September 2011

September 28, 2011 4:22PM

Unemployment Insurance System Fosters Unemployment

The Wall Street Journal reports on rising state and federal unemployment taxes at a time when unemployment remains high. Keynesian economists keep telling us that unemployment benefits have a stimulative “multiplier effect” on the economy. Unfortunately, that sticky little problem of the government having to suck resources out of the economy to pay for this alleged stimulus keeps getting in the way:

The higher tax tab could discourage hiring. ‘It’s just one more cost to add,’ said Douglas Devnew, vice president for finance and administration at Trumpf Inc., a Farmington, Conn., manufacturer. ‘Companies like ours are going to think that much harder if we need more folks.’

Yes, that’s only an anecdote. But I find anecdotes to be considerably more indicative of reality than, say, the fancy economic models favored by the White House that continue to erroneously predict growth and reduced unemployment if the government spends more of the private sector’s money.

If anecdotes aren’t your thing, check out this excellent Cato essay on the unemployment insurance system. Critics of a government administered unemployment insurance system are often accused of being callous toward the plight of those seeking work. But the essay’s examination of the history of unemployment insurance, and the ill‐​effects and failures of the government‐​run system indicate that it’s the supporters of the government‐​run system who should be on the defensive.

September 28, 2011 3:41PM

Cochrane’s Kinky Curves

The doctrine that inflation can cure unemployment, implicit in the Obama administration’s spending blowout, goes way back.

The modern version originated with William Phillips, a New Zealand‐​born economist who, in 1958, wrote a paper modestly titled “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861‑1957.” Phillips suggested that when inflation went up, unemployment went down. Keynesian economists Paul Samuelson and Robert Solow popularized Phillips’ idea as a reason to ratchet up government spending and inflate the money supply. That’s what the Kennedy and Johnson administrations did during the 1960s.

In 1967, Milton Friedman expressed a skeptical view about what had come to be known as the Phillips Curve, launching an extended debate. Then in 1973, President Richard Nixon, who had famously declared “I am now a Keynesian,” leaned hard on Fed Chairman Arthur Burns to inflate the money supply and drive down unemployment, hopefully to improve Nixon’s prospects for re‐​election. Well, as those of us who were around back then recall, both inflation and unemployment went up! This was a bit of a problem for Phillips Curve aficionados.

As if the stubborn stagflation of the 1970s wasn’t bad enough, subsequent efforts by new Fed Chairman Paul Volcker and President Ronald Reagan to stop inflation cold delivered another hammer blow against the Phillips Curve: both inflation and unemployment went down!

Now fast‐​forward to January 2009: President Obama levitated the Phillips Curve from the dead when he repeatedly declared that it was urgent to enact his $825 billion stimulus bill so unemployment would go down. But both spending and unemployment went up! It became harder to deny that the stimulus spending flopped, though the New York Times’ Keynesian columnist Paul Krugman tried valiantly. He claimed stimulus spending flopped because Obama didn’t spend enough. Accordingly, several weeks ago, Obama proposed still more stimulus spending to fight unemployment, and he begged people to support it: “If you love me, pass this bill!”

There shouldn’t have been any surprise about Obama’s flop, since the underlying idea – the Phillips Curve – proved to be a dud long ago. This would be a good time to review experience with the Phillips Curve.

Thankfully, Cato Adjunct Scholar John H. Cochrane, the AQR Capital Management Distinguished Service Professor of Finance at the University of Chicago Booth School of Business, has done just that. He focused on the period from 1966 to the present. That year, President Lyndon Johnson was going full bore, promoting runaway spending on new entitlement programs and on the Vietnam war simultaneously, and inflation reared its ugly head.

Cochrane charted what happened year‐​by‐​year to inflation and unemployment. The result wasn’t a nice smooth curve dreamed about by Keynesians. Rather, there was a kinky curve. One year, inflation went up, and unemployment went down. Next year, inflation went up again, and unemployment went up. Then when inflation went down, unemployment went up again. On and on as if we followed a drunk stumbling around a street. Since a single chart would have become an unreadable tangle if it tried to cover the entire 45‐​year period, Cochrane developed two charts, 1966–1984 and 1985–2011. Clearly, what we see is a random relationship between inflation and unemployment, that makes the Phillips Curve worthless as a policy tool.

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The charts appear in an insightful article Cochrane wrote, published in the Fall 2011 National Affairs. The article is important quite apart from the Phillips Curve charts. Although the prevailing view seems to be that high inflation is most likely to occur if and when the Fed increases the money supply, Cochrane warns high inflation could occur as a consequence of soaring government debt. Such inflation would amount to a default. It would be triggered by a run on dollar‐​denominated assets, if and when investors conclude that the government cannot pay its debts. Runs occur without warning, often after a succession of events have undermined investor confidence.

September 28, 2011 3:38PM

Quid Pro Quo, Mister Schmidt!

Silicon Valley has finally begun to learn the virtues of playing the political game, but some legislators appear to be tiring of a subtle approach to explaining how things work in Washington. Last week, Google Chairman Eric Schmidt was summoned before the Senate Judiciary Committee to be harangued about its “anticompetitive” practice of trying to make life simpler for its users by providing results from its own mapping, stock ticker, news, and other services atop the results for appropriate search queries. As many scholars and technologists have observed, insisting on a principle of “search neutrality” when it comes to these types of associated services doesn’t make much sense, because search results are essentially, and necessarily, an opinion (albeit an algorithmically generated one) about what information will be most relevant and useful in response to a user’s query. Schmidt did find one friend on the committee, however: Sen. Chuck Schumer (D-NY) sprang to his defense, declaring that he’d spoken to many tech entrepreneurs in his state who regarded Google as a net boon to competition. Then, in a remarkably shameless exchange—which Schumer later recounted in a press release on his own Web site—Schumer hinted at how the company might ensure that it would continue to have a powerful champion on the Judiciary Committee:

Schumer: Last year, Google selected Kansas City as a site for your new ultra high‐​speed Internet service. That really helped Kansas City. Hudson Valley’s very eager to be another test place for your network. We have IBM there; we have a lot of high tech industry. It’s growing, but it’s being hindered by a lack of Internet capacity. Would you agree to consider the Hudson Valley as a future test site for your broadband project?

Schmidt: I think the answer is absolutely. I’ve been there and it’s both a great technology place and also a wonderful natural resource. What we’re doing in Kansas City is we’re actually experimenting with a new model for broadband—different pricing, different pricing, and so forth—and if it works I think it has an opportunity to really change the discussion of broadband in this country. We want it to succeed first in Kansas City… so, absolutely.

The question, of course, had nothing to do with the nominal topic of the hearing—but Schmidt’s answer may have been the most important for helping his company avoid the burden of additional regulation. One can only assume Rick Santorum wishes he still enjoyed the same kind of leverage.

September 28, 2011 2:48PM

Privacy Protection as Security Risk?

Kashmir Hill at Forbes reports on the enormous quantities of data Facebook stores on its users, as revealed by records released pursuant to European “right to access” laws. One user unearthed some 880 pages of data, covering years of her account activity, including: Every machine she’d ever signed in from (and a list of other users who’d signed in from the same device), everyone who’d ever poked her, everyone she’d ever “defriended” and every friend request refused, and a history of messages and chats (including some users said they’d deleted). Some people might find it troubling how much information Facebook stores. I find it troubling how easy European laws apparently make it to extract all that data, especially when you consider that these “right to access” rules are supposed to safeguard people’s private information. As Hill notes:

One thing that I found a bit concerning about the process is that it only requires a photo of your government i.d., your name, and birthdate to confirm your identity. Given how easy it is to get one’s hands on someone else’s ID (say if you’re dating someone and s/​he leaves a wallet about your house), I could imagine some scenarios in which this process could be abused.

Full disclosure here: Hill’s my domestic partner—so, fortunately, she doesn’t have to worry about that sort of thing. But in principle it sounds like it might be even easier than that. Their data request form suggests that you must submit an ID on which your “full name, date of birth, and photo” are legible, while other extraneous identifying information can be blacked out. It’s not clear from either their site or the reporting I’ve read exactly how their verification process works, but it sounds as though anyone with some rudimentary Photoshop skills and a user’s photo and birthdate (Where would you ever get those? Oh… right.) might be able to put together a passable bogus request. I had assumed the process at least required some kind of confirmation response from the e‐​mail associated with a user’s account (along the lines of a password reset) but at least one of Hill’s sources says he doesn’t recall going through any such step. And in any event, the submission form allows you to provide an alternate e‐​mail address “where you can be reached” in case you no longer have access to the login e‐​mail on record with Facebook. So someone who knew that their target was no longer using (say) the college address they’d signed up with, or was going to be away from e‐​mail for a while, or had an aggressive spam filter that’s likely to block such messages, would still be able to game the process.

Now, Facebook’s a big company with plenty of resources, so it wouldn’t be surprising if their vetting process is actually more secure (or could be made more secure) than these descriptions make it sound. There are still the myriad other Web sites that store personal user information, and any user’s data is only secure as the weakest link in the chain. For users who recycle a small number of passwords on many sites, there’s an added risk: One of the categories of data Facebook provides is a hash of the user’s password. If a site is observing good security practice and using a salted hash, that wouldn’t necessarily be of enormous use to an attacker—but if they’re not (and, sadly, many sites don’t observe best practices here) an attacker could conceivably infer a weak password from the hash using a dictionary attack with a few hours of crunching.

There are, to be sure, ways to close some of the weak points in the process. And the goal of a “right to access” regulation—enabling users to understand how they’re monitored by different sites, so they can make informed decisions about their Internet use—is a reasonable one. But just as with regulations designed to ensure lawful police access to communications, any broad mandate creating an additional access point to information systems effectively creates a new attack surface, and a new security vulnerability, which in turn adds to the burdens on the company if they’re going to be responsible data stewards. (Presumably Facebook can afford a full‐​time compliance team to deal with the flood of requests they’ve gotten since this story started circulating in a timely and secure fashion; it’s not hard to imagine that it would strain the resources of a smaller start‐​up.) It’s difficult to adequately gauge the net costs and benefits of such mandates in advance, but in this case it doesn’t seem terribly plausible that there’s a genuine gain to consumers that could justify the added risk or expense—especially since most of the benefit here would be equally achieved by requiring companies to supply detailed general information about the kinds of records they keep.

September 28, 2011 1:31PM

Orszag and the People

Former OMB Director Peter Orszag has written a provocative New Republic essay calling for less democracy. Most people, myself included, would be inclined to dismiss his effort as an obviously self‐​serving call for rule by progressive experts. I believe that temptation should be put aside. After all, in 1789 and afterwards, the American people have not created a democracy but rather a republic. So we should address Orszag’s arguments on their merits while asking whether he is proposing a “Republican remedy for the diseases most incident to Republican Government.”

A bit of historical context offers a way into Orszag’s argument. Progressives did favor expert influence over government, but they also plumped for direct democracy; the referendum and the initiative were progressive reforms. They believed direct rule of the people would bypass corrupt and “reactionary” state legislatures who refused to enact progressive legislation. Orszag does not propose reforms introducing direct rule; he is thus left with the expert aspect of the progressive legacy. Why not more democracy?

The people are dysfunctional. Orszag reasons that legislative gridlock does harm to the nation and will do more in the future, that gridlock is rooted in polarization of the masses and not just of elites, and that polarization arises from people living and interacting only with people who share their views. Representatives in DC reflect these divisions. The problem, according to Orszag, is not in our agents but in ourselves. In response, we should sever the link between policymaking and the problematic people.

You need not equate the voice of the people with the voice of God to find Orszag’s analysis unconvincing. Is it really so surprising that the people are so polarized? For decades, we have lived under a redistributive government. Your gain is my loss and vice‐​versa. The politics of redistribution also foster a rhetoric of blame and contempt. You are the cause of my problems and vice‐​versa. In the zero sum struggles around the redistributive state, people begin to see each other as friend and enemy. Big Government leads to Big Polarization.

Orszag offers three general ways around the people and their representatives: automatic policies, backstop rules (like the sequester governing the supercommittee), and institutions more independent of the dysfunctional people. I focus on the last of these.

Is the independent judgment of experts what we need? Policies are means to ends, and the latter are tied to values. For example, Cato experts often argue for a policy of deregulation to limit government and thereby increase individual liberty. Experts have special knowledge about means not ends, about the effects of policies and not about the worth of values.

However, Orszag might say, Americans agree about ends/​values. Everyone wants more, not less, economic growth. Politicians (and their constituents) bicker over the policies needed to bring growth; in contrast, experts agree about the effects of policies. If we turn over policy to experts, we will get policies that achieve the ends everyone wants. Is this true? Consider for a moment the expert debates about the stimulus, the most recent policy designed to renew growth. Would you say those debates reflect expert agreement or a polarization not unlike what Orszag ascribes to the public?

Orszag’s case for more independent institutions cites policies that involve ends as much as means, values as much as facts. Tax policy might be given to a board of independent experts similar to the Federal Reserve. But making tax policy requires making tradeoffs between liberty and equality (among other values). Why would a board of experts have special knowledge about the proper tradeoff between those two cardinal values? In fact, mainstream economics assumes such values and their proper relationship cannot be known. Hence, economists begin with exogenous preferences which are not a matter of knowledge but rather, of will. The most important decisions about tax policy are simply not within the competence of experts.

You might think that Orszag takes as his slogan “taxation without representation” but that would be unfair. He does allow that the legislature could overrule his various independent institutions and their judgments about ends and means. But the experts would set the agenda, and political scientists have found that those who set the agenda usually win the policy battle. So actually Orszag is proposing “taxation (usually) without representation.” The original Tea Party Patriots of 1773 might wonder: has it really come to this?

Orszag does have a point. Americans do deeply disagree about public ends and means and thus about the size and scope of government. Why must all those disagreements be resolved in Washington? Must we always be at one another’s throats? Actually, no. The same political tradition that promised “no taxation without representation” also endorsed a division of power between national and subnational governments. Federalism offers an chance for people who deeply disagree about values to live at some distance politically from one another. We are too centralized and too much a nation for the people that we have become.

But we can and should deal with this challenge by drawing on, not repudiating, American political culture.

Update: I did a podcast on this topic with Cato’s Caleb Brown.

September 28, 2011 8:58AM

Principal of the United States Returns

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Today the POTUS — in this case, Principal of the United States — will give his third annual, national back‐​to‐​school speech, to be televised live by MSNBC. The immediate target, of course, is the kids, but I doubt it would be viewed negatively by the President if lots of adults saw or heard the speech and thought, “Wow, this guy really cares about kids. I really like him.” And who knows, maybe footage of inspiring the children will make it into a campaign ad or two.

The speech itself, from what appears to be the early‐​release transcript, does seem to focus mainly on encouraging the kiddos. At least there’s that. But it also has some nice self‐ and special‐​interest‐​serving bits:

You’ve also got people all across this country – including me – working on your behalf. We’re taking every step we can to ensure that you’re getting an educational system that’s worthy of your potential. We’re working to make sure that you have the most up‐​to‐​date schools with the latest tools for learning. We’re making sure that our country’s colleges and universities are affordable and accessible. And we’re working to get the best teachers into your classrooms, so they can prepare you for college and a future career.

Now, teachers are the men and women who might be working harder than anybody. Whether you go to a big school or a small one, whether you attend a public, private, or charter school – your teachers are giving up their weekends and waking up at dawn. They’re cramming their days full of classes and extra‐​curriculars. Then they’re going home, eating some dinner, and staying up past midnight to grade your papers.

And they don’t do it for a fancy office or a big salary. They do it for you. They live for those moments when something clicks, when you amaze them with your intellect and they see the kind of person you can become. They know that you’ll be the citizens and leaders who take us into tomorrow. They know that you’re the future.

Probably the only big question stemming from this speech is why so little hubbub about it? In 2009 it was huge news. Today — almost nothing.

Certainly one thing is this year, unlike 2009, the Department of Education didn’t put out ham‐​fisted, potentially politicized teaching guides to go with the speech. And clearly the President’s supporters no longer have the same ardor they did in his early, far less bruised days. And it seems the White House just isn’t publicizing this address very much, maybe to avoid revisiting past acrimony, or maybe just to seem less intrusive in all aspects of American life than he did in 2009.

Or maybe it’s this: Like all unprecedented federal intrusions, once the precedent is set Americans just get used to it. And there are always new threats to battle, right? Meanwhile, freedom is eroded just a little bit more.

Now there’s a topic I’d like to see the Principal of the United States address.