Moneybox

The new issue of the American Federation of Teachers' magazine American Educator has a very interesting article from Richard Kahlenberg profiling the most innovative and effective socioeconomic integration schemes at work in public education today, and the considerable success these programs have at raising student achievement. But it ends on what struck me as an odd note:

I've been highly critical of Rhee's attack on teachers' unions in venues like Slate and the Washington Post. I don't expect her to give up her fixation on unions, but I do help to convince others of a fundamental but too-often-ognored truth: the major problem with American schools is not teachers or their unions, but poverty and economic segregation. That's what the research suggests. It's what 80 school districts have come to realize. And until federal officials catch up, it's what I will continue to push them to acknowledge.

The striking thing here is not so much the conclusion that classroom education isn't very important compared to socioeconomic issues, but the venue in which it appears. The basic logic of "the enemy of my enemy is my friend" is fairly clear. Michelle Rhee is an enemy of the AFT, and Kahlenberg's analysis suggests that Rhee's agenda is mistaken. So AFT wants to publish Kahlenberg's analysis.

But a straightforward reading of the policy implications of Kahlenberg's piece is that instead of pursuing Rhee's reforns, Adrian Fenty's administration in DC ought to have reduced spending on teacher salaries and invested the funds instead in low-income housing subsidies and tax cuts for high-income families. Promoting more economically integrated schools and neighborhoods isn't going to seriously reduce the city's need for police and fire officers, for garbage collection and bus service, or most other things. But if it's true that socioeconomic integration is much more important for student achievement than teacher quality, then it seems like a no-brainer to reduce expenditures on teachers (accepting that some good ones may leave and be replaced by somewhat worse candidates) and reinvest the funds directly in the key driver of achievement. Now maybe that's right (though I doubt it) but certainly it's not something AFT or other unions would be interested in seeing happen.

Yet it seems to me that if I want to make the business case for paying Slate writers, I have to persuade the bosses that Slate traffic is related to the quality of the writers employed in an important way. If it's not fair to blame us for bad traffic because actually all that matters is the photos that accompany the stories, then obviously the thing to do would be to spend less on paying writers and more on photographers or photo licensing services.

I've often wondered who it is that's buying these very expensive Beats By Dre headphones, but the answer turns out to be "lots of people" and the company scored 40 percent of US headphone sales over the Christmas season.

That's an awful lot. And while the headphones sound fine to me, they're definitely not better than competing offering from Senndheiser, Grado, Etymotics and other manufacturers that aren't associated with hip-hop icons. It's a real branding success story.

Teachers and the labor unions that represent them don't like the trend toward more and more reliance on standardized tests in education, and Abby Rapaport is eager to tell us that they're now being joined by cranky rural white people in Texas. Kevin Drum says that this is fitting. After all, "It was George W. Bush's Texas that led the way in the testing craze, and it would be appropriate if it were Texas that led the way in reining it in."

And maybe so. But I'm worried. Because here's the thing. Texas led the way in the testing craze and it seems to be working out well for Texas. As I wrote on Tuesday, African-American and Latino students in Texas perform better than the national average on the 8th grade NAEP reading test. The white and low-income subgroups perform at an average level. In 8th grade math, Texas is above-average overall as well as in the white, black, Latino, and low-income sub-groups. Those are pretty good results! Are they the best in America? No, probably not. But when you consider that Texas is unusually stingy in its funding of public schools and does relatively little to provide non-education social services to low-income children, I think you'd have to say that the teachers and administrators of Texas public schools are doing an excellent job with the resources available to them. I wouldn't say that it's a model for the nation, exactly, but it's certainly a model of efficiency. What Texas ought to be doing is stepping up and investing more money in its kids—take the ObamaCare Medicaid expansion, make sure districts have enough money to hire the teachers they need to keep pace with a rapidly growing population, etc. All that good stuff.

But in school management terms, Texas is going a good job. Backing off from what they've been doing sounds like a mistake to me.

Nobel Prize winning economist James Buchanan died earlier this week, and I have to say he really stands out for such a highly regarded scholar as someone who's work I feel like I don't understand or appreciate. This is not, I think, because of his right-wing politics. I don't agree with Milton Friedman about everything and I think Hayek wrote some foolish things but I'm also comfortable explaining what their major contributions are and ways in which they've influenced the thinking of people who don't fully share their conclusions.

And then there's Buchanan and public choice. The way this works, as I understand it, is that economists came to pay a lot of attention to "market failures" over time.

Situations arise all the time in which a benevolent social planner could improve on a market outcome because of externalities, information issues, transaction costs, high barriers to entry, etc. There are deep structural reasons why something like the market for cable television doesn't and never will feature any great resemblance to something like the highly competitive market for commodity corn. Buchanan's point is that is that an actual regulator or politician is not a benevolent social planner, but instead a regular person with regular motives. So while an unregulated local utility company might be a vicious exploitative monopolist, the director of a publicly owned utility might be a viciously exploitative bureaucrat, or the chief of a public utility regulatory commission might be viciously exploitative corrupt hack. You can't just infer from the existence of a market failure that a regulatory solution will in fact emerge.

Absolutely true. But also I think a little banal. People were aware of the problem of political corruption and malfeasance before Buchanan came along. What's always been tricky is the question of how to build effective public institutions? Why are there some places where the cops shake people down for bribes and others where the cops enforce the law and protect personal property (and of course with many intermediate cases)? Why are some military organizations effective and others fail? Lots of people have done lots of interesting work on these questions (I greatly enjoyed recent books by Acemoglu & Robinson and Francis Fukuyama) from an instituational and historical perspective.

And to the best of my understanding, Buchanan didn't really do any of that work or show much interest in the question. Instead his big idea, more or less, is that we should have constitutions that mandate libertarianism.

Now I will happily concede that I may be missing something. Many very smart people seem to have a very high regard for Buchanan's work. But they're not doing a very good job of conveying it to me. Brad DeLong says Buchanan got a lot right that "nobody else would have gotten right in his absence" but doesn't say what those things are. Tyler Cowen says he was "one of the least well understood and least accessible economics Nobel Laureates" and doesn't try to explain what he was saying. Arnold Kling praises the depth of Buchanan's thought and then quotes what sounds like gibberish to me. Based on those testimonials, I'm thinking that the error here is probably mine. Buchanan is responsible for some deep, hard to understand, and relatively inaccessible ideas and I am not understanding them or appreciating their depth. But I wish some of his fans on the Internet would try to explain what these are, since the basics seem correct to me but not overwhelmingly original or deep.

He ends up taking this in a direction I'm not that enthusiastic about, but David Brooks' summary of some recent behavioral research and its importance for policy is pretty great. I particularly liked the brief section on implicit bias:

Sometimes the behavioral research leads us to completely change how we think about an issue. For example, many of our anti-discrimination policies focus on finding the bad apples who are explicitly prejudiced. In fact, the serious discrimination is implicit, subtle and nearly universal. Both blacks and whites subtly try to get a white partner when asked to team up to do an intellectually difficult task. In computer shooting simulations, both black and white participants were more likely to think black figures were armed. In emergency rooms, whites are pervasively given stronger painkillers than blacks or Hispanics. Clearly, we should spend more effort rigging situations to reduce universal, unconscious racism.

This is a huge issue for business as well as government, I would say. In principle, you want to manage your firm internally without bias. You want to promote the best people regardless of gender or skin color. If anything, given the existence of implicit bias and old hierarchical norms you want to exploit the profit-making opportunities created by discrimination against women and people of color. But in order to do that, you have to understand how bias works. It's much too easy as a manager to look around and see that nobody's engaged in any comical Mad Men-style gross racist or sexist behaviors and persuade yourself that all is well.

It's not.

Annie Lowrey's New York Times Magazine article on how Washington got so rich and can it stay this way in an era of austerity is a great read.

But since the article deals with both the larger metropolitan area and also the city in particular, I think it's worth putting the growth of the District itself in some context. The chart above, drawn from Census figures, shows the share of the American population residing in the District of Columbia over the past hundred years or so. What you can see is that in the first half of the twentieth century, the nation's capital became more prominent and that the New Deal and World War II in particular turned the United States into a more capital-centric country. But since that time it's essentially been a long slide.

So you have to ask yourself, what is it that's really in need of explanation here. If you heard about a country with a growing economy and a growing population, and then you heard that the population and economy in its capital city is also growing you'd thing "fair enough." But DC's population actually shrank enormously between between 1950 and 2000 (despite, I hasten to add, a continual expansion in federal government spending) with the city losing about 25 percent of its residents. Census Bureau estimates suggest that in the two years since the 2010 Census, the city really has grown rapidly and once again contains 0.2 percent of the American population just like it did back in 2000. If we keep growing faster than the nation at large, it's easy to imagine us re-obtaining our 1990 or 1980 share of national population but to ever return to being home to 0.4 percent of the American population as we were in 1940 seems unimaginable. A more interesting question is whether the city's zoning authorities will ever allow us to once again contain 800,000 people as we did way back in 1950.

Which is just to say that DC growth should be put in perspective. In the 40 years after 1970, Houston added 900,000 people. DC has fewer than 700,000 people overall. That is a city that's growing rapidly.

Washington, I would say, is mostly a city that's snapping back from a combination of negative technology shocks (the automobile is very useful but was a huge blow to cities with a lot of pre-car infrastructure), very bad policy choices, and the national crime wave of the 1970s and 80s. It's true that the DC suburbs in Virginia are growing very rapidly. But the suburbs of Atlanta and Charlotte and other southern cities are also growing very rapidly. Ask yourself how quickly the affluent suburbs of New York and Boston would grow if they had developer-friendly sunbelt politics as seen in Virginia or North Carolina?

Shinzo Abe's effort to restart Japan's long-stalled economy took another step forward yesterday with the announcement of a 10.3 trillion fiscal stimulus plan (that's about $100 billion) paired with renewed talk of monetary easing:

Mr. Abe also reiterated pressure on Japan’s central bank to make a firmer commitment to stopping deflation by pumping more money into the economy — a measure the prime minister says is crucial to getting businesses to invest and consumers to spend.

“We will put an end to this shrinking, and aim to build a stronger economy where earnings and incomes can grow,” Mr. Abe told a televised news conference. “For that, the government must first take the initiative to create demand, and boost the entire economy.”

Given the track record of Japan's LDP and past fiscal stimulus efforts I think it's reasonable to believe there's going to be a lot of pork and waste in this package. But what Abe seems to be showing throughout his brief second tenure as prime minister is what Ben Bernanke wants called "Rooseveltian Resolve." He's determined to use every channel available to him—whether that's currency depreciation or deficit spending or expectations-targeting by messing with the Bank of Japan—to get things moving. It's exactly the kind of spirit the rest of the world needs to learn from.

Minneapolis Federal Reserve President Narayana Kocherlakota continues his tear of insightful statements with a chat on the basics of the Fed and monetary policy that ends with this contrarian but correct conclusion:

Congress has charged the Fed with making monetary policy to achieve two Main Street objectives: keep inflation close to 2 percent and unemployment low. Monetary policy tools operate with a lag of a year or two. These lags mean that the FOMC’s policy decisions are based on how it expects the economy to perform over the medium term. My own forecast, conditional on the FOMC’s current monetary policy stance, is that inflation will run below the Fed’s target of 2 percent over the next two years and the unemployment rate will remain elevated. This forecast suggests that, if anything, monetary policy is currently too tight, not too easy.

This is how Milton Friedman saw things and thus one might think it had become conventional wisdom. But it hasn't. The normal way of talking about things is to say that money is "easy" if interest rates are low, regardless of how forward-looking nominal variable perform. That standard leads to the absurd conclusion that money was tighter throughout the seventies inflation than it's been at any point since Alan Greenspan took the helm. As best I can tell nobody actually thinks that, but people say things about real growth being slow and unemployment low and stable "despite" easy money that logically commit them to that view. But Kocherlakota has this right. Low and stable inflation plus stubbornly high unemployment means relatively tight money, just as high and rising inflation mean easy money regardless of interest rates.

Kocherlakota's an interesting character. He very much started out the crisis as part of the freshwater school but changed his mind during 2012 in response to the evidence. That's a stark contrast to other regional Federal Reserve presidents like Jeffrey Lacker who just keep saying the same thing no matter how many times their model fails. For his trouble, Kocherlakota's gotten smeared by Stephen Williamson but otherwise I haven't seen the tight money crowd do much of anything to engage with what he's actually saying.

Here's Fox News confusing the idea of a coin-shaped pile of platinum worth $1 trillion and a $1 trillion coin that happens to be made out of platinum and can be of any size. We saw earlier this week that the National Republican Campaign Committee also doesn't understand how coins work, so perhaps I can try again to explain.

In my wallet right now I have a bunch of $20 bills, a few $1 bills, and a $5 bill. These bills are worth different amounts of money due to the fact that they have different numerals written on them. In terms of their actual contents, there's very little difference but a $20 bill is much more valuable than a $1 bill just because. By the same token, if you write a check for $20,000 it doesn't need to be physically different from a $200 check except for having different numerals written on it. Coins are the same. Dimes are more valuable than nickels even though they're smaller. It is true that several hundred years ago the value of a coin was driven by its metallic content, but this hasn't been the case for a long time. The issue doesn't even have anything to do with fiat money. The point of a gold standard is that you can exchange your currency for a certain amount of gold. But the currency itself is not made out of gold or anything else in particular. Mostly it's paper. Some of it is coins. But the content of the coins is irrelevant.

If you think about it for a second you'll see that it basically has to be this way. Quarters and pennies and dimes and nickels all have different metallic content. Since the relative prices of different commodities fluctuates on a daily basis, if the value of coins were based on the value of the metal they contain then the relative value of different coins would be constantly shifting. You'd have to fire up your Bloomberg machine every morning to see how much money the coins in your pocket are worth. That'd be nuts, which is why they write numbers on the coins. A $1 trillion coin would be a coin of any size with the number "1 Trillion" written on it somewhere near "In God We Trust."

A lot of pundits lament the fact that Democrats and Republicans can't come together to make the painful choices that would reduce the country's debt:GDP ratio. I find it much more frustrating that we can't come together and make the painless choices that would do the same thing. Monetary stimulus is one such example.

Immigration is another. Because we so throttle the supply of visas for engineers, it's possible to find great natural experiments where the question of who was let in and who wasn't was a matter of pure chance. Michael Clemens looked at one such case and was able to do a detailed study and found that statistically identical workers employed by the same firm can increase their earnings by over $55,000 a year by securing permission to come to the United States. So what if instead of allocating these visas by lottery, we let as many people come as there are corporate sponsors for and charged $5,000 per person per year? On the one hand, we'd raise a little chunk of revenue without needing to raise taxes on any American. On the other hand, the huge productivity gains here—the Indians' labor is worth five to six times as much in the USA as in India—would boost growth.