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.

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.

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.

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 dangerous...to 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.

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.

Stimulus and the Spending Freeze

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

Visit msnbc.com for breaking news, world news, and news about the economy

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.

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?

Political Incentives and the Problem of Special Interests

George Mason University professor Russ Roberts has a brilliant piece on political incentives:

Bruce Yandle uses bootleggers and Baptists to explain what happens when a good cause collides with special interests.

When the city council bans liquor sales on Sundays, the Baptists rejoice—it's wrong to drink on the Lord's day. The bootleggers, rejoice, too. It increases the demand for their services.

The Baptists give the politicians cover for doing what the bootleggers want. No politicians says we should ban liquor sales on Sunday in order to enrich the bootleggers who support his campaign. The politician holds up one hand to heaven and talk about his devotion to morality. With the other hand, he collects campaign contributions (or bribes) from the bootleggers.

Yandle points out that virtually every well-intentioned regulation has a bunch of bootleggers along for the ride—special interests who profit from the idealism of the activists and altruists.

If that's all there was to Yandle's theory, you'd say that politics makes for strange bedfellows. But it's actually much more depressing than that. What often happens is that the public asks for regulation but inevitably doesn't pay much attention to how that regulation gets structured. Why would we? We have lives to lead. We're simply too busy. Not so with the bootleggers. They have an enormous stake in the way the legislation is structured. The devil is in the details. And a lot of the time, politicians give bootleggers the details that serve the bootleggers rather than the public
interest.

Please, please read the whole thing.

Are Corporations Conservative?

Ross Douthat responds to this (characteristically overdone) tirade from Keith Olbermann:



Ross makes the obvious point that large corporations are not "conservative" by nature. Rather, they have a rent-seeking agenda that is politically ambiguous:

Such rent-seeking doesn’t always translate into support for the administration’s policies. The business/government nexus is more potent on some issues than on others, and the “business community” is hardly a monolith. (Different industries have different interests, and rival companies often want different things from Washington.) Corporate America has been divided on cap and trade, for instance, and the health insurance industry has played a double game on health care reform (now trying to shape the bill to their liking, now trying to stir up public anxiety about it) that’s so complicated I’m not sure even they understand it.

. . .

But still: The hand-in-glove relationship between a Democratic administration and certain precincts of corporate America is one of the major stories of the Obama era. And if you want to know why the Department of Energy has become a venture capital firm, or what happened to Barack Obama’s pledge to allow American consumers to buy their drugs from overseas, or why the health care bill looks, well, the way it looks, [Tim] Carney’s book is a good place to start.

Carney is more stringently libertarian than I am — more anti-TARP, for instance, and more thoroughgoingly critical of the welfare state in general. But his kind of libertarian populism is a important counterweight to what’s been happening in Washington across the last twelve months. His analysis represents the cogent version of the inchoate angst that’s gripped the conservative base of late. And both conservatism and the country would be better off if it enjoyed [as] wide an audience as say, Glenn Beck’s nightly forays into performance art.

Is Keynesian Stimulus the Best Approach?

Greg Mankiw tackles Keynes, and the Obama administration's fiscal policy:

When devising its fiscal package, the Obama administration relied on conventional economic models based in part on ideas of John Maynard Keynes. Keynesian theory says that government spending is more potent than tax policy for jump-starting a stalled economy.

The report in January put numbers to this conclusion. It says that an extra dollar of government spending raises G.D.P. by $1.57, while a dollar of tax cuts raises G.D.P. by only 99 cents. The implication is that if we are going to increase the budget deficit to promote growth and jobs, it is better to spend more than tax less.

But various recent studies suggest that conventional wisdom is backward.

. . .

Like [a] doctor facing a mysterious illness, economists should remain humble and
open-minded when considering how best to fix an ailing economy. A growing body of evidence suggests that traditional Keynesian nostrums might not
be the best medicine.

I await Paul Krugman's response.

How Do We Gauge the Stimulus?

Greg Mankiw responds to Paul Krugman's self-righteous assault on "conservative economists" who question the veracity of the administration's stimulus numbers.

Mankiw writes:

I do not object to claims such as,

A: "Based on our models of the economy, we believe there would be X million fewer jobs today without the stimulus."

But it is absurd to suggest that you can say,

B: "We have measured how many jobs the stimulus has saved or created, and the number is X."

Economists are capable of making statements such as A, but it is beyond our ken to make statements such as B. Statement B is, of course, much stronger than statement A, as it purports to be based on data rather than on models. Unfortunately, we are hearing statements like B much too often from administration officials. A good example is here, where can you "learn" that 110,185.36 jobs have been created or saved in California alone.

Does Social Security Create Poverty?

I recently came across this piece by Edgar Browning -- the author of my microeconomics textbook -- in which he suggests that Social Security actually increases poverty rates among elderly Americans by crowding out private investment.

It's an interesting contention, though I'm not quite convinced by it.

Putting Browning's argument aside, though, I think there's a pretty obvious problem with a Social Security system that simply collects taxes and disburses benefits without affording Americans the opportunity to make their own financial decisions.

Today, financial literacy in the United States is pretty dismal. I can't help but feel that most Americans would be a bit more savvy if they actually had more personal control over their money . . . and if their retirement really depended on them making good decisions.

(Interestingly, a strong plurality of Baby Boomers may be collecting Social Security income at age 62, rather than the "normal retirement age," due in part to financial necessity.)

Update: Freakonomics's Stephen Dubner points to this study on financial literacy:

[F]ewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification. Financial literacy is strongly related to sociodemographic characteristics and family financial sophistication. Specifically, a college-educated male whose parents had stocks and retirement savings is about 50 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents were not wealthy.