Wednesday, November 28, 2007

Romney's cabinet quota?

In yesterday's Christian Science Monitor, Mansoor Ijaz provided a pretty damning story regarding former Gov. Mitt Romney. Mr. Ijaz wrote:

I asked Mr. Romney whether he would consider including qualified Americans of the Islamic faith in his cabinet as advisers on national security matters, given his position that "jihadism" is the principal foreign policy threat facing America today. He answered, "…based on the numbers of American Muslims [as a percentage] in our population, I cannot see that a cabinet position would be justified. But of course, I would imagine that Muslims could serve at lower levels of my administration."

Gov. Romney's response, if it has been accurately reported, is disquieting in several ways. First, he seems to be ruling out an entire class of potentially qualified and relevant advisors for cabinet-level service on the basis of religion. This smacks of discrimination against a particular religious group--an odd stance given that the Governor himself is arguing elsewhere that people shouldn't discriminate against his own religious views.

Second, Gov. Romney's statement further suggests that certain types of representation will be a factor in making cabinet-level appointments. Were a Democratic candidate to express the same views, he or she would immediately be accused of establishing quotas. In the Governor's mindset, some groups are justified in getting cabinet positions based on their population numbers, and other groups aren't.

Finally and most importantly, the statement undermines Gov. Romney's claim that "defeating the jihadists" is his primary policy goal. For example, Gov. Romney has previously stated that, "as we stare at the face of radical violent Jihad and at the prospect of nuclear epidemic, our military might should not be subject to the whims of ever-changing political agendas." However, his response to Mr. Ijaz indicates that qualifications for contributing to national security concerns are trumped by another agenda, religious belief.

P.S. Governor Romney has made a similar statement against Muslims serving in the cabinet before.

Tuesday, November 27, 2007

Stand by your salaryman?

According to an 11/26 Washington Post article, divorce rates in Japan spiked following a recent change in divorce laws that allows ex-wives to claim up to half of their former husbands' pensions. The change went into effect in April, and divorce rates immediately rose 6.1 percent.

The news seems like a clear cut story of incentives. Standard economic theory posits that spouses contemplating a divorce compare the benefits of remaining married with those of divorcing. In this case, the benefits of divorce for women have increased, while the benefits of marriage have stayed the same. Consistent with theory, divorce rates shot up.

Part of the increase probably just represents a change in the timing of divorce rather than a change in the overall incidence. The change in pension distributions was part of a law that was passed in 2003, but the pension provisions did not go into effect until April. The timing of the implementation appears to have been well-known. Wives who had already made up their minds to divorce their husbands would have had strong incentives to wait until April. This would have contributed to a decrease in divorce rates just prior to April and a spike immediately afterward.

More interesting, perhaps, are the secondary changes in incentives that are created by this policy. The simple economic analysis given above is one-sided in that it ignores the possible responses of husbands. Husbands, especially older husbands, derive tremendous benefits from the care that their wives can provide. The change in policy should cause husbands to make accommodations within marriage that are more favorable to wives. Thus, the initial assumption that the benefits of marriage for wives would remain constant may not be a good one. The article indicates that Japanese men are aware that accommodations may be required but also that they have been slow to change.

The change also has implications for the people's decisions to marry in the first place. Marriage rates in Japan (and other industrialized countries) have been steadily declining, with people waiting longer and longer to get married. Marriage has been an especially raw deal for women in Japan. Japanese men tend to work long hours and then socialize with colleagues well into the evening. Japanese women are much less likely than American women to work outside the home (using U.S. labor force definitions, see Table 5, about 57 percent of American women were employed in 2006 versus 46 percent of Japanese women). According to a 2001 Japanese time use survey, Japanese women spend an average of 3 1/2 hours a day in housework, while comparable 2003 figures for American women indicate that they spend closer to 2 hours a day in housework.

The change in divorce laws gives single women a pecuniary incentive to marry. It may also increase other incentives by improving the conditions within marriage. Both of these factors could lead to an increase in Japanese marriage rates.

Overall, Japanese women stand to benefit a great deal from this policy--either directly from better divorce settlements or indirectly from more accommodating husbands. At the same time, men will bear considerable consequences. The policy change should provide substantial grist for the family-relations research mill.

(Thanks to Bryan Boulier for the story tip).

Sunday, November 25, 2007

Voting with their feet

On Friday, the Washington Post reported some of the most hopeful news to date regarding the Iraq war, namely that some of the country's 2.2 million refugees were beginning to trickle home. It's not clear from the article whether the number of people returning exceeds the number of people leaving. The article also notes that many are returning because they've exhausted their resources outside the country. Nevertheless, the fact that many people feel secure enough to return and attempt to resume their lives in Iraq is good news. This is literally a case of people being willing to "walk the walk."

This news should remove most doubts that the surge has been successful with respect to its military objective of improving security. Military and civilian casualties are now back to levels last seen in 2005. These levels are still unacceptably high (Iraq in 2005 wasn't exactly a "safe" country), but if they represent a trend, further improvements may be possible.

Despite this evidence of important benefits from the military surge, it is still not clear whether the policy is or was worthwhile as a whole. The security benefits that we are seeing now have to be balanced against the enormous costs--hundreds of additional U.S. troops killed and thousands more wounded, the depletion of military readiness, and billions of dollars each month in additional taxpayer costs. While a small draw down of troops is beginning, troop levels are still substantially above their pre-surge levels, and we will be adding to the costs of the surge for many more months to come. An analysis by Democrats on Congress' Joint Economic Committee puts the current tab for the Iraq war at $1.3 trillion (around $4,250 per person) and projects the complete tab if administration policies are continued at $3.5 trillion (just over $9,000 per person).

More disappointing is that the primary objective of the surge, which was to enable political reconciliation among the Iraqis, still has not been met. There have been some hopeful signs, such as the cease-fire by the Madhi militia and the increased willingness of some Sunni groups to cooperate with the government. These and other developments could mean that when the surge exhausts itself this spring, the Iraqis may fall into an uneasy, informal living arrangement--something well short of the civil war that the country was experiencing earlier this year but also well short of full and permanent reconciliation. At this point, informal arrangements may be all that we can hope for.

We also have to acknowledge that some elements of the administration's strategy are working at cross purposes. The "bottom-up" approach of working with (and arming) local groups who currently support some of our objectives may be undercutting the "top-down" strategy of national political reconciliation. There are considerable risks that when our troop levels are reduced, the informal arrangements will quickly collapse, with much more terrible levels of violence owing to the influx of arms. We may be buying temporary security at the cost of even greater violence down the road.

The returning Iraqi refugees appear to be betting on some type of reconciliation. Let's hope they're right.

Saturday, November 24, 2007

Consider the source

It's an information jungle out there. Between books, journals, newspapers, magazines, web sites, and the rest, there's just too much information for any one person to digest. We should read widely from a variety of sources. However, to be reasonably informed and make sense of that information, we need to understand the strengths and weaknesses of different media.

The thing to recognize is that anybody can write anything, and with the web, anybody can post anything. Blog providers like (the service that hosts this blog) are easy to use and lead to astonishingly attractive content. The services offer great publishing tools in the form of spell checkers, standard templates, easy formatting, and HTML features. It's just as easy to put up other types of web sites and to publish great looking pages. The process is truly democratizing and leads to a tremendous variety of content and points of view.

However, this strength--that anybody can now publish like a pro--is also a potential weakness that we need to keep in mind when reading material. Just because someone writes something doesn't mean that it is true, correct, or well-reasoned.

If the author is unfamiliar, there are also some reputational and review cues that you can look to. A first check is whether someone is writing or posting under their own name. Occasionally there are good reasons to use a pseudonym or to remain anonymous, but the reasons mostly involve authors who are taking genuine risks with their writing. More often, however, posting anonymously or under an unidentifiable handle is a way to avoid responsibility for what's being written.

The types of editorial and expert review that go into a source are other indicators that can help. Blogs, working papers, self-published reports typically don't have to go through the editorial gauntlet. This means that they can be "published" very quickly and inexpensively, but it also means that the reader needs to bring considerable caution to bear. Editing and peer-review don't lead to perfect or even necessarily sound analyses, but they do provide some level of screening. It also means that the editor and publisher are willing to lend some of their reputation to the author.

Ultimately, however, it comes down to carefully reading and considering what's written. Regardless of the source, critical reading and independent evaluation are necessary. An author who wants you to make that evaluation will provide sources and reveal his/her analyses.

Sunday, November 18, 2007

Call me irresponsible

In his weekly radio address yesterday, President Bush promised to veto legislation that was passed by the House to temporarily fix the Alternative Minimum Tax (AMT) without driving up the deficit. Said the President, "I will veto any bill that raises taxes as a condition of fixing the AMT. Members of Congress must put political theater behind them, fix the AMT, and protect America's middle class from an unfair tax hike."

Sadly, it looks like Sen. Majority Leader Reid is likely to go along.

The AMT was originally designed to keep high-income households from avoiding taxes. A problem with the tax, however, is that it was never indexed for inflation, the way that other parts of the tax code are. As a result of price inflation over time, more and more households have found themselves potentially subject to the AMT. Congress has enacted a series of temporary patches. Without a similar fix this year, some 25 million households could be affected by the AMT.

The government should raise the AMT threshold and more generally find a permanent solution to the AMT problem. However, given our enormous deficit and the need to finance the wars in Afghanistan and Iraq, it would be irresponsible to do this without replacing the $50 billion in revenue that the AMT would have brought it. The House plan fixes the AMT, extends several other tax breaks, but also closes a loophole that allows hedge fund and other investment managers to treat their earnings as lower-taxed capital gains.

The President, who has already proposed a budget with a gaping deficit and then returned to Congress to ask for $46 billion more in supplemental war funding, is essentially asking for an additional $50 billion tax cut. Earlier this week the President vetoed another revenue-neutral bill, urging "Congress to send [him] a fiscally responsible bill that sets priorities."

The House legislation is fiscally responsible. We cannot afford to go $50 billion farther into the hole to provide yet another upper-income tax cut. The AMT patch should be balanced by other revenue increases.

Tuesday, November 13, 2007

President Bush's fifth veto in context

For the fifth time in his Presidency, George Bush today vetoed a bill--this time it was a $606.4 billion bipartisan bill that would have funded the Departments of Education, Health and Human Services, and Labor--claiming that the "bill spends too much."

According to the President, the bill's main sin was that it spent $9.8 billion more than he originally requested. Given the large size of the bill, this amounts to less than a 2 percent difference between what the President and Congress proposed. Overall, spending would have gone up relative to last year's level by 4.3 percent; in real terms the spending increase would have been less than the total growth in the economy. So even with the higher spending under the bill, the share of economic output going to the three departments would have gone down.

The growth hardly seems irresponsible, especially when compared to the spending growth that the President green-lighted under previous Republican Congresses. In FY 2003, spending for Education, HHS, and Labor rose 8.9 percent over the previous year's level. In FY 2004, spending growth for these departments was 5.5 percent. In FY 2005, growth was 6.0 percent, and in FY 2006 (the last year for which we have final figures), growth was 10.1 percent.

Not only was growth in the proposed bill less than in previous years, but the bill followed the Democrats' "pay as you go" strategy, meaning that it included revenue increases to match the spending increases and thus wouldn't have contributed to the deficit.

There are many more pressing problems in Washington; the President should stop playing political games with these modest differences in spending bills and begin cooperating with Congress.

Saturday, November 10, 2007

Thompson grabs ahold of the third rail

Republican Presidential candidate Fred Thompson is boldly going where none of the other current Presidential hopefuls has yet dared to tread and courageously offering a comprehensive plan for fixing the Social Security retirement system. Unless changes are made, the Social Security system will begin drawing down its trust fund balance in 10 years and will exhaust that balance by about 2041. Politicians have generally shied away from specific proposals because they necessarily involve uncomfortable choices between revenue increases or benefit decreases to bring the system back into balance. Because the trust fund has already effectively been spent, a successful reform must also address how future trust fund inflows can be put beyond the reach of government spenders.

Thompson's proposal has two main parts to it. First, he would create voluntary "add on" retirement savings accounts. Workers would contribute 2 percent of their wages into the accounts, and each dollar of personal contributions would be matched by $2.50 in government contributions on the first $1000 of monthly wages and matched by 50 cents of government contributions for higher amounts. The government's contribution would be drawn from social security taxes that workers and employers already pay. For instance, a worker earning $2,000 per month would contribute $40 on her own (= .02 x $2,000) and be subsidized $60 by the government (= (2.50 x $20) + (.5 x $20)). For the year, this worker would have $1,200 added to her retirement account, which she could then invest into stocks, bonds, or some combination just like a 401(k) defined contribution plan. The funds would be available to the worker beginning at age 62, and any unused funds could be passed on to heirs.

The second part of Thompson's plan is to slow the growth in Social Security outlays by changing the initial retirement year benefit formula so that a person's history of wage contributions would be adjusted for inflation using the Consumer Price Index (price inflation) instead of the current wage index (wage inflation). Wages have usually grown faster than prices, so pegging initial benefits to price inflation should reduce benefits. For workers with the new voluntary retirement accounts, their Social Security benefits would be further reduced by the amount of the government matching contributions.

Thompson's plan would only affect current workers who are at least several years from retirement; it would not affect current retirees or older workers nearing retirement.

Thompson's plan addresses all three elements of reform. It would move Social Security closer to balance by gradually reducing benefits. It would also, however, strengthen overall retirement savings by bringing in more revenue--the workers' own contributions, which would come on top of taxes they are already paying into the Social Security system. If long-run trends in stock returns continue, the funds invested in those private accounts should also grow faster than the funds in the government's accounts, also adding revenue. Finally, the plan protects those new revenues from government spenders by moving them from public to private accounts--in effect individuals will hold portions of the trust fund.

There are downsides to be sure. Higher income households will benefit more than lower income households. The current benefit formula pays a higher return to low-wage earners than to high-wage earners, providing a considerable degree of redistribution. This redistribution would be reduced. Also, high-income households would be more likely to participate in the voluntary savings component than lower-income households. So the benefits from the savings component would flow mainly to them while the decreases in the benefit formula from the new indexing scheme would fall more heavily on the poor. Lastly, the plan shifts more financial risks toward households.

There is also a little distraction going on as each element of this plan could be proposed on its own. The voluntary contribution portion does nothing to "save" Social Security; indeed, it would do the opposite if only high-wage workers participate. So absent the voluntary component, it might be possible to get by with smaller benefit cuts. Also, we still need to see a bottom-line analysis on the Social Security system's finances.

Thompson's plan is a good first start that could form the basis for an ultimate reform. As written, the costs of his plan fall too heavily on the poor. Modifications to better protect the poor would make his plan a hands-down winner. Watch for all sorts of demonizing rhetoric, especially from the Democratic candidates. However, Thompson has put out an important marker, and it's up to the other candidates to improve on his plan and not just complain about its inevitable sacrifices.

Friday, November 9, 2007

Who benefits and who loses from the Rangel Tax Bill

The Tax Policy Center, which is jointly run by the Urban Institute and the Brookings Institution, has analyzed H.R. 3970, Rep. Rangel's "Tax Reduction and Reform Act." Rep. Rangel's bill is a revenue-neutral proposal that would eliminate the Alternative Minimum Tax, increase the standard deduction for household tax filers, expand the Earned Income Credit for low-income families, and make the Child Tax Credit refundable. To keep the country from going further into debt, it would balance these decreases by increasing tax rates for high-income households, returning some restrictions on deductions and exemptions for high-income households, and changing the way that investment fund managers can treat their income so that their income is taxed as earnings rather than as capital gains. The bill would also simplify corporate taxes, eliminating several deductions but also lowering overall rates.

Researchers at the Tax Policy Center looked at how households in different income groups would be affected. They concluded that 57 percent of households (86 million households) would end up with lower tax bills as a result of this proposal, while only 2.4 percent of households would end up with higher bills. On average, households with annual incomes below $500,000 would pay less under Rep. Rangel's proposal, while households with higher incomes would pay more. The researchers calculated that "almost no one earning below $100,000 would receive a tax increase."

On average, the benefits would be highest--both in absolute and in percentage terms--among households with incomes between $100,000 and $500,000. Many households in this income range would gain from the elimination of the AMT; however, some other offsetting tax increases would also kick in in this range.

Among households with incomes above $500,000, about 80 percent would see a tax increase. Average payments for households with incomes between half a million and a million dollars would rise 2.2 percent, while average payments for households earning over a million dollars would rise 4.5 percent.

Math-challenged Republicans continue to criticize Rep. Rangel as proposing "the largest individual income tax increase in history." For most sensible people, that would be an odd way of describing a plan with no net revenue impact, that benefits 57 percent of households, and that leaves another 40 percent untouched. Of course, it's not so odd at all if your goal is to steer more money to America's richest and most powerful households and you have no qualms about sticking today's children with the bill.

A permanent fix to the AMT is long overdue. Given the large existing budget deficit, our ongoing military commitments, and the swelling and underfunded entitlements for the elderly, we cannot afford to put another tax cut for rich households "on the tab." Rep. Rangel's responsible plan deserves serious consideration.