Category Archives: Public Policy

The Way Singapore Does It Is Amazing, So For God's Sake Don't Let It Happen Here!

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George Akerlof and Robert Shiller make a series of puzzling and inconsistent claims in their chapter on savings in Animal Spirits. In the section on “Why Conventional Theories of Savings Have It Wrong” they argue that Americans save too little. The evidence? Americans save more and are happy with it when enrolled in a Thaler-style Save More Tomorrow plan. And when you ask them, most Americans say they save less than they’d like to. I find their remarks about standard life-cycle savings models glib. But, sure.

But then A&S say that government old-age retirement pensions are a response to undersaving. Well, maybe. But doesn’t everybody know social insurance crowds out self-insurance, at least to some degree? If we’re confident that Social Security will deliver on its promises, we’ll obviously feel less need to save than we would otherwise. (We may even choose to have fewer children — the oldest form of self-insurance.) Indeed, many Americans think (and are encouraged to think) that their payroll taxes — their “Federal Insurance Contributions” – are a form of retirement savings, though they’re really just another tax legally unrelated to transfers received later in retirement. A&S decline to address the fact that Social Security depresses the savings rate, though they do begin their chapter praising Martin Feldstein!

Even better, they work themselves into a self-congratulatory lather about Bush’s failed attempt to reform Social Security by introducing a system of mandatory retirement savings. Of course, they don’t mention that’s what the proposed policy was, conveniently sparing them the trouble of explaining away the fact that it would have significantly increased the national savings rate. They just call the policy “privatization” and move on.

Why did Bush’s attempt to reform Social Security fail? A&S say most Americans opposed it because retirees depend pretty heavily on their Social Security transfer checks. Maybe so! But the fact that retired Americans do depend so heavily on Social Security would, again, tend to explain why retirement savings aren’t higher. You can depend on Social Security! But this is what A&S choose to say: “People depend on [Social Security] because their own retirement savings are so scant.” I can’t say they’re wrong!

But wait, it gets better! In the next section, “Savings and the Wealth of Nations,” they jump right into singing Singapore’s praises for having “adopted the strategy of saving their way out of poverty.” They go on to explain the Central Provident Fund in glowing terms. Now, the CPF is a system of mandatory savings including mandatory retirement savings. What is that a heckuva lot like? Why, the Bush administration’s plan to “privatize” Social Security! Just one page after dumping on the idea, A&S now love it!

However, they conveniently manage to describe Singapore’s mandatory savings program without mentioning that it finances the retirement and health-care system. Reading A&S, you might think Singapore just forces people to save money and that’s the end of it, though they do hint that it’s funding something. Of Singapore’s unmentioned social insurance system financed by its mentioned system of mandatory personal savings accounts they say:

The system has not been “pay-as-you-go,” and the sums collected have really been invested. Largely because of the CPF, the gross national savings rate has been in the vicinity of 50% for decades.

Not only has this been just terrific for Singapore’s savings rate and rate of economic growth, A&S claim its stunning example has totally transformed China!

[Lee Kuan Yew's] high-saving economy became a model for China, which has copied Singapore’s savings achievement and have been achieving significant economic growth fore decades.

So you might think that it wouldn’t have been a disaster had the U.S. followed Singapore’s example and replaced its “pay-as-you-go” tax and transfer retirement pension system with a system of mandatory personal accounts actually invested in the market. But, no. They hide the dots so the reader can’t connect them. They really do seem to go out of their way to prevent the reader from grasping that the Social Security reform proposal they deride was a mandatory savings program and that the mandatory savings program they praise finances retirement security.

Akerlof has a Nobel Prize. Shiller is a Nobel short-lister. So it’s hard to pin this on ignorance or incompetence. What’s going on!? Let’s jump back a page to Akerlof’s “personal footnote” about Social Security reform.

[Akerlof] was on a panel of economic advisers (a minor one) to the Kerry campaign in 2004. Up until the elections we had a conference call every two weeks. From the very first to the very last of these calls, Akerlof asserted that Kerry should affirm his support for maintaining Social Security in its current form. Toward the end, Austand Goolsbee (who is now a leading adviser to President Barack Obama) would joke, “And now we will hear from George, who will say that Kerry should demagogue the Social Security issue.”

LOL! George goes on to explain that he thinks Kerry lost because he didn’t demagogue the Social Security issue like he said he should. And then two paragraphs later, we get to read about how awesome the Central Provident Fund is.

This bit of Animal Spirits gave me whiplash. It’s incoherence is simply overwhelming if you happen to know a bit about pension systems and retirement savings. Maybe we’re seeing an unresolved problem of dual authorship. I don’t know. What I do know is that this section of the book really does convey the impression that some care was taken to omit very relevant details, and therefore to create a misleading picture — an impression only reinforced by Akerlof’s joshing, self-approving anecdote about his reputation for promoting demogogeury on Social Security. As Akerlof and Shiller are both phenomenally accomplished scholars who I’m sure have well-deserved reputations for intellectual honesty, I expect they’ll want to revise this section for the paperback edition of their book.

You Got Morals in My Economics!

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Economics, qua social science, is not a normative field. But much of the drive to understand how social interaction works is to give advice about policy. However, giving advice implies a standard for determining what counts as good advice, some kind of value theory. This is inconvenient for economists, who want badly to make policy recommendations, but who tend not to be very sophisticated moral philosophers (though there are some notable exceptions). Bryan Caplan tries to find a way around the inconvenience:

In many cases, there is no need to state your moral premise, because (economics + almost any moral premise) will do.

Suppose legalizing the market in human organs would make sick people healthy and poor people rich.  What moral premise would imply “don’t legalize”?  Sheer malevolence?  Blind adoration of the status quo?  While these are coherent moral premises, they’re so rare that the cost of addressing them is a waste of time.

It seems that Bryan thinks most opposition to markets in organs is a function of either ignorance of the likely consequences or perverse and exotic moral premises. This makes me wonder if he has ever debated this issue with anyone? Lots of people understand the economics well enough but continue to believe that markets in organs ought to be illegal. Here’s rough sketch of the standard argument.

Human beings have a certain dignity that is central to the value of human life. That dignity ought to be respected, preserved, and protected. Allowing the sale of human body parts diminishes the dignity of those involved in the transaction and erodes respect for the dignity of human beings generally. Therefore, markets in body parts ought to be legally prohibited.

Is this a good argument? No. I think it’s lousy argument, even in its most sophisticated form. But the idea that the value and conditions of human dignity imply that some things shouldn’t be bought and sold is not at all rare. Indeed, I think this is likely the dominant moral stance of most people in most places at most times in human history. If one grants the benefits of legalizing markets in organs, which I certainly do, then addressing this argument is not only not a waste of time, but is of fundamental importance in removing one of the main barriers to great improvements in human health and well-being.

Which is just to say, no, you can’t get around defending your moral premises by claiming that once the facts are established, all moral premises worth taking seriously point in the same direction. It’s just not true that there are “many cases” in which all paths converge like this. And when there is such a case, the convergence is often counterintuitive, and thus needs to be demonstrated, not just asserted. Policy analysis is at least as much applied moral philosophy as applied economics. Without some normative standard, economics has no application at all. Moreover, public deliberation about policy requires taking other people’s moral beliefs seriously and you can’t do that by ignoring them.

The Bailouts are Like Paying Off Molested Children

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Since I found it all interesting, I thought I’d just reproduce all of Will Ambrosini’s post about my last post here:

I’m actually with Will Wilkinson when he talks up “liberaltarianism” and I support a reasonable social safety net. I’m one of those people that thinks rising GDP indicates increasing interdependence, that that is a good thing and that self-sufficiency is the road to poverty. Today Wilkinson suggests a reason why liberaltarianism might be a non-starter:

[I]t’s easiest to get people to face up to tax increases if they don’t have the sense that they’re paying more just so the special interests of the winning coalition can get more.

Isn’t the conditional phrase an empirical fact about governments?

This reminds me of my dad and the Church. Even after all us kids grew up and he stopped going to church, he gave money to them every week. The Church does a lot of good things for people — disaster relief, poor assistance, etc — but a couple years ago my dad stopped giving. His primary reason: he thought his money was primary going to paying off molested children; it wasn’t going to help poor people. He didn’t want to subsidize corruption.

I don’t want to subsidize corruption either.

I think Will is just agreeing with me. I take it that the empirical fact about governments is this: when taxes go up, transfers to the special interests of the winning coalition go up. I think that’s probably a decent empirical generalization. But I don’t think most voters do. Now, if the increase in transfers is generally equal to the increase in revenues, then budgets balance only when revenues are underestimated. I’m not so sure that‘s true. And pretty sure most voters assume it isn’t.

What I was trying to say is precisely what Will is getting at: that willingness to contribute reflects a sense that the contribution is going to something worthwhile. Tax increases coupled with large spending cuts creates the sense that there is a good faith effort to balance the budget, which the tax increase is one part of.

As a matter of fact, I think the various bailouts have created a large problem for Democrats in generating public support for tax increases. Ideologues on the left enjoyed depicting the various Tea Parties as a ridiculous efflorescence of dimwitted rightwing ideology, and it was partly that. But it was also partly a real reaction to transparent distributive injustice. You can say that some of the bailouts were necessary to keep the whole system going. That may be true, but that doesn’t make it fair. (Maybe it was the best thing for the church to pay off molested children, but that doesn’t mean Will’s dad wants to pay for it.) That sense of unfairness, which is by no means limited to Limbaugh-loving Tea Partiers, together with the sting of the recession (even after it’s over), together with the typical American aversion to taxes increases that Obama has constantly catered to, is going to make tax increases on the middle class an incredibly hard sell even if there are also large cuts in spending, which there won’t be.

Yglesias on Taxes

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In an admirably frank piece in the American Prospect, Matt says the problem with Obama’s budget is that the government doesn’t have enough money to pay for it and so Democrats will need to raise taxes on the middle class if they want all this spending. This is such an important message because many Democrats are now going through a phase of magical-thinking freelunchism. Every huge new program will save money! Well, it won’t. So Matt’s right. It’s better to face up sooner rather than later to the fact that taxes need to go up a lot to pay for all this stuff. Or, we could spend a lot less. I know Matt’s down with slashing defense budgets, but I guess he just wants to spend that money elsewhere.  For my part, I think it’s easiest to get people to face up to tax increases if they don’t have the sense that they’re paying more just so the special interests of the winning coalition can get more. Large, comprehensive spending cuts together with a modest increase of tax rates on the middle class seems to me the most plausible way of regaining something like fiscal balance. After the recession.

Ladies Still Not Taxpayer Dispensers

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At Slate, Kerry Howley talks sense to Michelle Goldberg about the doubtful feminist wisdom of using population panic as a pretext for putatively “feminist” policies. Goldberg has clearly neglected Howley’s powerful Reason feature on natalist policy from which I offer this concluding excerpt:

But as pro-baby policies are inevitably sold as pro-mother, and by extension pro-woman, it’s worth recalling the sentiment behind the Australian birth premiums and Singaporean matchmaking schemes. At the heart of any fertility incentive lies an attempt to encourage a particular group of women to orient their bodies in a traditional way. Every pro-fertility policy is an effort to slow cultural transformation, to stabilize a society’s ethnic composition, to ossify a current conception of a national culture by freezing the genetic makeup of a nation. From Poland to Singapore, swollen wombs are a bulwark against change.

There is a reason we speak of “Mother Russia” and “Mother India.” Feminist sociologists such as Nira Yuval-Davis refer to women as the “boundary markers” of a state or society. While men may leave, fight, and be compromised, women represent purity and continuity. Yuval-Davis points out in her book Gender and Nation that the Hitler Youth Movement had different mottos for girls and boys. The boys’ motto was: “Live faithfully; fight bravely; die laughing.” For girls: “Be faithful; be pure; be German.” Girls simply had to be. They were the collective.

In times of great social anxiety, we see new calls for women to return to home and hearth—calls alternately cast as a return to tradition and as a progressive leap forward, but efforts, nonetheless, to enlist women in a national project while defining the boundaries of national inclusion. Depopulation is not a given, but ideologically fraught and scientifically questionable debates about gender, race, and culture will be with us no matter which way the population swings. “To know what demography is, we need to know what a population is,” the French social scientist Herve Le Bras wrote in The Invention of Populations. “That is where the trouble begins.” 

[Full disclosure: K.L. Howley and I co-own a rumbustious vizsla.]

The $250,000 Focal Point

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Yes, people who think they’ll get walloped with extra taxes if they touch that 250 thousand and first dollar don’t understand the nature of marginal tax rates. But it’s hard to escape the class war overtones of Obama’s stategy of sticking it only to those who’ve passed the magic number. If you’re under the line, you’re one of us. If you’re over the line, you’re one of them. Reserving higher marginal rates, the cut in the charitable deduction, etc. for the top bracket sends a message: you don’t deserve it and you owe us. It’s easy enough to grasp the desire to approach but not join the resented class.

Kill the Mortgage Deduction

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I agree with Ezra Klein in agreeing with Ed Glaeser. Here’s something, like trashing ag subsidies, you can get a lot of libertarians and liberals to agree on. It can be a bit disheartening to see just how little this kind of agreement amounts to when compared to the incentives of the politicans. (Iowa’s extremely powerful Senators will die in the last ditch for our subsidies.) But I think this kind of wonk consensus building really matters over the medium-term. Democracy is not a mechanical cui bono machine and elite opinion can, when not coopted by the incentives of the parties, work as a countervailing force.

Sachs on the Self-Defeating Stimulus

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Jeffrey Sachs’s new SciAm column titled “The Economic Need for Stable Policies, Not a Stimulus” forcefully reinforces the lesson I drew from my interviews with Prescott and Phelps. Sachs highlights:

The U.S. political-economic system gives evidence of a phenomenon known as “instrument instability.” Policy makers at the Federal Reserve and the White House are attempting to use highly imperfect monetary and fiscal policies to stabilize the national economy. The result, however, has been ever-more desperate swings in economic policies in the attempt to prevent recessions that cannot be fully eliminated. 

President Barack Obama’s economic team is now calling for an unprecedented stimulus of large budget deficits and zero interest rates to counteract the recession.  These policies may work in the short term but they threaten to produce still greater crises within a few years.  Our recovery will be faster if short-term policies are put within a medium-term framework in which the budget credibly comes back to balance and interest rates come back to moderate sustainable levels. 

Looking back to the late 1990s, there is little doubt that unduly large swings in macroeconomic policies have been a major contributor to our current crisis. …

[...]

We need to avoid reckless short-term swings in policy.  Massive deficits and zero interest rates might temporarily perk up spending but at the risk of a collapsing currency, loss of confidence in the government and growing anxieties about the government’s ability to pay its debts. That outcome could frustrate rather than speed the recovery of private consumption and investment.

[...]

Most important, we should stop panicking. One of the reasons we got into this mess was the Fed’s exaggerated fear in 2002 and 2003 that the U.S. was following Japan into a decade of stagnation caused by deflation (falling prices). To avoid a deflation the Fed created a bubble. Now the bubble has burst, and we’ve ended up with the deflation we feared!

By the way, here’s my earlier post on “Managing Expectations Better.”

Prescott told me that he considers economic theory that treats the economy like a machine attached to policy levers that can be pulled to achieve the intended outcomes to be pseudoscience. He actually compared stimulus-mongering Keynesians to chemists before Dalton. (I gathered that Dalton is Robert Lucas.) Commenter Odograph gave me a bit of grief for quoting Prescott saying “Stimulus is not part of the  language of economics,” when of course, as Mankiw’s poll shows, 90% of economists believe you can get a growth boost by fiscally goosing the economy when resources are underutilized. I don’t know whether Prescott agrees or not (maybe not if he really thinks you can’t surprise an economy twice). But Prescott’s general point is pretty much the same as Sachs’s here: discretionary macroeconomic policy is very likely to be self-defeating and we’d do better to concentrate on setting in place a sound structure of stable rules. When I asked what he would have advised, Prescott said he wished Obama had used his considerable political capital to form some kind of task force to very deliberatively restructure the tax system, the entitlement system, the financial system, etc., instead of pushing for a stimulus. But when the President instead uses his political capital telling people to panic, you just get more of the kind of mess Sachs describes. The government under both Bush and Obama has been giving us ridiculous fool-in-the-shower macro policy, and it really needs to stop.

[HT: Tyler]

Whatever Disagreements I May Have With Jonah…

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I must say he nails this one:

I understand that from the 30,000 feet level most policymakers view these things from, having homes worth less than their mortgages is a real problem. People can abandon their mortgages, which breeds contagion etc, etc. But I really don’t understand why it’s such an unbearable crisis for responsible homeowners themselves. Maybe it is in some cases, but it seems to me that having your home worth, say, $500K when your mortgage is for $600K is certainly undersirable but not necessarily disastrous. If you bought during a housing boom, you shouldn’t be stunned and crestfallen if the value of your home temporarily sinks for a while —  that is unless you’re a house-flipper, in which case my sympathies are significantly reduced anyway. Most people buy their homes and expect to hold on to them for a while. I don’t sell my stocks every time they go down. A dip in the value of your home now, isn’t a dip for all time. So, long as you can pay your mortgage, I don’t really see why you would walk away.  And, even if you are the kind of person who abandons his obligations, I have to presume that walking away from your mortgage has real costs to your credit rating (and, hopefully, your self-esteem). Indeed, if abandoning your mortgage doesn’t nuke your credit score, what good are credit scores in the first place?

It would be nice if more (any?) Republicans in Congress agreed with this.

America's Checkered Past: Not a Model for the Future

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Brink Lindsey replies to Matt Yglesias’s criticism of his paper:

I think Matt misunderstands both my argument and what Krugman has been doing. I quite agree that Krugman doesn’t want a full-scale reinstatement of the corporatist, cartelistic policies of yesteryear. I say as much in the paper. What Krugman does want, however, is to portray the economic policies of the early postwar decades as an inspiration for progressives today — an example of how activist, interventionist government can simultaneously promote growth and reduce inequality. To quote Krugman’s Conscience of a Liberal: “During the thirties and forties, liberals managed to achieve a remarkable reduction in income inequality, with almost entirely positive effects on the economy as a whole. The men and women behind that achievement offer today’s liberals an object lesson in the difference leadership can make.”

To get to that ideologically convenient punch line, Krugman is forced to systematically misrepresent the policies and culture of the early postwar decades. He has to leave out all the things he doesn’t like, all the things that virtually all his fellow economists and fellow progressives don’t like, about the supposedly good old days — for example, the widespread cartelization efforts of the thirties, farm supports, price and entry controls on large sectors of the economy, restrictions on retail competition, high trade barriers, racist immigration laws, and the sexist confinement of working women to a pink collar ghetto. All of these contributed to the compression of incomes, yet they don’t serve Krugman’s ideological purposes. So he ignores them. That’s nostalgia-mongering, plain and simple: the selective recall of the past to make it seem better than it really was.

I think Brink is exactly right, and that earlier periods of American history simply aren’t usefully comparable to the present. The so-called Great Compression was singular and, as Brink notes, it was driven in no small part by policies and social  norms that decent, well-informed people should now consider completely off the table. When it comes to policy to address inequality, the relevant comparison is to other contemporary liberal democracies. I think the evidence is strong that a high level of spending on welfare and social insurance is consistent with high levels of growth, as long as the economy is not hampered by excessive regulation, restrictions on trade, and large amounts of unproductive public spending. American progressives would make a lot more sense if they concentrated almost exclusively on reconfiguring the composition of curent levels of American spending–for example, moving money from defense to social insurance–rather than arguing for additional tax-financed spending. When progressives push for, say, more heavily regulated labor markets and trade barriers, it shows that they’re looking back to an era that wasn’t as good as they think, while failing to grasp what makes contemporary high-growth, eqalitarian social insurance states work relatively well.