The Really Big Country Problem

Brad Plumer has a useful piece today about  Sen. Tom Coburn's "Wastebook 2010," which allegedly exposes massive amounts of waste, fraud and abuse in the federal budget. You should read it, but I want to add a separate comment.

Nearly all WFA discussions fall victim to the Really Big Country problem. That is, the United States is a really big country, which means that no matter what kind of weird pathology you go looking for, you'll always find a fair amount of it. Or, more accurately, you'll find what seems to be a fair amount but really isn't. It's why so many parents worry about their kids being snatched off the street by strangers: only about a hundred abductions a year fall into this category, which seems like a lot. But in a country of 300 million, that's actually about as big as the number of people killed each year by lightning strikes. It's incredibly rare. [See update below.]

I'd venture to guess that barely any organization in human history has managed to reduce WFA below about 2%. If you earn $50,000 a year, that means waste of $1,000. Even careful households probably piss away that much each year. If you run a million-dollar small business, it means waste of $20,000 a year. Again: even a very miserly small business probably loses that much. It's just impossible to keep track of every expenditure, monitor every employee every minute of the day, or make sure you get the best price on every possible purchase.

Probably no one would argue too much about this because these numbers are human size. An average family blows a hundred bucks a month on dumb stuff? Sure. A business with half a dozen employees makes $20,000 worth of mistakes each year? Sure. But what about a federal government that spends upwards of $3 trillion per year? The same rate of WFA amounts to $50 billion or more. Or, using the usual budget window, $500 billion over ten years. That seems like an outlandish amount, but it's actually the same 2% as everyone else.

None of this is to say that we shouldn't fight this stuff. Families should, small businesses should, and the government should. Hell, Coburn's book might be a public service. But even if we do a rip-roaring job of fighting WFA and run the cleanest government in human history, any decent investigator will still probably be able to find at least 2% waste in the system. It seems like a huge amount, but it's largely a mirage based on people getting fooled by numbers too big for human comprehension. This happens a lot in modern society.

UPDATE: This doesn't really affect the main point of the post, but I was off base on the abduction figure. It's based on a 2002 report by David Finkelhor, which estimates 115 abductions per year "perpetrated by a stranger or slight acquaintance and involving a child who was transported 50 or more miles, detained overnight, held for ransom or with the intent to keep the child permanently, or killed."

However, a definition that includes any kind of abduction, even those lasting only a few minutes or a few hours, brings the tally up to 58,000 per year — and obviously parents are concerned about these kinds of abductions too. Some of them are what you'd think of as child snatchings and some aren't, but in any case the number is far higher than 115. Using the broader definition, the odds of having your child snatched is (depending on how broadly you cast your net) one in a thousand or less, which is quite low but still nowhere near the odds of being struck by lightning.

Chart of the Day: The Ascent of Man

Here's the latest Gallup poll on what Americans think of evolution 85 years after the Scopes monkey trial. Obviously progress has been slow. But on the bright side, the hardcore creationist position has lost a bit of ground lately while straightforward evolution has shown steady gains over the past decade. The "humans evolved with God guiding" position has stayed steady, and this is the position I associate with people who basically believe in evolution but don't want to be mistaken for godless atheists—which is OK with me. All in all, then, things could be worse. I'm thinking of making that my motto for 2011.

New START Primed For Passage

From National Review editor Rich Lowry:

Republican opposition to New START is collapsing. One Senate source just told me the vote for ratification could go as high as 75. Another said, “I don’t know if it will get that high, but it’s starting to tick up there.” As the sense builds that ratification is inevitable, Republicans are lining up to get on the “right side.”

In other words, a big chunk of the Republican caucus has known all along that New START was a good treaty but was holding out for strictly partisan purposes. If it had been close, and giving Obama a black eye had been a serious possibility, they would have voted no. But with that option gone, they're willing to vote yes. It's a real profile in cowardice.

This says nothing good about the modern Republican Party. Everyone expects partisan gameplaying in Congress, but over a nuclear arms treaty with Russia? Seriously?

Winners and Losers

Luke Johnson runs down the results of House districts gained and lost thanks to the latest census results:

Texas, where Republicans have a supermajority in the House and Senate and hold the governor’s mansion, gained four new House seats....Florida gained two seats....Arizona, Georgia, Nevada, South Carolina, Utah and Washington all gained one seat.

New York and Ohio lost two seats each, representing the longstanding decline in growth in the Rust Belt. Iowa, Illinois, Louisiana, Massachusetts, Missouri, New Jersey and Pennsylvania all lost one seat.

Michigan lost a seat too, according to Aaron Blake. Everyone else held their ground.

Stopping the Next Meltdown

Tyler Cowen is skeptical that vigilant bondholders can motivate banks to decrease their risk exposure. He's got a bunch of reasons that I agree with, including regulatory capture, the opacity of bank trading books, and the impossibility of making a no-bailout policy credible. But there's also this:

The net risk of a bank position is not determined solely by the bank's portfolio. Say a bank lends money to homeowners and then those homeowners increase their leverage. The bank is now in a riskier position, and de facto a more leveraged position, althoug it's measured leverage hasn't gone up a whit.

I think this gets to the heart of things. It's not practical to micromanage risk-taking in the financial sector, nor is it feasible to eliminate bubbles and bank crises entirely. But I really do believe that we could very substantially reduce the risk of bank crises without affecting the efficiency of legitimate banking operations. The way to do it is with very simple, very blunt leverage restrictions that apply to all financial actors over a certain size: banks, insurance companies, hedge funds, private equity, you name it. If you have assets over, say, $10 billion, then the rules kick in. Strict leverage limits (say, 10:1 or maybe 15:1) based on conservative notions of both assets and capital would be a pretty effective bulwark against excessive risk taking but wouldn't seriously interfere with the basic asset allocation function of the financial industry.

It wouldn't be perfect. Nothing is perfect. But if we got obsessed with leverage the same way that, say, the Fed is obsessed with inflation, we could all sleep a lot easier at night. Dodd-Frank and Basel III have gotten us part of the way there, but almost certainly not far enough. Maybe after the next global meltdown we'll finally do the job right.

Lame Duck Not So Lame After All

From The Hill:

Republican senators say privately they expect the Senate to ratify the New START treaty this week, which would hand President Obama his third major victory of the lame-duck session.

GOP senators — including those who plan to vote for the treaty and those who say they’ll oppose it — have told The Hill they expect it to pass easily. At least eight Republican senators have announced they either will vote to ratify the treaty or are leaning strongly toward doing so.

Hmmm. So Obama will have a tax deal, repeal of DADT, a food safety bill, approval of New START, and (maybe) the 9/11 first responders bill to his credit during the lame duck session. On the downside, the DREAM Act and the omnibus budget bill failed.

If this is how things turn out, that's a helluva lame duck session. Maybe we should have more of them?

Counterterrorism and You

Dana Priest and William Arkin have a big piece in the Washington Post today about the vast expansion of local counterterrorism efforts in the United States since 9/11. An excerpt:

At the same time that the FBI is expanding its West Virginia database, it is building a vast repository controlled by people who work in a top-secret vault on the fourth floor of the J. Edgar Hoover FBI Building in Washington. This one stores the profiles of tens of thousands of Americans and legal residents who are not accused of any crime. What they have done is appear to be acting suspiciously to a town sheriff, a traffic cop or even a neighbor.

....[For example, there's the question of whether a] man snapping a picture of a ferry in the Newport Beach harbor in Southern California simply liked the way it looked or was plotting to blow it up.

Suspicious Activity Report N03821 says a local law enforcement officer observed "a suspicious subject . . . taking photographs of the Orange County Sheriff Department Fire Boat and the Balboa Ferry with a cellular phone camera." The confidential report, marked "For Official Use Only," noted that the subject next made a phone call, walked to his car and returned five minutes later to take more pictures. He was then met by another person, both of whom stood and "observed the boat traffic in the harbor." Next another adult with two small children joined them, and then they all boarded the ferry and crossed the channel.

All of this information was forwarded to the Los Angeles fusion center...[where] it would immediately be entered into the Guardian database, at which point one of three things could happen:

The FBI could collect more information, find no connection to terrorism and mark the file closed, though leaving it in the database.

It could find a possible connection and turn it into a full-fledged case.

Or, as most often happens, it could make no specific determination, which would mean that Suspicious Activity Report N03821 would sit in limbo for as long as five years, during which time many other pieces of information about the man photographing a boat on a Sunday morning could be added to his file: employment, financial and residential histories; multiple phone numbers; audio files; video from the dashboard-mounted camera in the police cruiser at the harbor where he took pictures; and anything else in government or commercial databases "that adds value," as the FBI agent in charge of the database described it.

Definitely read the whole thing. But here's one thing to keep in mind as you read: in the great debate over body scanners at airports recently, one of the most popular lines of criticism was that counterterrorism efforts should rely more on intelligence and police work and less on physical security. And maybe so. But at ground level, this is what intelligence and police work looks like: having your name stored in a central FBI database for years because you took a picture of the world's smallest ferry boat.

This isn't necessarily wrong. Maybe it's the price of living in the modern world. But it is what it is, and it's what we get if we insist in ramping up intelligence and police work to keep tabs on potential terrorists. We also, apparently, get legions of newly minted terrorism trainers like Ramon Montijo: "What he tells them is always the same, he said: Most Muslims in the United States want to impose sharia law here." Lovely.

So: more porno scanners or more local intelligence? Or both? Or neither? There don't seem to be a lot of easy choices here.

Simple Answers to Simple Questions

Doug Mataconis has a question about Sarah Palin's continuing mockery of Michelle Obama's public education campaign aimed at improving child nutrition:

Is Palin actually saying she’s against child nutrition and against providing information to parents? Or is she just taking cheap shots at Michelle Obama?

The latter. Thanks for asking.

Deadweight Losses Among the Super Rich

After reading a new paper on income inequality, Tyler Cowen says this is a "scream it from the rooftops" result:

....we find that a one percent increase in the net of tax share is associated with an 0.7 percent reduction in incomes earned by people in the top 0.1 percent of the income distribution, which would imply that if we were to raise top marginal tax rates further on these taxpayers, the increase in deadweight loss would be substantially larger than the increase in revenue raised [emphasis added]. However, we find essentially no evidence at all of any responsiveness of people below the top 0.1 percent...

The paper is here. I read it over the weekend, and since a lot of people probably saw Tyler's excerpt I thought it would be worthwhile to point out a couple of things:

  • The authors find a long-term elasticity of income with respect to tax rates of 0.72 for earners in the top 0.1%, "suggesting a high degree of responsiveness to incentives for income-earning efforts [] among those with the highest incomes." In other words, when tax rates go up, super high earners earn less and deadweight losses are large. However, elasticity for earners in the top 1% is -0.34. In other words, merely moving down from the top 0.1% to the top 1% apparently changes your responsiveness to tax incentives from +0.72 to -0.34. That's an extremely dramatic result and should make us very suspicious.
     
  • And sure enough, using a slightly different model that incorporates a six-piece spline, elasticity among super high earners changes to -0.27. The authors are unsure of which model is better, and acknowledge that the emergence of such a large change from a fairly small modification to their model "reduces our confidence in the conclusion that the decisions of high-income people about how much income to earn and report are highly responsive to tax rates."

I'd say a bit more. Even if you assume that the original number is correct, you have to ask yourself what it means. For someone earning a million dollars a year or more, why would their income go down because their tax rates went up? Because they decided to work less? That's highly unlikely, and the kind of people who earn money at this level — primarily CEOs, executives, and financial industry professionals — aren't paid based on how many hours they work anyway. Would Wall Street traders make fewer trades? That also seems unlikely, but even if they did it just means that someone else would do it. (Though who knows? Less trading might actually be a net benefit to society, not a deadweight loss.) Would they quit their jobs? Again unlikely, but in any case this would have no effect on society at large. Would they get lazy and drive their companies into a ditch, therefore lowering their bonuses? That hardly seems likely either.

The problem here is twofold. First, the calculation of elasticity is obviously very sensitive to the parameters of the model you use. Second, it's very difficult to conceive of an actual mechanism in which higher taxes on top earners translates into lower work performance and therefore deadweight loss to society. My guess is that super high earners respond to tax increases mainly via accounting strategies, not work effort, and in any case, any reduction in their earnings simply ends up going somewhere else anyway. In fact, if you take the original model in this paper seriously, an increase in high marginal tax rates reduces the earnings of the 99.9th percentile but increases the earnings of the 99.0-99.9th percentile. In other words, the total earnings of the top 1% probably go up on net.

But if you still want a "scream it from the rooftops" result from this paper, try this one instead:

The real income growth rate for non-financial executives in the top 0.1 percent was 7 times as large as for non-financial executives in the 99th to 99.5th percentile range....The heterogeneity in income growth rates across professions within the top one percent, and the divergence in incomes within professions in the top one percent, both suggest that the causes of rising top income shares cannot just, or even primarily, be things that are changing in similar ways over time for everyone within the top one percent, such as federal marginal income tax rates.

According to the authors, skill-biased technical change and globalization are unlikely candidates too, and the superstar effect is too small to have a significant impact. It has to be something else. Something that's driving enormous changes not just at the top, but at the very tippy top. The financialization of the U.S. economy, along with changes in norms of corporate governance, seem like the best guesses to me. Anybody got a better one?

Quote of the Day: McConnell on START

From Republican minority leader Mitch McConnell, explaining why he opposes the New START treaty:

All of a sudden, we're once again trying to rush things right here before Christmas Eve. I think that was not the best way to get the support of people like me.

Translation: he's pissed that Democrats successfully repealed DADT and is bound and determined to get back at them. The childishness that passes for politics these days is endlessly astonishing.