AEIdeas The public policy blog of the American Enterprise Institute Fri, 25 Jul 2014 20:09:17 +0000 en-US hourly 1 Sweden’s school choice disaster? Nope Fri, 25 Jul 2014 17:21:05 +0000 read more >]]> Earlier this week, an article in Slate by Columbia Business School professor Ray Fisman provocatively titled “Sweden’s School Choice Disaster” made the rounds on Twitter, with the perfunctory head nodding and tut-tut-ing from the anti-school choice crowd.

From the jump, much of Fisman’s analysis didn’t really make sense. He blames the drop Sweden has seen in international test scores since 2000 on the country’s voucher program, even though that program precedes the drop by almost a decade. He also highlights the fact that only about 25% of secondary school students and only 13% of elementary school students use vouchers to attend private schools, so it would be hard to blame any nation-wide problems on such a small program. He further cites studies that appear to show that voucher and non-voucher students score about the same on fairly-grade exams. This is perhaps a scandal for schools with inflated grades, but it is not evidence that the voucher program is a “failure.”

But that’s about as deep as I want to dig. Luckily, several others went farther down the rabbit hole to get into numerous other problems with the piece.

Over at National Review, Tino Sanandaji offered myriad other possible explanations for Sweden’s poor performance on assessments. A key paragraph:

There is no doubt that the voucher reform was poorly implemented, but this doesn’t change the fact that the reform worked. Surveys suggest that parents and pupils in private schools tend to be more satisfied than average. Many of the worst schools have simply closed as few students choose them. Bullying is a major problem in Swedish schools; with school choice, children are no longer forced to attend the same school as their tormentors. Ambitious immigrant children have the option to escape the ghetto and attend better schools. Some — though admittedly not most — private schools have been innovative and significantly improved education.

At Education Next, the Cato Institute’s Andrew Coulson lowered the boom. He writes:

Nevertheless, Slate claims that competition from private schools may have led to “a race to the bottom” in Sweden. But since Sweden’s private schools score higher on PISA than its public schools, it’s not obvious what this might mean. Could Slate be claiming that the performance of private schools has been declining faster than that of public schools? If so, the reverse is true. Since the PISA test was first administered in 2000, Swedish private schools lost a scant 6 points overall. The nation’s public schools lost 34 points over the same period—nearly six times as much. If one of these sectors is leading a race to the bottom, it’s not the private sector.

Finally, Jay Greene of the University of Arkansas offers Fisman’s work as a cautionary tale on his blog:

Fisman would never make such sloppy mistakes in a journal submission or conference presentation.  His colleagues would laugh at him.  But nothing seems to deter Fisman or other would-be Paul Krugmans from making laughable claims in the popular press.  Maybe academics should not be given such a free pass for whatever they write outside of journals.  Maybe the credibility of their scholarly work and their status within the academic community should also be called into question if they are willing to be so reckless.

All good food for thought and worth checking out in full!

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Quotation of the day on what happens when oil companies get richer… Fri, 25 Jul 2014 16:02:58 +0000 read more >]]> … is from Karr Ingham, economist for the Texas Alliance of Energy Producers, from a recent presentation in Houston where he predicted that crude oil production in Texas will surpass its 1972 all-time high within two years:

When oil companies get richer, they don’t pocket their money. They invest in future projects. They drill. They pay people. That’s how economic growth is generated.

MP: Damn those evil, greedy oil companies…. they make money, and they invest, they drill, they pay workers, etc……

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If the Fed followed the House GOP’s proposed policy rule, it might need to slash rates Fri, 25 Jul 2014 15:54:48 +0000 read more >]]> Republicans, generally, seem very worried about the Fed’s low-interest rate policy, not to mention its bond buying. So this is their response:

Several House Republicans are embracing Stanford University economist John B. Taylor’s call for the Federal Reserve to adopt a mathematical rule for determining interest rates, stepping into a long-running debate among central bankers about how to set monetary policy.

But what if the Fed suddenly — today! — adopted such a rule. What would the Fed do? It would raise rates, unless it cut them. Deutsche Bank:

Monetary policy by discretion or equation? Even the House Republicans raising this question must concede that a formula is only as precise as its inputs. Consider the Taylor rule’s three variables for example: the equilibrium real interest rate and both the deviation of inflation from target and output from potential. The long-run real rate was generally accepted as 2 per cent before the crisis. Janet Yellen’s assurances of a lower terminal funds rate suggest it should be half that while secular stagnationists believe it is negative. Similarly some reckon headline unemployment underestimates America’s output gap due to discouraged workers. Meanwhile others contend that labour markets are tight given low short-term unemployment. Feeding this range of inputs into a Taylor rule spits out a 50 basis point raise or cut next Fed meeting. Central banker discretion is hard to dispense with.

And this, gang, is why I prefer NGDP level targeting.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

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Hillary’s weak-but-illuminating critique of the Ryan anti-poverty plan Fri, 25 Jul 2014 15:33:25 +0000 read more >]]> In the New York Times today, John Harwood asks the following of Hillary Clinton:

Harwood: Paul Ryan’s out with a plan today proposing that states be allowed to take all of the programs for those in need in one revenue stream as a way of finding better ways to make them work. Is that a good idea?

Clinton: No, not in the current atmosphere. It is not a good idea. All one has to look at is that nearly half the states refuse to expand Medicaid to realize why it’s a bad idea. If states won’t even take what are very generous terms from the federal government to give working people and poor people access to health care, how can we turn over all of the resources that are meant to assist those in need?

A key part of the Paul Ryan and Marco Rubio anti-poverty plans is combining federal anti-poverty programs into a single “funding stream,” and letting states experiment on the best ways to deliver benefits. Ryan calls his version an “Opportunity Grant,” Rubio terms his a “Flex Fund.” While the plans aren’t identical, they both are based on the theory that to get effective reform, the same people implementing the poverty program plan should be the same ones with accountability and funding authority.

Now this is the sort of thing left-liberals generally hate, so Clinton’s response was predictable. I would expect it to morph into a DNC talking point. Progressives don’t trust the states, and see themselves as having more influence and power at the federal level to create new programs and spend more money.

Here is the reaction of Oren Cass, a key wonk behind the Rubio/Ryan plans:

Of course states want to help those in need, they just don’t all agree on the right way to do it. The whole point of a Flex Fund is to remove the political, our-way-or-the-highway approach to funding that the federal government employs today and instead empower states to go in different directions and learn what works. Someone who believes that all the best ideas and all the best people are in Washington will be uncomfortable with such an approach, but that is the attitude that produced our tangled and ineffective safety net in the first place.

Let me expand on those thoughts concerning the Clinton Critique:

1.) Medicaid is a wrongheaded analogy. The Ryan/Rubio Opportunity Grant/Flex Fund plans are about flexibility, accountability, experimentation, and local knowledge. Medicaid is an example of Washington developing a rule-heavy program and and then insisting that the states implement it as is. Also, just because a state would reject Medicaid expansion doesn’t mean it would be a bad steward of anti-poverty funding that it is already receiving and that Washington already relies on it to deploy.

2.) Neither the Flex Fund nor the Opportunity Grant offer flexibility in the amount of money states must spend. Both plans also require states to spend it on anti-poverty measures. They can’t, like, build football stadiums with the dough.

Under the Rubio Flex Fund approach, all states would adopt the new model but by default they would continue their current spending approaches until they wanted to take the initiative to change them. And the Ryan OG proposal disrupts the status quo only where a state comes forward with a concrete proposal to use the funding in an innovative way with tight oversight.

3.) Does Hillary really think state governments, particularly those led by GOP governors, hate their poor people? Is that where the political debate is? Another, more constructive way of looking at it: The Rubio/Ryan approach is a perfect antidote to the “rejection of Medicaid funds” mindset because it strips the federalism politics out of it and invites/empowers states to innovate rather than feeling like they either have to (a) do what President Obama or President Hillary Clinton wants or (b) reject the whole shebang.

Bottom line: These 20th century anti-poverty programs desperately need reform, and the Ryan/Rubio plans give state and local government room to devise and implement innovative plans to better deliver services. (And demand accountability in return.) That seems pretty reasonable — unless, of course, you think only liberal Washington politicians and bureaucrats care about the neediest among us.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

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Missing the point on inversions and corporate taxes Fri, 25 Jul 2014 15:25:20 +0000 read more >]]> In his CNBC interview yesterday, President Obama offered a misleading criticism of corporate inversions and missed an opportunity to call for structural reform of corporate income taxation.

President Obama began by condemning inversion transactions, in which corporations effectively swap their US charters for foreign charters. Inversions offer tax savings because foreign-chartered corporations pay US tax only on their domestic profits while US-chartered corporations also pay US tax on their repatriated overseas profits (with credit for any taxes paid abroad). The president complained that it was unfair for corporations to “move their technical address simply to avoid paying taxes” while still benefiting from “the best university system in the world, the best infrastructure [and] a whole range of benefits that have helped to build companies.” But, those services primarily aid domestic production, on which inverted corporations, like other foreign-chartered corporations, remain subject to US tax. The president did not explain why corporations that previously had US charters and inverted to obtain foreign charters should pay US tax on their overseas profits while corporations that have always had foreign charters face no such obligation.

Rather than condemning corporations that change their “technical address” to lower their taxes, we should be asking why we base tax liability on that technicality in the first place. If we tell a corporation that it must pay millions of extra dollars in tax because it has a piece of paper that was issued in the United States rather than abroad, should we really be surprised when it tries to get a new piece of paper issued abroad? The tax incentive for inversions would vanish if all corporations, regardless of their charters, were treated uniformly, paying tax solely on their domestic profits.

It would be even better, though, to replace the corporate income tax with direct taxation of shareholders. In a recent report funded by the Peter G. Peterson Foundation, Eric Toder of the Urban-Brookings Tax Policy Center and I outlined a reform option that would abolish the corporate income tax and fully tax American shareholders at ordinary-income rates on their dividends and capital gains. Accrued gains would be taxed (and accrued losses deducted) each year, whether or not the shareholder sold the stock. Tax liability would no longer depend on where the corporation was chartered or earned its profits, but only on where the shareholder lived. Although that approach would raise some challenges and face some political obstacles, it would offer the huge economic advantage of eliminating the corporate income tax’s numerous distortions in one fell swoop.

Follow AEIdeas on Twitter at @AEIdeas.

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How high should tax rates go? Obama: ‘I don’t have a particular number in mind’ Fri, 25 Jul 2014 14:20:20 +0000 read more >]]> Here is President Obama in a chat yesterday with CNBC’s Steve Liesman:

STEVE LIESMAN: Mr. President, I just want to pivot back one more time to domestic issues.  You’ve said a bunch of times that getting the wealthy to pay a little bit more, and you’ve succeeded in raising that top tax rate to 39% or rolling back the tax cuts. Is there a limit there?  Is there a limit to how much you believe the government should take from an individual in terms of a top tax rate?

PRESIDENT OBAMA: You know, I don’t have a particular number in mind, but if you look at our history we are still well below what, you know, the marginal tax rates were under Dwight Eisenhower or, you know, all the way up even through Ronald Reagan.  Tax rates are still lower on average for most folks.  And what that means is that we probably can make some more headway in closing loopholes that folks take advantage of. As opposed to necessarily raising marginal rates.

Obama’s response raises an interesting question: How high does he think tax rates could go without really damaging the economy? As my pal Liesman asked, what is the limit?

The president’s answer certainly suggests, at least to me, that he believes the US is nowhere close to the danger zone. If so, he is merely in sync with top left-leaning economists —  such as Peter DiamondThomas Piketty, Emmanuel Saez —  who argue for top rates in the 70% to 80% range, if not higher. Oh, and at the same time the high-tax crowd would close tax loopholes and increase tax enforcement to limit avoidance.

Interestingly, Obama wrote in The Audacity of Hope that the real problem with the 70% tax rate that existed when Ronald Reagan was president was not that it “curbed incentives to work or invest” but that it led “to a wasteful industry of setting up tax shelters.” So maybe Obama thinks a 70% rate with little to avoid it would be just fine. Also keep in mind Obama’s blasé attitude about the US tax burden when Democrats fail to specify how the US will avoid a debt catastrophe in coming decades.

And  here are some links to posts on why the US shouldn’t return to the day of confiscatory taxation:

Why we can’t go back to sky-high, 1950s tax rates

New study shows why heavily taxing the rich won’t work

Obama’s economic plan? Back to the ’70s!

Do liberals really think an 80% top tax rate wouldn’t hurt the US economy?

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

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What you may have missed this week: Dodd-Frank 4 years later, Paul Ryan’s latest reforms, misleading retirement stats Fri, 25 Jul 2014 13:57:28 +0000 read more >]]> Each week, The LEDGER highlights AEI’s research and commentary on economic matters, covering hot issues such as the budget, tax reform, housing policy, inflation, minimum wage, and the Eurozone crisis. So you don’t miss anything, here’s a sneak peek.

Financial regulatory reform—four years later

Expanding opportunity

  • Paul Ryan proposes “Opportunity Grant” at AEI.
  • Don’t shut down alternative work schedules, advises Aparna Mathur.

Check those numbers

Sign up for a weekly copy of The LEDGER here.

You can also connect with the AEI Economics Team on Twitter, @AEIecon. Follow AEIdeas at @AEIdeas.

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Refuting the false claim at The Federalist that ‘food inflation blows away wage growth.’ It’s just not true. Thu, 24 Jul 2014 20:48:47 +0000 read more >]]> fed2Both Sean Davis and Ben Domenech at the web magazine The Federalist have used the chart above in their recent posts about food inflation here and here. As the title of the chart implies, Davis and Domenech are both claiming that “food inflation has blown away wage growth” since the end of the recession in June 2009.

But there’s a problem with that claim. Sure, certain food groups might have gone up in price over the last five years by more than the increase in average hourly wages. But a more realistic representation of what’s happened since June 2009 is shown in the chart below, and it’s just not true empirically that “food inflation has blown away wage growth.”

inflation2The blue line in the chart shows the 11% increase since June 2009 in the broadest CPI food category “Food and Beverages,” which is one of the eight major CPI groups according to the BLS, and includes (among hundreds of other items that cover all food and beverage groups): breakfast cereal, milk, coffee, chicken, wine, full and limited service meals away from home, and snacks (Note: This is a sample, see the full list of items here). It should be noted in any discussion about food prices that “food away from home” is almost 50% of total food spending for Americans, according to the most recent USDA data (see Table 10). Therefore, I’m using the most comprehensive measure of food and beverage prices, which would most accurately reflect the prices of food for the typical American household. Using different CPI measures doesn’t change the analysis much – the “CPI-Food” has increased 11.3%, “CPI-Food Away from Home” has increased the same 11.3%, and “CPI-Food at Home” increased 11.36%.

Here’s the key point – over the last five years, the BLS wage series “Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private” has increased by 10.8% from $18.57 to $20.58 per hour (see red line in chart). Therefore, the broadest measure of food and beverage prices has increased by only slightly more (11%) than the increase in average hourly earnings (10.8%). Food inflation is not “blowing away wage growth” – it’s basically almost exactly matching it! The BLS wage series used here starts in 1964 and is the measure of hourly earnings used most frequently for historical analysis, given its 50-year history. A more recent measure of hourly earnings was introduced by the BLS in 2006 — “Total Private Average Hourly Earnings of All Employees: Total Private” — and that measure has shown a slightly lower increase in hourly wages since June 2009 of 10.4%, but is still just slightly below the 11% increase in food prices, and provides no statistical support for the claim that “food inflation blows away wage growth.”

Update: On an average annual compounded basis, wages have grown at a rate of 2.08% per year, just slightly less than the 2.11% annual compound growth in food prices. That 0.03% difference per year (1/33 of 1 percent) is negligible and provides no evidence that “food inflation blows away wage growth.”

Even more important than comparing wage growth to only one major CPI group (food and beverages), the chart above shows that overall consumer price inflation (CPI – All Items) has increased by 10.6% (see brown line in chart), which is slightly below the 10.8% increase in hourly earnings, meaning that there has been a slight increase in real, inflation-adjusted earnings since June 2009. Using the other measure of hourly earnings would indicate a slight decrease in real hourly earnings.

Bottom Line: Over the last five years, consumer prices, food prices and hourly earnings have all increased at almost exactly the same rate, and there is no statistical support for the claim that “food inflation blows away wage growth.”

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The Ryan pro-work, anti-poverty plan: Thomas Aquinas 1, Ayn Rand 0 Thu, 24 Jul 2014 19:10:50 +0000 read more >]]> If you want America to become Scandinavia, then you won’t like Paul Ryan’s new anti-poverty plan. The House Budget chairman didn’t call for a universal basic income or universal preschool. And if you want Republicans to hush up and just accept the Obama minimum-wage agenda, you won’t like the Ryan plan. Before it was released, the progressive think-tank Center for American Progress opined, “If past is prologue, Rep. Paul Ryan’s latest poverty proposals will exacerbate poverty and inequality.” Now after seeing the plan, CAP wonders if the plan is really “the Ryan Budget in sheep’s clothing?” And so it goes.

But there is good reason why Brookings poverty scholar Ron Haskins calls the Ryan plan “sweeping, bipartisan, reasonable.” See, Ryan wants to raise the ceiling, not lower the floor. The goal: encourage work, self-sufficiency and upward mobility. One Ryan idea, presented at the American Enterprise Institute, would increase the gap between what work pays and what welfare provides by doubling the maximum Earned Income Tax Credit for childless workers to $1000 and lower the minimum eligibility age to 21 from 25. The EITC has been shown to draw low-income Americans into the labor force. Ryan would increase that incentive for a group that has seen a steady decline in the wages for low-skill jobs.

Now there is a whole lot more to the Ryan plan, which he prefers to a call a “discussion draft.” But the EITC expansion shows an endorsement of the safety net – with pro-work reforms, of course — that is currently lacking in some parts of the center-right community. A big part of a healthy American economy, Ryan said, “is having a strong safety net—both for those who can’t help themselves and for those who just need a helping hand.” Thomas Aquinas 1, Ayn Rand 0.

Now the part likely to get the most media intention is Ryan’s “Opportunity Grant” proposal. For states volunteering to participate, 11 existing federal anti-programs – including food stamps, cash welfare, and housing assistance – would be smooshed into a single funding stream for states and include work requirements. Receiving the same amount of federal dough as before, states could then experiment with different ways of providing aid such as partnering with nongovernmental organizations. Ryan: “So if the public and private sector work together, we can offer a more personalized, customized form of aid—one that recognizes both a person’s needs and their strengths—both the problem and the potential.”

Results would be thoroughly tracked and tested by a third party. “In short, more flexibility in exchange for more accountability,” Ryan said. Indeed, that bit about “accountability” is key, even more than the experimentation. To get effective reform, the same people implementing the plan – the “vanguard” Ryan calls them — should be the same ones with accountability and funding authority.

Now some, like CAP, worry that Opportunity Grants would just be block grants meant to cut spending over time and wouldn’t get bigger during recessions. But Ryan stresses this is not a budget-cutting proposal. And if the program moves beyond the experimentation stage, it would “benefit from increasing assistance during recessions.” And certainly there are other questions. Can nonprofits scale up? Will the next House budget reflect the Ryan’s new emphasis on poverty fighting?

But wait, there is even more to the Ryan plan, including expanding access to education through accreditation reform, and giving low-risk, non-violent offenders a second chance to contribute through prison reform. Yes, this is a severely conservative Republican talking: “Here’s the point: non-violent, low-risk offenders—don’t lock them up and throw away the key. Get them in counseling; get them in job training; help them rejoin and contribute to our society.”

At its heart, the Ryan plan rejects the view that the poor are an underserving burden on society. Instead, it sees low-income Americans as underutilized assets who need to be reintegrated into the work economy so they and America can reach full potential.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

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The fall-out from an Argentine default Thu, 24 Jul 2014 18:31:10 +0000 read more >]]> As in a Greek tragedy, Argentina finds itself yet once again moving rapidly and inexorably towards an external debt default. For barring any last minute backing down by US District Court Judge Thomas Griesa, Argentine President Cristina Fernandez, or Elliot Management’s Paul Singer, Argentina will almost certainly default on July 30. This should be a matter of concern not only for Argentina but also for the international community.

Judging by a sharp increase in the price of Argentina credit default swaps, markets are now pricing in around a 50% chance that Argentina will indeed default at the end of the month. They are doing so against the backdrop of the unlikelihood that Judge Griesa will reverse himself and now grant Argentina a stay to the end of the year in making its debt service payments. They are also doing so against the backdrop of the limited room for maneuver that President Fernandez has to negotiate with the hold-outs. A settlement with the hold-outs before year-end could trigger claims for equal treatment by the holders of around US$120 billion in restructured Argentine debt.

Yet another default now would likely have devastating consequences for the Argentine economy, particularly given its past experience with hyper-inflation. For the country is already in recession, its international reserves are depleted, its currency is on the ropes, and its inflation rate is already in the region of 40%. A default now would almost certainly trigger more capital flight from the country, which would severely impact the Argentine currency and cause inflation to ratchet up further. More serious yet, a default now would keep Argentina locked out of international capital markets for many years to come, which would severely constrain the country’s longer-run economic growth prospects.

Fortunately for the rest of the world, Argentina is a small economy with little systemic significance. However, because of its strong trade links with Brazil, Argentina’s fortunes do have an important bearing on the Brazilian economic outlook. This would seem to be particularly the case at a time when the Brazilian economy is struggling to avoid recession and when its politics are becoming very much more fluid ahead of its October presidential elections.

Argentina’s debt troubles will also have a bearing on the future functioning of the global debt market, even though in today’s environment of ample global liquidity such troubles should not be expected to affect global bond prices materially anytime soon. This bearing will not be the consequence of an Argentine default per se but rather of the US court’s recent ruling that a country cannot make payments on its restructured debt without also making payments to the hold-outs on the debt restructuring exercise. This is bound to complicate future debt restructuring exercises since it will increase the incentives for bond holders to remain outside such exercises. In the process, it must also be expected to raise the future cost of debt issuances.

Given the high stakes involved, one must hope that cooler heads prevail and that somehow a solution to the Argentine debt problem will be devised over the next few days by Judge Griesa, President Fernandez, and Elliot Management. However, this would not be the first time that there was an irrational resolution of an Argentine debt problem that had serious consequences both for Argentina and for its main trade partners.

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