Not Overstated

Last year, Jagadeesh Gokhale and I estimated [pdf] that state and local governments were sitting on about $1.4 trillion of promised, but unfunded, health care costs for their workers.

The Economist kindly discussed our estimate in their November 18 issue, but noted: “Even if Messrs Edwards and Gokhale have overstated the problem …”

It turns out that we hugely understated the problem for at least one state. We had New Jersey down for $20 billion, but news from that state today indicates that taxpayers may get hit with a $78 billion tab for state worker health costs unless are reforms are made (or $8,500 for every resident of the state).

New at Cato Unbound: Alan Reynolds’ Income Distribution Heresies

In a speech yesterday, Federal Reserve Chairman Ben Bernanke worried that rising income inequality may make Joe and Joanne Lunchbox “less willing to accept the dynamism … so essential to economic progress,” which would be bad. ”Bernanke Warns of Economic Inequality,” Forbes’ headline tolls. 

Bernanke is evidently sold on what economists call the ”skill based technical change” hypothesis, which basically says that new technology has increased the productivity, and thus the wages, of high-skilled workers faster than it has for low-skilled workers. Bernanke sagely advises us not to look to globalization as the source of increasing inequality, and urges a broader diffusion of the kinds of skills that really pay off in today’s economy.

But is there actually something to be worried about? Is income inequality really widening at all? Are the incomes of the wealthiest increasing faster than those of the rest of us?

As it happens, those are the question of this month’s edition of Cato Unbound, “Interrogating Inequality,” which kicks off today!

It turns out these questions are a lot harder than they seem, and the answers turn on which set of government statistics — each with its own special biases — one consults. In this month’s lead essay, “Income Distribution Heresies,” Cato’s own Alan Reynolds — who set off a firestorm of controversy with a Wall Street Journal op-ed last month disputing the received wisdom about growing inequality — clarifies and refines his argument that massively increasing income inequality is an illusion. Replying to Reynolds, we’ll have the Brookings Institution’s Gary Burtless, University of Oregon economist and econ-blogger Mark Thoma, Cornell University inequality specialist Richard Burkhauser, and the Germano-Italian econo-duo Dirk Krueger and Fabrizio Perri, of the Universities of Pennsylvania and Minnesota (and the Minneapolis Fed), respectively.

So … is the specter of rising income inequality a statistical quirk or not? What’s really going on, income distribution-wise? Why not pay more attention to the wealth and consumption numbers, in any case? Only Cato Unbound readers will really be in the know.

Max Boot as Oracle

Max “Case for American Empire” Boot’s latest LA Times column walks us through a seminal text in counterinsurgency, David Galula’s Counterinsurgency Warfare: Theory and Practice, in the course of describing the “Keys to a Successful Surge.”

Since the ideas are mostly Galula’s and not Boot’s, the column is decent, but this seems as good an occasion as any to recall that Boot was arguing that victory in Iraq would be quite easy as recently as 2003.  This was his take then:

Formal empire is passe, and Americans have little enthusiasm for it. Promoting liberal democracies with U.S. security guarantees is more our style. In Iraq, that means purging the Baathists, providing humanitarian relief, starting to rebuild, and then setting up a process to produce a representative local government…

This means using American troops to secure all of Iraq. It will be insufficient to set up a peacekeeping force whose authority extends only to the capital. It will be unacceptable to say that peacekeeping is not a job for the U.S. military. Since the United States is committed to a “unitary” Iraq, it will have to commit sufficient force to make this a reality. This probably will not require the 200,000 troops suggested by Army chief of staff Eric Shinseki, but it will require a long-term commitment of at least 60,000 to 75,000 soldiers, the number estimated by Joint Staff planners. (emphasis added)

So in 2003, Max Boot was arguing that 60-75,000 U.S. troops could provide security all across Iraq, while simultaneously “purging the Baathists, providing humanitarian relief, starting to rebuild, and then setting up a process to produce a representative local government.”

Why should anyone be listening to him now?

Goldman Sachs Predicts Recession if Bush Tax Cuts Expire

The Congressional Budget Office predicts a budget surplus in 2012, but only because it assumes the Bush tax cuts expire in 2011 (a reasonable assumption) and that this will lead to a flood of new tax revenue (a very unreasonable assumption). A TCS Daily column by James Pethokoukis notes that this leads the Wall Street firm of Goldman Sachs to predict a recession in 2011:
Deficits are often used as reason for higher taxes, such as in 1993 and 1982. But to believe in higher taxes as sound economic policy in coming years, you also have to believe in the CBO’s cheery forecast that hundreds of billion of dollars in new taxes will have little or no effect on economic growth. Now you don’t have to be an acolyte of supply-side guru Arthur Laffer to find that sort of “static analysis” a little weird. Most Americans probably would. So, apparently, did the economic team at Goldman Sachs, the old employer of Robert Rubin, President Bill Clinton’s second treasury secretary. Thus the firm’s econ wonks decided to try and simulate the real-world effect of letting the Bush tax cuts expire at the end of 2010. Using the respected Washington University Macro Model, Goldman reset the tax code to its pre-Bush status, assumed all tax cuts expired, and watched how the economy reacted as 2011 began. What did the firm see? Well, in the first quarter of 2011 the economy dropped 3 percentage points below what it would have been otherwise. “Absent a tailwind to growth from some other source,” the analysis concludes, “this would almost surely mark the onset of a recession.”

The German “Brain Drain” Continues

While the tax competition debate usually focuses on capital flows, there is growing evidence that talented individuals are “voting with their feet” and leaving high-tax regimes. German and French taxpayers are among the most likely to emigrate, according to the New York Times, with Swtizerland and the United States being favorite destinations:

Benedikt Thoma recalls the moment he began to think seriously about leaving Germany. It was in 2004, at a New Year’s Day reception in nearby Frankfurt, and the guest speaker, a prominent politician, was lamenting the fact that every year thousands of educated Germans turn their backs on their homeland. …There has been a steady exodus over the years, but it has recently become Topic A in a land already saddled with one of the most rapidly aging and shrinking populations of any Western nation. With evidence that more professionals are leaving now than in past years, politicians and business executives warn about the loss of their country’s best and brightest. …The trigger for this latest bout of angst was the release last fall of new government statistics showing that 144,800 Germans emigrated in 2005, up from 109,500 in 2001. At the same time, only 128,100 Germans returned, a decline of nearly 50,000 from the year before. That made it the first year in nearly four decades that more people left than came home. Demographic experts also say the nature of the emigrants is changing. These are not just young unskilled workers like those who fled the economically blighted eastern part of Germany after the country was reunified in 1990 to work in restaurants in Austria or Switzerland. They are doctors, engineers, architects and scientists — just the sort of highly educated professionals that Germany needs to compete with economic up-and-comers like China and India. “It’s not a problem of numbers as much as brain drain,” said Reiner Klingholz, the director of the Berlin Institute for Population and Development. “What we desperately need in the near future are talented and qualified people to replace those who will retire in 15 to 20 years.” …Germany is not the only European country losing people. Nicolas Sarkozy, the conservative presidential candidate in France, recently held a rally in London, home to 300,000 French citizens living in Britain, urging them to return and “make France a great nation.” The number of French citizens living in Britain jumped 8.4 percent in 2005, according to government statistics. But the total number of French people living outside the country grew only 1.2 percent, or 15,300 people, roughly equivalent to Germany’s net loss of about 16,700 citizens. Caveats aside, there is plenty of anecdotal evidence that Germany has become less attractive for people in fields like medicine, academic research and engineering. Those who leave cite chronic unemployment, a rigid labor market, stifling bureaucracy, high taxes and the plodding economy — which, though better recently, still lags behind that of the United States. …While the European Union’s expansion has given Germans more options, their two favorite destinations are outside it: Switzerland and the United States.

Three Cheers for Workers’ Rights

This year has seen a lot of attention paid to teachers unions, with the Supreme Court taking up the appeal from an outrageous Washington State Supreme Court decision that gutted the First Amendment rights of teachers and gave new “rights” to unions.

But battles are being fought all over the country.  There have been union revolts in Washington, California, and Iowa, and the latest comes from Illinois, where the Century Education Association (CEA), representing Century School District in Ullin, IL, voted to sever their ties with the state and national union and become “local only.”  And this official step comes after they were apparently harassed and lied to by their supposed representatives:

“We really felt that the IEA and the NEA were not organizations out to represent the best interests of teachers,” said Debra Goins, President of the CEA and a teacher at Century Elementary School. “We all felt we should have the right to choose to affiliate or not, without being harassed, bullied, lied to and intimidated.”

The Association of American Educators (the largest national, non-union, professional educators’ association) will step in to provide the benefits of a national without the burdens and baggage that come with NEA affiliation.

Keep an eye on Davenport v. Washington Education Association (WEA) and Washington v. WEA, which should be decided in June.  The Washington court accepted the bizarre union argument that requiring the union to get permission from non-union-members before using their mandatory dues to engage in express advocacy for or against state or local candidates or initiatives is a violation of the union’s First Amendment rights.  I think this is known as uber-chutzpah.

Friends of the First Amendment should hope the court will issue a broad ruling curtailing union tyranny.  And that more union locals will demand to be treated like professionals rather than the political pawns of union bosses. 

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The Climate Change Inquisition

Yesterday, the Washington Post ran an article highlighting accusations that our friends over at the American Enterprise Institute are trying to bribe climate scientists to take shots at a forthcoming UN report on climate change, an article which aped an earlier piece in The Guardian.  Shocking stuff.  Apparently, AEI scholars Ken Green and Steve Hayward commited the unpardonable sin of asking scientific experts to critique the upcoming report for a book of collected essays on the subject in return for a $10,000 honorarium.   

Although the blogosphere has gone wild, it’s unclear to me why.  While the letters they sent out soliciting contributions for the book highlighted their concerns about the IPCC process overall and the spin their work products are given in the media, they apparently did not stipulate what the authors were to say or the arguments they were to make.  For instance, the letter to Prof. Steve Schroeder at Texas A&M stated:

We are looking for an author who can write a well-supported but accessible discussion of which elements of climate modeling have demonstrated predictive value that might make them policy-relevant and which elements of climate modeling have less levels of predictive utility, and hence, less utility in developing climate policy.

Well, God forbid somebody write an article like that!  And may God doubly forbid the possibility that one might want to be paid for writing an article like that!  And may God strike down in righteous fury the scientist willing to air even a whiff of critical thought concerning the report in question.

The fact that some environmentalists are trying to characterize the Green & Hayward letters as demonic invitations to lie for profit is understandable enough.  The fact that prominent reporters are willing to give these accusations column inches in crowded newspapers is not. 

Even more distressing is the emerging concensus among the intellectual elite that some UN documents are akin to holy script that cannot be challenged, criticized, or even examined critically in civilized company.  Since when did scientific reports earn the status of the Hadith or the Koran?  Since when did science rule critical examination of popular hypotheses (no matter how well grounded) to be out of line?  And when exactly did otherwise smart people come to the conclusion that ad hominem attack was a perfectly good and reasonable line of argument?

For a more detailed examination of the issues in play - more than this story really deserves - see Jonathan Adler’s riff on the Volokh Conspiracy. 

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