PARK PLACE
Cantor, Burke and Political Representation

Eric Cantor’s primary loss to a Tea Party Republican is a major political event. There will be a lot of discussion of the causes and consequences, particularly as it relates to immigration reform. But Jay Newton Small writing in Time cautions against such policy conclusions and quotes Virginia Democratic strategist Dave “Mudcat” Saunders in suggesting a more mundane reason for Cantor’s defeat. 

People talk. And they talk about Eric Cantor. ‘Where is he?’ His constituent services suck. He was never in the district. And when he was in the district and he went out, he had a [security] entourage with him. He was out gallivanting all over the country being a big deal and this is a lesson.

If Virginia’s 7th District was upset that Cantor’s political ambition was self-serving, then it is a reasonable complaint. But if Cantor’s political constituency is upset that Cantor was trying to represent the interest of the country rather than the parochial concerns of his district, I am reminded of Edmund Burke’s “Speech to the Electors of Bristol” in 1774.

Parliament is not a congress of ambassadors from different and hostile interests; which interests each must maintain, as an agent and advocate, against other agents and advocates; but parliament is a deliberative assembly of one nation, with one interest, that of the whole; where, not local purposes, not local prejudices, ought to guide, but the general good, resulting from the general reason of the whole. You choose a member indeed; but when you have chosen him, he is not member of Bristol, but he is a member of parliament. If the local constituent should have an interest, or should form an hasty opinion, evidently opposite to the real good of the rest of the community, the member for that place ought to be as far, as any other, from any endeavour to give it effect. I beg pardon for saying so much on this subject.

Burke lost his seat in 1780. 

Adam Smith and Inequality

Chris House has a post connecting Adam Smith’s Wealth of Nations to inequality. Specifically, he notes that the flipside to the division of labo(u)r that Smith attributes for an increase in productivity is that workers become more specialized and therefore more exposed to economic shocks specific to their industry. House notes that the typical economic response to risk is insurance, but that such “career insurance” is not available. Mark Thoma points out that this market failure suggests a role for government.

Having just re-read the relevant portion of Wealth of Nations for my Urban Policy course, I want to highlight another section:

The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause, as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education. When they came into the world, and for the first six or eight years of their existence, they were perhaps, very much alike, and neither their parents nor playfellows could perceive any remarkable difference. About that age, or soon after, they come to be employed in very different occupations. The difference of talents comes then to be taken notice of, and widens by degrees, till at last the vanity of the philosopher is willing to acknowledge scarce any resemblance. But without the disposition to truck, barter, and exchange, every man must have procured to himself every necessary and conveniency of life which he wanted. All must have had the same duties to perform, and the same work to do, and there could have been no such difference of employment as could alone give occasion to any great difference of talents.

Smith is obviously on the “nurture” side of the nature vs. nurture debate, arguing that people are “very much alike” but become differentiated by “habit, custom, and education.” These differences are necessary for the division of labor that makes society as a whole more productive, but often come to be mistaken for natural abilities (I would also argue they may become mistaken for the natural consequence of effort and hard work). The differences continue to widen to the degree that “the vanity of the philosopher is willing to acknowledge scarce any resemblance” to the common street porter.

Smith isn’t denying the success of the philosopher, but arguing that it was made possible through specialization that depends on other individuals, even the common porter. It is the “You Didn’t Build That” argument in 1776 and still has clear relevance in the age the 1% vs. the 99%.

NC Employment and Labor Force

Given the debate about extending unemployment insurance benefits, North Carolina has been in the news recently for cutting its benefits in July 2013. Last month, the American Enterprise Institute’s James Pethokoukis concluded,

Did reducing the number of North Carolina residents eligible for federal extended unemployment benefits boost employment? These data suggest it did not, a reality Washington policymakers might want to consider.

And just today, Paul Krugman commented

North Carolina is an interesting place these days, and I mean that in the worst possible way…[I]f there were anything to the theory that cutting unemployment benefits encourages job search and somehow translates into higher employment even in a slump, harsh policies should work better at the state than at the national level. But there is no sign at all that North Carolina’s harshness has done anything except make the lives of the unemployed even more miserable.

Pethokoukis relies on just labor market figures from North Carolina to make his point. Krugman does a bit better in comparing North Carolina to the rest of the country.

I thought I could go a little farther in ensuring that differences in employment and labor force are due to policy changes, not other factors affecting labor markets. My approach is to only look at those counties in North Carolina and neighboring states that are located along the state border.

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Neighboring counties are likely sharing overall economic experiences, so there is a stronger case that differences in employment and labor force trends are linked to North Carolina’s “policy experiment.”

So what does the unemployment rate look like in these border counties?

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North Carolina’s border counties have a higher unemployment rate than their neighbors, but that difference narrowed considerably after July. Specifically, the aggregate unemployment rate fell from 9.4% to 7.9% (1.5 percentage points) while the comparison counties saw their rate fall from 7.8% to 7.0% (only 0.8 percentage points).

The change is more noticeable if you index the unemployment rate by its July 2013 level.

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Of course, Pethokoukis and Krugman note that the fall in the unemployment rate may be misleading. The unemployment rate is a ratio of the number of unemployed and the size of the labor force. As workers become discouraged and stop looking for work, the Bureau of Labor Statistics no longer counts them as unemployed or in the labor force. Consequently, the unemployment rate can fall by workers giving up— not exactly the sign of a robust labor market.

Indeed, that does seem to be the case.

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The decline in the size of the labor force is small (-0.67% in North Carolina counties compared to -0.42% in comparison counties) and the trend appear to precede the end of extended benefits in July, but North Carolina border counties have seen their labor force shrink more than neighboring counties.

But that is not to say the conservative argument is bunk (side note: the term “bunk" comes from Buncombe County in North Carolina). North Carolina border counties have seen a noticeable bump in the number of employed residents relative to their neighborhoods. Like the change in the labor force, the change here is small (0.97% compared to 0.43%), but should be noted.

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We can actually quantify which effect —the decrease in labor force or the increase in employment— is most responsible for the decline in the unemployment rate. If you were to hold the size of the labor force constant at its July 2013 level but allow employment to increase as it actually did, the unemployment rate would have fallen 0.9 percentage points in North Carolina border counties at 0.4 percentage points in neighboring counties. If you hold the level of employment constant and allow the labor force to shrink, the unemployment rate falls 0.6 percentage points in North Carolina and again 0.4 percentage points in neighboring counties. So in the comparison group the decline in the unemployment rate is equally accounted for by both effects, but in North Carolina the decline is somewhat more due to the increase in employment than the decline in labor force.

I should note that the small differences here and the margin of error in the household survey used by the Bureau of Labor Statistics likely means none of this is statistically significant and that a longer time series would prove more useful, but none of that will stop pundits from making claims about the North Carolina experience and its relevance to the national debate

Minimum Wage and College Tuition

There have been a couple of instances lately of Republican politicians remembering the “good old days” that inadvertently make the argument for policy actions today. About a year ago, North Carolina congresswoman Virginia Foxx (R-NC) commented,

I went through school, I worked my way through, it took me seven years, I never borrowed a dime of money. He borrowed a little bit because we both were totally on our own when we went to college, totally. […] I have very little tolerance for people who tell me that they graduate with $200,000 of debt or even $80,000 of debt because there’s no reason for that. We live in an opportunity society and people are forgetting that. I remind folks all the time that the Declaration of Independence says “life, liberty, and the pursuit of happiness.” You don’t have it dumped in your lap.

Rep. Foxx graduated from the University of North Carolina at Chapel Hill in 1968. The College Board’s data on college tuition only go back to the 1971/72 school year, but it is clear that college has become a lot less affordable. Tuition and fees at a four year public college are four times what they were forty years ago even after accounting for inflation!

The other instance reflects the debate over the minimum wage after President Obama proposed increasing the federal minimum wage to $9 per hour. Tennessee Rep. Marsha Blackburn (R) reflected,

What we’re hearing from moms and from school teachers is that there needs to be a lower entry level, so that you can get 16-, 17-, 18-year-olds into the process. Chuck, I remember my first job, when I was working in a retail store, down there, growing up in Laurel, Mississippi. I was making like $2.15 an hour. And I was taught how to responsibly handle those customer interactions. And I appreciated that opportunity.

But as ThinkProgress points out

Blackburn was born in 1952, so she likely took that retail job at some point between 1968 and 1970. And according to the Bureau of Labor Statistics’ inflation calculator, the $2.15 an hour Blackburn made then is worth somewhere between $12.72 and $14.18 an hour in today’s dollars, depending on which year she started.

At that time, the minimum wage was $1.60, equivalent to $10.56 in today’s terms

Combining both of these threads, below is a chart of the nominal cost of a public for year college and the annual income of someone working full time (40 hours a week for 52 weeks) at the minimum wage.

And here is a chart of the number of hours one would need to work at minimum wage in order to afford college.

In 1971, you would need to work about 235 hours at minimum wage to afford tuition and fees at a public four-year college, and another 613 hours for room and board. In 2013, you would need to work 1,194 hours for tuition and another 1,270 for room and board. The number of minimum wage hours needed to pay tuition and feeds is over five times what is was forty year ago, and total costs including tuition, fees, room and board is almost three times as expense if terms of hours.

The last employment figures before the election show an increase of 171,000 total nonfarm jobs in October and a revised total of 511,000 over the last three months. I have updated my jobs chart, which is centered on February 2009 - President Obama’s first full month in office. The dashed line shows October 2004, the same period under President Bush’s first term. Overall, total employment has grown 0.7% under Obama, compared to a loss of 0.3% under Bush. More dramatically, Obama has seen a 1.3% increase in private sector jobs while the public sector shrank 2.5% (note: the spike around May 2010 is due to the Census). In contrast, private sector employment shrank under Bush by 1.0% and the public sector grew 3.6%.
Almost 1.5 million private sector jobs have been added since Obama took office. And since the economy stopped hemorrhaging jobs, it has experienced 32 months of consecutive private sector growth, adding almost 5 million jobs. If the public sector had the same number of jobs as it did when Obama took office, the economy would also have another 566,000 jobs.

The last employment figures before the election show an increase of 171,000 total nonfarm jobs in October and a revised total of 511,000 over the last three months. I have updated my jobs chart, which is centered on February 2009 - President Obama’s first full month in office. The dashed line shows October 2004, the same period under President Bush’s first term. Overall, total employment has grown 0.7% under Obama, compared to a loss of 0.3% under Bush. More dramatically, Obama has seen a 1.3% increase in private sector jobs while the public sector shrank 2.5% (note: the spike around May 2010 is due to the Census). In contrast, private sector employment shrank under Bush by 1.0% and the public sector grew 3.6%.

Almost 1.5 million private sector jobs have been added since Obama took office. And since the economy stopped hemorrhaging jobs, it has experienced 32 months of consecutive private sector growth, adding almost 5 million jobs. If the public sector had the same number of jobs as it did when Obama took office, the economy would also have another 566,000 jobs.

The above chart shows the number of jobs over the last two presidents by private sector vs. public sector. The number for each is indexed so that February of 2009, President Obama’s first full month in office, equals 100. What is obvious is that the public sector, measured by government jobs at the local, state and federal levels, grew immensely under Bush and has fallen drastically under Obama. Just looking at the first 43 months in office (using February 2001 as the baseline for Bush), government jobs are down 2.5% under Obama but were up 3.5% under Bush. In contrast, private sector jobs were down1.3% under Bush and are up1.1% under Obama. In fact, Obama has presided over a net increase in total jobs by 0.5% while jobs were down 0.6% at this point in the Bush presidency. And the recession that Obama inherited was many times worse than the one Bush inherited.
(Note: the spike in government jobs in 2010 is due to the Census, not some “artificial” stimulus plan)

The above chart shows the number of jobs over the last two presidents by private sector vs. public sector. The number for each is indexed so that February of 2009, President Obama’s first full month in office, equals 100. What is obvious is that the public sector, measured by government jobs at the local, state and federal levels, grew immensely under Bush and has fallen drastically under Obama. Just looking at the first 43 months in office (using February 2001 as the baseline for Bush), government jobs are down 2.5% under Obama but were up 3.5% under Bush. In contrast, private sector jobs were down1.3% under Bush and are up1.1% under Obama. In fact, Obama has presided over a net increase in total jobs by 0.5% while jobs were down 0.6% at this point in the Bush presidency. And the recession that Obama inherited was many times worse than the one Bush inherited.

(Note: the spike in government jobs in 2010 is due to the Census, not some “artificial” stimulus plan)

Count Model Decision Tree
I’m in the middle of studying for my comprehensive exams and made this decision tree for dealing with count data.

Count Model Decision Tree


I’m in the middle of studying for my comprehensive exams and made this decision tree for dealing with count data.

FHA and the Great Depresson scenario

I’ve been reading the first independent actuarial review of the Federal Housing Administration’s Mutual Mortgage Insurance Fund from 1989 and noticed this:


Because FHA is essentially an insurer of mortgages, the credit rating approach reflects this methodology for issuing bond rating for private mortgage insurers. This methodology is applied through a stress test using a most detrimental scenario to determine how long an insurer (FHA) would survive a Great Depression scenario. This scenario includes four consecutive years of 10 percent nominal declines in house prices, a rise in the unemployment rate to 20 percent, and 5 percentage point declines in interest rates…..[W]e assume that the social purpose of the Fund is such that it should not be expected to withstand such a calamity. (emphasis added)

Four years of 10 percent house price declines comes to a 34.4% peak-to-trough decline; according to the S&P/Case-Shiller National Home Price Index, we’ve had a 34.7% decline although spread over almost six years. The contract rate on conventional mortgages reported by Freddie Mac have fallen 3.2 percentage points, so short of 5, but that also excludes higher rate subprime loans that Freddie didn’t buy. Headline unemployment peaked at only 10.6%, but the broader U-6 measure that includes workers marginally attached for economic reasons went to 18%.

So not quite the Great Depression, but pretty bad. And FHA is officially solvent, for now…

Power and Early Evidence of the Confidence Fairy

I am sure everyone has at least heard about Mitt Romney’s “Boca Moment” — Romney was secretly videotaped at a fundraiser in Boca Raton, FL back in May denigrating the 47% of Americans who don’t pay income tax. However, what I want to focus on is a little later in the transcript (via NBC):

They’ll— they’ll probably be looking at what the polls are saying, but if it looks like I’m gonna win the market— markets will be happy.  If it looks like the president’s gonna win, the markets should not be terribly happy.  It depends on, of course, which markets you’re talking about.  Which types of commodities and so forth.

But my own view is that if we— if— if— if we win on November 6th there will be— a great deal of optimism about the future of this country.  And we’ll see capital come back and we’ll see— without— without actually doing anything, we’ll (CHUCKLES) actually get a boost in the economy.

Paul Krugman calls this the “Confidence Fairy” —the argument that the mere perception a favorable business environment leads to investment and a self-fulfilling prophecy of economic growth without any actual policy changes. Alternatively, “uncertainty” about possible adverse policy changes stymies investment and stalls growth.

The quote reminded me of a contradiction I noticed in Robert Dahl’s 1961 classicWho Governs? Democracy and Power in an American City. In his analysis of the dynamics of power in New Haven, CT, Dahl states:

A few observers of the New Haven scene are convinced that bankers exert financial pressures on politicians in some clandestine way. However, in the course of this study we found no one who had any evidence to support this hypothesis, nor even an informant who could describe very realistically what the nature of the transaction was supposed to be. (p. 241)

But earlier in the study, Dahl provides early evidence of how the Confidence Fairy can influence policy:

The Democratic mayor in New Haven during the Depression was a union official, the only person of nominally working-class status ever to be elected to the office of mayor in New Haven; yet he came into office in 1931 when the city’s credit standing was so poor that it was difficult to carry on the city’s business; he took as his guiding objective the task of restoring the confidence of bankers and investors in the city’s capacity to meet fiscal obligations. Ironically, his policy of strict economy was so rigidly enforced that his defeat by a Republican in 1945 after fourteen years in office was widely attributed to general discontent with the shabby state of the public services. (emphasis added, p. 83-84)

A Democratic leader prevented from implementing his policy agenda due to the need to restore confidence of the financial industry… sound familiar?

Dahl, Robert Alan. Who Governs?: Democracy and Power in an American City. New Haven: Yale University Press, 1961.

My lecture for today’s Housing and Public Policy class.