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I’m not going to argue that we should necessarily have a market citizenship for immigrants, but I think it is a useful starting point for analysis. After all, when we have some scarce resource we want to allocate, absent some public goods nature of the good, markets are the way we normally do it. Does citizenship have some public goods nature? Even if this is the case, markets should be the starting point of analysis and the market failure should be clearly explained so that market-based solutions can be examined.

How would markets allocate citizenship? While citizenship is necessarily produced by the government, it doesn’t need be allocated by mandate or allocating shares democratically, but instead it could be done by auction. Each year the government can choose how many citizens to produce, and then they could auction them off. What would the problems be with doing it this way?

One could argue that low-skilled immigrants hurt low-skilled natives, whereas high-skilled immigrants are likely to invent things and produce externalities in production, which means we should favor the high-skilled over the low skilled. However, a system that allocates citizenship based on auction will naturally favor individuals who will be very productive, because they will have a high-willingness to pay. If the externalities to certain migrants were certain enough, we could also offer a x% discount to individuals with specific degrees or qualifications. That means these migrants would get a matching grant of 20 cents for every dollar they bid in the auction. Starting from a price system and attempting to correct for positive and negative externalities will be much more efficient than the status quo, and compared to setting immigration quotas based on country, education levels, etc. it would require less information from policymakers and be more dynamic.

Another objection is that we want to grant some people immigration for humanitarian reasons, and these people would be priced out of the market. But there are lots of goods we want to give people for humanitarian reasons, but we don’t throw out the price system for these goods. Private charities and individuals could spend money buying citizenship for people. Imagine how many people could have been brought from Haiti to the United States if citizenship could be bought. This allows private groups like NGOs who are actually on the ground in these countries to try and allocate citizenship to those who need it most.

I’m prepared to accept that markets won’t work for immigration or that there are some massive market failures that can’t be overcome. But I would like to see these things identified rather than assumed. I also think this analysis is useful in terms of selecting optimal non-market allocations. After all, if you think we should value high-productivity workers more than a price system, perhaps one combined with subsidies for specific degrees, then you should explain why. Likewise, if you think we should allocate these based on humanitarian reasons more than private charities and a market system would, then you should explain why. What is it about citizenship that suggests we should diverge from the allocations markets would produce?


ADDENDUM: It’s also worth noting how this relates to the DREAM act. People who have lived here for most of their lives, and especially those who are college bound,  will likely have a very high willingness to pay for citizenship. After all, consider this: if you’re an American reading this, what would your willingness to pay for U.S. citizenship be? Given this, I think the DREAM act is a pretty good marginal proxy for a market outcome, since it’s granting citizenship to likely auction winners.

It’s not perfect, of course, as some possible immigrants from across the world would probably outbid some DREAM act beneficiaries, and some charities would probably outbid them for citizenship for Haitians. Nevertheless, it does seem to be as good of a marginal allocation as any centrally planned allocation we could conceivably get.

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.

I still maintain that having more money is better than less and if you are worried about whether your agent (in this case the Treasury) is serving your best interests nothing should set you at ease like a big fat check. Incidentally this is why I am a big fan of dividends rather than retaining earnings.

From Bloomberg

The Treasury said it disposed of 2.4 billion shares at $4.35 each, compared with yesterday’s closing price of $4.45 on the New York Stock Exchange. The sale raises the profit for taxpayers on the rescue to about $12 billion, including the share gain, dividends and proceeds from other securities.

Now you can say that you would have preferred other measures as well. You can say we should have made even more money – indeed I say that. But, I find it hard to swallow that a government measure that reasonable people believed helped stave off another Great Depression and turned a handsome profit was a bad idea.

Incidentally these two ideas are not unrelated. If you really thought there was an unjustified generalized bank run then you ought to have been able to make a profit by shoring up the banks. The problem is finding a player with a big enough checkbook to do it.

That’s why there was a major profit opportunity for the US Government.

I am not a straight politics guy so I don’t have much to say about GOP vs. Obama maneuvering etc.

However, the policy we are getting is closer and closer to what I have wanted. The Fed is standing pat behind QE2 and opening the door to “make up inflation” or state dependent level targeting, whatever you want to call it. That’s clearly a win.

Congress is engaging in helicopter drop like tactics, a payroll tax cut – though a woefully small one, more unemployment benefits and an extension of the Bush tax cuts for everyone.

This goes towards my ideal policy – a money financed increase in transfers to private citizens. All of it is smaller than I hoped and there is no official commitment that the Fed won’t take away the punch bowl. All in all you have to be happy with the direction things are going.

We just want more of the same. As a reference here are the slides I gave last week as a presentation to a Chamber of Commerce breakfast. Most of them below the fold


Read the rest of this entry »

I will engage in some grandiose philosophizing before moving on to economics. Feel free to skip ahead.

Realism is an overused term and no one can be faulted for failing to know what it means in any particular context. Regardless, I am going to push that trend because no other English word covey’s its power and simplicity.

Under my definition of the term, this is from Mark A. Calabria is nearly the antithesis of policy realism.

If Beckworth wants to preach “conservative” values and principles, he might start with the observation that it is savings and work that provide wealth, and reject the Keynesian notions that we can spend or debase our way to prosperity.

Either savings and work produce wealth or they do not. Either Keynesian notions are correct or they are not. Whether one is a conservative, a liberal, purple or orange should have nothing to do with it.

Either we accept that there is a real world whose primal laws are independent of our hopes, dreams and values or we reject that in favor of some form of magic. That magic might operate through Voodoo, divine revelation, or the suggestion that ideology is a guide to fact. If we accept realism, our values become meaningless to the determination of truth.

For those who respond better to poetic pronunciations I offer Eliezer Yudkowsky

That which can be destroyed by the truth should be . . Relinquish the emotion which rests upon a mistaken belief, and seek to feel fully that emotion which fits the facts. . . .  Let yourself say: “If the iron is hot, I desire to believe it is hot, and if it is cool, I desire to believe it is cool.”

Somethings are true. Our mission is to find out what those things are. Are we biased – of course. Should we track down and fight those biases  – of course. Is open debate among the best methods for exposing biases – undoubtedly.

But, we begin with this premise:  At the heart of it all there is a fact of the matter. Our goal is to find it. We may fail, but we should not be unclear about what our mission is.

Now, on to Calabria’s larger statement

First, the good professor argues that spending is far below trend. That is true enough as it goes, but this trend includes a massive housing bubble, where imaginary wealth fueled spending, aided by massive borrowing from abroad. The objective of our economic policies should not be to get back to the top of the previous bubble. It was this desire to replace the lost wealth of the dot-com crash that contributed to the Fed’s juicing of the housing market. All that said, consumption today is higher than at any time during the recent bubble. The primary problem facing our economy is not a lack of demand.

The core question that I believe needs to be answered is: Why are people working less?

The nearly constant source of confusion is two fold

  1. The belief that a recession is a period in which people have to do with less. This is completely wrong. A recession is a period in which people produce less. Suppose the US were suddenly cut off from all world trade and we instantly and seamlessly reorganized our economy. On average everyone would have less but there would be no recession.
  2. That spending is equivalent to consumption. Investment is perfectly good spending and contributes to final demand. Whether they are consuming more or less is interesting and of proximate importance but ultimately irrelevant to whether there is a recession.

So, if the problem were simply that there was a massive spending bubble and people borrowed from abroad to consume more then the natural response would be to lower consumption, increase net exports to repay those from abroad and possibly increase investment so that we will be wealthier tomorrow.

Calabria says that savings is the key to wealth but I assume he means investment. Suppose I saved my money in the belly of whale? Should I expect to become wealthier? Suppose I used that money to create powerful and useful machines? Should I then expect to become wealthier?

It is investment that makes us wealthier, preferably investment in useful things. So if we feel that we are too poor we should be looking to spend our resources on investing in useful things. Instead our resources are sitting idle.

Here is capacity utilization and the employment ratio – that is the percentage of our machines and of our men that are working.

FRED Graph

As you can see they both collapsed during the recession and have not recovered. That is we are using fewer machines and we are employing fewer people.

We are not working and hence not producing. Calabria notes that consumption is back up. True, but several population has risen and productivity has risen. Consumption has not kept up with our ability to produce. This would be fine if investment or net exports had taken its place.

Again, to review net exports is how we repay foreigners. They sent us stuff during the bubble, now we repay them by sending them stuff. Lets look at net exports.

FRED Graph

It rose sharply during the recession but not all the way to the positive. See that’s still a –300 Billion at the top. That was good in more ways than one. It increased demand. Net exports are a part of Aggregate Demand and it helped repay our debts. However, net exports is now falling, hence it is subtracting from Aggregate Demand.

Again, remember, “spending” is not consumption and its certainly not US consumption. If we sell a bunch of bulldozers to China then that is money that is spent on US goods and services.

How about investment. Again, there would be no problem with the collapse in consumption if it was replaced by investment. Lets look at that:

FRED Graph

Investment has fallen from the peak and not recovered. This is a part of spending. Spending on anything that will help build a more productive tomorrow is spending. However, it is low.

I would love to see investment soaring. Unfortunately that’s not how recessions work. Consumption and Investment go down at the same time. Sometimes net exports goes up and that can only happen in a big way if our currency declines in value.

The reason why China persistently undervalues its currency is not because the Chinese government wants to weaken its economy but because the Chinese government understands that a weaker currency contributes to higher spending on Chinese made goods. Again they are looking for spending.

So to recap Spending is not the same as Consumption. Savings does not instantly transform into wealth, it has to be Invested. Both consumption and investment are below trend. Net exports has not altered enough to make up the difference. This implies that total private spending is below trend and this why people are working less. It is also why fewer machines are employed.

One potential remedy would be to increase government spending. If one is worried that this will lead to poor spending choices then one must endevaour to increase private spending. This could be done be done several ways

  1. Increasing net exports, which would mean lowering the value of the dollar.
  2. Increasing consumption which mean putting more money into the hand of liquidity constrained consumers.
  3. Increasing investment which would mean lowering the real interest rate.

Quantitative Easing directly goes after the 1st and the 3rd. It could be used to address the second if major lower income tax cuts were combined.

A new NBER working paper explores this issue and argues that they can by lowering the average .

This paper explores the practice of mortgage refinancing in a dynamic competitive lending model with risky borrowers and costly default. We show that prepayment penalties improve welfare by ensuring longer-term lending contracts, which prevents the mortgage pools from becoming disproportionately composed of the riskiest borrowers over time. Mortgages with prepayment penalties allow lenders to lower mortgage rates and extend credit to the least creditworthy, with the largest benefits going to the riskiest borrowers, who have the most incentive to refinance in response to positive credit shocks. Empirical evidence from more than 21,000 non-agency securitized fixed rate mortgages is consistent with the key predictions of our model. Our results suggest that regulations banning refinancing penalties might have the unintended consequence of restricting access to credit and raising rates for the least creditworthy borrowers.

An ungated version can be found here.

Importantly, the authors argue that lenders will compensate for lack of a prepayment by charging higher premiums, which will cause more defaults on the margin.  You don’t need to be persuaded that we shouldn’t regulate prepayment penalties, but just that we should be very careful when doing so, and recognize that there are real costs involved.

Arpit Gupta lays out a thoughtful commentary on TARP, concluding that it was a poor program. I don’t have a chance to address all of his concerns but let me push back on a few

First Gupta says

The case that TARP was a successful program of equity injection is based on praise by association. TARP was passed; the financial sector seemed to revive itself; therefore TARP must have fixed the financial sector.

Yet it is impossible to causally trace the improvement of conditions in the financial sector to any one program. The federal government also implemented a number of other programs to ease conditions for financial firms — from increasing access to the Fed’s discount window (resulting in trillions of dollars of loans to insolvent institutions), to easing mark-to-market accounting rules that allowed banks to hide losses, to unprecedentedly low interest rates which allowed banks to accept cash deposits from customers while paying virtually nothing. The scale and scope of the federal government’s interventions in the banking sector were enormous, and TARP does not deserve the entire credit for turning things around.

This seems to be a common class of complaints. One cannot know that project X worked or not because there are confounding factors. This is true but taking this objection to seriously leads only to nihilism. In government, in business and in life you only get one performance and there is no dress rehearsal. You can’t be sure that having your child provided satisfaction and meaning to your life, after all you didn’t live a life where you didn’t have her.

Nonetheless we have to make choices. Whether that is bringing a child into this world or rescuing a financial system. Sometimes, we want to take a step back and analyze how well those choices worked. Our basic strategy is to tell a narrative. This is how we think the world is working.

Both before and after our decision we check back with our narrative to see if it is working. The narrative of some moving into the Fall of 2008 was that full fledged bankruptcy of a broker-dealer would lead to chaos and perhaps a repeat of the Great Depression.

Then a broker-dealer went bankrupt. The process of chaos began to unfold. We had what looked very much like a run. Given that narrative the response was to somehow stem the run. This meant insuring creditors against losses.

Various schemes were proposed. In the end equity injections were settled upon. The terms where not what I would have wanted but I understand the pressure of being in the moment.

After the equity injections our measures of panic began to subside and indeed have not come back despite the fact that housing has not recovered. This lends credibility to those of us who said that housing and bad loans mattered only to the extent that they were possibly creating insolvency and fueling a run.

Do we know for sure that this is narrative is correct – no. However, the level of certainty I think Gupta is asking for is virtually never available to us in real time and is hard to ascertain even looking back. My core case is that the narrative holds and continues to hold as we accumulate more data.

Second Gupta says

In other words — the government was not provided an adequate risk-compensated return. In backing the American financial system, the Treasury Department took on an enormous financial gamble on behalf of the American taxpayer, one that could easily have gone bad. It is fortunate that things did, in fact, go well. But that doesn’t prove that the original risky gamble was sound; only that taxpayers were lucky, and under-compensated for their investment.

I am sympathetic to this view though I take a slightly different tact. I tend to think that the government should have simply squeezed the financial system for everything that it was worth on the grounds that its the responsibility of the Treasury Secretary to act in the best interest of his clients. The taxpayers were his clients. Making more money for you clients is generally preferable to making less thus he should have tried to make more money.

However, it is important to note that TARP as structured was profitable on the bank side. It wasn’t simply that the taxpayer got his or her money back.  Their were warrants that that gave the taxpayers a bit of the upside. I just don’t think they were big enough.

Also, and this is another conversation – I think the caps on executive pay and other restrictions were awful and led banks to pay money back too soon. This not only introduced unnecessary uncertainty but also cut the governments profits.

I understand the moral outrage and all but my general take is that the Government in this capacity should act to maximize taxpayer profits, not express taxpayer outrage. I realize that this is not a majority view.


In fact, Treasury was hardly the white knight of the crisis, working with distinction to do the (presumably unique) right thing in the face of the idiots in Congress. They actively shaped the narrative of what was going on; presented only the solutions they favored; and only saw legal obstacles as binding when they applied to policies they did not favor. They may well have been patriotic workaholics as well. That only suggests that no such agency, well-staffed though it may be, should assume that level of power or influence.

This is a common reaction and I think had some validity before the evolution of the blogosphere. However, in today’s world you can look at what outsiders, including some expert outsiders are saying at the time. It wasn’t as if the Treasury had everyone hoodwinked.

A number of people myself included responded immediately that the initial Treasury plan to buy assets was a horrible idea and should be replaced by the equity injections. This is what happened. However, the narrative flow did not come from the Treasury. It is not to say that the Treasury was listening to the blogosphere – even prominent members like Paul Krugman.

It is simply to say that this narrative wasn’t at the discretion of public officials in the same way that narratives of years past. Journalists may not feel comfortable pointedly saying: look either I understand finance better than Hank Paulson or Hank is pulling a fast one but many bloggers do.

I don’t mean this post to be a complete defense of TARP. I am great fan of the program, but a full defense would probably require a book. The point that I want to repeatedly make is that what looked a hell of a lot like the moment of truth a group of bureaucrats and politicians pulled off a plan that was wildly unpopular and sure to haunt them but that fit with strongest narrative of how to save the country.

There are two important questions in the economy today that may be related: 1) is negative equity causing a decrease in geographic mobility? and 2) why is the Beveridge Curve breaking down? Wait! Don’t stop reading yet, I can explain it in non-econo-jargon, I promise.

House prices have obviously fallen a lot since the peak of the bubble, and this has left many homeowners “underwater”, so to speak, meaning they owe more on their mortgages than their house is worth. This is potentially causing a big decrease in people’s willingness to move, which includes moving for a job. This, in turn, is potentially causing higher unemployment by preventing people from moving away from places where their labor isn’t demanded to places where it is. The question is, how big of a deal is this?

The second question relates to the Beveridge Curve, which shows the relationship between the unemployment rate and the number of job vacancies. The idea is that when unemployment is high, job vacancies should be low, and vice versa. If people are having a hard time finding work, then employers shouldn’t be having a hard time finding workers, since there are plenty of unemployed people looking for work. However, as the graph below shows this relationship has broken down somewhat over the recent recession. This is suggestive of some sort of friction in the labor markets that is preventing employers from finding hires among the vast numbers of unemployed.

A recent study investigates whether house price induced immobility is causing the breakdown in the Beveridge Curve. This is an intuitive and plausible mechanism.  House prices fall, homeowners are underwater and can’t move to jobs, so there are unemployed people in one area and job vacancies in another, and negative equity prevents them from moving to those jobs. Supporting their hypothesis, the authors cite a 2010 study by Ferreira, Gyourko and Tracy which found that having negative equity reduced the probability that a homeowner would move by 35%.

The study uses a structural VAR (which is a big regression with multiple dependent variables) to estimate the dynamic relationship between 3 housing market variables and 2 labor market variables. They find that their model predicts 30% of the increase in unemployment observed during the great recession, and in generates a flat or slightly upward sloping Beveridge Curve as observed in reality. The authors are then able to run a counterfactual where they removing shocks to housing preferences, meaning that they see what would have happened to unemployment without the housing bubble.  They find that the unemployment rates are in line with the Beveridge Curve, and thus conclude that underwater homeowners can explain the breakdown of the Beveridge Curve. The graphs below show the counterfactual unemployment rates in two scenarios: a high leverage economy, and a low leverage economy.

The authors do caution that their model is a simple one, but the results suggest that housing markets are holding back labor markets. What is also important to note however, is that the model only explains 30% of the increase in unemployment during the Great Recession, leaving plenty of room for aggregate demand led unemployment.

I have always wondered whether Chinese hackers were employed in a government agency, or alternatively how they coordinated. Wikileaks sheds some light on this:

Precisely how these hacking attacks are coordinated is not clear. Many appear to rely on Chinese freelancers and an irregular army of “patriotic hackers” who operate with the support of civilian or military authorities, but not directly under their day-to-day control, the cables and interviews suggest.

U.S. government hackers, I’d venture, operate under a more command and control structure: they work for the NSA, or some similar agency, and operate only under instructions from higher ups. How can China operate in a less command and control style than the U.S. here? This is pure speculation, but here is my guess:

In the U.S. the internet is not controlled and monitoring abilities are relatively low, so freelancers and an army for hire of hackers couldn’t be trusted. They would be too powerful, and uncontrollable. In China I’m sure they can monitor every move their army of hackers makes online, which means they can grant them more freedom and autonomy.

To put it in economic terms, China has a better hand on the principal agent problem because informational problems are less severe. The principal (the government) grants the agent (the hacker) power. But the operating without constraints, the agents profit maximizing behavior would not be optimal for the government. They’d hack domestic companies and government agencies trying to extract profit. The more complete the principal’s information about the agent’s behavior the more power and autonomy they can trust them with. Since they are more invested in monitoring and controlling internet activity, China has more complete information, and so can trust their hackers with more power and autonomy.

Like I said, this is almost pure speculation, so I’d be interested if anyone who knows something about this can tell me whether this description is plausible.

Paul Krugman suspects that cutting Social Security has become a badge of seriousness because

Social Security . . .is something that matters enormously to the bottom half of the income distribution, but no so much to people in the 250K-plus club. A 30 percent cut in benefits would represent disaster for tens of millions of Americans, but a barely noticeable inconvenience for [Very Serious People] and everyone they know. A rise in the retirement age would be a vast hardship for people who do manual labor, but if anything a gift to [Very Serious People], who don’t want to step aside in any case. And so on down the line.

So going after Social Security is a way to seem tough and serious — but entirely at the expense of people you don’t know.

Certainty, I doubt anyone thinks about it in such crass terms. I take Paul to mean that subconsciously Social Security seems like something of a relic to the “Investor Class” who thinks about their retirement not in terms of pensions and government payments but their 401(k).

Even now when I do fairly in depth calculations about my retirement plan I often forget that Social Security is a factor. When I first left college I didn’t even consider Social Security in relation to my savings because I simply assumed that it would exist by the time I retired. I did include what are now almost certainly gross overestimates of housing price appreciation, but that is another topic.

Even still, I would venture a perhaps more, perhaps less cynical view depending on your perspective. I think Very Serious People concentrate on Social Security because they can understand it. The program is relatively simple and the math straightforward. The ultimate driver of most projections – that there will be more retirees than workers – makes sense.

Reasoning about long term health care costs and affects, economic growth rates, global convergence, the importance or lack thereof of skill biased technological change, etc is more difficult and therefore I think people shy away from it.

When giving talks to business leaders and government officials about economics and taxation there is a sudden confidence that comes over them when the subject of Social Security comes up. They immediately feel as if they know the right questions to ask and could even potentially push back on some of the things I am saying. This confidence makes them want to steer the conversation in this direction.

I often get feedback that I am much more accessible and friendly than most economists so I don’t think I am browbeating them on the other topics. I just think they are having trouble completely wrapping their minds around them and feel less confident making assertions about them.

This is deeply unfortunate because the benefit – rather than cost – side of social security is incredibly complex and high stakes. In terms of the welfare of senior citizens cutting social security could range from massively destructive to mildly helpful.

There are the obvious issues of life cycle saving, risk and whether investment decisions are rational but it goes way beyond that. One of the largest effects of Social Security is that more seniors are able to live independently. Trying to get a handle on the surplus associated with that is a nightmare not least because when lack funds induces a change in your entire living situation, willingness-to-pay and willingness-to-accept are likely to diverge enormously.

When I last covered the war on allergy medicine, a D.A. from Oregon was writing in the New York Times telling us we need to make allergy medicines with pseudoephedrine require a prescription, and then Missouri looked like they were going to follow through with his advice. An assumption underlying this regulation, which I’ve questioned, is whether this will do anything to stop the flow of meth in this country. Providing some evidence in this debate,  the Washington Post ran a story last week that began like this:

Mexican cartels emerge as top source for U.S. meth

IN VERACRUZ, MEXICO Exploiting loopholes in the global economy, Mexican crime syndicates are importing mass quantities of the cold medicines and common chemicals used to manufacture methamphetamine – turning Mexico into the No. 1 source for all meth sold in the United States, law enforcement agents say…

Got that, Mexican smugglers are the #1 source for meth in this country, which means if we manage to stop all domestic meth production what we will have achieved is raising the prices and profits for Mexican drug gangs. “Ok,” the drug warriors might say, “that just means we have to move the war on pseudoephedrine global and stop it’s production worldwide”.  Well we’ve seen how well that works, but lets just grant for a moment that for the first time ever drug warriors are actually able to completely stop production of a chemical worldwide, and pseudoephedrine is wiped off the face of the planet. The meth problem will be solved right? No, the article continues to explain why:

Ever resourceful, Mexican cartels have begun to manufacture methamphetamine using legally obtained ingredients – such as phenylacetic acid, or PAA, a honey-smelling chemical used in everything from perfumes, soaps and body lotions to food flavoring and antibiotics.

Traffickers prefer methamphetamine made from cold tablets because it is more potent, but they are increasingly relying on PAA, as resilient Mexican cartels revert to old-school recipes developed by U.S. motorcycle gangs in the 1970s that use phenylacetic acid and its chemical cousins.

At least half of all the methamphetamine seized along the border in the past year was made with precursor chemicals such as phenylacetic acid, U.S. agents told The Washington Post.

We’re not going to win this war. Rest assured though, much blood will be spilled, money wasted, and allergies suffered so that drug warriors can feel good about themselves and keep themselves busy.

I’m sure everyone has had the experience where at the mention of some new or potential productivity enhancing invention, somebody laments “what about all the X that this will put out of work?”. This concern isn’t always voiced or seemingly brought to mind, and I can’t put my finder on what determines which innovations set it off in people’s mind and which ones don’t. Because this creative destruction -as Schumpeter called it- is all around us, and sometimes people simply enjoy the benefits without realizing the jobs lost. A better appreciation for how creative destruction makes us better off can be had if we keep it in mind at when we think about all technologies and innovations, rather then only considering it when the destruction part is most obvious. To wit, the New York Times reporting on the ongoing destruction of point-and-click camera market by smartphones:

Cameras, mostly point-and-shoots, are still found in 82 percent of American households, according to the Consumer Electronics Association. But for many consumers, the point-and-shoot they have now may be the last they ever own as they favor the camera in their smartphone….

The sales figures tell the story. While smartphone sales in the United States continue to skyrocket, unit sales of point-and-shoot cameras fell nearly 16 percent from 2008, according to the market research firm NPD Group. That corresponds to a decline of 24 percent in dollars, to $1.9 billion , from $2.4 billion….

Facebook says that since the site was founded in 2004, its users have uploaded more than 50 billion photos, making that feature one of its most popular. Flickr, the photo-sharing site, says users add more than three million photos to its inventory every day. Yet Flickr’s data shows that the most popular camera among its 55 million users is a smartphone, Apple’s iPhone 3G. Not a single point-and-shoot makes it into its top five.

Keep stories like these in your head for when someone argues that we are worse off because of some creative destruction.

The debate on tax reform is starting to heat up with various proposals being debated, and many policies are being considered for the chopping block. One of them is the mortgage interest deduction (MID). I’ve covered the previous research before, which shows the deduction doesn’t increase homeownership, and now a new paper sheds further light on the losers and winners from this subsidy.

The paper comes from Christian Hilber and Tracy Turner, who compare the effect of the MID in areas with tighter regulatory restraints on housing supply, i.e. inelastic supply, to areas with less regulatory constraints, i.e. elastic supply. The idea is that in areas where supply is slow or non-responsive to increases in demand, the MID may just drive house prices up instead of increasing homeownership, and may even decrease home ownership among some groups.

Using national data from 1984 to 2007 they found that the MID did not increase overall homeownership. In areas with light land use regulation they found that homeownership among higher income families was increased, and in tightly regulated housing markets homeownership was decreased for all income groups except the lowest. The effects, both positive and negative, generally range from 3% to 5%. Regardless of the regulatory environment, homeownership among the lowest income group was not affected at all by the MID.

The authors estimate that it each additional homeowner created by the mortgage interest deduction costs the government $53,590, a number they rightly call “staggering”.

An important implication of the findings is that in urban areas, where land use regulations are typically more restrictive, homeownership is likely to be negatively impacted.

We spend around $100 billion a year on this subsidy, and to the extent that it’s defenders are correct and homeownership does have positive externalities, it is actually making urban areas worse off. Even if we want the questionable goal of encouraging homeownership, recent research from the Cleveland Fed has argued that down payment subsidies are a more efficient way to do it.  If we can phase the mortgage interest deduction out slowly so that there is limited disruption to housing markets, this policy really should be the first on the chopping block.

With over 20 years of incrementally strict regulation of pseudoephedrine failing to prevent meth usage, states are again ratcheting up the regulatory burden, because, you know, this time it will work. I recently wrote about an Oregon district attorney who was calling on states to require prescriptions for over-the-counter allergy medicine containing pseudoephedrine, and now Missouri is heeding the call:

The Missouri governor and attorney general want to make Missouri the third state to require a doctor’s prescription to buy cold and allergy medicines that can be used to make the illegal drug methamphetamine.

Gov. Jay Nixon and Attorney General Chris Koster announced their support on Tuesday for legislation imposing a prescription mandate on medicines containing pseudoephedrine, which is sold under brands such as Sudafed,Claritin-D and Aleve Cold & Sinus.

Missouri for years has led the nation in busts of methamphetamine labs, even while enacting increasingly stricter laws.

This is an attempt to transfer welfare from allergy sufferers to meth addicts and their families. Unfortunately, I predict it will largely result in a permanent destruction of welfare for the former, and, at best, a temporary increase for the latter.

I wrote in 2009

Megan McArdle articulates some of what I have been hearing about GM.

Namely, that now that we know GM is toast we should stop bailing them out and head for Chapter 11 bankruptcy. After all why throw good money after bad?

There may be good reasons for supporting bankruptcy for GM but this is not one of them. First and foremost, we ARE going to throw good money after bad. There is no way around this. The first bailout was throwing good money after bad.

. . . the question is not should GM go bankrupt but should GM go bankrupt – now.

Today from the WSJ

GM, the largest U.S. vehicle seller, said its sales rose to 168,670 cars and light trucks in November from 150,676 a year ago.

Among the four continuing GM brands, Buick and GMC sales climbed 36% and 30%, respectively. Sales at the larger Chevrolet jumped 18% and rose 21% at Cadillac.

Will Wilkinson has another excellent post on the DREAM Act up at Democracy in America. He takes on David Frum, who is critical of the act. You should really read the whole thing, but to give you a taste here is how it ends:

Were Mr Frum to read the bill, he would see that he has made a serious error. DREAM is a stopgap measure of exceedingly limited scope which would slightly mitigate the injustices wrought by America’s reality-defying immigration and citizenship law. I look forward to his correction.

For more from Will on the DREAM Act see here.

I just discovered, a site that professes to analyze a blog, and explain the characteristics of the author and writing style, based on the content of a few of the recent posts. Being a curious lad, I decided to enter Modeled Behavior and see what would be the result. This is what I got:

“ is probably written by a male somewhere between 66-100 years old. The writing style is academic and upset most of the time.”

Check out the link to see some pie charts.

Just to make sure that I wasn’t the one that was skewing the age range with my decrepit, archaic prose, I decided to analyze my former blog,, as well. The results:

“ is probably written by a male somewhere between 18-25 years old. The writing style is academic and upset most of the time.”

Phew. While I add obviously add to the angry academic temperament of this blog, I don’t add to the aged fascia. I’m looking at you, Karl.

[h/t John Barrdear, whose blog I found by accident, and is actually very insightful.]

P.S. This was a joke, but UrlAI is interesting, though it probably isn’t suited for a multi-author blog.

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