House of Cards' Ridiculous Social Security Plot
News came today that in the president's latest budget proposal he won't be asking to cut Social Security benefits by switching to the use of the chained CPI as its preferred inflation index.
As a matter of practical politics, that's not even remotely surprising. That was the White House's preferred way to cut Social Security benefits, but cutting Social Security benefits was something the White House wanted to do in the context of a grand bargain on the budget deficit. Now that the budget deficit is falling and the grand bargain talks are off, it's off the table.
Which brings me to House of Cards.
There's a lot of implausible plot threads in this show, but the treatment of Social Security in Season 2 is politically insane. You have a Democratic administration working furiously to cut Social Security not in exchange for some big GOP concessions, but just to avoid a government shutdown. In the real world, there's absolutely nothing politics-minded Democrats would rather see happen than have Republicans shut the government down in an effort to force the country to swallow Social Security cuts. I saw some liberal wags on Twitter saying it was fitting that an amoral sociopath like Frank Underwood would lead the charge for cuts, but liberals shouldn't sell themselves short here. The liberal position on Social Security is very popular. A purely cynical Democrat would never want to give up a great issue for the country.
But even worse, the actual cut being contemplated is ridiculous. Underwood starts the negotiation by proposing to raise the retirement age to 67, which is where it already is under current law. Then a hard-line Republican pushes him to agree to 68. The problem here is that 30 years ago congress already agreed to gradually raise the age to 67. The change to 68 is tiny—far too tiny for anyone to pick a huge political fight over.
Colorado Pot Tax Proving More Lucrative Than Expected
About a month into Colorado's adventure in legal marijuana commerce, Gov. John Hickenlooper is raising estimates of how much tax revenue it will bring in from $70 million all the way up to $98 million.
It is worth noting, though, that you really want to think about the fiscal impact of legal pot in a more comprehensive way. A key question about the public health impact of legal marijuana is how does it change alcohol consumption patterns. To the extent that legal marijuana displaces legal booze purchases, you're going to see an offsetting decline in alcohol tax revenue. Which would be fine—a big win for public health, in fact—but not quite the financial bounty states may be hoping for. Alternatively, if legal pot leads to a complementary surge in beer drinking, you'll have lots of tax revenue but potentially large problems.
De Blasio Gets It on Density
Dana Rubinstein reports on some encouraging marks Bill de Blasio made while addressing a New York City real-estate developers group:
Mayor Bill de Blasio wants to build and preserve more affordable housing in ten years' time than Michael Bloomberg did in 12, and yesterday he told a group of real estate executives that "height and density" will prove key to that mission.
"It's going to take a willingness to use height and density to the maximum feasible extent. ... I don't have a hang-up about it," said de Blasio today. "I think it's necessary to do what I'm here to do."
That's great to hear. What will be really interesting to see will be whether de Blasio is able to leverage his ties and credibility with folks who aren't real-estate developers to get some of this done. A populist with a left-wing persona may be the right person to build the political coalition around more development.
Please Stop Giving Giant Donations to Rich Universities
Kenneth Griffin went to Harvard. Then he got rich running a hedge fund called Citadel. Now he's giving $150 million of that fortune to Harvard, which I think is a terrible idea.
Let's think about it this way. I don't have Kenneth Griffin money, so I can't give anyone $150 million. But let's say I was feeling inspired to give someone $1,500 tomorrow. Who should I give it to? That's a difficult question to answer. Should I give it to Kenneth Griffin? Nope! That's a really easy question to answer. You don't give extra money to Kenneth Griffin because Kenneth Griffin is already really rich.
And guess what: Harvard is already really rich.
But of course while Kenneth Griffin is rich, he's not the richest man in the world. Harvard is the Bill Gates of universities, not the Kenneth Griffin. Harvard's $32 billion endowment is about 50 percent larger than Yale's. Don't get me wrong, giving money to Yale is ridiculous. But giving money to Harvard is doubly ridiculous. And note that when it comes to these fancy universities the official endowment figures are a drastic understatement of the real wealth of the university. Harvard's real-estate assets are mind-bogglingly valuable, for example, but not part of the endowment.
At any rate, in the scheme of misguided donations to Harvard this one seems not-so-awful. It's mostly for financial aid, which is nice. But really you would almost certainly do more good with this money by picking 1,500 people at random and mailing them each a check for $100,000. I will as usual tout GiveDirectly where your money goes to desperately poor rural Kenyans as a great use of your charitable dollar. But really it's child's play to think of a better use of $150 million than to give it to the richest university on the planet.
America's Greatest Jobs Disaster
The unemployment rate remains fairly high across the United States, but with a substantial amount of regional variation. In the Logan, Utah, metropolitan area, for example, the unemployment rate is only 2.8 percent and in Burlington, Vt., it's 3.1 percent.
And then there's the other side of the spectrum. I toyed with creating a bar chart showing the jobless rate in the 20 highest unemployment metropolitan areas in the United States, but it looked terrible because the bottom two cities are so much worse than everyone else. Which is to say that while in America's third-worst job market (Merced, Calif.) the unemployment rate is 14.2 percent, the second worst is dramatically worse. In El Centro, Calif., a shocking 22.5 percent of the workforce can't find a job and in Yuma, Ariz., it's an even more shocking 27.1 percent.
Even more interesting, Yuma and El Centro are only about an hour's drive apart (Merced is also in California but quite far away) both nestled just north of the Mexican border on either side of the California-Arizona divide. And they're experiencing a joint joblessness crisis that's drastically worse than conditions anyplace else in the country.
Note that on the good side of the list you don't see this clustering. There are 19 different metro areas with an unemployment rate in the 2.8 percent to 3.8 percent range, and they're not really clustered anywhere. You can find low joblessness in Odessa, Texas, or Rochester, Minn., or Morgantown, W.Va., or Honolulu.
What's the WhatsApp Endgame?
When Facebook buys a company like WhatsApp for $19 billion it's natural to leap straightaway to quibbling about the valuation. But I have a more fundamental question about the line of business WhatsApp is in.
The way WhatsApp works is this. Mobile phone operators want to charge people money for data plans and then more money for SMS services. WhatsApp comes along and creates a service that uses data to replicate the functionality of SMS. Then WhatsApp sells this service very cheaply—$1 a year.
In the short term this makes perfect sense as a business. Carriers will lose some money and that money will be divided up between consumers and WhatApp. Smart idea.
But how does this scale? Mobile phone operators aren't really selling consumers some voice service, some data service, and some SMS service. They are selling access to the network. The different pricing schemes they come up with are just different ways of trying to maximize the value they extract from consumers. In a world without WhatsApp, selling SMS separately from data is the best way to do that. Then along comes WhatsApp to exploit a hole in the pricing system. But if WhatsApp gets big enough, then carrier strategy is going to change. You stop selling separate SMS plans and just have a take-it-or-leave-it overall package. And then suddenly WhatsApp isn't doing anything.
That's how it looks to me at least. Exploiting the loophole is a good business as long as the loophole exists. But the loophole is only going to exist as long as the system that gives rise to the loophole makes sense for the carriers. The more people who exploit the loophole, the more sense it makes for the carriers to change the system.
Tesla's Intriguing China Strategy
Tesla's share price has been on a tear over the past couple of days, first on (somewhat laughable) rumors of an Apple takeover and then today based on an earnings release that saw falling production costs and rising gross margins.
But the most interesting part of the shareholder letter (PDF) is the one that addresses an issue keeping margins down. Tesla's pricing strategy in China. The Model S is a very expensive car in the United States. And in China, it's even more expensive. But the standard practice for luxury automakers is to charge drastically higher prices in China than in North America or Europe—believing that the China market can support higher margin sales. Tesla, by contrast, only charges a bit more in China than in the U.S. to compensate for taxes and transportation charges:
We strive for transparent and fair pricing in every market. Consistent with this goal, the price for a Model S in China is the same as the price for a Model S in the US, adding only unavoidable taxes, customs duties and transportation costs. We are taking a risk with this strategy, because it is counter to prevailing auto industry practices. Still, we believe it is the right thing to do. It also means that in China the Model S is priced comparable to a mid-sized premium vehicle, instead of a large luxury vehicle.
As I wrote in my piece about Amazon, one should think of this kind of pricing strategy as an investment. Where other luxury brands see an opportunity to pad margins by gouging Chinese customers, Tesla sees a still-maturing market where it can earn goodwill and brand loyalty by eschewing that kind of behavior. This is the kind of thing you can get away with when your company is a hot growth stock that's already priced at a massive price-to-earnings ratio. Tesla investors are buying the future in a way that BMW investors aren't, so a China pricing strategy that's oriented to the future makes sense.
Economics Keeps Killing the Nuclear Power Renaissance
Ed Crooks reports for the Financial Times that in states with competitive electricity markets, nuclear power plants simply can't compete and are at risk of shutting down:
Where nuclear plants have to go head-to-head with gas-fired plants, and with wind and solar power that are supported by regulatory mandates, they are finding it hard to compete.
“Competitive markets can be efficient, but right now they aren’t,” says Marvin Fertel, president of the Nuclear Energy Institute, the industry group.
“We’ve seen a real problem that needs to be fixed.”
It has been clear for years that the shale gas boom made it hard for costly new reactors to compete. Over the past year, though, it has become clear that even some existing plants are no longer commercially viable.
Nuclear power usually gets discussed in the context of some wag trying to make the point that even though the environmental movement got a lot of juice in the 1970s from anti-nuclear campaigning, nuclear power is actually quite clean and from a climate change perspective it would be good for green groups to be more nuclear-friendly.
As best I can tell, that's all basically true. The problem with nuclear power is actually the economics. These plants are extremely expensive to build, moderately expensive to operate, and despite decades of hype and promise we really don't seem to be getting much better at it. Natural gas has become really cheap recently thanks to new developments in shale mining, and solar power is at least getting cheaper. If you just care about money, gas is clearly the way to go. If you care about the environment too, then subsidizing solar makes sense. Nuclear seems extremely well-suited to the rather unusual problems of power generation on a military submarine but as a mainstream electricity source it has a lot of problems. The scenario in which an existing plant becomes uneconomical to operate is pretty extreme and I think efforts to deliberately shut down existing plants that are economically misguided, but politics aside there just doesn't seem to be a future for new plants
Where Are the 2008 FOMC Transcripts?
Full transcripts of the Fed's monetary policy meetings are normally made available to the public on a five-year delay. Which is to say that when the calendar turned to January 2013, we got the 2007 transcripts. Today is Feb. 19, 2014, and there are no FOMC transcripts from 2008.
This is of particular interest because 2008, as you recall, was a year of some consequence for central banking and the global economy. We are now accustomed to debates about QE, fiscal stimulus, bailouts, etc. But back in the summer and fall of 2008, the United States was not at the zero bound or in a "liquidity trap." Ordinary monetary policy rules applied. And in its June 25 statement, the FOMC declined to cut interest rates. In its Aug. 5 statement, the FOMC again declined to cut interest rates. In its Sept. 16 statement—a day after Lehman Brothers went bankrupt—the FOMC again declined to cut interest rates.
The minutes and the statements confirm that in all three cases the Fed saw itself as balancing worry about an economic downturn with worry about inflation driven by rising commodity prices. In retrospect, this looks like a blunder. And indeed a fellow named Ben Bernanke once wrote a good paper about how it's a mistake for central banks to try to use monetary policy to smooth commodity price fluctuations. So it would be interesting to know what people were actually saying in these meetings. Which is why transcripts are supposed to come out.
So where are they?
Technological Progress Isn't GDP Growth
Tying together two recent posts, once you understand that GDP growth isn't all there is to human progress you can see another problem with Robert Gordon's techno-pessimism namely that he bounces back and forth between pessimism about economic growth and pessimism about technological progress.
In this, he is working in a longstanding tradition in the economics profession that happens to make no sense. If you decompose the source of GDP growth you have labor force growth (more workers) plus growth in the capital stock (more equipment) plus something else. This something else is sometimes called the "Solow Residual," which emphasizes that it is a mathematical artifact. It is sometimes called "total factor productivity," which emphasizes why it matters. And it is sometimes called "technology" because economists enjoy butchering the English language and engaging in wild flights of epistemological fancy.
But this last option is phlogiston economics.
The printing press was a major technological innovation. It was not an enormous boost to GDP because the market for books is not and never has been particularly large or economically significant. But there's more to life than economic output, and the market for books has always been very culturally significant thing. So an innovation that dramatically alters the cultural landscape is a major technological breakthrough. If it's not a big deal for total factor productivity or economic output, then that's just one of those things.
Which brings me to a way that I think Gordon could easily strengthen his argument. It seems entirely conceivable to me that future technological progress simply won't lead to that much economic growth. If we become much more efficient at building houses, that will increase GDP, because the output of the housing sector is selling housing. But the output of the health care sector is selling health care services, not curing illnesses, and sick people already buy a lot of health care services. People with cancer tend to buy cancer treatments. If those treatments become more effective at curing cancer, that'd be great for patients and their families, but it's not obvious that it would raise "productivity" in the economic sense.
Suppose someone invented a pill that cost $500 and if you took it once you'd enjoy perfect health until the age of 100 at which point you drop dead. That would be a pretty amazing invention. But it's impact on GDP is surprisingly ambiguous. In the short term, it would be a kind of catastrophe. Presumably in the long run the economics would all work themselves out. But in raw human terms, the gains would start right away. Being sick is incredibly annoying. Having a loved one die is awful.