AEIdeas The public policy blog of the American Enterprise Institute Wed, 22 Oct 2014 03:18:36 +0000 en-US hourly 1 Obama: There is not a black, white, Latino, Asian America, but there are black/white/Latino/Asian college applicants? Wed, 22 Oct 2014 00:41:03 +0000 read more >]]> Barack Obama in 2004: There is not a black America and a white America and Latino America and Asian America; there’s the United States of America.

Barack Obama in 2014: If the University of Michigan or California decides that there is a value in making sure that folks with different experiences in a classroom will enhance the educational experience of the students, and they do it in a careful way, the practice should be allowed.

Conclusion: Apparently when it comes to college applicants, there are black applicants and white applicants and Latino American applicants and Asian American applicants in Obama’s world, as Jennifer Gratz points out.

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An amazing chart of an amazing job-creating state; we all owe a debt of gratitude to ‘Saudi Texas’ and the shale boom Tue, 21 Oct 2014 21:24:36 +0000 read more >]]> The chart above shows a most amazing economic phenomenon: Since December 2007 when the Great Recession started, Texas civilian employment has increased by 12% and by more than 1.32 million jobs, from just over 11 million jobs in December 2007 to 12.32 million in September of this year (see blue line in chart). In contrast, civilian employment in the other 49 states without Texas is still 0.73% and almost one million jobs below the December 2007 level (see red line in chart) – 134.27 million non-Texas jobs in September vs. 135.26 million in December 2007.

It’s also important to note that while job growth in Texas slowed considerably in 2008 and 2009 due to the recession, the level of civilian employment in Texas never fell below its pre-recessionary, December 2007 level. Also, while Texas was able to actually increase jobs slightly even during the depths of the recession in 2008 and 2009, the US labor market minus Texas experienced a stunning loss of 8.374 million jobs (a percentage drop of 6.2%) in the two year period between December 2007 and December 2009.

In another job-related milestone for Texas, the BLS reported today that annual payroll employment in Texas increased in September by more than 400,000 jobs from a year ago for the second straight month, and established a new all-time state record for job growth over a 12-month period with a 413,700 gain from September 2013. Over the last year, Texas has added almost 1,600 new jobs every business day – a hiring rate of almost 200 jobs every hour! Also, Texas’s annual job gain of 413,700 through September represented 15.7% of the country’s 2.635 million increase in nonfarm payroll employment over that period, even though Texas’s population is only 8.4% of the US total. In percentage terms, Texas payrolls increased by 3.7% over the last 12 months, almost double the 1.9% growth in US payroll employment.

The chart and data tell a powerful and remarkable story of job creation in the Lone Star State of more than 1.32 million new jobs added since the start of the Great Recession, compared to a net deficit of almost one million jobs for the other 49 states combined. Much of the economic success of Texas in recent years that has fueled job creation in the state is a direct result of the shale oil and gas boom taking place in areas like the Permian Basin in west Texas (1.8 million barrels of oil per day) and the Eagle Ford in south central Texas (1.6 million barrels per day). Texas is now producing more than 36% of America’s total crude oil production, and as a separate country would be the world’s 8th largest oil-producer. Further, Texas has done a great job of attracting businesses like Toyota because of the state’s “employer-friendly combination of low taxes, fair courts, smart regulations and world-class workforce.”

Bottom Line: The country, the president, and all of us individually owe a huge debt of gratitude to the state of Texas and to the oil and gas industry for helping support the US economy during and after the Great Recession. Without the energy-driven economic stimulus from the fracking revolution, and without the gusher of jobs in the state of Texas, there’s no question that the Great Recession would have been much worse and lasted much longer, and the jobs picture today would be much bleaker. The chart above helps to illustrate how important the state of “Saudi Texas” is to the US labor market and economy – thanks largely to the Lone State State, the US has finally gained back all of the jobs lost during the Great Recession – September was actually the first month that employment in the US surpassed the pre-recession jobs peak. God Bless Texas.

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Quotation of the day…. Tue, 21 Oct 2014 18:39:22 +0000 read more >]]> …. is from the introduction of Radley Balko’s book Rise of the Warrior Cop: The Militarization of America’s Police Forces:

How did we evolve from a country whose founding statesmen were adamant about the dangers of armed, standing government forces — a country that enshrined the Fourth Amendment in the Bill of Rights and revered and protected the age-old notion that the home is a place of privacy and sanctuary — to a country where it has become acceptable for armed government agents dressed in battle garb to storm private homes in the middle of the night — not to apprehend violent fugitives or thwart terrorist attacks, but to enforce laws against nonviolent, consensual activities?

And from a recent review of Radley Balko’s book by Aaron Tao:

After reading through “Rise of the Warrior Cop,” if there be a single lesson we should grasp, it is that police militarization and the War on Drugs are intimately tied. The former cannot be reversed unless the latter is ended. Thanks to the War on Drugs, the Castle Doctrine crumbled, the United States ended up with the largest incarcerated population in world history, and the Officer Friendlies of yesteryear have been replaced by a de-facto standing army clothed like Darth Vader.

HT: Warren Smith

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Thomas Sowell on ‘predatory lending’ and ‘predatory journalism’ Tue, 21 Oct 2014 15:57:46 +0000 read more >]]> From a New York Times editorial on October 18 “A Rate Cap for All Consumers“:

Poor and working-class people across the country are being driven into poverty and default by deceptively packaged, usuriously priced loans. The obvious solution is a national standard for consumer lending. Both the House and Senate have bills pending that would adopt the 36 percent standard for all consumer transactions, including those involving payday loans, mortgages, car loans, credit cards, overdraft loans and so on.

Thomas Sowell responds in his column today “Predatory Journalism“:

The New York Times is again on the warpath against what it calls “predatory lending.”

Just what is predatory lending? It is lending that charges a higher interest rate than people like those at the New York Times approve of. According to such thinking — or lack of thinking — the answer is to have the government set an interest rate ceiling at a level that will be acceptable to third parties like the New York Times.

Low-income people often get short-terms loans when they run out of money to meet some exigency of the moment. The interest rates charged on such unsecured loans to people with low credit scores are usually higher than on loans to people whose higher incomes and better credit histories make them less of a risk.

Crusaders against such loans often make the interest rate charged seem even higher by quoting these interest rates in annual terms, even when the loan is actually repayable in a matter of weeks. It is like saying that a $100 a night hotel room costs $36,500 a year, when virtually nobody rents a hotel room for a year.

Because those who make unsecured short-term loans are usually poor and often ill-educated, the political left can cast the high interest rates as unconscionably taking advantage of vulnerable people.

Editorial demagoguery against “predatory” lending might well be called predatory journalism — taking advantage of other people’s ignorance of economics to score ideological points, and promote still more expansion of government powers that limit the options of poor people especially, who have few options already.

Update: Thanks to Gene Hayward (high school econ teacher and econ econ blogger) in the comment section for a link to the article “The Real Reason the Poor Go Without Bank Accounts,” written by Lisa Servon, a professor of urban policy at the New School. She who went “undercover” and spent four months working full-time last year as a teller at RiteCheck, a check cashing and financial services center located in the South Bronx. As Gene commented, Professor Servon came back with a story that would surprise the NY Times editorial board…. but not the people who use these services willingly and voluntarily. Here’s an excerpt of the article:

The primary critique of check cashers is that they are expensive. Sitting in my New School office eight miles south of Mott Haven, I had believed that, too. When I interviewed my customers, however, I learned that for many lower income people, commercial banks are ultimately more expensive. The rapidly increasing cost of bounced checked fees and late payment penalties has driven many customers away from banks, particularly those who live close to the edge, like many of my RiteCheck customers. A single overdraft can result in cascading bad checks and hundreds of dollars in charges.

Many factors—cost, transparency, convenience—go into the choice consumers make between a bank and a check casher.  Atmosphere and the attitudes of the staff are only one component, but this piece of the puzzle may be more important than we thought. Like the famous TV song goes, “You want to go where everyone knows your name.” If policy efforts to move the unbanked to banks are to be successful in the long run, banks need to remember they are a service industry involved in one of society’s most important and basic relationships.

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On the 20th anniversary of the Agreed Framework with North Korea Tue, 21 Oct 2014 15:42:48 +0000 read more >]]> On October 21, 1994, the United States and North Korea signed the Agreed Framework, hailed by the White House at the time as an important breakthrough and a triumph of diplomacy. Fast forward 20 years, and it’s clear that it was an unmitigated disaster. After all, North Korea began cheating almost immediately and, 20 years later, the Hermit Kingdom has achieved all the aims the agreement was meant to forestall, in addition to billions of dollars in additional aid.

So how should the Agreed Framework be assessed by historians and what lessons might the Obama administration learn before making the same mistakes with regard to its Iran nuclear negotiations? Over at Commentary, I explain.

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Can Iraq be fixed? Tue, 21 Oct 2014 15:40:08 +0000 read more >]]> Les Gelb, former chairman of the Council on Foreign Relations and a Carter administration diplomat, recently revived a debate he and then-Senator Joe Biden began almost a decade ago when they suggested dividing Iraq along ethnic and sectarian lines. While I have no problem with Kurdish independence should they so choose (for Kurdish leaders like Barzani, however, nationalism has always been more a rhetorical tool than a sincerely held belief), the Gelb plan to divide Iraq into Shi‘ite Arab, Sunni Arab, and Kurdish zones is as bad an idea now as it was then. It will create a host of new problems, all the while failing to resolve the old ones.

That does not mean, however, that federalism isn’t the solution. As I wrote yesterday in Commentary, not all federalisms are the same. Just as I wrote in The New York Times back in 2002 and in a book chapter from the same year, the way forward is decentralization along administrative lines. That doesn’t disempower the Kurds—they can still form their own grouping and enjoy the same autonomy—but it does mean an Iraq of 15 or 18 regions rather than just three. Just as in the United States, decentralization and investing power in states can be a path to liberty and a defense against the tyranny of the center.

While it will take military action to defeat the Islamic State, in the aftermath of any future victory, it will be necessary to renegotiate the Iraqi compact. And as I continue to travel to Iraq to talk with Shi‘ites, Kurds, Sunnis and Sunni insurgents (the latter in Jordan), it seems that decentralizing and diluting the power of the central government –limiting it largely to foreign affairs, supervision of national resources like oil, and defense–and instead investing that power in the sub-districts, districts, or provinces is not only the way forward, but a formula which can restore stability.

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If teachers are more risk averse than other professionals, what does that mean for education reform? Tue, 21 Oct 2014 15:19:59 +0000 read more >]]> There are over three million teachers in America. Debates rage over how to prepare them, recruit them, retain them, compensate them, and remove them should they not work out.

Much hullaballoo is made over the academic characteristics of teachers. There has been back and forth for years over where teachers fall in the spectrum of college graduates. But there is another teacher attribute that may also be important—how tolerant teachers are of risk.

If teachers are risk-loving, they might be enticed by merit-pay programs that stake pay to student performance. They might want more freedom in how they invest their retirement dollars to try and maximize their return. They might see a charter sector in which high performing schools are allowed to scale and low performing schools are shuttered as an ideal industry to get involved in.

But, if they are risk-averse, step and lane pay scales, defined benefit pensions, and stable, geographically zoned schools might be more up their alley. Until just recently, we knew little about the risk preferences of teachers. That is, until an intrepid band of researchers (and former colleagues of mine) from the University of Arkansas set out to try and measure them.

This table was presented to 65 teachers in a large Midwestern university’s Masters of Teaching program, 43 students in that university’s MBA program, and 24 students in its law school.


For each of the 10 lotteries, students were asked to choose option A or B.  Then the experimenters rolled a 10-sided dice twice, first to select which lottery the student would participate in and then again to determine how much the student won (each student only ended up playing once).

Afterward, the researchers analyzed the patterns of choices from each of the groups. A “risk neutral” individual (or one who simply is attempting to maximize the expected value of the payoff) would pick Option A for Lotteries 1,2,3, and 4, and then pick Option B for the rest. Someone with more risk tolerance would move from selecting option A to selecting option B sooner than someone who is risk averse.

They found that prospective teachers were consistently more risk averse than their peers in other career tracks. On average, MAT students picked 5 out of 10 safe choices, while non-MAT students picked only 4.3.

It is true that this was a small experiment and it looked at students in a relatively traditional preparation program. Perhaps looking at a cohort of Teach for America teaches might have yielded more risk-lovers. But TFA is still a small program, relatively speaking, so it’s possible that this study is representative of a very large swath of American educators.

If teachers are, on average, more risk averse, it has serious implications for education policy:

1.) Although advocates might be super excited about merit pay programs or educational marketplaces with a lot of creative destruction, it might be hard to recruit teachers who want to participate. If reformers want to restructure pensions to allow for flexibility (like portable 401Ks), they could run headlong into preferences aligned against them. They risk becoming leaders without followers, or, as the old management chestnut describes, just folks out talking a walk.

2.) Maybe that means reformers who advocate for these policy changes need to work with teacher preparation programs to recruit more risk-loving people to be teachers, or open up alternative avenues aimed at those with more tolerance for risk. That is, for the policies they support to get traction, it might be as important to change the composition of the teaching force as it is the behavior of current teachers.

3.) It is also possible that teachers only have so much tolerance for change and uncertainty, so reformers will be at a perpetual disadvantage to entrenched policies and practices. This might call for a moderation in expectation for change, given that the agents in charge of making it happen are inclined against it.

4.) There is also an argument to be made that we don’t want risk-loving people as teachers! There is good reason to prize stability and predictability, especially in creating safe and welcoming environments for children.

Wherever you come down on these questions, coming to a better understanding of the risk preferences of teachers is important. As you can probably tell, I’m still thinking through the implications of this paper myself, and imagine I will be for some time to come. I would love to hear your thoughts!

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Why attacking the Fed for making inequality worse is mostly wrong Tue, 21 Oct 2014 14:57:12 +0000 read more >]]> Fed Chair Janet Yellen is worried about inequality. As she said in a speech last week:

The extent of and continuing increase in inequality in the United States greatly concern me. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.

Now some Fed critics found Yellen’s concerns ironic or even hypocritical. After all, haven’t the Fed’s actions made inequality worse? Hasn’t quantitative easing pumped up the stock market to the benefit of wealthier Americans who have more of their assets in stocks than do the 99%? To this criticism, Boston Fed boss Eric Rosengren offers a spot-on response in a chat with the WaPo’s Matt O’Brien:

There’s no disputing the fact that asset prices have gone up as a result of what we’re doing,” Rosengren acknowledged, and that “disproportionately helps somebody who has enough wealth that they have, for example, stocks.” But “on balance” he “thinks the net benefits outweigh the net costs in terms of income inequality” for a simple reason: “the one thing that really contributes to income inequality is to have no income at all.”

Or, as he put it, “being unemployed is the ultimate inequality. It not only destroys your income, but probably destroys your wealth, and frequently has big impacts on your entire family.” And that means, “to the extent that QE and the other tools that we’re using bring the unemployment rate down, that disproportionately helps people at the lower end of the [income] distribution.” Furthermore, “if you think about who’s the lender and the creditor, the creditor who’s lending the funds tends to be at the upper end of the distribution.” So “low interest rates are good for the people at the bottom of the distribution” who need to borrow to go school or buy a car or a house.

Really, you have to consider the counterfactual, as Rosengren does. The US economy likely would look a whole lot more like the depressed eurozone right now if the Fed had mimicked the ECB and followed similar tight money policies. If the price for avoiding a multiyear depression is higher inequality, then so be it. Don’t forget that inequality dropped sharply during the Great Recession, though America was hardly better for it.

Now of course, the Fed could have theoretically followed a more egalitarian path by foregoing a bond-buying program that supports asset prices and instead doing a “helicopter drop.” Economist David Beckworth describes how that ideally might work:

First, the Fed adopts a NGDP level target. Doing so would better anchor nominal spending and income expectations and therefore minimize the chance of ever entering a liquidity-trap. In other words, if the public believes the Fed will do whatever it takes to maintain a stable growth path for NGDP, then they would have no need to panic and hoard liquid assets in the first place when an adverse economic shock hits.

Second, the Fed and Treasury sign an agreement that should a liquidity trap emerge anyhow and knock NGDP off its targeted path, they would then quickly work together to implement a helicopter drop. The Fed would provide the funding and the Treasury Department would provide the logistical support to deliver the funds to households. Once NGDP returned to its targeted path the helicopter drop would end and the Fed would implement policy using normal open market operations. If the public understood this plan, it would further stabilize NGDP expectations and make it unlikely a helicopter drop would ever be needed.

Certainly a more populist approach to monetary policy. Yet I doubt many Fed critics, at least those on the right, would like this alternate option any better than QE. But unless you wanted a repeat of the 1930s, doing nothing and letting the financial crisis “burn itself out” hardly seems realistic.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

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Chart of the day: The Iowa Electronic Markets odds of Dems losing Senate have increased from 20% last year to 95% now Tue, 21 Oct 2014 14:32:51 +0000 read more >]]> iowaThe chart above shows the history of market quotes for the Iowa Electronic Markets contract “2014 Senate Control Market” back to January 2013. Between January and June 2013, the odds for the Democrats to lose control of the Senate after the November 2014 mid-term elections were only about 20%, and were as low as 15% in May 2013 (see red line in chart). After a lot of volatility in the second half of last year, the odds of the Democrats losing the Senate increased and stabilized at around 60% between March and July of 2014, before gradually rising over the last three months to the current all-time contract high of 94.8% this week.

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Is breaking up the megabanks back on the Washington agenda? Tue, 21 Oct 2014 13:54:16 +0000 read more >]]> Shape up or break up. That’s the message Federal Reserve Bank of New York President William Dudley gave to Wall Street yesterday. Too much risk taking and law breaking means government will have to take action without some big changes by the megabanks. From the Wall Street Journal:

His comments, at a closed-door meeting at the New York Fed with big bank executives, continue his campaign of publicly and privately criticizing what he sees as Wall Street’s ongoing ethical lapses. Mr. Dudley said that if big banks don’t make significant changes to improve their ability to comply with laws, pressure to break up the banks will only increase.

“The inevitable conclusion will be reached that your firms are too big and complex to manage effectively,” he said. “In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively.”

Almost a decade, now, after the start of the Financial Crisis, this issue isn’t going away. The megabanks are getting bigger and the US financial system more concentrated. Too Big To Fail is still here, despite the Dodd Frank financial reform law. As Guggenheim analyst Jaret Seiberg puts it in a morning note:

– We believe this is consistent with our view that the mega banks are still facing increased policy risk, including pressure to break themselves up.

– In our view, regulators would like investors to pressure the biggest banks to shrink and to clean up their act so the agencies do not have to actively break up the mega banks. Yet we believe it would be a mistake to confuse this preference with an unwillingness to act. More mega bank scandals may compel regulators to impose structural punishments on the mega banks.

Dudley had some specific recommendations, too, such as the creation of a “performance bond” that senior management would forfeit if the bank got hit with a big fine. Also, he suggests building a central database to track lower level employees so bad eggs don’t keep getting fired and rehired across the industry. The point here is to wring short-term thinking out of megabank management.

I am all for that goal generally, not just on Wall Street but across Corporate America. But this would seem a losing or at least insufficient battle as long as investors believe the government backstop still exists. That presumed support not only makes yet another financial crisis more likely but also makes the US economy less innovative and productive. A next-stage financial reform agenda might include thing like much higher equity funding levels (which might cause banks to shrink on their own) and/or avoiding the deflationary consequences of megabank failures through “helicopter drop” monetary policy and fast-tracking the approval of new banks. But whatever your policy preference, Dodd Frank certainly has not ended the debate about US financial reform.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

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