Hillarious video: How the World Economy Works

Semi-Daily Reads: 5/28

1. Reading, Ranting, And Arithmetic--Christopher Dickey at Newsweek

2. The Economics of Immigration Are Not What You Think--Robert Shapiro at NDN

3. Development Aid in Five Easy Steps--Jeffery Sachs at Project Syndicate. 

Enjoy, and have a great weekend!

Government Waste and Cheap Education

The long awaited moment came today when I found out that I would not be paying for my education next year.  For me, this means that I will graduate with a degree from UC Berkeley without ever (seriously ever) paying a dollar to any college that I have attended. I’ve had to pay for student government fees, health care, and textbooks, but never a dollar in tuition. West Valley is still hounding me for the $76 I owe them—the cumulative total cost of my three years there.

While this is exciting for me, my purpose here is to provide a basis for altering the direction of conversations about government waste as a political and economic issue. 

The political side comes from the fact that many people are eager to criticize the government’s (mis)management or subsidizing of public institutions like Medicare, schools, the post office, welfare, or Social Security. Many people use specific personal examples or stereotypes. The problem with this reasoning is that the government has an almost four trillion dollar budget. So an example of a friend siphoning an extra $50/ week in his unemployment check, or the example of a single mother on welfare who spends her “extra” money on Lotto tickets don’t begin to explain how much the government actually does; not even if there are millions of unemployed people and welfare recipients wasting money. 

The truth of the matter is that many more people have succeeded not despite the government, but because of it. These success stories however, don't grab headlines. The media doesn’t cover the commencement of tens of thousands of students at publicly funded universities in this country, but everyday they find a story of some waste in the government. 

Another common argument about government spending is that if the government just gives stuff away, people won’t value it. A recent TED talk by Esther Duflo (highly recommended) provides another example of how this "economic" reasoning is baseless.  Duflo talks about ways to alleviate poverty in Africa by studying the most cost-effective ways to get Africans to use bed nets (to prevent mosquito bites) and deworming medications—two factors that have been shown to increase lifespan and surprisingly, school attendance.  After comparing various strategies, she found the most effective way to get people to use these items in the long and short run was to make them easily accessible and then pay people to use it. In America, this means limiting the economic, medical, and social/cultural barriers to education at all levels. 

What the Africa example and the thousands of graduates who used financial aid show is that if you give someone a little bit, they often want more; meaning that if you provide someone a high quality high school education for free, they will be more likely to go to college. If you provide an unemployed person training in a new skill, they will be more likely to use it than stay on unemployment for fun. While this runs contrary to basic economics, it seems to correspond nicely with reality.

The take-home point is that while the government is certainly not perfect at distributing resources, I think the recently developing anti-government hatred seems to have lost touch with reality.  So when people complain about the millions of dollars that have been wasted, remind them there are thousands of students who have made a great use of their tax dollars. The same students who will soon be paying for their social security. 

Why the Arizona Legislation Doesn't Really Matter

A friend of mine is currently engaged to someone from Central America who is not here legally. Let’s call him, Bob. Now, I’ve always argued that immigrants are the ones getting a raw deal by working here illegally because they pay taxes, yet don’t receive the benefits of government service programs.  To be fair, the numbers on the issue depend on where they come from.  The most recent information from Obama’s Council of Economic Advisors indicates that over the short run, immigrants receive more than they pay; but over the long run they contribute far more.  On a macro-level, year over year, undocumented workers pay $424 million more in taxes than they receive in benefits.  

The question from me to Bob was how he pays taxes without immigration enforcement officers knocking on his door the next day.  Apparently, the IRS knows that he is currently using a fake social security number, so they issued him an Individual Tax Identification Number (ITTN). He explained that just like most people, he trudges down to H&R block every March or April to pay his taxes. He even pays for social security, medicare, and unemployment insurance, even though he will never be eligible for these benefits. In general illegal immigrants also pay all sorts of other taxes as well, including sales taxes, gas taxes, liquor and tobacco taxes, and any other consumption tax you can think of.

The reason I bring this up is that it raises the questions of motives behind new anti-immigration legislation. If the government is not interested in policing hard-working, tax-paying, undocumented workers, who are they interested in policing?  This is where the Arizona legislation is quite revealing.  It specifically targets the laborers who stand outside Home Depot.  And it targets people who are driving or walking the street who look brown.  The goal is to find and deport visibly poor immigrants. The legislation passed by targeting the stereotype of an undocumented worker, and allowing the media extrapolate this stereotype (guy outside Home Depot) to all immigrants. The real argument over immigration has already been won by the racists and bigots. The debate should be about how to integrate immigrants; instead it’s about how to get these lazy, good-for-nothing slackers out of the country. 

This debate reminds me of Reagan’s welfare queen and George H.W Bush’s Willie Horton campaign commercial. The goal of these ads and the coverage surrounding the AZ legislation is not to create racism, but to reinforce and provide justification for people’s preconceived racist stereotypes about certain groups. And just as people already assume that those on welfare are all welfare queens, people will continue to presume that all immigrants are tax cheating, day-laborers.  While the legality of the Arizona legislation will ultimately be decided by the Supreme Court, the real debate in the minds of most American’s has already been won… at least for the foreseeable future. 

Some finance reform talk

Creating constructive financial regulations is not an easy task.  Banks spend hundreds of millions of dollars lobbying to weaken regulations, and then spend hundreds of millions more attempting to circumvent them. Complicating the problem is that bureaucrats and law makers often have little to no understanding of the complexities involved; and the ones that do have the necessary understanding are often past, or likely to be in the future, employees of the banks they are regulating. 

I have found two major schools of thought regarding how to address this dilemma.  One is to focus less on regulating banks, and instead concentrate on setting up the necessary infrastructure to clean up the mess should another crash happen. Greg Mankiw calls it crisis insurance.  While I think this could be part of a solution, the difficulty is how to effectively implement it.  For the past thirty years banks have justified taking on an extraordinary amount of risk because the "models" they were using to value complex derivatives didn't account for the possibility of a decline in housing prices.  The problem then for future crisis insurance is how to value the premiums (based on riskiness), when it has just been proven that both banks and regulators do not know how to value risk properly.  This just means that taxpayers will be stuck holding the bag again.

The other main solution is to eliminate big banks; break them up. The first part of this is to restore Glass-Steagall, separating commercial and investment banks. The second part is to cap the size of all banks. The general idea is that small banks can't cause systemic risk. I like this idea a bit more because it accepts the ineptitude of both bankers and the government to regulate the industry. The problem with such strong wide-ranging regulations is that banks will immediately have a tremendous incentive to drill holes in them through lobbying, etc.... So they become unsustainable, not to mention, that they are politically untenable right now.  

The compromise that passed the senate yesterday was that derivatives will be traded on a regulated exchange, hedge funds will be regulated, and banks will not be allowed to invest their own money without benefiting their clients, amongst others. 

In the long run, I am not as worried as most people. Regulators will catch up with finance; it's only a matter of time. Banks have been attempting to circumvent regulations for two hundred years, and this round of fighting probably won't be any different. My main concern is making sure democracy and the competitive market are not hijacked in the meantime.  Banks have been able to insulate themselves since the era of deregulation through lobbying and large-scale purchases on the congress and bureaucracy.  Separating this link would go a long way to improving the prospects of successful regulation.  To do this, the government must have the incentive to regulate and stop the build up of these massive mega-monopoly banks. The simplest and most effective solution is campaign finance reform.  Government officials have become beholden only to those who pay for their campaign, which unfortunately is not most of us. 

Some Links:
1. A good overview of the crisis insurance argument --Greg Mankiw
2. A good overview of the break 'em up argument --Robert Reich
3.  One of the first papers to address this problem -- George Stiglitz