Matt Yglesias

The Importance of Full Employment

Mike Konczal needs to start writing shorter blog posts. Until then, let’s just talk about the end of this post on the need for economic policy to be about more than handouts for the unfortunate:

To me, the end result of having a safety net without giving workers stronger bargaining power is that what you end up with is a kind of pity-charity liberal capitalism. That’s better than nothing, but at the end it can be a dead-end, if the government doesn’t step in to fight for full employment. Particularly if you think of unemployment as a particularly scarring state of existence and, like me, think that the next major battlegrounds already are closer looks at production and the experience and conditions under which people work.

I think that’s correct, but that “full employment” is doing almost all the work here even while Konczal’s emotional emphasis seems to be on bargaining power. After all, if you have strong labor unions and a government that doesn’t fight for full employment, then what happens is the unions use their bargaining power to cut insider/outsider deals at the expense of the unemployed. One of the great virtues of American unions in their heyday is that they used their political muscle to push the government to fight for full employment, which was excellent and it’s a political voice we’re desperately missing today. But that’s not to say that the unions themselves are a viable substitute for full employment. A market economy is either going to operate near full employment, or else people will only share in its benefits thanks to handouts. That’s true for any given set of labor market institutions.

Gone Beaching

I’m (hopefully) heading off this morning for a bit of vacation in the (hopefully) warm and sunny Turks & Caicos Islands. As usual, there’ll be some posts but expect reduced output.

Endgame

Everything is in the pawn shop:

— Should analysts count iPads as PCs?

— The voters don’t like repeal.

— Alien Hand Syndrome.

— Bankers are done pretending to be sorry.

— Robert Shiller’s book recommendations.

— Reihan Salam argues that massive income inequality and entrenched intergenerational social stratification are good because they boost the arts.

To win the future, Ramones, “Chinese Rock”

Winning the Future By Reducing Idleness

The reason the USA is more economically important than Canada is that we have many more people doing work, producing goods and services, and earning incomes. The reason China is more economically important than Serbia is that China has many more people doing work, producing goods and services, and earning incomes. This is often glossed by observing that China has a “large population” but of course a large population of people sitting on the couch watching TV doesn’t help, they need to be doing something.

So it strikes me as fairly scandalous—and not just in narrow humanitarian terms—that so many Americans are sitting on the couch and scanning help wanted ads:

As the recovery continues, the economy will add roughly 2.5 million jobs per year over the 2011–2016 period, CBO estimates. However, even with significant increases in the number of jobs, a substantial reduction in the unemployment rate will take some time. CBO projects that the unemployment rate will gradually fall in the near term, to 9.2 percent in the fourth quarter of 2011, 8.2 percent in the fourth quarter of 2012, and 7.4 percent at the end of 2013. Only by 2016, in CBO’s forecast, does it reach 5.3 percent, close to the agency’s estimate of the natural rate of unemployment (the rate of unemployment arising from all sources except fluctuations in aggregate demand, which CBO now estimates to be 5.2 percent).

This is an absurd situation to be in. Does anyone seriously deny that there’s something these people could be doing that would be more useful than being unemployed? Now ask yourself this. Suppose you had more money. Would you buy more goods and services? I would. And if more people were buying more goods and services, then wouldn’t firms need to hire more people to provide those goods and services? I don’t see any way around it. So why not put some money into people’s hands so they can go out and buy more goods and services? Maybe you think we can’t do that because “the money has to come from somewhere.” But it doesn’t. It’s fiat currency, we can just make more. It’s true that if we print more and more money that at some point we’ll soak up all the idle people and it’ll start to spark inflation. And that would be an excellent time to stop trying doing it. But what’s stopping us today?

Ezra Klein says the administration’s moved past unemployment as an issue because there’s nothing more they can get out of congress. Do they know there are other macroeconomic stabilization tools at the government’s disposal? Do they think it’s a problem that those tools aren’t being used?

The Eternal Mystery

I just got out of a meeting in the West Wing between David Axelrod and a few progressive writers and . . . well . . . I don’t have a ton to report.

An awful lot of progressive dialogue with the administration just keeps coming around to the same one point. According to the Obama administration the nation’s fiscal problem is in the long term. According to the Obama administration the nation’s fiscal problem is mostly due to entitlements. And according to the Obama administration in the short-term there’s a large output gap. So why a short-term discretionary spending freeze? Well on the merits there’s just no good reason you can give. The logic is clearly political. So, fine, politics is part of governing. But the White House’s belief that a strategy of unilateral preemptive concessions is a smart approach to legislative negotiations is as deeply held as it is difficult to understand. When has this worked? What has it helped achieve?

Essential Air Service

Most of the stuff that the government spends money on is in there because someone wants it in there. And the extent to which someone wants it has little to do with his or her nominal ideology. Brian Beutler has a number of examples of which this is my favorite:

For instance, the RSC plan would slash $150 million in spending on Essential Air Service — a government program, which ensures small and rural communities continue to receive commercial airline service.

Flash back to 2007, and possible Republican presidential candidate, Sen. John Thune (R-SD) spearheaded an effort to restore such service to his constituents. “I am encouraged by the Senate’s action to move this important legislation. Essential Air Service is just that, essential. It is essential to the people it serves and it is essential that the House of Representatives pass this legislation without modification so that we can restore commercial air service for Brookings,” said Thune. “Ensuring access to communities like Brookings strengthens the local economy, provides consumers with choices, and makes the entire commercial airline network more valuable.”

One of the main things the federal government does is transfer resources from high-productivity urban areas to low-productivity rural ones. It does this in part through direct obvious measures like this, in part through agricultural subsidies, in part through universal programs like the Postal Service that mask these subsidies, etc. And in the aggregate, it’s a huge drag on the American economy. Not so much because it costs money (though it does cost money) as because over time it drives misallocation of private sector resources.

In principle, it would be a good idea to change this. In practice, America’s constitutional setup all but guarantees this outcome. Which is what it is. But given the fact that politicians who like to talk about free markets and small government tend to also be the most zealous defenders of these measures, it would be nice if writers and thinkers who like to talk about free markets and small government spent some more time acknowledging that this is one of the main things the government does, and it does it because conservative voters, donors, and activists want it to happen.

Across the Sea

Suppose Hu Jintao stood before the National People’s Congress last night and delivered a long speech about national priorities that was overwhelmingly dedicated to domestic issues. Basically, Hu is talking about things that he believes will enhance China’s economic growth great—ideas about better schools, better roads, scientific research, tweaking the tax code, etc. It’s all pretty benign. Except there’s something weird about the speech. Instead of saying that the main reason to do this is that it will slightly increase the rate at which Chinese people improve their material living standards, he says that “the global competition for jobs is real” and the purpose of school reform is to “win the future,” topple American hegemony, and overawe India despite the latter’s larger and faster growing population.

The Great Hall of the People

Hu then observes that historically China has been the world’s most powerful state, that he looks on the past 150 years of non-dominance as an essentially transient phenomenon when you take the broad view. He says that the Han people are exceptional and through the same grit and determination that they used to shake off the Japanese yoke and tame the wild west of Tibet will continue their upward march. Then he briefly pivots to an overview of China’s main national security objectives—reunification with Taiwan, etc.

People would find that . . . odd . . . right? And kind of distressing.

I was at an event this morning with Anne-Marie Slaughter, Director of Policy Planning at the State Department who assured me that the US government doesn’t see the world in terms of 19th century power politics, but does worry that some elements of some foreign governments do see the world in those outmoded terms.

Transition Shock

Ezra Klein says America should feel okay about the looming specter of China’s economy being larger than ours:

A decent future includes China’s GDP passing ours. They have many, many more people than we do. It’s bad for both us and them if the country stays poor. A world in which China becomes rich enough to buy from us and educated enough to invent things that improve our lives is a better world than one in which they merely become competitive enough to take low-wage jobs from us — and that’s to say nothing of the welfare of the Chinese themselves.

But perhaps it’s better to think of it in terms of Britain rather than China. Was the economic rise of the United States, in the end, bad for Britain? Or France? I don’t think so. We’ve invented a host of products, medicines and technologies that have made their lives immeasurably better, not to mention measurably longer. We’re a huge and important trading partner for all of those countries. They’re no longer even arguably No. 1, it’s true. But they’re better off for it.

I think that’s all too, but that this is also a bit too complacent. One can make too much of the idea of a “special relationship” between the US and the UK, but there’s obviously a very real sense in which the deep cultural linkages between England and the formerly-English settler-states mean we relate to one another in an unusual way. You can see this in part by the fact that Australian, Canadian, and English (but not necessarily Scottish!) nationalists are very friendly to American nationalism. It’s with good reason that John Howard was George W Bush’s special friend among world leaders. Winston Churchill was able to write a History of the English Speaking Peoples that basically argues that the cause of human freedom was first carried by England, then by the British Empire, and then the torch was passed to the United States of America. The ability of English nationalists to accept and promote that kind of discourse was vital to making the transition so peaceful.

After Jeb Bush completes his second term in 2020, the transition to China as number one will be well under way. Can you imagine him spending his retirement years publishing a similar argument about China? I can’t. Our nationalist discourse is just way too different from and incompatible with China’s. Effecting a peaceful and mutually beneficial transition would require a substantial weakening of nationalist sentiment in both countries. I certainly hope it happens, but it’ll be a much thornier situation than the US-British transition.

Vagueness Is The Way To Go On Tax Reform

I think the tax reform elements of the State of the Union were among the speech’s finest moments, not so much as rhetoric but in terms of a practical intervention with the American political system. The reason, as Felix Salmon notes, is that the President was vague and evasive:

There were a lot of expectations, in the run-up to this SOTU, that Obama would present some really substantive proposals on the fiscal front. But it was not to be. There was a very vague hand-wave on the tax front — both corporate and individual taxes should be “simplified”, he said, without giving any details on the kind of loopholes that he wanted to eradicate. (Mortgage interest tax deduction? We can but hope.)

The implication here is that what the country needs from the president is some bold straight talk on taxes, and I think that’s just wrong. Look at what happened when the Bush administration kinda sorta went after the mortgage interest tax deduction—wonky bloggers praised him, Democrats slammed him, Republicans ran for the hills, he abandoned the idea, and everyone forgot the whole thing ever happened. If Obama had proposed a revenue-neutral phase out of the tax deduction, you’d just get the same thing in reverse.

The right way for the White House to engage with this issue is (a) vaguely, and then (b) in private. They need to try to credibly signal to reform-minded Republicans on the Hill that the President and his team won’t attack people who put technocratically sound proposals on the table. The point is precisely to avoid creating a partisan food fight over “Obama’s proposal to overhaul the tax code” while working constructively with people on the Hill to see what there might be support for. If you look back at the 1986 reform, the Reagan administration was definitely involved in the process, but it was overwhelmingly a behind-the-scenes thing that was about nudging good ideas forward rather than grandstanding for one day of good press.

And You Will Know Us By The Trail of Patent Trolls

One line from last night’s speech that really left me cold was this: “No country has more successful companies, or grants more patents to inventors and entrepreneurs.”

For one thing, obviously you should use per capita measures here. But the bigger issue is that the quantity of patents the government hands out to inventors and entrepreneurs is measuring two different things simultaneously. One is how many new ideas do inventors and entrepreneurs send in patent applications for. The other is how loosey goosey does the patent office get about what it deems patentable. I think that if you compare today to the time when Edison and Tesla were working in the United States it’s much more plausible to say that US patent policy has gotten more indiscriminate than that the gross quantity of inventiveness has accelerated.

To offer an analogy that I actually think isn’t stretched at all, but 21st century standards Isaac Newton should have patented calculus (“A Method For Using Fluxions To Determine Instantaneous Rate of Change”) and then waited patiently until Leibniz published his superior method and then sued the pants off anyone who tried to take a derivative without coughing up a hefty license fee. But would that world have been a better place? The issue isn’t really so much the rents that Newton would have thereby extracted (I’m not going to begrudge one of human history’s greatest geniuses a fortune) but the barriers to entry that would have been created as a secondary consequence. A world in which smart people have access to the stock of existing human knowledge and are free to apply it in new ways is a world of competition and innovation. A world where you need to consult with an army of lawyers first isn’t. If you ask the people who care most about promoting entrepreneurship in America about this they kind of shrug, concede that the patent system is hopelessly broken, and then confess to despair that it can or will be fixed.

In a broader sense, a lot of our politics is about symbolism. And symbolically intellectual property represents itself in the contemporary United States as a kind of property—it’s right there in the name. But it’s better thought of as a kind of regulation. Patents and copyrights are modeled, economically, the same as you would model any state-created monopoly.

Catch-Up Growth, Resource Scarcity, Fall-Behind Immiseration, and Political Instability

I alluded to this briefly in my Great Stagnation review, but separately on his blog Tyler Cowen has presented an intriguing hypothesis that the historical trajectory of natural resource prices is going to turn around.

Think of a world in which there are two kinds of growth. One is leap-ahead growth in which technologically advanced societies dream up even more advanced technology. The other is catch-up growth in which technologically backwards societies learn to use the advanced technology that already exists in the advanced countries. In the twentieth century we saw some instances of catch-up growth, but leap-ahead growth accounted for the majority of global growth in output. One result of that is that we got much much better at extracting natural resources (energy, food, metal) from the fixed supply of land, and commodity prices generally went down. But over the past ten years, catch-up growth in India, Brazil, and (especially) China has been the majority of world growth. Consequently, the rate of stuff-utilization is going up higher than the rate of stuff-production, meaning we’ll see rising commodity prices rather than falling ones.

For rich countries, that’s inconvenient but we’ll deal. For China, it’s fine—the whole point is that incomes will be rising faster than prices. But for poor countries that aren’t growing rapidly, it’s potentially a disaster. This kind of trend is what’s driving the current instability in North Africa and will probably be a major story for years to come.

Rahm on Transportation Policy

In the spirit of “be the change you want to see in the world” instead of just whining about the media not talking about where Rahm Emannuel stands on municipal issues I thought I should look into it myself. Here he is on transportation with a number of good ideas:

Every transit station attracts riders and development potential, but the City has not fully integrated the goal of improving rail lines and stations into its capital and economic development strategies. Rahm will issue an executive order that establishes clear and consistent principles for transit oriented development – expedited permitting, set-aside of city-owned property to expand car sharing and bike parking, assistance with land assembly, expanded use of tax credits and loan guarantees, and identification of instances where the City will jointly invest with CTA to improve the transit system. The order will recognize the clear link between housing and transportation costs in keeping neighborhoods affordable, and will evaluate improvements on their ability to reduce the combined cost of housing and transportation for Chicago residents. This policy will help to focus all investment – including in Chicago’s TIF districts – around developments that integrate station upgrades with mixed-use developments.

The devil’s in the details, always, but this is the correct spirit. Heavy rail mass transit is a potentially very valuable investment, but the value lies in the possibility of dense development near stations. Facilitating transit-proximate development is key.

When America Is Number 2

I don’t begrudge a president making a formal speech the chance to engage in some meaningless nationalism, but something I thought was really striking about Barack Obama’s speech last night was how utterly unprepared American political culture is for the idea of a world in which we’re not Top Nation. And yet the reality is that while we’re the world’s largest economy today, and will continue to be so tomorrow, we really just won’t be forever. The Economist predicts that China will pass us in 2019. Maybe it’ll be 2018 or maybe it’ll be 2022.

But it will happen. And fairly soon. And it’ll happen whether or not we reform education or invest in high speed rail or whatever. And the country doesn’t seem prepared to deal with it.

The Great Stagnation

Tyler Cowen’s new ebook How The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better is a bravura performance by one of the most interesting thinkers out there. I also think it’s a great innovation in current affairs publishing—much shorter and cheaper than a conventional book in a way that actually leaves you wanting to read more once you finish it. My guess is that this is the future of books.

The argument is in many ways a continuation and expansion of Paul Krugman’s themes from The Age of Diminished Expectations, Third Edition: U.S. Economic Policy in the 1990s. Specifically, the argument is that growth has been slow for the past 30-40 years for fairly fundamental reasons related to a slowing rate of increase in basic science and that our politics has become dysfunctional insofar as it’s failed to adapt to those realities. He also argues in parallel (and with, I think, less hard evidence) that a growing share of innovative energy is going into rent-seeking or otherwise unproductive activities. Cowen says we shouldn’t let rapid growth in China confuse us. What the Chinese are doing is seizing the low-hanging fruit of copying ideas from the US, Europe, and Japan whereas what the rich world needs is brand new ideas. Over the course of the book you get about one insightful point per page across a whole range of subjects. One key lefty-sounding insight is that we need to think higher about ways to improve quality of life that aren’t just about money and materialism.

The prescription is less persuasive than the diagnosis. In particular I think that for a book that talks so much about ideas, innovation, the internet, and rent-seeking it says remarkably little (indeed almost nothing) about intellectual property law. I also think the book goes awry near the end in doing too much to link the stagnation hypothesis to the present-day recession. Rich countries have experienced very divergent fates over the past 36 months when the key evidence for the technological stagnation thesis is that rich countries have experienced a broadly similar fate over the past 36 years. I wanted to hear more about the implications of a world in which catch-up growth by poor countries accounts for the vast majority of increased output. It seems to me that this is going to invert the results of the Simon-Ehrlich Wager in a problematic way.

Paul Ryan’s Evasion

Good analysis from Ross Douthat:

Ryan’s rejoinder was more urgent and more focused: America’s crippling debt was an organizing theme, and there were warnings of “painful austerity measures” and a looming “day of reckoning.” But his remarks, while rhetorically effective, were even more vague about the details of that reckoning than the president’s address. Ryan owes his prominence, in part, to his willingness to propose a very specific blueprint for addressing the entitlement system’s fiscal woes. But in his first big moment on the national stage, the words “Medicare” and “Social Security” did not pass the Wisconsin congressman’s lips.

None of this was particularly surprising. It’s clear that both parties have decided that a period of divided government twelve months before a presidential election is the wrong time to make big moves on entitlements and the deficit. Better to wait, jockey for position, and hope that the correlation of forces after 2012 will be more favorable to their preferred solutions.

But to further defend feckless politicians, not only is evading the entitlement challenge politically smart but economically speaking there’s no reason to focus on the deficit right now. Imagine a car driving on a very straight patch of empty highway at 45 miles per hour. Thirty miles ahead comes a very steep curve that’s dangerous to take any faster than 20 miles per hour. You’re going too fast. You’re going to have to slow down soon. But right now you’re going too slow. There’s no reason to be driving 45 mph on an empty straight highway. The fact that in the future you need to slow down and take a tricky turn is neither here nor there.

Paul Ryan vs Paul Ryan

I don’t have a ton to say about Paul Ryan’s response speech except to note it was odd that he didn’t mention any of the proposals associated with Paul Ryan’s “budget roadmap.” He spoke at length about his desire for less spending and more limited government. But he didn’t mention which programs, specifically, he wants to eliminate. Which is particularly odd because the “roadmap” calls for, among other things, the elimination of Medicare. That’s kind of a big deal! If Ryan thinks we should do that, wouldn’t a nationally televised addressed be a good opportunity to explain it to people?

The State of the Union

As I understand it, gay soldiers will win the future by riding high speed trains to salmon farms.

I thought it was a good speech; an example of trying to govern from the White House. I would say that zero percent of the speech was dedicated to building support in congress for concrete pieces of legislation that the President hopes to sign into law. And it’s too bad that the president’s not in a position to promise to shepherd big bills through congress. But the reality is that he’s not. So he’s wisely floating above the fray, issuing “sounds good but hard to do in practice” calls for smart infrastructure investments, tax reform, less oil subsidies, etc. Most likely none of it will happen. But it will definitely sound good, and if the president’s lucky some of it will happen!

The tragedy we can see unfolding, though, is the way the president shied away from even mentioning the idea that climate change is a problem. That reflects political reality, but it also reflects the greatest failure of Barack Obama’s term in office.

Endgame

You can say what you like:

— Health insurance saves lives.

— Time for the Palin apologists to let go.

— Michael Lind hates Star Wars, is history’s greatest monster.

— Ross Douthat stands up for Barack Obama’s trite platitudes and I agree.

— Presidential speeches matter less than they used to thanks to cable.

I’m feeling fake patriotic thanks to the State of the Union, so here’s New Model Army’s “51st State”.

The Revolution Will Be Tweeted

Look to my public twitter feed for live State of the Union coverage later.

Hydrocodone: A Dissent

Reader AC has more on turning your vicodin into pure hydrocodone:

Just wanted to tell you that the reader commenting on the ease of abusing hydrocodone-acetaminophen medication is incorrect. What he says about the dissolution in water of both chemicals is correct, but whether or not the acetaminophen is dissolved or not in water you drink is irrelevant – it’ll get into yr system either way. To extract the hydrocodone and remove the one must perform what’s called a cold water extraction – dissolving the pills in water, then cooling down the water so the acetaminophen crystallises. After filtration the resulting liquid will contain very little acetaminophen but retain the hydrocodone. As this takes less than an hour, it doesn’t really change the point yr reader was making, but I thought it was worth pointing out nonetheless.

So be careful.