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Matthew Yglesias has a post today, riffing off of Kevin Drum’s muted anger, calling for reviving the now defunct (in the United States) “postal savings system“. This system, which began in 1911, was designed to get money out from under mattresses, and encourage banking by immigrants (where postal banking was a common practice). The bank payed a flat 2% interest rate on deposits, which it then re-deposited in local banks at a rate of 2.5%. Upon deposit, customers were given certificates of deposit in $1, $2, $5, $10, $20, $50, and $100 increments. Minimum deposit was one dollar, and deposits were limited (by the end of the system) to $2,500. The system was slow on the pick-up, but really ballooned after 1929 (spiking to $1.2bn in the 30′s), for obvious reasons. However, during the 30′s, with local banking systems in shambles, the practical effect of postal banking was nearly the same as privately hoarding gold.

The draw of the postal banking system, of course, was the “full faith and credit of the United States government”, a guarantee that didn’t exist for private sector banks. Coincidentally, with the passage of FDIC, and after WWII (when it payed an astronomical interest rate relative to the “market” rate), interest in postal banking severely waned, and by 1967, the system was absolved by an Act of Congress. Mildly interestingly, at the time of its dissolution, there was around $50 million unclaimed on deposit, which individuals could claim up until 1985, when payment of any claims were stopped by law. Long before then, however, the system stopped paying interest on deposits.

Now, I’m on the record somewhere (though I can’t find it at the moment?) claiming that the FDIC nearly single-handedly killed financial architecture. By that I mean, banks are ugly now, and the FDIC made them so. Apparently the FDIC also had a hand in killing off the postal banking system. But I still have a lingering question about why it was so unpopular in the US to begin with, and no convincing answers really come to mind at the moment. Many countries (including Germany and Japan) still operate a public postal bank, although many are in the midst of being privatized (along with postal delivery in many countries!).

I think postal banks in the current era would be a magnet for small and very short-term demand deposits, and not much more. Those types of deposits are, of course, the type that people have trouble with (as far as ‘vanilla banking’ goes). Thus, the bank would likely be relatively costly, as I’m assuming that “we” would be subsidizing smaller explicit fees. This would undoubtedly help people who don’t manage their accounts very well (or don’t even have an account, as many poorer people don’t), but doesn’t do much by way of preventing that from happening. Pair it with a savings lottery, and you have a nice idea to help poor people build intergenerational wealth (a bigger problem). And of course the “payday lending” industry is ever-unpopular, so it’s an easy political solution.

Finally, you have a question of what is done with the deposits. Direct loans (of course to ‘small business’)? T-bills? Muni’s? Redeposit in other lending institutions? I would, of course, warn that a public savings bank given a broad enough mandate would be a nearly irresistible vehicle for highly subsidized (and politically directed) lending. I don’t think that we’re headed this way; but the history is not exciting, nor are the possibilities — so it is a natural subject for me to think about.

Given the skyrocketing costs of higher education in the United States, it is worth asking whether there is a supply side deficiency in higher education, or is education a bubble that might or might not be particularly hard to pop? Especially given that student debt has surpassed credit card debt for the first time ever. Noah Smith raises this question on his blog in response to a Matt Yglesias post regarding human capital stagnation. I am intending this as simply raising questions about the subject. As you will note by the end of the post, I offer a hypothesis that broadly agrees with Noah.

Yglesias is, of course, completely right. In fact, human capital stagnation seems to me a much likelier culprit for a “Great Stagnation” than the dubious hypothesis of a slowdown in technological innovation. People can’t spend their whole life in school, so education really is “low-hanging fruit”.

The buildup of Noah’s post pretty much screams his conclusion: supply shortage. But why would there be a supply shortage at such high tuition rates?

The skyrocketing prices you see after 2000 does not reflect skyrocketing enrollment. If you look at his previous graph, enrollment in four-year programs has had a fairly uniform increase throughout the last half of the last millennium. Enrollment in two-year programs is essentially flat. If I showed you similar graphs regarding the housing boom vis-a-vis population (which Karl, in fact, has done!), you would likely immediately assume that there is a bubble. Enrollment, just like population, has grown fairly predictably. At least predictably enough for investment in educational capacity.

So no, I don’t really buy the supply story as a full explanation. But it is useful to ask why supply hasn’t expanded roughly congruent to the increases in price? One (I think powerful) explanation is that the fixed costs to education (the buildings, the teachers, etc.) is expensive, and that half (or more) of the battle is building institutional reputation. Private schools (like DeVry and Kaplan) have overcome the first barrier, but have largely failed to overcome the second. This is where the idea of the government (at least initially) funding a national university system actually has a lot of merit. The government is likely the only institution that can hemorrhage money at the rate it would take to build the institutional capital a successful, and respected post-secondary institution would need. As Noah notes, there is no shortage of Ph.D’s out there looking for work (but this isn’t, in-and-of itself a reason to hire them).

Another useful question to ask is, why don’t universities price based on demand for classes? Almost every university has a fixed tuition rate for every class, and then we try and shoehorn people into a financing option that satisfies said price. Our university certainly does, and it’s not at at clear that is the best use of resources. We often cancel classes that don’t attract enough students…but why? The professors don’t get allocated any differently, they just have one less class that semester. The marginal cost of educating a student is very, very low. Why not advertise a discount special, and fill those desks? You’re still paying the professor, and you already have the building (or online classroom, for that matter). It would be a golden opportunity for disadvantaged kids to snag education on the cheap. You may say that this would lead to many people putting off enrolling in classes until specials arise. It might (but excellent, consumer surplus and all), but that isn’t the experience of car dealerships trying to move inventory to make room for new inventory.

The answer to the second question, I suspect, has a lot to do with signalling…which could also be the driver of the inflation of education in a more broad sense. No one wants to have the status “discount school”.

Addendum: An alternative (and compelling) explanation has to do with the wage transmission mechanism between the financial sector, and finance/math/physics/econ professors. Their marginal productivity is literally based on enrollment, and largely fixed…and certainly hasn’t grown at an extreme pace. What has grown at an extreme pace? The salaries of their alternative options in the finance sector.

Here is a chart of Federal revenue as a share of GDP in Canada, posted by Livio De Matteo, one of the newer bloggers at Worthwhile Canadian Initiative:

Many a contemporary American libertarian dreams of the day when US Federal spending is confined to ~15% of GDP. However, in the real world this happens in a country that has a fairly robust single-payer basic health care system*, early-childhood-on education initiatives (a previous Conservative government even passed a fairly robust school choice plan that was subsequently killed by a Liberal government after 2 years), and a generally higher level of simple transfers. Some transfers don’t make a whole lot of sense, and kind of get caught in backflips, but nevertheless, there it is. Canada seems to take in ~15% of GDP in taxes, although there is a fit about the budget deficit, which is measured in the happy-go-lucky millions.

I think this lends some credence to the notion that I know Matt Yglesias and Kevin Drum are partial to. That is, ‘largely release people from sources of grave uncertainty (like spells of unemployment, extreme health care and education bills, etc., which can be done at a relatively cheap cost), and sensible market reforms become much more popular’. I can see Canada leading the way in replacing their income tax with a revenue-neutral carbon tax.

But there is a chicken-and-egg story here, as noted by Joseph Heath**:

…it is important to observe that this lack of a correlation [between redistribution and long-term growth of GDP per-capita per Peter Linder's work] does not show that economic theory is false, that incentives don’t matter, and that government cna do whatever it wants. The lesson to be learned is exactly the opposite. One of the major reasons that big-spending governments tend not to be penalized by the market is that, due to their very bigness, they need to operate more efficiently, and they need to work harder to get incentives right.

The US government, by contrast, has a tax code that is seemingly designed, from the ground up, to keep tax accountants and attorneys employed. Our institutional structure is to blame for most of this, but our relatively low individual tax rates (compared to other rich democracies) enable it.

This is an important story since we’re wading into a battle between spending cuts and raising revenue. As I think about the issue more, I notice that few of my complains come from the entitlement state at all, and the ones that do are about the structure of programs, not the programs themselves. In contrast, I have major complaints about the revenue side of government, and still more major complains about the regulatory side of government (at the local, state, and Federal levels). I think a lot of self-styled libertarians or people who lean that way feel the same way. I don’t think that utilitarian redistribution is a bad trade for some of my other goals (which would likely uncomfortably expose certain segments of the population to the cold whims of the marketplace). How about you?

Note: Provincial spending in Canada pushes government/gdp up to ~32% vs ~28% in the US.


*With the option of pursuing private insurance above and beyond. Not my preferred plan, but it seems work on average.
**Filthy Lucre, pp57-61

Matt Yglesias echoes my general take on poverty in the developed world

Poor people, by definition, don’t have much money. And lack of money leads to a lot of problems. Oftentimes, these problems are best attacked at the source.

He then repeats the story of a British program in which the homeless were simply asked what they wanted and then those things were bought for them The average cost of their requests was $1277.

Yglesias concludes

lots of people might like $1,277 worth of stuff. I, for example, got a notice in the mail today from the Internal Revenue Service suggesting that I owe approximately that much in back taxes due to some improper filing in the past. So why should that money go to homeless people when I could use it too? Current spending on the homeless is already much higher than that, but it overwhelmingly consists of the in-kind provision of services—shelter beds, addiction treatment, incarceration, frostbite relief—that most of us don’t actually want. From a rationalist perspective we can see that helping people in cheaper but more dignity-respecting ways will ultimately end up with all of us having more money in our pockets. But to get there you need to move past the impulse toward scolding moralizing.

A lot of the intellectual push back I get against redistribution is based on the idea that there are lots of unfair advantages in the world and there is no particular reason to focus on a lack of money. For example, we don’t try to redistribute beauty, athletic talent or height.

Yet, one of the insights of economics is that money is special. Money allows us to direct resources towards our most acute needs. Conversely when people don’t have money acute needs can pinch in really dramatic ways. 

There can be enormous gains in human welfare from giving people who are short on cash the means to address the acute needs that they see for themselves.

Will some people abuse this, of course.

The question, however, is does it do more good than harm. We aren’t going to find the program that works perfectly, has no abuse and solves all social ills. We can try to reduce human suffering bit by bit where we find it.

I’m a tad bit late on commenting on the tax compromised reached between the White House and Republicans, but I think that there has been some fairly high-quality commentary around the blogosphere. I stand mostly with the reasonable left in supporting what was put into the package, even though we got the wrong payroll tax cut, and a strange and potentially politically deadly compromise on the Estate tax (which I otherwise oppose, but wouldn’t let my positing get in the way of providing economic stimulus, like some on the left).

Mark Thoma worries that the payroll tax cut will become permanent (edit: found the link). This is the mirror of the argument that government spending tends to become permanent, as well…which I have an inkling that Mark doesn’t mind that feature so much.

I think Kevin Drum misses a grand opportunity to call out to the left to articulate a better way forward here:

In the end, this is the second stimulus we all wanted. It’s not a very efficient stimulus, and it sadly caves into the conservative snake oil that the sum total of fiscal policy is tax cuts, but them’s the breaks. Anyone who doesn’t like it needs to spend the next two years persuading the public not just to tell pollsters they don’t like tax cuts for the rich, but to actually vote out of office anyone who supports tax cuts for the rich. That’s the only way we’ll win the replay of this battle in 2012.

I’m not looking to go tit-for-tat on whether direct government spending/investment is “more efficient” than providing payroll tax cuts, as it’s pretty clear which side we are both on (as I’m much less sanguine on the Keynesian consumption function, for a reasonable view from the other side, see here), however I do want to address his prescription of a public awareness campaign in order to return to “normal”, with normal being defined as roughly “Clinton-era tax rates” on capital and high incomes.

I view this very compromise as a golden opportunity for the left to reinvent themselves with regard to taxation, win an adjacent political battle (and a dear progressive goal), and wrap it all up in a bow that not only makes our government funding more efficient, but lowers tax rates for virtually everyone. And that is to begin a campaign of gradually removing the income tax, in exchange for a revenue-neutral tax on carbon, which would be gradually instituted as the income tax was phased out. In addition, offer an automatic stabilization policy of payroll tax cuts (all of them, or at least all of the “employers share” — the better side to cut — in exchange for a sharply more progressive payroll tax, used to fund Social Security and Medicare/caid. Institute a progressive VAT or GST with a standard deduction of the first $25,000 of income for all taxpayers, and expand a means tested EITC, as well. You could trade this for elimination of minimum wages, but that’s not a real pressing problem in my mind. At the end of the line, offer a land tax in exchange for really whatever the right happens to want for it. Repeal of the estate tax, maybe?

That would be a real “progressive” package that would end the debate regarding the level of income taxation (from any source; labour, capital, etc). It would simplify our tax code, and get rid of ridiculous inefficiencies like the mortgage income tax deduction. More importantly, contrary to our current tax code, the new consumption-based funding of government would encourage a greater savings and investment equilibrium.

Beyond the scope of this post — but relevant — is different ways that you can find to streamline efficiency of the government. I seem to remember an argument put forth by Matt Yglesias that I personally agree with (and can’t find the link to currently), and find it baffling that it is so often overlooked; and that is that there are some government workers whose marginal utility is so low, that paying them anything at all constitutes overpayment. So it’s not a question of overpayment, it’s a question of marginal utility. At the margin, is society gaining utility by paying various individuals? If yes, then pay them. If not, then don’t.

That aside, I do think that this is a unique opportunity for Democrats to articulate a new vision for government funding that better enables elements of the welfare state that they hold so dear, this is highly progressive, removes the distortions and bad incentives created by the income tax, and genuinely makes the economy more efficient — facilitating growth. It could be a popular platform, and one that I would vote Democrat for, and I’ll be that many other pragmatic libertarians would feel the same way.

Of course, at the end of the day, I still believe that monetary policy is the last mover. The Fed has quietly indicated that it is looking at extending QE2, which is definitely good for the prospects of any pet fiscal policy.

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