Friday, January 29, 2010

Maddow on the Spending Freeze, Continued . . .

The exchange between Rachel Maddow and Jared Bernstein is still bothering me, so I thought I'd offer some additional comments.

First, while I understand that Maddow is a strong-minded progressive, it's infuriating to hear someone -- even a left-wing television host -- assert the correctness of Keynesian theory without even acknowledging the opposition.

If Maddow had suggested that "many economists believe" that the Roosevelt Recession of 1937 and the Japanese Lost Decade were the result of contractionary fiscal policy, she would've been on much sounder footing. But Maddow didn't qualify her statements at all.

This kind of provincial thinking is exactly the reason liberals criticize conservative pundits, who seem unable to accept that there are often many legitimate views when it comes to complex economic problems. But for some on the left, fiscal stimulus seems to have become the liberal substitute for conservative tax-cutting ideology.

Second, Maddow's interpretation of both these events is, at best, extremely narrow-minded.

A more nuanced reading of the Japanese crisis provides a dramatically different story of the potential problems with a poorly-designed fiscal stimulus package:

For many, the moral of the story isn't that Japan erred in deciding to use fiscal policy to fix their economy -- its failure was in the execution.

For one thing, there was dubious logic behind too many of Japan's infrastructure projects. "It was the epitome of bridges to nowhere," says economist Ed Lincoln, director of the Center for Japan-U.S. Business and Economic Studies at New York University. "There was apparently a $2 billion bridge built to an island of 800 people."

. . .

Lincoln adds that at its peak in the 1990s, the government was spending 8% of GDP on public works projects. By comparison, the United States now spends about 3% - even several hundred billion dollars in proposed projects would not get the United States to Japan's peak.

. . .

Finally, any action by the government needs to be done swiftly and decisively.

The Japanese government's efforts were spread over several years but it was as if its leaders couldn't pick one strategy and stick to it. After passing a series of stimulus packages in the early 1990s, the economy showed signs of improving; by 1995, GDP was growing at roughly an annual rate of 2.5%.

And then the government took a fateful step. Worried about its growing debt, Japan raised its consumption tax two percentage points, to 5%, in 1997. And the economy, by now also hobbled with deflation, sunk into a recession.

"When you look at the Japanese crisis, you really don't see the drama of a collapsing economy and a big contraction of the economy and sharp increase in unemployment," says Reinhart. "What you see is this lingering malaise in which a very rapidly growing, buoyant economy becomes one that's limping along."

The trouble with any debate over Japan's stimulus in the 1990s is that it's impossible to know what would've happened if the government had taken lesser action. Many argue the situation would've been worse.

One thing is certain: Japan still faces a mountain of debt from all its spending; debt is now around 200% of GDP, vs. 45% for the U.S. And the U.S. can count on a similar situation if it embarks on more big-government spending.

In the end, though, looking to history can yield only so many lessons. Very few other countries have faced a comparable crisis followed by a huge government stimulus, and Japan is only one scenario. "I think it is extremely draw large lessons from one observation," says Reinhart. "Using the Japan example to make a bold statement about whether stimulus packages work or not I think is on very shaky ground."

Interpreting the cause of the Roosevelt Recession is an equally complicated business, and there are a number of different theories. Many economists attribute the rapid decline in 1937 to a contraction of the money supply, in addition to Roosevelt's dramatic reductions in the deficit spending. This was Milton Friedman's view of the problem, and those who took an introductory macroeconomics class may also remember that he wrote a whole book criticizing the Keynesian interpretation of the Great Depression.

Either way, Obama's proposed spending freeze -- which targets only non-defense discretionary funds, and is specifically designed to avoid impacting jobs -- is not remotely comparable to Roosevelt's large-scale reversal in federal spending, including vast reductions in funding to the WPA and other public works agencies.

Even some on the left have been savvy enough to criticise Maddow's faulty analogy. The more I watch Rachel Maddow, the more frustrated I become with her apparent lack of consideration for the other side.

Thursday, January 28, 2010

Alito, Obama, and the STOU

Two good pieces to read after last nights' State of the Union address . . . .

First, Dahlia Lithwick has nice take on Justice Alito's now infamous head-nod:

There was absolutely nothing wrong with the president’s criticism of the court’s decision, although as Linda Greenhouse points out, he was less than precise in his description of the holding. But there was also absolutely nothing inappropriate about the justice’s reaction to him. Both the president and the justices are political actors, and all are entitled to screw up their faces and grumble in public as they see fit. Anyone who’s watched Alito at oral argument at the high court knows that he screws up his face and mutters to himself all the time. The suggestion that he was showboating or grandstanding last night is spectacularly unfair. Unlike several of his colleagues, Alito is meticulously polite, balanced, and measured on the bench, and goes out of his way to shun big drama. I’m sure if Alito could take it back this morning he would. I’m equally sure that if he attends the next SOTU at all, he won’t move so much as a muscle.
Second, Ilyad Somin has a great post over at Volokh, attacking the idea that the Bush administration pursued free-market reforms:

In the State of the Union, Obama continued to blame Bush and the Republicans for our current economic problems. This is understandable for two reasons. First, the GOP does deserve a good deal of blame, though my list of their misdeeds would probably look different from Obama’s. Second, pretty much any president in Obama’s position would do the same thing.

Much less defensible is Obama’s attempt to claim that the Republicans purused free market policies during the last eight years, and thereby caused the economic crisis:

"From some on the right, I expect we’ll hear a different argument — that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away. The problem is that’s what we did for eight years. That’s what helped us into this crisis. It’s what helped lead to these deficits. We can’t do it again."

In reality, of course, the Bush-era GOP greatly expanded government control of the economy, including major increases in spending, regulation, and federal “investment” in education. I discussed this at some length here, here, and here. Far from “maintain[ing] the status quo in health care,” Bush established the Medicare prescription drug benefit, the biggest new government program since the 1960s. Ironically, Obama referred to the prescription drug program and other Bush-era spending increases as contributing to the deficit earlier in this very same speech.

Tuesday, January 26, 2010

Stimulus and the Spending Freeze

Rachel Maddow chastises the President for his supposed plan to freeze federal spending:

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Maddow argues that anyone who's taken an introductory macroeconomics course knows that you don't reduce federal spending during a recession. And, certainly, that seems to be the prevailing wisdom these days.

But it's not the only perspective. Perhaps Maddow should watch the second half of this video:

Here's another point that Maddow may be loath to acknowledge:

While it's true that two-thirds of economists surveyed by USA Today seem to favor a second stimulus, one third of those surveyed also said that they prefer tax cuts as the primary stimulus method.

Monday, January 25, 2010

Incremental Reform and Path Dependency

Ross Douthat has a brilliant piece in today's NYT:

Under Franklin Roosevelt and Lyndon Johnson, liberals created a federal leviathan that taxes, regulates and redistributes across every walk of American life. In the process, though, they bound the hands of future generations of reformers. Programs became entrenched. Bureaucracies proliferated. Subsidies became “entitlements,” tax breaks became part of the informal social contract. And our government was transformed, slowly but irreversibly, into a “large, incoherent, often incomprehensible mass that is solicitous of its clients but impervious to any broad, coherent program of reform.”

In other words, the problem with big governmental reforms is that earlier decisions create public interest groups that dramatically constrain later decisions. This ultimately leads to path dependence. Large public interest groups that benefit from earlier decisions become resistant to change. So, bad public policy decisions that affect large groups of people -- like the deduction for employer-based health insurance -- become nearly impossible to reverse.

This isn't a new theory, but Ross lays the argument out very well.

For anyone who's interested in this subject, I'd recommend reading Rauch's book, Government's End, as well as Jacob Hacker's The Divided Welfare State.

Wednesday, January 20, 2010

What's Going On?

Is health care reform dead on arrival?

Perhaps the most important question about the game-changing election returns in Massachusetts is how they reflect on the Democratic-controlled Congress and on the president.

It's true that Martha Coakley was a rather uninspiring candidate, and if she were running in any other state -- or for any other Senate seat -- her failure may be explained away fairly easily. But the pre-election polling seemed to suggest that many Massachusetts residents were deeply opposed to the health care reform bill, worried about the cost of health care reform generally, and doubtful that Coakley would have shown any political independence in representing her constituents.

Even as Scott Brown charged ahead of Coakley in the polls, Coakley's positives continued to outweighed her negatives. This suggests that Coakley's lackluster campaign was not her only electoral problem. National issues likely had a large influence on the final results.

So, what's really going on here? Was this a referendum on the president's agenda?

Hard to say. It's true that President Obama still maintains majority approval in Massachusetts, but many aspects of his platform are rapidly losing support in the Bay State and in the country as a whole. Nationally, the president's approval ratings are slipping as Americans on both sides of the political divide seem to be disillusioned with his performance.

(Although, it's still important to look at Obama's approval ratings in historical context.)

Conor Friedersdorf considers the reasons why President Obama seems to be losing support:

On the campaign trail . . . Obama didn’t campaign as an establishment pragmatist. He didn’t say, “Health care reform is important, so I’ll hold my nose, cut deals with a lot of special interests, and get more Americans covered in a very imperfect way.” Nor did he try to communicate that message in more politically palatable language. Instead he made being a change agent the foundation of his appeal. He talked, as they all do, about a broken system in Washington DC, noting that issues like health care reform were too important to be addressed in the same old way. Again, I didn’t particularly believe any of this, but having my cynicism justified isn’t winning President Obama any points.

Perhaps a down economy is the biggest reason that President Obama’s numbers are down, but I cannot help but wonder if his slip isn’t also due to a lie at the heart of his campaign. This man is calculating politico, as comfortable as anyone we’ve got at navigating Washington DC as it exists today. It’s a style of leadership that is perfectly defensible. But he sold himself as an idealistic agent of change whose special contribution would be fixing a broken status quo.

When you’re talking approval ratings, overall impressions like this one are far more important than most specific issues, and Obama supporters who took the man’s rhetoric seriously have reason to feel misled on everything from Gitmo to gay rights to bank bailouts to health care deals cut with industry players to courting special interests generally. That they’d still prefer him to McCain/Palin, Rush Limbaugh or Glenn Beck eventually begins to register as damning with the faint praise that it is. Obama defenders are perfectly within their rights to point out that sane alternatives to the president’s agenda haven’t many GOP champions. But let’s raise the bar a bit. Is there anything President Obama has accomplished that we couldn’t have expected from a President George H.W. Bush or a Bill Clinton?

Exceptional rhetoric + mediocre performance = falling approval ratings. So it goes.

I think Conor makes a good point. But I also believe that the problem is much larger, and has a lot more to do with human psychology.

Ross Douthat argues that President Obama's aggressive pursuance of a liberal agenda has turned some Americans against him. But on any given day, a Daily Kos blogger will argue that the President's conservative agenda -- or, at least, his deference to conservatives -- is what's causing all our problems.

Many party-line Democrats with whom I talk are extremely frustrated with the president for failing to deliver on what they viewed as his promise to transform the United States into a more progressive country. Meanwhile, conservatives seem convinced that President Obama is the most liberal president in history, and is actively transforming the United States into a more progressive country.

So, what's the real issue? Why do Americans on both sides seem to be rebelling against President Obama? Is all of this hostility toward the president really just a reflection of intellectual biases run wild?

As Morton Hunt once wrote in The Universe Within:

Most human beings earn a failing grade in elementary logic. We're not just frequently incompetent [in thinking logically], we're also willfully and skillfully illogical. When a piece of deductive reasoning leads to a conclusion we don't like, we often rebut it with irrelevancies and sophistries of which, instead of being ashamed, we act proud.

In my view, it's not just logical reasoning that we need. It's the ability to tell ourselves that we are biased creatures. The world is far more complex than our perceptions allow us to grasp.

I think we need to stop convincing ourselves that our intellectual opponents have nothing to offer but discredited ideals. We need to stop convincing ourselves that we're always right.

Monday, January 18, 2010

Does Flextime Work for Workers?

A few days ago, the First Lady came to my job to talk about, among other things, work-life balance. She highlighted the success of flextime programs, which give most federal employees broad discretion in setting their own hours.

Without citing any specific studies, the First Lady exclaimed that we now have the "evidence" that flextime "works." That comment received thunderous applause. But what does it really mean for a program like this to be effective?

Studies of flextime typically find positive effects in terms of individual-level productivity, but to my knowledge there is still a limited body of research examining the impact of flextime programs on overall workplace efficiency.

As a full-time student, I'm pretty happy to work on a flextime schedule. If I have to run errands or finish up some schoolwork, I can always come into work early and leave early. If I'm feeling tired one day, I can come in later without having to endure a passive-aggressive interrogation from my boss. The Department of Labor also allows its employees to work overtime and build up "credit" hours, which will likely be extremely helpful in the weeks prior to final exams. Does all of this increase my productivity? Maybe. But I tend to doubt that flextime programs actually enhance workplace efficiency.

In my experience, there are clear trade-offs. While my job doesn't require a lot of interpersonal interaction, I do work with a "team" and I do sometimes need some guidance from coworkers. Flextime can make this much more difficult. For managers, it is often challenging to administer a group of employees with dramatically different schedules. It's also hard to monitor abuses and direct joint activity. My division still uses sign-in sheets, and it's easy to consistently shave a few hours off of your workday.

More importantly, I think, flextime programs are very difficult to repeal if they are not working. Employees come to see these programs as a sort of fringe benefit, rather than an a way for the company to enhance productivity and promote loyalty.

I'm sure that these criticisms aren't new, and I know that studies of flextime have been ongoing for decades. What I'd like to see is a more comprehensive assessment of flextime programs. I haven't been able to find a meta-analysis of the various studies on flextime and worker productivity, but I'm sure that someone has tried to do a systematic review of the literature. I'd love to read it.

There are many other issues related to flextime. Does it make families stronger? Does it make workers happier? Does it improve employee health? Unfortunately, serious selection problems (and Hawthorne effects) make studies like this less than compelling.

I think it's only fair to say that the jury is still out on flextime. With programs like this, the benefits are often readily apparent, while the costs are less visible. There are still a number of concerns that have yet to be considered.

Any thoughts?

Sunday, January 10, 2010