Winner Take All

In a review of the book Winner-Take-All Politics, Ezra Klein notes that the gap between rich and poor has grown not because of economic changes, but because of political ones:

Perhaps the most shocking study the authors cite comes from Martin Gilens, a political scientist at Princeton University. Gilens has been collecting the results of nearly 2,000 survey questions reaching back to the 1980s, looking for evidence that when opinions change, so too does policy. And he found it—but only for the rich. “Most policy changes with majority support didn’t become law,” Hacker and Pierson write. The exception was “when they were supported by those at the top. When the opinions of the poor diverged from those of the well-off, the opinions of the poor ceased to have any apparent influence: If 90 percent of poor Americans supported a policy change, it was no more likely to happen than if 10 percent did. By contrast, when more of the well-off supported a change, it was substantially more likely to happen.”


In part, this is because politicians began to need money more than they had before, as the costs of campaigns started skyrocketing. The predictable outcome? Both parties have been relying more on wealthy donors and less on labor unions. Where unions had substantial support among the Republican Party in the middle of the twentieth century—then-Senator Ted Stevens, we learn, ended up backing the labor law reforms that the business community eventually killed—today the Club for Growth primaries anyone in the GOP who forgets to refer to union presidents as “bosses.” Meanwhile, the Democrats have had to embrace the business community to remain financially competitive. As Hacker and Pierson show, Democrats were at a massive funding disadvantage in the 1960s and ’70s. In 1981, the Democratic National Committee was still paying down debt incurred during the 1968 election. There was only one place to turn to close the gap: corporate America, and the (mostly) men who ran it, or lobbied for it. And so they turned there, which meant turning away from the middle class, at least somewhat. As Hacker and Pierson say, today’s Republican and Democratic parties are not black and white. They’re “black and gray.”

It seems we are moving toward a winner-take-all society? Is this what we want? The answer seems to be no:

Behavioral economist Dan Ariely and psychologist Michael Norton recently asked people to estimate wealth inequality in this country. As it happens, most Americans think wealth is distributed vastly more equally than it actually is, and yet they would like something more equal still: When given a choice between various options, they chose the one most closely resembling Sweden, followed by the world in which every quintile has exactly 20 percent of the wealth. Only 10 percent chose our world. But the problem, as Hacker and Pierson point out, is that the political system isn’t listening. It’s time it did.

Read the entire article here.

Thank you, Uncle Sam

In this open letter in the New York Times, billionaire investor Warren Buffett thanks the American government for its work during the financial crisis.

"...You have been criticized, Uncle Sam, for some of the earlier decisions that got us in this [financial] mess — most prominently, for not battling the rot building up in the housing market. But then few of your critics saw matters clearly either. In truth, almost all of the country became possessed by the idea that home prices could never fall significantly.

That was a mass delusion, reinforced by rapidly rising prices that discredited the few skeptics who warned of trouble. Delusions, whether about tulips or Internet stocks, produce bubbles. And when bubbles pop, they can generate waves of trouble that hit shores far from their origin. This bubble was a doozy and its pop was felt around the world.

So, again, Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening. But in this extraordinary emergency, you came through — and the world would look far different now if you had not.

Your grateful nephew,

Warren Buffett"

Read the entire letter here.

How social scientists make people vote

"Before the 2006 Michigan gubernatorial primary, three political scientists isolated a group of voters and mailed them copies of their voting histories, listing the elections in which they participated and those they missed. Included were their neighbors’ voting histories, too, along with a warning: after the polls closed, everyone would get an updated set. After the primary, the academics examined the voter rolls and were startled by the potency of peer pressure as a motivational tool. The mailer was 10 times better at turning nonvoters into voters than the typical piece of pre-election mail whose effectiveness has ever been measured."

...

"Yale political scientists Alan Gerber and Donald Green conducted a study testing the relative effectiveness of basic political tools. As the 1998 elections approached, Gerber and Green partnered with the League of Women Voters to split 30,000 New Haven voters into four groups. Some received an oversize postcard encouraging them to vote, others the same message via a phone call or in-person visit. One control group received no contact whatsoever. After the election, Gerber and Green examined Connecticut records to see who actually voted. The in-person canvass yielded turnout 9.8 percent higher than for voters who were not contacted. Each piece of mail led to a turnout increase of only 0.6 percent. Telephone calls, Gerber and Green concluded, had no effect at all."

Read about "How Behavioral Science is Remaking Politics" in the NYT.

Will we learn the lesson from Japan?

In the United States, a robust recovery remains stubbornly elusive, and Mr. Bernanke is said to be ready to take new, unconventional steps to increase the money supply in order to maintain the uncertain growth of the past year. He is also said by close associates to favor further fiscal measures to stimulate the economy. But in the current political climate, with Republicans poised to make strong gains in the midterm elections while preaching fiscal austerity, the prospect of more federal stimulus spending seems remote, and it is unclear if monetary policy alone will be enough to restore healthy growth.

Partly as a result, some economists now predict that it could take years or even a decade for the American economy to regain the levels of employment and vigor achieved before the 2008 crisis. The growing political pressure for cuts in federal spending — along with plunging consumer confidence and companies that seem more intent on cutting costs and hoarding cash than investing in new growth — have led economists to talk of the United States’ entering a grim new era of austerity.

That is very close to what befell Japan two decades ago, when the seemingly invincible Asian economic juggernaut fell into a deep rut of chronically anemic demand and corrosive price declines, known as deflation, from which it has never fully recovered. The parallels are so striking, and unsettling, that economists are now taking a renewed look at Japan for insights on how the United States can avoid the deflation trap.

“There has been a political and intellectual arrogance in the United States that it won’t happen to us,” said Adam S. Posen, a senior fellow at the Peterson Institute for International Economics in Washington. “We shouldn’t be so smug. You can get there without being Japan."

 From "U.S. Hears Echo of Japan's Woes" in the NYT

The Money Meltdown

I just came across this link--I haven't done much reading yet, but the site promises to be a great place to get a better understanding the financial crisis. I plan on spending some time there this week.

I have listened to Alex Blumberg's "This American Life" show (called "The Giant Pool of Money"), and it helped my wife and me understand the root causes of this debacle, though it was released before the financial system became the debacle it is today. From what I understand, the sequel to the show will be on TAL today, and it will pick up where the last show left off.

The site is http://www.themoneymeltdown.com/

The Subprime Bailout

The City Journal magazine recently pointed out that the recent talks of a government bailout of subprime borrowers--a bailout that basically excuses and forgives the idiocy of people who rolled the dice on their future by taking out subprime mortgages--will be hazardous, not only to those who get bailed out, not only to the housing market, but also to those who were prudent and waited for the market to correct itself.

Viz:

Henry Paulson’s Mortgage Mulligan
A new subprime debacle
Nicole Gelinas
3 December 2007

The Bush administration, federal regulators, and major investment banks are “aggressively pursuing,” in the words of treasury secretary Henry Paulson, a plan to save some mortgage borrowers and their lenders from the consequences of their bad decisions. The deal is called “Hope Now.” It should be subtitled: “Worry Later.”

Part of the pact likely will call for mortgage lenders and their agents—including teetering mortgage giant Countrywide Financial and tottering financial-services giant Citigroup—to change the terms of, potentially, more than $100 billion worth of mortgages that they approved for home buyers over the past few years. In those cases, borrowers, often those who couldn’t afford high monthly mortgage payments or who didn’t have much money for down payments, took on mortgages that carried initial “teaser” interest rates. That is, instead of signing mortgages that required the same monthly payment for 30 years, the borrowers agreed to pay a super-low rate for one or two years, and then to pay a much higher one for the remaining 28 or 29 years. Investment banks then packaged and sold huge bundles of these mortgages to outside bond investors, providing the original lenders with more money to make more such loans.

For these deals to work after the teaser rates expired, the housing market could never falter, because few borrowers could afford the new, higher rates that they would have to pay in a few years. Both the borrowers and the lenders understood this risk, or should have, but they ignored it. They assumed that when the teaser rate came close to expiration, the borrower could simply refinance his loan, taking out a new mortgage with a similar teaser rate—which would buy more time for the borrower and also provide new fees to mortgage lenders and brokers. This scenario collapsed when the housing market started to decline, because a borrower can’t refinance a mortgage loan if his home is worth less than the amount of money he already owes.

Now the Bush administration and the markets are terrified, because they know that nearly half a trillion dollars’ worth of these “adjustable-rate, subprime mortgages” will “reset” over the next year, triggering the higher rates. If a borrower can’t pay the rate and can’t refinance his loan, the normal procedure—under the terms of the agreement that he signed with his lender—calls for the lender’s agent to take possession of the home, writing off the loss and selling the home to another buyer.

But Paulson is devising an escape from this harsh reality. Under his plan, banks and investors will agree to keep the teaser mortgage rates in place, likely for several years, for borrowers who can afford those rates but not the higher “reset” ones. (Hope Now won’t cover all struggling subprime borrowers, though, since many borrowers can’t even afford their starter payments, as high default rates for such mortgages approved in the past two years show.) Paulson’s program is somewhat analogous to the price fixing that economically illiterate governments do to stop inflation—only in this case, the government is fixing rates rather than prices.

The Paulson plan’s flaws are manifold—and fatal. First, it will reward and encourage irrational behavior by future home buyers. It wasn’t logical for people to take on mortgage obligations that they couldn’t afford, but it will become logical in the future if they can reasonably expect that the government and their lenders will bail them out when the going gets tough.

Second, the deal will thwart the market by keeping home prices artificially high. In recent years, laughably easy credit has allowed many people to “buy” homes who otherwise couldn’t have. We’ve had “liar” loans, in which people could claim a false annual income without fear that their mortgage lenders would confirm the figure. We’ve had “Nina” loans (short for “No Income, No Assets”). And we’ve had “Ninja” loans, for “No Income, No Job or Assets.” Consumers, armed with the easy money provided by these lenient arrangements, have pushed home prices to record levels as measured against personal income. The decline of home prices, then, was both inevitable and healthy. But Hope Now, by placing an artificial floor under home prices, will penalize first-time buyers who did the right thing: not taking out mortgages that they knew they couldn’t afford, but renting instead until prices fell and they could afford homes with more conventional mortgages.

Third, the deal may hurt some borrowers it was meant to help, by encouraging homeowners who can barely afford their teaser rates to continue making those monthly payments in the hope that the property market will recover quickly and allow them to sell their homes. If that doesn’t happen, they’ll be right back where they started in a few years. While it would cause them short-term pain, they’d likely be better off losing their houses and renting cheaper homes. They could then regroup, save money, and rebuild their credit to buy an affordable property, with a more conventional mortgage, a few years down the road.

There are three more points, but they're a little more esoteric. Read them here.

The Feast of the Wingnuts

Jonathan Chait recently wrote an article in The New Republic called "The Feast of the Wingnuts." It's an unfortunate title for an interesting article, which is excerpted from his recent book which also sports an unfortunate title: "The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics."

The article discusses, with seemingly clear logic, how tax cuts don't really help the economy. It's so simple even an innumerate carbon blob like me can understand it.

The supply-siders believe that, if it were not for Reagan's tax cuts, the economic malaise of the late '70s would have continued indefinitely. They believe that economic history is a function of tax rates--they insisted that Bill Clinton's upper-bracket tax hike must cause a recession (whoops), and they believe that the present economy is a boom not merely enhanced but brought about by the Bush tax cuts.

It doesn't take a great deal of expertise to see how implausible this sort of analysis is. All you need is a cursory bit of history. From 1947 to 1973, the U.S. economy grew at a rate of nearly 4 percent a year--a massive boom, fueling rapid growth in living standards across the board. During most of that period, from 1947 until 1964, the highest tax rate hovered around 91 percent. For the rest of the time, it was still a hefty 70 percent. Yet the economy flourished anyway. None of this is to say that those high tax rates caused the postwar boom. On the contrary, the economy probably expanded despite, rather than because of, those high rates. Almost no contemporary economist would endorse jacking up rates that high again. But the point is that, whatever negative effect such high tax rates have, it's relatively minor. Which necessarily means that whatever effects today's tax rates have, they're even more minor.

This can be seen with some very simple arithmetic. As just noted, Truman, Eisenhower, and Kennedy taxpayers in the top bracket had to pay a 91 percent rate. That meant that, if they were contemplating, say, a new investment, they would be able to keep just nine cents of every dollar they earned, a stiff disincentive. When that rate dropped down to 70 percent, our top earner could now keep 30 cents of every new dollar. That more than tripled the profitability of any new dollar--a 233 percent increase, to be exact. That's a hefty incentive boost. In 1981, the top tax rate was cut again to 50 percent. The profit on every new dollar therefore rose from 30 to 50 cents, a 67 percent increase. In 1986, the top rate dropped again, from 50 to 28 percent. The profit on every dollar rose from 50 to 72 cents, a 44 percent increase. Note that the marginal improvement of every new tax cut is less than that of the previous one. But we're still talking about large numbers. Increasing the profitability of a new investment even by 44 percent is nothing to sneeze at.

But then George Bush raised the top rate to 31 percent in 1990. This meant that, instead of taking home 72 cents on every new dollar earned, those in the top bracket had to settle for 69 cents. That's a drop of about 4 percent-- peanuts, compared to the scale of previous changes. Yet supply-siders reacted hysterically. National Review, to offer one example, noted fearfully that, in the wake of this small tax hike, the dollar had fallen against the yen and the German mark. "It seems," its editors concluded, "that capital is flowing out of the United States to nations where 'from each according to his ability, to each according to his need' has lost its allure."

Here is where a bit of historical perspective helps. If such a piddling tax increase could really wreck such havoc on the economy, how is it possible that the economy grew so rapidly with top tax rates of 70 and 91 percent? The answer is, it's not. It's not even close to possible. All this is to say that the supply-siders have taken the germ of a decent point--that marginal tax rates matter--and stretched it, beyond all plausibility, into a monocausal explanation of the world.

Again, I agree with Motorhead. EAT THE RICH!

Read the entire article here.

The Oracle of Omaha Speaks

The United States' second-richest man has delivered a blunt message to the Bush administration: he wants to pay more tax.

Warren Buffett, the famous investor known as the "Sage of Omaha", has complained that he pays a lower rate of tax than any of his staff - including his receptionist. Mr Buffett, who is worth an estimated $52bn (£25bn), said: "The taxation system has tilted towards the rich and away from the middle class in the last 10 years. It's dramatic; I don't think it's appreciated and I think it should be addressed."

During an interview with NBC television, Mr Buffett brandished an informal survey of 15 of his 18 office staff at his Berkshire Hathaway empire. The billionaire said he was paying 17.7% payroll and income tax, compared with an average in the office of 32.9%.

"There wasn't anyone in the office, from the receptionist up, who paid as low a tax rate and I have no tax planning; I don't have an accountant or use tax shelters. I just follow what the US Congress tells me to do," he said.

Read the entire article here.

Simplify

Every year when I teach Walden, I begin asking myself some deep questions: Am I doing what I want to do with my life? Am I living deliberately or robotically? Am I spending my life pursuing "stuff," forgetting the truly valuable things in life?

Thoreau was a crank, a jerk, a hypocrite, but that does not change the fact that almost everything he said was true. When many think of Thoreau and Walden, they think he suggested we all drop out of society and go live in the woods as a hermit. The fact is, Thoreau was not a hermit--he walked to town almost every day. Rather, he decided to simplify his life, so he could determine truly what his life should be--that is, once you strip away all the unnecessaries of life, you will, by definition, be left with only what is necessary.

And, what is necessary for you must, of course, be different that what is necessary for me. Thus, Walden was simply a call for every one of us to simplify our life, determine what our goals are, and advance confidently in their direction.

Perhaps my favorite quotation from Walden is this:

I went to the woods because I wished to live deliberately, to front only the essential facts of life, and see if I could not learn what it had to teach, and not, when I came to die, discover that I had not lived. I did not wish to live what was not life, living is so dear; nor did I wish to practise resignation, unless it was quite necessary. I wanted to live deep and suck out all the marrow of life, to live so sturdily and Spartan- like as to put to rout all that was not life, to cut a broad swath and shave close, to drive life into a corner, and reduce it to its lowest terms, and, if it proved to be mean, why then to get the whole and genuine meanness of it, and publish its meanness to the world; or if it were sublime, to know it by experience, and be able to give a true account of it in my next excursion.

Every year I learn something from reading Walden. Reading it also puts me on the lookout for modern day Thoreaus, like this guy.

Down a rambling residential road on the outskirts of Sebastopol, the dream house sits like a testament to discriminating taste.

This dream house is the love child of artist-builder Jay Shafer, who lovingly hand-crafted it. The stainless-steel kitchen, gleaming next to the natural wood interior, is outfitted with customized storage and built-ins. From his bed, Shafer can gaze into the Northern California sky through a cathedral window. In his immaculate office space, a laptop sits alongside rows of architectural books and magazines -- many featuring his house on the cover. And from the old-fashioned front porch, he can look out on a breathtaking setting: an apple orchard in full bloom.

But in an era when bigger is taken as a synonym for better, calling Shafer's home a dream house might strike some as an oxymoron. Why? The entire house, including sleeping loft, measures only 96 square feet -- smaller than many people's bathrooms. But Jay Shafer's dream isn't of a lifestyle writ large but of one carefully created and then writ tiny.

Read the entire article (and see pictures of the house) here.

Education reform

I found this entry in my "drafts" folder, and I swore that I posted this, but I couldn't find it anywhere. As you can tell, I spent a lot of time on this, so I thought I should at least publish it once. However, knowing how often I change my mind, I might not even believe what I wrote anymore--heck, I wrote it in February of last year (as Emerson said, "A foolish consistency is the hobgoblin of little minds"). Also, the article I refer to in this post is very long, but ultimately fascinating. Print it and read it later.

Enough of my yakkin'...let's boogie.

I just read the most ridiculous recommendation for fixing public schools. It was published in Walrus Magazine, a Canadian magazine that has published, in the past, some wonderful pieces, including one on the economic value of the online game EverQuest. The article shows how an economist calculated the true economic value of the entirely virtual world of the game. The economist:

gathered data on 616 auctions, observing how much each virtual item [from the EverQuest game] sold for in U.S. dollars [on eBay]. When he averaged the results, he was stunned to discover that the EverQuest platinum piece was worth about one cent U.S. — higher than the Japanese yen or the Italian lira. With that information, he could figure out how fast the EverQuest economy was growing. Since players were killing monsters or skinning bunnies every day, they were, in effect, creating wealth. Crunching more numbers, Castronova found that the average player was generating 319 platinum pieces each hour he or she was in the game — the equivalent of $3.42 (U.S.) per hour. "That's higher than the minimum wage in most countries," he marvelled.
Then he performed one final analysis: The Gross National Product of EverQuest, measured by how much wealth all the players together created in a single year inside the game. It turned out to be $2,266 U.S. per capita. By World Bank rankings, that made EverQuest richer than India, Bulgaria, or China, and nearly as wealthy as Russia.
It was the seventy-seventh richest country in the world. And it didn't even exist.

This is a great article, and I expect great things from the magazine. However, the piece by editor and publisher Ken Alexander is one of the silliest things I have ever read. He proposes to solve the education crisis by a three pronged effort. I understand he is attempting to solve Canada’s education crisis, but I am assuming that Canadian education—and Canadian children—are not that different from the American versions.

First, he suggests replicating the small university seminar at the high school level. All classes would be conducted in this way. Like Alexander, I have fond memories of seminar classes, and I would love to teach in such an environment. However, if you have ever taught freshman, you realize what a silly idea this is, but I’ll forgive him for his naivete.

Next, he suggests good old fashioned tracking (grouping by ability level). Most schools already do this here, what with honors and AP classes.

Last, he suggest taking away all class choices in high school, submitting students to a core curriculum of only English, history, geography, math, science, art and physical education. This is the craziest idea of all. How does one propose teaching failing students to read by simply changing the subjects they are taught? The problem is not a lack of content, the problem is a lack of basic skills.

My friend Mark has a freshman class in which only one student is reading at grade level. These kids do not need more English classes, they need more rigor. They need to learn to read. This will not be done by simply giving them more classes. This will be done by radically altering how schools are structured. First of all, the idea of grade levels must be abolished in favor of skill levels. Ninth grade, as a concept, is simply a grouping based on age. Some ninth graders read at a fourth grade level, while others read at a post-high-school level. We must group them according to skill.

Next, the key is to have high expectations. If parents have low expectations for their students at home, we must have high expectations for them at school. These kids in Mark’s class who are all reading well below grade level will graduate from high school still reading below grade level because we have determined that everyone deserves a high school diploma, and that you should get one just for showing up. We can no longer blame parents for not educating their children. We must have a high standard.

The key to education reform lies in the following paradox: We will not raise achievement in this country until we increase failure. Too many people are graduating. I once had a student who had more credits waived than he had earned in his high school career. We did him no favors; he is almost thirty, and he is still a clerk at Blockbuster. We should have told him he will not graduate. He would have been bereft, sure, wondering what he was going to do with his life without a diploma. Then he would, maybe for the first time, have had a chance to pull himself up by his bootstraps, to determine to make himself better. The students in school these days skate by with D’s and we keep passing them from class to class, from grade level to grade level. A colleague of mine at work calls this the doctrine of the Infinite Last Chance: kids know that they have no deadline, no point of no return. Fail English? Take it again. Fail it again? Take summer school. Fail summer school? Do an online class. Fail the online class? We’ll figure out a way for you to get that diploma. Until we determine that, at some point, students will have reached the end of the line, we will not solve the education crisis. In ensuring that everyone gets a diploma, we have lowered the standard so much that students can pass it without effort.

The difficulty with this, though, is that, once we determine so many students need remediation, we must then be prepared to give them the instruction they need. That is why we take the students reading at grade level and put them in classes of 35, maybe even adopting the seminar idea, while we take students reading below grade level, put them in smaller classes, and give them intense reading instruction until they are up to grade level.

We also have to be prepared to allow our graduation rates to drop and not to panic. A sudden drop in graduation rates would be a PR nightmare. But, with patience and clarity, we could demonstrate that the falling rates represented true school reform.

Another possibility is a graduated diploma. One diploma could be called a Certificate of Mastery for the person who (a) is reading at or above grade level, (b) has passed the state’s standardized test for graduation requirement, (c) maintained a certain grade point average, and (d) earned a certain number of credits. That diploma would mean something. All others would receive a certificate of completion.

The fact is, we don’t need tougher material. This just makes the kid with low skills fall further behind. An analogy: You don’t take a second string JV player and put him in a varsity game. You have him learn one skill at a time: one, then another, then another, until he is ready to step on the field. That is how all instruction works.

In that sense, all of the exit tests across the nation have the right idea. Let’s have a diploma mean something again. Let’s have it signify that a person has these basic skills.

Getting rid of electives such as woodshop is not the answer. Students across the nation already have over 150 hours of English instruction per year in high school. That should be enough time to teach the skills they need. If we expect the students to learn at a brisk pace, if we hold them accountable for that learning, and if we make them responsible for learning it, we might have a revolution on our hands.

Our goal should not be every kid passing. No Child Left Behind is the antithesis of what our goals should be. We must be prepared to leave children behind. If every kid is passing, we are doing something wrong. Think of your graduating class you had in high school. Did every student deserve to pass high school? I can think of a number of my classmates who needed help, who needed motivation, because they didn’t learn a darn thing. And they wore the mortarboard. Did we do them a service by giving them a diploma they didn’t earn?

At the end of the article, Alexander writes, “As part of the exit criteria from high school, all students should be paraded down to the cafeteria, given five or six sheets of blank paper and two hours, and told: ‘Okay, one of the entrance requirements to university and college is a ten-paragraph essay on the colour red. Take your time.’ For regular readers, such an assignment might even be pleasurable. Either way, it represents a good test of accumulated skill and a clear indicator to colleges and universities of student ability.”

This is the stupidest idea I have ever heard. I love to read and write, but if somebody asked me to do such a stupid assignment, and told me that my graduation depended on it, I would laugh, then puke. Never again in any person’s history will he/she be asked to write such a ridiculous piece of prose. Writing it in an acceptable fashion proves nothing except a facility for bullshitting. Is this the best you could do for an exit test, Ken? This idea is not about standards based learning. It’s not even about learning for its own sake. It’s about the ability to write on a topic nobody cares about (I teach advanced kids, and I couldn’t imagine grading the pieces of shit the students would produce based on a prompt like that). It’s about writing something that is unnecessary and ridiculous--much like Ken Alexander’s editorial.