Jeffrey Friedman writes,

What I am calling social democracy is, in its form, very different from socialism. Under social democracy, laws and regulations are issued piecemeal, as flexible responses to the side effects of progress -- social and economic problems -- as they arise, one by one. (Thus the official name: progressivism.) The case-by-case approach is supposed to be the height of pragmatism. But in substance, there is a striking similarity between social democracy and the most utopian socialism. Whether through piecemeal regulation or central planning, both systems share the conceit that modern societies are so legible that the causes of their problems yield easily to inspection. Social democracy rests on the premise that when something goes wrong, somebody -- whether the voter, the legislator, or the specialist regulator -- will know what to do about it. This is less ambitious than the premise that central planners will know what to do about everything all at once, but it is no different in principle.

The whole piece is very consistent with my views on the financial crisis, regulation, and the discrepancy between the knowledge that policy makers are implicitly assumed to hold and their actual level of ignorance.

In going through some articles this weekend, I found the following, reprinted in full. It's titled, "Cubans Want Freedom, Not Welfare" and was published in the St. Louis Post-Dispatch, September 30, 1994. The Chicago Tribune published an almost-identical version around the same time. It's still relevant today:

Start with two principles. First, no one has the right to force us to pay for immigrants to the United States. Second, no one has the right to prevent people from escaping tyranny. Any just system of laws must adhere to these principles. The principles do not contradict each other. But the defenders of the welfare state have forced us to choose between them. In doing so, they have shown how truly corrupt the welfare state is.

What makes responsible Cubans risk their lives and their children's by crossing the ocean in fragile rafts? Did they just hear about our food stamps and generous unemployment benefits? Hardly. Those aren't worth risking life and limb.

So what do Cubans want? One thing. Freedom. The freedom to live in a relatively peaceful society where it is not (yet) a crime to work to feed one's family. The vast majority of our ancestors who immigrated to the United States got no welfare when they arrived here. It's not what they came for. It's not what the vast majority of Cubans want either.

But, some say, people leaving Cuba want just to escape poverty, not communism. How could we tell? Communism causes mass poverty everywhere it is tried. And why does it matter? These desperate refugees didn't reach their conclusions about the effects of communism as the result of a college bull session. They object to communism because of the horrendous human suffering that it has caused them.

Our welfare state and its leaders, in particular, President Bill Clinton and Florida's governor Lawton Chiles, give us a choice. Either we let Cubans escape tyranny and come to the United States, in which case we must subsidize them, or we refuse to subsidize their living here, in which case the government intervenes to prevent Cubans from coming.

Because Chiles is, appropriately, concerned about spending Florida taxpayers' money on new immigrants, he wants to prevent them from coming. And Clinton apparently agrees. He persuaded Fidel Castro to forcibly prevent Cubans from emigrating.

Note the irony. Clinton leads one of the freest countries in the world, a country built on the idea that each person has inalienable rights that no government can violate. He persuades the leader of a totalitarian government to re-adopt a policy that most clearly distinguishes free states from slave ones. The judges in the Dred Scott decision would have been proud of their willing student.

How did we reach a point where a governor concerned about spending lobbies a U.S. president to consign people to tyranny? The cause was our inhumane welfare state. The recent debate about the Cubans points up its absolute moral bankruptcy.

We often think of the welfare state as benevolent, the institutional equivalent of a kind uncle who bought you ice cream. It's not.

The comparison is unfair to the uncle. The uncle was willingly spending his own money. The welfare state, by contrast, uses taxes to grab other people's money. And even when the uncle is short of money, he lets you out to spend your own money if you have it. He doesn't lock you in a closet.

The welfare state does the equivalent of locking you in a closet. Instead of letting the Cubans decide whether they want to come here unsubsidized, it locks them in Cuba. The main people responsible are the welfare-rights activists who sued to achieve this result and the judges who decided in their favor.

Notice also the awkward position that Clinton has put our military in. He has ordered the military to pick up Cubans who are trying to leave their island hell to come here. His policies, like those of former President George Bush, require the military to use force against innocent foreigners, rather than engage in their only proper duty under the Constitution, which is to defend the United States from foreign enemies.

There's a simple solution. First, end our embargo against Cuba. The embargo hurts politically powerless Cubans most and sends them a mixed message about what our society is all about. On the one hand, we trumpet freedom; on the other hand, our government does not allow us one of the most basic freedoms of all--the right to trade. By instead letting innocent. joyous capitalism prevail, we would drive a stake in Castro's monstrous dictatorship.

Second, allow in all the Cubans who want to come, on one condition: that for 20 years they forswear all the trappings of the welfare state--food stamps, welfare and unemployment benefits.

Remember the words of Emma Lazarus, the young daughter of Jewish immigrants, inscribed at the base of the Statue of Liberty. She talks of aspiring immigrants as "huddled masses yearning to breathe free." Not yearning for food stamps.

The link to Bryan's article in my Encyclopedia is one I added. The article did not exist then and Bryan was 23.

When I teach labor economics, I debunk a caricature I call the "Standard History of Labor."  The Standard History goes something like this:

1.  In the days before the minimum wage, unions, etc., life was terrible for workers because employers paid them whatever they felt like paying them.
2.  But then government became more progressive, and changed the laws.
3.  Life is now better for workers because employers' greed has been tamed.

I often quote popular expressions of this narrative, but I've never come across one as funny  (even unintentionally) as the one in Book 4 of the Lemony Snicket series.  A worker at the Lucky Smells Lumbermill explains the plight of his class.  Factory employees get a stick of gum for lunch, a damp casserole for dinner, and no chance to escape because...

[T]hey don't pay us in money.  They pay us in coupons.  See, here's what we all earned yesterday: twenty percent off a shampoo at Sam's Haircutting Palace.  The day before that we earned this coupon for a free refill of iced tea, and last week we earned this one: 'Buy Two Banjos and Get One Free,'  The trouble is, we can't buy two banjos, because we don't have anything but these coupons.

If I were a Republican, I would use any health care summit to set the following conditions for agreeing to support a bipartisan health plan.

1. All Medicare savings must be used to shore up Medicare. None of those savings can be used to fund new insurance subsidies or entitlements. Medicare is unsustainable, and it is going to need every dollar that we can save, and more. There is nothing to spare for a new entitlement.

2. Medical savings accounts must not be killed.

3. Catastrophic health insurance must not be killed or heavily disadvantaged relative to comprehensive insurance.

4. All new subsidies that enable people to purchase health insurance must be on budget, rather than through insurance company regulations that are likely to result in cost-shifting.

5. The bill must provide for at least one of the following:

a. Interstate competition in health insurance.

b. greatly reduce (preferably eliminate) the tax inequity between obtaining health insurance on your own and getting it through your employer.

As far as I am concerned, any bill that fails to satisfy all five of those points deserves opposition.

Megan McArdle writes,

One estimate is that the cheapest iPad costs $270 to manufacture. Throw in advertising, transportation, distribution, and so forth, and maybe they can cut the price $100 if they're willing to make a slim profit in order to establish a market. Of course, there's probably more room on the high-end models, and presumably costs will fall as they get more experience, and volume. But I don't see them getting within striking distance of a Kindle particularly soon.

The revenue model is not selling iPads. The revenue model is getting people to pay for all the books, tunes, and apps that they download to iPads. Not to mention the cost of the "data plan" from AT&T.

The iPad, like the Kindle, is a portable cash register. With a Kindle, wherever you are, you are in a bookstore, with your credit card handy. There's nothing wrong with that. I own a Kindle, and I'm happy with it. But it's really not necessary to have to pay for one. I've shelled out much more for books on my Kindle than I did for the Kindle itself. The only reason not to give the Kindle away for free is that you would wind up putting it in the hands of consumers who are not all that interested in books.

Regardless of the price at which the iPad is sold, it is going to generate plenty of revenue. For Steve Jobs, getting people to pay for it is a bit like Tom Sawyer getting his friends to pay for the privilege of doing his whitewashing work for him.

In a post a few weeks ago, I stated that I had coined a term in 1994 to describe the effects of a ban on pre-existing conditions clauses in health insurance: adverse selection by law.

This weekend, I was going through some old files and found the 1994 op/ed. I hadn't used that term. Instead, I had used the term "adverse selection on purpose." Here's the op/ed, printed in the St. Louis Post-Dispatch on July 29, 1994, and titled, "Gambling on Guaranteed Coverage." At the time, the Clinton health plan was starting to look dead:

Although Republicans and some Democratic allies may successfully kill some of the worst features of the Clinton health-care plan, such as price controls and employer mandates, they risk creating a program that could be as bad.

Sen. Dan Coats, an Indiana Republican, for example, regards the Federal Employees Health Benefit program as a model for health reform. But trying to implement a similar plan nationally would kill health insurance. The result: lousy health care for the sick.

The two key features of a nationwide federal-employees plan are guaranteed issue and community rating. Guaranteed issue means that anyone who wants health insurance can get it. Combine that with community rating--everyone pays the same premium regardless of health status--and the result is disastrous. Buying health insurance with community rating and guaranteed issue would be like betting on a horse race--after the race was won.

The vast majority of us who are well would each have an incentive to buy insurance with benefits like sports medicine and maternity benefits and then, if we get really sick, switch to a company that has good coverage for our new disease. Insurance would no longer be insurance; instead, it would be prepayment for medical care, with the "insurance" company acting as an intermediary, taking our payments and passing them on to doctors and hospitals.

What's wrong with that? Consider the incentives that it would create for insurers. Suppose that all enrollees pay a community-rated premium of $2,000. Every one whose health care costs less than $2,000 is profitable to the insurer and everyone whose health care costs more is unprofitable. Insurers would want to attract the former and avoid the latter. How can they do that? They know that if they have a reputation for being the best at treating cancer, they will attract people with cancer. So their incentive is to avoid hiring the best oncologists.

Remember that an insurance company can survive only if it covers its costs. With community rating requiring the same premiums for all, they cannot raise the premiums for only those on whom they expect to spend more. They have to raise them for everyone. As they do so, healthy people who don't need cancer treatment will drop out and switch to less costly plans.

For decades, health economists have worried about adverse selection that comes about when insurance companies can't distinguish between high-risk and low-risk clients so that the unhealthy drive up premiums for the healthy. But this is even worse: It is adverse selection on purpose. It is the necessary effect of combining community rating and guaranteed issue.

Moreover, most people wouldn't know how bad the benefits are until it's too late. At anyone time, the vast majority of people in this country are healthy. So, while healthy, they would be very satisfied with their health insurance. It's only when they really need it that they would realize how inadequate it is. Our system would become like Canada's.

Poll after poll reveals that 80-plus percent of Canadians like Canada's system of nationalized health insurance. That's not surprising. More than 90 percent of Canadians are healthy. Canadians don't see the problems until they need surgery or other expensive care and then find themselves on a long waiting list. Thousands of those who can't wait end up spending their life savings for treatment in the United States. [Note: I did not fact check this statement and I'm no longer sure it's true.]

Managed competition advocates such as Alain Enthoven of Stanford and Dr. Paul Ellwood of the Jackson Hole Group also point to the federal employee health program as a positive model for reform. But these advocates have always refused to spell out how health plans that attract enrollees with expensive-to-treat illnesses will be able to survive. The answer is: They won't.

There is a better way. Most of us would like health insurers not to cancel people's insurance after they get sick. We can have that provision, called guaranteed renewability, without community rating and guaranteed issue.

As in the case of life insurance, if we want guaranteed renewability, we should be able to get it--at a price. After all, we don't expect to qualify for life insurance after we find out we are dying. We must decide, relatively early in life, how much and what kinds of risk we want to bear and how much we want insurers to bear.

If we want guaranteed coverage, we have to buy when we are well and not try to play the system by holding off on buying insurance until we get sick. Why should health insurance be different from life insurance?

This week's econtalk is a monologue by Russ Roberts on the topic of trade. My one quibble is that he brings up increasing returns as a source of specialization and trade without mentioning Paul Krugman's work on the topic. That is, after all, the work for which he received his Nobel Prize.

Overall, Russ does a really good job of explaining how important trade is to wealth.

James Surowiecki writes,

People want the government to help provide jobs, but they also want it to cut the deficit.

His point is that people are inconsistent, so the government just has to ignore them and run a deficit to create jobs. I have two questions about this:

1. Is it really the case that people want the government to create jobs? I have seen many progressives and pundits claim that people are angry about jobs, but I have not seen any people clamoring for the government to create jobs.

2. Does the government know how to create jobs?

Kurt Andersen writes that the Founding Fathers did not want a democracy. Instead,

They wanted a government run by an American elite like themselves

Of course, they also wanted a government of limited powers, but that is not important, is it?

Later, Andersen writes,

the job of serious Washington grown-ups with big populist constituencies--both presidents Roosevelt, Reagan, even Richard Nixon--is to respond to the rage with the minimum necessary demagoguery, throw them a few bones to calm them down, and then make deals with your fellow members of the elected elite.

...In the old days, the elite media really did control the national political discourse; there were no partisan, splenetic cable news or ubiquitous talk-radio channels and no blogosphere to keep the populists riled up and make them feel the excitement of a mob. Until fifteen years ago, presidents and congressional leaders could pretty well manage the policy conversations, keep them on reasonable simmer. But the new technologies have, maybe permanently, turned up the political heat to boil.

Finally, from two months ago there is Thomas Friedman,

One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century.

Everyone agrees that the Republicans are just throwing sand in the gears of good government and not offering any ideas. What that means is that they are not offering ideas to enlarge government. Congressman Paul Ryan's ideas do not count, because those would cut back on government, particularly Social Security, Medicare, and Medicaid.

My point here is not to champion Republicans. It is not to champion democracy. My point is that the ones throwing the temper tantrum right now are the Progressives. They think that the 2008 election gave them the right to operate like China's autocracy, and they are lashing out hysterically at those they perceive as preventing them from doing so On the one hand, the villains are a small minority in the Senate. Or maybe the villains are the incoherent majority of the people.

The important point is that Progressives are never wrong. Top-down reform is the only way to fix the health care system. Anthropogenic global warming is scientifically proven, and its solution requires strenuous exercise of political control over individual behavior. Deficit spending is necessary and sufficient to create jobs. Technocrats can make banks too regulated to fail. Markets without technocratic control are like adolescents without adult supervision. Individual happiness can be improved by political authorities using scientific knowledge. Concentrated political power is the wave of the future, and it is good.

I am not a populist. I fear the mob. But how can I fear the Progressives any less?

The problem of adverse selection: Insurance companies can't perfectly tailor rates to risk.  The standard government "solution": Forbid insurers from tailoring rates to risk.  Yet another example, courtesy of Gary Becker:

Since private insurance companies are not allowed to charge higher premiums to the obese because that is considered discrimination, largely under the Americans with Disabilities Act, the higher cost of obesity paid by privately insured persons can hardly be called an "externality", unless it is considered an externality from government policy.

P.S. The wheels are in motion for me to debate David Balan on free-market health care this semester before the GMU Econ Society. Stay tuned! 

Since there was a lot of interest in explaining supermarket shortages the night before the blizzard, I'm back for round 2.  Here goes:

I'll probably go to the supermarket tomorrow.  What will the supermarket look like?

a. Still stripped bare.  Due to the blizzard (and "fair" pricing), demand will still far exceed supply.

b. Business as usual.  Demand disruptions (plus pre-storm precautionary demand) will roughly balance supply disruptions.

c. Over-stocked.  Since the main roads are clear, but many residential streets remain unplowed, demand will be reduced much more than supply.

Extra points if you can derive your prediction from your initial theory about the pre-blizzard shortages.

Update: (a) holds for the local Giant.  (c) holds for the local Costco.

Sumner writes:

I'm not convinced mood swings are as obvious as they might seem.  I've argued that the stock market crash of 1929 was a rational response to the sudden awareness that we were rushing headlong into Depression.  I wonder if that stock market crash was one of those examples where Bryan thinks it's "obvious" there was a mood swing.  Even if Bryan doesn't believe that, I'd estimate about 99.9% of historians do look at the crash that way.

I'm not going to argue the Depression with an expert like Scott.  But I saw the 2008 crash and subsequent downturn with my own eyes, and I'm convinced that mood played a key role.  The world freaked out, big time.  It was the economic analog of a riot.

But hasn't Sumner shown that the fundamental problem was falling nominal GDP?   I'm sympathetic, but he never really explains why money velocity suddenly plunged.  (Yes, the Fed started paying interest on reserves, but that's far from the whole story).  After the 2008 crash, people clearly became much more reluctant to spend, holding their income constant.  Why?  Partly because their net worth had fallen, but as people often point out, that didn't seem to matter after the 1987 crash.  What was difference?  In 2008, far more people were scared out of their minds, which scared people who hadn't been scared by the original shock, which scared additional people...

What would a full-blown mood theory of macro fluctuations look like?  Ideally it would begin at the micro level - with the individual psychology of traumatic events.  What exactly scares people, and how long do they stay scared?  Then we'd move to the social psychology of fear - how do we respond to other people's fear, and how does "social proof" affect individuals' emotional recovery?  Once we've got these psychological patterns nailed down, it would be easy to insert them into a standard New Keynesian nominal rigidities model and see what happens.

Empirically grounded mood theories will probably imply that fluctuations are (slowly) self-correcting even in the presence of total nominal rigidity.  The large literature on hedonic adaptation finds that even after blood-curdling experiences, normal people don't remain miserable/ fearful/ angry forever.  After six months or a year, people come to terms with what happened.  It's almost like they get bored of feeling afraid. 

Of course, this doesn't mean that a year after the 2008 crash, our average mood will revert to normal.  The effects of the initial panic ripple out gradually.  People who lost their shirts in 2008 probably feel mostly better by now.  People who lost their jobs last month still feel like the world is ending.

None of this means that mood is the whole story.   Mood, market conditions, and policy all interact.  For example, if nominal wages were perfectly flexible, the anxiety ripple effects of consumer panic would be far more muted.  After a fear-driven demand shock, prices and wages would fall, output and employment would stay the same, and life would get back to normal.  To take another example: If Sumner ran the Fed, he would have maintained nominal GDP, and fear would have been localized to the construction and mortgage industries.

Is mood just Keynesian "animal spirits" in new clothes?  For that, I'll defer to historians of thought.  But the difference between a mood story and textbook Keynesianism is that the mood story would explicitly build on empirical psychology.  In textbook Keynesianism, the "animal spirits" can do almost anything.  A serious mood theory, in contrast, would be constrained by evidence on e.g. the timing of hedonic adaptation.

One last question: What are the policy implications of macro mood theories?  Many economists hastily assume psychological stories boost the case for government intervention, but that's far from clear.  (See e.g. my lecture on "Behavioral Political Economy").  Mood theories amplify the case for preventative flexibility; if wage rigidity fans the flames of panic, that's yet another reason against labor market regulation.   Mood theories allow for the possibility that decisive government action (or mere rhetoric!) could save the day; but they also suggest that decisive government action could start the very stampede it's supposed to stop.  Furthermore, the empirics of hedonic adaptation highlight a self-correcting psychological mechanism that supplements the self-correcting market mechanism.

In any case, we should figure out whether mood theories are true before we start worrying about their policy implications.  If I chose macro theories purely for their policy implications, I'd be an Austrian.  But I'm not.

This is going to be a random daydream sort of post. It beats watching Super Bowl pregame or doing pointless snow-shoveling (you loaded 16 tons, what do you get? Another day older and deeper in debt).

I want the U.S. to return to Federalism. But some of our states are too large--California has a higher population than any of the non-U.S. countries that are in the top 10 of the economic freedom index. And some states are too small. Finally, some cities are ridiculously large, but they are not easy to break up. So here is my proposal:

1. The New York Times editorializes,

Here is an unpopular but undeniable fact of life: When private sector demand is weak, the federal government must serve as the spender of last resort.

When the New York Times entitles an editorial "The Truth About..." what it really means is "the liberal elite narrative about..."

The narrative is that we are suffering from a shortfall in demand. The reality is that the private sector has decided that workers should be hired on the basis of profits, rather than on the basis of debt. The government may choose to make a different decision, of course, but that will not necessarily strengthen our economy.

The editorial continues,

To truly tame deficits will require serious health care reform

Is this the truth? In Washington, serious health care reform means "fixing" private health insurance. But our deficits are caused not by problems in private health insurance. They are caused by the structure of Medicare and Medicaid. That is where we need reform. But the Times and other liberal mouthpieces need to create a narrative that makes it sound as though unsound government programs are the fault of the private sector.

2. Tyler Cowen writes,

When it comes to the big issues, voters at the midpoint usually get the policies, if not always the exact outcomes, they want. In the federal budget, the largest line items include Social Security, Medicare, Medicaid and military spending -- all very popular programs. The interest on the national debt is mounting because we don't like paying higher taxes now for all those benefits, so our government borrows to postpone the pain.

In the immortal words of Pogo, we have met the enemy and he is us.

Take a look at the top ten countries in the economic freedom index. Then look at the top ten countries by population. The United States is the only country in both lists, and at the rate things are going we will not be in the top ten in terms of economic freedom much longer.

My reading is that there are serious diseconomies of scale in governance. The larger the polity, the worse the ability to govern. Yes, some small countries are very un-free, but the most-free countries are all small. Of the other countries in the top ten in terms of economic freedom, Canada has the largest population, and it is barely more than 1/10th of ours. My impression is that Canada also is less centralized than the U.S., with more autonomy in the provinces.

Several readers have asked how one can prepare financially for a collapse of European currencies. Perhaps in the short run the U.S. dollar will be helped, but I would be thinking in terms of securities from countries like Canada, New Zealand, Singapore, and Switzerland.

Ultimately, I think that democracy is a very unreliable friend of economic freedom. The ability to vote with your feet is more valuable than the ability to cast a ballot. The trend in the U.S. is toward giving people less power to vote with their feet, as power becomes more centralized. If the median voter would like more decentralization, that is one message that is not getting through.

I just finished filling out my survey on my views of the Food and Drug Administration's monopoly on approvals of drugs and medical devices. I was one of 305 economists asked by Econ Journal Watch to do so.

Most of the questions allowed for answers of the yes/no or strongly disagree to strongly agree variety. But at the end, I got to comment at greater length. The last question is:

Do you have any general comments about this questionnaire or further thoughts about the matters treated?

I answered:

Yes. I would have liked to give my reasons for things. Specifically, the question about government's knowledge. We are individuals with different incomes, wealth, inclination, attitudes to risk, etc. The idea that government can make good decisions about what drugs we should have is as absurd as the idea that government can make good decisions about what places we should be allowed to travel to.

A blizzard is about to hit DC.  As reports of its magnitude spread yesterday, people unsurprisingly rushed to grocery stores to stock up.  Stores unsurprisingly failed to raise prices to cope with this sudden demand shock.  By the time I got to the grocery store last night around 11 PM, many of the shelves were unsurprisingly empty.

Many, but not all.  They were out of milk and bread, but there was still plenty of cheese and chocolate.  That was easily explained - people knew they could shop again in a few days, so they only needed to stock up on staples.  But the more I looked around, the more puzzled I was.

Here's what I noticed: For any given type of product, the most popular brand always sold out first.  There were no Eggo waffles, but plenty of Wegmans brand waffles.  All the national brands of hot dogs and sausages were gone, but there were plenty of obscure sausages still on the shelves.  If you broadened the categories, the pattern remained.  In produce, all the bananas were gone, but there were still plenty of apples.

You might say, "What's the puzzle?  Of course the most popular stuff sells out first."  But that's a feeble explanation.  After all, if X is ten times more popular than Y, then you'd expect stores to simply carry ten times as much X as Y.  Why would X sell out faster in a blizzard if stores have already taken its greater popularity into account?

Bryan posted earlier this week on why means testing is "awesome." While I do think that future budget deficits will push us towards some version of means testing, I can't agree that it's awesome. It just may be less bad than what he accurately characterizes as "taking from Peter to pay Peter."

Specifically, I see three problems with means testing. None of these problems necessarily means that means testing is worse than what we have now, but they are big negatives.

1. The phase-out issue.
Bryan recognizes that you wouldn't want to give benefits below income threshold x and then zero benefits to people above that threshold. It's important to say why. The reason is that when you earn the first dollar that puts you at $x+1, your implicit marginal tax rate on that $ could be hundreds of thousands of percent. I made that point earlier in discussing a proposal by Megan McArdle. So what's the alternative? Phase out the benefit over some income range, recognizing, as one of the commenters on Bryan's post pointed out, that the implicit marginal tax rate over that income range could be quite high. Take Bryan's proposal of giving a benefit to the bottom decile and then phasing it out over the next decile. Let's say the benefit is a $5,000 government check. Just eye-balling the data, I estimate that the bottom decile (about 8 million families) in 2008 had income between $0 and $17,500 and the second from the bottom decile had income from $17,500 to about $28,500. So that's $11,000 of income over which to phase out a $5,000 benefit. The implicit marginal tax rate from that phase-out alone is, therefore, $5,000/$11,000 or 45%. That's on top of other tax rates.

2. What are means?
Without exception, every time I've seen someone advocate means testing, he uses income as his measure of means. This completely ignores wealth. Although income and wealth are highly positively correlated, the correlation is not close to 1.0. Therefore means testing would discriminate in favor of wealthy people with low income. Because the most expensive programs for which means testing is advocated tend to be for the elderly, this is an even bigger problem. Among the retired population, the correlation between income and wealth is even weaker, I believe, than among the population in general.

3. The fairness issue.
Again, because the programs at issue tend to be for the elderly, there can be huge differences in income because one family saved a large percent over the years, and is earning interest and dividends on that income, and the other family saved 0 and relies on Social Security. This could be so even though the two families had a similar age-earnings profile. It's unfair. I know that the program per se is unfair, with or without means testing, but this one seems particularly unfair.

Yesterday, Nick and I spoke at Cato, with comments by Tim Kane and introductory remarks from Brink Lindsey. You can watch or listen to it by going to this page.My personal bit starts at minute 22, or shortly thereafter.

Actually, I think that Tim does the best selling job for the book.

Carmen Reinhart talks to the WSJ.

historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we're in for a period where that kind of scenario is very likely. I don't think a repeat of the fall of 2008 is at stake here, where it looks like the world is going to end. But I do think there is still, for reasons that are beyond me, quite a bit of complacency out there. Eastern Europe is another source of concern, and Europe has limited resources. You can rescue one. You can maybe rescue two. But you can't rescue all of them. The Baltics are very vulnerable. Romania is vulnerable. Hungary is vulnerable. Problems in these countries feed back to their lenders. Austrian bank exposure to Eastern Europe is great. The Italian exposure to Eastern Europe is great. The Swedish exposure is non-trivial.

It's probably not a good idea to position myself to the pessimistic side of Reinhart, but I am tempted to do that. I think that at this point, a wave of sovereign debt crises would make the 2008 Lehman-Freddie-Fannie-AIG collapses seem like a walk in the park.

Psychologically, there is no worse time to hit someone with a new problem than just after they think their troubles are over. The markets have been thinking that we've put the financial crisis behind us. I do not think that investors and taxpayers have the stamina to go through another round of collapses and bailouts.

The key indicator to watch will be the interest rate on Treasuries and the value of the dollar. So far, the rumblings in Europe seem to be causing people to once again flee to the good old U.S. of A. But I'm not sure how long people are going to feel comfortable with putting more of their eggs in the U.S. Treasury basket. My guess is that the expiration date on our "safe haven" status is no longer measured in years, but in months. Or it could be weeks.

Have a nice day.

When Tyler accused my critique of Eggers and O'Leary (E&O) of being "surprisingly meliorist," I felt a sudden need to check the definition of the word:

me·lio·rism

Pronunciation: \ˈmēl-yə-ˌri-zəm, ˈmē-lē-ə-\

Function: noun

Date: 1877

: the belief that the world tends to improve and that humans can aid its betterment

Guilty as charged!  The only mystery is why Tyler imagined I might be anything else.  He's seen my meliorism on a near-daily basis for the last thirteen years.   He should know better than to say, "I once read a book that suggested voters were doomed to irrationality (albeit to varying degrees)."  We were together at the 2009 Mont Pelerin Society meetings when I presented an entire paper attacking this misinterpretation of my book.

But what about Tyler's substantive point?

If voters can be taught the correct sophisticated mix of cynicism and pro-liberty sentiment, can they not be taught to support good policies, thus making democracy a well-functioning system of government?

The answer, of course, is that I favor teaching the public (a) that the logical response to cynicism about government is support for smaller government, and (b) what policies are good.  Neither is easily taught.  But there's nothing in the definition of meliorism that says that improving the world is easy.

In any case, E&O's lesson plan is more challenging than mine, and less true.  Like me, they want to educate people about what policies are good.  The difference: Instead of teaching people that cynicism about government is an argument for liberty, they want to teach people to stop being so cynical about government.  While we're both fighting uphill battles, I'm starting on higher ground.  At least I can build upon the public's justified cynicism.  E&O have to somehow trick the public into trusting the typical politician.

From the Washington Post

1. In Finance

The Federal Reserve would consider reopening its program to support the mortgage market if interest rates spiked or the economy showed new weakness, Federal Reserve Bank of New York President William C. Dudley said in two new interviews.

Rates on 30-year, fixed-rate mortgages are 5 percent. The market wants those rates to be higher. Down the road, the market probably will want those rates to be much, much higher. If so, the ultimate lenders are going to take huge losses, as the interest rates they pay to keep these mortgages in portfolio will exceed 5 percent.

Who will bear these losses? As taxpayers, we will.

Michael Gerson writes,

For the second budget in a row, President Obama has proposed to reduce the tax deductions on donations by the wealthy, making it about 10 percent more costly for them to give to charity -- and gaining the federal government about $300 billion in revenue over 10 years.

To me, this is absolutely the most Obaminable tax proposal. Stealing from charities to give to the government. I favor doing exactly the opposite--making it more attractive for more people to give to charity rather than pay taxes.

From the lead editorial:

Most candidates for local office in Montgomery County covet the endorsement of the county teachers union more than any other, and all of them know the drill: Appear at union events, fill out the union questionnaire, submit to the union interview. The union, representing 11,000 teachers, helpfully provides a road map to candidates seeking its blessing, including 11 criteria spelled out in painstaking detail online. Just one thing is missing from this handy guide: Candidates who receive the union's stamp of approval are also then expected to pay.

...In the latest elections for the Montgomery County Council, in 2006, most candidates on the union-approved (and trademarked) "Apple Ballot" coughed up the maximum contribution allowed by state law, $6,000, to a PAC run by the Montgomery County Education Association, as the teachers union is known. Union-backed candidates for the Board of Education also paid handsomely. Supposedly, these funds covered the cost of the union's mailings to constituents and other activities on behalf of its anointed candidates -- although there is no real accounting on a campaign-by-campaign basis. In theory, these contributions are voluntary. In fact, several sources told us that the MCEA's chief political strategist, Jon Gerson, made it clear that he expected candidates, once endorsed, to pay what they "owed" for the union's campaign on their behalf. One candidate, asked to explain the decision to pay, answered concisely: "Fear."

I live in Montgomery County, which is why I know what a one-party state feels like. It is nominally the Democratic Party that is in charge, but in reality party affiliation does not matter. The teachers' union is in total control here.

What links these three stories is that they all involve state power infringing on civil society.