Democracy in America

SOMETHING happened over the course of the past week that moved Newt Gingrich from a relevancy-challenged 15 points behind Mitt Romney in South Carolina to a dominant 40-to-28 win. What was it? The New York Times' exit polling doesn't give many answers. More than half of voters made their choice within a few days of the primary, but that was obvious from the swing in the polls. More significantly, "Six in 10 voters said it was important that a candidate shared their religious beliefs, and nearly half of them backed Mr. Gingrich, who has converted to Catholicism; about a fifth went for Mr. Romney, a Mormon." As my colleague writes, it looks like the Mormon factor is important, at least in heavily evangelical states. But that's a static issue; Mitt Romney wasn't any less Mormon a week ago, when he had a dominant lead, than he was on Saturday, when he got crushed. This seems like a better explanation:

For nearly two-thirds of voters, the recent debates were an important factor in their decision; for about 1 in 8 they were the most important factor. Mr. Gingrich was considered by many to have done particularly well in the debates; he received the votes of about half of those for whom the debates were important.

Newt Gingrich did two major things in the past ten days. The first was to launch a blistering attack on Mitt Romney as a greedy "vulture capitalist" who doesn't care about American jobs. The second was to turn in a confident, aggressive performance in two debates. And what was it that so impressed audiences about those debates? Was it Mr Gingrich's big ideas for the future? That seems doubtful, largely because, as Ross Douthat writes, it's not clear what they are.

I have, for my sins, watched Gingrich make his pitch across what feels like seventeen thousand Republican primary debates, and I am at a loss to identify the “big ideas” and “big solutions” that he is supposedly campaigning on. Yes, he has an implausible supply-side tax plan, but you never hear him talk about it. He has technically signed on to some form of entitlement reform, but you never hear him talk about that, either. Instead, so far as I can tell, his “idea-oriented” campaign consists almost entirely of promising to hold Lincoln-Douglas-style debates with President Obama, grandstanding about media bias and moderator stupidity, defending his history of ideological flexibility much more smoothly than Mitt Romney, and then occasionally throwing out a wonky-sounding notion (like, say, outsourcing E-Verify to American Express) that’s more glib than genuinely significant. His last-minute momentum in South Carolina, which last night’s debate did nothing to derail, has been generated almost exclusively by the politics of ressentiment: If he wins the Palmetto State primary, it will be because conservative voters don’t much like the mainstream press, and Gingrich has mastered the art of taking tough questions and turning them into dudgeon-rich denunciations of the liberal media and all its works.

Mr Douthat thinks Mr Gingrich's success here hinges on his denunciation of the liberal media. I think the ressentiment here is actually more specific than that, and it sits significantly deeper. Mr Gingrich scored big on two points. The first was his insistence on terming Barack Obama the "food-stamp president"; my colleague is right to term this "expert racial dog-whistling". The second was the thunderous counter-attack against his disgruntled ex-wife's allegation that before their divorce 13 years ago, he had asked for an open marriage so that he could continue the affair he had begun with his then legislative aide, now his wife.

In the debates, in other words, Newt Gingrich hit two themes hard. The first was to link our black president with food stamps (and against hard work), and to angrily denounce the suggestion by a black media moderator that this could possibly be considered racial exploitation. The second was to blast the media for paying attention to his ex-wife's account of an extramarital affair. How might we characterise these themes? What is it about these two themes that makes them so appealing to the Republican voters who helped Mr Gingrich gain over 25 points on Mr Romney in ten days? I leave this exercise to the reader.

"THIS is the beginning of a long, hard slog," said Ron Paul, at his optimistically titled "Victory Party". "This is a hard fight because there's so much worth fighting for," said Mitt Romney, "and we've still got a long way to go." Indeed we do. A week ago South Carolina was going to be Mr Romney's coup-de-grace, turning Florida into an afterthought. He had won the two previous contests. Newt Gingrich, Rick Santorum and Rick Perry were squabbling over the social-conservative votes. Only Messrs Paul and Romney had the organisation and the ground game to go the distance, and Mr Paul's support had (and still seems to have) a low ceiling. But then Mr Perry dropped out, endorsing Mr Gingrich. A recount showed Mr Santorum won in Iowa. Mr Gingrich parlayed a couple of powerful debate performances into victory in South Carolina. And Mr Romney now finds himself with the wind in his face rather than at his back.

What happened in South Carolina? Erick Erickson writes that today's result was "about Republican grassroots giving the Washington Establishment the finger. The base is angry, and right now only Newt is left to fight for them." Mr Gingrich can hardly be considered a Washington outsider, having served in Congress for some 20 years, but if there is one thing the former speaker is good at, it's fighting. His debate performances this week displayed not a mastery of the issues, or any particularly novel policy proposals, but anger. His speeches have portrayed the campaign as an epic battle between an exceptional American, himself, and an un-American president. So it's hard to argue with Mr Erickson's analysis, but if you look at the exit polls, it is equally hard to be satisfied with it.

Particularly in the last week of the campaign, Mr Gingrich engaged in some expert racial dog-whistling. He called Barack Obama the "food-stamp" president (shades of Ronald Reagan's infamous "Welfare Queen") and accused him of declaring war on religion and traditional American values. He was not merely condescending to Juan Williams, the lone black moderator in the most recent debate, but effectively called him lazy at a campaign event. He then used this tussle as a campaign ad arguing that he could most effectively beat Mr Obama, who just happens to share the same skin colour as Mr Williams. These attacks seemed to go down well with primary voters, who were 99% white.

Then there is the religious angle: 64% of South Carolina's voters are white evangelicals, and 60% of those voters think it is very or somewhat important that a candidate share their religious beliefs. The Mormon Mr Romney did poorly with that group of voters, who instead gave their support to Mr Gingrich, in spite of his history of philandering. So South Carolina was always going to be unfavourable ground for the former governor; the question is what does he do now?

In the short term, he goes to Florida, where his SuperPAC has spent $7.3m on TV ads and Mr Gingrich's has spent none. Then he goes to Nevada, which is 11% Mormon, where he will do fine. He remains the likely nominee, but he will need to change tactics, and quickly too. His recent debate performances were as abysmal as Mr Gingrich's were stellar. When questioned about his wealth, he stuttered, twitched and stammered, for no good reason. He did not get rich robbing banks; he got rich by being good at his job, and if, as he said tonight, Republicans celebrate success and prosperity, he has nothing to apologise for. So he will need to confront the attacks on his business record, and tonight he made a good start, accusing Mr Gingrich of attacking free enterprise. But his air of inevitability has worn off, and his electability argument has been dented. That makes it much harder to win as everybody's second choice, and it may prove more costly in the long run than simply not winning the few delegates South Carolina offers.

(Photo credit: AFP)

ONE of the notable things about the marriage of Barack and Michelle Obama, as depicted in Jodi Kantor's new book "The Obamas", which I reviewed for this week's paper, is that it's apparently both happy and traditional. That's not striking because of who the Obamas are, but because of the state of marriage today. In 1960, 72% of American adults were married; last year, according to the Pew Research Center, just 51% were. And the "married or single?" binary obscures the range of experiences and arrangements that are available. Still, people have not abandoned their tendency to make judgments about other people's personal relationships. As polling from Gallup shows, there are some things, like infidelity and polygamy, that most Americans consider morally unacceptable. But the traditional model of marriage—one man, one woman, legally bound, loving one other, forsaking all others, until death do us part, come what may—is apparently unrealistic or undesirable for many, and so it's getting harder to draw sweeping conclusions about people based on their personal lives. 

This is the context in which we must place the question of how voters will react to Marianne Gingrich, Newt's second ex-wife, who has given a new interview claiming that her then-husband asked for an "open marriage" when he was already carrying on an affair with Callista Bisek, now his third wife. On one side there are observers who think this will be a problem and should be. "If this is true, it makes Gingrich look more French than John Kerry," writes James Taranto in the Wall Street Journal, adding that it's particularly damaging due to the contrast posed by Mitt Romney, who has been married to his "sweetheart" for 42 years, and who didn't abandon her when she was ill. The New York Times editorial board, meanwhile, scolds Mr Gingrich for hypocrisy: "It’s magnanimous of him to be willing to allow voters to decide for themselves on the importance of his moral choices, since he and his party have been so unwilling to allow the public to make its own moral choices."

But Marianne Gingrich's charges don't seem to be drawing much blood, perhaps because they are old news. Mr Gingrich's stormy marital history has been well-documented, and even the latest charge, that he wanted an open marriage, was implicit in some of Ms Gingrich's previous interviews. It's also easy to dismiss Ms Gingrich as a "disgruntled ex", as Sarah Palin did in her defence of the candidate. And the Gingrich camp may have effectively defused the problem by spinning it into a complaint about the media. "I think the destructive, vicious, negative nature of much of the news media makes it harder to govern this country, harder to attract decent people to run for public office. And I am appalled that you would begin a presidential debate on a topic like that," said Mr Gingrich at last night's debate. 

Continue reading "Marianne Gingrich shouldn't matter much"»

AS SOON as Mitt Romney acknowledged that he paid a tax rate of about 15% because almost all of his income comes from capital gains, which feels like about a million news cycles ago, a bunch of commentators rushed to declare that while Mr Romney's personification of the 1% is an unavoidable political issue, there are good arguments for charging lower tax rates on capital gains. Strangely, though, I haven't seen anyone make any of them. The closest I've seen was this widely cited post by Republican dissident David Frum. (Here's Paul Krugman citing it.) But it seems to me that while Mr Frum makes an argument for low capital-gains rates, he fails to make a good one. Here's his take:

We want capital assets put to their highest and best use. If Joe can run the company better than Jane, if Jill can make better use of the corner of Main and Elm than Jack, then we want to see ownership of that company or that corner transferred as expeditiously as possible to the higher and better user. That's why we encourage transparent and efficient markets for capital assets.

A capital gains tax is a tax on the transfer of control of assets. If that tax is set too high, it can discourage even the most glaringly urgent transfers of control. Under Joe's management, the value of the company may rise 30%. But if the capital gains rate is set at 50%, then the transaction from Jane to Joe will not occur—and everybody will be worse off.

The first part of this parable confuses ownership with management. As John Kay recently pointed out while arguing against the current usage of the term "capitalism", few significant modern enterprises are managed by their owners. For the overwhelming majority of cases in the modern business world, if Joe can run the company better than Jane, then what we want to see is for the board of directors to fire chief executive Jane and hire Joe to replace her. This has little to do with capital gains. People who report capital gains due to ownership of a company are generally not active players in the company's activities; they're stockholders. And that, obviously, is what Mr Romney made his money from last year. He's no longer running Bain Capital, taking over companies and trying to rejigger their assets or run them better. He's a retired executive with an estimated $200m-plus in assets that are producing revenue for him in the way that assets have always produced revenues for wealthy rentiers.

In many cases, efficient deployment of capital does depend on companies acquiring assets they can put to use better than another owner could, as with a merger or acquisition. But capital-gains taxes usually play a minor role here, because expected appreciation of the shares or assets of the target company after it is acquired is not usually a major reason for the deal to go through, except in private-equity takeovers. When Daimler acquires a majority stake in Chrysler, they're mostly thinking about synergies and market share, not potential gains from selling off Chrysler stock in the future if it appreciates, though that consideration isn't entirely absent.

What low capital-gains tax rates mostly do is to encourage people to save their money by investing in assets, rather than saving it in vehicles that pay interest or dividends, or spending it on consumption goods.

Now, one may say, that's good. We want people to save and invest. True enough (though why capital gains are more virtuous than earning interest or dividends is an open question). But we also want people to work hard to earn money and create value. If we don't tax capital gains, that means we need to get the money to fund the government by taxing something else, probably income. And taxing income means there's less incentive to work hard. Mr Frum is weak on this point, too:

The underlying asset will have taxes assessed against it: corporate income taxes if it is a company, property taxes if it is a piece of land. Those taxes are paid the day before the transfer of ownership, and they continue to be paid the day after. A transfer of ownership transfers the obligation to pay the tax. But the amount of tax collection in the economy is not diminished by the transfer, and it's difficult to justify why the occasion of transfer should trigger yet more taxes.

Sure, the corporation still has to pay taxes on its income. But if lower taxes are assessed on the transfer, then something else is going to have to be taxed more highly in order for the government to be able to pay its bills. The question with taxation is never whether or not to tax; it's whether this type of tax is a better or worse way to raise revenue than some other kind of tax. Mr Frum never makes an argument that capital-gains taxes are worse for the economy than income taxes, or sales taxes. And Greg Anrig adds another point: the capital-gains tax introduces tremendous complexity into the tax code, which creates inefficiency and distortions of its own.

But here's the main point. As Mr Krugman notes, capital-gains taxes have only been 15% since 2003. From 1987-1996, they stayed around 28%. We now have capital-gains taxes that are just over half as high as in the old dystopian socialist days of Ronald Reagan's economy.

If higher capital-gains taxes led to lazy management and widespread misapplication of capital, you would have expected American businesses to have become vastly better managed and more efficient starting in 2003. If this was supposed to lead to higher growth, you would have expected GDP growth in America to be significantly greater from 2003 on than it was in the late 1980s and 90s.

Does anyone seriously think this has happened? It just doesn't sound like a good description of the history of the US economy over the past 20-odd years. What we have seen, however, were two tremendous asset bubbles, the first concentrated on the stockmarket, the second on housing, as people's money was used in ways that let them take advantage of low capital-gains taxes. As Mr Anrig writes:

Advocates of the capital gains tax break have claimed for decades that the exclusion benefits the economy and all workers by encouraging higher levels of investment and savings, which in turn promote growth and prosperity. But researchers have never been able to demonstrate that such connections actually exist. Capital gains tax rates have gone up and down over the years with little apparent relation to economic performance, aside from fleeting effects on realization of capital gains when rates change.

I think you can probably make some good arguments for taxing savings at a lower rate than income. You can argue, for example, that high capital-gains taxes don't actually produce that much more revenue, because they just lead people to hold assets for longer. Or you can point out that capital-gains taxes need to be lower than income taxes in order to compensate for inflation, which makes assets appear to have appreciated even though they really haven't. But Mr Frum doesn't make those arguments. In fact, nobody's making any arguments on that side that are very convincing. A number of people are nodding to the claim that such arguments exist, but nobody seems to be producing them.

AFTER observing Rick Perry at close range for the last few years, I had thought that he would be a strong candidate for the Republican presidential nomination. He's a strong business conservative who has governed a state with a cracking economy, and although he has all the right-wing rhetoric down, his record has been more moderate than his public profile suggests. He is a good retail politician, and likeable. I never thought he was dumb (and still don't); lazy, perhaps, but as a small-government type, that doesn't really bother me.

Well, oops.

On the one hand, Mr Perry might seem like just another campaign casualty; national politics is unpredictable, and this year has been especially capricious. America is occasionally criticised for its long election cycles, and it certainly creates some problems, but one of the virtues of this system is that it lets voters put the candidates through their paces. Campaigning is not the same as governing, of course, but it does require endurance, discipline, and commitment, all of which are relevant traits in a would-be president. When Barack Obama joined the presidential race in 2007, there were millions of sceptics who thought he was too young and inexperienced; over the course of a long primary and fierce general election, he proved that he was more than just a pretty face. In this cycle, we've seen Rick Santorum and Newt Gingrich—neither of whom was considered a serious contender when they entered—fight their way into the top tier.

And sometimes candidates can't hack it. Mr Perry is actually the third candidate to enter the race with great expectations only to drastically underperform and drop out. The other two are Jon Huntsman and Tim Pawlenty. The fact that all three are former or current governors is curious. Perhaps the mood among Republican voters is not as anti-Washington as they say it is. More importantly, you don't know how somebody is going to perform on the national stage until they're on the national stage. (The other governor in the race, Mitt Romney, is likely to be the nominee, but he's been a national figure for more than five years.) When Mr Huntsman left, I said that despite his credentials, he just didn't have the "magic touch" for national politics. That could be part of the issue for Mr Perry too.

However, that analysis is ultimately too generous to Mr Perry. He lost this race fair and square. The voters gave him a serious look—at one point he was polling in the low 30s, which is about where Mr Romney is now—and they weren't impressed by what they saw. Most of the blame for that must go to the candidate. He did get hammered from all directions, in some cases a little unfairly. The attacks on the "Texas miracle", for example, were motivated as much by a desire to tear down Mr Perry as to have a substantive discussion about job creation, a rather important topic. But it was Mr Perry's job to counter those attacks, and he bungled it. His prescription for America's domestic ills seemed to involve fossil fuels, a flat tax, and little else. His views on foreign policy were at times both glib and belligerent; when asked how he would deal with Turkey, an American ally, he implied that it was run by Islamic terrorists. He also bungled his debate performances, which were at some points so rough that even liberal commentators had moments of sympathy.

But the debates do not test character in the way a fading campaign does, and here too Mr Perry disappointed. As his candidacy foundered, he indulged in some unpleasant pandering politics in an apparent bid to win over the social conservatives who had assessed (correctly) that he wasn't much of a holy warrior, even if he did host the occasional prayer rally. Having previously taken a sanguine view of gay marriage, he decided to target gays in the run-up to the Iowa caucuses. As the South Carolina primary approached, he ranted about "Obama's war on religion."

None of it helped. And so perhaps the greatest takeaway from Mr Perry's campaign is that it's a bad idea for candidates to run on anything other than their beliefs. The Texas governor did stick to some of his talking points, about the importance of fiscal discipline and the 10th amendment, but was uninformed about many issues, and pandered on others. It was enough to alienate moderates, not enough to convince the target audience, and it took the focus off his areas of strength. It may be that it's possible to win an election without having an extremely clear message—ask Mr Romney. But more often than not presidential campaigns don't pan out, and in the cases when they don't, it's the candidates who have a clear cause who retain their role as advocates—ask Ron Paul. "I have always believed the mission is greater than the man," said Mr Perry earlier today, but after making such a hard play for the social conservatives, it's not clear what the mission was. He would be in a stronger position now if he had stuck to his core interests and arguments.

(Photo credit: AFP)

THE candidates gather in South Carolina tonight for what is sure to be the best debate of Rick Perry's campaign. And this meal comes with a digestif: Nightline's interview with Marianne Gingrich. We'll be live-blogging the debate, which starts at 8pm ET on CNN.

A MAN with my cholesterol levels has no business being fed as much pure red meat as was offered at last night's campaign event. Devoted to abortion and held by Personhood USA, about whom we've written before, the forum drew Rick Perry, Newt Gingrich, Rick Santorum and Ron Paul to a rather dreary Hilton on the outskirts of Greenville (Mr Paul appeared via satellite from Washington, DC, having briefly stepped off the campaign trail to vote against a debt-ceiling increase) to answer a penetrating set of questions. Is life important? It is. Is there anything more important than life? There is not. Is abortion wrong? It is. When does life begin? At the moment of conception. So far, so unsurprising. The gems were further down in the questioning line.

Rick Perry went first. He was loose, funny and relaxed as only a man about to drop out of the presidential race could be. He genially floundered his way through some substantive questions about constitutional law, and declared his opposition to abortion so strong that he would bring government to a halt rather than sign any bill that included abortion-related funding. He sparked to life only when he started talking about Barack Obama ("this administration is at war with religion") and Mitt Romney. The latter's relatively recent discovery that he was in fact opposed to abortion rights was, Mr Perry charged, "a decision [he] made for political convenience, not an issue of the heart."

Mr Perry's problem has always been the culture-warrior's problem: only opposition moves him. He can rile a crowd as well as—and in the same way as—Pat Buchanan. Let a thousand pitchforks gleam! But then what? Ask Ron Paul why he wants to be president and he’ll bang on about fractional banking and the Fed and sound money and raw milk until he dislocates his shoulders from excessive twitching. Ask Newt the same thing and he’ll tell you why we’re at the most perilous point in human history and we need to fundamentally transform the way we breathe air and eat food and he’s the only American politician to ever truly understand human civilisation and by the way can he tell you about his plan to send poor children to mine tungsten on the moons of Neptune. Ask Mr Perry why he wanted to be president and all he could tell you is how awful the other guys are. That was necessary but insufficient. The crowd knew it, and apparently he does too now.

Still, he set in motion a contest—which candidate is most vehemently opposed to abortion rights, and who will do the most to curtail them—that the next three contestants took up with zeal. Newt Gingrich came out in full snarl, decrying "a secular judiciary that seeks to impose elite values on a country that deeply dislikes it." He offered a novel solution to this problem—one that went beyond his call for "aggressive, articulate leadership", a self-advertisement if ever there was one. If a court makes "a fundamentally wrong decision", the president can ignore it and Congress can abolish it. Mr Gingrich brushed off a panelist's suggestion this simply switched "tyranny by five justices for tyranny from one executive." If Congress sides with the Supreme Court against the president, it can vote to defund the presidency. If Congress supports the president, it can abolish the judiciary. "This is not something you would do capriciously," Mr Gingrich cautioned, in perhaps his first-ever understatement. "But I fully expect that as president there will be several occasions when we would collide." Phew! A Gingrich administration would see frequent rather than perpetual inter-governmental chaos. I'm relieved.

Rick Santorum also promised to "fight the courts". The president and every member of Congress takes an oath to uphold the constitution; "we have just as much say as they do." One wonders what their response would be if Mr Obama decided he was going to unilaterally ignore the Citizens United decision. Or imagine he had a Democratic majority in Congress and they passed legislation outlawing corporate political contributions. That certainly is in line with the Gingrich-Santorum view of a weak and dismissible judiciary. Still, Mr Santorum's main target was not law but science. "Science", he declared in answer to a question about experimental cloning, "is not an ethics- or moral-free zone. It is something society has every right—in fact, an obligation—to curb." 

The crowd loved these attacks (though the night's biggest cheers went to Ron Paul's giant televised head), and there's nothing wrong with a little pre-primary pander. But what would America's schools look like under a president contemptuous of science and education? And if America's political system is fractious and prone to gridlock now, what will it look like when the president starts ignoring and undermining the courts? The best one can say about such full-on attacks on law and science is to hope the candidates are making them in bad faith.

(Photo credit: Reuters)

INTERACTIVE: Explore our map and guide to the race for the Republican candidacy

BARACK OBAMA'S decision last year to put off a judgment on a proposed oil pipeline between Canada and Texas until after this year's presidential election swept a tricky problem under the carpet. Supporters pointed out that Keystone XL, a pipeline that would carry oil from Alberta's tar sands, as well as some from America's Bakken shale fields, would bring not just added energy security but jobs aplenty. Environmentalists would have none of these supposed advantages, decrying emissions-heavy oil from tar sands and claiming that in the event of a leak, the pipeline threatened a vulnerable aquifer on its route through Nebraska.

So the administration's announcement that it will now slap a big "rejected" stamp on the application from TransCanada, the Canadian company that wants to build and operate Keystone XL, seems to come down firmly on the side of the greens. But Mr Obama is still treading a fine line between the two sides. Thanks to resistance to the pipeline from Republican politicians in Nebraska last year, TransCanada had already offered to reroute it to avoid the Sandhills, a part of the state where the massive Ogallala aquifer rises almost to the surface. The ostensible reason for last year's delay was the need to study new routes (the unspoken ones being to duck a tough decision and placate the green lobby). The assumption was that the pipeline would eventually be approved in some form, but not at such an awkward time.

Republicans in Congress, however, tried to force the president's hand by inserting into an important spending bill a clause obliging him to rule one way or another by the end of February. The administration now claims, insouciantly, that it had to rule against the pipeline because the Republicans had denied it the chance to consider all the risks properly. In fact, little has changed. TransCanada can submit a new application for a similar pipeline following a new route, giving Mr Obama the respite he wanted while allowing him to bask in green adulation for now. The Republicans, for their part, can now make slightly stronger attack ads about Mr Obama's foot-dragging in the run-up to the election in November.

Meanwhile, the delays have strengthened Canadian resolve to find new ways of getting tar-sands oil to global markets. This might mean expanding an existing pipeline and building a new one to Canada's west coast for shipment to Asia's oil-thirsty markets. The western province of British Columbia, however, has feisty environmentalists of its own who might yet have a say.

The Chamber of Commerce is gnashing its teeth about the decision, but there are some American businesses who will rejoice at the new delay. The final section of the pipeline would have taken oil from Cushing, Oklahoma, to the Gulf coast, helping to alleviate a persistent price differential between Brent crude, the global benchmark oil, and West Texas Intermediate. Cushing, where most American oil is delivered is landlocked. There is not nearly enough pipeline capacity to the Gulf where global markets set prices. Unfortunately for American drivers, petrol (gasoline) is globally traded. The upshot is that local refiners can buy cheap Cushing crude and sell petrol at dearer global prices. So at least Mr Obama is keeping one lot of businessmen happy.

KEVIN DRUM worries that the high cost of college tuition is driven by the very large value of lifetime earnings gains derived from a college degree. He agrees with Kevin Carey that federal tuition subsidies and easy loans are part of what's driving up the price of a college education, but he thinks the real story is "more depressing": As long as we keep giving people whatever student loans they need to attend college, and absent any regulatory price controls, colleges will hike tuition to the very limit of what it's worth in higher wages.

[I]t's not just that universities are steadily making up for distortions caused by federal aid. The fact is that we've never been in a situation where universities were charging a market price in the first place. After all, if the lifetime wage premium for a college grad is a million dollars over 40 years, then how much is four years of college worth today? Answer: about $300,000 or so. That's $75,000 per year...

For many decades, universities acted as though they had a public, charitable mission. That was especially true for state universities, but it was true for most private universities too. That's largely changed. In the public sphere, taxpayers have noticed that (a) it's mostly well-off kids who go to college these days, not children of the poor bettering themselves, and (b) this education is worth a helluva lot of money. So why should they be asked to subsidize a route to higher earnings for kids who, for the most part, already have a lot of advantages? The cost of college loans seems more and more like a simple financial transaction to them, not a crushing burden being placed on struggling youngsters.

In the private sector, I'd guess that universities are simply coming to grips with the fact that they can charge a lot more than they ever imagined. They're testing the boundaries of their market price, and they haven't found it yet. Until they do, tuition costs will continue to skyrocket.

Mr Drum doesn't put this forward as a definitive figure. But the basic point seems valid, and I think there's one more consideration we need to mention: This seems like a particularly clear case where the market value of a good is much lower than its social value. One way to express this point is that the social value of each student's college degree is $1m. That's the earnings they'll add to the entire economy if they get a college degree. But without subsidies, the market value will be much lower, because most people can't afford to spend $300,000 on a college education, and will be reluctant to borrow that much even if banks are willing to loan it to them. Because the market value will be lower than the social value, the goods will be under-provided. Scrap government subsidies, and you may keep college tuitions down. But you'll be accomplishing that by ensuring that a whole lot of potential students decide not to go to college, which will ultimately mean poorer Americans and lower GDP.

Another way to think about this would be to ask what high-school tuition would cost if we didn't guarantee a free high-school education to every child, and instead funded it the way we do college education, by loaning people the money to pay for it. Assume the social value of a high-school degree is just the difference in lifetime earnings between a high-school graduate and a drop-out. According to Princeton's Cecilia Rouse, that was about $260,000 as of 2005. (In fact this greatly understates the earnings difference: it's just the difference between lifetime earnings for drop-outs and those with only a high-school degree. Since you need to finish high school in order to go on to college, we should really be factoring in some part of the eventual earnings difference for those with college degrees or higher. But I don't have those stats and it would be hard to decide what fraction of those earnings to include, so let's leave it at $260,000 and recognise that we're low-balling it.)

So how much is $260,000 in lifetime earnings worth today? I'm not sure how Mr Drum got his $300,000 figure, but I assume it's a future value calculation of what sum you'd have to invest to get $1m at some reasonable rate of return over 40 years. Which means he's estimating a real return of about 3% per year. Assuming a high-school grad or drop-out works perhaps five more years than a college grad over the course of their lifetime, what would you have to invest to end up with about $260,000 after 45 years at a return of 3% per year? If I'm doing my math right (1/e^rt * 260,000), it's about $67,500. So we're talking four years of high-school tuition at almost $17,000 a year. And, again, this is probably significantly low-balling the real value of that degree.

How many American parents can pay $17,000 a year per kid for their kids to go to high school? Say this math overestimates the present value of the degree, and the actual figure is only $10,000. How many parents could afford to pay that? How many can borrow that much on the private market? How many would be willing to, if they could? What percentage of American kids would graduate from high school if they or their parents had to pay the full future value of their education up front? Currently 70% of Americans graduate from high school; imagine that percentage dropped to even 50%. And here's the money question: How much poorer would America be, how much lower would our GDP be, if only 50% of Americans graduated from high school? I think this is the way we need to think about the value of government subsidies for, and/or cost controls on, and/or provision of low-cost Skype-enhanced alternatives to universal college education.

MOST observers will be stoical about the fact that Jon Huntsman has left the presidential race, as he never seemed to have much chance at winning, but many will also be a bit sad. Mr Huntsman is a thoughtful politician and a credible person, which would be faint praise if there were more of them around.

He might be back, so let's skip the eulogies and go straight to the analysis. There are several ways to understand the untimely end of the Huntsman campaign. One is that despite the good press, and regardless of his policies, he simply wasn't a good candidate. "He just wasn't any good at projecting an intriguing image," as Kevin Drum puts it. That may be a factor in any capsized candidacy. There are some people who seem to have a magic touch for national politics, and others who don't. It's a capricious quality that doesn't necessarily track with someone's charisma, intelligence or experience.

Another popular explanation of Mr Huntsman's failure to catch fire is that he was too moderate to win the Republican primary at a moment when the conservatives are so full of beans. "The early wisdom was actually right," writes David Weigel. "Divided as they are, ready as they are to let Mitt Romney win the nomination anyway, Republicans in 2012 had no interest in a compromise candidate who could speak Democratic parseltongue."

This is an appealing argument because it partly corresponds to the observable world, and I think it's largely correct. But it does gloss over the fact that a moderate is probably going to win the Republican presidential nomination. It may be that Mr Romney is not as close to the political centre as Mr Huntsman, having tacked to the right in both of his presidential campaigns, but there are some glaring blue blots on the Romney record, and he's clearly considered a moderate relative to the rest of the Republican field.

A slight variation is that Mr Huntsman's problem is not just that he was too moderate, but that he was too similar to Mr Romney, at least according to the rough typecasting of a presidential primary. The two were largely campaigning for the same voters—moderate Republicans and independents, the business conservative crowd, pragmatic people, people who aren't frightened about Mormons. Now Mr Huntsman has already endorsed Mr Romney, skipping the usual mini-drama of pretending to mull his endorsement (and despite the fact that he often attacked Mr Romney on the trail). Most of Mr Huntsman's voters probably will go to Mr Romney, if not to Barack Obama or Ron Paul. It might be that Mr Huntsman would have had more success, if not for the fact that Mr Romney had a head start of four years and millions of dollars. But now it's Mr Huntsman who has the head start for next time.

(Photo credit: AFP)

CHARLES DODGSON, otherwise known as Lewis Carroll, didn't much like travel, which makes his notes on one trip he did take, to Berlin in 1867, all the more entertaining. In particular there's a passage about what he calls the chief principle of Berlin architecture that has always stuck in my memory:

Wherever there is room on the ground, put either a circular group of busts on pedestals, in consultation, all looking inwards—or else the colossal figure of a man killing, about to kill, or having killed (the present tense is preferred) a beast; the more pricks the beast has, the better—in fact a dragon is the correct thing, but if that is beyond the artist, he may content himself with a lion or a pig. The beast-killing principle has been carried out everywhere with a relentless monotony, which makes some parts of Berlin look like a fossil slaughter-house.

I've recalled this passage frequently in recent years when thinking about Washington, DC. And it came to mind again after Kevin Drum passed on the latest complaints about the new Martin Luther King memorial. First the memorial was criticised for the somewhat Socialist Realist echoes of the style adopted by its Chinese sculptor, who cut his teeth on a whole lot of Mao. To be honest, I didn't quite get the criticism; I've never been able to see much of a difference between socialist realism and the tedious monumentalism of most American patriotic art. Bold men staring into the distance. Anyway, the latest problem is that the designers of the sculpture thought one of Mr King's quotes made a fitting eulogy but was too long to fit nicely on the side of the statue, so they edited it. After fierce criticism, they're now going to etch off the truncated version and put the whole thing on, in smaller letters.

I don't think people's words should be edited when they're literally etched into marble. And I wish the memorial committee had found a more artistically creative way to memorialise Mr King than putting up a big statue of him staring boldly into the distance. But the more important question than whether it's possible to fit Mr King's words onto his memorial is whether it's possible to fit a memorial to every single major figure and event in the ongoing process of American history into Washington, DC. 

I think the answer is no. There are many culprits in the devolution of much of Washington into a cloddish, ugly, characterless city. And in some neighbourhoods the past 20 years have seen momentum in the opposite direction. But the relentless drive towards ever more memorials is definitely part of the problem. There hasn't been an interesting or culturally significant one built since the Vietnam Veterans Memorial in the early 1980s. The FDR memorial is weird. The second-world-war memorial is pompous, empty of ideas, and militaristic; if the other guys had won, they probably would have built something that looked very similar. The "beast-killing" principle has never been such a big American thing, but as a native Washingtonian I thought the "fossil slaughter-house" feeling describes some parts of the city all too well.

What we need is a moratorium on new memorials in Washington, DC. Call it a Memorialtorium. Our nation's capital does not have a shortage of memorials. What it has is a shortage of human-scaled livable multi-purpose neighbourhoods that preserve the thumbprint of actual history; not the fake history of a memorial to some idealised leader, but the lived history of the actual buildings and streetscapes our parents and grandparents grew up in. For a look at what Washington looked like when it was a more or less normal small city in the late 19th and early 20th centuries, and what's become of it since, check out the amazing architectural blog "The Ruined Capitol", which I think misspells the word "capital" but contains an incredible assortment of lost streetscapes contrasted with their soul-crushing current equivalents.

(Photo credit: AFP)

OVER at Forbes Online, Josh Barro writes about "The Discussion We Should Be Having About Bain". His take: Bain represents creative destruction; the debate should be whether government policy, while accepting that destruction is necessary for the economy to grow, should act to alleviate the suffering of affected workers, and prepare them to take advantage of changes.

Private equity firms like Bain often seek to fix firms that have failed to adjust to economic change. This can mean downsizing, increased automation, offshoring, and the like. These changes make enterprises more efficient, and in some cases save firms that would otherwise have gone bankrupt... But it is also important to note that certain classes of workers have faced especially large negative effects from economic changes...

The question [Romney] should be asked, then, is what policy implications arise from the economic shifts of the last few decades, driven (in small part) by private equity. Does rising income inequality mean that fiscal policy should be more redistributive? Does a reduction in job security call for a stronger safety net? Do new workforce needs mean we need a shift in education and training policies?

This is certainly one conversation we should be having about Bain. But there are other conversations we should also be having about Bain. And, in fact, we are. One of those conversations has to do with leveraged buyouts and dividend recaps. These are two mechanisms private-equity firms use to get companies to carry much heavier debt loads, which can then generate revenue streams for their owners. But the heavy debt load can make companies more vulnerable to bankruptcy. And the extra revenues generated rely heavily on the fact that while profits are taxed, interest payments on debt are not. Critics say that in effect, taxpayers are subsidising private equity's extraction of value from firms through tax arbitrage. Here's Mike Konczal interviewing Josh Kosman, author of "The Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy".

JK: The original leveraged buyout firms saw that there were no laws against companies taking out loans to finance their own sales, like a mortgage. So when a private equity firms buys a company and puts 20 percent down, and the company puts down 80 percent, the company is responsible for repaying that. Now the tax angle is that the company can take the interest it pays on its loans off of taxes. That reduces the tax rate of companies after they are acquired in LBOs by about half... The company then could use those savings to pay off the increase in its debt loads. For every dollar that the company paid off in debt, your equity value rises by that same dollar, as long as the value of the company remains the same.

MK: So the business model is based on a capital structure and tax arbitrage?

JK: Yes. It’s a transfer of wealth as well. It’s taking the wealth of the company and transferring it to the private equity firm, as long as it can pay down its debt. It think it is real – the very early firms targeted industries in predictable industries with reliable cash flows in which they by and large could handle this debt. As more went into this industry, it became very hard to speak to the original model. Now firms are taken over in very volatile industries. And they are taking on debts where they have to pay 15 times their cash flow over seven years — they are way over-levered.

MK: The most common argument for why Bain Capital and other private equity firms benefit the economy is that they are pursuing profits. They aren’t in the business of directly “creating jobs” or “benefitting society,” but those effects occur indirectly through the firms making as much money as they can. But even here, “profits” — how they exist, where they come from, and how they are timed — have a crucial legal and regulatory function. A recent paper from the University of Chicago looking at private equity found that “a reasonable estimate of the value of lower taxes due to increased leverage for the 1980s might be 10 to 20 percent of firm value,” which is value that comes from taxpayers to private equity as a result of the tax code. Can you talk more about this?

JK: That sounds about right. If you took away this deduction, you’d still have takeovers, but you’d have a lot less leverage and the buyer would be forced to really improve the company in order to make profits.

Now, maybe Mr Kosman is wrong, and private equity really is overwhelmingly creating new efficiencies and generating value in the economy, rather than exploiting a tax feature that delivers money to owners while depriving the government of revenue and making otherwise healthy firms more vulnerable to bankruptcy. But this is certainly a debate we should be having. Because for many people, it's clear that "capitalism" as represented by post-1980s Wall Street is a different beast than capitalism as represented by 1950s Detroit. It may be a better beast. It may be a worse beast. It may just be a new beast we'll have to learn to live with. But Mitt Romney is a walking incarnation of this variety of capitalism, and he's forcing the topic into the public consciousness. As Michael Lind puts it, he confronts America with a choice between different visions of the economy:

The choice is between "stakeholder capitalism" and "shareholder capitalism." According to the theory of stakeholder capitalism, corporations are and should be quasi-public entities with responsibilities to the nation-state and to the communities in which they are embedded. The corporation should make a profit and provide a fair return to investors. At the same time, workers who contribute their labor to the company have a legitimate interest in it as well as investors who provide capital. Managers serve the company and the country, not merely the investors.

In the theory of "shareholder capitalism," the corporation exists solely for the purpose of the investors, whom the managers serve as agents. In shareholder capitalism, short-term profits are the only goal, and if that means laying off workers instead of retraining them or reassigning them, breaking up the company and selling the assets to enrich private equity partners and shareholders, so be it.

The stakeholder conception of the firm is still the norm in Europe and East Asia, as it was in mid-20th century America. But beginning in the 1970s, the shareholder conception of capitalism prevailed in the United States.

In at least this sense, Newt Gingrich's attacks on Mitt Romney are on the mark: he is not the same kind of capitalist as Steve Jobs. There are plenty of people who think Mr Romney's capitalism is just as valid as Mr Jobs's kind, liberals like Jonathan Chait among them. But when the GOP nominates a private-equity CEO for president, this is one of the discussions we're naturally going to have.

(Photo credit: AFP)