Bad-mouthing the Economy

Critics of the Bush tax cuts used to complain that America had a so-called jobless recovery. That’s no longer a tenable assertion, so now they argue that wages are stagnant or that people don’t save enough.
The Wall Street Journal certainly does not give credence to any of these claims:
[T]he current expansion was derided right through 2004 as a “jobless recovery.” We now know the economy has created 7.4 million new jobs since mid-2003, as revisions by the Bureau of Labor Statistics have added hundreds of thousands to its original monthly estimates. Thus the hand-wringers have had no choice but to move on, turning their laments to allegedly “stagnant wages.” Well, that’s now vanishing too.
As for real (inflation-adjusted) wage growth, it averaged 0.6% annually for non-farm workers in the first half of the 1990s compared with 1.5% a year so far in this decade. “This cycle as a whole has witnessed twice the average real wage growth than the first 64 months of the previous expansion,” Mr. Darda writes. For the last 12 months, real wages have risen even faster, at a 1.7% clip.
So moving right along, this week’s bad news is said to be the U.S. “savings rate,” which according to the official measure was “negative” for a whole calendar year for the first time “since the Great Depression,” as Martin Crutsinger of the Associated Press helpfully put it.
As a statistic, however, the official “savings rate” is nearly as useless a guide to prosperity as the trade deficit. In the government accounts, what is called the savings rate is literally income less consumption. But the government defines income too narrowly and consumption broadly. For example, “income” doesn’t measure capital gains (whether realized or not), the rising value of your home, or even increases in your retirement accounts.
…[T]hese columns long ago began to watch a far more instructive figure known as “household net worth.” That number, released by the Federal Reserve, includes all assets (tangible and financial) held by individuals less their liabilities (mortgage and other debt). At the end of last year’s third quarter, U.S. household net worth had climbed to $54.1 trillion. That was an increase of more than $3 trillion over the previous four quarters.

Endorsing the U.S. Trade Complaint Against China

On Friday, the U.S. Trade Representative initiated a formal challenge of various Chinese tax programs within the dispute settlement system of the World Trade Organization. It was only the third formal challenge of Chinese policies since that country joined the WTO in 2001.

Specifically, the United States alleges that Chinese tax policies that encourage production for exportation and that discourage the use of imported materials and components in the production process constitute subsidies that harm U.S. interests and violate the obligations China undertook when it joined the WTO in 2001.

I have been critical of the administration’s various trade policy errors of commission and omission over the years. Last week I lamented U.S. trade representative Susan Schwab’s failure to articulate the broad case for trade.  Today, I have only kudos for the USTR. Not only was the United States well within its rights to bring this case, it was the right thing to do, politically and economically. 

Free trade purists might disagree, arguing that if China wants to subsidize its exports to the United States, Americans should write the Chinese thank you letters for financially supporting our consumption. And accordingly, we shouldn’t intervene if the Chinese want to squander their resources that way. I think that argument holds water up to a point — a point that we are well beyond and where the costs of the status quo outweigh its benefits. 

Yes, we benefit as consumers from subsidized Chinese production, but only until the consensus for a liberal trading order collapses. At that point, retrograde protectionism threatens not only the benefits of that subsidized consumption, but the benefits of trade more generally, and the conditions that make relatively freer trade possible. Furthermore, the U.S. trade relationship with China is wealth-creating in both countries without need of subsidization. Safeguarding continuation of the flow of the benefits of trade to both countries by expecting China (and the United States) to play by the established rules seems a reasonable compromise to me.

The rules-based trading system has been remarkably successful at promoting trade and investment, and its continued success depends upon adherence to its rules and respect for its institutions — particularly by the world’s large economies.

China has demonstrated that it doesn’t respond well to bilateral threats — if for no other reason than its desire to avoid the appearance of being bullied. China knows what its obligations are. But it also knows that one of the many benefits of its membership in the WTO is that its policies are above board unless and until the dispute settlement body of the WTO finds against them. If China wants to drag its feet with respect to compliance and reform, bringing cases against China within the WTO might become fashionable.  

We are already witnessing a deterioration of support for trade and its institutions in the United States precisely because of perceptions that policymakers are doing too little to enforce the existing rules. I don’t advocate knee-jerk invocation of our rights to dispute settlement — there is plenty of room for deliberation and consultation (which is perpetually in play under the radar). 

To the extent that Friday’s actions serve as a release valve for some of the political pressure that has been building in Congress for unilateral actions against China, it is already a success. By bringing the case through formal WTO channels, Congress will see that there are, in fact, alternatives to dangerous, unilateral sanctions. In that sense, this case could reduce the likelihood that Congress intervenes and mucks everything up and it could actually improve long-term prospects for the U.S.-China trade relationship.

Why 2012?

I’ll chime in with a broader analysis of the new Bush budget later. For now, it’s worth noting one of the big questions it raises: What’s so special about 2012? 

That’s the year the president claims the budget can be balanced while simultaneously renewing the Bush tax cuts. It’s also three fiscal years after Bush leaves office.

What the president could have done is propose a plan to balance the budget in two years. Revenues are on the upswing, so it could be accomplished — assuming you cut spending, that is. 

For a president who is, according to insiders, interested in bequeathing a healthy Republican Party to the 2008 presidential candidate, it seems there would be great value in simultaneously handing them a balanced federal budget while also showing voters there is still some inkling of interest in smaller government within the party. And it would eliminate the Democrats’ ability to use the deficit bogeyman as a reason to kill the Bush tax cuts that expire in 2010. 

Instead, President Bush resorted to increasing spending in almost all categories — in some cases, like the Pentagon budget, massively. It’s not a budget that supporters of small government can really sink their teeth into. It is weak sauce indeed.    

I’m Restraining Spending, But…

Like most politicians, President Bush is addicted to new spending initiatives. His budget message is always: “We need to restrain spending — except for all the exciting new investments and programs enhancements I want.”

It’s more of the same in the president’s new 2008 federal budget. The president wants to get credit for proposing to balance the budget four years after he has left office, yet here is some of the language from the budget’s “Overview”:

  • “Increased funding to combat terrorism and protect the homeland…”
  • “Enhanced diplomatic efforts … with additional resources…”
  • “Increase funding for nuclear detection, more secure borders…”
  • “American Competitiveness Initiative to increase federal investment…”
  • “Significant new resources” for No Child Left Behind, including “more funding to high schools…”
  • “Increases [in] the Pell Grant maximum award…”
  • “Increases [in] Academic Competitiveness Grants…”
  • “Advanced Energy Initiative” to improve energy reliability and increase the use of alternative fuels…

The Budget Overview does provide some details on proposed spending restraint: “In the Budget, each program was closely reviewed to determine if it is among the Nation’s top priorities…. [F]ailure to meet these criteria resulted in proposed termination or reduction of 141 programs for a savings of $12 billion.”

Total federal outlays in 2007 will be $2.784 trillion. Thus, programs that are “top priorities” of the Bush administration account for 99.6 percent of all spending.

Will we ever get a president who wants to make serious cuts and doesn’t have a lengthy spending wish list to send to Congress?

It’s the Epistemology, Comrade

In recent posts, I’ve argued that it is not only ineffective but undesirable for the state to compel all children to be taught evolution. [Standard disclaimer: my personal views on human origins are essentially those of Richard Dawkins.]

This opposition to government-mandated instruction in evolution does not sit well with many of my fellow evolutionists, and there have been several lengthy and thoughtful dissents. I’d been planning to dedicate this current post to a point-by-point response to evolutionary biology grad student Joshua Rosenau, but after thinking about it a little more, and looking at some of the other responses to my earlier essay, I think there may be a way to short-circuit the debate and get right to the nub of the issue.

The arguments for imposing evolution instruction by government fiat often boil down to an idea presented here by Rosenau:

Teaching [read “imposing”] empirical results of our shared reality is different from imposing untestable beliefs on others. Teaching [imposing] empirical results of the scientific method does not prevent anyone from having beliefs in the supernatural, and the only liberty it takes away is the liberty to believe things that are false, or to treat nonscience as science. In short, to lie.

Note that I had to correct Rosenau’s language. We’re not debating the merits of teaching evolution, we’re debating the merits of using the government’s monopoly on the use of force to compel its teaching.

You have to pay taxes to support the public schools. If you don’t, you go to jail. The public schools, because they are constitutionally prohibited from proselytizing students, cannot teach anything but a naturalistic view of evolution. Hence, all American taxpayers are compelled to fund the teaching of a non-theistic account of human origins, at least to the extent human origins are taught at all.

So Rosenau is arguing that it’s okay to impose instruction in the scientific consensus view of evolution, because science is true.

In other words, Rosenau is saying that the government is in possession of absolute truth, acquired through science, and that it is the proper role of government to spread the Good Word. This is a government establishment of rational empiricist epistemology.

There are a host of problems with this view of the role of government, but the one that many of my fellow evolutionists have the greatest difficulty grasping is that not everyone shares our epistemology, and that establishing an official government epistemology is every bit as harmful as establishing an official government religion.

When parents teach their children the Biblical creation story as literal truth, they are not “lying” to them as Rosenau imagines. They are passing along the “truth,” as they think it should be acquired, on the subject of human origins. Their epistemology, when it comes to this particular issue, is an epistemology of religious faith. As a result, they do not want their children taught an account of human origins based purely on science because they think science is the wrong epistemological tool for that job — any more than Richard Dawkins would want his children taught creationism.

Ramming an official epistemology down the public’s throat has the same effect as establishing an official religion. It leads to never-ending conflict. Even if this kind of indoctrination were consistent with America’s political ideals (which it most certainly is not), and even if it actually resulted in the widespread understanding of evolution (which it does not), there is no justification for doing it that could outweigh the costs in social Balkanization and animosity.

A related point that many rational empiricists seem unable to internalize is that their official epistemology can be hijacked by people with differing views on what the evidence shows. Proponents of “Intelligent Design” maintain that their views are more scientific than those of the consensus of biologists.

The mandate-evolution crowd thinks that their ideas are safe because they are in the majority among scientists. But we live in a democracy, not a scientocracy. Any government-mandated epistemology, and its fleshing out in the form of government curricula, will likely reflect the views of the majority of the people, not the majority of scientists. And, as the polling data I’ve previously cited show, the majority of the people do not see eye-to-eye with the scientific consensus on the subject of evolution. That is why evolution is taught so sporadically, and poorly, in so many public schools around this country.

Paduda Cuts (Closer) to the Heart of the Matter…

…when he responds to my post thus:

I think this is because libertarians don’t believe in health insurance as a means to help people with health conditions pay their bills.

I would put it this way:

Insurance is a voluntary arrangement where consumers agree to subsidize each other. By definition, sick people have higher medical expenses. Thus, some seek to charge healthy people more than they cost to insure, so that insurers can reduce the premiums they charge to the sick.

There are lots of reasons why healthy people may agree to that. They may be very risk-averse, and so they are willing to pay more than they cost to insure. They may be altruistic, deriving satisfaction from knowing that their higher premiums are making coverage more affordable for others. Or they may precommit to such subsidies before it is known who in the insurance pool will develop a chronic illness (read: guaranteed renewable insurance).

As a libertarian, I have no problem with the healthy subsidizing the sick via private health insurance — so long as the arrangement is voluntary. But problems arise when public policy tries to get healthy consumers to provide, shall we say, “extra-voluntary” subsidies:

  • The healthy people eventually figure out that they are being over-charged, and they bolt. That makes the risk pool less-healthy, premiums rise, and more healthy people leave. Lather, rinse, repeat, and you’ve got your very own adverse selection death spiral.
  • The insurers realize they can’t make money off the sick people, so they avoid diabetics and such as if they had the plague. 
  • And it doesn’t help the situation that forced subsidies lead to greater moral hazard among the very people who already use lots of medical care. That just fuels the first two responses.

So to tweak Paduda’s characterization, libertarians think private insurance is a wonderful vehicle for voluntary subsidies and a lousy vehicle for forced subsidies.

In a world without such forced subsidies, Paduda is correct that we would purchase a lot less health insurance. And I find this comment instructive:

[I]nsurance would not be available at any kind of affordable price for anyone who really needs it if Cannon’s prescription becomes reality” [emphasis in original].

Sick people don’t need insurance. Insurance doesn’t make sick people healthy. They need medical care. They may even need subsidies. So why not try to provide them those things, rather than wreck the markets for both health insurance and health care?

Many equate insurance with subsidy. In fact, one is a subset of the other.

Aqua Teen Overreaction Force?

Boston officials investigating this week’s marketing campaign gone awry should be sure to include themselves in the scrutiny, asking if they overreacted to the incident.

A In case you missed the story, Cartoon Network, a division of Time Warner’s Turner Broadcasting, recently launched a “guerrilla marketing campaign” to promote its new adult-audience cartoon Aqua Teen Hunger Force. As part of the campaign, the network hired New York marketing firm Interference Inc. to place notepad-sized, electronically lit signs of the show’s “mooninite” characters in unusual locations around urban areas.

The campaign received little notice in New York, Los Angeles, Chicago, Atlanta, Seattle, Portland, San Francisco, Philadelphia, and Austin, Texas. But in Boston, public officials treated the signs as a possible terrorist threat, closing bridges, subway stations, roadways, and even part of the Charles River while bomb squads removed the signs.

Once the nature of the signs became known, Boston mayor Thomas Menino issued a press release blasting the campaign:

It is outrageous, in a post-9/11 world, that a company would use this type of marketing scheme. I am prepared to take any and all legal action against Turner Broadcasting and its affiliates for any and all expenses incurred during the response to today’s incidents.

Estimates for those expenses have already topped $1 million.

Boston officials’ initial concern is understandable and appropriate. Seeing an out-of-place object containing batteries, circuitry, and glowing lights is unsettling in these times and it should be investigated. But at what point should Boston officials have realized that the signs posed no threat, and called off the bomb squads?

This raises an issue that we often discuss here at Cato, and that has become especially important in the post-9/11 era: should we be more concerned about Type-1 errors (false positives) or Type-2 errors (false negatives)?

Detection systems, whether mechanical (burglar alarms, ultrasounds) or human (analysts, emergency services workers) are rarely error-free. Often, we have to decide whether we want a very sensitive detection system that likely will detect any real problem but also subjects us to Type-1 errors, or else a less sensitive system that likely won’t give us many false alarms but may also miss a real problem.

Boston officials’ bomb-squad response to the mooninite signs is a perfect example of a Type-1 error produced by a highly sensitive detection system. I suspect that government officials would defend the high sensitivity, saying “it’s better to be safe than sorry.”

But Type-1 errors can end up making us feel very sorry. The current Iraq War can be considered a Type-1 error resulting from the Bush administration’s high sensitivity to the threat posed by Saddam Hussein’s regime.

Or consider the 2002 Beltway sniper attacks, during which local schools publicized that they were in “lockdown mode” and keeping schoolchildren indoors — that is, they went into “better safe than sorry” mode. The snipers later told police that the schools’ pronouncements enticed the snipers to try to kill a child, and they ultimately wounded a 13-year-old as he arrived at his Bowie, Md., middle school.

For an excellent discussion of why 9/11 should not lead us to be too accepting of Type-1 errors, read Ohio State University national security professor John Mueller’s article “A False Sense of Insecurity?