Archive for January, 2010

Federalism: New Arguments for an Old Idea

Wednesday, January 27th, 2010

Two good pieces have come out recently advocating distributing power away from the federal government in Washington towards the states and the counties: one by Alex Castellanos and the other by Arnold Kling. Castellanos writes to give the GOP a message for the 2010 electoral cycle that can reach the ears of the Millennial generation. He puts the ideas of individual liberty and free markets in terms of networks, such as Facebook. Free markets work, he argues, because their network-like structure allows coordination among individuals more efficiently than a hierarchical, top-down, command structure.

Kling, on the other hand, notes that those hierarchical command structures simply don’t work. A national government must institute a uniform policy, which can never satisfy everyone in a large country like the United States. State governments can create a variety of policies, each tailored to the different preferences of their residents. State and local governments can also respond more quickly to policy challenges because of the reduced chain of command.

Yet, neither of these articles presents any radically new ideas. James Madison outlined the federal nature of the Constitution in Federalist No. 10 and Federalist No. 39. In the Federalist No. 10, Madison argues for a large nation, so as to diminish the influence of any one faction in the body politic. With many competing interests, a government could not pass laws that benefited one group at the expense of another, such as the recent Senate heath care bill where all 49 states would pay for the costs of Nebraska’s heath care.

In Federalist No. 39, Madison explains how the Constitution conforms to republican principles and creates a government that is neither wholly federal nor wholly national. Though the federal government derives some of its powers directly from the people, but it mostly coordinates actions between the states and leaves most of the powers of government to the states:

The idea of a national government involves in it, not only an authority over the individual citizens, but an indefinite supremacy over all persons and things, so far as they are objects of lawful government. Among a people consolidated into one nation, this supremacy is completely vested in the national legislature. Among communities united for particular purposes, it is vested partly in the general and partly in the municipal legislatures. In the former case, all local authorities are subordinate to the supreme; and may be controlled, directed, or abolished by it at pleasure. In the latter, the local or municipal authorities form distinct and independent portions of the supremacy, no more subject, within their respective spheres, to the general authority, than the general authority is subject to them, within its own sphere. In this relation, then, the proposed government cannot be deemed a NATIONAL one; since its jurisdiction extends to certain enumerated objects only, and leaves to the several States a residuary and inviolable sovereignty over all other objects.

You can find the complete Federalist Papers here: It’s like an owner’s manual for the Republic.

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How Much is a Zero Rupee Note Worth?

Tuesday, January 26th, 2010

The World Bank has post on one of its blogs explaining the rise of zero rupee notes in India as a protest against bribery and corruption in the governement. The notes are printed by 5th Pillar, a local NGO. 5th Pillar has distributed over a million of the zero rupee notes, which have effectively reduced corruption in India. For example, one old lady outside Chennai City needed to pay a bribe to obtain a title for the land she owned.

Fed up with requests for bribes and equipped with a zero rupee note, the old lady handed the note to the official. He was stunned. Remarkably, the official stood up from his seat, offered her a chair, offered her tea and gave her the title she had been seeking for the last year and a half to obtain without success. Had the zero rupee note reached the old lady sooner, her granddaughter could have started college on schedule and avoided the consequence of delaying her education for two years. In another experience, a corrupt official in a district in Tamil Nadu was so frightened on seeing the zero rupee note that he returned all the bribe money he had collected for establishing a new electricity connection back to the no longer compliant citizen.

Is the zero rupee note money? It’s not official in any way, and, by definition, it isn’t worth anything. Does it function as a store of value when it is intended to store no value? (Think about that one for a while.)

Yet, I say that it does function as money, at least in the case above. The old woman presented a object worth the advertised price of the service she wanted and exchanged it for that service. I doubt that she could have gotten the same effect out by writing “zero rupees” on a piece of paper and handing it to the official.

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Coakley Doubles Down on Stupid Comment

Saturday, January 16th, 2010

Martha Coakley, the Democrat candidate for Senate in Massachusetts, spoke on a radio show earlier this week about hospital employees who refuse to provide certain types of care (emergency contraception, abortion) because of religious objections:

Ken Pittman: Right, if you are a Catholic, and believe what the Pope teaches that any form of birth control is a sin. ah you don’t want to do that.

Martha Coakley: No we have a separation of church and state Ken, lets be clear.

Ken Pittman: In the emergency room you still have your religious freedom.

Martha Coakley: (……uh, eh…um..) The law says that people are allowed to have that. You can have religious freedom but you probably shouldn’t work in the emergency room.

The remark got a lot of negative press, and deservedly so. Separation of church and state implies that the state will not inject itself into matters of religious conscience that do not interfere with its ability to establish a secular order. Those with religious beliefs that condemn contraception should have the freedom to follow their convictions. State Senator Scott Brown, Coakley’s opponent, sponsored an amendment that would have preserved that freedom to a 2005 bill that mandated hospitals provide emergency contraception.

So in response, Coakley released this ad, which reads:

1,736 women were raped in Massachusetts in 2008.
Scott Brown wants hospitals to turn them all away.

Wanting some people to have the option to refuse to provide some kinds of care is not at all the same thing as actively wishing that all hospitals refuse all care to rape victims. Brown’s campaign just held a press conference announcing they will press charges in response to the flyer.

In this country, health care is the free exchange of a service and money between two individuals. If the doctor or nurse isn’t willing to provide a service, he or she should not be compelled to do so.

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White House Drops “Saved or Created”

Tuesday, January 12th, 2010

The administration has decided to change the way in which it counts the number of jobs affected by stimulus spending. Previously, it used the measure “saved or created,” which counts jobs that would have been lost or would never have existed without stimulus spending. Since we don’t know for sure what would have happened without the stimulus, the measure depended heavily on subjective projections.

The new measure tracks the number of jobs funded by the stimulus, a much more objective count. However, it isn’t particularly useful for gauging the stimulus’ effectiveness. The government is just one employer among many; the number of new employees it has signals the strength of the economy no more than the number of new hires at Google or Citibank. Additionally, the fact that the government funded a job doesn’t mean that the new employee creates anything of value. For example, spending $1.1 million dollars to fix a guard rail in a little used stretch of Oklahoma highway doesn’t add much value to the economy. Google could probably put that $1.1 million to use more effectively.

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December Jobs Report: Are We Facing Structural Unemployment?

Sunday, January 10th, 2010

The Bureau of Labor Statistics reported Friday that the economy lost 85,000 jobs in the month of December. The unemployment rate stayed unchanged at 10.0 percent. Now, two years after the start of the recession, the National Bureau of Economic Research has not yet declared it over, which makes it the longest recession since the Great Depression of 1929-1933. Recessions have averaged about 11 months in length since the creation of the Federal Reserve. The latest jobs report indicates that unemployment might remain high because of a structural, rather than a cyclical, shift in employment.

Cyclical unemployment stems from businesses’ inability to forecast the ebb and flow of demand. In times where demand unexpectedly decreases, inventories go unsold, so businesses produce less and lay off employees. When demand returns, they hire workers to fill the same positions and replenish their inventories. Structural unemployment occurs when demand shifts permanently. The jobs that existed before the recession won’t return in the next phase of the business cycle, nor will the cycle progress until new businesses or industries to meet the permanently shifted demand.

In December, 6.1 million unemployed workers had been without a job for 27 weeks or longer — up from the month before and over twice as many as in 2008. Long-term unemployment accounts for 40 percent of the jobless. Additionally, 2.5 million people were marginally attached to the labor force, i.e. they had looked for a job in the past year, but not in the past month. More than a third of those marginally attached had given up looking for work because they believe that there are no jobs available for them. The underemployment rate, which includes the workers with part-time jobs who want full-time jobs, stands at 17.3 percent — up from 17.2 percent last month and 13.7 percent a year ago. All of these points are consistent with structural unemployment where jobs lost do not return.

If that’s the case, then government subsidies to struggling firms prevent the recovery by delaying the shift from failing to productive firms and industries. Welfare transfer payments to individuals won’t help people find jobs in the new industries as much as increased funding for education and retraining.

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Are Economists Cheapskates, or are Cheapskates Economists?

Thursday, January 7th, 2010

Justin Lahart has a great piece in the Wall Street Journal chronicling stories of economists who practice what they preach by acting “rationally” — maximizing personal utility. For instance, John Sigfried, a professor at Vanderbilt, bought a black car instead of a gray one, even though he preferred gray, because it was $100 cheaper. Robert Hall, a Stanford professor, wants to hire someone to trim his Christmas tree so he can use the time for more productive things.

Economists typically posit that people act in their own interest — they maximize their own utility, or happiness. It explains why studies have shown that economists free ride — get others to pay for things from whcich they themselves benefit — and contribute less to charity. A purely self-interested person would never give to charity; yet people give to charities all the time.

All of which give rise to the question: are economists cheap because they assume people are self-interested, or do self-interested people gravitate to studying economics?

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Colorado’s Minimum Wage Falls

Tuesday, January 5th, 2010

On New Years’s Day, Colorado lowered its minimum wage, the first state in the nation to do so. Colorado ties its minimum wage to the state’s consumer price index, which fell 0.6% over the past year. To accurately adjust for the change in prices, Colorado’s minimum wage should have fallen four cents, from $7.28 to $7.24, but it cannot go below the federal minimum of $7.25.

“It is hard to make it, hard to get by,” said John Mullen, 50, an out-of-work construction worker waiting for a bus on a bitterly cold New Year’s Eve in Denver. Mullen said he remembers making minimum wage at a factory and having enough for small comforts.

“You’d get paid every Friday, have enough money to go catch a poker game or take your girl out to a dinner,” Mullen said. “But the law is the law. What can you do?”

Others said that even a tiny drop for the lowest-paid workers will be felt.

“Yeah, it’s 3 cents an hour. But that 3 cents an hour adds up at the end of 12 months,” said 59-year-old Gary Foeller of Denver, a house painter who hasn’t worked in weeks but usually earns more than the minimum wage when he has a job.

The 3-penny difference would amount to about $62 a year for someone who works 40 hours a week and doesn’t take time off.

But remember, the minimum wage decreased because the price of goods fell. So while someone making the minimum would earn $62.40 less over the year, that same person would, on average, spend $83.20 less to purchase the same goods. In effect, someone making the minimum will have an extra $20.80 to spend over the year.

While the nominal minimum wage — the minimum wage in terms of dollars — might have fallen, the real minimum wage — the minimum wage in terms of goods — has risen.

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