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A lot of people seem pretty sure that student loans are behind a slow economy. Elizabeth Warren got there first. Then Vox posted a few charts confirming that, yes, those with student debt are less likely to own homes. Today I read that Larry Summers and Joe Stiglitz endorse this idea. Rick Rieder from BlackRock agrees. 

Let me play devil’s advocate.

The facts are clear – home ownership among those with student loan debt is decreasing much quicker than for those without.

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It is difficult to reach the conclusion, at least from this chart alone, that student loan debt decreases home ownership. For one, both lines are following the same trend over the same period of time, only one has a steeper slope since the financial crisis. Except this isn’t surprising, student debt is correlated with debt which is poison over a period of deflation (or lower than expected inflation). It is not unique to students.

But more importantly, those jumping at the correlation between student loans and home ownership over a few years of data are not paying enough attention to large, structural shifts in economic geography over the past fifty years. For nearly a century, suburban growth eclipsed urban. Millenials, the fraught group in question, are changing that. Two-thirds of young graduates now want to move to cities for a better job, compared to a fraction not too long ago. Not to mention the more than 80% that are willing to move to any city if needed.

Dad is no longer a company man, nor mom a housewife. Rather, graduates are likely to vie for shorter commitments focused on training and, in a number of cases, with a higher probability of relocation in the future. Not to mention the logistical, locational difficulty of maintaining a dual-income family (specifically outside of urban centers).

And that’s the demand side. Jobs that cater to college graduates are slowly disappearing from middle America toward coastal centers that capitalize on economies of scale and network effects. Vox notes that the age at which graduates first purchase a house is becoming later. True, but not necessarily relative to household formation itself – something happening later across the country driven by graduates. (Not to mention, as a commenter on Twitter mentions, the increasing necessity of a post-Baccalaureate degree).

Here’s the thing about those with “student debt” – they are much more likely to be “students” than those “without student debt”. In the latter group, you either don’t have a degree – in which case none of the above qualifications apply – or you’re wealthy enough to go through college without any debt. Neither is a representative group.

The bottom line is students increasingly want to live in areas where homeownership is unaffordable. (And it’s not like twenty-somethings even should be able to afford a place in New York City). There is increasing evidence that homeownership is probably not the best investment for many people. The returns on real estate are dwarfed by the stock market, and other carefully-orchestrated investment plans, especially without the (clearly excessive) boom years of the past decade. Maybe millenials are paying more attention and making smarter investments.

Of course, jubilees are almost always a good thing (and it’s not clear that lower rates as Elizabeth Warren wants, would even achieve lower debt – it may just encourage poorer people, or those who otherwise would not have, to borrow more). Deleveraging, especially in a time of low inflation, will improve the economy through simple wealth effects and encourage capital formation via higher savings rate (and perhaps investment in domestic equity).

But it does not strike me as a particularly equitable, or necessarily economically-optimal, use of our budget to help those who were, are, or would-be students. Or, in other words, near the top of the income distribution. An expansion of the EITC with the same money would be more equitable, more directly encourage job creation, and give more bang for the buck.

Of course, the best thing for debtors and the economy would be a inflation above expectations.

 

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I’ve been thinking a bit about why wealth inequality really doesn’t matter – but I think the argument is a little more nuanced than I presented. In particular, what I wrote yesterday is concerned largely with the positive, but in reality this debate is intimately connected with normative action. In the wake of Piketty’s book (which I have not finished) a number of people are talking about taxes on global capital.

I don’t have a very strong opinion on that (other than a negative gut reaction). But there are things we can do closer to home – appealing to both conservatives and liberals – that would be more feasible and possibly more effective. In this debate we are faced with a slurry of terms that are sometimes used to describe the same underlying phenomenon but are each different: wealth, capital, returns on capital, and capital share of income.

While I am unconvinced that just the inequality of net worth (“wealth”) really does much harm to a nation’s socioeconomic fiber – indeed I think concentrated wealth is probably a necessary consequence of capitalism – it is clear that skill-biased technological change, and what that portend’s for labor’s share, is probably an important concern (if nothing else in the discussion of income inequality itself).

And here’s the problem. Government programs, the way they are currently structured, are largely to blame for gaping disparities like this:

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(Before I go on, it is worthwhile noting this picture, yet again, confirms my previous point that wealth inequality per se isn’t increasing and was never a problem).

What we see isn’t surprising. The bottom 90% of Americans are basically excluded from the stock market – the most important source of long-run returns for pretty much everyone else. What’s striking here is that this inequality is far worse than inequality of wealth itself. So not only do the rich own more capital, they own the best capital.

To some extent this is unavoidable. Rich, well-connected elite have far better access to the best investment opportunities like secondary private markets and hedge funds that provide alpha. (Chances are if a hedge fund is doing well accounting for management fees, they don’t want you as a client). But the people that benefit from this are the extremely wealthy percent of a percent not even demarcated above, not simply affluent Americans who are still extremely well-represented in stock markets as a whole.

And the reason for this? Perhaps poor government policy.

The real wealth of most Americans is their claim on social security in the future. Social security has been an incredible source of, well, security for many citizens and pretty much the reason many are not in poverty today. But the Social Security Trust, which actually handles all of this money, is basically forcing you to invest in low-return government debt.

This becomes a source of inequality as social security as a portion of total implied wealth (here defined as your claim on future GDP) is far higher for the bottom 95% of Americans, who can barely save, than anybody else. On the other hand, for people that actually manage to save (even if just a little bit) the stock market is a source of real, long-term prosperity.

Furthermore, misguided government programs encouraging homeownership – something many economists have come to agree isn’t a good thing for poorer people – once again distorts private investment choices to relatively low-return stores of wealth like residential real estate. When the productivity growth is coming from financial, informational, and social capital, what value is owning a home in Podunk, Missouri?

Again, mortgages are the primary – and possibly only – source of explicit wealth for middle-class Americans.

Many conservative economists have reached the conclusion that we should probably privatize social security. As a purely financial matter, I am inclined to agree – the justification for our current program is fully predicated on the dangerous assumption that government bonds are the best long-term investment when, in fact, Vanguard Target Retirement 2045 is the way to go.

In fact, what we need is something akin to a Sovereign Wealth Fund that allocates payroll tax receipts in a more productive way. This should have great appeal to conservatives as well as liberals. For conservatives, it frees an immense source of domestic equity away from relatively inefficient projects furnished by the national government to more entrepreneurial and productive ventures in private markets. Indeed the cost of capital (in normal times) would probably fall. For liberals, it is the most logical extension of the welfare state, designed in a way complementary, not opposed, to modern capitalism.

This would solve what I see is the heart of the problem Ezra Klein and others are getting to when they worry about wealth inequality. It isn’t the disparity of wealth itself (which is background noise), but the changing structure of the returns. It is a tragedy that over the past thirty years, the stock distribution was so much more skewed than wealth distribution.

The government is ultimately a bank that can print its own money. What it should be doing is guaranteeing a minimum return in future receipts, as it does today, as well as investing in the option for more explosive growth. If the stock market performs so poorly as to not provide the returns necessary for to meet the obligation (and there’s a very low chance this would happen over the long run) the government can always finance the difference with a deficit. In fact, since returns would be far higher, chances are in a financially-driven recession, the increase in deficits would be lower.

This is probably not enough, but does more to solve inequality than a meaninglessly small increase in capital gains taxes would accomplish. More importantly, it achieves this without further harming private interests, and yet greatly increases capital redistribution. It would also unleash an incredible amount of capital for the investment the private sector desperately needs.

Here’s the short and sweet argument for privatized, but guaranteed, security. Rich people should give poor people equity in their companies rather than taxes to the government to solve issues of capital return disparity. The only role government should play is effectively guaranteeing a minimum return, in other words purchasing a barrier put on the S&P in the event valuations fall below what is promised. That is cheaper, more efficient, and the principle we ought to work on.

Tyler Cowen links to a brief, frank symposium on the economics of climate change. Many of the responses, particularly from Lomborg and Tabarrok are fascinating. But, unfortunately, there are a few big myths about the economics of climate change that seem so obviously true but are dangerously false. Take Otaviano Canuto, Senior Advisor to the World Bank, for example:

The economist’s solution to climate change can be summarized in a single statement: “get the prices right!” This means taxing fossil fuels proportionately to the amount of carbon they release, in order to correct the problem that corresponding negative spillovers of their use are not reflected in their market prices. Incentives in favor of more climate-friendly technological innovations would also be reinforced. Subsidies to these innovations, as well as to avoid deforestation would also help, as potential benefits of these mitigating factors would in turn become appropriately embedded in their reduced costs.

First of all, one would imagine that the World Bank could put its money where its mouth is and stop flying its officials in first class on taxpayer dime. Second of all, “taxing fossil fuels proportionately to the amount of carbon they release” is only enough under the assumption that the revenues will be spent on undoing the damage of the initial emission. (There are a few exceptions to this which I’ll get to later). If Canuto noted this as a start he would be on sound economic footing, but like so many in this debate he misses a nuance in the way externalities work.

To see why imagine the effect of a $25/ton tax on carbon. We know this would increase gas prices by just over 25 cents. If $25 was the “spillover cost” of carbon, the climate would be robust to large increases in drilling efficiency. But let’s say there’s a breakthrough in refinery technology and a substantial increase in available petrol, putting a strong downward pressure on costs such that the tax becomes a majority of the price itself. Would the carbon tax be enough in this case? Well, it depends what you’re doing with it. A good, if brute, measure of spillover may be the cost of recapture. Therefore, the tax is enough if and only if the government is spending the money on a large scale recapture program undoing the ills of the initial emission. Otherwise, the decrease in costs of production would increase supply and hence emissions beyond a sustainable level.

It is always useful to consider various parametric limits in assessing the validity of one’s claim. In doing so we discover hidden assumptions that never make their way to public consciousness. Textbook economics is tricky. Whether a spillover is intimately connected with your definition of social costs and the implications for your revenue thereof.

Of course, this assumes that the socially optimal level of carbon is effectively zero. In fact, there is a carrying capacity and the optimal level, economically speaking, probably exceeds this carrying capacity. The initial capacity emerges from the Earth’s innate ability to absorb emissions along with uncertainty that more is always worse. That the optimal capacity exceeds this level is a result of a positive discount rate along with the fact that future generations – due to improvements in technology – will be richer than us. Therefore, under perfect generational smoothing, we endow our children with superior technology and a shittier earth.

But neither of these change the fundamental premise that pricing carbon “at its cost” will hardly ever be enough (unless, as other more intuitive commenters noted, green technology becomes competitive in its own right). For one, the last sentence in the previous paragraph should make uncomfortable your moral sensibilities – for axiomatic reasons. More importantly, the economic models that are needed to quantify such ambiguous statements are really crappy.

As Robin Harding writes in the Financial Timeseconomic models of climate change fail the limit test with flying colors. Standard models suggest output would only be reduced by half for warming over twenty degrees Celsius in magnitude. To get some perspective, the rest of the academic community is freaking out about an increase of two degrees. Therefore, by the rule of seventy, our kids will be better off than us if the Earth warms twenty degrees and we grow at a measly 2% a year. You would be right to laugh.

Of all the answers that actually say something of substance, Larry Summers has the one that I find most practically challenging. I think he misjudges the political landscape of the United States. Cap-and-trade failed in 2009 – truly a “moment of great opportunity” – not because of deep forces against its passage but primarily because the Obama administration decided socialized healthcare was its priority and secondarily because of the Massachusetts mistake that is Scott Walker. Permit trading has something a carbon tax does not. That is, it’s not a tax. In America, that gets you very far. It’s why second best alternatives like banning incandescent bulbs or regulating fuel efficiency work, but simple taxes do not.

But I think he misses one more thing. Practically, we are more likely to have a system that both subsidizes and taxes carbon before we have one that does neither. Yes, we should phase out fossil fuel subsidies and tax breaks. This is a bit like the problem with sugar subsidies. Mancur Olson’s The Logic of Collective Action is a must-read for this. Oil subsidies have very low average costs but remarkable concentrated benefits that make “big energy” a powerful lobby in both parties. Big energy will also loose more from a repeal of our most inefficient subsidies than it will from a broad based carbon tax. Therefore, one is distinctively easier to fight. In fact, big business in general may yield to a carbon tax if they know a larger decrease in subsidies is not immediately to follow. Poor Americans loose out on this one but it is hard to argue that subsidy without tax is better than subsidy with tax.

Therefore while Summers is unimpeachable in his economic logic, public choice concerns dominate. Here’s to the second best.

Permit trading has many benefits a tariff does not. For one, we are far better at estimating the effect of carbon than calculating its price (and, as noted above, we would not use the revenues from a carbon tax appropriately to begin with). But more importantly, it isn’t a tax, and it isn’t as “leaky”. A relatively important component of a broad carbon tax at the level we need it (probably around $100 to the ton) is subsidizing the poor. Under a carbon tax, this ends up undoing part of the tax and is counterproductive. On the other hand, under a permit trading system, the government can guarantee a fixed number of permits to each household from its initial “stock” which would simply increase the cost of luxury carbon.

But ultimately, economists need to step up on climate change. It is more than a textbook example of externalities and far more nuanced than many simple accounts make it to be. It is also far more harmful than many of their models suggest (consider the limits). Economic logic sometimes fails. It was, if I recall, Larry Summers who prevailed over Gore and Browner, convincing Bill Clinton not to follow a more aggressive reduction in carbon emissions wary of economic consequences. (Not a criticism of Summers – just one of his decisions).

Lomborg makes a lot of sense in the snippet of the linked symposium. Subsidizing basic research and hoping for the best is our only real option. But, in general, he doesn’t acknowledge scientific realities that clash with his optimism and occasional myopia. Indeed, climate change hurts the poor more than anyone and, when the water runs dry, probably more than anything else he worries about. But, even within his economic frame, an ideal, international, permit trading system would be the most beneficial. Think about what would happen if each of us were limited to some level of carbon output. The west would need far more than this limit, and poor Africans would need far less. Money is going to flow in one direction and, given the need for carbon in the west, would be enough to replace the inefficient foreign aid already in place. An international carbon marketplace is the ideal cash transfer – something economists should be killing for.

I believe in economics and, indeed, the value of economists. They are unfortunately neglected in important policy decisions which – independent of any political affiliation – may be cited as a cause for much hardship over the past thirty years. But if an astroid was about to crash into New York City, we wouldn’t ask economists to create a poorly-founded model of its costs. We would tell NASA to do whatever it can to save us. Economists need to stop telling us what the program for change should be, but rather identify the most efficient means of implementing a program scientists already deem necessary. Otherwise we’ll end up with nonsense like CAFE standards and Cash-for-Clunkers. Otherwise, we’ll end up with an absolute mess of leftism that is Greenpeace and organic, anti-GMO activism claim climate change for its own. Now that is scary.

One of the biggest skills I’ve gained writing an economics blog is dispassionate writing and thinking. Sure, we all have ideologies and spirit, but a common thread across good writing is relatively sterile analysis. For me, that means not writing about things that truly incite me (beyond an intellectual curiosity). Like the criminal justice system. Or elephants and their poachers.

But as Ferris Jabr writes, “to look an elephant in the face is to gaze upon genius”. It is abundantly clear to me that the problem is largely economic, and therefore something that I should at least try to blog about without expletive passion (of which there is plenty elsewhere). I hope more economists publicly and privately advocate market solutions to the poaching problem – because the government, unsurprisingly, lacks the necessary competence in basic market design and incentive formation.

Economics is a constructive field, and is therefore concerned with efficient means of building a market. The task at hand is efficiently destroying a market. That is very difficult. It’s not really possible argue whether a market is driven by supply or demand, but for reasons I’ll outline, it is fair to assume restricting demand should be the primary tactic.

African governments unfortunately lack the competence, wherewithal, and and will to fight monied (probably Chinese) interests in any meaningful way. The investment necessary in good law enforcement to prevent large poaching networks is something that Africa will not have for a long time. And, anyway, that money is better spent on education and infrastructure. African countries shouldn’t have to drain the public purse because of foreign demand that dwarves its national wealth. More importantly, the production function will remain cheap so long as poachers need to kill elephants to put food on their children’s plate. And who can blame them? Poaching wouldn’t be a problem if elephants roamed American prairies as they do African forests. But Africa is no America, and any real effort should start with demand.

A ban is the crucial first step, but easily circumvented (in the United States, for example, you can only purchase ivory that is at least a hundred years old – but how hard is it to forge the necessary documents), especially if the punishment isn’t commensurate with the potential reward.

Enforcement is also ridiculously expensive. Police officers and the DEA waste billions trying to stop people from smoking crack, but the results are a complete joke. Sure we don’t have the brightest people spending that money (to say the least), but enforcement costs are non-trivial, especially without a culture that supports the cause (If everyone was a murderer, police officers couldn’t do a thing about it).

Civilizing people is a long process. It took centuries for humans to see the moral flaws with slavery – a far more heinous crime – and the socioeconomic forces in emerging markets to flaunt wealth is strong; without a government that really cares it is unlikely we’ll get anywhere. So molding culture is out of the question (in the time period we have, which isn’t that long).

In contemplating a solution, I couldn’t but think of George Akerloff’s “A Market for Lemons”, one of the best pieces of economic intuition and analysis I’ve had the pleasure of reading. Without getting into the details, the import of his paper is that a market can break down  under a little information asymmetry.

Policymakers and conservationists need to stop auctioning horns and burning stockpiles of ivory, they need to create this asymmetry. And it’s not hard. By virtue of being a black market, there isn’t a good organized body that can consistently verify the quality of ivory in general. Sure, it’s easy to access, but ultimately there’s a lot of supply chain uncertainty.

There is a cheap way to exploit this. The government, or some general body that has access to tons of ivory, should douse (or credibly commit to dousing) the tusks with some sort of deadly poison, and sell the stuff across all markets. Granting some additional complexities, the black market could not differentiate between clean and lethal ivory, and buyers would refrain from buying all ivory in fear. The market would be paralyzed. It is analogous to Wall Street during a bank run, and probably stronger given that lives – and not just portfolios – are on the line. And it’s far cheaper than anything we’re trying to do now. (As a commenter notes, another smart method would be to flood the market with uncertainty of authenticity, but this is a lot harder to achieve, and possibly very expensive).

It sounds like a batshit crazy idea, and it probably is, but it’s not morally that much worse than what we have now (that is even completely ignoring the cruelty of purchasing ivory in the first place). The human suffering of the current system is immense, with many poor Africans threatened or bullied into poaching under the threat of death. Moreover, many African governments – in a Hail Mary effort to combat the Chinese economy – have draconian penalties for those caught poaching. I would only transfer that risk from producer to consumer, suggesting the trade, ethically, is weakly superior at least.

It is hard to imagine such a fragile market functioning with a competent organization trying to fool it. It wouldn’t even require governmental support (though may be illegal). If you’re a mess about the ethics of poisoning people, we can try the flu instead.

This is, like unemployment, a moral, social, and political problem. And, like unemployment, it has an economic solution. I don’t know if what I’ve outlined could actually work in practice (though I am somewhat confident that a well-thought out try, with the proper support, would make a difference). But I do know that without aligning incentives and goals we have no hope. It’s time for better ideas than burning stockpiles or auctioning hunts.

Ezra Klein’s remarks on inequality led to a pretty rich discussion, for the most part, disagreeing with his proposition that inequality isn’t the defining challenge of our time. His response today is great, making a clear – and agreeable – case that full employment is the most urgent problem facing policymakers today. The problem, I think, is that this still conflates importance with urgency and that which implies the former most certainly does not so the latter. Most of his recent post is correct. Unemployment is depressing median wages and absolutely nothing is more important right now than job creation.

But I want to focus on another, somewhat tangential, part of his post. Ezra writes:

Within the general rubric of “inequality,” income inequality gets a whole lot more attention than wealth inequality. But wealth inequality is much more concentrated and, in various ways, much more dangerous for the social structure. In particular, it’s wealth inequality that really ossifies social mobility.

The children of the top one percent only occasionally manage to match their parent’s incomes. But they often receive massive inheritances that grow over time, installing them atop the economic ladder and giving them a political reason to fight like hell against progressive tax policies (the Walton family is a good example here). And this kind of inequality doesn’t have any of the salutary benefits of income inequality: Massive inheritances don’t make people work harder. They give them a reason to never work very hard at all, and to try to influence public policy so they never have to work hard in the future, either.

I’ve written something along the same lines before, but have revised my belief that wealth inequality is an important signal. I’ll first detail why I think wealth is not too important before noting some reasons why it might be in the future. For one, wealth inequality has almost always been bad and – unlike income inequality – is not showing significant deterioration. In fact, the richest one percent actually saw a decline in their power over the Clinton boom:

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Of course, the wealth Gini is at any given moment in time “worse” than the income Gini, but that’s like comparing apples and oranges. To consider why think about how wealth and inequality thereof accrues: savings and investment. At any arbitrary level of income inequality, wealth inequality will increase, with a higher propensity to save among the rich as the first order effect (and capital gains as an important feedback). 

It’s pretty shocking how static wealth distribution has been, then, given the increasing income inequality. It’s difficult to argue then that wealth inequality – which is hardly a changing feature, unlike income – actually matters for political process in the way Ezra suggests. As disgusting as the Walton family’s politics might be, they have if anything only ossified the existing wealth inequality, without any first order effect on income (as Ezra points out, why should useless trust fund babies care about income taxes when they aren’t actually doing anything productive enough to earn seriously). Arguing that it is important that wealth inequality ought to be more important by arguing that wealth inequality engenders policies to protect wealth inequality is begging the question.

A focus on wealth also obscures monetary policymaking. Quantitative easing almost certainly increases wealth inequality, though there are good reasons to believe it improves income inequality (which over the long run would decrease wealth inequality… as you can see the interplay and economic dynamics are complicated to say the least) through a tighter labor market. In fact, one reason why monetary policy over the past decade did not increase wealth inequality as much as it could have is America’s expensive, pro home ownership programs like interest deductions and guaranteed loans.

In a freer real estate market – one that many economists agree would be more efficient and fraught with less moral hazard – it is likely that homes ownership would be more concentrated, with much of the middle class renting from the rich. The easy money policies of the early and late 2000s, then, would have increased wealth inequality that much more. But that would not mean anything, and should not be the basis for any policy action.

On the other hand, some important things are changing and wealth inequality may be more important in the future. As Piketty and Zucman document in a must-read paper, the wealth-to-income ratio in rich countries has increased substantially over the Great Moderation challenging conventional economic wisdom that this ratio is constant over time and reflecting lower population and productivity growth coupled with higher savings.

However, their data is a lot less remarkable for the United States, where population growth is relatively robust, and savings low – the ratio has increased though not markedly so. Still, in an age of automation and increasing capital shares, the increasing ratio could become an important economic issue.

Ultimately, though, capital income is still income. The return of wealth is not as much a reason to worry about wealth inequality but for capital tax parity with income – something progressives worried about income inequality have long advocated.

The importance of wealth inequality boils down to this. It is difficult to argue, as I think Ezra does, that this matters in and of itself because wealth inequality has historically been around as high as it is, and few would have suggested this is a problem a few decades ago. Suggesting that high wealth inequality begets more wealth inequality is not just assuming the conclusion (that this is bad) but also is not empirically guaranteed (though I am less convinced of this, data show that the 1%/median wealth ratio has increased substantially).

The arguments that wealth inequality matter for other reasons go back to some form of income inequality, usually distribution of capital gains. These are central to debates about inequality of all stripes. Wealth is not at all irrelevant, though. Flows matter more than stocks but when we as a society realize that deeper safety nets and education for the poor are important, we’ll tax the flow of inheritance every year instead of income which is scarce relative to the flow of wealth.

Cardiff Garcia has a good rundown on the minimum wage debate. He’s looking for someone to persuade him either way, and I’ll try to explain my qualified support for a minimum wage. For many, the debate is about the relative value of a minimum wage, which is theoretically inefficient, against wage subsidies which are not. However, as Paul Krugman pointed out earlier this year (though this is nothing new) the minimum wage and Earned Income Tax Credit (EITC) are really compliments, at least to the extent your goal is ensuring workers and not employers capture the benefits.

Here’s the pith in just a few sentences. As far as welfare goes, the government should not really be concerned about the wage paid by employers as much as the wage received by workers. If we decide that everyone needs $15 dollars an hour to live a comfortable life, then the government should not require that employers pay at this level, but promise to cover the differential between the market clearing rate (for unskilled laborers). The problem is labor supply is not perfectly inelastic, so this becomes subsidy for employers who can pay less.

There’s another problem with the EITC – it’s somewhat procyclical. There’s some econometric evidence to this effect, but it’s pretty easy to see that a program dependent on employment is not very countercyclical. This is not a problem per se but the marginal value of government spending – not just in increasing the welfare of the poor, but in moderating business cycles – is much higher in recession.

We should institute a procyclical minimum wage – relatively high when growth is good, and low when growth is bad. Actually, at least in the short run, this will address Tyler Cowen’s problem as well:

What about when the wage profile for low-skilled workers is sloping downward over time?  One would expect the opposite result to hold, namely that employers are less likely to hold on to workers when confronted with a mandated wage increase.

For much of the 1990s, the labor market for less skilled workers was in decent shape.  Since 1999 or so often it has been in bad or declining shape, excepting the “bubbly” years of 2004-2006.  Therefore a minimum wage hike today would be more likely to boost unemployment than the minimum wage hikes of the past.  And that unemployment is more likely to be long-term, corrosive unemployment than in previous decades.

I do understand that a minimum wage hike, in the eyes of some, is more “needed” today, perhaps for distributional reasons.  But can we admit it is more likely than average to lead to additional unemployment?

There are many ways to make a minimum wage procyclical, but a simple heuristic might be keeping the portion of the workforce on minimum wage constant over time. That means when the labor market is tight the minimum needs to be raised to keep the level constant, and vice-versa in a loose market like today. There’s a pretty good argument that a minimum wage is like fiscal stimulus the government doesn’t have to pay for, advocated most vocally by billionaire Nick Hanauer. He thinks that’s a good thing, but huge cash piles or not, a recession is precisely the worst time to ask the private sector to pay more.

This would work in tandem with a wage subsidy guaranteeing some minimum income that is acyclical. In good times, the required employer pay rate increases, easing the government’s deficit. The disemployment effect during this time will be relatively negligible as per Cowen’s logic but also because inflation is higher during boom times allowing the employer to erode the real wage rate if the employee turns out to be bad.

When times are bad, the wage employees need to pay falls, which increases demand for labor, and the government picks up the tabs. Sure it’s partly a subsidy to employers, but one precisely when they need it.

This has the free benefit of making the EITC a lot more countercyclical. It also eases political constraints of efficient stimulus. The government can choose to make the minimum wage zero in slow times – something I’ve advocated before – which would in effect be providing free labor to employers. This sounds a lot better once you consider that at least today employers seem to think the long-term unemployed are approximately useless.

A procyclical minimum wage in tandem with a wage subsidy is in effect a countercyclical stimulus program. It also directly encourages hiring in a way the standard program does not. Here’s to the market determined minimum wage.

I came across a Parag Khanna editorial in the New York Times that starts of documenting the CIA’s “Alternative Worlds” scenario – one of which is a so-called “non-state world” – and culminates in some kind of weird romance about the Silk Road days of yore when prosperous traders were the lifeblood of the Arabian Peninsula.

I need to make two quick points, one positive and the other normative. Khanna’s principal charge is that this “non-state world” is already here. The emergence of special economic zones, Dubai, and Hong Kong as centers of international commerce somehow hark the end of the international system as we know it:

A quick scan across the world reveals that where growth and innovation have been most successful, a hybrid public-private, domestic-foreign nexus lies beneath the miracle. These aren’t states; they’re “para-states” — or, in one common parlance, “special economic zones.”

Across Africa, the Middle East and Asia, hundreds of such zones have sprung up in recent decades. In 1980, Shenzhen became China’s first; now they blanket China, which has become the world’s second largest economy.

The Arab world has more than 300 of them, though more than half are concentrated in one city: Dubai. Beginning with Jebel Ali Free Zone, which is today one of the world’s largest and most efficient ports, and now encompasses finance, media, education, health care and logistics, Dubai is as much a dense set of internationally regulated commercial hubs as it is the most populous emirate of a sovereign Arab federation.

This complex layering of territorial, legal and commercial authority goes hand in hand with the second great political trend of the age: devolution.

In the face of rapid urbanization, every city, state or province wants to call its own shots. And they can, as nations depend on their largest cities more than the reverse.

Mayor Michael R. Bloomberg of New York City is fond of saying, “I don’t listen to Washington much.” But it’s clear that Washington listens to him. The same is true for mayors elsewhere in the world, which is why at least eight former mayors are now heads of state.

Scotland and Wales in Britain, the Basque Country and Catalonia in Spain, British Columbia in Canada, Western Australia and just about every Indian state — all are places seeking maximum fiscal and policy autonomy from their national capitals.

There’s a good argument that as urbanization proceeds and technology improves, cities ought to have more autonomy in local decisions. But that’s hardly true right now. Mayor Bloomberg can say whatever the hell he wants but, as it happens, he has to listen to Washington. It is the American people from the Dakotas and Carolinas that signed into law Dodd-Frank, which will regulate New York City’s largest and most important export. It was a Federal Judge that ruled against stop-and-frisk, and Bloomberg wasn’t even able to strongarm the state judiciary when it came to his ban on Sugary drinks.

If there’s one city-within-a-nation that has the political and economic clout, it’s New York City. If there’s one man to exploit that, it’s Bloomberg. And it’s not really worked out all too much in his favor. Indeed, since the death of Benjamin Strong, economic power has shifted from New York City to Washington, where the most important financial and economic decisions are made. And as shitty as the government in DC may be, they represent the people of the United States, not New York.

Let’s take the more surprising example of India, which as far cry from “autonomous cities”. Take a look at this McKinsey report (which, as far as they go, is pretty good) on India’s Urban Awaking. One of the clearest detriments to progress in urban India is the abject disempowerment of the urban voter. Few Indian cities – aside from New Delhi, which is its own state – have a more-than-ceremonial mayor. City politics are dominated by the Chief Minister of encompassing state. That means local action in Chennai is dominated by the mess-of-a-women that is Jayalalitha. And it’s no better in the more “advanced” cities of Bombay or Bangalore. Local politics is slave to rural concerns.

The money is in the cities, but the votes are in the country. National pro-urban policies are in complete disrepair, while India’s urban taxpayers fund the world’s largest welfare program for the villagers. It’s a good program as far as redistribution goes, but horrible in its effect on the productivity and progress – modern commerce – about which Khanna speaks. Not only does it come with the inefficiencies of taxes in general, but it engenders a culture of demechanization as the Indian government wants to guarantee maximum employment in the shittiest jobs as far as they are in the country.

A city-state? I think not.

And sure, there will always be a Dubai, Singapore, or Hong Kong. But as far as commerce go, the whole of the United States doesn’t do too badly. We’re the most economically free country, save two Asian city-states with a population less than New York City, and that counts for something. Power is also concentrated at the national level. As far as international politics go, who even cares what the Sheiks in Dubai want? It’s all about Obama, Putin, Assad, and Jinping. These are people who derive their powers from a national electorate.

But there’s a deeper, more normative problem, with Khanna’s assessment:

The Arab world will not be resurrected to its old glory until its map is redrawn to resemble a collection of autonomous national oases linked by Silk Roads of commerce. Ethnic, linguistic and sectarian communities may continue to press for independence, and no doubt the Palestinians and Kurds deserve it.

And yet more fragmentation and division, even new sovereign states, are a crucial step in a longer process toward building transnational stability among neighbors.

The classical world is gone. And thank god for it. It’s not like being born anywhere in Arabia is great today, but it is infinitely better than it was when Islamic culture ruled the world. It’s too easy to think about the “more cultured” days of our classical past.

At a more analytical level, nation states are key to economic mobility and prosperity. Think about what Dubai, Singapore, and Hong Kong represent – other than a gleaming success story of Khanna’s brave new world. They represent inequality and exclusivity. They represent don’t represent talent as much as wasted talent. Indeed, each of them almost solely represents all that was wrong with the world in 2008. Finance is key to a modern economy, and no one is going to deny it. But it would be a brutal joke to say that the kind of nonsense exported from these “modern city-states” is anything like what America (and, ugh, Britain) once did. It’s a joke to assume the real innovation comes from real estate in Dubai instead of modern ways to improve livelihoods in the heart of India and Africa (not the urban fringes thereof).

Within a nation state, because of fiscal union, someone can dream of settling in the country, but also making it to Manhattan. What kind of dream does Dubai represent in the world – other than young American grads that want a consulting gig for two years so they can party a little harder.