Thursday, April 29, 2010

Christie Cuts Breakfast

New Jersey Governor Chris Christie is planning to reduce funding for school meal programs:

Christie wants to eliminate the state's $3 million for subsidized school breakfasts, which also run on $41.4 million from the U.S. Department of Agriculture. For school lunches, which get $173.4 million in federal funding, Christie seeks to trim the state bill to $5.6 million from $8 million.
I'm no expert on this subject -- and I'm not even sure if this is possible -- but it seems to me that the state should cut funding to school meal programs to help close its budget gap. Schools can then increasing the price of meals for other students.

Right now, kids who pay for lunch are getting bargain-price meals for no apparent reason. But if higher-income students were made to pay more and the additional revenue were used to subsidize meals for low-income students, then the state might not need to contribute to these food programs.

The Center on Budget and Policy Priorities (CBPP) has already recommended that the federal government try to increase regular meal prices, since the current price of a meal in most schools does not even cover the cost of preparation. CBPP's research also suggests that demand for school lunch is relatively inelastic over a certain price range, which makes sense since the prices are often dramatically lower than other available substitutes.

I don't think that we should be cutting funding for students who need free and reduced price meals. But we should be shifting more of the cost onto other students who don't need free and reduced price meals.

There is no reason for us to be subsidizing kids whose parents can afford to pay more.

Wednesday, April 28, 2010

Tea Party: Partisan Frauds or Racists?

Andrew offers a pretty good description of how I've come to see the Tea Party Movement:

[O]n the fiscal front, they're total frauds. They have yet to propose any serious cuts in entitlements and want far more money poured into the military-imperial complex. In rallies, the largely white members in their fifties and older seem determined to get every penny of social security and Medicare. They are a kind of boomer revolt - but on the other side of that civil conflict, and no longer a silent majority. In fact, they're now the minority that won't shut up.

More and more, this feels to me like an essentially cultural revolt against what America is becoming: a multi-racial, multi-faith, gay-inclusive, women-friendly, majority-minority country. The "tea-party" analogy is not about restricting government as much as it is a form of almost pathological nostalgia. That's why there's much more lashing out than constructive proposals. And yes, a bi-racial president completes the picture.

He also offers this caveat, which I think is important:

And no, that doesn't mean they're all racists. Discomfort with social and cultural change is not racism. But it can express itself that way. [My emphasis.]

Is Twitter Making Reporters Lazy?

As far as I can tell, the primary source for this CNN story is . . . a bunch of tweets from random Twitter users:

UK Prime Minister Gordon Brown apologized "profusely" on Wednesday after he was caught on microphone describing a woman who spoke to him on the election campaign trail as "bigoted."

. . .

One Twitter user, Thermalsocks, said: "Gordon Brown has created a total survailance society. Glad to see he got caught out, now he knows how we all feel."

Another user, urbantaoist85, said: "Anyone else up for making all politicians wear a microphone at all times?" Ririnyan added: "I wonder if that was the final nail in the coffin for Labour this time." Andy_Francis said: "I think GB has just kissed goodbye to any chances Labour had left."

However CupCate wrote: "I'd be more concerned if Brown had said, "What that brilliant woman said about all those damn immigrants, too right!"

. . .

But one Twitter user, SusanCalman, spoke for many when she said: "I feel sorry for Gordon Brown. If people I've met knew half the things I'd said about them when I left I would be stabbed and left for dead."
How has this become an acceptable method of reporting on overseas elections?

Update: Here is Andrew Sullivan's (non-Twitter) analysis:

Gillian Duffy is a life-long Labour voter. She doesn't like being called a racist because she worries about immigrants; she's fed up with the welfare state rewarding, as she sees it, the unworthy; she's working class; she's not alone. This is Brown's base. He has essentially attacked his own base in the most condescending two-faced manner possible, on a live microphone, on every broadcast. Imagine if Obama's gaffe about "clinging to guns and religion" had been uttered by John McCain, about his own base. With a week to go.

Friday, April 23, 2010

Two Must-Read Articles

First, a newsletter(pdf) from the Federal Reserve Bank of St. Louis, rethinking the static way that we typically talk about the income distribution in the United States:

The Census Bureau essentially ranks all households by household income and then divides this distribution of households into quintiles. The highest-ranked household in each quintile provides the upper income limit for each quintile. Comparing changes in these upper income limits over time for different quintiles reveals that the income of wealthier households has been growing faster than the income of poorer households, thus giving the impression of an increasing “income gap” or “shrinking middle class.”One big problem with inferring income inequality from the census income statistics is that the census statistics provide only a snapshot of income distribution in the U.S., at a single point in time. The statistics do not reflect the reality that income for many households changes over time—i.e., incomes are mobile. For most people, income increases over time as they move from their first, low-paying job in high school to a better-paying job later in their lives. Also, some people lose income over time because of business-cycle contractions, demotions, career changes, retirement, etc. The implication of changing individual incomes is that individual households do not remain in the same income quintiles over time.

. . .

Another problem with drawing inferences from the census statistics is that the statistics do not include the noncash resources received by lower-income households—resources transferred to the households—and the tax payments made by wealthier households to fund these transfers. Lower-income households annually receive tens of billions of dollars in subsidies for housing, food and medical care. None of these are considered income by the Census Bureau. Thus the resources available to lower income households are actually greater than is suggested by the income of those households as reported in the census data. At the same time, these noncash payments to lower-income households are funded with taxpayer dollars—mostly from wealthier households, since they pay a majority of overall taxes. One research report estimates that the share of total income earned by the lowest income quintile increases roughly 50 percent—whereas the share of total income earned by the highest income quintile drops roughly 7 percent—when transfer payments andtaxes are considered.
Second, a great piece from Henry Louis Gates -- yes, that Henry Louis Gates -- on the question of slave reparations in the United States:

Advocates of reparations for the descendants of those slaves generally ignore [the] untidy problem of the significant role that Africans played in the trade, choosing to believe the romanticized version that our ancestors were all kidnapped unawares by evil white men, like Kunta Kinte was in “Roots.” The truth, however, is much more complex: slavery was a business, highly organized and lucrative for European buyers and African sellers alike.

Tuesday, April 20, 2010

Is the SEC Reaching?

Goldman Sachs offers a pretty thorough defense of its business practices:

We want to emphasize the following four critical points which were missing from the SEC's complaint.

-- Goldman Sachs Lost Money On The Transaction. Goldman Sachs, itself, lost more than $90 million. Our fee was $15 million. We were subject to losses and we did not structure a portfolio that was designed to lose money.

-- Extensive Disclosure Was Provided. IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities. The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side.

-- ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions. ACA had the largest exposure to the transaction, investing $951 million. It had an obligation and every incentive to select appropriate securities.

-- Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SEC's complaint accuses the firm of fraud because it didn't disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.
Obviously, this is all pretty self-serving. Ezra describes the charges against Goldman this way:

Another way of think about it comes from the Washington Independent's Annie Lowrey, who analogizes it to a housing sale. Imagine a broker shows you a home. It looks good to you. Looks like the other homes, in fact. But when you buy it, it turns out that the foundation is cracked and the roof leaks and the neighborhood is full of crackhouses.

How can this be? You got the home appraised! And your broker knows all about homes!

Well, it turns out that your broker was working for the seller, who did the appraisal himself. And the seller had bet a bookie that whoever he sold the home to would move out within a year, which and your broker knew that but never told you. In this analogy, as you've already guessed, the broker is Goldman, the seller is Paulson, and the buyer is the counterparties.

But that's not a very fair presentation of the facts either. Since Goldman Sachs was also taking a long position on the CDO in question, the "broker" in this analogy would have had a much greater incentive to see the house appraised well. Goldman was gambling way more of its own money on the assumption that this CDO would pay off. The fees it was receiving from Paulson & Co. were paltry in comparison.

To me, this seems like a rather salient point. If the SEC is trying to prove that Goldman was engaging in some kind of nefarious deception, why did it work out so badly for them?

Update: Here is Felix Salmon's take on the whole thing, and here is the SEC's formal complaint.

The big question seems to be whether Fabrice Tourre -- the Goldman employee who helped structure the deal and market it to investors -- mislead ACA into believing that Paulson was taking a long equity position on the ABACUS 2007-AC1 CDO, when in fact Goldman knew all along that Paulson had intended to short it.

Here is the SEC's primary evidence:

On January 10, 2007, Tourre emailed ACA a “Transaction Summary” that included a description of Paulson as the “Transaction Sponsor” and referenced a “Contemplated Capital Structure” with a “[0]% - [9]%: pre-committed first loss” as part of the Paulson deal structure. The description of this [0]% - [9]% tranche at the bottom of the capital structure was consistent with the description of an equity tranche and ACA reasonably believed it to be a reference to the equity tranche. In fact, GS&Co never intended to market to anyone a “[0]% - [9]%” first loss equity tranche in this transaction.
As the key evidence against Tourre, this seems pretty weak. The SEC is essentially quoting one phrase from an email out of context. I suspect that the upshot of this case will depend largely on whether Tourre ever explicitly stated that Paulson would be investing in the CDO alongside ACA. The actual wording of this email matters immensely.

Monday, April 19, 2010

J.K. Rowling on Incentives and Single Mothers

In a recent op-ed in the London Times, author J.K. Rowling slamed Tory leader David Cameron for his apparent hostility toward single mothers.

Rowling writes:

Yesterday’s Conservative manifesto makes it clear that the Tories aim for less governmental support for the needy, and more input from the “third sector”: charity. It also reiterates the flagship policy so proudly defended by David Cameron last weekend, that of “sticking up for marriage”. To this end, they promise a half-a-billion pound tax break for lower-income married couples, working out at £150 per annum.

I accept that my friends and I might be atypical. Maybe you know people who would legally bind themselves to another human being, for life, for an extra £150 a year? Perhaps you were contemplating leaving a loveless or abusive marriage, but underwent a change of heart on hearing about a possible £150 tax break? Anything is possible; but somehow, I doubt it.

Rowling goes on to detail the trials of single-motherhood, and portray Cameron as out of touch with the lower-class and ignorant of nontraditional family dynamics.

But what is Cameron really saying that’s so controversial?

There are a number of things that bother me about Rowling’s piece. While it’s true that some children suffer because of acrimonious marriages, the overwhelming amount of research suggests that – all other things being equal – kids are substantially better off in stable two-parent households. Asserting that two-parent households are better for children in the aggregate isn’t the same as demonizing single parents. It's simply acknowledging what seems to be the empirical reality. Rowling is wrong to misconstrue Cameron's statements as some sort of crusade to smear single moms.

The central complaint of Cameron's “sticking up for marriage” campaign is that the British welfare system provides a fiscal motive for single-parenthood, while the tax system fails to encourage matrimony in any meaningful way. Since we know that kids from two-parent households perform better – even when controlling for a range of other demographic factors – this makes little sense. Conservatives argue that we need to provide parents with more of an incentive to stay together for their children.

The real question, then, is whether you believe that people actually respond to economic incentives – even if those incentives seem relatively meager. Rowling is very skeptical, primarily because she doesn’t believe couples will stay together for such a trivial amount of money. Afterall, why would any woman base her decision to get married on the how much she would receive in tax breaks?

Of course, this is a pretty silly oversimplification. And whether she knows it or not, Rowling is actually challenging decades of microeconomic research (with broad theoretical underpinnings) that shows people do respond to these kinds of incentives, at least on the margin. Certainly, no one is expecting – or hoping – that an abused wife will remain with her husband so that she can take advantage of a small tax break. But what about a young couple that recently had a child out of wedlock and is wavering on the marriage issue? Or a couple that has lived together for years and never thought it was “worth it” to get married?

What bothers me most about Rowling’s piece is her ignorance of microeconomic theory – an ignorance that I believe is widespread. Microeconomic analysis rests on two primary assumptions: people respond to incentives, and those responses can be measured on the margin. This is the central thesis of books like Freakonomics.

To argue that people won’t respond to a tax incentive because you can’t picture them responding to it strikes me as a pretty weak and ineffectual argument, particularly when you're railing against such a widely-held and widely-supported proposition.

But, then again, Rowling has never been very good at economics.

Saturday, April 17, 2010

Questioning the Tea Party's Motives

Andrew Sullivan has a great piece on why he distrusts the Tea Party Movement:

[Tea Party members] have no genuine proposals to reduce spending and taxation. They seem very protective of Medicare and Social Security - and their older age bracket underlines this. They also seem primed for maximal neo-imperial reach, backing the nation-building efforts in Afghanistan and Iraq, favoring war against Iran, etc. Only Ron Paul, peace be upon him, extends his big government critique to the military-industrial-ideological complex.

So they are truly not serious in policy terms, and it behooves the small government right to grapple with this honestly. They both support lower taxation and yet bemoan the fact that so many Americans do not pay any income tax. They want to cut spending on trivial matters while enabling the entitlement and defense behemoths to go on gobbling up Americans' wealth. And that lack of seriousness is complemented by a near-fanatical cultural alienation from the modern world.

. . .

When they propose cuts in Medicare, means-testing Social Security, a raising of the retirement age and a cut in defense spending, I'll take them seriously and wish them well.

Until then, I'll treat them with the condescending contempt they have thus far deserved.
Let me be the first to say: I propose cuts to Medicare, progressive price-indexing of Social Security benefits, a raising of the retirement age, and reductions in defense spending. And, also, higher taxes on both the middle class and the wealthy.

Yes, Andrew, there are people like me out there on the electoral fringes.

Friday, April 16, 2010

Taxes, Taxes, Taxes

Ezra writes:

[W]hile it's true that we can't solve all our fiscal problems by taxing the rich, we can solve more of them than people realize, as inequality has made the rich a lot richer than people realize. In 2007, the top 1 percent of households accounted for 23.5 percent of the nation's income. That is to say, for every dollar of income in America, the top 1 percent got about a quarter and the rest of us split the other 76 cents.
What are the policy implications of continuing to solve our problems by taxing the top one percent? Of course we can set the top marginal rates as high was we want. The important question is whether this is a good idea.

Ezra is correct that the richest households accounted for 23.5 percent of the nation's income in 2007. But as the Tax Foundation points out, the top one percent of earners also paid 40.4 percent of all income taxes in 2007.

Is it really smart to have such a large portion of our federal income tax revenue coming from such a narrow base? Of course not. In fact, it's more dangerous than many people realize, since earners in top one percent tend to share many common characteristics.

The truth is that it's unwise for the federal government to get most of its revenue from such a narrow subset of the population for the same reason that it's unwise for an insurance company to cover mostly houses in a particular neighborhood. It's bad to have so many correlated risks. You need to diversify.

But how do you diversify when the wealthy have so much and the rest of us have so little?

Debates over tax policy are often framed in terms of rich versus poor. There are, as John Edwards insisted during the 2008 Democratic Primary, "two Americas." President Obama has arbitrarily decided that the division between these two Americas begins around the $200,000 income level. Anyone below this level should be exempt from federal tax increases, while anyone above this level should experience substantial rate increases.

Sounds good to most of us. But is it really fair that those making between, say, $30,000 and $199,000 should be insulated from any kind of federal tax hikes? Is it smart to tell so many people that they can have more services without having to pay more money? Is it good policy?

Politically, it may be wise to tell 95 percent of Americans that they should never expect to see their taxes raised. But, outside the world of electoral gimmickry, narrowing the tax base so dramatically isn't just stupid, it's essentially fiscal suicidal . . . .

Thursday, April 15, 2010

Task of the Day

If you read one thing today, read this.

So sad, but such a great piece . . .

Wednesday, April 7, 2010

Science and Morality

Sean Carroll -- a prominent cosmologist at CalTech -- has written an excellent critique of Sam Harris's TED talk on science and human values.

In his comments at TED, Harris contends that the perceived distinction between science and moral judgment is "an illusion," which has led many secular thinkers to embrace a dangerous kind of moral relativism. According to Harris, scientific truths can tell us an awful lot about the well-being of conscious creatures and, as a result, inform our understanding of human morality. The "facts" will point to the superiority certain moral frameworks and tell us which system of morality fail to promote well-being.

Caroll takes exception to this view:

Morality and science operate in very different ways. In science, our judgments are ultimately grounded in data; when it comes to values we have no such recourse. If I believe in the Big Bang model and you believe in the Steady State cosmology, I can point to the successful predictions of the cosmic background radiation, light element nucleosynthesis, evolution of large-scale structure, and so on. Eventually you would either agree or be relegated to crackpot status. But what if I believe that the highest moral good is to be found in the autonomy of the individual, while you believe that the highest good is to maximize the utility of some societal group? What are the data we can point to in order to adjudicate this disagreement?
In his extended response to Carroll and other critics, Harris argues that morality must arise from a certain ethical premises regarding the value of "well-being," just as science must be premised on the value of logical coherence. Thus, we can and should dismiss as "imbeciles" those who argue against the premise that well-being the fundamental value upon which our moral judgments must be based.

As Carroll rightly points out in his second post, however, Harris seems to be straying off course. People clearly disagree over what constitutes human "well-being." Harris cleverly bypasses this point by assuming that there are - or can be - definitive measures of well-being.

The bigger problem with Harris's argument, though, is that he hasn't really solved the problem that he identifies: namely, that moral subjectivity leads to a dangerous kind of moral equivalence, which ultimately jusfies immoral actions.

My own view is that you generally can't convince people to change their minds on fundamental moral questions by simply asserting the objectivity of premises with which they disagree. You must convince people by finding common premises and deducing your conclusions therefrom. Telling your intellectual opponents that their morality is objectively wrong based on our scientific understanding of the world doesn't make the world less dangerous. Nor does it automatically lead to moral consensus.

Carroll explains:

The problem, obviously, is that we don’t all agree on the assumptions, as far as morality is concerned. Saying that everyone, or at least all right-thinking people, really want to increase human well-being seems pretty reasonable, but when you take the real world seriously it falls to pieces. And to see that, we don’t have to contrast the values of fine upstanding bourgeois Americans with those of Hitler or Jeffrey Dahmer. There are plenty of fine upstanding people — you can easily find them on the [I]nternet! — who think that human well-being is maximized by an absolute respect for individual autonomy, where people have equal access to primary goods but are given the chance to succeed or fail in life on their own. Other people think that a more collective approach is called for, and it is appropriate for some people to cede part of their personal autonomy — for example, by paying higher taxes — in the name of the greater good.
I think the issue of redistributive taxation offers an excellent challenge to Harris's view of objective morality. After all, the most controversial moral questions often exist in the realm of the social sciences rather than the physical sciences.

In economics, there remains an important distinction between positive analysis and normative analysis. Positive analysis seeks to explain the world as it is, while normative analysis seeks to describe the world as it ought to look. (This distinction can be traced back to David Hume's is/ought problem.)

Nowhere is the barrier between positive analysis and normative analysis more apparent than in discussions of efficiency and equity. Economists often explain that positive economics can inform us about the efficiency trade-offs from redistributive taxation, but it cannot tell us anything about the appropriate level of equity in a society. Different economists will come different conclusions regarding the "best" level of taxation in a society based on their view of equity.

When we look at different kinds of policy interventions, each of us employs her our own evaluative criteria. You may be willing to accept more inequality in order to create more economic growth, while I may be willing to accept a lower level of growth in order to achieve greater equality. No matter how much data we collect - or how many econometric models we construct - empirical investigation can never tell us which of these moral preferences is correct in an objective sense.

The only thing that we can do is try to agree on certain ethical premises and go from there . . .

Thursday, April 1, 2010

The Gender Wage Gap

There has been an interesting discussion over at Andrew Sullivan's blog on individual choice and the gender wage gap, so I figured I'd add some context and some further thoughts.

There is no doubt that the gender wage gap has narrowed over the past several decades. Full-time working women now make 80 percent of what their male counterparts make -- a figure that is likely to increase as male-dominated manufacturing jobs become increasingly obsolete.

In spite of this progress, though, there remains an enormous income disparity between the sexes. What could be causing this inequality?

The challenge for social scientists has been determining what portion of the 20 percent wage gap is due to discrimination, and what portion is due to individual life decisions. A simple, side-by-side comparison doesn't tell you much about discrimination. It only tells you that there is a gender disparity, which could be explained by any number of things.

One way to address the discrimination question is to use a statistical technique called regression analysis that holds other variables constant in considering the impact of gender on wages. This technique is sometimes called gender-wage"decomposition." When social scientists use regression to control for other relevant job factors -- the number of hours worked, for example -- the wage gap between men and women narrows dramatically, but does not disappear.

The most reasonable conclusion to draw from this is that many individual-level choices contribute to wage differences between men and women in the aggregate. Discrimination may account for some small portion of that difference, but it certainly not all of it.

Of course, this doesn't quite settle the controversy.

A far more complicated question for policymakers is whether women's choices are really independent, or simply a function of the social pressures and cultural dynamics that unwittingly drive many of our actions. Do women who choose to work fewer hours so that they can spend more time at home with their children make this choice freely, or does society compel them to make it?

There are no easy answers to this question. People are is complex, and "society" is far from monolithic. We can't quantify the millions of subtle forces that influence our decisions and bias our perceptions. We don't know what causes some men to choose work over family and some women to choose family over work. We also don't know what causes some women to choose a work over family and some men to choose family over work.

One thing that we do know, however, is that men will never have to endure the months of physical and emotional misery associated with pregnancy. Men will never have to experience the pain of childbirth, or the stress of waking up night after night to breast-feed a newborn baby. And because of this -- ironically and unfairly -- men will always be paid higher wages.

No matter how much society progresses, the gender wage gap will never vanish completely. There will always be some women who choose to have children, and these women will have to make sacrifices for that child that a father will never have to make. This doesn't mean that men shouldn't take on more responsibility for raising children. But, in the aggregate, full-time working women who become pregnant will miss more workdays, be less productive, and see a marginal decline in wages as a result.

I'm not sure whether this is fair or not, but I simply can't see any fair way to correct the problem. We can give women the option not to have children, and attempt to remove any stigma that may be attached to the "career woman" or the stay-at-home dad. Beyond that, I don't know how to proceed without simply generating further inequity.

Any thoughts?