Category Archives: links to my essays

Squeezed Up, Nine Years Later

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Mark Perry writes,

America’s “middle class” did start largely disappearing in the 1970s, but it was because they were moving up to a higher-income category, not down into a lower-income category. And that movement was so significant that between 1967 and 2009, the share of American families earning incomes above $75,000 more than doubled, from 16.3% to 39.1%.

Nine years ago,I wrote,

the middle has shrunk, from 22.3 percent of households to 15.0 percent…the two categories below the middle also have shrunk, from 52.8 percent of households to 40.9 percent. Adjusting for inflation, the percentage of households with incomes over $50,000 has climbed from 24.9 percent in 1967 to 44.1 percent in 2003.

McMedicine, Coming?

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Lifted from the comments:

Well, it’s not scientifically valid, but I did have dinner last weekend with a friend who is a CEO of a 2000 person HC provider, and he would tell you that margins are being squeezed mercilessly. Overhead is enormous – 80% of his employees are NEITHER doctors NOR nurse-practitioners. Consolidation is going to come very fast, and a decade from now, there will be less than 100 healthcare providers in the United States.

Some remarks:

1. This prediction may be quite independent of whether Obamacare remains intact.

2. Higher education, too, has bloated overhead. Of course, that industry is not being squeezed mercilessly. Yet.

3. There was once an essay that began, “The traditional model of medical delivery, in which the doctor is trained, respected, and compensated as an independent craftsman, is anachronistic.”

Rules vs. Discretion

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Scott Sumner writes,

I’m all for a rules-based approach to policy. But unfortunately Taylor fails to make his case. You’d think a fan of rules-based policy would provide a razor sharp critique of Fed policy, but Taylor’s critique is anything but clear

Scott Sumner’s rallying cry is “Target the Forecast!” (for nominal GDP) and John Taylor’s rallying cry is “Follow the Taylor Rule!”

Some remarks:

1. I think I saw the clash between Sumner and Taylor coming even before Sumner did.

2. “Target the Forecast!” is, in a generic sense, what the Fed has been doing since the 1960s. The FOMC discussions revolve around forecasts. Fed staff scrutinize data closely in order to divine what it means for the forecast. Alan Greenspan was an intense and promiscuous data-scrutinizer. Taylor would argue that, until late in his term, Greenspan’s target-the-forecast approach happened to line up with the Taylor rule.

3. What is the result? As Ed Leamer puts it in chapter 15 of Macroeconomic Patterns and Stories,

On the basis of circumstantial evidence, the Federal Reserve Board, by raising rates late in expansions, can take some blame for almost all our recessions.

Below is circumstantial evidence of the sort he describes. See how large moves in the Fed Funds rate tend to lead large moves in the unemployment rate.

4. Leamer also says,

With all these patterns, it is a mystery* whether monetary policy can be said to cause anything or merely reacts to things that would have occurred anyway. But if I felt the need, I could suppress the doubt and tell with confidence the following story.

[Expansions start out with mild inflation. Then price pressures build as the expansion matures] But the Fed fiddles as inflation smolders. The ever-so-gradual increase in inflation is not enough to get the Fed to respond, but like a small brush fire, inflation soon enough gets out of control…By the time the data are in, and the Fed rate-setting committee has deliberated enough to make absolutely sure that it is time to make a change in monetary policy, inflation is burning fiercely and it takes a heavy spray of higher interest rates to put the fire out. That creates an inverted yield curve, a credit crunch** for housing, and an unpleasant recession. Oh, Oh, we’re sorry, say the Fed Governors, who knock down interest rates to try to get housing and the rest of the economy back on their feet.

5. From this historical perspective “target the forecast” is what got us where we are today. Sure, it looks like a great idea now, when we think that the expansion is still not mature and price pressures are still nowhere to be seen. But eventually “target the forecast” will once again result in a failure to change policy in time. We will continue to experience needless, Fed-induced cyclical behavior unless the Fed is lashed to a rule.

6. You might characterize my beliefs as:

Probability that “target the forecast” (using some market prediction for nominal GDP) would stabilize the economy = .15

Probability that “stick to a rule” would stabilize the economy = .10

Probability that monetary policy “merely reacts to what would have occurred anyway” = .75

*The “mystery” arises in part because the Fed only controls the short-term nominal interest rate, and it is the long-term real interest rate that most plausibly drives spending. In chapter 5, Leamer writes,

the interest-rate on the 10-year has a life of its own, sometimes moving with the 3-month rate, but not always. That should make one wonder how much impact the Fed has on the longer-term rates and also wonder how much it matters.

In chapter 15 he says that

long-term interest rates were generally elevating at the ends [of economic expansions since 1960]. Maybe that is what killed off housing. Maybe that would have occurred even if the Fed had not taken action.

**Leamer was writing prior to 2008, when a different sort of credit crunch arose. I will discuss the Leamer credit-crunch model in a subsequent post.

Re-Reading David Brin

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I write,

Early in June 2013, a major news story was the revelation of a government program called PRISM, which taps into electronic communications in an effort to identify and disrupt threats to America. The controversy over this discovery sent me reaching to my bookshelf for David Brin’s 1998 work, The Transparent Society: Will Technology Force Us to Choose Between Privacy and Freedom? Re-reading it made me realize that Brin articulated more than just an unusual approach for addressing the issue of surveillance technology. He offers a perspective on the relationship of citizens and the state which challenges conventional libertarian thinking.

Read the whole thing. I really enjoyed going back to Brin’s book and writing this essay.

UPDATE: Here is Brin on Snowden.

Snowden — and Julian Assange (of WikiLeaks) — are part of a vital trend. I do not find either spectacularly admirable. Given that the heinous things they have revealed were kind of yawners, it strikes me both were propelled by today’s addictive high — self-righteous sanctimony.

Sad But True

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Morris A. Davis writes,

the costs and risks of homeownership are almost never discussed by public agencies and that the benefits of homeownership as widely articulated are either hard to measure or are quickly refutable. I conclude that U.S. housing policies and government institutions designed to promote homeownership are deeply flawed. Serious discussion should occur at the highest levels about eliminating current policies and de-emphasizing homeownership as a policy objective.

See also my essay, Who Needs Home Ownership?

Here are two ways to characterize U.S. housing policy:

(a) it addresses a clear market failure in a reasonably cost-effective manner

(b) it is a collection of special-interest boondoggles

Is there anyone of any ideology persuasion who can make the case for (a) rather than for (b)?

We Need 250 States

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Have you heard about the folks who want to create North Colorado? The reader who sent me the link suggested that it was time to plug my essay We Need 250 states. There, I wrote,

In 1790, the largest state in the union, Virginia, had a population of under 700,000. Today, Montgomery County has a population of over 900,000. Our nine-member County Council answers to about the same number of registered voters as the entire House of Representatives of the United States at the time of the founding of the Republic.

We cannot have an accountable democracy with such large political units. We need to break the political entities in the United States down to a manageable size.

I have just started reading America 3.0, by James Bennett and Michael Lotus. One of the early chapters offers a utopian scenario for America in 2040 in which there are 71 states. In that scenario, people have sorted themselves in part by political preferences. That would not work for someone like me, who lives in a blue state but who does not want to move. I think we need the option of virtual citizenry. Imagine I paid user fees in Maryland for specific services here, but for most tax and policy purposes I lived in a virtual state with other libertarian-minded folks.

Notes from a Civilization-Barbarism Symposium

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I heard a number of former Bradley Prize winners speak at a symposium Wednesday morning. That evening, there was an awards reception, at which this year’s winners were announced. Yuval Levin said,

Conservatives tend to begin from gratitude for what is good and what works in our society and then strive to build on it, while liberals tend to begin from outrage at what is bad and broken and seek to uproot it.

You need both, because some of what is good about our world is irreplaceable and has to be guarded, while some of what is bad is unacceptable and has to be changed. We should never forget that the people who oppose our various endeavors and argue for another way are well intentioned too, even when they’re wrong, and that they’re not always wrong.

…That’s not to say that conservatives are never outraged, of course. We’ve had a lot of reason to be outraged lately. But it tends to be when we think the legacy and promise we cherish are threatened, rather than when some burning ambition is frustrated.

Overall, I think that he spoke to the civilization-barbarism axis, as one would expect. He also tended toward Thomas Sowell’s “conflict of visions” analysis of the difference between liberals and conservatives.

The Bradley folks are conservatives, not libertarians. In the hallway conversations at the morning symposium, I heard lots of support for government snooping. (Speaking of the snooping program, David Brooks certainly took the conservative line, didn’t he? I think others have pointed out that Brooks is more concerned about the lack of checks and balances against Edward Snowden than about the lack of checks and balances against the intelligence agencies.)

One of the panels at the Bradley symposium addressed the topic of threats to freedom (other than economic policy, which was the subject of a separate panel). A couple of panelists cited Charles Murray’s “coming apart” thesis. Heather MacDonald thought that perhaps too much individual freedom was leading the lower classes into behaviors that lead to dependency. Later, after Robby George voiced similar concerns in response to a luncheon speech by Charles Krauthammer, Krauthammer replied that the Constitution was not designed to require virtuous citizens. On the contrary, it is meant to be robust to human failings. While I appreciate both sides, I think that in the end I come down on the side that a culture of virtue matters more than the Constitution. I think where I would differ from Murray/MacDonald/George is on where the cultural problem lies. I think it lies not with the lower classes but instead with certain parts of the elite. Another panelist, Brad Smith, spoke of the need for conservatives to regain control over the K-12 curriculum. I think that is closer to being on track, and if that is the case, then lamenting the breakdown of the traditional family is barking up the wrong tree.

MacDonald also cited the atmosphere of censorship in academia. Topics on which there is not freedom of speech include gender differences and IQ. But note that, again, this is a problem among the elite.

Krauthammer offered an optimistic take on the electoral prospects of conservatives. Among his reasons:

1. Polls show more conservatives than liberals.

2. The 2012 election was idiosyncratic. Romney lost on the issue of “who cares more about people like you?” in which Obama swamped Romney in exit polls by 60 percentage points. (Krauthammer did not give figures, but one can imagine something like 75 Obama, 15 Romney, 15 undecided)

3. The current scandals hurt Democrats, because they are the party of government.

4. The key issue of our times is the crisis of the welfare state, an issue on which conservatives are better positioned than liberals.

The immigration issue came up in the earlier panel on the economy. Victor Davis Hanson carried the ball for the restrictionist civilization-vs.-barbarism team. Gary Becker proposed using tariffs rather than quotas (although he did not use that terminology). I used that term in my essay ten years ago, and in fact you should read that essay to see how little the issue has changed during the interim.

Hamilton, Hooper, Greenlaw, Mishkin

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I thought I linked to their paper before, but I cannot find the post.*

we calculate the level of the primary government surplus that would be necessary to keep debt from continually growing as a percentage of GDP. We argue that if this required surplus is sufficiently far from a country’s historical experience and politically plausible levels, the government will begin to pay a premium to international lenders as compensation for default or inflation risk.

This sounds a lot like my Guessing the Trigger Point paper, in which I say that a key variable is the “pain threshold,” which is my term for “politically plausible levels” of the required fiscal adjustment.

I heard Jim present a different paper, on estimating the off-balance-sheet liabilities of the U.S. government, at a recent Cato event. I questioned the usefulness of an exercise that tries to come up with a single number, when so many of these liabilities are contingent (the government has written a lot of put options). Douglas Holtz-Eakin shot back that policy makers cannot handle multiple possibilities. They need one number.

Fine, then. If policy makers cannot handle something that is essential to financial management in any public corporation in America, tell me why we want them to manage trillions of dollars?

*Ah, here is where I linked before.

Robert Fogel

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Tyler Cowen notes his passing. One of his difficult books, The Escape from Hunger and Premature Death, had an enormous influence on my thinking. In fact, it was just one table, showing the long-term income elasticities of large categories of goods and services, that I have referred to many times. Indeed, The New Commanding Heights, the essay that Nick Schulz and I wrote, is hardly more than an extended riff on that table.