Tuesday, December 3, 2013
The effects of income on a child's development and family environment is no secret. Families with greater income security tend to have more stable family environments, better parent-child relationships, and better educational opportunities. The environment and attention a child receives is a major factor in his/her development later in life, which is the motivation for President Obama's push for universal pre-k. Early childhood development is the first and, perhaps, most important step in unlocking the potential human capital of an individual. However, greater degrees of inequality creates a situation where fewer children receive the minimum amount of parental attention and education needed to proceed along a good development path.
Greater inequality disproportionately impacts young children compared to other groups in society due to poor schooling and unstable households. Welfare programs designed to reduce inequality should not be considered as a redistribution based on some idealistic notion of equality. They should be viewed as way to raise the floor of society instead of lowering the ceiling. The lost productivity due to unrealized human capital among low income populations is unknowable, and, in all likelihood, enormous. Policies designed to reduce inequality also reduce the number of children who grow up neglected and under stimulated.
The millennial generation (of which I am a part) grew up on the message of unlimited human potential signified by the slogan "you can be/do anything if you work hard." For the most part, this was a selfish motto used to try to convince ourselves that we will end up rich and respected. However, the magnetism of that often scorned philosophy gains new power when it is applied to the subject of growing inequality. There are millions of children growing up right now who could, but likely won't, be computer scientists, engineers, technicians, analysts, or a thousand other professions. In a time a social and political disunity, the universal human instinct to protect and invest in our children likely provides the greatest return on investment for our tax dollars. The reduction of inequality in this country is an investment designed to avoid the squandered productivity of millions of workers. The story of reducing inequality will be one of productivity and growth once we move past the trap of class warfare.
Friday, November 22, 2013
So with all that household borrowing, you might have expected the period 1985-2007 to be one of strong inflationary pressure, high interest rates, or both. In fact, you see neither – this was the era of the Great Moderation, a time of low inflation and generally low interest rates. Without all that increase in household debt, interest rates would presumably have to have been considerably lower – maybe negative. In other words, you can argue that our economy has been trying to get into the liquidity trap for a number of years, and that it only avoided the trap for a while thanks to successive bubbles.An argument that bubbles have been good for the economy is a counter intuitive claim that is likely to be met with heavy resistance, but that reaction is precisely why (according to Krugman's logic) the economy is having trouble escaping the fallout of the housing bubble. Less serious bubbles in the past have been met with painful, yet short, recessions because the economy was able to essentially shrug off its past mistakes and move on to new productive investments. However, the housing bubble was a widespread phenomenon that has personally impacted a massive proportion of the population. Huge negative effects hit individual consumers much harder than previous bubbles, which has caused a fear of economic instability within the population that is unrivaled since the Great Depression.
People are now afraid of bubbles and are actively trying to prevent future bubbles from disrupting the economy. The response and fear of the public has lead to overwhelming support for financial reform like Dodd-Frank. The movement for financial reform might actually be impairing economic growth, as Krugman states:
He goes on to say that the officially respectable policy agenda involves “doing less with monetary policy than was done before and doing less with fiscal policy than was done before,” even though the economy remains deeply depressed. And he says, a bit fuzzily but bravely all the same, that even improved financial regulation is not necessarily a good thing – that it may discourage irresponsible lending and borrowing at a time when more spending of any kind is good for the economy.It is a particularly terrifying idea that financial reform is harming the economy because it is discouraging irresponsible lending, which would help to create another bubble that leads us to a temporary recovery. It is plausible that the economy could stagnate, a la Japan, due to handcuffed monetary policy and regulation acting to prevent a bubble-fueled recovery. This one blog post by Krugman is perhaps the best argument yet for Miles Kimball's idea of e-money (read Miles on e-money here).
The Summers speech/Krugman post has lead me to closely examine my beliefs on monetary policy and has convinced me that e-money offers the best alternative to the current policy regime. E-money can provide large social benefits by avoiding an arbitrary boundary on perhaps the one policy mechanism that economists understand very well. If Summers and Krugman are correct about the possibility of stagnation, support for e-money (or other similar policy alternatives) is almost a moral imperative for economists. It is the duty of economists to use the influence they hold to improve the economy and the lives of the people in it. I am now convinced that e-money is perhaps the best example of socially beneficial policy changes that can occur because of the influence of the economics profession.
Wednesday, November 13, 2013
The current levels of inequality is the United States created a less stable economy that has struggled to recover from a debt driven financial crisis in 2008. Fed Governor Sarah Bloom Raskin gave a speech at the 22nd Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies in April that strikes at the heart of how inequality has weakened the economy. Member of the middle class and below had the majority of their wealth tied up in home equity that was destroyed by the collapse of the housing bubble. The past five years has been a painful period of deleveraging (see chart) as many families were stuck with unrealistic mortgages as a result of irrational exuberance in the housing market. Families most damaged by the housing collapse were also the ones most vulnerable to the increase in unemployment. The wealthiest members of society have fared well since the financial crisis while others are still struggling to regain financial stability.
The result of the dramatic disparities in economic circumstances for the different income classes since 2008 has lead to a disturbing increase in political polarization. Below is the Political Polarization Index developed in a study by Marina Azzimonti at the Philadelphia Fed. Polarization has been trending sharply upward since 2008 and reach its highest level at any point from 1981-present during the 2012 election. To a large degree, the political polarization of the country has been driven by inequality and the result of the 2008 financial crisis. Republicans are sternly on the side of low taxes and reduced welfare benefits, which is supported by many extremely wealthy donors and social conservatives. Democrats have been advocating increased taxation of the rich and financial relief for those hit hardest by the financial crisis. The two sides of the wealth spectrum have been placed on opposite ends of the wealth spectrum, and the result has been a contentious partisan environment.
The polarized political environment has done far more than slow down the legislative branch and inspire hateful debates in the last election cycle. It has created sub-optimal policy initiatives that are actively harming economic growth in both the short and long-term. Political polarization has created instability in the legislative process that has damaged fiscal policy in the U.S. Sequestration was intended as a bitter pill to end debt ceiling squabbles that Republicans have been all too eager to swallow. In reality, Sequestration is a temporary band-aid that serves very little purpose in the long-term debt ceiling or budget battles but causes very real damage to portion of society that have been hurt the most by the financial crisis. Long-term unemployment is still a pressing issue for legislators who are barely able to keep the government operational. The future growth path of the economy gets bleaker every day as long-term unemployment remains an issue that politicians are content to stash on their shelves until it becomes politically useful during 2014 or 2016.
Political instability even shares part of the blame for the botched implementation of Obamacare. The Obama administration has been forced to expand the scope of the federal exchange due to state-level intransigence and even the development of the project was damaged by party politics. The administration felt the need to be secretive and insular during the development of the federal exchange because of constant attacks from the right. Now the country gets to wait with bated breath for another doomsday deadline to see if the exchange can be fixed in time to avoid extensive damage to insurance markets. Politics is not an excuse for the mismanagement of the launch, but it is still a reality of the situation.
Wednesday, November 6, 2013
From what I understand of the land certificates, land developers pay to have residential rural land to be converted into farmland. By converting residential land to farmland, developers now have a certificate that allows them to build on an equivalent piece of farmland elsewhere. The land certificates will allow land developers to shift farming land toward areas that are less valuable for urban development. In theory, the land certificates sound like an ingenuous way to improve land utilization in China. The program will help China to make better used of rural land abandoned by rural emigrants (slides 9-11). The ideal scenario is that rural land being converted will belong to individuals who have already emigrated to urban areas. However, rural residents needing new housing as a result of the land conversion would likely need some form of subsidized urban housing.
The need for subsidized urban housing for rural emigrants highlights an important obstacle to any land reform designed to increase urbanization within China. Rural residents are given less generous welfare/social benefits compared to urban residents. Urban immigrants from rural areas are often treated as second class citizens forced to work less desirable (and lower paying) jobs. The current land system essentially provides a social safety net for rural residents. The rural land gives residents a guaranteed source of income and subsistence during old age and unemployment. Many rural residents are hesitant to partake in urbanization because there is not an adequate social safety net in place. The Economist reports that 85% of the land certificate value will go to rural residents, which is a good financial incentives grounded in the socioeconomic reality of China's rural population. However, the actual payment to rural residents is likely to be lower given the rampant corruption that is common during land exchanges.
Another important aspect to consider is the impact on agricultural yields of the land certificates program. The impact of the program on agricultural yields will depend on the definition of an "equivalent" piece of rural land and the geographic boundaries of the program. It may be the case that, in many situations, rural land that formerly contained residential property is less fertile and will yield lower output. Therefore, the definition of an "equivalent" piece of farmland might need to factor in the fertility and productivity of the land in order to avoid declines in farming output. It is also unclear how these land certificates would work on a national scale. The land certificates would likely only transfer within a province or county but a full scale national certificates transfer might lead to biases in the allocation of urban vs. farmland within China.
The program sounds like a very clever way to improve land use in China but its success will depend on a collection of reforms to the treatment of rural residents and the crackdown on government corruption. The land certificates must be implemented carefully and comprehensively if it is to be a revolutionary change intended to improve economic growth.
Friday, November 1, 2013
In other sectors of the economy, the initiative might have more impact on wage growth than unemployment. The initiative has the potential to cause upward pressure on wages as workers have more financial security to pursue entrepreneurial projects or commit more time to social responsibilities. Perhaps it won't be reflected in wages but instead in other benefits provided to workers. Work-life balance and the work environment will be more powerful bargaining chips with the increased financial security that a basic income will provide.
Tuesday, October 22, 2013
Conservatives are likely to view it as a disaster that will cause perverse incentives for an even larger portion of a nation's society instead of those benefiting from welfare programs. For conservatives, the basic income is a diabolical way to buy the approval of middle income citizens. The number that has been floated for the Swiss initiative is that every citizen will be given $2,800 per month. Theoretically, this monthly value could be strategically placed as the buy the favor of the median voter. For example, if the median voter pays $2,750 in taxes every month, then the transfer will make them better off and they will approve of the program. Anyone paying more than $2,800 per month in taxes will be worse off and the program will be a redistribution of their income to the rest of society.
Liberals are likely to view the policy as the endgame toward which most social welfare programs have been striving toward. It is finally a program that can effectively fight income inequality within a society without legal loopholes and arduous application requirements. A guaranteed state income would finally free important social groups from the need for financial survival. Struggling families will now have more time to spend raising their children properly and artists will break free of financial incentives to create an explosion of creative expression.
The interesting development in these discussion will be to determine how many conservative thinkers will be persuaded to support the initiative. A basic income program might actually reduce the bureaucratic mess of government because the program eliminates the need for many others. A basic income is unemployment insurance, food assistance, and social security all rolled into one. The complex process of applying/qualifying for government programs would be eliminated by simply sending the same check to every citizen. Conservative social values might be strengthened by such a program as divorce rates drop due to more stable marital relationship, absent the pressure of financial circumstances.
The basic income program is unlikely to pass in the short-term because it is too radical. It would be very surprising to see such a dramatic paradigm shift in the government of a developed nation in such a short period of time. However, the initiative will create some very important questions about the ideal future of human society.
I neglected to mention another aspect of the basic income initiative that will appeal to conservatives in my rush to type this up during my lunch at work. A basic income could actually improve the incentive structure of the economy by eliminating the cliff effects inherent in qualifying for many welfare programs. A person will no longer need to avoid getting a raise because it would actually make there circumstances worse by reducing the welfare they receive from the state.
Tuesday, October 15, 2013
The beauty of the free market and America's economic/political system is its creativity. Advocates of the free market often cite America's leadership in innovation as the ideal of an economic system. The Randian uprising in the past decade in American politics stems from the wish to protect America's economy from developing an incentive structure that halts innovation. Unfortunately, the free market political movement has moved away from its core strength toward an anti-welfare message. The shift in message doesn't change the root of the movement at the grass roots level. People are attracted to the idea of America as a nation of dreamers and idealist who strike oil where everyone else has failed. The strength of the free market message is not in the idea of individual rationality but in individual irrationality. Steve Jobs did not make a rational decision by dropping out of college in order to sit in on random courses and eventually take a job with Atari. Many people have taken similar paths in life and ended with much less desirable outcomes than if they had received a college degree. However, we hear about the one that helped build an international empire that has sales rivaling the GDP of entire nations. We celebrate his decision despite the fact that it was irrational in the face of overwhelming statistics about his probability of success. Americans are a romantic people who worship the trailblazer and not the everyday foot soldier.
Republicans should embrace the romantic version of the free market by praising the irrational confidence and passion of Americans who attempt to innovate by starting new businesses or applying for patents. The current free market philosophy of the Republican party comes off as a form of paternalism where people need to take responsibility for their lot in life. A shift toward policy objectives centered on patent/copyright reform, deregulation that favors new business formation, and state level changes to professional licensing laws would help to significantly improve the party's public image. The free market can be a great source of hope and inspiration but the current strategy of the GOP has made it seem like a punishing environment that advocates Social Darwinism. The support of the people can be won if the message is focused on the creativity of society instead of its jealousy of the rich.
Thursday, October 10, 2013
If this really isn't going to be settled until the debt ceiling deadline, can't we just get a 2-week CR till then?The issue is that passing a two week CR right now is not something that Democrats are willing to do. A two week CR only serves as a way to delay the current shutdown. The only option right now is to sign the clean CR that Democrats have been proposing from the start. However, the only way such a clean CR will get passed is if the GOP is willing to go all in on the debt ceiling. An all in move to the debt ceiling would be a signal that the reports about Republicans are true. The removal of the government shutdown as a bargaining chip for the Republicans would signal that they view a breach of the debt ceiling as a real possibility. If Republicans anticipate a resolution to the debt ceiling standoff (which I believe they do), then the only way to avoid a total defeat is to move forward with the government shutdown. The party leadership anticipates that the debt ceiling will be resolved before the government shutdown, and that is a reason for optimism on the debt ceiling front. The continued government shutdown is a sad reality for the United States but it is a positive signal that the macroeconomy is not the hostage in this negotiation.
— Ross Douthat (@DouthatNYT) October 2, 2013
Wednesday, October 9, 2013
Dems need their own Ted Cruz. Someone to say: No deal unless it includes a debt ceiling hike and a return to pre-sequester spending.— Joseph Weisenthal (@TheStalwart) October 2, 2013
This idea was simultaneous appealing and repulsive to imagine as an established part of the American legislative system but there is an important reason why the tactics currently being employed by the GOP would not work for Democrats.
The problem is that there is legitimate uncertainty about the willingness to default on the part of a coalition within the GOP. It is generally believed that the majority of the elected officials on the right are not brazen or stupid enough to force a default of the US government. However, the expected probability of such an event is uncomfortably high due to a growing track record of extremist rhetoric and actions. The existence of this asymmetric information is the source of power being exploited by House leaders.
If the current situation were mapped as a game tree, last year's dabble with the debt ceiling set us down a previously ignored path because the expected payoffs to both political parties was assumed to be negative. However, now there is the creeping doubt that some House Republicans mistakenly believe that there is a positive expected payoff waiting for them at the end of the road.
The same strategy would not be credible if threatened by a coalition within the Democratic party for a number of reasons. For one, the Democratic party has exhibited more effective control of its members in recent history and the growth of such a faction within the party structure would likely be powerless. One motivation of rogue GOP members is the idea that they have nothing to lose from staking out this position. Voter groups adversely affected by the tactic of a government shutdown are can ignored for some Republicans. However, Democrats have built their party image around duty and fidelity to the suffering individual which makes a kamikaze threat by the party ineffective.
More importantly, at the core of the Democratic party, there is a feeling of something almost akin to manifest destiny. The history of the 20th and early 21st century has been a steady (and seemingly unstoppable) movement of progressiveness and liberalism. In the last two decades, America has become more liberal economically and socially. Time has been symbolic ally of liberals and conservatives feel the pressure. Ross Douthat wrote an excellent column about why the right is fighting this battle over Obamacare and the debt ceiling that touches upon the pressures of history. The Democratic party doesn't have a feeling of exasperation that has swelled over the previous decades to embolden them to take extreme measures.
Without the pressure of history and endogenous movements within the Democratic party toward a fervent ideology, there is no asymmetry regarding the intentions of Democrats. Such threats would sound like hollow, desperate attempts to fight fire with fire.
Monday, July 8, 2013
Assumption in theoretical economics have the benefit of removing the noisiness of human behavior and decision-making. Human behavior is immensely complex and difficult to predict based on observation alone. Modeling assumption help to cancel out some of the noise associated with human behavior and allow economists to isolate a topic of interest. Essentially, theoretical models try to build a perfect world to serve as a benchmark to the real world. It might not be able to full encompass human behavior but it can provide a much clearer picture to help analyze a basic problem. If we understand how people would act in a perfect world, then we have a better framework to understand real world deviations.
The analytic framework made possible by simplifying assumption is one area where economics has the potential to follow the scientific method. A formal economic theory provides a hypothesis that has the potential to be tested based on available data or observation of the real world. Great economic theory inspires a vast stream of literature that continue to evolve and correct itself based on new data. The macroeconomic revolution started by Keynes is a wonderful example of the potential to apply the scientific method to economics.
However, it a danger to economics is theory induced blindness that widely accepted models and assumptions can create. Daniel Kahneman and Amos Tversky's development of prospect theory is a perfect example of how economics can develop a blindness to the weaknesses of widely accepted assumptions. It is important to treat models as a tool to be used to understand the real world and not an actual representation of it. The rise of behavioral economics has helped to keep the unrealistic nature of most assumptions at the forefront of the field. Behavioral economics is another development that will improve the development of economic theory in the future.
The development of prospect theory is an important event in economics, not only because of the improvement of utility theory but because it highlights the need for collaboration with fields outside of economics. The inclusion of psychology, sociology, and other social sciences will only serve to improve and enrich economic economic theory.
Saturday, June 1, 2013
Wednesday, May 8, 2013
WARNING: This post is inspired by my experience with municipal level government data and does not apply to macro indicators.
Now that everyone has been warned I can get into my semi-cathartic rant about micro-level government data.
Records are poorly kept, information systems in state and local governments are hopelessly behind the private sector, and little helpful data is available. Part of it is simply due to limited funds and a list of priorities that is extremely difficult to manage. Government agencies do not have the luxury of simply not serving an area where it is troublesome or expensive to operate. Also, nobody wants to put aside valuable funds for data collection and analysis.
Internal data quality is one beautiful thing about private industry and the profit motive because it is a necessity of competition. Firms must remain vigilant in examining their operations to monitor profitable and forecast future financial needs. In government, it is easy to ignore a program's effectiveness once it has been legislated and examining program effectiveness can be politically unpopular. Fiscal conservatives might consider spending on program evaluation wasteful and many politicians might choose willful ignorance. Program evaluation may very well make some easy and popular talking points obsolete.
By no means are all state and municipal governments the same when it comes to data tracking but it is clearly a weakness from most areas. It takes a conscientious effort and extension of resource that is easy to avoid in the absence of the profit motive.
Saturday, April 13, 2013
A popular axiom these days seems to be that government can't do innovation and only the free market can produce the type of innovation that increase growth and welfare. The market can indeed be a powerful force but can sometimes be limited by the profit motive. "Businesses will invest in solar whenever it becomes profitable/competitive" or something similar is a phrase I have heard when discussing the need for "green" energy sources. A major problem with this type of reasoning is the dismissal of the path that technology takes to become profitable. The Department of Energy states that they have invested $1 billion since 1995 in solar technology to increase its efficiency and reduce costs. Government funded research has helped to raise solar energy to a competitive level with fossil fuel technology.
Noah Smith wrote a post about why libertarians should support solar energy demonstrating the ways it can decentralize the production of energy. In the post, he also mentions that government funded basic research is a better use of funds than private subsidies to solar companies. This point is an important one because it describes how the government can augment markets instead of the classic claims of interference. By funding basic research, the government can speed up the progression of technologies like solar energy which have enormous social benefits. Without basic research, it is likely that solar technology would have taken much longer to reach its currently level of competitiveness. A similar story can be spun for the progression of the internet. Many will balk at claims about the importance of government in the development of the internet, such as Andrew Morriss in an article written 15 years ago (produced from a quick Google search). However, the vital portion of the internet's narrative is the basic research that the government funded, which eventually led to the internet as we know it. Basic research can get technologies to a level of effectiveness that allows market forces to use them in the most productive way.
The argument for basic research is a phenomenal argument for the funding of NASA. NASA is a place where intensely passionate and intelligent individuals wrestle with problems beyond the scope of everyday life. Along the way, the discoveries made by NASA tend to have very tangible benefits for society. Here is a link to NASA's innovation page where anyone can see the social application of the findings of the organization's scientists.
It is alluring for politicians and taxpayers to cut funding for basic research and programs like NASA because it is a long-term investment in a political world dominated by short-term, electoral logic. The funding of social welfare programs understandably dominates U.S. budgetary discussions and coverage, but the funding of basic research is one of the few areas where the government can effectively invest in the future welfare of its citizens.