Via Matt Yglesias, Kathleen Madigan reports that finance industry profits have recovered from their late unpleasantness and now account for over 30% of all corporate profits once again. Life is grand if you're a plutocrat, isn't it?

The DC school system under Michelle Rhee famously produced substantial gains on standardized test scores. But USA Today reports that one of the district's star performers, the Crosby S. Noyes Education Campus, may have cheated its way to success:

A USA TODAY investigation, based on documents and data secured under D.C.'s Freedom of Information Act, found that for the past three school years most of Noyes' classrooms had extraordinarily high numbers of erasures on standardized tests. The consistent pattern was that wrong answers were erased and changed to right ones.

....On the 2009 reading test, for example, seventh-graders in one Noyes classroom averaged 12.7 wrong-to-right erasures per student on answer sheets; the average for seventh-graders in all D.C. schools on that test was less than 1. The odds are better for winning the Powerball grand prize than having that many erasures by chance, according to statisticians consulted by USA TODAY.

....At Noyes, USA TODAY found several grades with wide swings in their proficiency rates from one year to the next. In 2008, 84% of fourth-grade math students were listed as proficient or advanced, up from 22% for the previous fourth-grade class.

Wow. Going from 22% to 84% in one year is suspiciously impressive. And it's not just Noyes:

In 2008, the office of the State Superintendent of Education recommended that the scores of many schools be investigated because of unusually high gains, but top D.C. public school officials balked and the recommendation was dropped.

After the 2009 tests, the school district hired an outside investigator to look at eight D.C. public schools — one of them was Noyes, USA TODAY learned — and to interview some teachers.

....School district officials would not release the reports Caveon compiled. Caveon has been hired again to investigate the results of 2010 tests in which 41 DCPS schools, including Noyes, had at least one classroom flagged for high erasure rates. USA TODAY could not determine which schools are being scrutinized

It's impossible to prove malfeasance based just on erasure rates. As the story notes, there are sometimes legitimate reasons for lots of erasures.1 But the pattern here sure seems to follow a pattern we've seen in other school districts that have reported startling test gains and later had to recant them for one reason or another. For more, read the whole piece, which is long but worth plowing through.

1For example, kids might be trained to carefully review their answers after they've finished the test. The problem here is that conventional wisdom in the ed community recommends that you never change an answer on a multiple choice test unless you're absolutely sure you got it wrong. More often than not, your first answer is the right one. So even with a careful review, it would be very unusual to see a high number of wrong-to-right erasures.

On the left, we have a cat and his shadow. On the right, we have a cat and her garden. Who do you think has the better deal?

Hey, John Lott is back in the news! Remember him? Chris Brown of Media Matters catches him retroactively changing a blog post and then complaining that he was misquoted. Luckily, Chris kept a screen shot of the original, always a useful precaution when dealing with Lott.

For what it's worth, Lott is famous in the blogosphere for conducting a gun survey that nobody else could duplicate and then claiming that literally every trace of evidence that he'd actually conducted the survey was missing. He's also famous for using a sock puppet named Mary Rosh, who popped up in discussion threads and lavishly praised Lott whenever he was criticized.

But for my money, his biggest sin came in 2003, when he surreptitiously made retroactive changes to a dataset to make it look as if the modified version was the one he'd been using all along. I summarized all this in EZ-to-follow bullet points here. Chris Mooney talked to Lott for Mother Jones here. It's a nice trip down memory lane. Making changes and then backdating them is an old MO for Lott, so his latest antics come as no surprise.

Jonah Goldberg is dumbfounded at Barack Obama's desire for the United States to let others take the lead in the Libya operation. But that's not what really ticks him off:

What’s most infuriating is that if this ends “well” — say Qaddafi is killed by one of his own men in the next couple days or the rebels manage to assassinate him, or he flees to Venezuela, whatever — you know that Obama will take credit for leading this successful mission and he will be praised for his “leadership” by many of the same people who are now pretending they believe this fiction that NATO has taken over.

Actually, it seems like this would be fair enough, since Goldberg and his copartisans are equally ready to trash Obama regardless of how everything turns out. Still, I think this is a telling comment. It's no surprise that conservatives are upset that Obama is taking the back seat in a military operation — even rhetorically — and allowing our allies to take the lead. Given their peculiar worldview in which America is required to assert its superiority at all times and in all places, this is plainly intolerable regardless of whether or not it makes sense. Goldberg, in fact, views it as almost self-evidently impossible for someone else to be in charge.

But as bad as this is, what's even worse is the possibility that it might work: it's entirely possible that Qaddafi will leave or be defeated and that the rebels will win a victory that's not viewed as merely another case of American imperialism run amuck. That would genuinely be a victory for American foreign policy, and Obama would deserve tremendous credit for it.

If it works, that is — something that's obviously still up in the air. I'm not thrilled with this operation, and I'm not thrilled with the seeming disarray over who's controlling it and what we're trying to accomplish. Still, this isn't Vietnam or Iraq: Obama is taking the risk that a limited military operation in Libya can succeed in the short term if American arms are brought to bear, and can also succeed in the long term as long as American arms and American interests aren't viewed by the Arab world as the prime motivation for action. Oddly, even after decades of experience with blowback, conservatives still don't seem to get the second half of this equation.

In the end, Obama might be wrong. We might not be able to topple Qaddafi with France and Britain driving things, and even if we do it might not turn out to make much difference in how the Arab world views us. That's the risk Obama is taking. But if it does work, he'll deserve all the credit he gets for it.

The "hanging judge of Orange County" writes today that he's had a change of heart:

I watch today as Gov. Brown wrestles with the massive debt that is suffocating our state and hear him say he doesn't want to "play games." But I cringe when I learn that not playing games amounts to cuts to kindergarten, cuts to universities, cuts to people with special needs — and I hear no mention of the simple cut that would save hundreds of millions of dollars, countless man-hours, unimaginable court time and years of emotional torture for victim's family members waiting for that magical sense of "closure" they've been falsely promised with death sentences that will never be carried out.

There is actually, I've come to realize, no such thing as "closure" when a loved one is taken. What family members must find is reconciliation with the reality of their loss, and that can begin the minute the perpetrator is sent to a prison he will never leave. But to ask them to endure the years of being dragged through the courts in pursuit of the ultimate punishment is a cruel lie.

It's time to stop playing the killing game. Let's use the hundreds of millions of dollars we'll save to protect some of those essential services now threatened with death. Let's stop asking people like me to lie to those victim's family members.

More at the link.

Leaving the Workforce

The Congressional Budget Office has a new study out suggesting that labor force participation is declining not so much because of our current recession, but because of long-term demographic trends:

The downward trend since 2000 can be attributed largely to the aging and retirement of the baby boomers. It also reflects a leveling off in participation among women between the ages of 25 and 54 — who are no longer participating at higher rates than their predecessors did at the same age — and a pronounced decline in participation among people under 25....Demographics account for slightly more than the entire projected decline of 3.0 percentage points in the aggregate participation rate between 2007 and 2021.

So if the CBO is to be believed, in the tight labor market of the late 90s we overshot the natural rate of labor force participation, setting us up for a sharp drop after the dotcom crash. The 2008 recession caused a another sharp drop that sent us below the trend line, but even so we're likely to see labor force participation drop even further from now forward, regardless of how quickly we recover.

I want to write more about this in the future, but that will have to wait until I get my thoughts in order. In the meantime, there are two takeaways from this. First, we're well below the trend line right now, and we ought to be doing everything we can to get back to it. Unemployment is our biggest problem at the moment, not the specter of future inflation. Second, the long-term trend of lower labor force participation isn't necessarily a sign of anything fundamentally wrong with the economy. It might just be the result of an aging population and changes in work preference. More later.

I've written several times before about Winner-Take-All Politics, in which Jacob Hacker and Paul Pierson argue that middle-class wage stagnation and growing income inequality are due as much to political decisions over the past 30 years as they are to broad economic trends. I find their arguments persuasive, but there's no question that it's a tough case to make. After all, exactly which political decisions are we talking about? Can we point to specific pieces of legislation or specific agency decisions that have retarded wage growth? In fact, we can—things like tax policy, financial deregulation, the decline of antitrust enforcement, and anti-union rulings by the NLRB all played a role. By themselves, though, these just aren't enough to account for what's happened. So what's the smoking gun when it comes to the impact of politics on wage stagnation and growing income inequality?

I think Lane Kenworthy fingered the right culprit a few weeks ago: the abandonment in recent decades of full employment as even a rhetorical goal of American economic policy:

The post–World War II experiences of the rich democracies suggest three routes to rising working- and middle-class wages. One is an environment in which firms face only moderate competition in product markets and limited pressure from shareholders, allowing them to pass on a significant share of growth to their employees. This characterized the period from the late 1940s through the mid 1970s, but it’s now long gone. The second is strong unions. I see little hope of that in America’s future. The third is full employment.

But full employment is only possible if the Federal Reserve is committed to it, and this is decidedly no longer the case: "Since the late 1970s, independent central banks such as the Fed almost always have prioritized low inflation, rendering low unemployment difficult to achieve. If the Fed isn’t on board, even a workable plan for full employment supported by the American public and our elected officials probably won’t be enough."

Following the stagflation of the 70s, conservatives decisively took over Fed policy and put it in the service of the wealthy, prioritizing low inflation over low unemployment and tacitly promising bailouts whenever Wall Street found itself in danger (a practice charmingly known as the "Greenspan put"). Matt Yglesias has a useful piece in Democracy this month arguing that progressives need to take the Fed far more seriously if we ever want to have any chance of reversing this:

Central banks and monetary policy are the primary determinant of short-term economic conditions—of the unemployment rate, and thus of workers’ ability to bargain for wages. This is, clearly, a hugely important subject in its own right. But it’s also a critical determinant of overall political conditions.

....But when Barack Obama was elected in 2008, he rather hastily chose to reappoint [Ben] Bernanke, creating a situation in which no Democrat has held the most important domestic policy job in the land since 1987. He inherited two vacancies on the Board of Governors that he left open for over a year, only putting names forward after a third vacancy emerged in 2010....Of course, no one can know for sure what the Fed would have done had Obama picked someone other than Bernanke to chair it or filled the vacancies more rapidly. But it’s certainly plausible that different personnel would have led to swifter and more forceful moves toward monetary stimulus, a more rapid end to the recession, and a lower unemployment rate.

A lot has happened over the past 30 years, but if you're looking for a single political sea change that's had the biggest impact on middle class wages—more important than union decline, more important than NAFTA, more important than the end of Glass-Steagall—it's the political consensus that underlies the Fed's reluctance to allow labor markets to stay tight enough to generate wage increases in the real economy. And it's something we're seeing all over again right now, as the DC chattering classes have almost unanimously decided that inflation is our real enemy right now, even though core inflation is running around 1% and unemployment is still near 9%.

This is a policy beloved of the business community, which prefers loose labor markets that keep wages low and executive compensation high, but it hasn't always been the Fed's policy and it's not written in stone that it has to be now. Tight labor markets and rising middle-class wages are, to a large extent, a choice we make. Politics took them away 30 years ago, and politics can return them to us if we want.

Front page image: Celine Nadeau

Economist Scott Sumner is aghast at his profession:

If pressed, Keynesians will usually point to real interest rates as the right measure of monetary ease or tightness. By that criterion the Fed adopted an ultra-tight monetary policy in late 2008. Monetarists will usually say that M2 is the best criteria for the stance of monetary policy. By that criterion the ECB adopted an ultra-tight monetary policy in late 2008. And yet it’s difficult to find a single prominent macroeconomist (Keynesian or monetarist) who has publicly called either Fed or ECB policy ultra-tight in recent years. Maybe tight relative to what is needed, but not simply “tight.”

I’m calling out my profession. Do they really believe what they claim to believe about good and bad indicators of monetary tightness? Or in a crisis do they atavistically revert to the crudest measure of all, nominal rates.

Tight money and inadequate fiscal stimulus, two terrible tastes that taste even worse together. It's almost as though we want our economy to suck for as long as it possibly can.