Reihan Salam on the Tea Party

He writes,

Deep divisions notwithstanding, there are a number of principles that unite the movement. The most important is a devotion to subsidiarity, which holds that power should rest as close to ordinary people as possible.

Read the whole thing. He may be right in his description of leading politicians who claim allegiance to the Tea Party, but I do not think he describes the movement at a grass roots level. I think of it as ordinary Americans who are filled with resentment of Washington. They perceive that Washington takes care of its own, not them.

Failure Gets Rewarded

Reihan Salam writes,

Yesterday, the Congressional Budget Office announced that it believes the bill will cost $35 billion over three years, ramping up to as much as $50 billion a year if its programs are made permanent. As, of course, they will be, meaning that this is an absolutely gigantic expansion of the VA.

The way capitalism works, if a private firm fails its customers, it goes bankrupt and someone else takes over. (Crony capitalism does not work that way, of course. Instead, you get bailed out.) When a government organization fails its customers, it gets a huge budget increase.

I guess the idea of selling the VA facilities to the private sector and instead giving veterans money to shop around for the best available health care is just too silly to consider.

Politics and Policy

William Galston writes,

The document’s emphasis on the middle class is a thinly veiled repudiation of the Romney campaign, whose emphasis on “job creators” reduced the 2012 Republican convention to a gathering of the National Federation of Independent Businesses. As Sen. Mitch McConnell noted at a “Room to Grow” public event last week, Republicans must stop imagining that average Americans are anything like John Galt in Ayn Rand’s “Atlas Shrugged.” Few of them are entrepreneurs, let alone heroic individualists. Most of them are holding jobs or looking for them. A political party that doesn’t address their needs isn’t likely to get their votes.

Pointer from Reihan Salam.

Let me propose the following distinction between politics and policy. Politics is a set of gestures and poses that politicians use to win votes, either in elections or in Congress concerning legislation. Policy is what actually gets done.

The Obama team has been magnificent at executing gestures and poses and thereby winning votes. Their approach to policy appears to have been much more haphazard, with results that I imagine disappoint even many of their supporters.

My criticism of “Room to Grow” is that it while it purports to be a policy document, it is in fact a set of gestures and poses. I think that the way Galston and Salam discuss “Room to Grow” tends to confirm that. Rather than complain that these are just gestures and poses, they are willing to engage with the gestures and poses and ask how well they will work politically.

I seem to be the only one who cares whether there is a coherent, implementable policy agenda embedded in “Room to Grow.” Maybe it is premature to worry about that. If you don’t get the poses and gestures right, you won’t have the opportunity to implement anything. But I do not think you should come in as unprepared as the Obama Administration was to deal with actual policy.

RtG on the Safety Net

The chapter is by Scott Winship.

rather than instituting work-promoting reforms program-by-program, there is much to be said for consolidating them, thoughtfully modifying phase-out rates to transparently encourage people [to] move to work, and offering supports outside the confines of specific programs.

As part of SNEP, I have a somewhat specific proposal that attempts to do this. Winship refers a proposal by Oren Cass that sort of sounds like mine, but as I look closer the resemblance seems to go away. You can read Reihan Salam’s write-up from last year on the Cass proposal.

As an alternative, Winship writes,

Congressman Paul Ryan, who chairs the Budget Committee, has spoken favorably of the United Kingdom’s “universal credit.” Under this approach, various means-tested programs would again be consolidated, and benefits would be distributed to families as a single amount rather than through separate programs with their own applications procedures and bureaucracies. A universal credit may be designed with a single phase-out schedule as beneficiaries move into work

Yes. I need to find out more about the British experience, which I understand ran into a number of implementation snafus.

Again, I raise the issue of coherence. The big enchilada of means-tested programs is Medicaid. If you going to have a coherent policy document, then you need to decide whether or not Medicaid reform is going to consist of folding into a universal credit. Instead, the chapter on health care reform talks about a completely different approach to Medicaid.

I want to see a policy playbook, and that means that the ideas have to fit together. Relative to that expectation, RtG comes across to me like a bunch of vendors standing outside the ballpark, all shouting. “Tax credits!” Getcher health care reform here!” “Gotta have higher ed reform!”

SNEP and the EITC

Reihan Salam writes,

In theory, the EITC is a simple program. But in practice — and in particular from the vantage point of recipients — it’s opaque and complex. It’s almost surprising how much recipients did know about how their behavior related to the refund.

Salam’s piece has many useful links for what I am calling the Setting National Economic Priorities project. One of the project’s ideas is to introduce a standard “fade-out” rate of 20 percent for all means-tested programs in the safety net. A next step might be to consolidate all such programs into a single “flexdollar” benefit program, which I have described in previous posts.

My priors, which I think are supported by the research cited by Salam, is that trying to use a program like the EITC for social engineering is a mug’s game. I think that the flexdollar idea is a reasonable compromise between offering a pure cash benefit and trying to do fine-grained social engineering.

Immigration and Skills

Reihan Salam writes,

While only 6 percent of working-age native-born Americans do not have a high school diploma, the share of working-age immigrants without a high school diploma is over 25 percent. And though immigrants represent 16 percent of the U.S. workforce, they represent 44 percent of workers without a high school diploma.

Salam clearly sees it as a mistake that the U.S. encourages more low-skill immigration than high-skill immigration. However, this is not as obviously correct as it appears. One interesting question is how much the U.S. raises the productivity of low-skilled workers when they cross the border. If the answer is “a lot,” then the case for restricting low-skilled immigration is not particularly strong.

From the conservative point of view, the dire scenario is one in which low-skilled immigrants and their families ultimately consume more in government services than they produce. The libertarian answer would be “more immigration, less social welfare spending,” neither of which seem like popular policy positions at the moment.

Spending Our Accumulated Wealth: Who Decides?

Reihan Salam writes,

in trying to avoid a doom loop of oligarchy we instead wind up with a doom loop of technocracy, in which elite research universities grow ever larger and more powerful and non-profit organizations press for the expansion of a government that operates largely through private administrative proxies. This doom loop might move at an even faster clip than the doom loop of oligarchy, as non-profit organizations are tax-exempt, a fact that has had significant consequences for jurisdictions like New York city, where non-profit medical providers have been growing robustly. Imagine “profitable non-profits” that offer their employees lavish salaries, thus drawing talented workers away from firms engaging in productivity-enhancing business-model innovation, and devoting just as much of their effort to preserving and extending their privileges as they do to their ostensible social missions.

Consider three groups that might decide how to allocate large concentrations of wealth:

1. Private individuals and money managers, seeking the highest return.

2. Government officials.

3. Non-profits.

Progressives fear (1). Conservatives fear (2). Salam is saying that at some point we should start to worry about (3). He has a point.

Reihan Salam on Low-Wage Employers

He writes,

McDonald’s and other low-wage employers…are taking on a task that many American families and schools are failing to perform. To put it bluntly, McDonald’s is a company that hires large numbers of people with limited skills, many of whom are teenagers and young adults, and it introduces them to the ways of the workplace.

…Perhaps the employers who makes a risky bet on a raw employee, and who take the time and effort to train her, should be entitled to a small portion of her lifetime earnings as she moves on to more lucrative employment. That would create a powerful incentive for employers to devote real resources to building the skills of their workers.

At this point, the working title for my economic priorities project is “Setting National Economic Priorities.” “Setting National Priorities” makes a grandiose idea seem even grandioser. “Setting economic priorities,” which is another alternative, might not refer to economic policy at all.

I am currently most comfortable with the following three priority areas:

1. Improving labor supply and demand incentives for low-wage workers. Improving labor supply means making sure that the structure of means-tested benefits does not create high implicit marginal tax rates for low-wage workers. Improving labor demand means lowering the cost to employers of hiring low-wage workers, particularly health insurance mandates and payroll taxes. I think it also means removing barriers to entry in the education and health care industries. I think it also means reducing the economic friction caused by occupational licensing.

2. Reconfiguring for the 21st century the regulatory missions and mechanisms for dealing with industries that have undergone significant technological change. This includes telecommunications, medicine, the electric grid, and eventually probably should include air traffic and motor vehicles (because of drones and self-driving cars).

3. Reducing the risk of a fiscal train wreck. I suspect that bringing this risk down to what I would consider a reasonable level requires taking steps on Social Security and Medicare that are more radical than what is politically feasible. I would aim for more modest goals, such as indexing the eligibility age for both programs to longevity (hardly a modest goal from a political standpoint!) and developing budget reporting mechanisms (accrual accounting? stress testing?) that provide important information not currently used in the budget process.

Anyway, Reihan’s column fits in with (1).

My Best Sentence?

From my January 31st post:

Again, I have not read the book (it will be released in about 6 weeks). Does he come out in favor of privatizing Social Security? If not, then why not?

According to Arpit Gupta, Piketty understands how his analysis helps make a case for privatizing Social Security, but he says

one must bear in mind that the return on capital is in practice extremely volatile. It would be quite risky to invest all retirement contributions in global financial markets. The fact that r > g on average does not mean that it is true for each individual investment. For a person of sufficient means who can wait ten or twenty years before taking her profits, the return on capital is indeed quite attractive. But when it comes to paying for the basic necessities of an entire generation, it would be quite irrational to bet everything on a roll of the dice. The primary justification of the PAYGO system is that it is the best way to guarantee that pension benefits will be paid in a reliable and predictable manner: the rate of wage growth may be less than the rate of return on capital, but the former is 5-10 times less volatile than the latter.

What’s that, Dr. Piketty? There’s risk, you say? Capital income is 5-10 times more volatile than labor income? It is “quite irrational to bet” on capital unless you are “a person of sufficient means”? And these factors only matter in the context of Social Security privatization, but can be ignored in the main part of your book?

I Do Not Understand

Joshua Gans attempts to explain WhatsApp, the small text messaging service that was acquired by Facebook for a combination of cash and stock reported as $19 billion. He writes,

WhatsApp experimented with various paid models from a paid up to a paid subscription to its now, try before you buy, option. Basically, after a year you pay $1 per year. It is dead simple and quite lovely. There are no gimmicks there either. You have to initialise the paid version. It doesn’t just kick in. There is something so refreshing in a service that just gets people to pay for it if it is worth something to them rather than exploit some failing in their rationality.

Among the things I do not understand.

1. I agree that the business model is refreshing. But I think that in this case it is also self-extinguishing. The service has value to people who are otherwise charged for sending text messages. As more people adopt the service, cell phone companies will obtain less revenue from charging for text messages. The end game is for them to obtain revenue in other ways and drop the charges for text messages (a lot of us in the U.S. already have plans with unlimited text messaging). At that point, the rationale for paying even $1 a year to WhatsApp will have evaporated.

2. I do not understand why, in a bidding war between Google and Facebook, if Google bids $10 billion, Facebook has to pay $19 billion. I would think that the minimum raise in this game would be a little smaller.

3. Reihan Salam reproduces some analysis by Tariq Krim that indicates that WhatsApp has a faster-growing user base than Twitter, which is valued by the market at $20 billion. (a) I think I understand what makes Twitter’s market advantage seem defensible, but I do not understand what is defensible about WhatsApp’s user base. (b) As an investor, I would not go anywhere near Twitter at its current valuation.

4. Reihan points to Ben Thompson, who writes breathlessly,

Still, it’s only recently that the killer app for this era, when the nodes of communication are smartphones, has become apparent, and it is messaging. While the home telephone enabled real-time communication, and the web passive communication, messaging enables constant communication. Conversations are never ending, and friends come and go at a pace dictated not by physicality, but rather by attention. And, given that we are all humans and crave human interaction and affection, we are more than happy to give massive amounts of attention to messaging, to those who matter most to us, and who are always there in our pockets and purses.

I do not understand why Thompson is so confident of this. I teach in a high school, so I think I have a bit of sense of what teenagers are up to these days. They are the natural market for this stuff, and a few students are really into messaging. There also are a few of them who are really into games. A few of them are really into music. And a lot of them are perfectly content to leave their phones in their pockets for the whole day.

Late in 1999, I started my first blog, which I called The Internet Bubble Monitor, to make fun of the stock valuations of that era. I shut it down about six months later, because there was nothing to make fun of any more. I think I might have to start it up again.