upward mobility. When local voters impose stringent development restrictions in the cities where entrepreneurs gather and build businesses, and where young adults go to make their way in the world, they effectively put the brakes on the entire American economy.

Local control has its virtues. In some areas, however, you need state governments to give local entrepreneurs room to breathe. Just as California’s Public Utility Commission has enabled innovative new ride-sharing services to take hold, and to compete with incumbent cab companies, we need state governments to prise open dysfunctional real estate markets in cities like New York and San Francisco, and to enable aggressive outsiders to take on insider developers who have an interest in keeping housing prices high.

How Avikcare Would Fix Medicaid

by Callie Gable

Medicaid is a mess, and a very expensive one at that — the health-insurance program for low-income Americans is administered by states but has dozens of federal mandates and rules that drive up Medicaid costs. In response, the states cook up creative financing techniques to shift more costs back to the feds. The end result, among other things, is higher taxes for everyone and poorer care for Medicaid patients.

In his new health-care plan, Avik Roy, a fellow at the Manhattan Institute, proposes changes to the Medicaid system that would end the state-federal finance battle, give each entity clear cut responsibilities, and improve Medicaid patients’ access to quality care.

So how did Medicaid become a mess in the first place? In large part, state-federal Medicaid cost sharing.

The federal government pays around 60 percent of states’ traditional Medicaid costs (richer states get a bit less, poorer states a bit more). This creates all kinds of problems, but here’s just one example Avik provides of how this can be distortionary: If a state levies a new tax on Medicaid premiums or providers, which is then passed on in Medicaid payments, the federal government pays 60 percent of the amount of the tax to the state, which pays just 40 percent, essentially to itself. Roy lays out an example of how states can profit from these taxes in his plan:

A $15,000 Medicaid plan, thereby subject to $1,200 in sales and premium taxes, might be 60 percent subsidized by the federal government, leading to $720 in additional federal spending. The state government, by contrast, makes money on this deal: $1,200 in additional tax revenue, and $480 in additional Medicaid spending, for a net gain of $720. BL

Today, the federal government pays about $33 billion dollars more for pre-expansion Medicaid each year than it would if states weren’t using creative financing to shift the costs to the feds:

The tax game is, of course, just one example of how Medicaid is a mess. And states and the federal government are going to a lot of trouble to run and spend an incredible of money on a system that doesn’t work very well. Medicaid’s outcomes are significantly poorer than those of private insurance, and there is some evidence to suggest that uninsured patients even fare better than those with Medicaid.

To improve outcomes, Roy’s plan would give the low-income adults and children who use Medicaid for doctor and hospital visits generous subsidies to purchase private insurance plans on the Obamacare exchanges (which his plan would otherwise deregulate). The subsidies would be fully paid for by the federal government, absolving states of any fiscal responsibility for this part of Medicaid (called “acute care”).

In return, states would eventually take full fiscal responsibility for Medicaid’s long-term care population, the elderly and disabled who receive nursing-home and home-health-care benefits. Because aged and disabled beneficiaries are much more expensive to care for than children and adults, states would be still be responsible for financing much of this program. While long-term-care individuals make up less than a quarter of total Medicaid beneficiaries, they account for about 64 percent of Medicaid spending:

Splitting Medicaid into clear federal and state responsibilities is obviously appealing. But is this the right way to do it? American Enterprise Institute health-policy expert Joe Antos likes Roy’s proposal overall, but isn’t convinced that states are willing to fund long-term care on their own, as it’s an even riskier and more expensive proposition than funding health insurance.

“Long term care is a rapidly growing cost that states already fear,” he tells the Agenda, “and this does not deal with the fiscal consequences to the states. This plan will collapse because states lose.”

The Avikcare arrangement would be fiscally neutral or positive for most states, but some would be big losers in terms of federal Medicaid funding. The Urban Institute estimated that some states like Ohio and Louisiana, which would have to spend $788 million and $452 million more each year respectively, would need to increase Medicaid spending under this arrangement. The chart below (click to enlarge) is an estimate of how a plan like Roy’s would affect each state:

Avik’s proposal would address this specific problem by providing grants to the states that are “losers” to smooth their transition into the program (the total losses to the losers in 2011 would have been $4.5 billion). “In sum, the Medicaid swap and related offsets below would be designed in such a way so as to be modestly fiscally advantageous to every state government, rela- tive to the federal government, in order to encourage states’ participation,” his plan explains.

Another expert, Tevi Troy from the American Health Policy Institute, sees making long-term care a state responsibility as an opportunity for cost savings and efficiency gains (as Roy does), which means that, in theory, everyone could be a winner even after the transitional grants are phased out. While Troy is wary of the government’s ability to adequately deliver long-term care in the first place, he said states are in the best position to do it:

“Changing the paradigm is good,” he says. “This way there is little incentive for fraud or cost shifting. My general predisposition is to give states more flexibility and let them find the answer.”

Moreover, Troy is enthusiastic about the prospect of moving adults and children currently on Medicaid into private insurance via the exchanges. Troy and a colleague recently published a study finding that private insurance is less expensive per capita than governmentally run programs like Medicaid.

Roy’s approach could be a good deal all around: It gives acute-care patients access to a wider range of providers and care, which should result in better outcomes, while leaving states to coordinate care for the elderly and disabled, whose specific needs can best be met with smaller, state-level programs. It gives states and the federal government autonomy over their own programs, which should cut administrative costs and reduce incentives to game the system. However, as with any division of the system, some states will be winners and some states will be losers, so the politics of it won’t necessarily be simple.

How Conservatives Can Win on Social Issues

by Reihan Salam

On Monday, Jonathan Martin of the New York Times reported on how Democratic and Republican candidates have been adapting to a changing cultural landscape. Rising support for same-sex marriage, for example, has transformed what had been a wedge issue for social conservatives on the right into a wedge issue for social liberals on the left. And on a wide range of issues relating to women in the workforce, including the contraception mandate and pay equity, Democrats have exploited GOP flat-footedness to build upon their traditional advantage among women, and in particular unmarried women. Drawing on the work of Ruy Teixeira and Alan Abramowitz, I assume, Martin observes that while white voters without a college degree represented 65 percent of the electorate as recently as 1980, they represented 36 percent as of 2012, and their share continues to shrink. And so, Martin maintains, “a growing presence of liberal millennials, minorities, and a secular, unmarried and educated white voting bloc will most likely force Republicans to recalibrate.”

Ramesh Ponnuru, addressing a similar set of issues in Bloomberg View, sees matters differently. While he recognizes that public attitudes on same-sex marriage and legalized marijuana have changed, and that conservatives will talk less about them as a result, he makes a strong case that abortion is a different matter: first, public opinion has not shifted to the left on abortion; and second, talking less about abortion won’t do conservatives much good. Rather, he argues that conservatives need to identify areas where social conservatives are more closely aligned with the broader public, e.g., on the question of restricting abortions after 20 weeks.

I think that Ponnuru is exactly right. Abortion is a distinctive social issue for many reasons. Recently, J. Alex Kevern and Jeremy Freese, both sociologists at Northwestern University, that differential fertility might play a role:

Differential fertility is frequently overlooked as a meaningful force in longitudinal public opinion change. We examine the effect of fertility on abortion attitudes, a useful case study due to their strong correlation with family size and high parent-child correlation. We test the hypothesis that the comparatively high fertility of pro-life individuals has led to a more pro-life population using 34 years of GSS data (1977-2010). We find evidence that the abortion attitudes have lagged behind a liberalizing trend of other correlated attitudes, and consistent evidence that differential fertility between pro-life and pro-choice individuals has had a significant effect on this pattern.

That is, pro-life adults tend to have more children than pro-choice adults, and the views of children seem to correlate with those of their parents on at least this particular issue. I would argue that we ought to think harder about the political implications of differential fertility as we consider a wide range of policy questions: it is not unreasonable to expect that the children of parents who earn low market wages due to their limited skills and social networks might be more favorably disposed towards redistribution, and so policies that tend to increase labor force participation and average skill levels will have an impact not just on this generation, but also on the next one.

I would go further than Ponnuru. While I agree that abortion is an issue where the Democratic edge on social issues is at best overstated, I tend to think that Republicans are, in theory at least, in a stronger position than Democrats on a variety of other social issues. In his New York Times article, Martin quotes Ben Domenech of The Federalist:

“Just as Democrats had to accept or pretend to accept what was viewed as the cultural center of the country, Republicans are going to have to accept or pretend to accept that the center has shifted,” said Ben Domenech, a conservative writer. “They can respond by pretending it isn’t happening or isn’t a problem. But they have tried that in recent cycles, and it hasn’t really worked. Or they can reorganize around an agenda that favors individual liberty.”

While Domenech and I might disagree on what exactly an agenda that favors individual liberty would look like, I do think that conservatives can and should be the first movers on, for example, creating a more sustainable legislative settlement around the state-level regulation of cannabis. One can easily imagine conservatives arguing that the chief federal concern in regulating cannabis and other controlled substances is in containing the negative interstate spillovers associated with their use, and so if states succeed in containing these spillovers, they ought to be given wide berth to craft their own regulatory regimes — an argument I’ve gleaned from Mark Kleiman of UCLA and Will Baude of the University of Chicago Law School, in somewhat different forms. Similarly, conservatives might try experimenting with, say, empowering states to lower the drinking age, provided (again) they make a convincing case that they can contain negative spillovers. For example, a state might lower its drinking age while also increasing its taxes on alcohol in an effort to control binge use. I can’t confidently say that being the first mover on one of these issues would necessarily redound to the GOP’s advantage. But it would certainly change the conversation, and break the GOP out of its defensive crouch.

Martin cites the recent Republican embrace of allowing for the sale of birth control pills over the counter as a way of parrying liberal attacks. Yet it is actually much more than that — it is an authentically conservative proposal that empowers women, including the many women who will still be uninsured, by choice or otherwise, even if Obamacare, and its Medicaid expansion, firmly takes hold. One hopes that this birth control shift will prefigure a new policy creativity on social issues.

Tesla and the Interstate Subsidy Chase

by Reihan Salam

The Wall Street Journal has published an outstanding editorial on the success of Tesla, the boutique manufacturer of high-end electric automobiles, in extracting $1.3 billion in tax subsidies from Nevada for its new $5 billion ”Gigafactory,” to be built in Reno. Much of the editorial simply details the various provisions of the deal, which will leave crony capitalists everywhere salivating. It is worth noting that, as Kevin Bullis warned in MIT Technology Review last year, there are reasons to doubt the economic viability of Tesla’s new battery factory, not least because sluggish sales for electric vehicles have led to a glut of battery manufacturing capacity. Though I’m sure Tesla will do its best to drum up interests in its vehicles, despite the fact that they’ve been plagued by serious questions about their reliability, and though Tesla is indeed planning to release a mass-market product at a lower price point than its luxury sedans, larger changes in how Americans live and work might be challenging for Tesla’s business model, as they have been for all automobile manufacturers. If Tesla were operating according to the old-fashioned rules of free enterprise, I wouldn’t care in the slightest if the Gigafactory were a boondoggle in the making. Indeed, I might celebrate the company for its daring. But federal subsidies have been crucial to keeping the hothouse flower that is Tesla alive since its inception, which makes the gargantuan scale of the project seem like something other than a triumph of the entrepreneurial spirit. Had Nevada eliminated property and sales taxes for all business enterprises within its borders, or for all of them younger than, say, 15, I’d respect Nevada Gov. Brian Sandoval, a Republican running for reelection, incidentally, for his moxie, if not for his fiscal prudence. Instead, like the Wall Street Journal’s editorial board, I can’t help but think he and his allies have been snowed.

Emily Badger of Wonkblog has zoomed out from the specifics of the Gigafactory to discuss the many ways business enterprises try to pit one jurisdiction against another. Rather than base location decisions on economic fundamentals alone, large firms have taken to shopping around for where they can secure the biggest tax breaks. Even desirable jurisdictions that should have no problem attracting investment have been getting in on the game. And when location decisions are distorted by subsidies, they are often less sticky than they would be otherwise. That is, the firms in question often threaten to pick up stakes and move again, setting off yet another bidding war among desperate state and municipal governments. One possible solution, promoted by Mark Funkhouser, a former mayor of Kansas City and one of Badger’s chief sources for the article, is a federal law designed to limit these zero-sum subsidy wars. In a 2013 column, Funkhouser elaborated on the idea:

We need a national law that prohibits corporations from extracting bribes from state and local governments and bans governments from donating tax dollars to private entities — a sort of domestic equivalent of the Foreign Corrupt Practices Act, which prohibits American companies from bribing foreign governments.

Some will argue that such a law would damage America’s global competitiveness and drive companies to outsource even more of their work abroad. I think that, on balance, this is not so. America is a magnet for global talent because of the quality of life offered here, and current economic trends are damaging to that quality of life.

The governors of the six states that Texas Gov. Rick Perry is targeting, urging their entrepreneurs to pack up and move to the Lone Star State, ought to support such a federal law, and Missouri Gov. Jay Nixon should lead the charge. For years the economy of the Kansas City metropolitan area has been damaged by the “border war” of incentive-fueled competition between Kansas and Missouri. Recently, in response to big tax cuts pushed into law by Kansas Gov. Sam Brownback, the Missouri legislature enacted massive tax cuts of its own. Nixon vetoed the legislation, saying it would gut the state’s ability to deliver services, and he called for an end to the destructive competition between the two states “The competition with the highest stakes … isn’t between Kansas or Missouri, or between Jackson County and Johnson County.” Nixon said. “It’s with Brazil and Russia, South Korea, Germany and India.”

It’s not clear how such a law would work in practice. Congress could attempt to ban firm-specific incentives, for example, but then state and local governments would presumably draft provisions that could only apply to one firm, or to a narrow class of them. Moreover, Funkhouser seems to be confusing different issues. Whether or not the tax cuts backed by Kansas Gov. Sam Brownback have proven wise, they’re quite distinct from the kind of special interest subsidies that the Wall Street Journal rightly condemns. Indeed, I see nothing wrong with Texas Gov. Rick Perry urging entrepreneurs to move to the Lone Star State by touting its attractive economic climate. What I’d find objectionable is if Perry promised individual firms tax breaks and other subsidies, which he has routinely done. But again, as Badger suggests, it’s hard to know where a federal law would begin or end. So as with most of these policy dilemmas, what we really need are vigilant citizens willing to make a stink about corporate giveaways. For conservatives in particular, cronyism has to become a voting issue. 

Elizabeth Warren Is Still Deceiving People about Student Loans

by Jason Richwine

Politico reports that Senator Elizabeth Warren’s student-loan “refinancing” bill, which suffered death-by-filibuster back in June, will be resurrected in the Senate as early as this week. The legislation would drop the interest rate students are paying on older loans from around 7 percent to about 4 percent, which is the rate the government charges for newer loans.

That’s a transfer payment from taxpayers to people who have attended college. But Senator Warren insists her bill merely levels the playing field by granting students the right to refinance. “With interest rates near historic lows, homeowners, businesses and even local governments have refinanced their debts,” she wrote in an op-ed on Tuesday. “But a graduate who took out an unsubsidized loan before July 1 of last year is locked into an interest rate of nearly 7 percent.”

As I noted last spring, students already have the right to refinance their loans. They can go to any private lender and ask for a lower rate, just as homeowners and business can. The reason that few students do, of course, is that they are getting a great deal — a generous government subsidy — on their existing federal-direct or federally guaranteed loans. Private lenders are rarely in a position to offer better terms.

The Warren bill would allow students to refinance with the federal government, but why should taxpayers agree to accept lower interest payments? In the private sector, lenders will allow refinancing only if they fear losing loans to their competitors offering lower rates. But the federal government, which charges below-market interest rates, has no serious competition for student loans.

It’s not unreasonable to believe that student debt is excessive, and lowering the prior interest rate would be one way to relieve the burden. But when Senator Warren says her bill merely puts students on a refinancing par with homeowners and businesses, it does the whole student-loan debate a disservice.