How To Teach The Recession? The Financial Crisis As Case Study

How do we teach economics students about one of the most fascinating case studies in our recent economic history and one they can probably relate to personally? Hoover Institution fellow John B. Taylor, a well-known economist who teaches at Stanford, has some ideas on how the recent crisis can be used to teach economic theory. As Taylor points out, the history of the recession is still being written so professors will have different views on what lessons it holds. He offers a few of his own in the form of slides from a recent talk he gave on the topic.

Two graphs I found particularly interesting:

Graph by John B. Taylor, Stanford University

Graph by John B. Taylor, Stanford University

The first graph shows the failure of increases in personal income due to the stimulus to increase spending on personal consumption. This data supports Milton Friedman’s personal income hypothesis (PIH) that people make their consumption decisions based on their long-term income expectations, and short-term changes in income (like tax rebates and other temporary stimulus measures) don’t have much of an impact on consumer spending. The second graph shows how targeted incentives – like the “Cash for Clunkers” program that offset the cost of newer, more fuel-efficient vehicles for people who traded in their old cars – can bend the PIH and increase personal consumption spending.

You can find more on Taylor’s blog.

Lessons From the Financial Crisis For Teaching Economics
John B. Taylor // Hoover Institution // June 6, 2011

Another TSA Battle Brewing, This Time Over Privatizing Airport Security (Part 2)

As I reported earlier, the latest TSA-related controversy is whether the agency should expand a program that allows airports to contract out security screening to private firms.

Image Credit: Tim Beach

The debate is mainly about costs: the TSA claims privately-operated screening is more expensive while the House Committee on Transportation and Infrastructure asserts that it costs significantly less. As I outlined in my previous post, there are problems with both estimates, especially the House Committee one, so for now I think the jury’s still out on the cost question.

I can’t believe I actually have to say this given that we’re talking about airplane security, but I don’t think money should be our primary consideration here. I don’t care which type of screening is cheaper if it doesn’t keep me safe (or if it involves extensive groping and general disregard for my desire not to be groped). Previous TSA studies only took a limited look at screener performance and the new House Committee study doesn’t analyze performance at all, probably because it is difficult to measure.

Here’s why we need to nail down a comparison of private and TSA-managed screening performance before we even start to look at costs:

With goods and services that are simple to measure, such as providing garbage pickup or manufacturing license plates, it’s easy to determine how well a government agency or private contractor is doing the job and at what cost. When the good or service in question is a complex one like education or healthcare, measuring success is much more difficult and it’s harder to hold an agency accountable for the quality of services it provides.

The performance measurement problem plays out differently for government agencies and private contractors. Government bureaucracy can hinder innovation and responsiveness, as we saw when the TSA refused to respond to public anger over invasive screening techniques. The million dollar question in that debate was a performance measurement question we didn’t have the answer to – was the TSA keeping us safer (i.e. performing better) by doing the screenings? If we had hard data showing that the answer was no, these screening techniques would already be gone.

When private firms provide publicly funded services that are difficult to measure, the problem has less to do with bureaucracy and more to do with profits. Government agencies have a tendency to operate up to their allotted budgets, while private contractors try to kept their costs as low as possible to maximize profit. When it’s hard for us to hold private firms accountable for their performance, their incentive to skimp on costs is greater. This is why privately-run prisons have encountered so many problems and, as the LA Times reminds us, it’s part of the reason the TSA was created in the first place.

The question right now shouldn’t be whether or not to privatize airport security screening. It should be how we can really measure performance of this task. Once that is determined, we can analyze whether private or TSA-managed screeners perform better, and factor in other concerns like cost and political ideology.

Innovative Ideas: An Online Forum For Lobbying

Fun fact of the day: For every Washington lobbyist representing a public interest group or union, there are 16 representing business interests.

The Brookings Institution has a novel proposal for dealing with the $3.5 billion lobbying industry: encourage more of it. In a new brief, Lee Drutman asserts that the problem isn’t lobbying itself, but that the current system gives an outsize voice to those with the most to spend. His solution? A comprehensive government-run online clearinghouse where any group or individual – from business lobbyists and public interest groups to academics and private citizens – can comment on proposed legislation and view the positions of others. In Drutman’s vision, Congressional representatives would require professional lobbyists to post to their positions on the site as a precondition for meeting face-to-face. If widely used, such a system could increase transparency and accountability in lobbying and lower the barrier for less wealthy groups and individuals to attempt to influence government policy.

While I think a central policymaking forum to which all interested parties contribute in a spirit of lively public debate would be a beautiful thing, it seems a bit pie-in-the-sky for our current political system. However, there are pieces of Drutman’s plan I believe we could realistically implement to great benefit:

(1) A streamlined, centralized system for constituents to communicate opinions to their representatives. Imagine if you could go to one website, select a proposed bill or issue, use a series of dropdown menus to articulate your opinion on the topic, add extra text comments if you like, and then hit a button to have your input sent to all your representatives. This kind of system would allow legislators to obtain richer data on their constituents’ perspectives more quickly and easily than under existing systems (90% of constituent feedback currently comes via email).

(2) An online clearinghouse that aggregates the public positions of key actors on proposed legislation. Industry groups, public interest organizations, think tanks and others frequently release statements of their positions on pending legislation, though these materials are scattered around the internet and often only the loudest or best-funded voices see their opinions make it into the media. A voluntary, NGO-operated site that collects position statements from any organization willing to publicly comment on a bill would be immensely helpful to legislators, their staff, journalists, and citizens, and might eventually morph into a system like the one Drutman proposes.

A Better Way to Fix Lobbying
The Brookings Institution // Lee Drutman // June 2011

Another TSA Battle Brewing, This Time Over Privatizing Airport Security (Part 1)

Image Credit: Tim Beach

The Transportation Security Administration (TSA) just can’t catch a break these days. Fliers are still upset about invasive scanning technologies, Republicans have set their budget-slashing sights on the agency’s funding, and now the House Committee on Transportation and Infrastructure, chaired by Representative John L. Mica (R-FL), has issued a report slamming the TSA for halting the privatization of airport security.

Some background: At most airports, passenger and baggage screenings are conducted by TSA employees. The Screening Partnership Program (SPP), however, allows some airports to contract with private firms to conduct screenings in accordance with TSA standards and under TSA oversight, but TSA froze the program in January with little explanation as to why. A 2008 TSA study found that privatized screening at SPP airports cost 17% more and was not significantly more effective than TSA-managed screening. In response to a 2009 GAO review requested by Rep. Mica that identified several weaknesses in the original study design, TSA revised its cost estimates in January 2011 and found private screening to be just 3% more expensive.

Now the House Transportation Committee has released its own report claiming that the TSA fudged the numbers and, based on a comparison of the privately-staffed screening at the San Francisco airport (SFO) and the TSA-staffed screening at the Los Angeles airport (LAX), private screening is cheaper and more efficient than TSA screening.

Unfortunately, what the House Committee has produced is not an evaluation of privately- and publicly-managed airport screening systems. It is a comparison of data from two airports, one of which happens to use private screening and one of which doesn’t, that attributes all differences in screening costs and performance to the private or public management of the screening systems, with no consideration for the many other factors that might account for these differences (such as the age of the technology being used, the layout of the screening areas, or the type of passengers being screened). To point out just one major factor that I didn’t even see mentioned in the report: 15 million passengers on international flights pass through LAX each year, compared to 8 million at SFO, according to the U.S. Department of Transportation. I imagine having nearly twice as many international passengers to screen might slow down your efficiency a bit.

The report goes on to make generalizations, based on this very shaky, limited data, about potential cost-savings from a nation-wide conversion to private screening. Unfortunately, the unfounded claim that privatizing airport security could save $1 billion over five years is now getting media coverage, when the truth is we really don’t know which system is better or cheaper.

A post on The Heritage Foundation’s blog The Foundry glosses over the study’s serious weaknesses and claims in bold text that, “SPP saves taxpayer dollars,” and, “[p]rivate screeners are more efficient.” I’m not sure what caused the post’s author, Jena McNeill, to conclude, “The committee’s report makes a pretty compelling case… that privatization of screening functions makes absolute sense,” but I can pretty much guarantee that, if Rep. Mica asked the GAO to review his own committee’s report, they would tear it to shreds.

Tomorrow I’ll have Part 2 of this post, on why we shouldn’t jump too quickly to privatize airport security, regardless of any potential cost savings…

TSA Ignores More Cost-Effective Screening Model
House Committee on Transportation and Infrastructure // June 3, 2011

Aviation Security: TSA’s Revised Cost Comparison Provides a More Reasonable Basis for Comparing the Costs of Private-Sector and TSA Screeners
U.S. Government Accountability Office // March 4, 2011

Aviation Security: TSA’s Cost and Performance Study of Private-Sector Airport Screening
U.S. Government Accountability Office // January 9, 2009

How Much Is A College Degree Worth? The Answer Depends On How You Look At It…

Image Source: The Brookings Institution, Michael Greenstone & Adam Looney

Many young people chose to weather the recession by hiding out within the confines of a classroom, hoping the economy would improve by the time they graduated. College enrollment jumped 6% between fall 2007 and fall 2008 (the largest increase in 40 years), driven primarily by increased enrollment among minority students and at two-year community colleges.

Flash forward a few years and unemployment is still high, especially among young people. So did these college students make the right choice? According to a new Brookings Institution analysis of employment and earnings among 23 and 24 year olds in 2010, they did. Despite the fact that recent college graduates are earning less and are more likely to be unemployed than they were in 2007, those with a college education are still faring much better than those without. Among young adults, more education continues to translate into significantly higher earnings and employment rates, as can be seen in the graph above, suggesting that it may not take long for college grads to make up any earnings they sacrificed by choosing to focus on their education.

While the economic benefit of a college degree is significant, I think the authors of this analysis overstate it slightly. They present two advantages of a college degree: the employment advantage (college graduates are more likely to be employed) and the earnings advantage (college graduates earn higher wages). But because their earnings figures include the entire population of 23 and 24 year olds, even those who don’t have a job, the employment advantage also gets folded into the earnings advantage. If you extrapolate from their data and look only at 23 and 24 year olds who are employed, those with a college degree make $660 a week and those with a high school degree make $477 a week. The earnings of employed college graduates are 40% higher than those of employed high school graduates, a slightly smaller figure than the 90% earnings advantage we see with Greenstone and Looney’s numbers.

How Do Recent College Grads Really Stack Up? Employment and Earnings for Graduates of the Great Recession
The Brookings Institution // Michael Greenstone & Adam Looney // June 3, 2011

Bush Tax Cuts Turn 10, Having Added $2.6 Trillion to Our Debt

In honor of the tenth anniversary of the passage of the first Bush-era tax cuts next week, the Economic Policy Institute has released a report summarizing their impact. Perhaps I should say, “in dishonor of the anniversary”, as it is pretty clear where the authors stand on the cuts: “[T]he Bush tax cuts have exacerbated the trend of widening income inequality, accompanied the worst economic expansion since World War II, and turned budget surpluses into deficits.”

While much of their report summarizes existing research, it’s interesting to consider in light of current debates about the deficit and our long-term budget crisis. According to EPI, the Bush-era tax cuts added $2.6 trillion to the national debt, almost half of the new debt we accumulated over the past decade, and have already cost $400 billion in increased interest payments. This recent graph from the Center on Budget and Policy Priorities shows that the cuts added more to our debt than the Iraq and Afghanistan wars, the recession, or the economic stimulus measures implemented under Obama.

The authors of the EPI report also remind us that the tax cuts were originally designed as a response to the 2001 recession, but they suggest the cuts were/are a less effective form of economic stimulus than the tax credits that were included in the 2009 recovery package:

“Moody’s Analytics Chief Economist Mark Zandi estimates that making the Bush income tax cuts permanent would currently generate only 35 cents in economic activity for every dollar in forgone revenue. Targeted refundable tax credits included in the American Recovery and Reinvestment Act, on the other hand, are estimated to generate much more bang-per-buck, ranging from $1.17 for the Making Work Pay Credit to $1.38 for the Child Tax Credit.”

When you think about it in terms of the national debt, which affects everyone, the inequality in the benefit of the tax cuts is quite startling. During the 2010 tax year, 38% of the Bush-era cuts went to those with incomes in the top 1% (over $645,000) and 55% went to those with incomes in the top 10% (over $170,000). Only 1% of the cuts went to families with incomes in the bottom 20%.

I’ll have another post soon on how much letting the cuts expire at the end of 2012 might help our debt crisis.

Tenth Anniversary of The Bush-era Tax Cuts: A decade later, the Bush tax cuts remain expensive, ineffective, and unfair.
Economic Policy Institute // Andrew Fieldhouse and Ethan Pollack // June 1, 2011

Welcome to The Policy Brief

The idea for this blog grew, like many good ideas do, out of frustration. After time spent studying public policy and working in the think tank trenches, breathing the politics-saturated air in Washington, and closely following our country’s political course during the Bush and Obama years, I feel discouraged by the degree to which facts and research often get sidelined in our political discourse and policymaking process. The wealth of quality public policy research being produced at think tanks, universities, and other organizations is not having the full impact it could or should on our political conversations and decision-making. The Policy Brief is my small effort to bridge this gap and bring new, innovative social and economic policy research to a broader audience.

For more about me and the vision for this blog, click here.