Economist's View

Pain Inequality and the Social Security Retirement Age

Should we raise the Social Security retirement age?:

Pain and inequality, Crooked Timber: The results of this new study on pain assessment by Princeton’s Alan Krueger and SUNY Stony Brook’s Arthur Stone are for the most part not particularly surprising. As it turns out, ... even physical pain is unequally shared. For example, the Krueger/Stone study found that respondents with low socio-economic status experienced “significantly higher pain occurrences and severity.”...

Occupational status seems to play an important role, given that

the average pain rating for blue collar workers is 1.00 during work and 0.84 during nonwork, and for white collar workers it is 0.61 during both work and non-work episodes.

And in an interview, Krueger said, “Those with higher incomes welcome pain almost by choice, usually through exercise,” he says. “At lower incomes, pain comes as the result of work.”

It’s a pretty decent study; though the response rate was low enough (37%) to be worrying, the sample was weighted to reflect the composition of the general population. It’s also an improvement on earlier surveys...

The results aren’t exactly news; other studies have shown that pain and socioeconomic status tend to be inversely related. But Krueger said the relationship between pain and socioeconomic status was “stronger” than he expected.

What are the policy implications? Well, for one thing, the authors say:

The strong association between self-reported disability status and pain is notable given concerns by economists and some policymakers that able-bodied individuals may seek benefits from the Disability Insurance system.

So maybe, just maybe, all those people applying for disability aren’t just a bunch of perfectly able-bodied fakers and whiners after all?

Also, one expert says the results demonstrate “the need for pain preventing measures [in the workplace] such as better ergonomics.” Well maybe, but it’s hard to see how even the most high-quality ergonomic devices are going to make life much easier for people who make a living by scrubbing floors all day, or lifting heavy boxes. And sure, a health care system that provided universal access and did a better job at pain management would help things, too.

Given that pain is higher among blue collar workers than among white collar workers, and given that pain tends to increase with age, retirement has got to look to very different to blue collar workers who have done physical labor all their life, than it does to their more sedentary white collar counterparts. Conservatives and other Social Security crisis-mongerers love to scream about how if we don’t raise the retirement age the Social Security fund will go bankrupt. The more honest ones don’t claim Social Security is going to go under any time soon, but they do say that, given increased life expectancy, increasing the retirement age only makes sense.

In fact, I once heard a University of Chicago economics professor make that very argument. It was a lecture so I couldn’t interrupt, but it was exasperating to listen to. Easy for you to say, Mr. Economics Professor! You can do your job until you’re 100, or until senility sets in, at least.

But what about the people who scrub toilets for a living? Or health care workers who spend much of their work day manually lifting patients? Asking people to do highly physically demanding jobs like those until they’re 65 is already asking quite a lot. There’s a reason why the classic union steelworker contract had a “30 and out” pension provision. After 30 years on the job, a lot of those guys’ bodies had taken so much that they weren’t physically capable of doing physical labor anymore.

So please, let’s not hear anything more about raising the Social Security retirement age... (H/T: Shakesville)

What do conservatives say about people who want to raise taxes? That nothing is stopping them from sending the government more money voluntarily, or something like that? I suppose we could say the same thing here - if you think people should work longer, nothing is stopping you from doing so - except, perhaps, your health. We could make people with physically demanding jobs get a new job somewhere else, probably a much lower paying job than they are used to given the difficulty finding employment as age advances, just to be sure they have done their part for society. After all, doing physical labor day in and day out, and in some cases giving up their bodies and their health to produce stuff for the rest of us isn't enough, we need more than that before we give them a few years in peace.

[See also: The Costs and Benefits of Raising the Retirement Age, and Indexing for Longevity.]

"A Case for Extending Jobless Benefits"

I agree with this part of what Robert Samuelson says:

Sensible Stimulus A Case for Extending Jobless Benefits, by Robert J. Samuelson, Commentary, Washington Post: It's an election year, and partisan acrimony has escalated. ...Can we find a refuge of common-sense agreement amid this ... political din? Well, here's a proposal for the economy: Enact a temporary extension of unemployment insurance from the standard 26 weeks to 39 weeks. ...

Benefits have been extended in every recession except one since the 1950s. Although most unemployed usually find new jobs within the normal six months, the task becomes harder in a slump. Perhaps 3 million people will exhaust their benefits this year.... The cost of added protection is also modest: about $13 billion...

True, it's not yet clear that we're even in a recession. ... But... The job market is already in retreat. Look at the numbers. Though the April unemployment rate of 5 percent is not historically high..., it's way up from the recent low of 4.4 percent in October 2006. ... Even ... the number of jobs has begun to decline. Since December, payroll employment has fallen by 260,000. ... By many indicators, the job situation may get worse before it gets better.

The great danger of unemployment insurance is that people are paid to be jobless. Benefits that are too generous or that last too long can raise unemployment. .... But ... some academic studies find that extending unemployment benefits by 13 weeks might slightly slow the flow of workers back into jobs. ... But the effects aren't large, because the benefits are fairly stingy. ...

Congressional Democrats -- and some Republicans -- have supported an extension of benefits. The Bush administration has resisted, arguing that Congress has never before lengthened the benefits with such low overall unemployment. True. ... But so what?

What's wrong with this argument is that it ignores basic changes in U.S. labor markets. ... After the 2001 recession, payroll employment didn't reach its pre-recession peak for more than three years.

It's harder to find a new job. Average spells of unemployment have slowly lengthened. The increase since 1960 has been about six weeks, estimates economist Gary Burtless of the Brookings Institution. "It's more likely you'll exhaust your benefits today than in the 1950s and '60s," he says. In a slump, the share of those unemployed for more than six months typically rises to a fifth or more.

Congress ought to send the president a stand-alone extension of unemployment benefits. It would be hard to veto. Compared with the $152 billion price tag on the economic stimulus program earlier this year, the cost is slight.

But I don't agree with the argument in the next, and closing paragraph:

But this may be a fantasy. House Democrats said yesterday that they will attach the unemployment benefits extension to a supplemental appropriation to fund the wars in Iraq and Afghanistan; if that fails, they might add the extension to a package of massive spending increases and tax cuts labeled "Stimulus II." Either approach could easily become mired in partisan politics, resulting in paralysis and demonstrating again the long odds against common sense.

So, Democrats will be to blame if they can't somehow find a way to get legislation past Republican opposition, it will be their fault if they don't manage to stop Republicans from making a big stink over the bill or blocking its passage in the House or Senate. If Democrats can't find a way overcome the administration's resistance by forcing Bush's hand - assuming they can get the legislation to him without "partisan politics" Samuelson so fears, or that such politics won't arise from putting Bush in this position, or that the administration really wouldn't veto it - it will be their fault. But those who oppose the bill and are blocking its implementation - a bill he believes deserves to be supported - the ones making the stink and creating the partisan politics, aren't to be blamed at all.

Granny Bashing

We probably can't say this enough:

Return of the granny bashers, by Dean Baker, Comment is Free: ...Last month a bipartisan group of prominent budget experts had a press event at the Brookings Institution where they argued that Congress had to make major cuts in Social Security, Medicare and Medicaid. They claimed large cuts in these programmes were necessary in order to prevent the explosion in the budget deficit that is projected...

While there are long-term fiscal issues facing the country, the real problem is not the budget and these core social insurance programmes. The real problem is that the United States has a broken healthcare system, which is projected to get progressively more inefficient through time.

Since roughly half of the country's healthcare costs are paid by the government, primarily through Medicare and Medicaid, the projected explosion in healthcare costs is also projected to lead to an explosion in government spending. If the healthcare system is never fixed, the burden on the budget will eventually be unsustainable, ... exactly as the Brookings contingent claimed.

However, it is crucial that the public recognise that the problem is healthcare costs, not a growing population of elderly. The two issues are easily confused, especially since most public sector healthcare costs go to provide healthcare for the elderly. ...

The country has always been aging - we are living longer - we can easily cover the cost of a growing population of retirees as long as the economy is healthy. With normal productivity and wage growth, our children and grandchildren will be able to support a larger population of retirees and still enjoy a much better standard of living than we do; just as most of us now enjoy a better standard of living than our grandparents, even though we support a much larger number of retirees than they did in their working years.

However, if healthcare costs follow the projected trajectory, then the cost of ... healthcare programmes will be unsustainable. Of course, in this scenario the rising cost of healthcare will also place an enormous burden on the private sector.

Per capita healthcare costs in the United States are already more than twice as high as the average in other wealthy countries like Germany, England and Canada. In the budget projections, per person healthcare costs will be four or five times as high in the United States ... by 2050. In this context, US firms will face an enormous competitive disadvantage if they pay for their workers healthcare costs.

If the companies don't pay for insurance, then most workers will face an enormous struggle paying for insurance costs... In either case, workers will have far less money to spend on food, housing education and other necessary expenses, if healthcare costs grow as projected. ...

If healthcare costs in the United States were brought in line with costs in other wealthy countries, all of which enjoy longer life expectancies than we do, then we would not be looking at scary budget projections 20 or 30 years down the road.

This suggests the urgency of fixing the US healthcare system. Healthcare reform is not only necessary to extend coverage to the uninsured, it is also essential for preventing our healthcare system from strangling the economy. ...

As the Brookings contingent said, the current path is unsustainable. And it is not acceptable to tell our parents and grandparents that they will just have to die because our healthcare system has made their care unaffordable.

That's one of the reasons some people care so deeply about the healthcare issue.

"A Strategy to Promote Healthy Globalisation"

Larry Summers continues his conversation on how to promote broad based support for globalization:

A strategy to promote healthy globalisation, by Lawrence Summers, Commentary, Financial Times: Last week, in this column,... I suggested that opposition to ... economic internationalism ... reflected a growing recognition by workers that what is good for the global economy and its business champions was not necessarily good for them, and that there were reasonable grounds for this belief. ...

This ... was ... emphasised years ago by Robert Reich... The normal argument is that a more rapidly growing global economy benefits workers and companies in an individual country by expanding the market for exports. This is a valid consideration. But it is also true that the success of other countries, and greater global integration, places more competitive pressure on an individual economy. Workers are likely disproportionately to bear the brunt of this pressure. ...

In ... an open economy where investments in innovation, brands, a strong corporate culture or even in certain kinds of equipment can be combined with labour from anywhere in the world. Workers no longer have the same stake in productive investment by companies as it becomes easier for corporations to combine their capital with lower priced labour overseas. Companies, in turn, come to have less of a stake in the quality of the workforce and infrastructure in their home country... Moreover businesses can use the threat of relocating as a lever to extract concessions regarding tax policy, regulations and specific subsidies. Inevitably the cost of these concessions is borne by labour.

The public policy response of withdrawing from the global economy, or reducing the pace of integration,is ultimately untenable. It would generate resentment abroad on a dangerous scale, hurt the economy as other countries retaliated, and make us less competitive as companies in rival countries continue to integrate ... with developing countries. ...

The domestic component of a strategy to promote healthy globalisation must rely on strengthening efforts to reduce inequality and insecurity. The international component must focus on the interests of working people in all countries, in addition to the current emphasis on the priorities of global ­corporations.

First, the US should take the lead in promoting global co-operation in the international tax arena. There has been a race to the bottom in the taxation of corporate income as nations lower their rates to entice business to ... invest in their jurisdictions. Closely related is the problem of tax havens that seek to lure wealthy citizens... It might be inevitable that globalisation leads to some increases in inequality; it is not necessary that it also compromise the possibility of progressive taxation.

Second,... prevent harmful regulatory competition. ... Financial regulation is only one example of where the mantra of needing to be “internationally competitive” has been invoked too often as a reason to cut back on regulation. There has not been enough serious consideration of the alternative – global co-operation to raise standards. While labour standards arguments have at times been invoked as a cover for protectionism, and this must be avoided, it is entirely appropriate that US policymakers seek to ensure that greater global integration does not become an excuse for eroding labour rights.

To benefit the interests of US citizens and command broad political support, US international economic policy will need to focus on the issues in which the largest number of Americans have the greatest stake. A decoupling of the interests of businesses and nations may be inevitable; a decoupling of international economic policies and the interests of American workers is not.

"Food Prices: The Need for Insurance"

Esther Duflo says it's time to "make the international financial services actually work for the poor" by providing insurance against volatility in food prices:

Food prices: The need for insurance, by Esther Duflo, Vox EU: Throughout last week, violent riots in Haiti – provoked by Haitians’ fury over the increased price of basic foodstuffs – brought the issue of agricultural prices to the forefront. Other incidents occurred in Indonesia, Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen. Several large rice producers (e.g. Vietnam, India, Egypt) put severe limits on rice exports.

After being stable for several decades, foodstuff prices began to rise again in 2005, and in 2007, their increase was phenomenal. From March 2007 to March 2008, the average world price for corn increased 30%; for rice, it increased 74%; for soybeans, 87%; and for wheat, 130% (the BBC has a nice summary of what is happening to food prices).

High prices Several reasons explain the upward trend in prices, including the demand for biofuels (which consume a significant part of the corn produced worldwide), and the growth and enrichment of the world population (particularly the increased demand for meat in China – paradoxically, it takes more grain to produce a calorie in meat form than it does to produce a calorie in grain form).

Several short-term factors also help to explain the recent price peak.

Applauding Failure

What's the best thing Bush tried to do, but couldn't?

The Best Thing that Didn't Happen During The Bush Administration, by Robert Reich: The best thing to have occurred during the Bush administration is something that did not happen. We did not privatize Social Security.

Had we done so, boomers facing retirement over the next few years would be even worse off than they are today. Now they’re struggling with pension plans worth less than they counted on, and home values that are tanking. At least they can rely on a monthly Social Security check.

But had we privatized, they’d be totally reliant on the stock market. And look what’s happened to the market: Compared to stock values ten years ago, the S&P 500 has risen a little over 1 percent a year, adjusted for inflation. Even Treasury bonds have done better. Go back nine years and there’s been no gain at all. Go back eight years and the market has been off an average of 1.4 percent a year.

Yes, I know, it’s been a rough time. First the tech bubble bursting, then 9/11, then Enron, then the housing bubble bursting, then the credit crunch. But that’s my point. We can’t necessarily rely on the stock market. ...

Sure, the stock market has done well over the past half century. But there have been decades like the 1970s and this one, so far, where it’s been a disaster. That’s why we have Social Security – so that if your timing is bad and you get caught in a downdraft, you still have something to fall back on in retirement.

If we had privatized, you’d have had nothing to fall back on. You’d crash.

I'm pretty happy the whole permanent Republican majority thing didn't work out so well either.

Housing Stimulus Bill Has Little Help for Homeowners

Pete Davis at Capital Gains and Games:

Housing Stimulus Bill to Pass the Senate Next Tuesday With Hardly Any Help for Homeowners, by Pete Davis: Yesterday afternoon, the Senate cleared the way to pass a $14.9 b. housing stimulus bill ... that won't stimulate housing much. They did that by killling Senator Durbin's (D-IL) amendment to give bankruptcy judges the power to rewrite first mortgages. That was a deal-breaker for the mortgage lending industry. It was also the only thing that might have helped those facing foreclosure, albeit as the cost of raising future mortgage interest rates for the increased risk that future mortgages might be written down.

The real beneficiaries of this bill are the housing industry. Homebuilders and other firms that support housing, including the mortgage lenders who brought this crisis on us, will get ... instant cash..., and a lot of it: $1 b. by the end of September, $16.7 b. in fiscal year 2009, and $7.9 b. in fiscal year 2010.

Those facing foreclosure get no instant cash. They get a measly $100 m. of additional counselors to talk to. Those counselors have been woefully unable to stem the tide of at least 2 m. foreclosures so far. Last night, the Senate voted down Senator Murray's (D-WA) amendment to add another $100 m. for counseling.

Robert Reich: Taxpayers Deserve a Share if Bear Stearns Makes a Profit

Scroll for:

• Bear Stearns "bailout" for taxpayers [4:38 -9:42]
• The prospect of a depression [10:26-14:38]

The idea is that if taxpayers are going to cover the downside, then they ought to have a share of any profits on the upside.

Paul Krugman: Partying Like It’s 1929

We're relearning the lesson that "unregulated, unsupervised financial markets can all too easily suffer catastrophic failure":

Partying Like It’s 1929, by Paul Krugman, CVommentary, NY Times: If Ben Bernanke manages to save the financial system from collapse he will — rightly — be praised for his heroic efforts.

But what we should be asking is: How did we get here? Why does the financial system need salvation? Why do mild-mannered economists have to become superheroes?

The answer, at a fundamental level, is that ... having refused to learn from history, we’re repeating it.

Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931.

This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure. As the decades passed, however, that lesson was forgotten — and now we’re relearning it, the hard way. ...

Banks ... sometimes — often based on nothing more than a rumor —... face runs... And a bank that faces a run by depositors ... may go bust even if the rumor was false.

Worse yet, bank runs can be contagious. If depositors at one bank lose their money, depositors at other banks are likely to get nervous, too, setting off a chain reaction. And there can be wider economic effects...

That, in brief, is what happened in 1930-1931, making the Great Depression the disaster it was. So Congress tried to make sure it would never happen again by creating a system of regulations and guarantees that provided a safety net for the financial system.

And we all lived happily for a while — but not for ever after.

Wall Street chafed at regulations that limited risk, but also limited potential profits. And little by little it wriggled free — partly by persuading politicians to relax the rules, but mainly by creating a “shadow banking system” that ... bypass[ed] regulations designed to ensure that banking was safe.

For example, in the old system, savers had federally insured deposits in tightly regulated savings banks, and banks used that money to make home loans. Over time, however, this was partly replaced by a system in which savers put their money in funds that bought asset-backed commercial paper from special investment vehicles that bought collateralized debt obligations created from securitized mortgages — with nary a regulator in sight.

As the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players ... seemed to offer better deals... Meanwhile, those who worried ... that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned.

In fact, however, we were partying like it was 1929 — and now it’s 1930.

The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.

Mr. Bernanke and his colleagues at the Fed are doing all they can to end that vicious circle. We can only hope that they succeed. Otherwise, the next few years will be very unpleasant — not another Great Depression, hopefully, but surely the worst slump we’ve seen in decades.

Even if Mr. Bernanke pulls it off, however, this is no way to run an economy. It’s time to relearn the lessons of the 1930s, and get the financial system back under control.

"Bush's Market-Liberal Scam"

This is from the Ludwig von Mises Institute. They are pleased Bush wasn't able to get his Social Security plan implemented because it would have undermined free market capitalism:

Bush's Market-Liberal Scam, by Llewellyn H. Rockwell, Jr.: President Bush began his second term with a big push for "Social Security privatization." ... Let's say Bush had actually achieved his goal of creating private accounts..., and a sizable swath of the American public had invested in safe mutual funds spread across many sectors.

What would have been the result? Look at the state of the financial markets. The Bush administration would have holy Hell to pay. The public would have turned against the "market liberals" who gave us this scam. Capitalism would have been denounced as having generated yet another shock-therapy failure. Investment standards would have been ever more regulated. The companies that held most of the "private" funds would be declared too big to fail. The subprime bailout would have become a full-bore stock market bailout. This would have been declared the ultimate failure of free markets.

I think we can be pleased that Bush was unable to muster public enthusiasm for the program. ... It's hard to be grateful for anything during the Bush presidency, but the failure of a phony privatization that would have discredited free markets is one.

Of course, their point is that the government shouldn't be in the business of providing social insurance at all ("abolish it completely and instantly"), but once you accept that won't work, and it won't for a variety of reasons including significant market failures, these are some of the reasons why Social Security privatization schemes should be avoided.

Updating the New Deal

Robert Reich on the New Deal:

Recalling old lessons from the New Deal, Marketplace: On the anniversary of President Roosevelt's first inaugural address, ...Tess Vigeland speaks with ... Robert Reich about how New Deal principles could be applied to our current economic situation.

Tess Vigeland: ...Let's listen to this clip from the beginning of that address as FDR was taking office:

Franklin D. Roosevelt: This nation will endure as it has endured, will revive and will prosper. So first of all, let me assert my firm belief that the only thing we have to fear is fear itself.

Vigeland: Bob, of course, this is one of the more famous lines in recent history, but I think a lot of people out there may not realize that it was indeed referring to the economy, not foreign aggression.

Reich: Yes, the great fear at that time was that the economy would continue to do badly... Remember, there's a psychological component to economics. When people don't trust banks to keep their deposits, when the don't trust that the economy is really going to be there for them, people act in ways that almost create a self-fulfilling prophecy and that's what FDR was eluding to. It wasn't just psychology obviously; it was also some other inconvenient facts, such as the monetary system wasn't working -- the Federal Reserve Board was not pumping out nearly enough money; nobody knew the importance of generating a lot of additional liquidity in a situation like the Great Depression -- and of course, the stock market was still completely frozen.

Vigeland: So, in very basic terms, what was the New Deal? Why was it so radical at the time?

Reich: Nobody before 1933 conceived of the federal government as having a major role to play in regulating or in stimulating the national economy. The dominant political and economic philosophy was laissez-faire, just leave it alone. Well, that changed pretty rapidly. People knew something dramatically had to be done. ...

There wasn't one proposal... It was much more trial and error ... -- there was no precedent for this. They started kind of an alphabet soup of agencies: the WPA -- Works Projects Administration, the Securities and Exchange Commission, National Labor Relations Act. They enacted a whole bunch of social safety nets: Social Security, unemployment insurance. All of these were kind of groping in the dark for some answer to what could possibly be done to get the economy going again. ...

Vigeland: Let's go to another clip, and I have to say, this seems particularly relevant today:

Roosevelt: There must be a strict supervision of all banking and credit and investments. There must be an end to speculation with other people's money and there must be provision for an adequate and sound currency.

...Reich: Sounds like it could be any one of our candidates. You see, you have to understand some background. Leading up to the great crash of 1929, there was huge debt -- the United States and many, many individuals, corporations very, very deeply indebted, a great concentration of wealth and income larger than it is today and also rampant speculation and these three conjured up a very dangerous brew which ultimately blew up. Roosevelt understood that something had to be done to end speculation. There was no regulation to speak of. One of his goals was to make the market work, not to replace the market.

Vigeland: Bob, we often hear that the New Deal is dead. Do you think that's true?

Reich: Well, it's certainly dead in terms of some of the agencies -- the National Recovery Administration was struck down by the Supreme Court, the Works Projects Administration was ended by World War II. Also, I think it's fair to say that Americans today feel they have less need for and certainly have less confidence in government, but there are certain legacies that nobody can deny. Not only Social Security, unemployment insurance, agencies like the Securities and Exchange Commission, but there's also ... the notion that when things get very bad, government has to be there as a kind of last resort. We're seeing the debate now with regard to the housing crisis, the credit crunch. The question in Washington and around the country and indeed, around the world is what should government do to make the markets work better. That probably is the enduring legacy. ...

Suppose you had the power to alter the New Deal however you want. Some of you would abolish it all together, and shame on you, but for those who would choose to keep it around, how would you change it? What issues should an updated New Deal address? Perhaps:

• We need to provide health and dental insurance that doesn't end when a worker changes or is between jobs.
• We should recognize that it is normal for both parents to work outside the home. Child care that is affordable, reliable, and that helps children to get off to the best possible start needs to be available to all parents. For many parents, this is a big problem.
• We are much more geographically mobile than we were in the 1930s. If we expect a flexible workforce, we need to do more to support geographic movement of workers and their families.
• I would redefine poverty as a relative rather than an absolute standard and ensure that everyone has what they need to fully participate in society. And if my powers do not extend that far, I would at least raise - substantially - the absolute poverty threshold and then make sure nobody falls below it. Right now, it's too low. Along these lines, an expansion of the EITC is needed as well.
• The existence of large speculative bubbles - first in the stock market then in the housing market - threatens to undermine the stability of the economy and put an end to "The Great Moderation." We need to reexamine the regulatory structure of the  financial sector to be sure we are doing all we can to prevent destabilizing bubbles from emerging. If the consequences were confined to participants in these markets this wouldn't be necessary, but they are not. Problems in financial markets spread through the economy more generally and impose costs on people who had nothing to do with the creation of the problem.

What else?

Renting versus Owning and the Flexibility of Job Markets

Dean Baker says the government's plan to intervene in mortgage markets is a bad deal for some homeowners:

The hidden homeowner tax, by Dean Baker, Comment is Free: ...As we know, millions of families are facing foreclosure on their homes... This is a situation where the banks would ordinarily take a huge hit...

But politicians can't resist a bank in distress. They want the government to step in and either guarantee or directly issue new mortgages to these homeowners. When these new mortgages are issued..., they will be giving the banks far more money than they can reasonably hope to get if the houses had gone through ... foreclosure...

This can be viewed as bad policy because it is giving tens of billions of taxpayer dollars to the truly rich. But it should be viewed as even worse policy because it is effectively taxing millions of low- and moderate-income families to live in homes in which they have no equity. ...

Typically, houses sell for about 14 times as much as what it would cost to rent ... for a year. The run-up in house prices in the bubble raised the ratio ... to more than 20 to 1. While prices have begun to fall, in many areas that ratio remains nearly unchanged. ...

Suppose that a moderate homeowner gets a 6% mortgage, and then pays an additional 1% of the sale price each year on both tax and maintenance. This means that their costs of "owning" the house is equal to 8% of the sale price, not counting any payments of principle...

Let's put numbers in this story. Suppose the house would sell for $200,000. The 20-to-1 sale-to-rent ratio implies that it would rent for $10,000 a year or $830 a month. Instead, this homeowner is paying $12,000 a year in interest, $2,000 a year in taxes and $2,000 a year in maintenance for a total of $16,000 a year, or $1,330 per month.

This additional $6,000 a year in housing costs is likely to be large relative to the family's income. ...

Paying extra to own, rather than rent, a home could make sense if the homeowner was accumulating equity in the house. However, this is almost certainly not the case. House prices are falling rapidly and will likely continue to fall until the overhang from the housing bubble is eliminated. The vast majority of moderate-income homeowners facing foreclosure will never see a dime in equity on their home. ...

We need a housing policy that is designed to give people decent housing, not fulfill ideological commitments to an "ownership society".

There's something about owning a home - maybe it's the ability to paint the walls as you please without asking, put a garden in the backyard, have a dog or a cat - and much of it can't be capitalized into the price because it's unique to the individual (that carpet you chose might even lower the value to potential buyers). And if you do get out, especially with a foreclosure, will you be able to get back in later once prices have bottomed out? Wouldn't it be better to find a way to ride it out somehow even if it costs more now? Over several decades, won't I be likely to make money? I understand the financial argument, but there's something intangible about owning a house as compared to renting that the difference in prices doesn't seem to fully capture.

James Surowiecki says there's another cost to home ownership, slower adjustment to shocks, and my kind of thinking - getting a house somehow and then only reluctantly giving it up - makes it worse:

...Homeownership ... impedes the economy’s readjustment by tying people down. From a social point of view, it’s beneficial that homeownership encourages commitment to a given town or city. But, from an economic point of view, it’s good for people to be able to leave places where there’s less work and move to places where there’s more. Homeowners are much less likely to move than renters, especially during a downturn, when they aren’t willing (or can’t afford) to sell at market prices. ...[R]eluctance to move not only keeps unemployment high in struggling areas but makes it hard for businesses elsewhere to attract the workers they need to grow.

This doesn’t mean that the U.S. should become a nation of renters—even if both New York City and Switzerland show that high rates of renting are compatible with great prosperity. With the bursting of the housing bubble, though, it’s time not just to scrutinize the excesses of our home-buying process but to recognize the risks and costs inherent in owning a home. Sometimes the price—for the home buyer and for the economy as a whole—is too high to pay.

I struggle with this one a little bit. Should we, as official policy, expect people to move when things get bad - to leave their family and friends, to move away from the place they grew up and put their kids into new schools - or should government try to find a way to attract new business and provide enough jobs for residents? The latter strategy isn't always feasible, sometimes changes are permanent and nothing can be done about that, and attracting business is difficult in any case. When it isn't feasible, when change that is out of their control forces people to uproot and relocate, shouldn't we do what we can to help with the transition?

But I'm not sure what role the government should play in these cases. The difficulty that comes from leaving a place where you've lived a long time isn't just from home ownership, though that certainly contributes, so simply promoting more renting or even making it easier to sell a home won't fully resolve this "stickiness". If we want to encourage faster adjustment, then to help ease the transition I'd certainly be in favor of generous tax advantages for middle and lower income households who are willing to relocate if we can structure the policies to avoid the distortions that tax breaks for relocating create (e.g., we don't want people moving just to get tax breaks).

But tax breaks aren't the only possibility. Many families won't even move across town while their kids are in school because even if they are willing to provide transportation, the kids cannot stay at the same school due to residency requirements. Reexaming rules such as these could help promote labor market flexibility without costing taxpayers much. The point is that we can do a lot more than we do now to facilitate the transition for families willing to relocate for economic reasons and hopefully, when the administration changes after the next election, domestic issues such as these will receive much more attention than they have in recent years.

Funding the New Deal

LizardBreath at Unfogged reviews Eric Rauchway's "Very Short Introduction to The Great Depression & The New Deal."

An Even Shorter Introduction to The Great Depression & The New Deal: A Very Short Introduction, by LizardBreath: ...If you, like I, haven't heard of the series before*, Oxford University Press publishes a series of Very Short Introductions to various topics, with the goal (roughly, as I understand it) of providing the basic background you'd want in a topic in order to be able to read scholarly work with comprehension of the current thinking on the subject, in a tidy little package you can consume in a couple of hours. ...

The initial summary of the causes of the Depression ... was largely new to me. ... Also new to me was a large part of the discussion of Roosevelt's methods in the New Deal; I'd had a vague sense that the New Deal was funded by a strongly redistributive progressive income tax policy, mostly because I was aware that income taxes were much more progressive in the 50s than they are now, and assumed that that was a hangover from the tax structure of the 30s. Rauchway notes, rather, that the Roosevelt administration focused on raising regressive excise taxes on liquor and other similar luxuries, rather than hiking the income tax in an attempt to keep business invested in the economy (this sort of thing does start to answer some nagging confusion I'd had about why Social Security is funded in the weirdly Rube Goldberg manner it is). The redistributive effects of the New Deal were accomplished more through the redistribution of power to entities other than owners of capital (e.g., through the empowerment of unions) than through the direct redistribution of money. Similarly, a conservative dislike for the moral consequences of handing out cash relief led to the New Deal focus on work relief -- providing jobs rather than money to unemployed workers. ...

We here a lot about the redistribution of income. We hear quite a bit less about the redistribution of power.

Hillary Clinton and NAFTA

Did Hillary Clinton oppose moving forward on NAFTA in 1993? Robert Reich tells what he remembers:

Hillary and Barack, Afta Nafta, by Robert Reich: Was Hillary Clinton really against NAFTA in 1993? I was in the administration then, and I remember her position quite precisely. And I'll get to that in a moment. But before I do, I want to say something: It’s a shame the Democratic candidates for president feel they have to make trade – specifically NAFTA – the enemy of blue-collar workers and the putative cause of their difficulties. NAFTA is not to blame. ... What happened? The economy ... crashed in late 2000, and the manufacturing jobs lost in that last recession never came back. They didn’t come back for two reasons: In some cases, employers automated the jobs out of existence... In other cases, employers shipped the jobs abroad, mostly to China – not to Mexico.

NAFTA has become a symbol for the mounting insecurities felt by blue-collar Americans. While the ... winners from trade ... far exceed the losers, there’s a big problem: The costs fall disproportionately on the losers -- mostly blue-collar workers who get dumped because their jobs can be done more cheaply by someone abroad...

Even though the winners from free trade could theoretically compensate the losers and still come out ahead, they don’t. America doesn’t have a system for helping job losers find new jobs that pay about the same as the ones they’ve lost... There’s no national retraining system. Unemployment insurance reaches fewer than 40 percent of people who lose their jobs... We have no national health care system to cover job losers and their families. There's no wage insurance. Nothing. And unless or until America finds a way to help the losers, the backlash against trade is only going to grow.

Get me? The Dems shouldn't be redebating NAFTA. They should be debating how to help Americans adapt to a new economy in which no job is safe. Okay, so back to my initial question. The answer is HRC didn't want the Administration to move forward with NAFTA, but not because she was opposed to NAFTA as a policy. She opposed NAFTA because of its timing. She wanted her health-care plan to be voted on first. She feared that the fight over NAFTA would use up so much of the White House's political capital that there wouldn't be enough left when it came to pushing for health care. In retrospect, she was probably right.

NAFTA Isn't the Problem in Ohio

Brad DeLong provides a follow-up to the "Reactionary, Populist, Xenophobic and Just Plain Silly" Roundup:

Stagnant Wages and Ohio: NAFTA Isn't the Problem: An excellent column by David Leonhardt:

The Politics of Trade in Ohio: Now come Mr. Obama and Mrs. Clinton... tough talk about foreign trade... you'd have to conclude that they believe that Nafta and other trade agreements have caused Ohio's huge economic problems.

"She says speeches don't put food on the table," Mr. Obama said in Youngstown. "You know what? Nafta didn't put food on the table, either." Later, he went further, claiming that Ohio's workers have "watched job after job after job disappear because of bad trade deals like Nafta."

Mrs. Clinton's advisers, meanwhile, have been putting out the word that she tried to persuade her husband not to support Nafta -- which liberalized trade with Mexico and Canada -- when he was running for president....

[However, n]either candidate calls for a repeal of Nafta, or anything close to it. Both instead want to tinker with the bureaucratic innards of the agreement.... They call the country's trade policy a disaster, and yet their plan to fix it starts with, um, cracking down on Mexican pollution....

The first problem with what the candidates have been saying is that Ohio's troubles haven't really been caused by trade agreements. When Nafta took effect on Jan. 1, 1994, Ohio had 990,000 manufacturing jobs. Two years later, it had 1.03 million. The number remained above one million for the rest of the 1990s, before plummeting in this decade to just 775,000 today. It's hard to look at this history and conclude Nafta is the villain. In fact, Nafta did little to reduce tariffs on Mexican manufacturers, notes Matthew Slaughter, a Dartmouth economist. Those tariffs were already low before the agreement was signed.

A more important cause of Ohio's jobs exodus is the rise of China, India and the old Soviet bloc, which has brought hundreds of millions of workers into the global economy.... [Y]our credit card's customer service center isn't in Ireland because of a new trade deal. All this global competition has brought some big benefits, too. Consider that cars, furniture, clothing, computers and televisions -- which are all subject to global competition -- have become more affordable, relative to everything else. Medical care, movie tickets and college tuition -- all protected from such competition -- have become more expensive.

So what can be done for Ohio?

There is actually a fair amount of agreement among economists on this question. The solution should involve more government investment in infrastructure, the medical sciences, alternative energy and other areas that could produce good new jobs. A more strategic approach to investment, one less based on the whims of individual members of Congress, would also help....

Over the last week, the candidates' talk has, at times, been silly and even inaccurate. And Ohio's problems would certainly be easier to solve if, as Luis Proenza, president of the University of Akron put it, the candidates were "more true to reality and less prone to invective." But the larger problem is that Ohio's voters have good reason to be angry. For years, they have been promised that globalization was making the United States a richer country. They're still waiting for their share of the bounty.

This is from a previous post:

I want to highlight an important distinction [Olivier] Blanchard makes between protecting jobs and protecting workers:

...It is one thing to say that labor market institutions matter, and another to know exactly which ones and how. Humility is needed here... Nevertheless, even if one cannot pretend to have much confidence about the optimal overall architecture, much has been learned... We know much more about the incentive aspects of unemployment insurance on search intensity and unemployment duration... We know more about the effects of decreasing social contributions on low wages ... We know more about the effects of employment protection, ... From both the macro evidence and this body of micro–economic work, a large consensus—right or wrong—has emerged:

• It holds that modern economies need to constantly reallocate resources, including labor, from old to new products, from bad to good firms.
• At the same time, workers value security and insurance against major adverse professional events, job loss in particular. While there is a trade-off between efficiency and insurance, the experience of the successful European countries suggests it need not be very steep.
• What is important in essence is to protect workers, not jobs.
• This means providing unemployment insurance, generous in level, but conditional on the willingness of the unemployed to train for and accept jobs if available.
• This means employment protection, but in the form of financial costs to firms to make them internalize the social costs of unemployment, including unemployment insurance, rather than through a complex administrative and judicial process.
• This means dealing with the need to decrease the cost of low skilled labor through lower social contributions paid by firms at the low wage end, and the need to make work attractive to low skill workers through a negative income tax rather than a minimum wage.

This consensus underlies most recent reforms or reform proposals ... These measures are probably all desirable...

The point is, if you go along with the idea that we should use social insurance programs to protect workers but not jobs, then this gives a means of evaluating candidate's trade proposals that doesn't depend upon whether the changes are driven by technology, globalization, or some other shock. To what extent does a particular proposal protect jobs and hence inhibit needed flexibility of the labor market? To what extent do the proposals compensate for job flexibility and the insecurity that comes along with it by protecting workers who have been displaced? Do the proposals cause firms to fully internalize the costs of their employment decisions? What types of incentives are built into worker protection programs, i.e. do workers still retain the incentive to seek out and accept new employment?

Workers in Ohio and elsewhere are feeling the effects of something - I think the story above is basically correct but does not place enough emphasis on technological innovation as a cause of recent labor displacing change - but debate over the cause of their troubles shouldn't delay the implementation of policies that could help now.

"From the New Deal, a Way Out of a Mess"

Alan Blinder says it's time to bring back the HOLC:

From the New Deal, a Way Out of a Mess, by Alan S. Blinder, Economic View, NY Times: ...Wounded financial markets are supposed to cure themselves: asset prices fall, bargain hunters rush in and markets return to normal. But so far, that doesn’t seem to be happening much. Instead, house prices keep dropping, the mortgage-foreclosure problem grows and new strains in the financial system keep popping up like a not-very-funny version of Whack-a-Mole.

While the problems are multifaceted, I have several reasons for focusing on just one aspect of the mess: the potential tsunami of home foreclosures. First, it strikes home, literally. Foreclosures throw families — some of whom were victims of deception — into the streets. ...

A second reason is that reducing the wave of foreclosures would mitigate the closely related financial crises in home mortgages and the alphabet soup of financial creations based on them (M.B.S., S.I.V.’s, C.D.O.’s, etc.). ...

A third reason for focusing on foreclosures is that we’ve seen this film before. During the Depression, President Franklin D. Roosevelt and Congress dealt with huge impending foreclosures by creating the Home Owners’ Loan Corporation. Now, a small but growing group of academics and public figures ... is calling for the federal government to bring back something like the HOLC. Count me in.

The HOLC was established in June 1933 to help distressed families avert foreclosures by replacing mortgages that were in or near default with new ones that homeowners could afford. It did so by buying old mortgages from banks ... and then issuing new loans to homeowners. The HOLC financed itself by borrowing from capital markets and the Treasury.

The scale of the operation was impressive. Within two years, the HOLC received about 1.9 million applications ... and granted just over a million new mortgages. (Adjusting only for population growth, the corresponding mortgage figure today would be almost 2.5 million.) Nearly one of every five mortgages in America became owned by the HOLC. Its total lending over its lifetime amounted to $3.5 billion — a colossal sum equal to 5 percent of a year’s gross domestic product at the time. (The corresponding figure today would be about $750 billion.)

As a public corporation chartered for a public purpose, the HOLC was a patient and even lenient lender. It tried to keep delinquent borrowers on track with debt counseling... But times were tough in the 1930s, and nearly 20 percent of the HOLC’s borrowers defaulted anyway. So the corporation eventually acquired ownership of about 200,000 houses, nearly all of which were sold by 1944. The HOLC closed its books in 1951, or 15 years after its last 1936 mortgage was paid off, with a small profit. It was a heavy lift, but the incredible HOLC lifted it.

Today’s lift would be far lighter. And a good thing, too, because our government is far more timid and divided than Roosevelt’s. ...

What about the operation’s scale? Based on current estimates, ... the new HOLC might need to borrow and lend as much as $200 billion to $400 billion. ...

Given current low interest rates, a new HOLC could borrow cheaply and should find it easy to earn a two-percentage-point spread between borrowing and lending rates, for a gross profit of maybe $4 billion to $8 billion a year.

What about loan losses? A 10 percent loss rate, or $20 billion to $40 billion, spread over the life of the institution, seems incredibly pessimistic. (The original HOLC experienced a 9.6 percent loss rate during the Depression.) So the new HOLC seems likely to turn a profit, just as the old one did. But even if it loses a few billion, we must remember its public purpose: to help the economy recover, not to make a buck. By comparison, the new economic stimulus package has a price tag of $168 billion.

It is said that history never repeats itself. But sometimes there are sequels. Now is the time to re-establish the Incredible HOLC.

Count me in too. If the government can improve the flow of resources in financial markets by absorbing some of the risk of foreclosures through a social insurance arrangement, and do so in an way where the downside risk isn't all that large (there's an expected profit under most scenarios), then why not?

Update: Richard Green adds:

Alan Blinder and Mark Thoma want to bring back the HOLC, by Richard Green: ...I am myself a fan of the HOLC, and have said so in articles I wrote with Susan Wachter for Journal of Economic Perspectives and for the Jackson Hole conference last summer, as well as a comment I just wrote for Housing Policy Debate. Yet I am not sure it is alone the medicine for the current crisis.

When the Home Owners Loan Corporation was invented, it was in response to an economic tsunami that swamped lenders and homeowners. Moral hazard was not much of an issue, as loans were stringently underwritten (typical LTVs were 50 percent at origination). But loans had short terms, and therefore were vulnerable when people were forced to refinance in the teeth of the great depression. The HOLC allowed for massive loan modification and helped get incentives for borrowers and lenders aligned correctly.

Now, however, we are in the midst of a crisis that has arisen in part because of agency problems throughout the lending chain. To bail out lenders through some sort of HOLC setup could very well encourage excessive risk taking in the future, which is of course problematic.

I think if we are going to go the HOLC route, it needs to be accompanied by a regulatory structure that will prevent the sort of bad practices that led to the current crisis going forward. As I have noted before, such regulatory changes would require greater transparency, a requirement that everyone who touches a mortgage be subject to federal supervision, and a requirement that everyone who touches a mortgage have some capital at risk.

Paul Krugman: Poverty Is Poison

Why don't we do more to reduce poverty, especially among children?:

Poverty Is Poison, by Paul Krugman, Commentary, NY Times: “Poverty in early childhood poisons the brain.” That was the opening of an article in Saturday’s Financial Times... As the article explained, neuroscientists have found that “many children growing up in very poor families with low social status experience unhealthy levels of stress hormones, which impair their neural development.” The effect is to impair language development and memory — and hence the ability to escape poverty — for the rest of the child’s life.

So now we have another, even more compelling reason to be ashamed about America’s record of failing to fight poverty.

L. B. J. declared his “War on Poverty” 44 years ago. Contrary to cynical legend, there actually was a large reduction in poverty over the next few years, especially among children, who saw their poverty rate fall from 23 percent in 1963 to 14 percent in 1969.

But progress stalled thereafter: American politics shifted to the right, attention shifted ... to the alleged abuses of welfare queens driving Cadillacs, and the fight against poverty was largely abandoned.

In 2006, 17.4 percent of children in America lived below the poverty line, substantially more than in 1969. And even this measure probably understates the true depth of many children’s misery.

Living in or near poverty has always been a form of exile, of being cut off from the larger society. But the distance between the poor and the rest of us is much greater than it was 40 years ago, because most American incomes have risen in real terms while the official poverty line has not. To be poor in America today, even more than in the past, is to be an outcast in your own country. And that, the neuroscientists tell us, is what poisons a child’s brain.

America’s failure to make progress in reducing poverty ... seems to provoke ... creativity in making excuses. Some of these excuses take the form of assertions that America’s poor really aren’t all that poor — a claim that always has me wondering whether those making it ... have ever looked around ... while visiting a major American city.

Mainly, however, excuses for poverty involve the assertion that the United States is a land of opportunity... But the fact of the matter is that Horatio Alger stories are rare... That’s not surprising. Growing up in poverty puts you at a disadvantage at every step.

I’d bracket those new studies on brain development ... with a study ... which ... found, roughly speaking, that ... parental status trumps ability: students who did very well on a standardized test but came from low-status families were slightly less likely to get through college than students who tested poorly but had well-off parents.

None of this is inevitable. Poverty rates are much lower in most European countries..., mainly because of government programs that help the poor and unlucky.

And governments that set their minds to it can reduce poverty. In Britain, the Labor government that came into office in 1997 ... has achieved a great deal. Child poverty, in particular, has been cut in half...

At the moment it’s hard to imagine anything comparable happening in this country...; if a progressive wins this election, it will be by promising to ease the anxiety of the middle class rather than aiding the poor. And for a variety of reasons, health care, not poverty, should be the first priority of a Democratic administration.

But ultimately, let’s hope that the nation turns back to the task it abandoned — that of ending the poverty that still poisons so many American lives.

Update: Krugman has more at "Other countries’ wars on poverty."

Paul Krugman: A Long Story

Paul Krugman says the economy is all Obama's fault. Okay, he didn't really say that. It is, of course, all Bush's fault. No, wait, that's not right either, well not completely right anyway. There is a problem with the administration and the stimulus package, but it's "a long story" and I'll let Krugman straighten it all out and explain why he thinks it's time for the government to consider making investments in infrastructure as a means of dealing with the potential slowdown in the economy. On the infrastructure spending point, I agree such investments are needed to strengthen our long-run growth prospects. I was calling for investment in infrastructure when times were good, and if making the investments now also helps to bolster the economy during its recovery period should there be a recession, so much the better. But I would hope that, to borrow a phrase from another debate, infrastructure spending is an 'add on and not a carve out' from more immediate stimulus measures that might have a large impact on the economy:

A Long Story, by Paul Krugman, Commentary, NY Times: The economic news has been fairly dire this week. ... It’s still not a certainty that we’re headed into recession, but the odds are growing greater.

And if past experience is any guide, the troubles will persist for a long time — say, into the middle of 2010.

The problems now facing the U.S. economy look a lot like the problems that caused the last two recessions — but this time in combination.

On one side, the bursting of the housing bubble is playing the role that the bursting of the dot-com bubble played in 2001. On the other, the subprime crisis is creating a credit crunch reminiscent of the crunch after the savings-and-loan crisis of the late 1980s, which led to recession in 1990.

Now, you may have heard that those recessions were short. And it’s true that the last two recessions both officially ended after only eight months.

But the official end dates for those recessions are deeply misleading, at least as far as most peoples’ experience is concerned. There’s a reason that the Bush administration ... always talks about jobs added since August 2003. It was only then — two and a half years after the recession began — that the U.S. economy began to experience anything that felt like a recovery. And the same thing happened a decade earlier ... in 1990...

Since the current problems of the U.S. economy look like a combination of 1990 and 2001, the shape of this episode of economic distress will probably be similar...

How severe will the distress be? The double-bubble nature of the underlying problem — a housing bubble and a credit bubble combined — suggests that it may well be worse than either 1990 or 2001. ...

Maybe we’ll be lucky... But what can be done to limit the damage? Since September, the Federal Reserve has slashed its target interest rate five times, and everyone expects it to cut further. But interest rates were cut dramatically during the last two slumps, too — yet the slumps went on for years anyway.

Meanwhile, Congress and the Bush administration have reached agreement on a much-hyped stimulus package. But the package, while probably better than nothing, is unlikely to make a noticeable dent in the problem — in part because the insistence of the administration and Senate Republicans on blocking precisely the measures, such as expanded unemployment insurance and food stamps, that are most likely to be effective.

Still, by January the White House will have a new occupant. If the slump is still going on, which is likely, this will offer a chance to consider other, more effective measures.

In particular, now would be a good time to think about ... stimulating the economy with some much-needed public investment — say, in repairing the country’s crumbling infrastructure.

The usual rap against public spending as a form of economic stimulus is that it takes too long to get going... But if this turns out to be a prolonged slump, which seems likely, that won’t be a problem.

But we won’t get any innovative action to help the economy unless the next president has a couple of key attributes.

First, he or she has to be free of the ideological blinders that make the current administration and its allies fiercely oppose the idea that the government can do anything positive aside from cutting taxes.

Second, he or she has to be knowledgeable about and interested in economic policy. Presidents don’t have to be their own chief economists, but they do need to know enough to take the right advice.

Will we have that kind of president? Stay tuned.

“Why Welfare States Persist”

Andrew Gelman reviews “Why Welfare States Persist,” by Clem Brooks and Jeff Manza:

Why Welfare States Persist, by Andrew Gelman: ...[for Political Science Quarterly] Why do welfare states persist? Because they are popular, argue Clem Brooks and Jeff Manza in their new book, a statistical study of the connections between public opinion and policies in 16 rich countries in Europe and elsewhere.

Rich capitalist democracies around the world differ widely in their welfare states ... despite having comparable income levels. Brooks and Manza report that welfare state spending constituted 27% of GDP in “social democratic countries” such as Sweden and 26% of GDP in “Christian democratic countries” such as Germany, but only 17% in “liberal democracies” such as the United States and Japan. These differences are correlated with differences in income inequality and poverty rates between countries.

In their book, Brooks and Manza study how countries with different levels of the welfare state differ in their average policy preferences... Brooks and Manza find that countries where government jobs policies and redistribution are more popular are the places where the welfare state is larger, and this pattern remains after controlling for time trends, per-capita GDP of the country, immigration, women’s labor force participation, political institutions, and whether the ruling party is religious or on the left. ...

Brooks and Manza make a convincing case that attitudes are indeed correlated with policies... Chapter 2 of the book attempts to go further and make a claim of causality, to say that variation in countries’ attitudes are not just associated with policy variation but are actually a contributing cause of these policies. As a substantive matter, the causal claim undoubtedly has truth: in a democracy with all other things equal, we would expect a change in attitude to generally push toward the corresponding policy. ... That said, I do not see that the statistical methods used ... establish causality... Using a statistical “test for endogeneity” cannot get around the fundamental issue that this is a cross-national comparison based on observational data: some countries have bigger welfare states than others, and these tend to have higher support for welfare states, even after (approximately) adjusting for some country-level factors. ...

Turning to surveys from individual countries--Sweden, Norway, Holland, and the United States--Brooks and Manza find that attitudes toward government-provided social services vary by country but have changed little from 1975 to 2000. Cross-national differences in attitudes, as well as in policies, seem stable... Meanwhile, the size of the welfare state in rich countries has been stable since 1980, although with variation in individual countries...

These findings of stability in opinions and, in general, in spending, appear to contradict the conventional wisdom that welfare state policies have become repudiated in recent decades because of various factors, including: the fall of Communism and the corresponding discrediting of socialism as an economic policy; various economic crises since 1973 which have brought into question the ability of governments to pay for generous welfare benefits; and the growing presence of immigrants from poor countries, which has reduced the social consensus for income redistribution. One possible reconciliation of Brooks and Manza’s story and the general “decline of the welfare state” narrative is that, since 1980 or so, we have seen a conflation of welfare state expansion and reduction which happens to have averaged to a pattern of stability. In the wake of an aging population and lower employment rates, health-care spending has increased while job security programs have declined. Perhaps Brooks, Manza, and others who know more about this topic can let us know if this attempted synthesis makes sense.

Brooks and Manza have made a useful contribution... The book makes a compelling case for how policy differences between countries can persist, even in our modern, globalized, and post-socialist economy.

"Globalization Has Not Yet Gone Far Enough"

I stumbled across this review of Dani Rodrik's book Has Globalization Gone too Far? (1997) written by Brad DeLong in December, 1998:

Globalization Has Not Yet Gone Far Enough, by Brad DeLong: Dani Rodrik is trying to create space in the debate over globalization for a rational middle--for positions that neither lead the cheers for the onrushing economic integration of the world, nor m mindlessly condemn international economic integration in a fit of reactionary nostalgia for a past that never was.

Dani Rodrik's argument is an updated and better-written version of an argument made by Karl Polanyi--in a book called The Great Transformation--long ago, back at the end of World War II. Polanyi argued that the developing market economy tended to destroy the web of social realtionships that held human society together. The market for labor pressured people to move around the globe to where they could earn the most--at the potentially substantial sociological price of creating strangers in strange lands. The market for consumer goods rewarded people for being fortunate or for responding to the incentives provided by factor markets--and in so doing made human status rankings the product of responsiveness to market forces rather than the result of social norms and views about distributive justice. And, Polanyi argued, in the long run this undermining of sociological order by the market economy threatened to destroy the social and institutional bases on which the market economy rested.

You can disagree with virtually all of Polanyi's argument. You can say that the market for labor offers people opportunities, not constraints. You can point out that the "social norms" and "views about distributive justice" that underlie non-market distributions of income give the most to those with the biggest spears or those who can most effectively perform the confidence trick of convincing their lessers that obedience to the powerful is obedience to God. Market distributions of income at least have a meritocratic component, as well as a positive entrepreneurial component that makes it possible to do well by doing good.

Yet there remains a sense in which Polanyi's argument cannot be dismissed. The distribution of economic welfare produced by the market economy--roughly that one's weight in the social welfare function maximized by the market is approximately proportional to the market value of your endowment--does not fit anyone's conception of the just or the best. We have considerably more confidence in the correctness and appropriateness of political decisions made by democratically-elected representatives than we do of decisions made by those with large spears or large temples. So there is a powerful place for government to manage the market--in the interest of avoding large depressions, in the interest of providing social insurance to transform the market distribution of income into one that produces higher social welfare, in the interest of avoiding pointless churning of the structure of industry produced by the fads and fashions that sweep the minds of financiers.

Mankiw's Birthday Wish

The birthday boy points out that we have a problem with an aging population and rising health care costs. Shall we hope, at his age, that he doesn't have the wind left to blow out fifty candles and get his wish?:

My Birthday Wish: Not Burdening Our Children, by N. Gregory Mankiw, Economic View, New York Times: It's official. As of today, at 6 a.m., I am a half-century old. ... As I reach this particular milestone, it is hard not be worried about the economy. No, I am not talking about the subprime meltdown and the possible recession that looms on the horizon. I am confident that the team at the Federal Reserve can contain that problem.

Moreover, from the broad vantage point of history, the next recession, whenever it occurs, will likely be a minor blip. ... What worry me are the problems that we will bequeath to our children.

Long before I was born, Franklin D. Roosevelt established a compact among the generations. Families had long cared for their elderly members, but Roosevelt federalized that responsibility in the form of the Social Security system. Social Security is sometimes viewed as a pension plan, but it is mostly pay-as-you-go. The working-age population taxes itself to support its parents, in the hope and expectation that its children will do the same. On the day of my birth in 1958, the payroll tax to pay for this program, including both the employer and employee shares, was 4.5 percent.

Around the time I started grade school, Lyndon B. Johnson expanded the generational compact to include health care for the elderly. The Medicare system increased the payroll tax... By 1968 ... the payroll tax for both programs had risen to 8.8 percent.

Today, the payroll tax for these programs is 15.3 percent, far higher than the programs’ creators ever imagined. More worrisome is that this 15.3 percent is nowhere near enough to maintain solvency in the future. When my generation of baby boomers retires in large numbers and starts claiming benefits, spending on these programs will far outstrip revenue at the current tax rate.

Two problems are working in concert. The first is demographic. Because people are having fewer children and living longer than past generations, the number of working-age people supporting each elderly person has fallen and will continue to fall. ...

The second problem is that the cost of health care has risen significantly and is expected to continue rising.

From one perspective, these problems are really blessings. Life expectancy ... has risen by about eight years over my lifetime... Part of this improvement is attributable to technological advances in medicine, which sadly do not come cheap. But they are worth it nonetheless. ...

The big question for the green-eyeshade crowd is how to pay for these blessings. It is an issue that no presidential candidate has taken up in earnest.

Republican candidates are fond of saying we should cut tax rates because doing so would incentivize more rapid economic growth (true) and raise tax revenue (wishful thinking). But unless we figure out a politically acceptable way to reduce the benefits now promised to future retirees, taxes are going up in the coming decades. ...

Democratic candidates like to talk about expanding the social safety net with universal health insurance. But they blithely ignore the fact that the safety net we already have was bought on credit and that the bill is almost due. The Democrats claim fiscal responsibility by advocating taxes on the rich, but the numbers don’t back up the rhetoric. ...

Inside the Beltway, meanwhile, in a rare outbreak of election-year bipartisanship, checks are being prepared to send to voters nationwide. If all goes as planned, a few months before the November elections, a typical family of four will get a windfall of $1,800. Whether the economy needs a short-run fiscal stimulus is debatable. But there’s no doubt the stimulus will add to the national debt we are passing on to future generations of taxpayers.

My birthday wish is for all of us to stop asking what the government can do for us today. Instead, we should focus on what we can do together to prepare the economy for our children and grandchildren. That means getting ready to care more for ourselves in old age, perhaps by retiring later, perhaps by saving more. I hope that when I celebrate my 100th birthday in 2058, my descendants won’t look upon Grandpa and his generation as the biggest economic problem of their time.

I wish Greg would have actually said that Social Security is not the problem instead of leaving it implicit. That will surely leave some people confused on this point.

On the rebate, whatever is done to stabilize the economy now is, to use Greg's term, a "minor blip" on the long-run horizon. Fear about rising health care costs in the future is not a reason to oppose fiscal stimulus today. The problems that people have when unemployment hits their families, people who show up to work every day, work hard and make it possible for us all to have the things we have, are difficult. It's hard to even imagine what it feels like on that day when you have to go home and tell your family that you lost your job and things are going to be tough for awhile, to tell your kids that promises - both explicit and implicit - cannot be kept. These aren't people who are looking for a handout or a way to avoid working, they have been hit by an unfortunate circumstance beyond their control and suddenly those dreams such as sending their kids to a decent college are evaporating - they'll be lucky to pay the bills at all or be able to keep the house, in any case savings will be depleted. If we are worried about future generations, keeping tragedies from hitting families with children - and losing a long held job unexpectedly is a tragedy - is every bit as important as making sure the tax rate our children face is a few percentage points lower.

(I should also note that stabilization policy today, minor blip or not, will not necessarily raise the level of federal debt in the longer run - there is nothing in the economics that says this has to be true - it's a matter of having the political will to actually implement Keynesian style stabilization policy and balance the budgetary changes used to smooth the economy over the business cycle. Update: I should have also noted the extent to which expanding health care coverage is an investment in children, and an investment in the future more generally.)

I See What You Mean, It Is Broken

Lately, I've been hearing a lot about how recent events in financial markets show that capitalism is broken.

When regular old workers are thrown out of work and their lives are thrown into turmoil, we're told that's capitalism functioning as it should, creative destruction, dynamism, able to respond quickly to changes in conditions and all of that. It's a big shock to the workers who lose their jobs and their source of steady income, even more so for the large number who don't qualify for unemployment compensation that allows the unemployed to replace about half their lost income, at least for a time, but a necessary shock according to the creative destructionists.

However, when executives face the same dynamism and their income falls (so that they also face a reduction in their income, say from a million to half a million), global capitalism is broken and needs to be fixed (e.g. "Market Bloodbath Highlights Cracks in Capitalism," one of many along these lines).

So, when only workers are affected, it's capitalism doing what it does best. But when it's executives who are facing the turmoil, capitalism needs fixing. I actually agree that we could do more in terms of both preventative policy (better regulation of the financial sector for example) and stabilization policy (see the less than optimal current fiscal stimulus package) to help capitalism function better, it's just interesting how much louder the calls are to fix the system when it's the executive ox that's getting gored.

"Small is Resilient–the Impact of Globalization on Denmark"

The nordicmodel blog highlights a paper discussing the impact of globalization on Denmark:

Small is Resilient–the Impact of Globalization on Denmark, by aplefebvre: ...it is really interesting to see that a small country is sometimes better at facing globalization than bigger ones. The example of Denmark, in this article from Klaus Nielsen and Stefan Kesting..., is ... a lesson for our governments.

Abstract
The aim of this article is to investigate the impact of globalization on the Danish economy. We focus on four possible influences of globalization and European integration (as one of the expressions of globalization) which are widely discussed in the scientific discourse on this topic and appear to be relevant for the Danish case. These dimensions are the reduction of the repertoire and effectiveness of national economic policy, the pressure for industrial restructuring, the seemingly required welfare retrenchment and the ideological implications of globalization as a predominant neo-liberal discourse. On the one hand we discuss Denmark as a typical example of a small European state and a Scandinavian welfare state regime, on the other hand we put emphasis on its nation peculiarities. The article shows that Denmark changed and adapted successfully to challenges of globalization while keeping the core of its particular form of the Scandinavian welfare model.

Income Volatility: Jacob Hacker Responds to the CBO

Recently, the CBO Director's Blog posted an entry that seemed to contradict many of the results on the volatility of household risk that come from the work of Jacob Hacker:

Income volatility, Peter Orszag, CBO Director's Blog: Substantial interest has arisen recently regarding how much household income and workers’ earnings bounce around from year to year, prompted in part by the work of Jacob Hacker at Yale University. This topic is important not only to understand potential sources of household anxiety, but also in designing social insurance systems and the tax code.

In previous work released in 2007, CBO examined the volatility of workers’ earnings. That report concluded that earnings were surprisingly volatile, but had been roughly as volatile since the early 1980s — in other words, earnings volatility had not increased.

In preliminary work that I discussed in the latter half of a talk hosted by the Society of Government Economists at the ASSA meetings in New Orleans over the weekend, CBO has now examined the volatility of household income (rather than workers’ earnings volatility, the subject of our study in 2007). The preliminary results suggest that household income is much less volatile than individual worker’s earnings, and that household income volatility has not increased over time — and perhaps even declined slightly. Some other recent studies relying on other data sources have suggested increases in household and family income volatility, but various problems in the surveys used in those studies may be contaminating those results. CBO will soon be releasing our final report on the topic.

CBO’s work on income and earnings volatility is led by Molly Dahl and Jonathan Schwabish of CBO (along with Thomas DeLeire of the University of Wisconsin-Madison) ...

I will let Jacob speak for himself. Here is his response, in full:

I have received numerous queries about a recent post on the Congressional Budget Office’s (CBO) blog that indicates that the CBO has examined the instability (also known as “volatility” or “variability”) of U.S. family incomes from 1984/85 to 2001/2002 and, in preliminary results, has found no consistent increase over that period.

This preliminary finding obviously runs counter to the results that I present in my book, The Great Risk Shift (revised and expanded, 2008), for the 1973-2004 period. In the revised edition of the book, and a forthcoming brief from the Economic Policy Institute, written with Elisabeth Jacobs of the Brookings Institution, I show that the volatility of family incomes has roughly doubled over the 1973-2004 period—a finding that is closely in line with a number of other recent studies.

In my book, I discuss many other indicators of declining economic security among American families: dwindling health coverage and the rising financial threat posed by medical costs, the steady demise of pension plans offering a guaranteed benefit for the remainder of a retired workers’ life; the growing costs of job dislocations and high levels of involuntary job displacement; the rising levels of household debt, growing prevalence of bankruptcy and mortgage foreclosures; and the increasingly threadbare character of public benefits for American workers, especially in light of the increasing number of workers juggling household duties and paid employment due to the movement of women into the workforce. It is the confluence of these trends, not just rising family income volatility, that I believe helps account for rising levels of public anxiety about economic security. In this memo, however, I focus on family economic v