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NATIONAL REVIEW ONLINE: Is Work More Like Leisure or is Leisure More Like Work?

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This article originally appeared in National Review Online

In 1930, John Maynard Keynes predicted that over the coming century, per capita income would quadruple and that work hours would plummet. Jerry Brito observes that while this first prediction has essentially come true, the second prediction has come true in a more roundabout way. For large numbers of workers in the affluent market democracies, and in particular workers in knowledge-intensive services, the distinction between work and leisure has blurred. Professional pursuits for the most privileged workers often align with basic desires for stimulation, challenge, and camaraderie that would be met one way or another, whether on the job or off. Brito cites himself as an example of this phenomenon, as the bulk of his professional work consists of activities that he would happily engage in were he a wealthy retiree.

Tyler Cowen has discussed this same landscape in the context of “threshold earners,” i.e., people who choose not to maximize earned income, but rather to improve their quality of life. Tyler suggested that as the number of single-occupancy households increases, the share of threshold earners would increase as well, as one of the main drivers of the desire for income gains is to care for dependents. And one of Tyler’s central preoccupations is the increase in the quality and variety of leisure and consumption experiences, an enormous boon to novelty-seekers. This development implies that the opportunity cost of a work-centered lifestyle has increased, at least for the novelty-seekers who benefit from it the most.

While Jerry Brito and Tyler Cowen are optimistic about the prospect of a world in which the distinction between work and leisure has collapsed, Rob Horning offers a contrasting view. Brito and Cowen are both enthusiastic consumers and users of social media, which they see primarily as a means of discovery. Horning, however, sees social media as a means of harvesting the labor of individuals hoping to achieve self-actualization on behalf of profit-making enterprises, both directly (as Facebook and Twitter profit as their users deepen and enrich their platforms) and indirectly, as the constant process of public reinvention and taste-making helps spread new modes of consumption via viral means. I’ve expressed some gentle skepticism about the Horning thesis in the past, but the idea that social media transforms “living labor” — or self-defining activity, which includes the kinds of leisure Brito and Cowen prize most  – into “abstract labor” that, as he puts it, “can be an input to a profitable production process,” is insightful. Consider, for example, a little start-up called Mass Relevance, which harvests publicly-available user data from Facebook and Twitter to provide media companies and other clients with a rich portrait of how consumers think. Horning’s deeper point, however, is that social media is both a homogenizing force and a force that produces “an urgent need to manufacture new distinctions,” as social media participants compete to demonstrate their uniqueness. A crude way to put the difference between Brito and Cowen on the one hand and Horning on the other is that while the libertarians are inclined to believe that work is becoming more like leisure, the critic of capitalism is inclined to believe that leisure is becoming more like work.

And finally, to pivot back to Brito, the idea that some workers are choosing to earn less in return for the opportunity to engage in more self-actualizing and stimulating forms of work raises interesting questions about the tax-and-transfer state. When high human capital individuals choose not to earn as much as they can, they are making a decision to avoid paying taxes, whether or not the tax question is top of mind. The elasticity of taxable income varies across groups, as Matthew Weinzierl explains in his work on tagging, and it also varies across societies, e.g., because younger people have a more elastic labor supply than older people, there is reason to believe that labor supply in older societies in more sensitive to the tax rate. In a similar vein, changes in marginal tax rates might not have a big immediate impact on labor supply, as work patterns arguably have at least as much to do with family obligations and identity as they do with after-tax income, at least in the short-term; yet they might have a bigger impact over time, as individuals and larger communities adjust their expectations. (See Arpit Gupta’s post summarizing Raj Chetty et al. on evidence from Danish tax records.) That is, higher marginal taxes might foster a society in which mothers and fathers are more likely to want to spend another hour with their children than another hour at work, or in which people prize access to positional goods that money can’t buy (or money can’t buy easily) rather than more accessible modes of consumption. This could be a salutary development in some respects, but it will presumably mean a somewhat smaller pie, and somewhat less scope for redistribution, as money is fungible in a way that networks, relationships, and access are not.

BOSTON REVIEW: Response: Inefficient, but Not Plutocratic

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This article originally appeared in Boston Review

Rob Reich sees foundations as part of a diverse, competitive, and decentralized landscape for exploring competing visions of the good society. I agree, but I object to the path he takes to this conclusion.

The first part of Reich’s essay can be read as a devil’s advocacy, raising arguments that he will rebut later on. Still, he uses too many general and value-laden terms and prejudges substantive issues.

Reich says than a foundation represents an “institutional oddity in a democracy” because “its considerable private assets give it considerable public power.” I would sooner say that we live in a constitutional republic with strong democratic elements, not a democracy, and indeed influence was never intended to be egalitarian, nor should it be. With that rather different description, private foundations suddenly sound less odd.

The phrase “considerable public power” also obscures the reality. To be sure, foundations have some lobbying power, if only indirectly, but their essence—giving away some money and investing the rest—doesn’t rival more common coercive conceptions of power. The philanthropic process may be better described as an alternative to that power.

Maybe the power of wealthy foundations comes in stifling the expression of grant-seekers’ opinions: the arts community may be reluctant to criticize tobacco, for fear of hurting its connections with Altria (Philip Morris). But I have seen no evidence that this problem is significant. Some commentators complain about the far reach of the extremely wealthy Gates Foundation in economic development and education, but its net impact, relative to non-philanthropic institutions such as corporations and government, appears quite small. That could be said of philanthropy in most areas.

Reich repeatedly describes foundations as “plutocratic.” Some meanings of plutocracy refer mainly to influence, but, again, the term seems misplaced here. I don’t see foundations campaigning against “one man, one vote” or against basic human rights—quite the contrary. Or maybe one fears that the Peterson Institute, for example, will have disproportionate influence over future fiscal policy, but I observe politicians pandering to voters for the most part on the major issues; we would do better if foundations had more influence over public policy.

There is no conflict with principles of accountability.

Moreover, few if any foundations achieve donor-directed control in perpetuity or even past the first generation. The Ford Foundation and Pew Foundation are well-known cases. The law may “enshrine the donor’s wishes in perpetuity,” but this is largely an illusion in practice, and arguably for the better, as it limits the influence and power of the founders and initial grantees.

I also disagree with Reich’s complaint about foundations lacking accountability. But a similar complaint may be leveled about voters: to whom are they accountable? Or for that matter consumption decisions: to whom are consumers accountable? Accountability is not an endless chain where each party along the line is accountable to someone or something else. Assigning accountability to a foundation’s board of directors alone is not fundamentally in conflict with the principles of accountability underlying a free society.

Like Reich, I worry about the tax-subsidized nature of foundations, especially in a time of budget squeezes. Yet I feel uncomfortable calling this a subsidy, or grounding it in the view that foundation giving is part of a more public sphere.

Let’s consider a parallel. In many localities some items are subject to sales tax and others exempt, or perhaps subject to different rates. Let’s say that I spend my money on untaxed items or lower-taxed items. Does this untaxed expenditure—an indirect subsidy of sorts—imply that “the public” should have a greater say in how I spend my money? I see comparable judgments being applied, if only implicitly, to the untaxed status of private foundations.

I have some significant worries about foundations but prefer to view them in more concrete terms: foundation overhead is often extremely high and not for the better; many wealthy foundations become highly risk-averse or too averse to negative publicity and too much like massive bureaucracies; the balance between board and staff control very often misfires, often in ways harmful to all involved; and there is a tendency to pursue vanity projects.

So all is not well in the world of U.S. foundations, but Reich’s critique uses too broad a brush, and is too caught up in abstract political concepts to get at these very real and enduring problems.

THE NEW YORK TIMES: A Profession With an Egalitarian Core

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This article originally appeared in The New York Times

ECONOMICS is sometimes associated with the study and defense of selfishness and material inequality, but it has an egalitarian and civil libertarian core that should be celebrated. And that core may guide us in some surprising directions.

Economic analysis is itself value-free, but in practice it encourages a cosmopolitan interest in natural equality. Many economic models, of course, assume that all individuals are motivated by rational self-interest or some variant thereof; even the so-called behavioral theories tweak only the fringes of a basically common, rational understanding of people. The crucial implication is this: If you treat all individuals as fundamentally the same in your theoretical constructs, it would be odd to insist that the law should suddenly start treating them differently.

At least since the 19th century, the interest of economists in personal liberty can be easily documented. In 1829, all 15 economists who held seats in the British Parliament voted to allow Roman Catholics as members. In 1858, the 13 economists in Parliament voted unanimously to extend full civil rights to Jews. (While both measures were approved, they were controversial among many non-economist members.) For many years leading up to the various abolitions of slavery, economists were generally critics of slavery and advocates of people’s natural equality, as documented by David M. Levy, professor of economics at George Mason University, and Sandra J. Peart, dean of the Jepson School of Leadership Studies at the University of Richmond, in “The ‘Vanity of the Philosopher’: From Equality to Hierarchy in Post-Classical Economics.”

Professors Levy and Peart coined the phrase “analytical egalitarianism” to describe the underpinnings of this tradition. For example, Adam Smith cited birth and fortune, as opposed to intrinsically different capabilities, as the primary reasons for differences in social rank. And the classical economists Jeremy Bentham and John Stuart Mill promoted equal legal and institutional rights for women long before such views were fashionable. Their utilitarian moral theories placed individuals on a par in the social calculus by asking about the greatest good for the greatest number.

Bentham and Mill didn’t support personal liberty in every instance — Mill was a proud imperialist when it came to India, and Bentham’s idea for a Panopticon prison was a model of state-sponsored surveillance. But they prepared the way for dissecting the prevailing defenses of hierarchy and injustice.

More recently, a tradition from University of Chicago economists asserts that deep down, all human beings have the same desires, even though they may face different circumstances and incentives. Gary Becker, the Nobel laureate who is one of the founders of this approach, used the economic method to lay bare the selfish motives behind racial and ethnic discrimination. And the recent Republican amicus brief endorsing gay marriage carried the signatures of two renowned economists, Harvey S. Rosen of Princeton and N. Gregory Mankiw of Harvard. (Mr. Mankiw is a regular contributor to this column.)

Often, economists spend their energies squabbling with one another, but arguably the more important contrast is between our broadly liberal economic worldview and the various alternatives — common around the globe — that postulate natural hierarchies of religion, ethnicity, caste and gender, often enforced by law and strict custom. Economists too often forget that we are part of this broader battle of ideas, and that we are winning some enduring victories.

So where will a cosmopolitan perspective take us today?

One enormous issue is international migration. A distressingly large portion of the debate in many countries analyzes the effects of higher immigration on domestic citizens alone and seeks to restrict immigration to protect a national culture or existing economic interests. The obvious but too-often-underemphasized reality is that immigration is a significant gain for most people who move to a new country.

Michael Clemens, a senior fellow at the Center for Global Development in Washington, quantified these gains in a 2011 paper, “Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?” He found that unrestricted immigration could create tens of trillions of dollars in economic value, as captured by the migrants themselves in the form of higher wages in their new countries and by those who hire the migrants or consume the products of their labor. For a profession concerned with precision, it is remarkable how infrequently we economists talk about those rather large numbers.

Truly open borders might prove unworkable, especially in countries with welfare states, and kill the goose laying the proverbial golden eggs; in this regard Mr. Clemens’s analysis may require some modification. Still, we should be obsessing over how many of those trillions can actually be realized.

IN any case, there is an overriding moral issue. Imagine that it is your professional duty to report a cost-benefit analysis of liberalizing immigration policy. You wouldn’t dream of producing a study that counted “men only” or “whites only,” at least not without specific, clearly stated reasons for dividing the data.

So why report cost-benefit results only for United States citizens or residents, as is sometimes done in analyses of both international trade and migration? The nation-state is a good practical institution, but it does not provide the final moral delineation of which people count and which do not. So commentators on trade and immigration should stress the cosmopolitan perspective, knowing that the practical imperatives of the nation-state will not be underrepresented in the ensuing debate.

Economics evolved as a more moral and more egalitarian approach to policy than prevailed in its surrounding milieu. Let’s cherish and extend that heritage. The real contributions of economics to human welfare might turn out to be very different from what most people — even most economists — expect.

NATIONAL POST: U.S. has run out of ‘low-hanging fruit’ and needs the next generation of innovation

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This article originally appeared in National Post

Hailed by Foreign Policy magazine and The Economist as one of the world’s most influential thinkers, Tyler Cowen, an economics professor at George Mason University, has also won a devoted following for his writings on eclectic subjects — from American arts funding to the nature of fame and the economics of lunch. His book, The Great Stagnation, argues the U.S.’s current economic slump is just part of a decades-long period of stagnation. This is not the result of policy, but because the country has run out of “low-hanging fruit.” The National Post’s Jen Gerson interviewed Mr. Cowen before his visit to Calgary Thursday to speak in the Post-sponsored Teatro Speaker Series. Here is an edited version of their conversation.

Q Your book offers a surprising thesis for most people who are Internet addicts.

A People who love the Internet are much better off than people who do not. But if you look at the median family, they have Internet instead of TV, and their real-estate, health-care and education costs are much higher, and the net gain there isn’t that strong.

Q So having an iPhone doesn’t necessarily negate the fact it costs me a lot more to get ahead and to live, essentially?

A Correct.

Q In Canada and in the U.S., we believe getting a college education or a higher education degree is a universal good, that it will lead to a bigger middle class and a wealthier society. Your thesis seems to argue this isn’t the case.

A Obviously, it’s still better to go to college — and a lot of people who don’t go could go and should go — but it’s not going to save us. If you have a lot of stagnation, that little pie is only increasing so much and any group of people going to college doesn’t make that big of a difference.

Q There’s a notion a college education is a ticket to a middle-class life, but it seems the middle class only gets so big and then you wind up with a lot of people with a college education that doesn’t do them much good.

A You see in Europe, the Middle East and a lot of countries a large number of people with college educations and there’s literally nothing for them to do. We’re not at that stage, but education without the surrounding infrastructure is of limited value.

Q What needs to happen so the innovation jumps we’ve seen over the last 100 years can continue into the future? How do we restart this machine?

A I think a lot of it is just time. The arrival of innovations are lumpy: a big thing happens, there’s a lot of spin off and a long period of consolidation. Science hasn’t slowed down. There is still a lot of new things being discovered, but they don’t translate right away into new products. Like genomic medicine, it’s really not a thing yet, but the science is there.

So a lot of what we need to do has already been done. That’s the optimistic spin, it’s just going to take another 10 or 20 years for things to pay off. For some time to come, people are going to be very disappointed.

Q Do people need to re-adjust their expectations?

A In the meantime, absolutely. We’re spending and borrowing as if we lived in a world of 3% growth and we do not.

Q Is there anything else you’re going to discuss while in Calgary?

A Canada is a special case because it has a lot more resource wealth per capita than do most countries. Resource prices are generally high and they have been high, but the thing to keep in mind [this is] because other countries have to pay a lot for stuff. The success of Canada and Australia has, in some regards, been premised on the slowdown of other countries — that your country does better when other countries have to pay more. Canada and Australia are in fine shape, but should also be a little more nervous than they are.

THE WALL STREET JOURNAL: Seib & Wessel, What We’re Reading Wednesday

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This article originally appeared in The Wall Street Journal

With Congress and the president unable to resolve their budget differences, Alice Rivlin says the public must take the role of adult-in-charge and send three loud, clear messages to Washington: First, stop the damage! Second, stop the blaming! Third, get to work! [Brookings]

Blogger Tyler Cowen (@tylercowen) of George Mason University tries to figure out what Republicans are thinking about the sequester. His guess is many of them believe that much government spending is massively wasteful. His view: “While the sequester is far from my first choice, I also don’t think it is the end of the world.” [marginalrevolution]

Former Republican Rep. Bill Frenzel argues that the “stupid” budget cuts of the sequester are better than no budget cuts at all: “The sequester is a distant second choice” to smart cuts, “but, clearly, it is better than nothing.” [Brookings]

New Jersey Gov. Chris Christie, under fire from his party’s conservatives for accepting the Obama administration’s Medicaid overhaul and supporting gun control, and uninvited to the CPAC annual gathering of conservatives, is in a position to lead a revamp of the Republican party and its image much as Bill Clinton was in the 1990s for the Democrats. [National Journal]

A summary of where the nation’s elected leaders are as the sequester approaches: “Congress engaged in a new round of finger-pointing, intraparty bickering and frustration on Tuesday, at one point prompting top party leaders to hurl vulgarities at each other.” [WSJ]

Matthew Cooper (@mattizcoop) says the U.S. has no right to throw stones at Italy for its failed election. “We’ve obviously reached a point where the government doesn’t work …Their parliamentary coalitions may shift with comic frequency, but budgets get passed and things get done in a way that Congress might have reason to applaud.” [National Journal]

Instead of tying a skilled immigrant’s visa to a particular employer, why not tie the visa to a geographic region, thus directing immigration to where it is most economically efficient, suggests Modeled Behavior blogger Adam Ozimek (@ModeledBehavior). Let cities or states petition for regional visas instead of individual employers. [Forbes]

Our colleague Dennis Berman (@dkberman) set out to show that Twitter, the company, isn’t worth the $10 billion or so that some people think it’s worth. But then the facts intervened. [WSJ]

Pimco’s Bill Gross says that measuring the irrationality of markets and asset prices on a scale of one to 10, we’re now at six and climbing. [Pimco]

Sign of the Times

Minor milestones we’ve spotted:

Washington’s budget machinations appear to be hurting economic confidence: 51% say the budget negotiations between the president and Congress make them less confident about the economy getting better. [WSJ]

Almost six in 10 Americans favor raising the minimum wage, as President Obama has suggested; just 36% oppose. [WSJ]

The Post Office may have its problems, but it’s more popular than either political party: 60% have positive feelings about the Post Office, compared to 41% for the Democrats and 29% for the Republicans. [WSJ]

Democrats prefer regular soda (47% regular to 31% diet) while Republicans prefer diet (42% diet to 34% regular). [Public Policy Polling]

Bolstered by gains on loan sales and trading revenues, U.S. banks reported fourth-quarter net income of $34.7 billion, a 37% increase from the same period in 2011, the FDIC says. [WSJ]

Wall Street’s bonus pool for 2012 hits $20 billion, up from $18.5 billion last year but well below the pre-crisis peak of $34.3 billion in 2006, New York State Comptroller reports. [WSJ]

House prices in some metro areas rose at a double-digit pace over the past year, the latest Case-Shiller data show: San Francisco (14.4%), Detroit (13.6%), Las Vegas (12.9%), Minneapolis (12.2%), Miami (10.6%). [WSJ]

Thanks in part to ultra-low interest rates, the share of after-tax income that U.S. households spend on debt service, last estimated at 10.6%, is lower than at any time since 1983. [Federal Reserve]

Honda is opening its first new factory in Japan in 49 years. [Bloomberg]

New Mexico has (or did in 2008) the highest teen pregnancy rate of any state. [Washington Post]

The underground cable in Con Edison of New York’s system could wrap around the Earth 3.7 times. [Con Edison]

Heritage Auctioneers & Galleries auctioned off $37 million in comic books and comic-book art last year, triple the amount 10 years earlier. [WSJ]

THE NEW YORK TIMES: Austerity Kills Government Jobs as Cuts to Budgets Loom

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This article originally appeared in The New York Times

The federal government, the nation’s largest consumer and investor, is cutting back at a pace exceeded in the last half-century only by the military demobilizations after the Vietnam War and the cold war.

 The reductions are designed to be indiscriminate, cutting everything from air traffic control to nursery schools. And the turn toward austerity is set to accelerate on Friday if the mandatory federal spending cuts known as sequestration start to take effect as scheduled. Those cuts would join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government’s contribution to the nation’s gross domestic product by almost 7 percent in the last two years.

The cuts may be felt more deeply because state and local governments — which expanded rapidly during earlier rounds of federal reductions in the 1970s and the 1990s, offsetting much of the impact — have also been cutting back.

Federal, state and local governments now employ 500,000 fewer workers than they did on the eve of the recession in 2007, the longest and deepest decline in total government employment since the aftermath of World War II.

Total government spending continues to increase, but those broader figures include benefit programs like Social Security. Government purchases and investments expand the nation’s economy, just as private sector transactions do, while benefit programs move money from one group of people to another without directly expanding economic activity.

The Federal Reserve and other economic forecasters say that the latest round of government austerity is not likely to return the economy to recession, thanks to stronger private sector growth. But the spending cutbacks and actions to raise taxes could reduce growth by roughly 1.5 percentage points this year, according to the Congressional Budget Office, leaving the sluggish economy operating well below capacity.

In testimony to lawmakers on Tuesday, the Fed chairman, Ben S. Bernanke, urged Congress and the Obama administration to replace the scheduled budget cuts with a plan to reduce federal deficits more gradually.

“Although monetary policy is working to promote a more robust recovery, it cannot carry the entire burden of ensuring a speedier return to economic health,” Mr. Bernanke said. He warned that the combination of previous spending cuts and the looming mandatory reductions “could create a significant headwind for the economic recovery.”

The shrinking government is a normal response to an extraordinary situation. Government spending generally rises during recessions and falls as the economy recovers. Spending always declines at the end of one war, let alone two. And three years after a recession, the American economy typically is restored to full bloom.

But this time is different. Growth has remained sluggish and millions remain unemployed even as the federal government, riven by partisan differences, has largely turned its attention to deficit reduction.

Mr. Bernanke, like many critics of sequestration, said the government could not ignore the need to reduce its annual deficits and curtail the growth of its debt. But he said short-term cuts would worsen those problems by slowing the economy. Moreover, sequestration mostly spares Medicare and Medicaid, the health care programs that are the primary reason federal spending is projected to increase.

Congress and the administration, he said, should “introduce these cuts more gradually and compensate with larger and more sustained cuts in the future.”

Others, however, say that it makes no sense to postpone inevitable cuts. They note that government cutbacks may cause short-term pain, but also tend to provide long-term benefits by making resources available to the private sector.

“People focus on the upfront cost and they don’t think through the whole timeline,” said Tyler Cowen, an economist at George Mason University and an occasional contributor to the Sunday Business section of The New York Times. “You have to cut spending within the next 10 years anyway. It may be time to take some lumps.”

The current round of austerity does not yet approach the depth or the duration of the earlier round of cutbacks. Between 1969 and 1974, as spending on the Vietnam War declined, the government reduced consumption and investment by 24 percent after adjusting for inflation. Between 1991 and 1999, the government reduced consumption and investment by an inflation-adjusted 14 percent.

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THE NEW YORK TIMES: Nips and Tucks and Big Budget Cuts

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This article originally appeared in The New York Times

UNLESS lawmakers act by March 1, the budget sequestration process will start cutting government spending automatically — reductions that would amount to $1.2 trillion by 2021. Congress and the White House agreed in 2011 to the sequestration, and many people see it as a kind of political gimmick.

But I believe that it can turn out to be a very good thing — and that most of these cuts should proceed on schedule, though with some restructuring along the way.

One common argument against letting this process run its course is a Keynesian claim — namely, that cuts or slowdowns in government spending can throw an economy into recession by lowering total demand for goods and services. Nonetheless, spending cuts of the right kind can help an economy.

Half of the sequestration would apply to the military budget, an area where most cuts would probably enhance rather than damage future growth. Reducing the defense budget by about $55 billion a year, the sum at stake, would most likely mean fewer engineers and scientists inventing weaponry and more of them producing for consumers.

In the short run, lower military spending would lower gross domestic product, because the workers and resources in those areas wouldn’t be immediately re-employed. Still, that wouldn’t mean lower living standards for ordinary Americans, because most military spending does not provide us with direct private consumption.

To be sure, lower military spending might bring future problems, like an erosion of the nation’s long-term global influence. But then we are back to standard foreign policy questions about how much to spend on the military — and the Keynesian argument is effectively off the table.

On a practical note, the military cuts would have to be defined relative to a baseline, which already specifies spending increases. So the “cuts” in the sequestration would still lead to higher nominal military spending and roughly flat inflation-adjusted spending across the next 10 years. That is hardly unilateral disarmament, given that the United States accounts for about half of global military spending. And in a time when some belt-tightening will undoubtedly be required, that seems a manageable degree of restraint.

The other half of sequestration would apply to domestic discretionary spending, where the Keynesian argument against spending cuts has more force.

But here, too, much of the affected spending should be cut anyhow. Farm support programs would be a major target, and most economists agree that those payments should be abolished or pared back significantly. Regulatory agencies would also lose funds, but instead of across-the-board cuts, we could give these agencies the choice of cutting their least valuable programs — or, for that matter, we could cut farm subsidies even further.

Of course, much discretionary spending goes toward useful projects — building or repairing roads, for example, or research toward medical innovation. Limiting these investments would bring the Keynesian argument into play, and perhaps harm productivity, too. So we should look to substitute some areas for others — and turn to Keynesian macroeconomics for guidance.

THE Keynesian argument suggests that spending cuts do the least harm in economic sectors where demand is high relative to supply. Thus, the obvious candidate for the domestic economy is health care, and the sequestration would cut many Medicarereimbursement rates by 2 percent. We could go ahead with those cuts or even deepen them, because America has had significant health care cost inflation for decades.

We already have huge demand in our health care system, along with a corresponding shortage of doctors. And the coverage extension in the Affordable Care Act will add to the strain. In this setting, cutting Medicare reimbursement rates wouldn’t result in fewer health care services over all. Yes, doctors might be less keen to serve Medicare patients but might be more available for others, including the poor and the young. In the long run, the improved access for those groups would yield much return on investment, and would move the health care system closer to many of the European models.

In any case, these Medicare cuts would be unlikely to bring a macroeconomic debacle, and would ease long-term fiscal pressures. We could address the shortage of doctors by removing some barriers to entry into the profession, and, in possible new legislation for immigration, easing the way for more medical professionals to come to the United States.

Most generally, there is an issue of global investor perceptions. As the credit rating agencies have noted, some investors wonder whether spending cuts of any kind are possible in the nation’s current political environment. And even if the economic recovery is causing budget deficits to shrink, there are plenty of negative signals about our political ability to address longer-term fiscal concerns, which will become more severe as the population ages.

Simply accepting the automatic spending cuts of the sequestration, without modification, could look like more dysfunctional politics, too. Though many of the reductions have merit, others need orderly renegotiation so the resulting cuts aren’t just necessary acts of fiscal restraint, but also net pluses for the economy.

THE WASHINGTON POST: Can We Ever Do Better Than the Toilet?

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This article originally appeared in The Washington Post

The cover story for this week’s Economist is on one of our favorite topics: the debate over the state of innovation — whether its slowing down, speeding up and what it means for economic growth. In the grand tradition of the magazine, the authors are anonymous, but there are two pieces on the debate over whether innovation has slowed. The shorter of the two asserts that we have yet to develop “an invention half as useful as” the toilet, going on to state that “the biggest danger” to the fast-flowing juices of innovation in the 21st century is government. The second, longer piece is a tour of the current debate over whether innovation and new technology have stopped fueling growth. The conclusion: take claims that innovation and new technology are no longer fueling economic growth with a grain of salt. The innovation engine continues to churn, just not in the way it once did.

“There will be more innovation,” writes the cover-story’s author, “but it will not change the way the world works in the way electricity, internal combustion engines, plumbing, petrochemicals and the telephone have.”

The longer piece also addresses the work of George Mason University professor and economist Tyler Cowen, mostly from his 2011 book titled “The Great Stagnation.” Asked what he thought of the piece, Cowen said via an e-mail Friday that he thought it was “excellent.”

He went on to say that a “key distinction” needed to be made between ”whether we have had lots of recent innovation” — he thinks we have — and “whether those innovations have much raised typical standards of living for Americans,” which he says is “much less clear.”

“Looking forward, I am optimistic actually,” Cowen said. ”Science has not stopped, it simply gets turned into practical products at a very uneven rate.  The new question will be who is poised to benefit from the forthcoming stream of advances.”

The debate over whether innovation has stalled will very likely continue well after this and many other pieces are written. That said, at least in so far as the toilet is concerned, the Gates Foundation already has an initiative to fund inventions to improve that particular technology. The Foundation’s work, however, did not make an appearance in either piece. So, while they may not be inventing something new, different and completely earth-shattering, at least there are people trying to improve on our existing commode technology.

Notable in the longer cover story, although perhaps not central to it, was this drawing of a thick line between innovation and technology:

Innovation and technology, though talked of almost interchangeably, are not the same thing. Innovation is what people newly know how to do. Technology is what they are actually doing; and that is what matters to the economy.

It’s an important distinction to consider, particularly as the consumer electronics show winds down — an event that was greeted with arelatively loud, collective yawn on the part of tech writers. The next, great, industry-transforming invention may not have been unveiled in Las Vegas this week, but an absence of new technology, as outlined above, doesn’t necessarily mean a slowing of innovation.

 

THE NEW YORK TIMES: James M. Buchanan, Economic Scholar and Nobel Laureate, Dies at 93

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This article originally appeared in The New York Times

James M. Buchanan, a scholar and author whose analyses of economic and political decision-making won the 1986 Nobel in economic sciences and shaped a generation of conservative thinking about deficits, taxes and the size of government, died on Wednesday in Blacksburg, Va. He was 93.
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James Buchanan after it was announced that he had won the Nobel.
Alex Tabarrok, the director of the Center for Study of Public Choice at George Mason University, which Mr. Buchanan founded, confirmed his death.

Dr. Buchanan, a professor emeritus at George Mason, in Fairfax, Va., was a leading proponent of public choice theory, which assumes that politicians and government officials, like everyone else, are motivated by self-interest — getting re-elected or gaining more power — and do not necessarily act in the public interest.

He argued that their actions could be analyzed, and even predicted, by applying the tools of economics to political science in ways that yield insights into the tendencies of governments to grow, increase spending, borrow money, run large deficits and let regulations proliferate.

The logic of self-interest was nothing new. Machiavelli’s 16th-century treatise “The Prince” detailed cynical rules of statecraft to extend political power. Thomas Hobbes, in his 17th-century book “Leviathan,” held that aggressive, self-serving acts were “natural” unless forbidden by law. Adam Smith’s “The Wealth of Nations,” published in 1776, noted that people pursuing their own good also produced benefits for society at large.

But Dr. Buchanan contended that the pursuit of self-interest by modern politicians often led to harmful public results. Courting voters at election time, for example, legislators will approve tax cuts and spending increases for projects and entitlements favored by the electorate. This combination can lead to ever-rising deficits, public debt burdens and increasingly large governments to conduct the public’s business.

Indeed, he said, governments had grown so vast and complex that it was no longer possible for elected officials to make more than a fraction of the policy decisions that genuinely affect the people. Thus, he said, much discretionary power is actually held by civil functionaries who can manipulate priorities, impose barriers to entitlements and pressure legislators for rules and budgets favorable to their own interests.

Dr. Buchanan did not invent the theory of public choice, an idea whose origins are obscure but that arose in modern economics literature in the late 1940s. But from the 1950s onward, he became its leading proponent, spearheading a group of economists in Virginia that sought to change the nature of the political process, to bring it more into line with what the group considered the wishes of most Americans.

In lectures, articles and more than 30 books, Dr. Buchanan amplified on the theory of public choice and argued for smaller government, lower deficits and fewer regulations — a spectrum of policy objectives that were ascendant in the 1980s conservative agenda of President Ronald Reagan.

Over the years since Dr. Buchanan won the Nobel, much of what he predicted has played out. Government is bigger than ever. Tax revenue has fallen far short of public programs’ needs. Public and private borrowing has become a way of life. Politicians still act in their own interests while espousing the public good, and national deficits have soared into the trillions.

Dr. Buchanan partly blamed Keynesian economics for what he considered a decline in America’s fiscal discipline. John Maynard Keynes argued that budget deficits were not only unavoidable but in fiscal emergencies were even desirable as a means to increase spending, create jobs and cut unemployment. But that reasoning allowed politicians to rationalize deficits under many circumstances and over long periods, Dr. Buchanan contended.

In a commentary in The New York Times in March 2011, Tyler Cowen, an economics professor at George Mason, said his colleague Dr. Buchanan had accurately forecast that deficit spending for short-term gains would evolve into “a permanent disconnect” between government outlays and revenue.“We end up institutionalizing irresponsibility in the federal government, the largest and most central institution in our society,” Dr. Cowen wrote. “As we fail to make progress on entitlement reform with each passing year, Professor Buchanan’s essentially moral critique of deficit spending looks more prophetic.”

James McGill Buchanan Jr. was born in Murfreesboro, Tenn., on Oct. 2, 1919, the son of a farmer and a schoolteacher, Lila Scott Buchanan. His grandfather John Price Buchanan was governor of Tennessee from 1891 to 1893.

He attended Middle Tennessee State Teachers College in Murfreesboro, living at home and milking cows to pay his way. He graduated first in his class in 1940, and earned a master’s degree in economics at the University of Tennessee in 1941. He joined the Navy, became an officer and served in World War II on the staff of Adm. Chester W. Nimitz, the Pacific Fleet commander.

In 1945, he married Anne Bakke. The couple had no children.

Dr. Buchanan earned his doctorate in 1948 at the University of Chicago, a hive of brilliant conservative economists known as the Chicago School, where he was influenced by the free-market economist Frank Hyneman Knight and by the writings of the 19th-century Swedish economist Knut Wicksell, who likened politics to fair exchanges among citizens and organizations.

Dr. Buchanan began teaching economics at the University of Tennessee, rising to full professor in 1950. He moved to Florida State University in 1951, and became chairman of its economics department in 1954. On a Fulbright grant, he studied in Italy in 1955-56, further developing his ideas on politics and economics.

He then became chairman of the economics department at the University of Virginia in Charlottesville, where in 1957 he and the economist G. Warren Nutter founded the Thomas Jefferson Center for Studies in Political Economy. Dr. Buchanan, its director for a decade, called it “a community of scholars who wished to preserve a social order based on individual liberty.”

After a year at the University of California, Los Angeles, Dr. Buchanan, in 1969, joined the Virginia Polytechnic Institute in Blacksburg, where he and the economist Gordon Tullock founded the Center for Study of Public Choice. They moved the center to George Mason in 1983, and it became the headquarters for public choice disciples. Conservative foundations helped support the center financially. Dr. Buchanan lived in Blacksburg.

Dr. Buchanan, an austere man with a severe aspect that many students found intimidating, often spoke of complex phenomena in metaphors, referring, for example, to politics as a game and to the Constitution as its rules. His books included “The Calculus of Consent: Logical Foundations of Constitutional Democracy” (1962, with Gordon Tullock) and “The Limits of Liberty: Between Anarchy and Leviathan” (1975).

He was a senior fellow at the Cato Institute, a libertarian research organization in Washington. He called himself a libertarian, but insisted that his ideas were primarily academic, not narrowly political, even when they inspired citizens’ property tax revolts or balanced-budget movements.

In awarding his Nobel, the Royal Swedish Academy of Sciences cited his work on economic and political decision-making. “Buchanan’s foremost achievement,” it said, “is that he has consistently and tenaciously emphasized the significance of fundamental rules and applied the concept of the political system as an exchange process for the achievement of mutual advantages.”

Dr. Buchanan said the prize highlighted his long struggle for a concept. “I have faced a sometimes lonely and mostly losing battle of ideas for some 30 years now in efforts to bring academic economists’ opinions into line with those of the man on the street,” he said. “My task has been to ‘uneducate’ the economists.”

BUSINESS STANDARDS: In Rural India, People will Vote for Cash Transfer

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This article originally appeared in Business Standard

Tyler Cowen is a professor of economics at George Mason University. He was among the “Top 100 Global Thinkers” of the Foreign Policy magazine in 2011. Bloomberg Businessweek named him America’s “hottest economist”. He leads Mruniversity.com, an online educational platform, which has many courses on India’s history, economics, politics and culture. Cowen was recently in India for a talk hosted by Centre for Civil Society, a think-tank based in Delhi. In a conversation with Shanu Athiparambath, he speaks on the role of the market and government policy in eradicating poverty. Edited excerpts:

You had said voters respond better to a food crisis in states where the newspaper readership is high. But many economists argue that much of the food grains that the government distributes are wasted.
I would agree to these arguments in the sense that I would not give the poor ‘food aid’, but when there is a crisis, I would increase the cash transfer. Food aid is not efficient, but it might be better than doing nothing. The marginal utility of extra food is quite high even if half of it is wasted.

Getting people registered will be very hard. Getting people into the banking system will be very difficult. Banking is still a product, and the banking sector has many regulations at different levels. This makes it difficult to set up accounts at low costs. You cannot make it easier by simply passing a law. The government can tell the banks to take in customers, but banks might not be willing to do it. But my biggest worry is that in rural India, people would vote for cash. I think it is a good idea, but politically, it can be dangerous. When you make transfers very easy, it is also very easy to manipulate.

Do you think policies like MGNREGA (rural job scheme) are also politically dangerous?
Those programmes in my opinion do not cure poverty or unemployment. But you cannot abolish them immediately. That would throw many people out of their jobs. They should be abolished gradually, making it easier for people to adjust when they are thrown out of their jobs.

You think that an artist is as much a trader as businessman, and that the making of a Bollywood movie demands as much talent as that of a Satyajit Ray movie. Many would disagree with that.
They should try making a good Bollywood movie. When you make a Bollywood movie, a lot of coordination is required. In my view, it’s not less of an art than a Satyajit Ray movie. It’s harder to make a commercial movie, because the audience has less patience with you. You really have to grab their attention somehow.

Why do you think that Amartya Sen has done good work in economics, despite the fact that he underestimates the importance of corporations and capitalism in eradicating poverty?
I think that he grossly underestimates the importance of corporations and capitalism, but he has done a lot of good work. His work on missing women is important. His work on development and capabilities is very important. But when it comes to policy, I think he is often wrong.

Recently, there was a paper by Anderson and Ray which argues that much of the missing women in India can be found at the age of pregnancy or after. Typically, the life expectancy of women in India is higher than that of men. So is there anything missing in this argument?
I understand what you are saying. Some of these might be disease effects. But it could be that those women either die after pregnancy or that they live very long. There might be more women dying at the age 25, but fewer women dying at a later age, and this perhaps results in higher life expectancy overall. I would say that we do not know, but I do not think that it is actually a contradiction in their accounting.

That is a great paper, and I think that they are right. Still Sen was the first person to identify the problem, though he stated the problem in a wrong way. Others could not have done it without Sen.

You once said that Kerala is one of the states which have achieved high levels of development despite the low income levels because of larger investment in education and healthcare. Why is the development model of Kerala considered a paradox?
If you look at wealth, you will see that Kerala is a lot wealthier than other Indian states. Wealth is harder to measure than income. Kerala does not happen to be such a poor state. But it’s not an economically important state. The problem of unemployment is very extreme when compared to other states. In Kerala, you have a good mix of conditions you do not find somewhere else. You will find that Sri Lanka is another place where the development indicators are very high, relative to their income. I think it is a bit of a paradox. The early rulers in Kerala did a lot that helped the population in Kerala. Many things are difficult to trace. But some parts of the paradox make sense. It’s not all about social spending. The causes are more deeply rooted.

You had said that even private schools in the slums of poor countries perform better than public schools. But there are some recent studies which suggest the difference can largely be traced to the differences in their family background.
Private schools are more responsive to consumers. There are positive gains from private schooling, but they are not very huge. One thing we know for sure is that parental satisfaction is much higher in private schools. That is not disputed. But we really do not have any hard knowledge on how large the gains from private schooling are. Policy alone cannot change things. There should be a change in family norms. If parents did different things, they could have more influence on children. Parents who really work with the kid, and really believe in that kid have a lot of influence.

Do you think farmers will have a better deal when Wal-Mart enters India?
The wages in agriculture are very low in India. The productivity is very low. When the Wal-Mart enters, the distribution will be better, and the productivity will go up. The wages will go up. If the farmers earn very little from their products now, it’s only because retailing is not that competitive, and because it’s not that efficient. More FDI (foreign direct investment) will only help everyone.

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