Public Equity

Marc Thiessen coins the term "public equity" to aptly describe President Obama's business model as president, then whips through a string of spectacular failures that Mitt Romney's Bain Capital would have a hard time matching.

His last blow is vicious:

Amazingly, Obama has declared that all the projects received funding “based solely on their merits.” But as Hoover Institution scholar Peter Schweizer reported in his book, “Throw Them All Out,” fully 71 percent of the Obama Energy Department’s grants and loans went to “individuals who were bundlers, members of Obama’s National Finance Committee, or large donors to the Democratic Party.” Collectively, these Obama cronies raised $457,834 for his campaign, and they were in turn approved for grants or loans of nearly $11.35 billion. Obama said this week it’s not the president’s job “to make a lot of money for investors.” Well, he sure seems to have made a lot of (taxpayer) money for investors in his political machine.

How come those who want to "keep the money out of politics" never propose banning no-bid government contracts for businesses that have contributed to a campaign or PAC? I can't imagine.

Vouchers for Rich Kids, Too

Since Mitt Romney snuck into the president's turf and took the president to task for repeatedly trying to shut down the money-saving DC Opportunity Scholarship voucher program, everybody has been talking about what a strong issue vouchers are for Republicans.

It's practically a gift: Obama worked futilely as a "community organizer" in urban Chicago, but insists on keeping DC city schoolkids firmly within the purview of the AFT and NEA (I won't use the incendiary word "plantation", as some have). Romney can make the easy case that markets and vouchers provide better opportunities for those too poor to leave failing school districts.

While focusing on the poor is good politics, voucher programs shouldn't be means-tested. Why did white flight occur? Why is the gentrification of America's beautiful urban neighborhoods limited to young professionals, gays, dinks, and a handful of over-50 types? Poor schools, of course. In Jamaica Plain, one of the most vibrant and diverse neighborhoods in America, one rarely sees a white person between the ages of 5 and 18, despite a 50% white population.

Those well-off enough to flee the city may not need vouchers as badly as poor students do, but the city needs them. With school choice, neighborhoods can become diverse, as highly-educated urbanites stay in their homes when their eldest kid hits age 4 instead of fleeing to the suburbs or exurbs. Cities rife with boarded-up homes could experience much-needed private investment along with rising tax revenues and greater diversity of achievement. More affluent kids would grow up in poor neighborhoods and be attuned to the breadth of human need. And the taxes paid by well-off parents would allow cities to keep tax rates reasonable, instead of chasing businesses out to the suburbs with a vicious cycle of rising taxes and shrinking tax base.

Does that mean government should take voucher money away from poor kids? Nope - cities and states can expand their voucher programs almost limitlessly, since vouchers are cheaper than keeping kids in the old monopolistic public schools.

Public Goods

I was sipping my coffee down at Brooks Landing today in the halcyon sunshine, watching the other users of the public space: a guy covered in tattoos fed the ducks, several out-of-shape joggers huffled past, a college student and her mom nibbled at their breakfasts.

Parks, libraries, the Jazz Fest, National Forests: all of these are public goods. Governments (usually local) tax and spend to provide citizens with goods which would be underprovided by private supply and demand. However, individual enjoyment of public goods remains (usually) a private choice. Brooks Landing is just there: if you want to use it, you must take your time, walk down there, and find your own way of enjoying it.

From casual observation in many settings, it appears to me that public goods are enjoyed more by the affluent than by the poor. There isn't anything wrong with that, as long as the public goods are easily accessed by all. In the case of Brooks Landing, it's located in a poor neighborhood - yet relatively few of the neighbors habituate the spot.

Why do the well-off love public amenities, when they could afford private alternatives, but the poor - who cannot - seem indifferent to them?

Clearly, a straightforward notion of public goods as perfect substitutes for private ones is insufficient to explain what I've observed. That approach - the simplest - would suggest that the poor would consume a lot more public goods than the rich. Another simple approach, treating private and public goods as completely independent, also fails: it would imply equal usage patterns if costs are identical. Since the time of the well-off is typically worth more, and since the poor in America have more leisure time, even in the case of additive separability of utility the poor should consume a bit more of public leisure goods.

That leaves us with the idea that public goods may be complements to private goods, and are not primarily complements of leisure time. In some cases, this makes sense: you can't use a DVD borrowed from the library unless you have a DVD player. You can't hike in a National Forest if you can't afford to transport yourself there. But a local park? Or a public festival?

Another theory, one that has some merit in a society like mine where race, class, and income tend to run together, is that the activities I am thinking about are those where one goes "to see and be seen". It might be the case that the poor have a distaste for seeing (or being seen by) the well-off, so they steer clear of public functions. With enough distaste for others, any group will self-segregate. As a white, I might simply fail to observe the enjoyment of public goods by blacks if they don't want me to see them doing so.

As always, the last resort of an economist in explaining a phenomenon is 'preferences'. Perhaps there are cultural preferences for public goods that are correlated with ability to earn income. The best evidence for this is college students. They are likely to be affluent in the future, but have little income in the present. And they LOVE public goods: college students crowd parks, love libraries, join fun activities, go hiking, crowd beaches, and generally consume far more than an average share of leisure-oriented public goods. This fits well with the simple theories of utility, and suggests a life-cycle in which a young adult will shift consumption away from public and toward private goods as his income rises.

Could the preferences of the poor be deterministic? Does someone's indifference to riverside walks, libraries, and music festivals express itself as well in an indifference toward schoolwork or saving money? That's a much trickier question.

Election 2012: Not Very Important

You have heard it before: this year's election is "THE MOST IMPORTANT OF {OUR LIFETIME, THE CENTURY, AMERICAN HISTORY, OUR ERA}!!!".

Not only is this overblown and immodest, as the Atlantic's Conor Friedersdorf points out, but the opposite is most likely true.

Does the 2012 election offer voters the opportunity to elect a major historical figure, someone who will introduce a new element or ideology to the presidency? No - Obama is already president, and Romney's ideas and identity conform well to the last 140 years of G.O.P. politics.

Is a great deal of policy change likely in the next four years? No. Congress will be Republican, the Senate will be split near 50-50. If re-elected, Obama will have to play small ball for two years, and then all eyes will turn to 2016, which would utterly overshadow 2012 in importance with a new generation of leadership from both parties (Biden, Clinton, Romney, and Paul would all be out of the game - think Chris Christie versus Andrew Cuomo, or Susana Martinez versus Mark Warner). If instead voters choose Romney, the new president will most likely make changes at the margin.

The two potentially enduring policies from Obama's first term are Obamacare and the amazing increase in U.S. debt. In the 2013-2017 presidential term, whoever is elected will fight trench warfare with the opposite party in the Senate over implementation of Obamacare. And whoever is elected will beg for mercy from the budget. Without a massive electoral mandate, it's hard to imagine either one enacting long-term entitlement reform.

Does the 2012 election present a historical breakpoint, with a possible realignment of politics in the U.S.? That occurred in 1852-1860, 1912, 1932, 1980 and could have in 1992 (if Perot had won some states). Does anybody expect the 2012 victor to carry more than 55% of the vote? Or either major party to seriously rethink its positions in defeat? Most likely, 2016 will feature the same arguments over the same issues as the 2012 election... which are largely the same as the arguments in every election since 1980, when the GOP took its modern form.

Since there are only twenty-five presidential elections in a century, and several of them each century do offer stark, historical choices, the in-between elections are by necessity less important than average. When an incumbent runs, importance dips still further, since only one new set of ideas and identities is considered. Think about 2004, 1996, 1992, 1984, 1972, 1956, 1944, 1940, 1936, and 1916. Along with 1924 and 1976, wouldn't those be among the 12 least interesting elections of the past 100 years?

So keep your shirt on, gentle reader: this election will determine who makes some important decisions from 2013 through January, 2017, and it probably won't decide much more than that.

Elizabeth Warren, Cherokee?

The kerfuffle over Professor Elizabeth Warren's heritage is best understood through the prism of governmental demands for diversity. While the biggest issue for her campaign (and for voters) is whether or not she lied about past claims, outsiders to academia are, I think, mistaking the margin at which Warren claiming minority status would have distorted the system in her favor.

Why do I know something about this? I'm an academic, for one. But also: I'm married to a woman with ancestry very similar to Warren's. Mrs. Global Review is 1/32nd Algonquin, according to family history. Warren claims to have two separate great-great-great-grand-Indians, which would make her 1/16th Native American.

Top schools care very little about race. They are brutally meritorious, and count publications the way baseball GM's count home runs. Nobody in baseball says, "hmm, we could really use a Japanese pitcher to connect with Asian fans". But having signed an Asian due to his pitching skills, they'll freely use his background as an advertising tool. Why not?

It's similar with academic departments. In my wife's case, she could help her own school out by listing herself as Native American. How? Well, certain National Science Foundation training grants are available only to programs that have a certain percentage of minority students (and no, Jews and Asians don't count, despite historical and current discrimination against them in academia). My wife's school missed the cutoff - she could have curried favor with her bosses and possibly made more money available for herself and her colleagues by listing herself as Native American.

An important distinction to make between my wife's case and Warren's is their place in the system. As a nearly blank slate, just beginning grad school, schools would have definitely taken my wife's declared race into account. This is in accordance with Federal policy; why else would the government make NSF training grants contingent on minority inclusion? But at Warren's level, accomplishments matter much more.

For Warren, if Harvard Law favored her at all, it would more likely be for her sex (she was hired as one of 11 women on a faculty of 71) than her race. My wife, however, did not enjoy this benefit: her field is already 50/50, so she does not have to suffer the stigma of affirmative action, and can take her place as an equal of the men and women in her program.

The real question is: did Warren lie about using her Cherokee background to help her employers look good? If she did, she's guilty of rank hypocrisy. As a leftist who wants government to help those less favored by circumstance, lying about her past claims would essentially show that she feels guilty about abusing the very system she wants to enshrine.

Monetary Expansion and the 1%

One-percenter Mark Spitznagel, a California hedge-fund founder, shines an Austrian spotlight on a major source of inequality:

A major issue in this year's presidential campaign is the growing disparity between rich and poor, the 1% versus the 99%.

The source is not runaway entrepreneurial capitalism, which rewards those who best serve the consumer in product and price. (Would we really want it any other way?) There is another force that has turned a natural divide into a chasm: the Federal Reserve. The relentless expansion of credit by the Fed creates artificial disparities based on political privilege and economic power.

Spitz (I'm sure his friends call him that) reviews the Austrian-school economics criticism of the Fed that its methods of providing liquidity are not neutral, as most simple economics models construe them. Instead, lower interest rates or quantitative easing are directly beneficial to a few big-dollar players who have access to the Fed's open market operations. Those with a financial stake in Goldman Sachs, Bank of America, and a few others disproportionately benefit from expanding monetary supply.

Some important qualifications that Spitz leaves out: when the Fed expands the money supply, inflating the currency slightly, those who own a lot of dollars or dollar-denominated assets lose wealth, and those who have a lot of dollar debt see the real value of their debt shrink. So loose money is not just a giveaway to the wealthy, it's also a form of debt forgiveness. In fact, with inflation of about 2% per year, we approximate the Bible's Year of Jubilee: after 50 years, one's entire debt is forgiven.

Secondly, when the Fed has a contractionary policy - high interest rates - won't that have an equal-and-opposite effect, hurting most those who rely directly on short-run Fed loans to play high-finance games?

To me, a bigger issue is overall government indebtedness, which leads to a long-run transfer of wealth to the wealthiest. It's a triviality that in a model economy with patient & impatient individuals, the patient ones will eventually hold all the wealth (this is also Biblical, incidentally). If the government approximates a representation of the entire country, and it consistently borrows from and pays interest to the 1%, why should we be surprised to see wealth inequality growing? If we, as society, want to shift consumption from the future to the present, should we be surprised when we arrive in the future and find ourselves poor?

Major Choices

One of the biggest advances in economics in the last decade came courtesy of newly available data on college majors. A spate of papers has examined this data using sophisticated econometrics. In brief: college major matters more than we thought it did.

The WSJ has a handy table summarizing the data. And you won't be surprised to see which major is on top.