Category Archives: Reihan Salam is the ultimate wonk

Some Sentences

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1. From Reihan Salam.

Right now, we’re stuck in a political debate in which a federal government that spends, say, 24 percent of GDP represents tyranny while a federal government that spends 19 percent of GDP represents a free society, irrespective of state and local expenditures, tax expenditures, off-balance-sheet activities, and the cost of regulatory initiatives. The end result is that we have endless debates over spending levels while ignoring, for example, the shadow nationalization of the mortgage market and the perverse buck-passing dynamic created by cooperative federalism programs that fuels the growth of state and local government.

2. From Philip Moeller.

“The best childhood personality predictor of longevity was conscientiousness—the qualities of a prudent, persistent, well-organized person,” according to the two professors (he at the University of California—Riverside, and she at La Sierra University). “Conscientiousness … also turned out to be the best personality predictor of long life when measured in adulthood.”

3. Carmen Reinhart.

it is certainly more difficult for a central banker to raise interest rates with a debt to gross domestic product ratio of over 100 percent than it is when this ratio stands at 39 percent. Therefore, I believe the shift towards less independence of monetary policy is not just a temporary change.

Redistribution Recession watch

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The WSJ reports,

Michael Feroli, chief U.S. economist for J.P. Morgan, JPM +1.40% estimates that since the recession, the worker flight to the Social Security Disability Insurance program accounts for as much as a quarter of the puzzling drop in participation rates, a labor exodus with far-reaching economic consequences.

Pointer from Tyler Cowen.

This is one of those topics where the three-axis model correctly predicts that there will be no communication across ideological boundaries.

1. From the progressive perspective, an unemployed person is oppressed by a lack of aggregate demand, end of story. Anyone who suggests otherwise (I’m looking at you, Casey Mulligan) is going to be attacked without mercy. And these are people on disability, for crying out loud. If they are not members in good standing of the oppressed class, then who is?

2. Libertarians see government coercing some of us to give others incentives to be unemployed. In fact, if I were one of those libertarians who felt schadenfreude pleasure out of pointing out the stupidity and perversity of the way that government executes programs, disability insurance would make me happy.

3. Conservatives think that everyone should be like this guy:

Mr. Mann, age 30, said many disabled people can work with the right help, and he included himself. Paralyzed in a diving accident as a teenager, he graduated from Princeton University and earned a doctorate in economics from the University of Pennsylvania. He uses a motorized wheelchair to navigate Mathematica’s Princeton, N.J., offices.

Now that’s civilization for ya.

Since I do not think that there will be a meaningful debate or attempt to reach middle ground, I want to lie low on the issue. For substantive analysis, I outsource to Reihan Salam.

Personal Saving and Public Policy

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1. Ezra Klein writes,

This is the other, perhaps more pressing, Social Security crisis: It’s not generous enough to counteract the sorry state of retirement savings nationwide. In a report for the New American Foundation, Michael Lind, Steven Hill, Robert Hiltonsmith and Joshua Freedman survey this data and conclude that the ongoing debate over how to cut Social Security is all wrong: We need to make Social Security much more generous.

They would keep today’s income-based Social Security program, but add a “Part B,” which would be a flat payout to all retirees. When parts A and B are combined, all retirees would be guaranteed 60 percent of their average working wage in retirement, with low earners seeing closer to 100 percent replacement. Part B would be pricey, adding almost a trillion dollars to Social Security’s costs in 2037, and the authors don’t have a clear proposal, much less a politically realistic plan, for how to pay for it. But not paying for it doesn’t mean those costs disappear: It either means living standards for seniors will tumble, or families will strain as they try to support older relatives.

When I read this, it came across to me as a poor use of economic language. Instead, I would have pointed out that if Baby Boomers are not saving enough for retirement, and someone suggests using transfer payments to give them more resources, then in order to know whether or not this is a good idea one needs to know where the resources will come from. Take any year, say, 2018. If you increase Baby Boomers’ consumption in that year, then either you have to decrease the consumption of other people who are alive that year or you have to diminish the rate of capital accumulation. Those are the costs that do not disappear in using transfers to solve the problem of Baby Boomers’ consumption needs in retirement. Perhaps this sounds picky. But as an economist I think that, particularly when one is writing for a lay audience, it is appropriate to employ the principles of scarcity and trade-offs.

2. Richard H. Thaler writes,

Payroll savings plans are vital because they are essentially the only way that middle-class Americans reliably save for retirement. Your grandmother probably knew that the best way to save is to put money aside before you have a chance to spend it. That approach has always worked — and is a core idea embedded in these plans.

…The Obama administration has proposed a simple solution to this problem: the automatic I.R.A. This plan, originally proposed by scholars at the Brookings Institution, would require any employer that doesn’t offer its own plan to enroll workers automatically into individual retirement accounts, with the option to opt out. The burden on employers would be tiny, and the benefit to workers could be life-changing.

Pointer from Mark Thoma.

I liked Thaler’s piece better. He sees the problem as one of encouraging people to provide for their own future consumption by deferring current consumption. If his suggestions were adopted and they work as intended, then there will be more capital in 2018 than otherwise, which would result in more output. Therefore, Thaler’s solution is consistent with economic principles.

As an aside, Klein covers another topic in his column, which is the cost of health care. He writes,

A key fact — perhaps the key fact — about American health care is that the prices we pay for the health care we consume are far, far higher than in any other country.

He recommends putting people age 55-65 on Medicare and negotiating down the compensation of health care providers.

Maybe I was in an uncharitable mood, but I was disturbed by the tone of the quoted sentence. In Crisis of Abundance, I spent a chapter talking about various narratives that have been used to explain health care spending in the United States. On page 25 I wrote,

The most awkward fact for the narrative that attributes high health care spending solely to prices is the finding by John Wennberg and his colleagues…by looking directly at utilization figures, it is clear that when it comes to explaining spending differences across regions it is not prices. Patients in high-spending regions see more physicians and undergo more procedures than patients in low-spending regions.

After surveying a lot of literature, I concluded that the most important narrative for explaining American health care spending is that we use a lot of what I dubbed “premium medicine.” I offered evidence that health care in the United States uses more physical and human capital, meaning medical equipment and specialists, than health care in other countries.

Klein is entitled to disagree with me, of course. But I cringed when he pronounced the over-pricing narrative as if it were a “fact.” In fact, there are many economists who doubt that we can have a free lunch by paying providers less for their services.

3. Turning back to Baby Boomers’ retirement, Reihan Salam writes,

In recent months, opponents of reducing the growth of Social Security benefits have been making the case that Social Security benefits should actually increase, to reflect the inadequacy of private retirement savings. A month, I wrote about Josh Barro’s call for an expanded Social Security program and how it might be reconciled with Andrew Biggs’ center-right vision for Social Security reform. Basically, Barro is open to expanding the public commitment to retirement security through a number of strategies, including mandatory savings accounts….

while policy intellectuals are thinking hard about Social Security’s future — another good example is the work of Charles Blahous and Jason Fichtner on how to make the Social Security payroll tax more work-friendly and fertility-neutral — there has has yet to emerge a consensus among Republican lawmakers on Social Security reform, hence the fact that the House Republican budget proposal didn’t tackle the issue head on. My sense is that there is a way to draw on the work of Biggs (the larger architecture), Barro (his idea of a new class of government securities linked to wage growth or GDP growth merits consideration), and Blahous and Fichtner (thinking through how we can connect their work on fertility-neutrality to the Stein tax reform agenda) to craft an attractive retirement security agenda that would actually prove more generous, when all elements including the mandatory savings element are taken together, than the current system while also proving more fiscally sustainable. Fundamentally, this would be a “conservative” reform, as it would improve work incentives and emphasize pre-funding.

Read the whole thing. Salam is my favorite policy wonk.

Tantalizing Findings

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David Autor and Melanie Wasserman summarize trends in education and labor market outcomes by gender. Timothy Taylor locates their explanation for the relative decline among males.

the earnings power of non-college males combined with gains in the economic self-sufficiency of women—rising educational attainment, a falling gender gap, and greater female control over fertility choices—have reduced the economic value of marriage for women. This has catalyzed a sharp decline in the marriage rates of non-college U.S. adults—both in absolute terms and relative to college-educated adults—a steep rise in the fraction of U.S. children born out of wedlock, and a commensurate growth in the fraction of children reared in households characterized by absent fathers.

The second part of the hypothesis posits that the increased prevalence of single-headed households and the diminished child-rearing role played by stable male parents may serve to reinforce the emerging gender gaps in education and labor force participation by negatively affecting male children in particular. Specifically, we review evidence that suggests that male children raised in single-parent households tend to fare particularly poorly, with effects apparent in almost all academic and economic outcomes. One reason why single-headedness may affect male children more and differently than female children is that the vast majority of single-headed households are female-headed households. Thus, boys raised in these households are less likely to have a positive or stable same-sex role model present.

As I interpret it, their story is one of mutually reinforcing economic and social trends. The economic trend is that the comparative advantage of non-college-educated males in the work force has declined, as innovation and globalization have increased productivity in manufacturing. This reinforces a social trend in which those males are not attractive marriage partners, so that women who formerly would have married them are instead having children out of wedlock. This social trend then reinforces the economic trend, because men born out of wedlock are disadvantage when it comes to being able to remain in school.

I would say that the trends are real, but the narrative is controversial. I think this is a situation where you pick your narrative to fit your policy recommendation. Are you Bryan Caplan, and do you recommend promoting marriage? Then your narrative has to be that marriage plays a causal role in improving men’s earnings. Are you Barack Obama, and do you recommend expanding pre-school and access to college? Then your narrative is that the the main causal factor is education. Are you Charles Murray and do you recommend promoting Victorian virtues? Then your narrative is that this is a civilization-barbarism problem, and we have to reverse the slide into barbarism.

My preferred narrative is that Neal Stephenson predicted this in The Diamond Age. The Vickies and the Thetes have divergent lifestyles, and I suspect that the attempt by the Vickies to impose their lifestyle on the Thetes is doomed to fail.

On the topic of marriage trends, Reihan Salam writes,

instead of serving as a foundation of a successful adult life (a “cornerstone”), it is seen as a culmination of a successful young adulthood (a “capstone”), according to the authors of the Knot Yet report on delayed marriage.

Pointing out the likely correlation between a decline in marriage and an increase in government dependency, Salam writes,

My suspicion is that it will be very difficult to construct such a post-marital libertarian agenda, but that’s not to suggest it’s a futile effort.

He then writes,

What I find interesting is the emerging tension between two tendencies on the center-left: (1) the civil libertarian desire to protect the autonomy of families, particularly families rooted in minority cultural traditions, as a post-marital culture yields ever more children raised in the context highly fragile, unstable family relationships; and (2) the egalitarian imperative to do more to build the human capital of children raised in the poorest households, an effort that may well require increasingly intrusive, heavy-handed, paternalistic interventions.

At the risk of being uncharitable, I do not think that (1) is a factor. Using the three-axes model, the single mom is in the oppressed class and her disadvantaged offspring are in the oppressed class, end of story.

In the talk that I gave in Phoenix, I compared universal pre-school to eugenics. Both appeal to the same desire to improve the human race based on “scientific evidence” of the unfitness of some parents.

Vickies and Thetes

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Ross Douthat writes,

Yet the decline of work isn’t actually some wild Marxist scenario. It’s a basic reality of 21st-century American life, one that predates the financial crash and promises to continue apace even as normal economic growth returns. This decline isn’t unemployment in the usual sense, where people look for work and can’t find it. It’s a kind of post-employment, in which people drop out of the work force and find ways to live, more or less permanently, without a steady job. So instead of spreading from the top down, leisure time — wanted or unwanted — is expanding from the bottom up. Long hours are increasingly the province of the rich.

Pointer from Reihan Salam.

As befits his role as a conservative NYT columnist, Douthat gives this a civilization vs. barbarism spin.

Here the decline in work-force participation is of a piece with the broader turn away from community in America — from family breakdown and declining churchgoing to the retreat into the virtual forms of sport and sex and friendship. Like many of these trends, it poses a much greater threat to social mobility than to absolute prosperity. (A nonworking working class may not be immiserated; neither will its members ever find a way to rise above their station.) And its costs will be felt in people’s private lives and inner worlds even when they don’t show up in the nation’s G.D.P.

Note: Joseph Sunde thinks along similar lines.

An Immigration Tariff

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Reihan Salam discusses the idea.

The problem with Kenny’s proposal, in my view, is that if we are going to set a tariff, $50,000 is almost certainly not the “correct” price. Kenny’s concern is that the price might be too high, yet the findings of Miao Chi and Scott Drewianka suggest otherwise. Moreover, his thought experiment stipulates that a $50,000 tariff would lead to an influx of 1 million, but of course we don’t know what the market-clearing price would be. In the first year of the new system, in light of pent-up demand, the $50,000 tariff might lead to far more than 1 million immigrants, which in turn might lead to a backlash against immigration tariffs.

The way to fix the number slots, Salam argues, is with an auction of immigration slots, rather than a tariff. But I do not see why this is an instance where it is easier to know the number of slots than the correct price. (Not that i have any idea about what the correct price would be.)

When I thought about this issue nine years ago, I wrote

The tax rate for guest workers would provide a means with which to fine tune the competition between domestic and foreign workers. If we believe that foreign workers are driving domestic wages too low, we can raise the tax on foreign workers. On the other hand, if the economy is at full employment and we want continued expansion without inflationary pressure, we could lower the tax on foreign workers.

I was talking about a high payroll tax for guest workers, not about an immigration fee.

Note that the employers of illegal immigrants would much prefer a quota to something like my payroll tax proposal.

Organizational Mediocrity is No Accident

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Tim Kane’s book, Bleeding Talent, earns a review from the New York Times.

That act binds the military into a system that honors seniority over individual merit. It judges officers, hundreds at a time, in an up-or-out promotion process that relies on evaluations that have been almost laughably eroded by grade inflation. A zero-defect mentality punishes errors severely. The system discourages specialization — you can’t expect to stay a fighter jock or a cybersecurity expert — and pushes the career-minded up a tried-and-true ladder that, not surprisingly, produces lookalikes.

Pointer from Tyler Cowen. Reihan Salam has more praise for the book.

This reminds me of the Federal Reserve Board, or of the public school system. To some extent it reminds me of the way large corporations treat middle managers. As I explained almost fifteen years ago,

For corporations, encouraging middle managers to take good risks is not as easy as it sounds. Middle managers understandably do not want the same degree of personal downside risk as entrepeneurs. However, in the absence of personal downside risk, the middle manager’s incentives would be skewed toward taking unjustifiable risks. Bureaucratic controls and limits on upside incentives may be an appropriate adaptation for correcting this potential bias.

I think that mediocrity is the natural state of organizations. Only the discipline of competition serves to bring about improvement.

Activities vs. Results

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Edward Glaeser writes,

The U.S. has six large programs — Temporary Assistance for Needy Families, Medicaid, food stamps, housing vouchers, unemployment insurance and the earned-income tax credit — spread across four Cabinet departments and the Internal Revenue Service.

Pointer from Reihan Salam. Salam also recommends an essay by Steven Teles on kludgeocracy.

Unfortunately, this is not an accident. There is a tendency in all organizations to focus on activities rather than results. Every program represents an activity. Managers of an activity seek to perpetuate and expand their domains.

Activities are easy to measure. The impact on results is difficult to quantify. Think tanks report on how many op-eds their scholars publish. How many think tanks report on their impact on results?

Corporations are often the victims of activity-centered thinking. Activities acquire a momentum of their own. One thing that management consultants do is challenge the mindset and power of departmental managers who focus on activities rather than results.

Fortunately, corporations face market constraints and competition. These forces serve to weed out mindless activities and re-focus attention on results. In government, those checks are missing. Thus, it is almost inevitable that government programs will be perpetuated without regard to results. That is the natural behavior in organizations, and only if there are countervailing forces will that natural behavior be overcome.