Fallacy of composition, W-NOMINATE version

I've been neglecting my blog lately. Much of the reason is that I've been working to understand the political science program NOMINATE, so that I can gather information about the ideological make-up of the New Hampshire legislature.

The data is posted on the W-NOMINATE page of my blog. Here's the cool graph (click to enlarge):

Keith Poole and Howard Rosenthal, the main developers of the program, claim that the program measures economic attitudes on the x-axis, and, in recent years, social attitudes on the y-axis.

At first blush this is what it appeared to be doing for New Hampshire legislators. However, after taking a closer look at the votes, I discovered that it's not doing this. At least, not very well.

The x-axis measures economic issues well, and correlates beautifully with the House Republican Alliance's scorecard ratings. (See this impressive graph, courtesy of Seth Cohn.) The y-axis, on the other hand, has issues. Apparently, because there have been so few votes on social issues this year, there is little basis for the y-values. Mostly they reflect positions on gun rights and criminal justice issues, with pro-gun and tough on crime on the bottom.

This is yet another reminder that politics at the state level does not necessarily imitate politics at the federal level.

Thanks to Rep. Seth Cohn, Scott Pauls at Dartmouth, and professor Jason Sorens for criticism and help. Peer review fixed my mistake.

Fallacy of composition, balanced budget version

Nicholas Johnson at the Center on Budget and Policy Priorities argues that the federal government, unlike states, shouldn't have to balance the budget:

From the economy’s perspective, the fact that states have to balance their budgets even in recessions makes it even more important not to require the federal government to do the same. States’ balanced budget requirements force them to cut spending and/or raise taxes at the worst possible time: when the economy is weak and needs more public and private spending, not less. These measures help keep state budgets in balance, but they can also make downturns longer and deeper — and the current downturn is no exception.

There's more to the story. States balance their budgets for a reason— if states attempt to use fiscal policy (government spending) to stimulate the economy, much of the stimulus leaks into bordering states. A New Hampshire stimulus package would end up stimulating Massachusetts, Maine, Vermont, and Canada. Because of these leaks, fiscal policy is less useful to New Hampshire policymakers. State government may perform better by forsaking weak attempts at fiscal policy and sticking to a balanced budget.

Fiscal policy at the federal level is much more effective because it covers a larger area, and there's less leaking as a proportion of the stimulus. It also solves the coordination problem between states (where New Hampshire policymakers don't account for the stimulus to Massachusetts, and Massachusetts policymakers ignore stimulatory effects on New Hampshire).

The macroeconomic policy lesson that we've learned over the last few years is that fiscal policy can matter a lot. Forsaking it at the federal level, where it works best, would be extremely foolish.

Tax competition

CONCORD, N.H. - New Hampshire pays Michael Bergeron to be a full-time thief, sending him across the border in an unmarked black sedan to poach Massachusetts companies.

To help keep his missions undercover, the business recruiter even scraped the New Hampshire state seal off his Ford Fusion. Equal parts real estate agent, financial adviser, and deal fixer, Bergeron has lured dozens of Massachusetts companies to the Granite State over the past few years with promises of lower tax bills, cheaper office and industrial space, and fewer regulations.

John Hancock Financial and Liberty Mutual Group are among the high-profile firms that recently moved significant parts of their operations over the state line - partially because of Bergeron’s pitches. And an increasing number of small and midsize firms are considering migrating as a way to reduce costs in uncertain economic times. (Read more at the Boston Globe.)

HT: GraniteGrok.

Unfunded pension liabilities

Edward Glaeser argues that we should pay government workers to give up part of their pensions:

The problem with public pensions isn’t that teachers or firefighters or police officers are overcompensated. These are tough jobs. The problem is that public workers get too little of their pay while they work and too much when they retire. According to a new paper by Maria Fitzpatrick of Stanford University: “Schools and other public sector employers contribute nearly three times as much per hour worked to the pension benefits of their employees as their counterparts in the private sector.”

Many public workers would vastly prefer to get more money today in exchange for lower pension payments, Fitzpatrick finds in the study, “How Much Do Public School Teachers Value Their Retirement Benefits?”

In 1998, Illinois upgraded the pensions that teachers would get on future earnings and gave these employees an opportunity to increase their pension payout based on past earnings. Teachers had the option of making a one-time payment equal to 1 percent of their salary per year of service prior to 1998, up to a maximum of 20 percent.

The returns of taking the deal were quite high, Fitzpatrick wrote. “The average price of the upgrade offered to employees with 25 years of experience in 1998 was $15,245 while the expected costs of providing them with the extra retirement benefits if they all purchased would have been $94,166.”

Yet even given those extremely generous terms, plenty of teachers preferred to have more money immediately: “More than 20 percent of these employees do not purchase more retirement benefits even when offered them at just 16 cents on the dollar.” Using a sophisticated statistical procedure, she determines that “averaging along the entire demand curve, employees in [Illinois Public Schools] are willing to trade just 30 cents for a dollar’s worth of future benefits.”

This work suggests that we should offer cash to public workers in exchange for giving up some of their future benefits. If public workers really only value their pensions at 30 cents on the dollar, then a deal where we paid workers 65 cents today to reduce the net present value of their benefits by a dollar, would essentially make both public workers and taxpayers 35 cents richer. [Emphasis added.]

The entire article is worth a read.

Tim Geithner at Dartmouth

Courtesy of Andrew Samwick:



A few choice quotes:

"If you look at any history of financial crises, the speed with which growth went from negative to positive, the speed with which we've had stability come back to financial markets -- costs of credit coming down, equity prices, wealth, start to rise again -- was incredibly quick, relative to any experience we've had."

"If you look at the cost of this intervention we designed, even conservatively, today, it's going to be even less than one percent of GDP, less than one third the cost of the S&L crisis, an incredibly cost-effective, creative rescue of the financial system."

What if the federal minimum wage disappears?

Lucy Edwards, at Blue Hampshire, rhetorically asks,

Now that NH no longer sets its own minimum wage, what would happen if the federal minimum wage law were repealed? We've all been upset that we no longer can raise our wage above the federal limit, but imagine if the law were repealed? What do you think would happen to low wage workers? And maybe higher wage workers as well, as the race to the bottom accelerates?

I can't resist answering.

This is what David Neumark, a prominent minimum wage researcher and coauthor of Minimum Wages, has to say:

The central goal of raising the minimum wage is to raise incomes of low-income families and reduce poverty. There are three reasons why raising the minimum may not help to achieve this goal. First, a higher minimum wage may discourage employers from using the very low-wage, low-skill workers that minimum wages are intended to help. Second, a higher minimum wage may hurt poor and low-income families rather than help them, if the disemployment effects are concentrated among workers in low-income families. And third, a higher minimum wage may reduce training, schooling, and work experience—all of which are important sources of higher wages—and hence make it harder for workers to attain the higher-wage jobs that may be the best means to an acceptable level of family income.

The evidence from a large body of existing research suggests that minimum wage increases do more harm than good. Minimum wages reduce employment of young and less-skilled workers. Minimum wages deliver no net benefits to poor or low-income families, and if anything make them worse off, increasing poverty. Finally, there is some evidence that minimum wages have longer-run adverse effects, lowering the acquisition of skills and therefore lowering wages and earnings even beyond the age when individuals are most directly affected by a higher minimum....

Those interested in using economic policy levers to redistribute income to lower-income families should instead push for policy options that encourage work, that better target poor and low-income families, and that have a proven record of reducing poverty. The Earned Income Tax Credit, which is implemented at the federal level and supplemented by many states, appears to satisfy all of these criteria and thus is a better redistributive policy. (From Greg Mankiw.)

This is why nearly half of economists want the minimum wage abolished, a shockingly large percentage when you account for the fact that economists are far more likely to be registered Democrats than registered Republicans.