Economics, Pethokoukis

Ed Glaeser’s quick take on the US infrastructure ‘crisis’

I recently wrote why I think the US infrastructure “crisis” is way overblown. Not that we don’t necessarily need more spending. Maybe we do. Not trillions, though. Transportation, in particularly, is poorly priced, leading to ineffecient use. Like economist Edward Glaser of Harvard, I am more worried about the state of our schools than our highways. On a recent EconTalk podcast with Russ Roberts, Glaeser gave his two cents on the supposed infrastructure crisis:

When I think about America as a whole, I see an amazing amount of infrastructure. And it certainly doesn’t appear to me that we are deeply lacking in infrastructure. That wouldn’t have seemed to me to be America’s primary lack. I worry about competitiveness over the next 50 years; I am far more concerned with the quality of our schools than the quality of our highways.

And the second thing which I think is central is I see no reason; almost all infrastructure can be paid for by users rather than the general tax revenues. I just cannot possibly see why we think that the crumbling bridge is a job for taxpayers far away rather than the users of that bridge. Or our airports need to be paid for with general tax revenue rather than by the generally well-heeled customers of those airports.

So, I am certainly willing to believe that there are particular points of infrastructure that need upgrading; but if they can’t be upgraded with the fees on their own users then I’m going to be much more skeptical about the need to upgrade it.

Adam Smith said this quite clearly, quite eloquently, 240 years ago, that the best way to avoid white elephant projects was to fund those projects with fees on the people who were actually going to use them. Those words remain true today.

Follow James Pethokoukis on Twitter at @JimPethokoukis

Economics, Pethokoukis, U.S. Economy

Will robots terminate the US middle class? A Q&A with Tyler Cowen, author of ‘Average is Over’

Image Credit: Shutterstock

Image Credit: Shutterstock

Flash fact: While most of the jobs lost during the Great Recession were mid-wage occupations, most of the jobs added in the recovery have been low-wage jobs. Many of those disappearing middle-level jobs are what economists call “routine, manual tasks” that can be easily automated. If economist Tyler Cowen is right, that trend is merely a taste of things to come.

In my Ricochet Money & Politics podcast, I chat with Cowen about his new book, “Average Is Over: Powering America beyond the Age of the Great Stagnation.” It’s a follow-up to his popular e-book, “The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.”

Cowen is the Holbert L. Harris professor of economics at George Mason University and co-author of the popular blog Marginal Revolution. He also writes the “Economic Scene” column for The New York Times. In addition, he is cofounder of the online education venture Marginal Revolution University.

Here are the edited highlights of my chat with Cowen:

Your new book is “Average Is Over: Powering America beyond the Age of the Great Stagnation.”  It’s a follow-up to your popular e-book, “The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.” 

In “The Great Stagnation” you made the case that U.S. was stuck on a growth plateau or on an innovation-productivity plateau after picking those low-hanging fruit that you mention in the title: free land, educating all the smart uneducated kids, huge technological innovations such as public sanitation, the internal combustion engine. 

But now, in the new book “Average Is Over,” innovation may be ready to re-accelerate, but with mixed results.  As you write:

The basic look of our lives in the surrounding physical environment has not been revolutionized all that much in 40 or 50 years.  That’s about to change.  One day soon, we’ll look back and see that we have produced two nations– a fantastically successful nation working in a technologically dynamic sector and everything else.

So what you do in the book is you sketch a sharply bifurcated American coming decades, one that looks like a mash up maybe between Downton Abbey and Elysium based on these two principles:  First, machine intelligence can replace human labor. And two, machine intelligence can augment the value of other human labor for many individuals, which is where we get your famous 15 percent will do great, 85 percent not so much. 

Is there evidence that this phenomenon is already happening. Do we see signs of it already in the current slow recovery? 

I think we see signs in the slow recovery that most sectors are still in the great stagnation. But we have already had one dynamic sector, incredibly dynamic, and that’s information technology. So we already see that happening. I just tried to play that out a bit. So imagine that we get driverless cars and get Watson doing medical diagnosis.  We get more smart software and we automate even a lot more manufacturing jobs. That to me is quite plausible for the next 20 years.  And that’s a scenario the book is trying to spell out.

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Pethokoukis, Politics and Public Opinion, Economics, U.S. Economy

Is Christie more Giuliani 2.0 or the GOP’s Bill Clinton?

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Certainly an impressive win last night for Chris Christie. And a note from the Christie campaign team highlights just how impressive. The New Jersey governor won reeleection by large margins among, well, almost everybody in the deep-blue Garden State (via Politico):

Christie won among both men and women: 63 percent of men and 57 percent of women. His margin among women represents a 10-point improvement from 2009 when he won 45 percent of the vote … Christie won 21 percent of African-American voters – up from 9 percent in 2009 … Christie won an outright majority (51 percent) of the Hispanic vote – up from 32 percent in 2009 … Christie won every education level and income group … Christie won 32 percent of the Democratic vote … Christie won 66 percent of independents and 61 percent of moderates … He did this in a state where Democrats outnumber Republicans by 700,000 voters.

Little surprise, then, that the media are describing Christie as the frontrunner for the Republican presidential nomination. But it’s early. Two years before the 2008 presidential election, it seemed a reasonable bet that the race for the White House would be Rudy Giuliani vs. Hillary Clinton.

Indeed, Christie skeptics point to the failed Giuliani campaign as a cautionary tale. The mayor was a northeasterner whose brash political style and policy moderation didn’t play well among national Republicans. Aren’t the comparisons to Christie obvious? Not to me. Giuliani was a tax-cutting hawk whose moderation was on social issues. Christie, in contrast, is a pro-lifer who has expressed personal opposition to same-sex marriage. And while Christie certainly has a big, blunt personality, he would seem to have more suburban appeal in a GOP primary than Giuliani, the thrice-married, urbane Manhattanite.

Maybe the better analogy is Christie as the GOP’s Bill Clinton. As columnist Matt Lewis wrote recently: “[Christie] could be the bizarro Bill Clinton. Just as America was willing to accept a ‘moderate’ Democratic governor from a Southern state in 1992, might they be willing to accept a “moderate” Republican from a Northeastern state in 2016?”

I would put it this way: Clinton ran as a modern, problem-solving reform Democrat. The Un-Mondale. Christie seems likely to run as a modern, problem-solving reform conservative. But he’ll need a policy agenda that supports his “we’re all in this together” persona. As Henry Olsen explains, “Christie’s New Jersey success ultimately rests on the notion that he represents the aspirations of average New Jerseyites against the elites.” He sided, for instance, with taxpayers over public sector unions in his battle over pensions.

But what would a national agenda look like? How can he avoid, as Olsen puts it,  “the ‘many versus the few’ trap the Democrats are waiting to deploy” — the same one that snared Romney — while also proposing smart solutions to America’s challenges? Yes, business taxes must be cut and entitlements reformed. But at the same time, crony capitalist tax subsidies must be eliminated and social insurance programs redirected via means testing toward lower-income Americans. Cut top tax rates back to Clinton-era levels and cap deductions while also creating a more generous tax credit for families. End too-big-to-fail by breaking up the megabanks. In short, fashion an economic mobility agenda that also takes seriously modernizing the safety net for the demographics and problems — such as labor force participation and declining wages for lower-skill Americans — of the 21st century.

Maybe Christie can even call it his Putting People First agenda.

Follow James Pethokoukis on Twitter at @JimPethokoukis

Pethokoukis

Did the Fed’s QE bond buying prevent a deep 2013 recession in the US?

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Economist David Beckworth points out a scary QE counterfactual from Political Calculations. According to PC’s model, the fiscal drag from spending cuts and tax hikes should have put the US economy into a deep recession this year. Instead of nominal GDP rising by 2% from late 2012 through the first half of this year, it would have fallen by 2%.

The model, based on research from economists such as Christina Romer and Valerie Raney, assumes for every $1 in government spending cuts, the nation’s GDP only shrinks by about 60 cents, while every $1 increase in taxes will reduce the nation’s GDP by three times that amount below what it might be otherwise. Most of the fiscal drag is tax cut hike related:

Why do government spending cuts have so much less than a dollar-for-dollar impact? Perhaps the easiest explanation is that about 30-40% of all government spending is wasted in non-value added, non-productive activities that make no positive contribution to the nation’s gross domestic product.

Meanwhile, when the government hikes its taxes, it’s really acting to penalize the most productive people in the nation to support its wasteful spending activities. The multiplier is so large because tax hikes are so disruptive in their immediate negative effect upon the economy

As it happens, a recent San Francisco Fed study also found 90% of the recent fiscal drag comes from higher taxes:

Surprisingly, despite all the attention federal spending cuts and sequestration have received, our calculations suggest they are not the main contributors to this projected drag. The excess fiscal drag on the horizon comes almost entirely from rising taxes. Specifically, we calculate that nine-tenths of that projected 1 percentage point excess fiscal drag comes from tax revenue rising faster than normal as a share of the economy.

1. Anyway, by looking at what did happen versus what might have happened helps give an estimate for the impact of the Bernanke Fed’s bond buying (and revised communications strategy). It may well have prevented a double-dip recession of the sort Europe (and the stand-pat ECB) has experienced where unemployment is over 12%. In the US, the U-3 jobless rate might have made a return trip back near 10%. Noting the 2012 US economy seems no better than the 2013 US economy misses this counterfactual.

2. As Beckworth puts it: “My assessment is that QE2 and QE3 has done more to shore up the U.S. economy than many observers realize. … With that said, the QE programs have been flawed because of their ad-hoc, make-it-up-as-we-go-along approach that until recently was not tied to any explicit target. Tying the LSAP more firmly to conditional outcomes would do much to improve them. The more rule-like and predictable the better.”

3. The other big point here is that Democrats have been focusing on the economic impact of sequester when really the major threat to the economy this year came from the Obama tax hikes on labor and capital income.

Follow James Pethokoukis on Twitter at @JimPethokoukis

Economics, Energy and the Environment, Pethokoukis, U.S. Economy

Climate scientists: ‘There is no credible path to climate stabilization that does not include a substantial role for nuclear power’

Credit: Breakthough Institute

Credit: Breakthough Institute

I am always on the lookout for issues that can get some degree of bipartisan support. Expanding the role of nuclear power in America’s energy portfolio should be one of those issues. Last Sunday, big-name climate and energy scientists released an open letter in support of nuclear power. This is the key bit:

Renewables like wind and solar and biomass will certainly play roles in a future energy economy, but those energy sources cannot scale up fast enough to deliver cheap and reliable power at the scale the global economy requires. While it may be theoretically possible to stabilize the climate without nuclear power, in the real world there is no credible path to climate stabilization that does not include a substantial role for nuclear power.

This is a line that’s been pushed hard by Ted Nordhaus and Michael Shellenberger of the Breakthrough Institute, who also see how the issue can bring climate change believers and skeptics together:

Help might come from an unlikely alliance between climate skeptics and climate scientists. That’s because both groups tend to be strongly pro-nuclear, albeit for completely different reasons. Two of the country’s leading conservative writers on energy and the environment, Steve Hayward, formerly of American Enterprise Institute, and Robert Bryce of Manhattan Institute, express great skepticism of the climate science while advocating nuclear energy. “The smartest, most forward-looking U.S. energy policy,” wrote Bryce, “can be summed up in one acronym: ‘N2N’,” — meaning going to natural gas and then to nuclear power.

Indeed, a recent BT analysis found “the vast majority of the carbon dioxide emissions associated with America’s carbon intensity decline since the mid-1900s can be attributed to the increasing shares of two energy sources: nuclear fission and natural gas.” (See above chart.)

Views on nuclear power are a handy way of separating the Walden Pond environmentalists and those who acknowledge that humanity desires a standard of living requiring a high-energy consumption plant where energy demand will quadruple by century’s end.

Follow James Pethokoukis on Twitter at @JimPethokoukis

Pethokoukis

‘ … confidence that this can all get fixed by December 1 is not high among the people on the other end of those 834 transactions’

The latest from Robert Laszweski:

The most urgent need is for the government to fix the back-end enrollment transactions between the government and the health insurance plans (the 834 problem). It will be impossible to conduct any kind of high volume enrollment through the health portal’s front door so long as the data being transmitted to the insurance companies is unreliable.

Has the government made progress in fixing the large variety of detailed 834 transaction issues? Yes. But the progress so far is incremental and nowhere near enough to be able to go to high volume processing.

The Obama administration finally seems to have a strong group of experienced managers in charge of fixing Healthcare.gov. I don’t mean to pile anymore bad news on them then they already have. But I also have to report that the confidence that this can all get fixed by December 1 is not high among the people on the other end of those 834 transactions.

 

 

Pethokoukis

What the film ‘Defending Your Life’ says about the ‘Obama misspoke’ defense

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Pretty tough stuff from National Journal’s Ron Fournier as the polls show President Obama collapsing:

Why didn’t Obama add their caveats during his reelection campaign? His aides debated it. Some argued that the president had to shoot straight with the public. Others feared that he public wouldn’t understand the nuance and GOP rival Mitt Romney would use it to his advantage.

The cynics won. The truth was buried. And the man who promised to run the most transparent administration in history participated in a lie.

On history’s scale of deception, this one leaves a light footprint. Worse lies have been told by worse presidents, leading to more severe consequences, and you could argue that withholding a caveat is more a sin of omission. But this president is toying with a fragile commodity: his credibility. Once Americans stop believing in Obama, they will stop listening to him. They won’t trust government to manage health care. And they will wonder what happened to the reform-minded leader who promised never to lie to them.

Will swing voters, much less congressional Republicans, trust the Obama White House when it comes to immigration reform or creating any sort of framework for a larger budget deal? Even if the online exchanges get fixed sooner rather than later, there is still the minor matter of what Fournier calls a lie. I am reminded of a scene from “Defending Your Life” where Albert Brooks is stuck between this life and the next making his case to move on. Here is Brooks as “Daniel Miller” being grilled on his relationship with his father:

Daniel Miller: Oh, yes. I had a bond with my father. I pretty much never lied to him.

Lena Foster: You never lied to your father? Would you like me to show you at least 500 examples?

Daniel Miller: I said “pretty much” never lied. I didn’t say I never, ever lied. You have to lie sometimes… in an emergency. But, ah, it doesn’t mean the bond is affected. If you’ve got the bond the bond is always there, and if you have to lie occasionally you’re not going to interfere with the bond. You know, the bond can wait for a little lie and… in the end it’s there for you. You know, sometimes in the middle of a lie I found that the bond would kick in… maybe squeeze a little truth out.

Maybe Team Obama thought the president’s bond with the American public could wait as the president told a “light footprint” lie to sell Obamacare — which, after all, was supposedly for their own good. But the declining polls suggest Fournier might be correct — the bond is gone.

Follow James Pethokoukis on Twitter at @JimPethokoukis

Pethokoukis, Economics, U.S. Economy

The Anti-Fed | ‘The ECB is explicitly steering the eurozone into a depression’

Image Credit: Jelle-vd-Wolf / Shutterstock.com

Image Credit: Jelle-vd-Wolf / Shutterstock.com

During the 2012 Republican presidential race, the various candidates were asked at a debate in Tampa about the Federal Reserve and monetary policy.

Rick Santorum: I believe that what we should do with the Fed is to make it a single charter instead of a dual charter.  .. . They should be a sound-money Federal Reserve.”

Herman Cain: I don’t believe in ending the Fed, I believe in fixing the Fed. For many, many decades the Fed did its job when it was singularly focused on sound money.”

Michele Bachmann: “The Federal Reserve has a lot to answer for, and that’s why it’s important that they’re not only audited, but they have got to be shrunk back down to such a tight leash that they’re going to squeak. (Cheers, applause.)

Rick Perry: “But I stand by this: that we need to have a Fed that is working towards sound monetary policy that creates a strong dollar in America, and we do not have that today.”

Mitt Romney: “Well, my own view is that — quite simply, that the Federal Reserve has a responsibility to preserve the value of our currency, to have a strong American currency such that investors and people who are thinking about bringing enterprises to this country have confidence in the future of America and in our currency.

None of that makes me feel too good about the monetary policy counterfactual assuming a Romney win. Put that all together and what you find on the GOP side is a preference for a hard-money central bank with a singular, laser-like focus on inflation. Kind of like the European Central Bank.

And how is the euro zone doing right now? Well, the European Commission just trimmed its 2014 euro area GDP forecast from 1.2% to 1.1% and said unemployment will remain stuck at a record 12.2% next year. “Only in 2015, when growth is expected to increase to 1.7%, does the commission see a dent being made in the jobless total, with unemployment predicted to drop to 11.8%,” according to The Guardian.

Oh, the region also seems to risk sinking into deflation. Policymakers hopefully noticed, according to IHS Global Insight, the surprisingly sharp drop in Eurozone consumer price inflation from an already very low 1.1% in September to a 47-month low of 0.7% in October. As  AEI’s Desmond Lachman writes, “One must suppose that absent a meaningful economic recovery, the very large output and employment gaps across the European periphery will almost surely push the European periphery into deflation.”

Now as Scott Sumner points out, the ECB has taken the single-madate’s inflation obsession even further:

There’s a sort of unspoken assumption that there are two policy options, a hawkish single-minded focus on inflation, and a dovish dual mandate approach, which focuses on inflation and growth. Yet the European Central Bank has adopted a policy that is more hawkish than even a single-minded focus on inflation would entail. That’s exactly analogous to the interwar central banks adopting much tighter monetary policy than the rules of the game called for during the early 1930s. And yet, although this fact is right out in the open, almost nobody important seems to understand what is happening, just as almost no one important seemed to understand what was going on in the 1930s.  We’ve learned nothing.

I have sources in Europe that are well connected with European policymakers. They describe an almost total ignorance of monetary policy, nominal GDP, aggregate demand, and all the other things that we learned about from Friedman and Schwartz.  To the extent that there is a debate in Europe, it’s about the relative importance of structural reforms and fiscal policy. Even worse, Europeans can’t even use the zero bound excuse. At no time during the last five years has the ECB been at the zero bound, and in many cases they been both well above it and raising short term interest rates.  This is an active monetary policy; this is the ECB explicitly steering eurozone NGDP into a depression.

Follow James Pethokoukis on Twitter at @JimPethokoukis

Pethokoukis, Society and Culture, Economics, U.S. Economy

Will de Blasio put the teachers union in charge of New York City schools?

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This might be just a bit of election day tomfoolery — at least I hope it is. From the New York Post:

Bill de Blasio is considering hiring teachers’ union boss Randi Weingarten as the next NYC schools chancellor, sources tell me. Weingarten — who was head of the United Federation of Teachers in New York before becoming chief of the national American Federation of Teachers — is against charter schools, teacher evaluations and most of the other reforms Mayor Bloomberg enacted.

“She wants the job, and de Blasio’s people have been making calls, asking about Weingarten and testing the reaction,” said one well-placed source in the public education sector. “The idea of putting a union chief in charge of a school system is mind-boggling,” said a political consultant. “It strains credulity that de Blasio would go that far.”

Indeed, it does strain credulity that de Blasio would play so perfectly into the worst characterizations and predictions of what his mayoralty would do to education reform in New York City. Then again, de Blasio seems hell bent on reversing Bloombergism —  giving grade schools an A-through-F report card, shuttering over 160 failing schools, expanding charter schools — as AEI’s  Daniel Lautzenheiser explains:

In stark contrast, de Blasio has openly declared that he will eliminate letter grades for schools in his first year of office and will convene a panel of “educators, experts, and parents” to determine if progress reports are the right way to evaluate schools. Calling Bloomberg’s school closures “an excuse to not address ways to help struggling schools,” de Blasio instead plans to create a new Office of Strategic Support to intervene in underperforming schools instead of closing them. And, of particular import during the last few weeks of the campaign, de Blasio has advocated making charter schools pay rent to use city buildings and putting a moratorium on co-location, in which multiple schools are housed in the same building.

De Blasio has made income inequality the core of his campaign. But moving away from education reform will only decrease economic mobility and opportunity in the city.

Follow James Pethokoukis on Twitter at @JimPethokoukis

Economics, Health Care, Pethokoukis

This may be ‘the single worst decision’ Obamacare planners made

Image Credit: Images_of_Money (Flickr) CC

Image Credit: Images_of_Money (Flickr) CC

The United States is the global leader in medical innovation. You can measure that by Nobel Prizes or biotech R&D or where breakthrough treatments are developed or commercialized. And as University of Michigan economist Miles Kimball points out, one reason healthcare spending is lower in other advanced economies is their ability to ” cheaply copy drugs and medical techniques developed in the US at great expense.”

But healthcare innovation isn’t just about miracle drugs and cutting-edge technology. Innovation can happen in how healthcare services are delivered and paid for. And it is in this area that the Affordable Care Act is particularly harmful to innovation. The law’s “medical loss ratio,” or MLR level is supposed to suppress costs by requiring insurance companies to pay out on health claims at least 80% of the revenue they take in from premium payments. The 20% left over can be used for  administration and profits. (Medicare has a 98% MLR. Then again, it also suffers from $60 billion a year in annual fraudulent payments.)

Here’s the big problem: Obamacare’s MLR rule heightens the entry barriers to entrepreneurial, innovative new companies entering the market against large, established insurance players who can spread their fixed cost across a deep customer pool. AEI healthcare expert Scott Gottlieb calls the MLR caps “the single worse decision” Obamacare planners made. Gottlieb:

The Affordable Care Act was designed so that you can only profit as much as the government says you can profit. … But you can lose as much money as you want. .. So your downside is uncapped, by and large, and your upside is tightly regulated. You basically guarantee that the only people who can play in this market are the incumbent players. And you’ve seen no entrepreneurial capital get into this marketplace for the purpose of launching a plan on the exchange.

With the exception of some hospitals trying to do it out in California — who are going to fail like they did in the 1990s — you’ve seen no new players in this marketplace. And that’s because when a new plan launches, early on its medical loss ratio is typically around thirty of forty percent because they need a lot of operating margin because launching a new plan costs a lot of money and you lose money in the early years. So when you tell an insurance company they can only take 20 percent of their premium revenue for their operating margin … a new insurance plan can’t launch unless they are willing to lose substantial amounts of money in the initial years.

MLR rules also are biased toward existing practices and technology. A big battle when developing the MLR rules was over what activities would count or not count as healthcare expenditures versus administrative expenditures. Wellness programs, for instance, were determined to count as healthcare spending but with narrow limits, as Ben Wanamaker and Devin Bean of the Clayton Christensen Institute explain: 

While federal regulations allow for wellness programs to count as health care expenditures, certain restrictions narrow the scope of these programs, including strict limits on accepted clinical practice, reliance on criteria issued by professional medical associations, and accounting regulations for cost-cutting activities. New entrants attempting to implement disruptive technologies that fall outside the narrow scope of insurance-sponsored wellness programs are thus further hindered.  … MLR limits increase the already- large entry barrier for to new entrants in the insurance market. They prevent new entrants from succeeding in the market because they mandate a “size and scale wins” profit model.

Disruptive innovation transforms industries by lowering prices, creating new products and services, and increasing value. But that sort of transformative change typically comes from the new guys on the block who are locked into existing business models. In this case, Obamacare has created a gated community with a big sign: Entrepreneurs Keep Out.

Follow James Pethokoukis on Twitter at @JimPethokoukis