Monday, January 04, 2010

Well, At Least His Head Can Hold Inconsistent Thoughts....

Ross Douthat lectures us that, while the U.S. may have had a miserable decade, other nations did okay.
A billion-odd Chinese had a pretty good decade, and so did a billion Indians: their economies just about doubled in size, minting new millionaires and lifting countless peasants into a growing middle class. Brazil boomed, Indonesia prospered, and even Africa enjoyed a season of substantial growth. Nobody would mistake Vladimir Putin’s Russia for a liberal democratic paradise, but most Russians seem to prefer its stability to the basket-case republic Putin inherited from Boris Yeltsin.
Douthat drones for a while about the Bush/Obama approach to bailouts - fairly attributing the policy to Obama, but eliding that it was a continuation of the prior Administration's policies and not the departure he suggests, concluding,
Social democracy has its benefits, but global competitiveness isn’t one of them.
Let's see... He just got through telling us how great things went in China and Russia, and in the economies of India, Brazil, and parts of Africa, and he's lecturing against "social democracy"? Communism and totalitarianism "good", social democracy "bad"... except in India and Brazil? Meanwhile, Douthat ignores that emergency spending polices don't reflect long-term strategy - for all of his whining about Democrats, it was Reagan who started the massive run-up of the deficit, Clinton who restored fiscal sanity, and G.W. who massively expanded entitlement spending, initiated the bailouts, and broke the bank.

I know what Douthat is trying to argue, or perhaps I should say would be trying to argue if I believed he had an understanding of the topic - that in a developed nation's economy, there is a trade-off between employment and productivity, and if you tilt the balance toward full employment and greater wages and benefits for workers you're going to see a reduction in productivity and likely a shift of manufacturing jobs to nations with lower costs of labor. Mind you, you're going to see that shift anyway - that's another chapter of the story - but you may be able to claim a higher percentage of your GDP as resulting from manufacturing as you diminish compensation for labor-intensive manufacturing or implement labor-saving technologies that boost productivity at the expense of jobs. For all of Douthat's loosey-goosey usage of terms like "global output", he should keep in mind that auto manufacturing represents about 4% of GDP. So when he cites a source that brags that, from 1947 through 2001, U.S. manufacturing output consistently hovered around 14% of GDP, he should consider how well that brag would work had GM and Chrysler been allowed to fail. His source likes to speak of "economic output per person", something that has been grossly inflated in the U.S. by the financial sector - had that sector been allowed to collapse as a consequence of its own incompetence, how much of that "economic output per person" would remain?

Douthat's source, although better written, can be equally silly:
From 1980 through today, America's share of global output has been constant at about 21%. Europe's share, meanwhile, has been collapsing in the face of global competition — going from a little less than 40% of global production in the 1970s to about 25% today. Opting for social democracy instead of innovative capitalism, Europe has ceded this share to China (predominantly), India, and the rest of the developing world. The economic rise of the Asian heartland is the central geopolitical fact of our era, and it is safe to assume that economic and strategic competition will only increase further over the next several decades.
Yeah. Because nobody could get confused and draw the ridiculous conclusion that the U.S. has ceded jobs and "global production" to nations like India and China. Unless they actually think about it. But fortunately the financial sector has made up for the losses....

Douthat offers up his source's conclusions,
Unwind the partnerships forged between Big Business and Big Government in the wake of the 2008 crash; seek financial regulations that “contain busts,” by segregating high-risk transactions from lower-risk enterprises; deregulate the public school system, to let a thousand charter schools and start-ups bloom; and shift our immigration policy away from low-skilled immigration, and toward the recruitment of high-skilled émigrés from around the globe.
Were Douthat more courageous, he might have noted that his source doesn't just want the U.S. to "unwind the partnerships" resulting from bailing out failed and failing industries - he wants the U.S. "to take the loss and move on". That is, he's flat-out endorsing lemon capitalism. I think it's more than fair to ask how it benefits capitalism, competitiveness or responsible business management if we allow industry to privatize profits and nationalize losses... but apparently that's not a concern for Douthat's brand of conservatism. Industry demands the bail-out, the Douthats of the world screech about "social democracy", then industry and the Douthats join in a chorus of "remove the strings from the bailout money to totally socialize our losses while 'freeing' us to 'compete' as irresponsibly as before." Douthat also fails to mention that his source not only wants to avoid any further stimulus spending - he wants to roll back the existing stimulus programs. For all of the Republican caterwauling about stimulus spending (that most are happy to take credit for obtaining for their districts), what responsible economists are saying that less stimulus spending would presently be good for the economy. Anyone?

The second idea, regulation that "contains busts" and prevents the interconnectedness that would cause massive losses in one sector to spill over into others, is pure pie in the sky. Giving due credit to Douthat's goal of making the pie higher, how do we do that? We can talk about "tiers" of risk, "so that a bust in a higher-risk tier doesn't propagate to lower-risk tiers", but isn't that what we were promised would be achieved, for example, by securitization of mortgages? And how well did it work for AIG to segregate its highest-risk, least sensible operations into its financial products division - they still managed to take down the entire company.

As with the first, Douthat omits pretty much every relevant detail from his source's third "solution". His source sees voucher programs as likely to fail over time because eventually "taxpayers will appropriately demand that a range of controls and requirements be imposed on the schools they are ultimately funding". That is, he recognizes that if programs like "No Child Left Behind"... Republican social democracy... are imposed on schools accepting vouchers, many will very quickly demonstrate themselves to be substandard. His alternative is to move public schools into a decentralized model, with funding following students and teachers freed from NCLB and similar initiatives such that "far broader discretion is permitted to those who actually teach and manage in our schools". He suggests that we look to Europe, specifically Sweden and the Netherlands, as models. Yes, we should look to Europe.1 But while Sweden insists that the "same standard of education is to be provided throughout the country", Douthat's source apparently prefers that we do away with standards. Both the Netherlands and Sweden allocate per pupil funding to students in independent schools, forbidding the schools from charging additional tuition to parents, so we're back to that "social democracy" thing - nothing approximating a free market system. It's also a faith-based solution - faith that charter schools will suddenly start producing outcomes that exceed those of public schools, faith that the core problems in our school system can be addressed by charter schools, faith that the system won't succumb to profiteers and opportunists...

Beyond that, it seems fair to ask, if you look at overall school performance, why would we model our reformed system after nations that aren't on top? Why aren't we looking at Finland and Canada? Could it be, because the "solution" is based on ideology, not facts? By the measure of what supposedly makes for a great school system, at least in Douthatian terms, Finland seems to get a lot of things wrong.2

Douthat and his source also favor shifting immigration away from low-wage workers to "high-skilled émigrés" - something akin to what Canada does. His source laments,
We have chosen a strategy that provides low-wage gardeners and nannies for the elite, low-cost home improvement and fresh produce for the middle class, and fierce wage competition for the working class.
Perhaps it's because European Ph.D.'s aren't interested in performing migrant field labor, or cleaning the houses and swimming pools of the wealthy? But isn't it closer to the truth that a lot of highly skilled people have emigrated to the United States, which historically has been a magnet for talented people who want to further their educations, start companies, join high tech firms, etc.? But that changes in the global economy have opened doors for those same people closer to home, while post-9/11 immigration reforms have made it harder for them to come to the U.S. either to study or work? Companies that might have brought foreign workers to the U.S. can now open overseas branches, or contract with firms in other nations, and have those same people work for them doing the same work at lower wages. What actual strategy does Douthat actually propose to turn things around?

Douthat can't help himself, and adds a couple of proposals of his own:
To this list, I would add tax reform and entitlement reform. The former should broaden the tax base while cutting taxes on work, childrearing and investment. The latter should means-test both Social Security and Medicare, reducing both programs’ spending on well-off retirees rather than questing fruitlessly for their privatization.
Douthat doesn't tell us what he means when he speaks of broadening the tax base, beyond describing it as part of "a right-of-center agenda". It's thus safe to say that he doesn't anticipate raising taxes on the rich, capital gains (he's in fact promising cuts), estate taxes.... And he's apparently also promising to cut income taxes. What magical population of untaxed people will Douthat "broaden" the tax code to reach? I have a child, but wasn't aware that I was paying a tax on childrearing... please, Ross, tell me more. And pray tell, how will your tax cuts balance the budget?

As for means testing Social Security, why not be honest? That's an undisguised part of the program to break it down as a social insurance program, separating the taxpayers from the beneficiaries, so that we can get the usual Republican class warfare - "Why should you pay Social Security taxes that only benefit them."

A better case would be made for means testing Medicare benefits if, in fact, everybody paid equally into the program during their working lives. But higher wage earners pay higher premiums throughout their working lives. I will grant, a case can be made for means testing for deductibles and copays, but I am skeptical of the political viability of such a reform. After all, when we start talking about "right-of-center" agendas, we should recall that the Bush Administration massively expanded Medicare through the prescription drug benefit without so much as a thought for how it would fund the expansion - and while legislating away the government's right to negotiate over drug prices. Social democracy, indeed....
1. Douthat's source also laments that we're not more European when it comes to unmarried couples raising children - unmarried European parents are much more likely to live together. One could argue that it's part of the trade-off between social stablility and economic growth - when a society does more to ensure that its people have stable jobs, it likely helps ensure that family units, married and unmarried, are more stable.

2. They might respond, "How can something so wrong feel so right?"


  1. Thanks for the very thoughtful comments about "Douthat's source" (i.e., my article in National Affairs). I can't possible respond to all of this, but let touch on a few things that I think are most relevant.

    "Were Douthat more courageous, he might have noted that his source doesn't just want the U.S. to "unwind the partnerships" resulting from bailing out failed and failing industries - he wants the U.S. "to take the loss and move on".

    This is a huge concern, and I wrote about it extensively at the time. I argued for (the first tranche of) TARP as the worst possible course of action other than the available alternatives, and argued that no protection should have been given to shareholders or management. The executives should have been canned, and the shareholders wiped out. I argued that compensation limits are entirely appropriate for guys who are now, in effect, on the public payroll. I argued against the auto bailouts on any terms, and argued that a controlled bankruptcy would have been the better course of action. (Bankruptcy is a change in ownership; avoiding it protected shareholders and contract holders, not workers.) Given that we have made this mistake (or what I think is a mistake), we, as in we the people, should get out as soon as practicable.

    "what responsible economists are saying that less stimulus spending would presently be good for the economy. Anyone?"

    Among others, are (Nobel laureates) Ed Prescott, James Buchanan, Gary Becker and Vernon Smith. (You can find Nobelists and other eminent economists in the pro-stimulus camp as well, byt the way; my only point is that it is not true that no serious economists oppose the stimulus package).

    "The second idea, regulation that "contains busts" and prevents the interconnectedness that would cause massive losses in one sector to spill over into others, is pure pie in the sky."

    I don't think this is true. This is exactly what Glass-Steagall did. In the article, I argue for what is essentially an updated version of theis new Deal era reform. The New Deal did a lot of, in retropsect, counter-productive things, but its architects were very, very smart. One thing it sure seems like they got right was restrcuturing the banking system - e.g., would any non-dieologue argue that we would have wanted to have gone through the 2008 / 2009 financial crisis without the FDIC? The financial system has evolved since 1935, so it would simply be the case that we would want to reinsititute G-S, but the concept reamins valid, and was in place for 60 years, so I don't think its pie-in-the-sky.

    "But while Sweden insists that the "same standard of education is to be provided throughout the country", Douthat's source apparently prefers that we do away with standards. Both the Netherlands and Sweden allocate per pupil funding to students in independent schools, forbidding the schools from charging additional tuition to parents, so we're back to that "social democracy" thing - nothing approximating a free market system."

    I agree with a lot of this. Though a long article, there were still space limitations. One point I was trying to make to the right was that a pure focus on vouchers is not practical. Charter schools (ie, relief from collective bargianing agreements plus "consumer" empowerment) appears to provide most or all of the benefits anyway, and is far more practical, and likely more politically acceptable. I didn;t have space to get into the role for the federal government in establishing standards in the sense of consistent, uniform metrics of performance for every school every year, rather than standards as in consistent curriculum. I think the latter make no sense becuase (1) different needs are so great in different contexts, and (2) despite self-interested advocacy, we know so little about what acutally works.

    Jim Manzi

  2. Nobody suggested you couldn't find economists who would argue, against the overwhelming consensus, that stimulus spending is a bad idea. Just that they're not responsible. I give you credit for finding four who you believe we should regard as both (cherry-picked from the Cato ad?)

    At this point I think it's safe to say that Prescott has been proved wrong in his claim that the stimulus bill "is likely to depress the economy," raising the question of whether he even belongs on your list. Similarly, quoting Gary Becker's WSJ editorial from today, "While some elements served the package's stated purpose and helped to soften the recession's impact, the overall package was not well designed to foster a speedy recovery or set the stage for long-term growth." - having conceded that stimulus spending can work and to some degree has worked, he's perhaps not a good example, either. Few, if any, supporters of the stimulus won't acknowledge that it was full of pork or could have been improved and better targeted.

    Buchanan and Smith seem to have contributed little to the public debate beyond their signatures on the Cato ad - did you have specific articles or statements in mind that we should look at?

    Incidentally, the same economists you cite as "responsible" claimed in the Cato ad that "Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth". If in fact you're calling for the return of Glass-Steagall, how many of them are on your side? How do they explain how a decade that opened with budget surpluses followed by massive tax cuts, with no small contribution from a deregulated financial industry, turned into such a wreck? While I appreciate the concept of "the hair of the dog that bit you" cure for hangovers, I'm not convinced that it's a responsible approach to economic catastrophe.

  3. Thanks for stopping by.

    I believe that by your own definition TARP I was not the worst course of action "except for all the others", because it did not impose a meaningful consequence on shareholders and management. I don't think we're that far apart on the bankruptcy issue - I argued for the bankruptcy code to be expanded to include a chapter (or version of Chapter 11) for companies that are "too big to fail" - something that would not only help with the present crisis, but would let the companies know what's in store if it happens again - and not just manufacturing firms. Congress didn't act either under Bush or Obama, so we were stuck with the bankruptcy code we have - and the excuses that all of the companies would fail, Lehman style, if put through the standard process. Also, the deliberate lack of transparency and accountability in TARP I is inexcusable, and set the course for a similarly inexcusable lack of transparency and accountability the second time around.

    Given the ramifications of a collapse of GM and Chrysler, with the consequent failure of their suppliers taking down Ford and possibly the domestic manufacturing arm of some foreign manufacturers, I think that "saving" those companies was a no-brainer - although in better times it would have been better to let nature take its course. Your claim that the U.S. was doing a good job sustaining manufacturing productivity as compared to the EU would have had to have been dropped in a post-Big 3 world.

    On a side note, I think it was the consequences that you would have imposed in a better TARP I that kept Ford from going through a similar bankruptcy process. The Ford family preferred to put in its own money rather than allowing the government to take away its shares. I think that quite a few financial firms would have been able to find their own way, or would at least have made an effort, had they faced similar consequences - wiping out shareholders and bondholders, firing CEO's, demands for their plans for a return to profitability, etc.

    In terms of economists, I'll defer to the comment above on the economists you mention rather than searching for any other specific statements they've made. Frankly, I don't think you need to look past the content of the CATO ad, quoted above, to question their responsibility. Doing the same thing we've been doing and expecting a different outcome, to me, sounds more like insanity than responsibility.

    To put it another way, you believe that the future should hold increased regulation of financial firms, and either a reduction in expenditures or increase in taxes (why "or"?) - the CATO statement they signed opposes regulation and increased taxes in broad, simplistic terms - while endorsing additional tax cuts and deregulation. I personally can't cut the ideological baby in half such that I could deem them responsible in one aspect while rejecting the balance of their statement. It's an irresponsible statement.

    I didn't realize from your article that you endorsed the reinstitution of Glass-Steagall. It seems a bit odd that it would be a serious struggle to reinstitute Glass-Steagall-type regulations after the banking industry collapse, but while it's not outside the realm of possibility it would be a fight. I don't think that would resolve the core issues that led to the crisis - excessive leveraging, dubious securitization, and bond ratings that are hard to regard as anything but fraudulent. Also, you will surely hear major banks, such as BOA, argue that were Glass-Steagall in effect you would have seen more investment bank failures because commercial banks would have been precluded from taking them over - and that BOA shouldn't be "punished" for having absorbed Merill Lynch. I am skeptical that the crisis could have been prevented by Glass-Steagall, and I'm skeptical that its reinstatement would prevent recurrence.

  4. The education discussion does deserve a lot more space. For all the attention "failing schools" get, there's little serious thought given to what would constitute effective reform. Keep in mind, though, that some charter schools are unionized, and most others have to peg teacher compensation to the union pay scale to keep qualified teachers on board. Also, while unions are an impediment to serious reform in large cities (often along with corrupt school boards and city administrations, and incompetent school administrators), the experience of successful school districts in this country, and that of nations like Canada, suggests that unionization is not an impediment to school success.

    I like the idea of having schools compete for students, and having them compete on modality of teaching, so that parents could choose between a variety of options for their kids. Under your regime, most likely some teaching modalities would have to be modified - Montessori schools aren't conventionally structured to meet the same benchmarks as regular public schools, even as they do a good job teaching problem-solving skills and independence; traditional Waldorf schools would show kids "falling behind" in the early years because they de-emphasize academics in the early grades, although they produce some amazingly mature, academically capable teens. In the interest of full disclosure, my child attends a Montessori kindergarten, and her school has both modified the traditional Montessory approach and adopted annual standardized testing to hep ensure that the children in grades 1 through 6 track with their peers in public school.

    I'm big on national standards for purely selfish reasons. I changed schools a number of times during my childhood, and missed some core blocks of curriculum because they were taught at different grade levels in different provinces. (Yes, I said "provinces" - I'm largely a product of the Canadian K-12 system.) I can't turn back the clock, but I do think it's reasonable for a nation to at least define best practices or a model K-12 curriculum, even if the choice of whether or not to implement the national standard is left to the states in the interest of federalism.

  5. Oooh, gotta disagree with the idea of schools competing for kids. On the surface, yes, it makes sense because if you have to compete you will work to do better. But, this leads to schools cowtowing (sp?) to parents. For example, some schools are afraid to kick a kid out b/c they lose the funding. Another example that I've witnessed firsthand is when a parent comes in and causes some flux and threatens to pull their kid out. The reason could be legit but not the times I've seen this. So, the school bends over backward to pacify a parent, all to keep the funding.
    Conversely, charter schools--which are by and large unregulated and not held to the same standards as publics--can cherry pick their students and frequently (at least in the D) will take special needs and other kids, hold them until Count Day and then kick them to the curb. Charter schools need less funding because their pay scales (the ones I know of) look like this: $30k-$40k. Publics go up to $90k (not mine!). So it also comes down to how much we want to pay our teachers.
    I can say with confidence that most teachers (in my case, no teachers that I know of personally)do not set out to teach in a charter school. But right now there is such a glut of teachers that charters can get away with paying someone $30k to do the job that someone down the street is making $60k to do. My friend in Troy told me that there were 7000 applications for 3 positions. Even special ed isn't hiring any more. So you have thousands and thousands of teachers who are begging for scraps and will take the charter job.
    I say all this to illustrate that the playing field is not the same as, say, two car companies competing for business. Maybe the field isn't level in other businesses as well, but we have another key difference...we have to take our "product"; that is, we have to take every kid who walks in the door. We can't physically change their make up (unlike someone who is manufacturing) and we can't change crappy home lives, disabilities, etc.
    Just MHO and YMMV, etc. etc...but in closing I will say that I'd much rather be in a union with collective bargaining rights than not. The only time I hated on unions was when I wasn't in one and was as jealous as hell. Just sayin'.

  6. The subject of school reform and competition deserves its own post; for now, let me say that schools can compete in ways other than for bodies. The competition Jim Manzi highlights has funding go with the bodies (just as is the case with private schools), but the schools appear more free to compete on modality. That is, standard public school model vs. Montessori vs. Waldorf vs. some other model vs. a hybrid.... That could be good for both parents and kids.

    By the same measure, it could be really difficult to compare schools by standardized test, the approach that now appears to be the standard of "school performance". Test a second grader and the standard public school will say, "Good in reading, behind in arithmetic;" a Montessori school might say, "Presently focusing on reading; not so far behind on arithmetic that it's a concern - and kids learn differently"; the Waldorf school might respond, "Why are you testing seven year olds in reading and arithmetic, when they should be learning how to be creative, play and socialize?"

  7. Manzi's "decline of Europe" argument appears to be worse than you thought.