Monthly Archive for February, 2011

Krugman And Oligarchy – A Response

David Harsanyi writing in The Denver Post responds:

According to Nobel laureate and raconteur Paul Krugman, Gov. Scott Walker and “his backers” are attempting to “make Wisconsin — and eventually, America — less of a functioning democracy and more of a Third World-style oligarchy.”

Now, it’s common knowledge that throwing around loaded words like “socialism” is both uncivil and obtuse, so it’s comforting to know we can still refer to people as “Third World-style oligarchs.” And boy, that kind of Banana Republic doesn’t seem very appealing.

Democracy, naturally, can only be saved by public sector unions, which attain their political power and taxpayer-funded benefits by “negotiating” with politicians elected with the help of unions who use, well, taxpayer dollars. And you know, that doesn’t sound like an oligarchy at all.

While Walker, who won office using obnoxious Third World oligarchic tactics like “getting more votes than the other candidate,” is a cancer in the heart of democracy, union- funded Democrats evading their constitutional obligation to cast votes are only protecting the integrity of representative government by completely avoiding democracy.

You’re getting it now, right?

In this world, when you tax a citizen a bit less to try to generate economic growth, you are not taking less from the taxpayer but “stealing” from a third party who at some point in his life was told he had an indelible right to your wallet, no matter the cost. And if you don’t hand it over? Well, even though Wisconsin is home to some of the nation’s highest taxes, and even though the Milwaukee Journal-Sentinel reported that tax cuts were “not even in effect yet, so they cannot be part of the current problem,” you can’t stop unionists from blaming “giveaways” to the rich.

Full post can be found here.

Quote Of The Day

“This is actually a pretty big issue in labor relations.  You have a situation where employers are paying much more for compensation, but it isn’t making workers feel better compensated.  Probably the best argument against allowing collective bargaining for non-wage benefits is this: it reduces the transparency of the employer-employee bargain.  When your employer gives you an extra $1,000 in your paycheck, you understand (almost) exactly what this has cost them.  When they change the formula for calculating pension benefits fifteen years hence, give you a work rule change that makes your life more pleasant but will cost them an aggregate $100,000 in lost productivity, or add chiropractic care to your health insurance, you have at best a hazy idea of the cost on the other side.  Of course, the employer may tell you, but these things are often hard to quantify precisely, and collective bargaining tends to take place in a fairly mistrustful atmosphere.  This leads to worker pressure for “small concessions” that aren’t small–and the asymmetry between the employee and the employer perception can further poison the negotiations.” — Megan McArdle

Quote Of The Day

“The question for states and cities is not whether “collective bargaining” is a basic undeniable right, but how much union power in the public sector is too much. Progressives talk as though it can never be enough–or, at any rate, that no union privilege, once extended, should ever be withdrawn. Conservative supporters of Walker talk as though public-sector unions have no legitimate role at all. To me, the evidence says that the balance needs redressing. Public-sector workers in the US are better paid (if you take benefits into account) and enjoy greater security of employment than their private-sector counterparts. Quit rates from public-sector jobs are about one-third of quit rates in the private sector. Equally important, to my mind at least, is that the unions’ quasi-management role in education (especially) has expanded to the point where it is difficult to run schools well, and practically impossible to pursue systemic school reform. So I think the power of public-sector unions needs trimming in states like Wisconsin.” — Clive Crook, blogging at the Financial Times blog

How To Balance The Budget

David Friedman gives his solution:

Let the two sides agree that both will support any cut that either supports, and both will oppose any increased expenditure that either opposes. The Republicans get to cut any expenditure that they disapprove of, the President gets to cut any expenditure he disapproves of, and neither gets to make any additional expenditure unless the other agrees.

Quote Of The Day

“Almost everyone on both sides of the debate uses the term “collective bargaining rights” to mean the right of a union to bargain with an employer who must, by law, bargain in good faith. It also includes the right of a union to negotiate even for employees who don’t want to be members of the union and don’t want to pay dues to the union. So “collective bargaining rights” really mean the power to force others–to pay the dues and/or to join the union and/or to give up their power to negotiate with an employer. So the alleged right is really the “right” to monopolize the supply of labor to an employer. That’s a phony right, not a real right. It’s really a power.” — David Henderson

Quote Of The Day

“When people like Paul Krugman say that almost $900 billion in stimulus didn’t work because it wasn’t big enough, you have to wonder if an adequate Keynesian stimulus is even possible.  Could any government anywhere borrow 15% of GDP or more to spend on temporary measures with the blessing of their citizens?  For that matter, would the markets lend the money without ratcheting up interest rates?  Can an extra 15% of GDP be spent without showing sharply diminishing returns–meaning that you’d need even more spending to generate the effects you want?” — Megan McArdle

My 2012 Presidential Pick

So far, from what I have read, it’s this guy.  Seriously.

Mortgage Interest Deduction

For the record, I support Obama’s plan to reduce the mortgage interest deduction for the wealthy:

As the part of the new budget, the personal itemized deduction phaseout would be re-instated for high-earning individuals.  The phaseout is pretty complex, and essentially means that itemized deductions are phased-out at higher income levels.  (I am not a tax expert and don’t want to get bogged down in tax talk.  Here is a pretty good article by Mary Gallagher that explains the issue in more depth if you are interested in further information).  The takeaway is that homeowners with mortgages that make over $250,000 as a household, or $200,000 as an individual would see their mortgage interest deductions decreased under the plan.

Does this make me anti-rich? On the contrary, since I support the complete elimination of the mortgage interest deduction for everybody – rich and poor. It is simply bad economics that economists from both sides agree should be removed. See here for a good primer on why.

Toyota Cleared Of Wrongdoing

The Associate Press reports:

WASHINGTON – Electronic flaws weren’t to blame for the reports of sudden, unintended acceleration that led to the recall of thousands of Toyota vehicles, the government said Tuesday.

Some of the acceleration cases could have been caused by mechanical defects — sticking accelerator pedals and gas pedals that can become trapped in floor mats — that have been dealt with in recalls, the government said.

And in some cases, investigators suggested, drivers simply hit the gas when they meant to press the brake.

“We feel that Toyota vehicles are safe to drive,” declared Transportation Secretary Ray LaHood.

Presidential Movies

Neal Gabler, writing in this months American Prospect gives a poignant view of presidents past:

Every president, whether he says so explicitly or not, approaches the presidency with a metaphor in mind. Theodore Roosevelt thought of his as a “bully pulpit” from which to educate the public. Franklin D. Roosevelt seemed to think of his as a national living room from which he could bolster American spirits in dark times. John F. Kennedy seemed to think of his as a salon. George W. Bush acted as if his were a testosterone-drenched fraternity.

Each of these metaphors has its benefits — and its problems — but it was left to Reagan to find a metaphor that reshaped the entire institution of the presidency to the point where his successors could ignore his conception at their peril. For him, the presidency was no bully pulpit, living room, salon, or fraternity. Nor was it the college lectern that Obama seems to think it is from which he can calmly and rationally explain his policies. It was a darkened theater in which Reagan could project a movie about the country’s desires and dreams — an American fantasy.

Reagan came to this idea naturally from his training as an actor. An actor’s object is to move an audience, excite it, and ultimately give it pleasure. When Reagan entered politics, he intuited that theatrical performance and political office were essentially the same. The goal was, once again, effect — to make the audience feel. He understood that in the age of mass culture, the relationship between the president and his public was paramount and that his primary role was to be the actor-in-chief who starred in the national movie and provided vicarious thrills.

This was a radically different conception of the presidency, but because it was couched in all sorts of bold policy pronouncements, not everyone caught on that the pronouncements were smokescreens covering the movie screen. Before Reagan, only FDR seemed to have presentiments that the presidential function was as much psychological as political and that an effective president, particularly in bad times, had to be an entertainer as much as, if not more than, a politician. Die-hard liberals used to blanch when Reagan cited FDR as his inspiration, but this is undoubtedly what he meant. Roosevelt wasn’t a political forebear; he was an aesthetic forebear who vehemently promoted optimism.

Still, FDR was a traditionalist. For him, aesthetics were in the service of politics — a way to gain support for his agenda. Reagan’s political genius, such as it was, was to recognize that politics is basically aesthetics, that the public is an audience, and that the president has to satisfy that audience. He realized that people care less about what you do in substantive political terms if you manage to buoy them psychologically. They want to feel good — the way they feel when the lights come up at the movie theater. That’s why Reagan wasn’t a detail man. He knew that the details were irrelevant. It was the show that counted.

Healthcare And Education

Their similarities:

The parallels are obvious: In both fields (1) we have systematically suppressed normal market forces; (2) the entity that pays the bill is usually separate from the beneficiaries of the spending; (3) providers of the services see the payers, not the beneficiaries, as their real customers and often shape their practice to satisfy the payers’ demands — even if the beneficiaries are made worse off; (4) even though the providers and the payers are in a constant tug-of-war over what is to be paid for and how much, the beneficiaries are almost never part of these discussions; and (5) there is rampant inefficiency on a scale not found in other markets.

The full post can be found here.

Quote Of The Day

“The typical person in the top 5 percent of the Indian population, for example, makes the same as or less than the typical person in the bottom 5 percent of the American population. That’s right: America’s poorest are, on average, richer than India’s richest — extravagant Mumbai mansions notwithstanding.” — Catherine Rampbell, writing in the New York Times book review about “The Haves and the Have-Nots”a book written by World Bank economist and development specialist Branko Milanovic

Inequality In Context

World Inequality

George Mason University economics professor explains:

Along the horizontal axis are within-country income percentiles running from the bottom 5% (1st ventile) to the top 5% (20th ventile). Along the vertical axis are world income percentiles.

The graph shows that the bottom 5% of Brazilians are among the poorest people in the world but the top 5% are among the richest. Thus the vertical range of the curve tells us about within-country inequality.

Comparing between countries we see that the poorest 5% of Americans are among the richest people in the world (richer than nearly 70% of other people in the world). The poorest 5% of Americans, for example, are richer than the richest 5% of Indians.

The Left vs Right Economic Model (aka Europe vs United States model)

My good friend Jon asked an important question: why not prefer the European economic model vs the United States economic model? I didn’t want to bog down his comments section with a long response, so I thought I’d post my longer response here.

Basically, there are two paradigms, two “visions” of an economy. The first, is generally considered left (or European): an economy with a large safety net, strong unions, and generally high taxes. The second, and my preferred, is considered right (or USA model): an economy with a large percentage of immigration, weak unions, weak safety net, and generally low taxes. The leftist economy tends to grow slowly. The rightwing economy tends to grow in a boom and bust way, with higher average growth than the leftist economy.So which one is better? Well that depends on personal preferences. The answer will be different for each person, depending on their personality (It would be like asking someone if they should join a union – it depends). If you are ambitious, entrepreneur minded, and generally a high achiever, you would prefer the United States model economy, where it’s easier to strike it rich (and, similarly, you would tend to oppose union membership). If you are someone who, for example, prefers small gains over large risks, and doesn’t have any ambitions to be CEO one day, you just want a steady pay with little growth – then the leftist economy is better for you (and, similarly, you would probably tend to favor union membership).

It’s kinda like asking someone should you invest their money in stocks or bonds? There is no right answer…it depends on the personality. Stocks give you better long term gains, but they are a lot riskier and volatile. Bonds are safer, but you sacrifice long term growth. It depends on the person (and age group – which is why the young around the world tend to prefer the USA, while the older Canada, see here).

Here is the important thing you have to notice about these two economies: they are mutually exclusive (please, click on the link and read the blog, it’s very pertinent to this discussion ). You can’t have a large safety net, for example, and a large immigration class. And you don’t need high taxes if you don’t have a large safety net. And you don’t get high growth with high taxes. etc. It’s all a domino.

So for example, in the United States, you have a dynamic corporate sector with one company rising to prominence in one decade, and going bankrupt in the next decade. Whereas in Europe, it’s usually the same companies, decade after decade (see here and here). Again, the United States model gives you boom and bust, with more growth, while the European model gives you steady growth, with less long term growth.

Or take immigration. Germany, for example, is not very friendly to the immigrant Turks (only recently, beginning to change, see here). And Germany – like the Scandinavian countries – is generally homogeneous (White).

More importantly,  these dynamics feed off of each other. Because safety nets are indeed zero sum – your welfare gain really is my loss – large safety nets foster an ant-immigrant culture (it’s the same reason that during a recession, anti-immigration sentiment increases – the people feel that in a time of scarce jobs, immigrants are “stealing” their job).

Matthew Yglesias, who lived in Europe, writes on the cultural difference between Europe and the United States:

There’s often a kind of conventional idea on the left that the United States is an unusually racist society. And I think there’s also often a kind of image of Europe as a place where more of the progressive agenda has been achieved than in the USA. But I think that you’ll find if you look at Europe through the eyes of the liberal agenda that while the German left has certainly been more successful than the American left at securing universal health care, it’s been much less successful at promoting a tolerant, integrated, multicultural society. And allowing for the errors implicit in making any kind of sweeping generalization, I’d say that’s pretty generally the case across Europe. …

In the US, in other words, racial problems have been more salient for a long time since we’ve been a racially diverse society for a long time. But by the same token, for all the problems we have with us today, we’ve made enormous progress over the years. Racial and ethnic tensions are a common problem in the world, and the United States manages diversity pretty well in comparison with other places (not just in Europe) even if we fall short in some absolute terms. Just look at Barack Obama. I think we’ll be waiting a while yet before someone of non-European ancestry is elected head of government in a European country. Denmark has some great public policy ideas, but it’s also kind of made itself into the gated community of nations in a way I don’t find particularly appealing.

Just look at this youtube video on Black soccer players to see how different race relations are in Europe compared to the United States.

The United States is much more tolerant of immigrants not because we are inherently different than Europeans, but precisely because of our smaller safety nets. Because immigrants that come here are largely excluded from our safety nets, we don’t feel that they come to steal our piece of the pie – instead they are viewed as coming here to enlarge the pie for everyone (unless of course, you are a poor Black person – in that case you do feel threatened from immigration, and rightly so – which helps explain the high anti-immigration sentiment in the poor Black communities) .

That is not to say that the European economic model is bad for everyone. I agree that some people probably are better off under the European model. If you are a White, not very ambitious member of the middle to lower upper class (think liberal arts university professors, or White union members), the European model probably is better for you than the United States model.

But liberals often speak as if all that mattered were White union members (another example of this is in the minimum wage debate), but immigrants and minorities count as well and so do the non union members (White or not) and the very poor and even the very rich. And so the question is: are they better off under the European economic model?  And on that I would say no. In addition to the exceptions mentioned above, the unemployment rate is significantly higher in European than in the United States (and especially higher if you have the bad luck of being a minority in Europe). And strong welfare nets notwithstanding, having a job counts for a lot (Highly recommended article here). It’s a source of self respect, pride and happiness. Furthermore, the unhappiness associated with being unemployed swamps out any happiness gains from the slightly higher job security gains of others.

And don’t say that ‘a couple percentage points of unemployment is worth it’, since even a couple points of unemployment could have a drastic affect on happiness levels. An economist explains: ‘Think about how hard it was to find a job back in January 2009 when our unemployment rate was 7.2%. The plight of the job-seeker wasn’t 30% worse than it was in May, 2008,  when the unemployment rate was 5.5%.  It was probably more like two or three times worse. Now imagine turning 7.2% unemployment into a way of  life.  It’s pretty awful to imagine, isn’t it?  Well, you don’t just  have to imagine it, because in France and Germany, 7.2% is normal.  The horror!”

So to summarize: the European economic model is better for low ambition White union prone citizens. It’s worse for immigrants and minorities of all  stripes. White non-union members. The United States model is better for those at the bottom and top of the economic ladder, and those who prefer risk and growth over stability.