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The government did not make a profit on TARP.

June 23, 2016
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It’s frustrating to see that people who should know better are still saying this. That the government bought for 80 something it could have bought for 50 that went to 100 does not mean it earned a profit. In other words, the government could have made just as much cash for a lower upfront investment if it bought its equity stake in Citigroup on the market. You might say that the government overpaying to capitalize a systematically important yet insolvent institution was a good idea, and you would very plausibly be right. But in that case you would be happy about the outcome even if the government lost some of its TARP money. Citigroup did not accept public capital at a high price because it wanted to be charitable to the government. It accepted public capital at a low price because no one else would make an offer nearly as good. No economist, journalist, or politician would have been happy with the terms of TARP if they were lending their own money. The government didn’t proft from TARP any more than I did from the game of Russian roullette I survived that I was paid to play the other day. 

Middle class wealth fell – but you shouldn’t worry.

August 24, 2014
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Vox reports (but makes no editorial comment on) a Census Bureau chart showing a steep decline in middle class wealth between 2005 and 2011. This is a sensitive topic, and on the heels of Piketty, who advocates a global wealth tax, one that may fuel progressive criticism of increasing wealth inequality. While the economic malaise of the poor is something we need to address, thinking through the lens of wealth is the wrong way to go about it.

For one, median household wealth tells us less than a lot about living standards, inequality, or economic power. 

wealth

At least among OECD countries, non-income factors account for a majority of the variation in median wealth. (The relationship is stronger for the per capita counterpart, but that is skewed by a long, right tail.) Income does clearly determine a good bit of wealth, but no one would walk away convinced that the median Slovenian or Spaniard is actually richer than the American. That isn’t to say income per se is an effective measure of living standards either: wealth provides a sense of security and certainty for bad times, but that is surely of second order importance. 

But the more important point is, if there’s a measure in which a country like Israel is almost as rich as America, it’s a bad measure. At least to measure median economic prosperity. And the problem comes in measuring wealth. While we may think of it in its accounting reality, assets less liabilities, its better to think of trends through a more fundamental definition: that is a claim on future output. Wealth, after all, is the discounted present value of the future cash flows from your net position.

That makes a big difference. Not all wealth is created equal. A good amount of the returns from wealth sitting in the hands of the one percent will be taxed between 15 and 55%. A good amount of the returns from wealth sitting in the hands of everyone else will be taxed more or less at 0%. 

There’s a bigger angle to this as well. Healthcare is going to be a large part of future output, and that’s something we kinda sorta socialized between 2005 and 2011, supposedly the time period over which middle class wealth plummeted. And yet, as we each have a more equal claim on what will be a growing component of future output, implicit wealth inequality falls. Nor does this include social security and disability, which surely represent a big chunk of middle class wealth. 

Wealth, unlike income, is intertemporal. Measures of wealth inequality, unfortunately, are not as nuanced. I would venture to say, however, that anyone who thinks the utility of middle class consumption over the discountable future actually fell by 35% in absolute terms better prepare for armed revolution. 

Rather, implicit claims of more progressive taxes and even more progressive expenditures will probably keep the Bolsheviks at bay. For now. 

Immigration – what’s the limit?

March 1, 2013
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Dean Baker replies to my post:

I may give a longer response later, but just out of curiosity, would you support a system of complete open borders in the United States. If so, given that we have 12 million people who were willing to go through months of hell to get over the border, do you have idea as to how many immigrants the United States would see if anyone who wanted could come to the United States and had the same right to work as native born citizens? If that is not the policy you are supporting, then how would you restrict immigration?

My initial response was:

I sometimes have trouble reconciling my views on this. On the one hand I’m in complete principle support of ‘open borders’, on the other, I know within the current system that would lead to chaos. I think immigration without assimilation is bad for a country and society, largely what has created a cohesive “American” culture is rapid (by international standards) assimilation towards our culture. I think a path to citizenship is also critical for all immigrants. So I would limit immigration at the point where our bureaucracy (not political framework) can’t support the infrastructure necessary for such assimilation and/or process citizenship requests in a sane manner fast enough. At the margin, for reasons you note, I would always pick the ‘skilled’ over the ‘unskilled’.

Because of vast inequality, we may already be reaching that limit, I don’t know.

But it still left me thinking. I don’t like the idea of arbitrary guidelines (“5 million is okay, but 10 million isn’t”). We would all prefer some general principle on which restrictions can be designed.

After a bit of thought, I think I was pretty close on. I came across a Pew Study that notes that 61% of children of Asian and Hispanic immigrants think they are ‘typical Americans’:

Image

The similarity between Asian and Hispanic children really struck me. Initially, I thought inequality was a big deal as far as assimilation is concerned, but maybe it isn’t. As I noted in my reply to Dean, when our social system can’t support immigration, protectionism might be valid. Systems that work to this end are highly accessible and robust public education systems, libraries, strong ESL programs, and interaction with ‘traditional’ customs.

Inequality erodes pretty much all those entities. Schools get bad, communities get segregated, and libraries get torn down. Asians are rich and latinos are poor, and both react very similarly, so I must have been wrong somewhere…

My gut tells me the long-term effect of today’s inequality has yet to be felt, especially as many Asians still live in the ‘poor man’ mentality (high savings rate, humble beginnings, etc.)

But every society has its breaking point. I don’t know what the number is, but if all of Africa suddenly came to the US well, then, there’s a problem.

I’d also like to know what Dean thinks about population density, in relation to land, but also in relation to overall natural resources. India is projected to have 1.5 billion people on land far smaller than the US. Doesn’t it make sense that some come over, it would seem to be more productive overall…

This is something I haven’t fully thought about, and expect to blog about soon; would love to hear opinions in the mean time.

Some thoughts on India…

March 1, 2013
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In light of our most recent budget… my thoughts

…

Neither of India’s national political platforms can really support visionary thinking; the BJP falls prey to religious and social populism, while the National Congress does so to economic populism. However, urbanization will bring an end to the unfair grip rural India has on national politics. While neither leading candidate for premier, Rahul Gandhi or Narendra Modi, are likely to oversee the same level of liberalization as did the Narasimha Rao government, the defining moment of the next Union Cabinet will be the transition to an urban India. If it facilitates a strong city system, with independent mayors, competitive economic zones, and strong rule of law, the stage will be set for meaningful growth and reform.

Comments appreciated!

Dean Baker and Immigration

March 1, 2013
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Dean Baker replies to Noah Smith regarding unskilled immigration reform:

As far as less-skilled immigration, I would want it sharply limited, except for family re-unification. The evidence is that this does lower wages, although most of the impact is on the wages of other immigrants because we have a highly segregated labor market. I don’t consider this to be a good thing. As I’ve written elsewhere, I don’t want policy to be structured to give professionals cheap help. I would be very happy with a world where no one could afford to hire nannies for their kids.

There are places in the world where jobs that are low-paying jobs here allow for a middle class standard of living. A retail clerk, custodian, or housekeeper can earn enough to support a family. We just need the right set of labor market conditions to make this possible.

I think I understand where Dean is coming from now. I was initially very skeptical at the idea that progressives, who just won a decisive victory with immigrant support, should become labor protectionists. However, I still am in favor of more flexible labor markets, for paupers and PhDs alike.

As I understand it, the crux of Dean’s argument is that an inflow of skilled professionals benefits our poor, whereas the inflow of menial laborers depresses their wages. He (rightly) argues that rigid labor markets place an undue burden on other marginal groups.

This is true. If the number of doctors, lawyers, and programmers suddenly doubled, the salaries of the top 5% may be hurt, but middle and low America would derive huge benefits from cheaper appointments, technology, and services.

Dean argues, though, that a large portion of consumer surplus derived through inflow of menial labor is allocated to the wealthy:

Of course, there is a story of labor shortages in this picture—in the sense that it will be difficult to find workers for the lowest-paying and least productive jobs. With a stagnant or declining labor force, workers will have their choice of jobs. It is unlikely that they will want to work as custodians or dishwashers for $7.25 an hour. They will either take jobs that offer higher pay or these jobs will have to substantially increase their pay in order to compete.

This means that the people who hire low-paid workers to clean their houses, serve their meals, or tend their lawns and gardens will likely have to pay higher wages. That prospect may sound like a disaster scenario for this small group of affluent people, but it sounds like great news for the tens of millions of people who hold these sorts of jobs. It should mean rapidly rising living standards for those who have been left behind over the last three decades.

And that is the basic story of fears over stagnant or declining populations. The people who hire help—the very same who also dominate economic policy debates—are terrified over the prospect that they will have to pay workers more in the future. But the rest of us can sit back and enjoy watching them sweat as ordinary workers may finally start to see their share of the gains of the economic growth of the last three decades.

This argument was made in context of shrinking populations epidemic across the rich world, but, can be extended to immigration as well. However, I have two qualms with this premise:

  1. This argument may actually be somewhat true for a poor country like India. That is, my lifestyle in India is rich because we have lots of people cooking for us, driving us around, tending the lawn, etc. Simply, wealth in India manifests in labor-intensive ways. However, while undoubtedly the increased consumption by wealthy Americans creates employment (heh), it is more capital-intensive and will continue to become more so.
  2. The rich will certainly take a disproportionate amount of the benefits from low-skilled laborers, sure. However, the decreased cost of menial labor will also benefit the poor. That is, most Americans buy the same food in similar grocery stores, and when there are more people processing food, the price of food will fall. Food eats a good portion of a poor man’s leftover salary, but isn’t even a consideration for the affluent. So, much of the financial surplus might go to the wealthy, but it will hardly change their lives, as it will that of the poor.

The idea that low-paying jobs provide a middle-class standard of living in some countries is true, but doesn’t apply for this argument. In my head, Dean’s argument sounds something like this: “If a Mexican field-hand comes and works in America, he’ll barely earn $20,000 a year. Gee, he’d be poor by American standards. But if he stayed in Mexico, that would get him a really middle-class lifestyle”. This is a pretty unfair caricature of his argument, but low end jobs in America, are low end jobs in Mexico. I don’t think there are any non-Western countries where “custodians” can live a middle-class lifestyle. Housekeepers, maybe, but for cultural reasons (i.e. maids that live in mansions).

Dean doesn’t buy Noah’s argument re: agglomeration effects:

On some more general points, Noah presents evidence that densely populated metropolitan areas have the highest productivity. I don’t have any quarrel with this or the economics of agglomeration that Noah cites, but there is a serious problem of untangling cause and effect. Certainly economically dynamic areas will attract lots of workers and workers are needed to sustain dynamism. But do we really think the benefits of a larger population increase without limit?

Mexico City’s metropolitan area has a population of more than 20 million people. Do we think the people in the area would be poorer on average if the population was just 10 million? I find that hard to believe, especially if we take into account the pollution and congestion rather than just a straight per capita GDP measure.

Because I’m working at the Santa Fe Institute on a project that is specifically concerned with socioeconomic scaling in cities, this was a really interesting point to me. And my answer is an emphatic YES! We would expect Mexico city, which is 100% larger than a city of 10 million, to be 115% richer. Of course, he’s absolutely right that pollution also increases superlinearly with population, but this isn’t as bad a thing (and will cease to be a problem with enough wealth and popular demand). The real concern for the future is water and carbon efficiency, which consistently scale sublinearly with population. The scaling laws hold true across America, Europe, and – based on some preliminary sleuthing – India as well. Cities are where ideas have sex, without birth control.

After reading this post, I’m a lot more sympathetic to the idea of labor protectionism. I’ve always been somewhat appreciative of the nativist viewpoint. Hey, I’m never going to be at the blue-collar margins, so it’s not me who has to face harder competition and maybe lower wages. But also, I’m allergic to the idea that we should prevent low-skilled laborers from entering the United States.

The poor in Mexico are surely more disempowered than those in America. Many go through months of hell to come up north, and I think it is slightly patriarchal to say “You’d have a better live in Mexico, you could be considered middle-class there”.

I found the tax treaty for skilled foreign labor a fascinating idea, though. This would not only be a great economic move, but would forge the way to much more robust relations with ‘source countries’.

Would also direct readers to Adam Ozimek’s thoughts on region-based visas. This is another idea that I’m against, but has changed at least some of my priors.

Malaria, DDT, and Affluence

February 25, 2013
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American and European agencies that regulate “organic” food, obviously, require said crops to be DDT-free. This makes a lot of sense.

There’s a big fight out in Uganda now between organic farmers making tons of cash on European supply chains and the real humanitarians that want to get rid of malaria (which decreases, as Jeffrey Sachs has demonstrated, GDP by 30% controlling for all other factors).

There are many ways to treat rid of malaria (bed nets being a prime example), however DDT is remarkably cost-effective. The organic farmers in Uganda have pretty much put a stop to all activities that would cripple malaria, thereby subjecting their countrymen to another generation of poverty, disease, and malnourishment – in hopes of meeting American and European standards.

This is just another example of how the well-intentioned crusaders for an all organic world ignore that for anyone that isn’t rich, organic food is irrelevant, and probably harmful (with second-order effects).

I’d bet every dollar of foreign aid (which is a mess by itself) that goes towards malaria relief has been counteracted by Greenpeace spreading exaggerations across the world. You don’t have to give any money to help those afflicted, just stop giving to various, “eco” groups that make the situation far worse than it is.

 

Addendum: I have nothing against real, substantive environmental policy. I’m a fan of high carbon tax rates, higher efficiency standards on air travel, awareness of depleting fossil fuels, etc. I’m just allergic to much of the crap that dominates “eco-talk”, like Greenpeace asserting Google and Cloud computing are a threat to the environment when video-cons reduce the need for carbon-intensive executives to be in Australia in the morn and DC in the eve. 

Wisdom from Hegel

February 25, 2013
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“Sound is the change in the specific condition of segregation of the material parts, and in the negation of this condition; merely an abstract or an ideal ideality, as it were, of that specification. But this change, accordingly, is itself immediately the negation of the material specific subsistence; which is, therefore, real ideality of specific gravity and cohesion, i.e.–heat. The heating up of the sounding bodies, just as of beaten and or rubbed ones, is the appearance of heat, originating conceptually together with sound.” -Hegel

Uhm.

The Golden Opportunity of Sequester

February 24, 2013
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When “NATO” (read: the Americans) instituted a no-fly zone to help rebels in Libya, then Secretary of Defense Robert Gates warned against defense cuts by European nations.

NATO accounts for over 70% of international military spending. America accounts for more than half that.

There is value in an international military alliance that is dominated by one superpower. NATO speaks of a common history and, maybe more poignantly, a shared struggle against Soviet communism.

For several reasons, America should no longer subsidize European defense:

  1. We are not as dominant a force today as we were in the 20th century. More importantly, we have to worry about our own shores (or, rather, chips) against Chinese cyberterrorism. China, unlike the American Senate, knows Europe to be irrelevant.
  2. The Marshall Plan was the beginning of American reconstruction of Europe. If not for American pressure, the French and British would have exacted brutal reparations on Germany. We knew that intercontinental trade would be critical to redevelopment, and luckily had the wherewithal to implement it. With the Marshall Plan, America entered an era-long agreement to run trade deficits to rebuild the Old World.
  3. Today, Europe is not as primeval with anachronistic monarchies and egoistic governments. European nations are rich, and have some of the most robust (if inefficient) welfare states in the world.
  4. We spend almost 5% of our GDP on defense, while much of Europe spends less than 1%. Also, 5% of our GDP actually adds up to something significant. Theirs? Not so much.
  5. Americans of the 20th century remember a shared struggle against communism. Even Bill Clinton, our first baby boomer president, worked on increasing NATO spending and forged a stronger alliance (and single-handedly saved Kosovo with it). My generation doesn’t remember that struggle. Actually, what we remember is a European disdain for America and its way of life, a heavy-handed criticism of our military, and a holier-than-thou attitude towards our culture. Quite simply, unlike my Dad’s generation, we just don’t care about Europe, anymore.
  6. Sec. Gates was prescient enough to note this. As he told the Germans (who have the most pathetic military budget) this younger generation of Americans will find it harder to justify the placement of Patriot missiles in Europe while at the same time slashing social welfare stateside.
  7. Oh, and, while we cut our welfare spending – French kids protest an earlier retirement and the idea of working more than 35 hours a week.

Ultimately, with the evaporation of communism, the resurgence of a somewhat robust Europe, and a struggling economy, the Sequester represents a perfect opportunity to move from an old era of international dominance and foreign entanglements to a more American isolationism.

We’re leaving Iraq. We’re leaving Afghanistan. It’s time to leave the Old World and focus on more pressing threats from the East. The Middle East will become quite a bit less important as, by 2020, America will be a net exporter of oil. Europe will find the resources to fund its own defense, maybe at the cost of an enshrined work week of 35 hours, but surely to the benefit of a single-mother in Harlem who has to decide between rent and heat.

I have nothing against Europe. But I also have nothing for it.

 

Addendum: I should note that there are some European countries like Netherlands and Denmark that really do pull their weight.

Youth Unemployment, a case for decreased regulation

January 27, 2013
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Jacque Lipchitz noted that “Cubism is like standing at a certain point on a mountain and looking around. If you go higher, things will look different; if you go lower, again they will look different. It is a point of view.”

Youth unemployment is an excellent example of how government regulations are but a point of view on this grand mountain of Economica. In the West we take pride in our minimum wage laws. We read chilling stories of boys in Bihar laboring for less than a dollar a day. We feel our system, our democracy – unequal as it may be – vindicated by the guarantee that our sons and daughters are paid a fair share for their hard work.

However, as we traverse that mountain we see that the very institutions protecting our youth are tearing society at the seams. There are effectively two ways to decrease unemployment: by encouraging employers to hire more workers (through stimulus, economic growth, etc.) or by decreasing the size of our labor force.

For the economy as a whole, the latter is undesirable. It might signal an increase in discouraged workers as has been noticed on both sides of the Atlantic over the past few years. It might signal a workforce that is unskilled in the context of modern demands. It might signal, especially scary for conservatives, a workforce simply unwilling to work. In a purely neoclassical model, a contraction in labor supply would also result in cost-push inflation. However, in the context of youth unemployment, a smaller workforce might be a good sign.

It means that more of our youth are investing in their future by going to college. It might mean that fewer students feel the economic pressure to work, fulfilling extracurricular pursuits such as sport and family-time, both activities any modern and wealthy economy ought to encourage.

Therefore the first way to decrease youth unemployment is to contract the labor force in a beneficial way – incentivize college education and ensure that families are able to make end’s meet without forcing children to work.

This still leaves a pretty big hole left to be filled. What about young students uninterested in pursuing further education? What about the many that want to work at Carrefour for the plain pleasure of it? This is where our perspective ought to change vis-a-vis minimum wage.

While implemented with noble intentions, preventing the economic reality of wage depression in a relentlessly free market, the minimum wage is one of the key culprits of youth unemployment. It is no accident that in Western countries teenage unemployment is almost twice as high as general unemployment; no accident that, historically, increases in minimum wage result in a sharp increase in youth, and not general, unemployment.

The reality is that the marginal revenue product of labor from hiring a young student is less than that of hiring a seasoned worker (even if unskilled). Our youth are more distractible with other commitments, some more important like a secondary education and others less so like drinking at the pub with friends. While the minimum wage might prevent income depression for the general workforce, compelling employers to pay at a rate of five pounds rather than four-and-a-half, it will most certainly not make up for the difference between what hiring a youth is worth and what it actually costs.

As Milton Friedman said, employers are not in the business of charity. Minimum wages, merited as they might be, are one of the most regressive laws when it comes to youth unemployment. The beneficiaries of such a law are more likely the children of the educated class who are more likely to present themselves in an employable manner in terms of dress, vocabulary, and overall disposition. They are also more likely to have direct contacts for employment, even for relatively unskilled jobs.

Youth unemployment has corrosive social effects. Unemployment results in youth with nothing better to do taking to the streets, resulting in crime either for money or out of boredom. Youth unemployment also results in a more contracted general labor force in the future. As young citizens who need employment are left to rot, they stand far more vulnerable to becoming discouraged in the future and hence becoming entirely unemployable, resulting in increased government entitlement outlays and a decreased national income.

Again, it’s not important that youth employment in the absolute be increased. By removing the minimum wage laws for young citizens it is likely that a few who do not need the extra money or want the reduced wages spend more time with their family or studying. The marginal value of an educated student in the aggregate results in a more robust economy, more ready for the skilled jobs necessary in the coming century.

We need to abandon the myth that minimum wage laws prevent exploitation of children. Today, with the information revolution abuse of young workers will take to the social media in a matter of minutes, destroying the name of any employer who dare pay less than competitive wages. On the other hand we need to make it as easy as possible to hire youth – perhaps offer employers tax credits per hire, decreased red-tape, and a sharp decrease in any tax regulation that would make employers unwilling to hire.

Proposals that suggest we need to train our youth miss the fundamental point that most of our youth need unskilled jobs. We’re not talking about the next mathematicians. The relentless free- market certainly ought to be regulated and protected, as is done in OEDC countries today, but not in a way that it cripples that whom it claims to protect.

Even as a fierce liberal I stand that minimum wage laws are among the most regressive and anti-poor legislation. Let’s move around the mountain and realize that the orthodoxy of regulation and protection will be its own undoing, let’s protect liberalism from itself. 

Learning from our Confederate Past

December 30, 2012
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Watching Lincoln encouraged me to familiarize myself with 19th Century government and, most importantly, the political system of the Confederacy. The Old South teaches us a lot about what not to do (hint: slavery), but the real lessons from the Civil War are not just Lincoln’s political acumen, but the innovative government of Jefferson Davis.
 
The long-term ability for the President to effect change is checked by two opposing forces: the inability to truly see lasting change in the blink of four years against the importance of considering reelection from day one.
 
The Confederacy dealt with this by restricting its president to one, six-year term. This is a tremendously inventive and powerful idea. It acted as a check on presidential authority by precluding reelection, but also gives great political capital by removing the need to consider actions from a purely partisan standpoint. 
 
I am not concerned by the financial burden of reelection for an economy as large as ours as much as the political burden it places on a president to ignore sweeping reform in preference to piecemeal actions that do not conglomerate into a coherent narrative. 
 
The Confederate model, by itself, is not desirable. A grand President is, by definition, a rare phenomenon. It would be undesirable to turn away such an icon for unfairly harsh electoral rules that seem to overrule the will of the people. After all, if a striking majority of people want the incumbent, is the Constitution not getting in the way of popular will?
 
Bill Clinton himself told Piers Morgan that the two-term limit seems unduly austere in today’s world, noting that he would have probably been ready to run again for a third time. But in understanding the perplexities of term limits as they apply to the President, it is important to understand the more important underlying message.
 
We don’t want a President to define a generation. In the United States we are deeply suspicious of political dynasties and central authority. We occasionally drink into conspiracy theories that our elections are not democratic after all, succumbing to mad dreams that there is a big Man behind it all, running our elections, as Chomsky would say, manufacturing our consent.
 
Term limits serve a check on this grander, greater-than-human belief that we are but pawns on the Chessboard of kings. But there is very much a way to reconcile this suspicion with a greater reform. Adopt, partially, a Confederate model – a President may win the Electoral College only once.
 
However, after five-years of incumbency, give Senate the authority to proffer an official Censure Vote on the President. If this vote of no confidence passes by simple majority, the House of Representatives would be granted authority to announce an Electoral College precisely one year later, narrowing the campaign process to a little under a year’s time.
 
If Senate fails to present an official Censure on the President or it is ultimately rejected by the House, the President is granted authority to serve for six more years, at which point a general election would be called regardless.
 
This accomplishes several objectives. It decreases the political cost of the first five years of Presidency and removes the need to campaign cross-country allowing the President to focus on the issues that matter. It increases the maximum tenure of a President from eight to twelve years, understanding that today’s politicians serve well into old-age. 
 
Finally, it would increase the importance we as a Nation place on midterm elections. It would increase the voter turnout on Congressional campaigns and would increase voter awareness of our Legislative branch in the large. Indeed, this acts as an important check on the President by forcing awareness of midterm elections in the two years after election, but it also allows for grand action where it is important.
 
Ultimately, we need to ensure that general elections are run by Federal authorities, with uniform security across all states. Our decentralized voting system for a highly centralized office lies in the dreams of yore when the President was far weaker than he is today.
 
Importantly, this kind of reform would have very predictable political consequences if implemented for the next election. Indeed such a system would benefit our President today as the Senate is not likely to Censure Obama. However, if we promise to implement such a system in ten to fifteen years, it would require deep arrogance for any politician to think his party will either benefit from or be victim to this reform.
 
The way we elect our president is in dire need of reform. This evolution can achieve bipartisan support while, at the same time, move towards engendering a healthier relationship between the President and his legislators, to heal the wounded relationship Washington has with its people.