Mitchell's Musings

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  • 20 Jul 2017 10:41 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 7-24-2017: Rand Paul Saves the Fed (from Himself)


    Daniel J.B. Mitchell


    In a musing a month ago, I noted that Democratic hopes may be unrealistic if the expectation is that voters will be so offended by Donald Trump – or so annoyed with his actions on health care or other issues – that they will defeat him if he runs again in 2020 (or, somewhat more likely, even give them control of one house of Congress in 2018). The argument I made was that unless the economy turns down, the urge to vote out an incumbent president may not be sufficiently strong.[1] Nothing is impossible, of course, but the issue is what is probable.


    The economy is currently running at something close to full employment, inflation is low, etc. And there is nothing visible on the horizon that says the economy is on the verge of tanking. Meanwhile, the mail continues to be delivered, Social Security payments go out, and other federal services continue. If you are not a close follower of foreign affairs and/or domestic political news, everything seems normal. Election Day in November 2018 is not all that far away, so the clock is ticking on the prospect for some economic crisis to arise. And although the recovery from the Great Recession will be in old age in historical terms by 2018 or 2020, there is no theory that says that recoveries die of old age alone. There has to be a tangible cause.


    Of course, apart from the economy, there is the Russia-thing, I argued in the earlier musing, and who knows what revelations are yet to come out? Maybe the discoveries will be so overwhelming that even normally uninterested swing voters will be forced to pay attention. Possibly, there could be enough shockers revealed to force an early exit of the president or some kind of 2018 or 2020 election upset. So it’s not wrong as a strategy for Democrats to concentrate on the Russia scandal; absent an economic downturn, it may be the best hope they’ve got at the moment.


    But if you wanted to compose a scenario in which something could go wrong in the economy, you might look to the Federal Reserve and its monetary policy. The Fed could undertake actions that would trigger some kind of economic faltering. Fed monetary policy is the one active element in macroeconomic policy; fiscal policy in the hands of Congress seems to be on gridlocked autopilot. And, as it happens, current Fed chair Janet Yellen’s term (as chair) expires in early 2018.[2]


    Because the Fed has the power to create money, there is a long history of suspicion of it in American politics. Money is supposed to be “real” somehow. People compete, toil, struggle, rob and steal for it. So how can it just be created out of nothing by some government entity? For years, former Congressman Ron Paul was the champion of such thinking. In the early 1980s, the incoming Reagan administration, as a sop to the wing of the Republican Party that goes in for anti-Fedism, even created a Gold Commission – with Ron Paul on it – ostensibly to consider going back on the gold standard.[3]


    Father Ron Paul is largely off the political scene now, but son Rand Paul is in the US Senate and has inherited the anti-Fed mantle from Dad. The mantle shows up in his periodic calls to “audit” the Fed. Exactly what auditing the Fed means is not clear. I’m sure it would be found that the debits equal the credits in any audit. And the seeming mystery of how an entity has the God-like power to create something out of nothing would remain in place.


    Shortly before Trump took office, Senator Paul seemed to think that the new president would be receptive to Fed auditing.[4] And, indeed, Paul had a Trump tweet from the campaign that suggested just such support:

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    So one could imagine a scenario in which a Rand Paul-endorsed person, a monetary crank, was nominated by the president to replace Yellen. It is true that Trump’s Secretary of the Treasury likely wouldn’t be keen on any such appointment.[5] But Trump doesn’t always pay close attention to what his cabinet members think. And weird Fed policy instigated by a Paul-endorsed nominee could upset the markets, and even the economy, although maybe not in time for the election of November 2018.


    But now the repeal-and-replace Obamacare effort in the Senate seems to have failed. And Rand Paul is a key villain in that failure. Republicans could lose no more than two yes votes for their health bill out of their 52 members in the Senate. Paul was one of the original two saying absolutely no. And while the president didn’t seem to be wedded to any particular version of health care “reform,” he did want to sign something that could be said to be repeal-and-replace, or even just repeal (with replacement put off beyond 2018).


    The president doesn’t think highly of folks who thwart him. So the chances now for a Rand Paul acolyte as Fed chair, or even just a member, seem remote. And thus the prospects for a strange character at the Fed threatening to mess up the economy also seem remote. Critics may note that despite the recovery, the economy isn’t creating enough “good” jobs and rising pay. But it is creating jobs and maybe folks have gotten used to things “as is.” A recession would end that job creation and reverse it, with political consequences to follow. But from where would that recession come? Absent a deviant Fed, what would be the cause?


    Footnotes

    [1] http://employmentpolicy.org/page-1775968/4911683#sthash.8DZHhQcb.dpbs

    [2] She could stay on as just one member of the Board of Governors, although Fed watchers consider that outcome unlikely.

    [3] The Commission was essentially neutered and ended up writing a lengthy report. For a history, see http://www.anderson.ucla.edu/documents/areas/fac/hrob/mitchell_gold.pdf.  

    [4] http://thehill.com/policy/finance/312662-audit-the-fed-bill-gets-new-push

    [5] https://www.bloomberg.com/news/articles/2017-01-24/mnuchin-backs-fed-independence-and-signals-reform-isn-t-priority.  

  • 13 Jul 2017 3:47 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 7-17-2017: Much Ado About Accounting


    Daniel J.B. Mitchell


    You walk into the local commercial bank where you have an account and deposit a check for, say, $100. The bank “credits” your account for the $100. Why? Because that deposit is now a claim that you have on the bank; the bank owes you $100 and the $100 thus represents an increase in the bank’s total liabilities. At the same time, the bank now has an asset worth $100, namely its claim upon the commercial bank on which the check you deposited was written. So its assets have also increased by $100. That increase in assets is the “debit” that balances the credit. It is standard double-entry bookkeeping. The bank, on Day 1, has an increase in liabilities and an increase in assets of equal value: $100.


    Over time, however, your bank will invest a good portion of its deposits in interest-earning assets such as securities, mortgages, or loans it makes to businesses. It will keep only a limited amount in cash that it needs for routine business to cover temporary excesses of withdrawals over deposits.


    But suppose the bank makes some bad investment choices with its assets. Suppose, for example, that the securities it holds fall in value. Suppose that some of the loans and mortgages it makes go into default. If the bank’s assets fall in value relative to liabilities, depositors may became nervous about their claims on it. Back in the day, before there were such cushions such as deposit insurance and central banks as creditors of last resort, such nervousness could cause a run on the bank. If all depositors try to get their money out at once, the bank might not have the liquidity on hand it needed to honor all the requests.


    But even apart from short-term illiquidity problems, if the bank’s assets are permanently worth less than its liabilities, some of the bank’s creditors (including depositors) will get back only a fraction of what they are owed or maybe nothing at all. In effect, the institution would be in bankruptcy. The very word “bankruptcy” conveys the notion of a disrupted, ruptured, and destroyed institution.


    Now let’s move from local to global. When the International Monetary Fund (IMF) was created towards the end of World War II to administer the Bretton Woods international monetary system, it was established, not as a world central bank, but as a financial intermediary. It would operate similarly to the local commercial bank in which you made your hypothetical $100 deposit. While a central bank can create money, a financial intermediary can only borrow money (in the example above, in the form of deposits), and then invests and lends the funds it has borrowed. It creates nothing.


    For reasons we don’t have to go into here, in the late 1960s, the IMF was given limited authority to act like a central bank and create something called Special Drawing Rights (SDRs). When authorized by its member nations, the IMF essentially creates a dollop of SDRs and gives them out to its member states in proportion to their “quotas” (essentially, in proportion to their deposits). Over the years, over $280 billion worth of SDRs have been created. The member states can then use their SDRs as a kind of restricted currency to be utilized only by official monetary institutions (central banks, treasuries) to pay off debts to each other. So unlike your local bank in the example above, the IMF has created something in the case of SDRs. But it has gotten nothing in return for them. It sounds a lot like a credit (a deposit of the member states) with no balancing debit.


    The IMF takes pains to deny that SDRs are really a currency (although in any meaningful sense of that word they are) and also denies that they are a liability of the IMF.[1] Why the denials? Because in conventional thinking, if the IMF recognized a liability with no corresponding asset, someone might say it was heading toward bankruptcy. So, officially, the SDRs are said to be, not the liability of the IMF, but instead the liability of all the member states who jointly agreed to accept them as payoffs for debts.


    If that’s so, if SDRs are the creation of the member states, what are the assets that all the member states have to balance their liability? (Should we worry, for example, that if there are no such assets, all the member states are risking bankruptcy?) If you pushed the IMF, it would undoubtedly say that the missing assets DO exist, and that they are the self-same SDRs the member states authorized it to create!


    I hope, by now, that you are beginning to recognize that there is something funny about thinking that an institution that can create money can go bankrupt. When the IMF creates SDRs, it is - in effect - creating a form of money (even if it denies that the SDR is a “currency”) and it is acting like a central bank. In essence, if you have an institution that can create money – which is what a true central bank does – it CAN’T go bankrupt.[2] More generally, you should not think of central banks as if they were commercial entities like financial intermediaries that borrow something they can’t create and then lend it out. If financial intermediaries make bad choices, or if the fates are against them, they CAN go bankrupt. As the IMF case illustrates, a money-creating institution can even create a liability, essentially get nothing for it, and yet not go bankrupt.

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    As part of its effort to deal with the impact of the Great Recession, the Federal Reserve – the American central bank – bought a lot of assets and issued payment for them, i.e., lots of money was created in the process. Viewed as a bookkeeping matter, the value of the liabilities the Fed created for itself equaled the value of the assets that it bought, as the charts above and below show. You can argue about how the Fed responded to the Great Recession. You can argue about the causes of the Great Recession. But none of those debates matter to the point here. The point is that the Fed’s bailing out and stimulative efforts produced a large increase in both its assets and liabilities. It’s not an accident that the two charts look similar. One is the mirror of the other.

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    Some commentators said at the time (and keep saying) that a vast inflation would (will) occur, due to this monetary creation. It didn’t happen, certainly to the surprise of ideological monetarists and even to the surprise of the more pragmatic Fed policy makers. But apart from the inflation issue, should you now be worried about the fact that the Fed is holding a lot of assets? Should you worry about the value of those assets? Should you worry, for example, that rising interest rates might cause the value of the Fed’s asset portfolio to fall below the value of its liabilities (since rising interest rates cause the market value of longer-term securities to fall)? And if you worry about that possibility, should you worry about the Fed going bankrupt?


    The simple answer is that since the Fed can create money, it can’t go bankrupt in any meaningful sense of that word. Therefore, its monetary policy should not be driven by any such considerations. Unfortunately, however, because the growth of the Fed’s portfolio was very large, this type of thinking seems to be having an influence.


    Here is an excerpt from a recent article from the Los Angeles Times:


    Federal Reserve officials took bold steps to battle the financial crisis and the Great Recession, none more audacious than purchasing trillions of dollars in bonds in an unprecedented and politically charged attempt to boost economic growth. Now, with the economy healthier — and mixed opinions about how much the bond purchases actually helped — the Fed is preparing to scale back its massive stock of about $4.5 trillion in assets.


    Those holdings of mostly Treasury bonds and mortgage-backed securities are more than quadruple what they were before the crisis, and reducing them is another risky move that could affect mortgage rates, consumer prices, bank lending, stock values and federal government borrowing. But there’s also risk to standing pat. Like any investor, the central bank could suffer losses on the bonds if it holds them too long and interest rates rise.  [Underline added] At the same time, holding a lot of assets could make it harder to buy more if that’s needed to fight a future recession. [Italics added]


    So Fed policymakers plan to start trimming their holdings this year. They hope to do it gradually and seamlessly, without the controversy and fanfare that has made the once-boring institution a political target and shaker of financial markets.


    “We think this is a workable plan and it will be … like watching paint dry,” Fed Chairwoman Janet L. Yellen said last month in detailing a methodical sell-off of some of the assets on the bank’s balance sheet. “This will just be something that runs quietly in the background.”…[3]


    The underlined sentence suggests that important people (The reporters? The folks they interviewed?) think we should be tossing and turning about the Fed possibly taking losses on its portfolio, as if it were a private, commercial firm that could go bankrupt. The italicized sentence suggests that because the Fed has a lot of assets, it would be hard for it to buy more of them in the next recession. Why? It can create money and buy more. Are we to believe that holders of such assets won’t sell them for cash?


    Finally, the last few sentences suggest that the Fed, in the face of such anxieties, feels it needs to respond to them. As noted, you can raise questions about how the Fed dealt with the last recession. But we should not create artificial issues that could hamstring the Fed’s responses to the next one, whenever it comes. And if those anxieties can’t be assuaged with logic, why not do what the IMF did when it created SDRs? Insist that the liabilities and assets are something other than what they are. Maybe take them off the books. Be creative and find other approaches to the accounting and bookkeeping that are cosmetic rather than real. If there are rules, laws, or practices that are mistakenly based on the idea that a central bank is like a commercial bank, change them or find ways around them.


    There is enough to worry about, with the chairmanship of the Fed opening up for a new appointment by President Trump next year, without creating additional concerns.

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    Footnotes

    [1] http://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR.  

    [2] Note that when countries – as in the Euro-zone – give up their currencies, their former central banks stop being true central banks, whatever they call themselves. They have surrendered their money creation authority to the European Central Bank.

    [3] http://www.latimes.com/business/la-fi-federal-reserve-stimulus-20170710-htmlstory.html.

  • 08 Jul 2017 9:01 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 7-10-2017: My Guess on Sluggish Pay Increases


    Daniel J.B. Mitchell


    There are beginning to be headlines and news items about labor shortages. A recent article from the New York Times is headlined “Lack of Workers, Not Work, Weighs on the Nation’s Economy.”[1] California farmers are complaining they can’t get enough workers.[2] Such anecdotal reports are not surprising given the fact that unemployment is down to levels that preceded the Great Recession. And the job openings (vacancy) rate is higher now than then. (See charts 1 and 2 below.) More demand; less supply.

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    Chart 1: Unemployment Rate: June of Year Shown


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    Chart 2: Job Openings (Vacancy) Rate


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    However, the reports on the labor market are telling us that wages have been slow to increase, despite labor market pressures. Nominal wages, measured by average hourly earnings, were increasing about 2% per annum during the aftermath of the Great Recession. Now the rate is about 2.5%. (Chart 3) So there is some acceleration in pay, but not as much as might be expected.[3]

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    Chart 3: Average Hourly Earnings for Private Nonfarm Employees, 12-Month Percent Change: June-to-June


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    It’s also interesting that employers – although they may complain about the difficulty in finding workers – are not behaving as if there is a shortage, even if they are talking about one. Here is another anecdotal report:


    …Looking for a job has never been fun but lately it seems to be getting more complicated. The U.S. is at close to full employment, but companies are getting pickier and less responsive at the same time, as Kristen Shattuck found out recently. Shattuck got a shock when she started looking for a new job last year. She’s an education consultant and found the process much more involved than the last time she was on the market back in 2011. Before her interview, organizations asked her to write a personal statement, submit strategic plans, proposals, and watch videos, which she then had to give written feedback on… So why do job hunters have to go through all this? Allison Hemming runs The Hired Guns, a New York City recruiting firm. Her clients are digital companies. “They’re looking for more and more out of each individual person that they hire, and this is their way to manage the risk,” she said. “I think some of it can be ridiculous and too long.” But she added that candidates need to look at it like dating. You wouldn’t want to marry someone after the first date, right? She said these interviewing marathons are a way for companies and candidates to make sure you’re the one….[4]


    There is a problem with the explanation of putting job seekers through all kinds of hoops. The rationale seems to be that the hoops are due to the fear of making a hiring mistake. But that story doesn’t make sense. Let’s put aside the issue of whether the hoops have any correlation to later job performance. Yes, there are costs of making a mistake. But these costs can be mitigated by such devices as probationary periods. Is there any evidence that the cost of making a mistake is higher than it was in, say, 2006-2007 or 2000-2001 (previous business cycle peaks)? I haven’t seen any such evidence.


    It’s worth noting that there is another stream of recent news stories about robots taking over jobs. In that story, there really isn’t a labor shortage because robots are raising productivity so much that more labor isn’t needed. Workers are unnecessary, so why pay those that are hired more? But the robot story flies in the face of available evidence. The output per hour numbers don’t show a blast of productivity. The last productivity blast occurred in 2009-2010, when employers dumped labor in a panicked response to the drop in demand. (Chart 4)

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    Chart 4


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    You can always argue that maybe the real output data are somehow missing the growth in output due to all this alleged productivity. But if you take that approach, you have to explain why measured unemployment is so low. You have to explain why vacancy rates are so high. Are those numbers wrong, too?


    OK. So what IS happening? All I can venture is a guess as to why wages are at best reacting very slowly to a tight labor market. The first three minutes or so of the “Marketplace” public radio program for July 7, 2017 deal with the wage issue.[5] One employer says that, yes, she is raising wages but not more than her competition. If she raised them faster, she wouldn’t be competitive, she says. A construction employer is reported to be worrying that if wages go up, newly built homes won’t be affordable. There is an element in such stories of a labor-buying cartel, even though these employers are small and competitive. How can that be?


    Let’s look at the idea that you can’t raise wages more than your competitors or you won’t be competitive, or that your product won’t be affordable. Presumably, if you can’t hire all the labor you need, you are giving up business. Your labor demand is a reflection of product demand; no one hires workers for the sake of it. So, apparently, you have customers lined up and a margin for (profitably) raising wages to get the labor you need.


    Nonetheless, if all employers in your market think that way, collectively profits might be reduced. A strategy of everyone just doing what the others do – even if all experience a labor shortage – could be net beneficial for the group. Regardless of how the behavior is rationalized, everyone doing what everyone else does is a form of labor buyers’ coordination that can benefit employers at the expense of workers (monopsonistic behavior). And there is one thing we know from surveys of employers about how they set wages. The universal answer is that they find out what others are doing. They may do their research informally. They may get reports from trade groups or other sources. They may hire pay consultants who have survey data. But imitation of other employers is the key feature.


    In that sense, current behavior – grousing about labor shortages but not competitively raising pay in response – is not abnormal, at least for a time. So the question is whether there is something now that is different from past recoveries. The most comparable recovery was the episode in the 1980s. It started with two back-to-back recessions, the second of which was quite severe. These recessions, however, were in some sense less dramatic than the Great Recession. They were essentially engineered by the Fed to combat inflation. In contrast, the 2008-9 event was characterized by a collapsing housing/mortgage market that led to a collapsing financial sector which, in turn, had to be bailed out to avoid further disaster.


    The profile of the recovery was also different. Unemployment shot up in the second of the two back-to-back episodes, but then came down relatively fast after it peaked. (Compare Chart 5 below with the earlier Chart 1.) That profile is in contrast with the Great Recession in which unemployment peaked, and then only slowly came down. During the Great Recession, there was endless talk of a “new normal” in which the economy would forever be sluggish and workers would just have to adapt to their diminished prospects. In human resource/employer circles, the new normal talk after the Great Recession was especially pronounced. I don’t recall anything comparable to it having occurred in the 1980s.[6]


    Wage behavior was different in the 1980s episode. (Chart 6) Pay increases were high in the inflationary late 1970s, but in the face of the second of the two back-to-back recessions, they started down.[7] By 1986, however, the downward pressure on wage had reversed. Thereafter, pay increases rose.

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    Chart 5: Unemployment Rate: June of Year Shown


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    My guess is that the accumulation of all the new normal talk among employers is now showing up in a more gradual adaptation to a tight labor market than might have been expected, based on historical data. How long will that retarding effect last? We don’t have past experience to go by to answer that question. There was only one Great Recession and it has left economic and political scars.

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    Chart 6: Average Hourly Earnings for Private Nonfarm Production and Nonsupervisory Employees, 12-Month Percent Change: June-to-June


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    Footnotes


    [1] https://www.nytimes.com/2017/05/21/us/politics/utah-economy-jobs.html 

    [2] http://www.sacbee.com/latest-news/article159380274.html 

    [3] Confession: Back in 2015 in a Mitchell’s Musing, I interpreted a blip up in wage change as a sign the Phillips curve had returned. [http://employmentpolicy.org/page-1775968/3328512#sthash.aUGSQVXW.dpbs] The curve isn’t dead, but it is less healthy than I had thought.

    [4] https://www.marketplace.org/2017/07/05/economy/why-are-job-interviews-getting-so-complicated

    [5] https://download.publicradio.org/podcast/marketplace/pm/2017/07/07/pm_20170707_pod_64.mp3.

    [6] Indeed, the 1980s saw the beginning of the overheated “end-of-the-job” talk that continued into the 1990s and after (caused by the growth of temp agencies and related practices). “End-of-the-job” postulated that the labor market was becoming a spot market. Such chatter was an earlier version of the contemporary “everything-is-turning-into-a-gig economy” talk. Pay in a spot labor market should be highly responsive to labor shortages. It presumes low costs of hiring and firing and no real employment relationship. There are no “employers,” just users of labor in the same sense that there are users of copper.

    [7] Chart 6 uses the less comprehensive measure for production and nonsupervisory workers rather than all employees, since the all-employees series was not available in the earlier period. 

  • 29 Jun 2017 2:45 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 7-3-17: The Way It Was


    Daniel J.B. Mitchell


    Thirty-six years ago in 1981, I participated in a forum held at the National Press Club in Washington, DC. The forum’s topic was what to do about inflation. More specifically, it dealt with the anti-inflation policy of the new Reagan administration. The Reagan administration had abandoned what was then called “incomes policy” – essentially a program of wage-price “voluntary” guidelines that had been pursued by the previous Carter administration - and was relying on a “tight” monetary policy to reduce the inflation rate. In terms of fiscal policy, however, the Reagan administration had cut taxes based on some version of “supply-side” theory. So fiscal policy was stimulative, while monetary policy worked in the opposite direction.


    As can be seen from the chart below, the “core” Consumer Price Index (CPI) was recording double-digit increases in 1981. There had been problems with the index’s methodology, notably in its treatment of housing, but then as now, it was the headline indicator of inflation. The real economy was in the midst of a double-dip recession episode, the second dip of which would substantially boost unemployment. Although we now talk about the Great Recession of 2008 and afterwards, at the time of the 1981 forum, the U.S. was embarking on a comparable episode, both in terms of the depth of the drop and the length of time it took to return to something like full employment.


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    Consumer Price Index - All Urban Consumers

    All items less food and energy: 12-month percent change


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    There were three economists/participants in the forum. Apart from me, there was Barry Bosworth of the Brookings Institution who had earlier headed the Carter administration’s effort at incomes policy. And there was Laurence Seidman, then of Swarthmore College, who was known as a promoter of using the tax system to restrain inflation through what was then called “tax-based incomes policy” (TIP). The TIP concept consisted of tax penalties for exceeding specified wage and price guidelines.[1] My own participation on the panel was because of my advocacy of “gainsharing” pay plans (profit sharing and similar arrangements) as potential anti-inflation devices.[2]


    I would not have thought of the 1981 forum had it not been for my recent discovery of cassette tapes of the event in a closet. The forum was broadcast on NPR at the time, and the cassettes had been provided to participants afterwards, either by NPR or by the sponsoring organization, the Center for Democratic Policy.[3] I have digitized the one-hour recording put it on the web at:

    https://archive.org/details/NatlPressClubNpr101581edited


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                   Above: Seidman, Press Club Official, Mitchell, Bosworth

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    The three participants in the forum were united in two beliefs. All three agreed that dis-inflating the economy via monetary policy alone was going to be a painful exercise. And, indeed, the depth of the recession that later unfolded proved that expectation to be true. All three of us were thus looking for some way to make the dis-inflation less painful. All three sought to make wage and price setting more responsive to macroeconomic restraint. In addition, all three agreed that, given the emphasis on such restraint by the Reagan administration, a tax cut (fiscal stimulus) made no sense in the face of monetary restrictiveness. But beyond those agreements, the policy suggestions diverged.


    My own view at the time was that gainsharing programs, which were well known – but not especially widespread – would have the indirect effect of making wage adjustments more sensitive to the ups and downs of the business cycle. That effect wasn’t the reason employers installed such plans; they were seen by employers who used them as incentives for productivity improvement and some versions, in addition, received tax incentives. My proposal was to re-target existing tax incentives toward those plans that had the beneficial macro effect. There was some increased interest in Congress in gainsharing at the time and in subsequent years – mainly because of the productivity effect. But nothing much emerged from that interest.


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    Number of work stoppages idling 1,000 workers or more beginning in period


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    Bosworth’s proposal was to limit union contracts to one year’s duration (the typical contract at the time was 2 or 3 years) and to impose compulsory final offer arbitration in the case of impasses in negotiations for new contracts. At the time, however, unions were down to around one fifth of the private workforce and were experiencing a wave of “concession bargaining.” Put another way, about four out of five private-sector workers were nonunion and thus had no long-term contracts. Strikes – which are virtually all union-related – were rapidly declining in frequency, as can be seen from the chart above.


    Bosworth seemed to think that arbitrators would take account of macroeconomic externalities in making decisions – which in fact they don’t typically do. And there was no reason to think that use of final offer arbitration, as opposed to conventional arbitration, would change their criteria.[4] In any case, pay increases had already peaked, as the chart below illustrates, and never returned to anything like the rates of the early 1980s.


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    Seidman had less focus on the labor market and primarily promoted his two tax policies. One was a progressive personal consumption tax to replace the personal income tax. The idea was to tax consumption rather than income, thus promoting saving. You can think of this concept as something like the tax incentive given to IRA accounts (dating back to 1974) and to 401k plans (dating back to 1978). The idea would be to give a similar tax treatment to ALL forms of saving.


    Under such a tax system, you would presumably start with determining your income. Then you would deduct your saving and be taxed on that remainder. Of course, a sales tax or European-style value added tax (VAT) also taxes just consumption, but it would be regressive. So there would have to be progressive rates applied to the consumption remainder.


    For people at the top end of the income scale, the tax rates would have to be very high to match the current progressivity of the income tax. And folks who dissaved, as they might if they became unemployed or otherwise faced hard times, would presumably be taxed on more than 100% of their income. This proposal – a complete rewriting of the tax system – was not going to go anywhere. And it related to inflation only indirectly. One connection was in the vague sense that by encouraging saving (and thus investment), it might - over the long run - raise productivity growth. In the shorter run, a sudden shift to such a tax might boost saving, diminish consumption, and thus be contractionary.


    The other Seidman tax proposal was the TIP plan under which violations of guidelines for non-inflationary wage and price guidelines would be subject to a tax penalty. In the abstract, this idea was appealing to economists: if you don’t like an activity, impose a tax to discourage it. The problem is in the implementation.


    On the wage side, you would need detailed regulations to deal with such things as merit increases, promotions, deferred pay, etc. These complications arise under wage controls, too, but when taxes are involved, there needs to be a level of precision that would be difficult to define and administer. The price side is also complicated. What about tie-in sales, discounts, quality vs. quantity, coupons? Again, the concept was appealing but impractical.


    So what do we conclude from this historical exercise? One is that while there are current worries about inflation (but not much sign of it), no one talks about the kinds of remedies that were on display in the 1981 forum. For one thing, with unionization in the private sector down to around 7%, the labor market focus on collective bargaining is largely gone. At most, there are occasional references to labor shortages leading to wage increases and maybe thus to price increases.


    What may be lingering from the inflationary period of the late 1970s and early 1980s is the concern about inflation among senior policy makers, such as those who make policy for the Fed. The median American would have no memory of that period. But Fed chair Janet Yellen will be celebrating her 71st birthday in August.

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    Footnotes


    [1] In his remarks, Seidman made a joke about his promoting the TIP plan to “TIP” O’Neil, the Democratic Speaker of the House, which seemed to go over the heads of the forum’s audience.

    [2] Later in the 1980s, (then) MIT economist Martin Weitzman produced a theory of the “share economy” (not to be confused with the current notion of a “sharing economy”). The share economy involved promoting profit sharing and similar plans to improve macroeconomic performance including reducing the “stagflation” that characterized the 1970s and 1980s.    

    [3] The Center was founded as a Democratic Party-oriented think tank in 1981 in response to the Reagan election. Its name was later changed to the Center for National Policy.

    [4] Under final offer arbitration, the arbitrator receives an offer from management and an offer from the union. No compromise decision is allowed. He/she must choose the one that is most “reasonable.” The notion is that there will be an incentive to make reasonable offers, thus promoting a convergence of offers (and possibly a settlement without the need for an arbitrator in the first place). Conventional arbitration, in contrast, is said to produce a divergence of offers because the arbitrator will somehow split the difference. The incentive to diverge is sometimes characterized as the “chilling effect” of conventional arbitration, i.e., the presence of arbitration as the eventual decision maker in the event of an impasse is said to chill the chance of a private settlement. There is a substantial literature on these ideas. 

  • 21 Jun 2017 2:40 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 6-26-2017: It’s the Russia-thing, stupid


    Daniel J.B. Mitchell


    After the Democrats failed to win a highly-contested congressional seat in Georgia on June 20, the political wisdom seems to be that their strategy for the 2018 congressional elections should aim at economic issues rather than the ongoing Russia-thing investigations.[1] The Russia thing, after all, didn’t flip the seat. And all the related and unrelated Trump/DC turmoil didn’t flip the seat.


    There is an ongoing literature on the effects of economic conditions on presidential elections. But 2018 is not a presidential year. My personal sense is that what is likely to drive election results in 2018 is whether things seem to be OK in the economy. There could be some seat gains for Democrats in 2018, since there is said to be some tendency for the party in control to lose some seats in midterm elections. But that is not the same thing as a political revolution. Congressional seats remain in the same GOP-favoring gerrymander that characterized them in 2016. Still, as a strategy for Democrats, there remains the Russia-thing.


    I recently attended the UCLA Anderson economic forecast. So let’s see what that forecast suggests for 2018. The two charts below basically tell the UCLA story:

    ---


    ---

    The economy, as projected by UCLA, keeps growing at something like 2% per year measured by real GDP. That’s a slower rate than the post-World War II average, and there is a debate as to whether 2% is a “new normal” or some kind of aberration. But note that if it is an aberration, the prospect would then be for faster growth, not slower. And given the assumptions that suggest 2% is a reasonable number, unemployment is projected to decline slightly and bottom out in 2019. Again, this economic story is not the stuff of political revolution. Democrats can complain about the economy, but the UCLA forecast suggests that issue will not be a plus for them.


    Now you can always point to scenarios that could throw the economy into recession. But the time remaining for any such scenarios to develop before the November 2018 elections is diminishing. The forces that produce recessions take time to develop. So you could disagree with this or that assumption underlying the UCLA forecast and still come out with something like the above charts. The simple fact is that story on the charts is becoming more and more locked in for 2018. And that means the political ramifications of the story are also being locked in.


    The argument for a focus by Democrats in 2018 on the economy seems to be embodied in the notion that the 2016 issues that might not have had sufficient resonance then will matter a lot a year from now:


    “Democrats have to be hyper-focused on an economic message that tells people that the Republican Party is all about economic growth for millionaires and billionaires and the Democratic Party is about economic growth for everybody,” [Senator Chris] Murphy (D-Conn.) told MSNBC’s “Morning Joe” on Tuesday. “The fact that we have spent so much time talking about Russia, you know, has been a distraction from what should be the clear contrast between Democrats and the Trump agenda, which is on economics.”[2]


    In this view, “economics” is not just real GDP growth and unemployment rates, but instead involves income distribution and fairness. Perhaps, if Republicans succeed in some version of repealing and replacing “Obamacare,” the economic fairness issue will have increased salience among voters. At this writing, however, it is unclear whether there will be a repeal and replace bill, or – if there is one – what it will contain.


    There is the headline estimate of 20+ million people who will lose coverage in the House version of the Republican anti-Obamacare effort. But the problem is that such displacement is projected to occur over time, not immediately after repeal. Thus, if the GOP Senate leadership is smart – not a guarantee, of course – they could produce a bill that keeps the current health system going beyond the 2018 election cycle. The actual replacement could come later, yet still allow Republicans to say they did the repeal in 2017. That way, the losses of coverage occur later than November 2018 and perhaps become an issue for 2020. And note that if the Republicans fail to produce a bill, their failure will likely be due to Democrats’ efforts to block any repeal. In other words, the Democrats are committed to make every effort to prevent Republicans from doing something that could eventually hurt GOP prospects.


    The fact is that the Russia-thing is the only lever the Democrats have. Maybe it isn’t a very effective lever. Maybe most people in the electorate are not political junkies who follow DC affairs closely. Maybe, to the extent that folks are aware of current White House turmoil and missteps, they tend to dismiss it as “just politics as usual,” even though the junkies and professionals know that it isn’t at all usual. But the Russia-thing is the only lever available to be pulled. After all, if you were driving a car and the regular brake failed, wouldn’t you yank as hard as you could on the available hand break, despite its limited effectiveness? What else could you do?


    In any case, you can think of the options as playing the probabilities. The odds that the Russia-thing will produce a smoking gun that could tilt the 2018 election results are greater than the economic equivalent.

    ---

    [1] "Sen. Murphy on Dem's Georgia loss: Russia has been a distraction," 6-21-2017, Politico. Available at: http://www.politico.com/story/2017/06/21/georgia-special-election-2017-democrats-lose-239798

    [2] Ibid. 

  • 16 Jun 2017 12:09 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 6-19-17: What If What We Know Ain’t So?


    Daniel J.B. Mitchell


    The Fed keeps raising interest rates to counter inflation as the unemployment rate falls to a level (below 4½%) that someone thinks will cause price inflation to rise above the Fed’s target of 2%/annum. Let’s set aside the question of why 2% is the target. (Why not 2.5% or 1.5%? What price index is best?) The fact is that core inflation (excluding volatile food and energy prices), shows no trend toward acceleration:


    Core Consumer Price Index: May of Year Shown:

    12-Month Percent Change:

    2008

    2.3

    2009

    1.8

    2010

    0.9

    2011

    1.5

    2012

    2.3

    2013

    1.7

    2014

    2.0

    2015

    1.7

    2016

    2.2

    2017

    1.7


    Nor is there any sign of inflation expectations accelerating above 2%:

    ---


    ---

    If we look at the labor market for signs of “wage-push,” we don’t see it. Presumably, wages would start to “push” the price level up if they rose faster than some long-term allowance for productivity. But there is no sign of such an outcome from current data:


    Employment Cost Index for Private Sector:

    12-Month Change, Total Compensation

    Year

    Qtr1

    2007

    3.2

    2008

    3.2

    2009

    1.9

    2010

    1.6

    2011

    2.0

    2012

    2.1

    2013

    1.9

    2014

    1.7

    2015

    2.8

    2016

    1.8

    2017

    2.3


    Even if you think there is something funny in the numbers above related to benefit costs, when we look at just wages (no benefits), it’s still hard to see any wage-push.


    Employment Cost Index for Private Sector:

    12-Month Change, Wages and Salaries           

    Year

    Qtr1

    2007

    3.6

    2008

    3.2

    2009

    2.0

    2010

    1.5

    2011

    1.6

    2012

    1.9

    2013

    1.7

    2014

    1.7

    2015

    2.8

    2016

    2.0

    2017

    2.6


    Those who argue we are in some kind of “new normal” of very modest productivity growth would surely allow at least a 1%/annum long-term increase in productivity:

    ---


    ---

    And then there is the question of what to do about the vast portfolio of assets the Fed accumulated in trying to offset the Great Recession. The flip side of the asset purchase was a big increase in the monetary base:

    ---


    ---

    If you are a firm believer in some version of the quantity theory of money, you see great danger in the enlargement of the monetary base. Too much money chasing too few goods, etc. Inflation should rip any day now once “velocity” goes back to normal. Except it hasn’t happened, despite continued predictions by monetarists that inflation was imminent since the early days of the asset accumulation.


    There appears also to be a group that thinks it is unseemly for a central bank to hold a big portfolio of assets, whether or not it poses an inflation danger. It’s not clear why because something is unusual, based on past history, it has to be reversed. If asset sales were purely cosmetic, at least there could be no harm in such worrying about appearances. The difficulty is that just as the original asset purchases were viewed as expansionary (or at least resisting the downward tug of the Great Recession), asset sales have to be seen as potentially contractionary. So why do them, if there is a risk?


    The problem seems to be one of “everybody knows.” Everybody knows that very low interest rates are abnormal and Bad Things. Everybody knows that when unemployment is at current levels, inflation will inevitably accelerate. Everybody knows that the Fed has too large a portfolio of assets. Actually, at most what everybody knows is that models based on the past suggest such conclusions. But nobody knows whether – given the changes in financial and labor market institutions that have occurred – those models still hold. Why is it prudent to base monetary policy on models that don’t seem to be working? Wouldn’t prudence call for not changing policy until there is clearer evidence? Just asking.

    ---


    ---

  • 10 Jun 2017 2:37 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 6-12-17: Trump on Trade: It’s a Puzzlement (or Maybe It Isn’t)


    Daniel J.B. Mitchell


    In the musical “King and I,” the King of Siam sings about learning of facts that don’t fit into his frame of reference and declares them to be a “puzzlement.”[1] During the 2016 presidential campaign, then-candidate Trump indicated that he would undertake various “protectionist” measures to protect the jobs of American factory workers. University of California-Irvine professor Peter Navarro – who had earlier denounced Chinese trade practices – became an official economic adviser. In the period before the inauguration, but after the election, Trump attracted substantial news media attention by ostensibly intervening personally with the management of various companies to preserve jobs and not outsource abroad.


    All of these actions tended to go against establishment Republican pro-free trade beliefs. But Trump would sometimes point to President Ronald Reagan – now a god-like figure in conservative Republican circles – and Reagan’s trade policy.[2] Reagan first came into office in 1981 at a time when the U.S. economy was entering a downturn. In fact, there were two back-to-back recessions that developed, the second of which was quite severe. Indeed, if measured by the unemployment rate, the severity of the Reagan recession was greater than the more recent Great Recession. (See below.)


    So if Reagan followed a protectionist policy, and since Trump promised it citing Reagan, why hasn’t he followed through? Even the veiled, and not-so-veiled, threats Trump made about what he would do if companies continued to outsource seem to have disappeared. It’s a puzzlement.


    It is even more puzzling when you consider the way Reagan went about his protection arrangements. Trump seems to prefer country-by-country “deals” over multilateral accords. And he believes himself to be a great dealmaker. Reagan didn’t depict himself in that fashion, but his most high profile policy of protection – restricting Japanese car exports to the U.S. – was precisely such a Trump-type deal. Reagan seemed to know about the Art of the Deal, even without having (ghost-) written a book by that title.


    Of course, nowadays it’s China, not Japan, playing the role of the chief U.S. trade villain. But the Chinese told Trump that currency manipulation was no longer occurring, and Trump accepted that story and even took credit for it.[3] The general view seems to be that Trump gave up pressuring China on trade in the hope that China will fix his North Korea problem – although it’s not clear that anything like that is likely to occur.

    ---

    Civilian Unemployment Rate, seasonally adjusted


    Source: U.S. Bureau of Labor Statistics. Note that the 1983 Reagan recession shows an unemployment peak higher than any other post-World War II recession, including the most-recent Great Recession.

    ---

    There is a possible explanation for the puzzlement, at least as far as China is concerned, which goes beyond the North Korea issue. Reagan made a deal with Japan for what were called “voluntary export restraints” (VER). There was no official American quota, which would have required Congressional action. Japan agreed “voluntarily” to limit its automobile exports to the U.S. The Japanese government then essentially distributed the quota among the various Japanese auto manufacturers.


    One version of the Reagan story is that Japan agreed to the de facto quota system because of fears that if it didn’t agree, Congress would enact something more restrictive. That lesser-of-two-evils motivation could have been part of the reason. But we know something else about the VER arrangement with Japan after the fact. When the Reagan administration later indicated that there was no need for continued voluntary quotas, the Japanese seemed reluctant to give them up. So why, if the threat was over, and if the threat had been the motivation, wouldn’t the Japanese quickly terminate the quota arrangement?


    Note that there are only a handful of major brand name Japanese auto manufacturers. They had been established in the U.S., and had developed a degree of brand recognition and loyalty, since the 1960s. In effect, the quota system, by restricting supply, raised the price of Japanese cars in the U.S. (which also benefited competing American brands). The quota system operated as a coordinated Japanese auto cartel, limiting supply but raising the profit markup on each car sold. From the point of view of Japan, reduced competition and higher markups were beneficial. But did the quota system provide a net benefit to Japan? Even if it didn’t, it did provide Japanese auto companies at least an offset to the restriction on market share. And the fact that there was reluctance to give up the VER system when it was no longer required suggests that there may well have been a net benefit to Japan.


    Could Trump have reached a comparable deal with China? The problem would have been that Chinese imports are not concentrated in a few brands or product lines that are highly recognizable to American consumers. What is the Toyota equivalent of China products? Maybe Lenovo computers? Imports from China more typically are outsourced arrangements with other, often American, firms. Apple’s iPhone is an example. And there are lots of different products that constitute Chinese exports to the U.S. as opposed to a concentration (as in the Japanese case) on cars.


    So a Chinese equivalent of a VER, even if Trump had requested one, seems unworkable. If, say, a VER-type quota was somehow imposed on iPhone imports, who would get the increased markup? Apple or the Chinese manufacturer? Would there even be an increased markup, or would Apple just outsource to some other cheap-labor country?


    In theory, China could agree to an export tariff (or some equivalent) on its sales to the U.S. Such an approach might capture some added revenue for China. But there are lots of other low-wage countries in the world that would pick up the slack, so the incentive for China to take such a step is small. Moreover, the idea that if China didn’t impose a restriction on itself, Congress would enact something more restrictive seems far-fetched. There is no indication that the Republican Congress is itching to impose such a restriction.


    Bottom line: There is a possible explanation of the puzzlement as to why Trump didn’t make a trade deal with China: Without any leverage, he couldn’t. You don’t need to know much about the Art of the Deal to know that without leverage, there is no deal to be had.

    ---

    [1] https://www.youtube.com/watch?v=9u5iHzag120.    

    [2] http://money.cnn.com/2016/07/27/news/economy/donald-trump-ronald-reagan-trade-japan/index.html

    [3] https://www.washingtonpost.com/news/fact-checker/wp/2017/05/16/president-trumps-evolving-claims-about-when-china-stopped-manipulating-its-currency/

  • 31 May 2017 6:50 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 6-5-17: What’s the problem at UC?[1]


    Daniel J.B. Mitchell

    ---


    Clark Kerr hands Master Plan to Gov. Pat Brown.

    ---

    The University of California (UC) is a public university. As such, it competes for state funding with all other state programs. It has operated under a (gradually eroding) Master Plan for Higher Education that was put together in 1960 under the direction of the then-UC president, the legendary Clark Kerr, and shepherded into legislation by our current governor’s dad, Pat Brown. Spoiler alert: UC’s underlying economic problem is that the State has never fully adjusted to the end of the Cold War. Its underlying political problem is that doesn’t have the leadership (despite the fact that it is headed by a former governor) that can make true long-term deal with the state.

    ---


    ---

    At the time of the original Master Plan (which actually expired in 1975, but somehow lives on), California was in what state historian Kevin Starr termed an age of “golden dreams.” Not only was the state promising every college-age student a place somewhere in the higher ed system – virtually for free – but it was building new campuses to accommodate them, both at UC and in what was then called the state college system (now California State University – CSU). Even those students with marginal high school records could get into a community college and then transfer to a public 4-year institution after two years. Moreover, new freeways were being opened. And an ambitious state water project being planned.

    ---


    Gov. Pat Browns open a segment of the Santa Monica freeway in 1964.

    ---


    Gov. Pat Brown promotes his planned State Water Project.

    ---

    How was it possible for a single state to be doing all of these things, given normal budget constraints? Part of the answer has to do with the fact that there was less competition for state funds back then. If you ask how much was the state spending on Medicaid (called Medi-Cal in California) when the Master Plan was adopted in 1960, the answer is zero. The program didn’t exist at the time.


    More importantly, there was an ongoing stimulus to the California economy (and thus indirectly to the state budget) that resulted from the military-related spending that was then going to the aerospace industry and related sectors. The stimulus was uneven – there were bumps in the road over time depending on hot wars and Cold War confrontations. But when the Soviet Union dissolved, the state stopped growing faster than the U.S. A very mild recession in the early 1990s for the rest of the U.S. led to a years-long California state budgetary crisis and shaky fiscal conditions which persist. Even the dot-com boom of the late 1990s, and the housing/mortgage boom of the mid-2000s, were unable to put California back on its old growth path.


    In the age of golden dreams, and beyond until 1990, although there was a budget constraint in California and an increase in claims by social welfare programs (such as Medi-Cal), it was easier to allocate funds out of the rapidly-expanding pie than it is now. One dollar for X was not one dollar less for Y. In today’s average-growth world for California, however, there is a more unpleasant trade-off. The average American state is used to being average and has adapted its expectations. California is not used to being average and resists adaptation.

    ---


    Above: California grew faster than the U.S. from statehood on, but got a special boost starting with World War II and ending around 1990. Thereafter, it essentially grew, and is projected to grow, at about the same rate as the U.S. as a whole. Below: Employment in California breaks away from (falls behind) the post-WWII trend starting in 1990.


    ---

    I am telling an oversimplified story, of course. Fiscal aficionados of California would undoubtedly want me to say something about Prop 13 of 1978, for example, which drastically cut local property taxes and made the K-14 system heavily dependent on state support. Still, the underlying pressure resulting from the switch from state super-fast growth to average growth is an important part of the tale of UC’s dilemma.


    One response of the state to being average has been to increase reliance on the income tax and, especially, the top brackets thereof. As a result, the state has a volatile tax base which depends heavily on the incomes of a relatively small group of high income taxpayers whose incomes often reflect the ups and downs of financial markets (capital gains), as well as the underlying real economy. 


    Almost half of income tax receipts are received from the top 1 percent of filers.[2] In the governor’s proposed budget for fiscal year 2017-18, the income tax is projected to account for seven out of ten dollars received by the state general fund.[3] As an illustrative anecdote, back in February 2012, the Legislative Analyst’s Office devoted a section of its report on the governor’s initial budget proposal for 2012-13 to the impact of the Facebook IPO and how much the state could collect in capital gains from Mark Zuckerberg & Co.[4]


    When there are economic downturns, UC is particularly vulnerable because state support for it is seen as discretionary. The legislature knows, moreover that reductions in tax support for UC can be made up by tuition increases that it doesn’t have to approve. Indeed, it can blame the UC Regents for the increases, which is even better.


    That observation brings me now to the Regents. Under the state constitution, the Regents have “autonomy.” But the legislature can always condition funding on the Regents doing something or not doing something. So the meaning of constitutional autonomy has never been clear. The legislature does show some deference to the Regents, given the constitution, but less so now than in the past.


    So let’s look at the political side to UC’s problem. Back in the day, before voters approved term limits for legislators (in that fateful year of 1990!), legislators tended to stay in office for long periods and specialize in particular fields (such as higher education). UC’s legislative representatives – some would say lobbyists – would form relationships with the key personalities in the legislature who controlled UC’s appropriations and cut deals when needed. But that ability eroded under term limits as the legislative personalities kept changing. Schmoozing with a few lawmakers just doesn’t work like it used to.


    Moreover, UC’s president has typically been an academic and political skills did not always accompany academic credentials. So, for example, when Arnold Schwarzenegger became governor after a recall election in 2003, the then-UC president, physicist Robert Dynes, rushed to sign a “compact” with him dealing with university funding. Remarkably, Dynes seemed to think that his compact meant something. But as soon as the state budget went south under Schwarzenegger, neither the governor nor the legislature paid much attention to the compact.

    ---


    At budget presentations, Gov. Jerry Brown regularly highlights a chart on “unpredictable capital gains” as a component of state tax revenue.

    ---

    The current governor, Jerry Brown, is actually in his second iteration in that office. He was first elected governor in 1974, reelected in 1978, and then went into political eclipse after an abortive run the for the U.S. senate in 1982. 


    During his first iteration as governor, Jerry Brown had a tense relation with UC. The governor is an ex officio member of the Board of Regents and, in fact, is technically the “president” of the Board. But, as a matter of practice, most governors haven’t attended Regents meetings. Brown, however, took an interest in UC and does attend meetings. Why? He considers himself, if not the smartest guy in the room, then certainly the most profound questioner in the room. Brown was famous in his first iteration for promoting the idea that faculty should be content with their “psychic incomes” (as opposed to cash). There is still much of the old Brown in his attitude towards UC.


    After emerging from his political eclipse, Brown was elected mayor of Oakland, then attorney general of the state, and finally governor in 2010 (reelected in 2014). As governor, as noted, he does show up at Regents meetings. At first, the Regents didn’t quite know how to handle him and generally played nice and went along with what he wanted. These things included more online education and a cut-rate pension plan for new hires, among others goals. 


    Eventually, however, the Regents seems to reach the conclusion that they were being outgunned politically, both by legislature and the governor. To change that dynamic, they decided to appoint a former governor – Janet Napolitano of Arizona – as president instead of a traditional academic. Surely, a former governor – a politician - could deal with the politics of UC.

    ---


    -

    The most recent scandals.

    ---

    Unfortunately, although Napolitano is more politically astute than many academic administrators, she doesn’t seem to have a sense of the underlying economic quandary facing UC that we noted at the outset. So she concedes what the governor and legislature want whenever they push hard enough or when there is a scandal. For example, the pension deal she cut with the governor has a real downside, but the governor pushed for it so she met with him in private (in what was termed the “Committee of Two”) and proclaimed the result to be a done deal.


    UC admitted more out-of-state students during its most recent budget crisis (because they pay higher tuition), contributing to the popular notion that the reason Johnny didn’t get into Berkeley was because of these outsiders.[5] (The question of why there are more outsiders is not always asked – or is ignored.) So after the legislature fussed about out-of-state students, the UC president agreed to admit more in-state students and cap out-of-staters, although not with sufficient funding to pay for the extra admits and for the needed added facilities and services.


    Most recently, there has been a clash with the California state auditor over UC’s budget reserves and a brouhaha about super-expensive dinners for the Regents. As these problems arise and receive attention in the news media, Napolitano – as a politician – detects that something must be done in response to quiet the controversy. That’s good. But it is basically a firefighting skill. And the lesson drawn is that if you want something from UC, you have to create enough of a controversy so that legislators start to threaten. UC agreed to do what the auditor said should be done about reserves. And UC ended the dinners. The pressures arising from the bad PR were sufficient to bring a swift result.

    ---


    -



    Firefighting the recent scandals.

    ---

    But consider another controversy involving outsourcing. UC-San Francisco, the medical campus, outsourced various information technology jobs to India. Particularly in the age of Trump (in which issues of outsourcing and job displacement by foreigners have been highlighted), you might think that the UC president would quickly override the decision. But despite complaints delivered to the Regents and adverse publicity in the news media, the issue never got enough traction in the legislature for UC to change course. There was a fuss, but not a big enough fuss.

    ---


    So far, not enough legislative traction to obtain a result.

    ---

    This reactive approach by UC doesn’t get to the heart of things. Given the fact that California is no longer in its one-time age of golden dreams, and that prospects for a renewed golden period are slim, what is needed now is a new Master Plan. Such a plan has to be far more than the useless “compact” UC had with Gov. Schwarzenegger. It can’t be a hasty deal between the UC president and the governor, another Committee of Two arrangement. The legislature must be involved, the stakeholders within the university must be involved, and outside interest groups must also be involved. There has to be an encompassing political process.


    The University of Michigan’s arrangement with its state is sometimes referred to as the “Michigan Model.” Essentially, the deal in Michigan is something like what happened to UC as state funding was restricted, i.e., tuition increases, expanding admissions of out-of-state students paying a premium to raise revenue, etc. But it was done in Michigan through a process that involved the key stakeholders including the outside interest groups. It might be noted that the University of Michigan was headed at the time by an academic economist, Harold Shapiro, who could see where the Michigan economy was going long term. In short, hiring a politician to run a university system gives you short-term political sensibilities, but not necessarily a strategic vision.


    In any case, UC’s problem is that it has stumbled into the Michigan Model (higher tuition; more out-of-state students) on an ad hoc basis without ever having a Michigan-type accord. Unfortunately, the ad hoc approach doesn’t work very well. Eventually, the legislature, the public, the interest groups, and the internal stakeholders say they never agreed to it and the approach falters.


    At one time, when politics in California were more balanced, there were such things as centrist Republicans in the state, business types who saw UC as contributing to the state economy. Thus, Jerry Brown’s gubernatorial successor after his first iteration, Republican George Deukmejian, took pains despite the budget crisis Brown bequeathed to him in 1983, to substitute competitive pay for UC faculty in place of psychic income. His rationale was simply standard labor market analysis, an approach easily understood by business-type Republicans.


    But now Republicans in California tend to be tea party types who don’t like UC because it is seen as elite. And they are particularly turned off by misbehavior on the left: riots over guest speakers, demands for safe spaces, etc. There will be no George Deukmejian-type candidates in the next gubernatorial election (2018) to rescue UC, since there are no Deukmejian-style Republicans left in California who are capable of winning a statewide election. On the Democratic side, the candidate who is most prominent at the moment is the current lieutenant governor who is, like the governor, an ex officio member of the Regents. Nothing in his behavior on the Regents so far gives me reason to hope he will be a friend of UC should there be another budget crisis.


    Now don’t get me wrong. There is plenty the Regents could do, and UC administrators could do, to improve efficiency. Huge capital expenditures are routinely approved by the Regents without a capability for real review of plans or alternatives. The Regents are unpaid part-timers meeting once every two months and they have their day jobs to worry about. So their ability to oversee UC – now a vastly more complicated entity than when the Master Plan was developed - is more limited than they would like to admit. But the notion that if only “waste, fraud, and abuse” were vanquished, Johnny could get into Berkeley is simply wrong. You can complain that the Regents and/or UC top brass have “tin ears.” But even with the most acute ears on the part of UC’s powers-that-be, Johnny’s odds at getting into Berkeley won’t materially improve.


    Back when the Master Plan was enacted, there were about five and half million Californians under age 18, the potential seedbed of future college admissions. At the time of the 2010 Census, there were about 9.3 million in that age bracket, i.e., less than a doubling. Even allowing for the fact that a larger fraction of high school graduates want to go to a 4-year undergraduate institution now than back in 1960, the fact is that the number of UC enrolled undergraduates who were California residents more than quadrupled from around 40,000 to 176,000 over that interval. But there is still only one Berkeley campus. There is no way they all could go to Berkeley.


    The Master Plan of 1960 projected increased enrollments, but dealt with them mainly by adding new campuses. So, if anything, it is easier for Johnny to get into UC somewhere than it was in 1960, but not into Berkeley. Indeed, the state Legislative Analyst’s Office (LAO) believes that the Master Plan target of UC offering admission to just the top 12.5 percent of high school graduates is currently being exceeded.[8]


    Gov. Brown said at a Regents meeting that as far as Berkeley admissions is concerned “you got your foreign students and you got your 4.0 folks, but just the kind of ordinary, normal students, you know, that got good grades but weren’t at the top of the heap there – they’re getting frozen out.”[9] And indeed they are. But that freezing has nothing to do with lavish Regents’ dinners or sloppy accounting for reserves at UC headquarters.


    What does it have to do with? Actually, although it’s hard to find good historical data online, the Berkeley campus’ undergraduate enrollment appears to have expanded significantly as the under-18 population in the state has expanded, although probably not proportionately.[10] But more high school graduates now want to go to college than in 1960. Cost-cutting pressures have encouraged more transfer students (who spend their first two years in community college), so getting in via good grades and scores as a freshman is now more constrained. There are pressures on the university from the legislature for diversity in admissions. So despite Prop 207, the 1996 voter initiative banning “affirmative action,” admissions have become more “holistic,” i.e., less focused on grades and scores. Finally, there is relative pricing.


    Yes, UC tuition went up as state budget appropriations were squeezed. But for in-state students, tuition cuts two ways. On the negative side, it is a lot more expensive to go to Berkeley than it was in 1960. But Berkeley is cheaper than, say, Stanford or most other privates for many applicants. So if you want to get into Berkeley as a freshman via grades and scores, demand for slots is up for that route – but when it comes to supply, not so much.


    Bottom line: Unless UC leadership sits down with state politicos and other stakeholders and interest groups concerned with the future of UC and develops an accord concerning the alternatives for funding, the long-run prospects are for continued firefighting. Quality erosion and decay could be the consequences. There are no guarantees that a better future can be produced by a deliberate and probably difficult political process to produce a new Master Plan. But the current approach of ad hoc adjustments to crisis and pressure, even with a former governor at UC’s helm, is not working very well.

    ---

    Footnotes

    [1] Some thoughts for the June 4, 2017 panel in Anaheim, California on “Shifting Employment Relations in American Higher Education,” Labor and Employment Relations Association.  

    [2] http://www.sacbee.com/news/politics-government/capitol-alert/article74271532.html.  

    [3] http://www.ebudget.ca.gov/2017-18/pdf/Revised/BudgetSummary/SummaryCharts.pdf.  

    [4] http://www.lao.ca.gov/analysis/2012/update/economic-revenue-update-022712.pdf. See pp. 25-26.  

    [5] I focus the issue on UC-Berkeley because, as will be noted below, Gov. Jerry Brown (as an alumnus) has that focus.

    [6] https://www.census.gov/prod/1/pop/p25-384.pdf; https://www.census.gov/prod/cen2010/briefs/c2010br-03.pdf.     

    [7] http://accountability.universityofcalifornia.edu/2011/index/1.1. The 1960 data do not separate California residents from non-residents. So the 40,000 figure is an overstatement of Californians.  

    [8] http://www.lao.ca.gov/reports/2017/3532/uc-csu-enrollment-capacity-011917.pdf

    [9] https://www.insidehighered.com/news/2015/01/23/gov-brown-says-normal-californians-cant-get-berkeley-problem-some-californians-blame.  

    [10] Enrollment in 1960 was reported as a little over 15,000. See “Berkeley Campus Enrollment Rises,” Los Angeles Times, September 16, 1960, p. A5. In 2010, it was about 25,000 of which around three fourths were California residents.

  • 28 May 2017 9:43 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 5-29-2017: Creative Accounting


    Daniel J.B. Mitchell


    In June 2011, California governor Jerry Brown faced a problem. He had a budget crisis inherited from his predecessor, Arnold Schwarzenegger. Brown hoped to resolve the problem by extending certain temporary taxes that were due to expire. But he needed a few Republican legislative votes to put the tax issue on the ballot for voters to decide – a two-thirds vote of the legislature would have been required - and no Republicans would go along. However, the budget needed to be passed before the July 1, 2011 start of the new fiscal year, and budgetary rules required a “balanced” budget.[1] So eventually an extra $4 billion in revenue was simply assumed, although it was not specified which tax or taxes would supply the extra revenue. With the assumption of the phantom $4 billion, the proposed budget was balanced on paper and could be passed.


    Readers will quickly discern that just assuming more revenue, while it solved an accounting problem, did not address the real problem, insufficient tax receipts. The revenue needed for the proposed budget to be in actual “balance” was not produced by just assuming it would appear, so the true problem was not resolved. If extra revenue is assumed that then doesn’t appear, and if programs are continued absent that extra revenue, someone eventually must pay. In the California case, presumably that someone would be future taxpayers, since state debt will rise. Or perhaps some future programs that would otherwise be in later budgets won’t be undertaken because of that debt.


    Essentially, what an accounting trick does is to allow some course of action to go forward. But eventually there will be consequences.


    That conclusion from this California anecdote is readily evident. And it can be applied more generally. From time to time, the idea of using a trick to deal with Social Security’s long-term “underfunding” is suggested. Sometimes the trick involves giving recipients less in the future without making it apparent. Fiddling with the cost-of-living provision falls into that category. But sometimes the idea is to protect future recipients from cuts in the future, also without making that goal apparent.


    A bit of history: Social Security, when it was enacted in 1935, was made to look like a private pension plan of the type that existed at the time in a few big firms. So it had a mix of employer and employee contributions, a trust fund, and a defined-benefit schedule. The trust fund was invested in U.S. Treasury securities. The fact that it was made to resemble a private pension plan was really for political purposes; such a structure made the plan – a radical innovation in its time – seem more normal. The trust fund was invested in Treasuries rather than in the stock market because in the midst of the Great Depression – which had begun with the market crash of 1929 – putting money into stocks would hardly have been reassuring.


    In more recent history, however, the idea of putting some of the Social Security trust fund into the stock market has been raised on the grounds that stocks, over long periods, have earned more than Treasuries. So if you earn more on what is in the trust fund, there is less pressure to raise tax revenue for the program by increasing payroll taxes. But various objections have also been raised. In some cases, the stock market suggestion is combined with the idea of phasing out or diminishing the defined-benefit element of Social Security and substituting individual accounts, basically a variant on IRAs. Conservatives who don’t like Social Security on ideological grounds favor that idea.


    But liberals can see earning higher returns via the stock market as a way of preserving the program “as is” and its promised benefits. A recent paper makes just such a case.[2] The paper takes up various objections to diverting money to the stock market and puts them aside. For example, it raises the issue of whether Social Security purchases of stocks would “disrupt” the stock market (not clear what disrupt means) and finds that it wouldn’t be a problem. But the paper misses the macro perspective. Social Security resembles a private pension plan. But as a near-universal federal program, it really isn’t an ordinary pension.

    There is a key problem facing Social Security as a system when it is seen as an ordinary pension plan. Viewed that way, it is underfunded. However, Social Security is basically a pay-as-you-go transfer arrangement (today’s taxes pay current benefits). But it also has some savings built up – but not enough – for the demographic bulge created by the baby boom/baby bust. So the trust fund will go to zero before all the boomers have collected what current formulas suggest they will be owed.


    Of course, the most obvious solution for preserving the system as it is would be to raise the associated employer and employee payroll taxes. But Washington gridlock prevents that step. So if earnings on the trust fund were raised sufficiently, those extra returns might get the system over the demographic hump.


    Now, in theory, you could make those earnings go up by simply raising the interest rate paid on the Treasuries held by the system. In effect, Social Security would become solvent on paper and the national debt would rise to cover the added interest costs. The accounting trick would thus protect future boomer retirees and put the burden of paying for them on future taxpayers. However, the fact that it is a trick is too transparent for such a step to be undertaken. Why should the Treasury pay a higher interest rate to Social Security than to other lenders, folks would ask?


    Diverting investment of the trust fund into stocks is a more subtle trick, but it is nonetheless a trick from a macro viewpoint. All that would really happen is that the identity of the holders of Treasury securities and stocks would shift. The trust fund would buy stocks. Those stocks would then not be available for institutions and individuals that otherwise would have bought them. On the other hand, more Treasury securities would have to be sold on the market since Social Security would not be buying them. So those institutions and people that would have bought stocks will end up buying Treasuries. There might be some second-order effects arising from this shuffling of portfolios, but in the end that’s all it is: a portfolio shuffle.


    In, say, the year 2040, when the boomer retirement will be at or near its peak, the then-existing GDP will be whatever it is and some of it will be consumed by retirees. The more they consume, the less will be available for anyone and anything else. That is the underlying macro significance of the baby boom demographic bulge. More for the elderly; less for others. Reshuffling the portfolio has no obvious impact on the total size of that future GDP. It doesn’t, for example, raise national saving now which might – through more investment – lead to a higher GDP by 2040. So the trick entailed in diverting the trust fund into the stock market has only one effect. It tends to ensure that future retirees will be fully protected from cuts in promised benefits because the system will be “solvent.” The flip side of that solvency is that the incidence of paying for the demographic bulge will be borne by someone else.


    Let’s do some simple examples. Imagine a society in which every year there is one birth at age 0 and everyone dies at their 80th birthday. Persons age 0-19 are “children-dependents.” From age 20 through age 59, they are active workers and parents. From age 60 until they die, they are retirees. Children-dependents are supported by intra-family transfers from parents, not the government. Retirees are supported by a government-operated, pay-as-you-go, tax-based Social Security system.


    As we have set up this story, there will be a steady state in which at any time there will be twenty children (aged 0-19), 40 active workers-parents (aged 20-59), and 20 retirees (aged 60-79) in society. Let’s now suppose further that each active worker earns 1 dollar. So total GDP will be $40. The 40 active workers, in producing that GDP, are supporting both their non-working children and non-working retirees. Forty workers, in other words, are supporting 80 people.


    If every person receives an equal income, that income will be 50 cents. So the active worker-parents will, through intra-family transfers, divert $10 of GDP to their 20 children (so each child will receive 50 cents). The twenty retirees are supported by Pay-Go Social Security, so $10 will be taxed away from active workers and paid to the retirees (giving each retiree 50 cents). The 40 active workers thus will have $20 left for themselves (50 cents per capita). This steady-state situation is shown on Appendix Figure A1.


    Now let’s create a baby boom demographic bulge. Suppose in one year, there are 11 births (10 extra babies) instead of one. Thereafter, the birth rate goes back to one per year. There will be 30 children total in society until, after 20 years, the boomer-children become active worker-parents. Figure A2 show a typical year before the boomers age into the workforce. Let’s assume that parents want to maintain per capita consumption of children at 50 cents. They will have to divert $15 of the $40 GDP they are generating to their 30 kids. The number of retirees is still 20 so $10 will still be taxed away from active workers to support the Pay-Go Social Security system and its promise of a retirement income of 50 cents/retiree. Active worker-parents will receive only 37.5 cents per capita for their consumption, assuming they want to sacrifice to keep their kids at 50 cents per capita.


    When the boomers become workers, society faces two choices. It can continue Social Security on a Pay-Go basis, and not put anything away in a trust fund for the eventual retirement of the boomers. Or it can pre-fund the eventual increment of boomer-retirees. Figures A3 and A4, respectively, show the alternatives. In Figure A3, with the number of children back to 20 (baby bust), the intra-family transfer/diversion from the enlarged GDP of $50 is back to $10. There are still only 20 retirees so the tax diversion from the $50 GDP is again only $10. We now have 50 workers supporting 90 people which leaves more income for the active workers than when only 40 workers supported 90 (when the boomers were children) or when 40 workers supported 80 people (before the boomers were born). Boomer-workers have a per capita income of 60 cents if there is no pre-funding.


    If there is full pre-funding of the extra boomers’ retirement, we will need to put aside $100 in the trust fund.[3] (The 10 extra boomers will be retired for 20 years and get 50 cents per year; we’re assuming zero interest on the trust fund.) As Figure A4 shows, if we tax the 50 workers $12.50 (instead of the previous $10 with no pre-funding), over the 40 years before retirement of the boomers, the extra $2.50/year will add up to $100). Even so, the 50 active workers will do better than the steady-state and better than when the boomers were children. Their per capita income will be 55 cents.[4]


    So what happens when the boomers become retirees? If the tax for Social Security is not raised, the $10 tax taken from the $40 GDP will produce only a per capita income for retirees of 33.3 cents ($10/30), as shown on Figure A5. If, on the other hand, sufficient income in earlier years had been put aside to build the trust fund to $100, as Figure A6, all groups – children, active workers, retirees – get their 50 cents per capita.[5]


    What if there is no prefunding and also a decision is made to give the boomer-retirees their promised 50 cents per capita anyway? The money has to come from somewhere. As Figure A7 shows, if the incidence falls entirely on active workers, their per capita income falls to 37.5 cents, assuming they continue to give their children 50 cents per capita. It’s worth noting that this result during boomer retirement is the same as what occurred when the boomers were children. But because no government agency was involved when the boomers were kids (the transfer was intra-family), we didn’t call what occurred a “crisis.” When a government agency is involved, however, we do. Go figure!


    Let’s get back to the proposal to put some Social Security funds into the stock market. Which of the various figures is most analogous to that proposal? Figure A7 is the closest analogy. As noted, putting the money in the stock market does not make GDP bigger. And more money has not been diverted from prior GDP to produce an actual reserve of resources.  But putting funds in the stock market does make the Social Security system solvent on paper. Politically, the boomers are thus protected. Still, the incidence has to fall on someone other than retirees, as in Figure A7. That figure assumes the incidence falls on active workers by the mechanism of a higher tax. But it could fall on them through inflation.


    The point is that if you have a $40 GDP and 90 people to split it up, the average per capita income has to be less than when you have a $40 GDP and 80 people to split it up. With a $40 GDP and 90 people, you can’t give everyone 50 cents per capita. It’s no more complicated than that. Putting Social Security money in the stock market doesn’t change that logic. It just rigs the game – assuming that stocks do earn more than Treasuries in the future - so that the boomers are not the ones who take a hit (because their system appears solvent). If they don’t take a hit, the incidence has to be on active workers and/or their children.


    There is another danger in resurrecting the stock market approach. As noted earlier, that idea has been more associated with dismantling the current structure of Social Security and turning it into individual IRA-type accounts. So re-introducing the dormant stock market argument risks destroying Social Security, not protecting it.

    ----------------

    Footnotes


    [1] We are putting aside here what “balanced” might mean. That matter is a separate issue we don’t need to deal with here.

    [2] Gary Burtless, Anqi Chen, Wenliang Hou, and Alicia H. Munnell, "What Are the Costs and Benefits of Social Security Investing in Equities?" (Boston College, Center for Retirement Research, May 2017), available at http://crr.bc.edu/wp-content/uploads/2017/05/IB_17-10.pdf.

    [3] We are fully funding just the extra boomers, not all retirees.

    [4] The gain is due to the baby bust. The 50 active worker-parents are supporting only 20 kids. In the steady state, we had 40 workers supporting 20 kids.

    [5] Note that this result does not depend on earnings on trust fund monies, which are zero. At the macro level, what has happened is that in prior years real resources were diverted from GDP consumption, stored, and now paid out. 

    ----------------


    ----------------


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  • 18 May 2017 3:44 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 5-22-2017: Emily Dickinson & the Civics Lesson


    Daniel J.B. Mitchell


    A recent movie, “A Quiet Passion,” depicts the life of poet Emily Dickinson from childhood to death. Basically, the film’s version of her life is of a household with tight rules of decorum and religion within which Emily rebels. But she nevertheless remains confined in the house and family of her birth and ultimately becomes a recluse – with most of her poetry discovered after her death.

    ---


                     Emily Dickinson

    ---

    As it happens, in 1950, as I entered the third grade, the powers-that-be in the New York City Board of Education built a new elementary school in the Manhattan district where I resided, PS 75, and named it the “Emily Dickinson School.” As such things often happen, the building was actually not ready to open on time when classes began in the fall of 1950. So we first attended in an old school, and then transferred to the new structure when it was ready.

    ---


                              PS 75 today

    ---

    Exactly why the new school was named after Emily Dickinson was made never clear to the incoming students. She had no connection with New York City. However, PS 75 was new, not only in the sense of a new building, but also because it featured “progressive education.” Perhaps the person or committee that named schools viewed Dickinson as progressive, since she was a female poet in an era when such things were generally not welcome in society. In any case, although I attended the third and fourth grades in the school, I cannot recall anyone in authority saying much about who Emily Dickinson was, or why the school was named after her.


    I passed by the school recently on a visit to New York – see photo – and noted that there was no plaque with Dickinson’s name on the outside wall. Her name did appear on a plastic banner attached to the playground fence, and the school’s website does say it is the “Emily Dickinson School.” But there is no explanation of the name’s significance for the school on the website.[1]

    ---


                     Playground banner

    ---

    For that matter, it was not clear back in 1950 that the teachers knew what progressive education was supposed to be or how it differed from traditional education except for two tangible changes. In the first and second grades, the schools I attended had the old screwed-to-the-floor rows of desks. But in the new school, the desks were moveable and modern looking. They could be arranged in patterns other than rows. And they did not contain the hole for an inkwell that the old desks had.[2]


    The other tangible change in response to progressivism involved what you were to do – or not to do - when seated at your desk. In the old system, you were to keep your hands folded your desk. Indeed, teachers provided hand folding lessons to show you the correct way of doing it. But under progressivism, not only were you not required to keep your hands folded, you were ordered not to do it. Not doing it was a problem for us, however, since by then hands being folded when seated had become an entrenched habit. So it seemed that progressive education, like traditional education, had strict rules. It just had different strict rules.[3]


    In any event, at some point during the school year, an official ceremony was arranged to inaugurate the new school’s opening. The ceremony was scheduled for an evening performance by students which their parents would attend. I can remember two musical elements in the ceremony. Some of it involved playing excerpts over the loudspeaker from a phonograph record of “Manhattan Tower,” an especially soupy tribute to New York City.[4] The other musical piece that I can recall was the singing by students of an Emily Dickinson poem, “The Grass So Little Has to Do.” I’m not sure, however, that we were told anything about the poem’s meaning or why somebody would write one about grass.[5] We were just supposed to sing it.

    ---


       Manhattan Tower on two 78 rpm records

    ---

    Anyway, I wasn’t particularly concerned with grass, which obviously doesn’t have anything to do. What struck me at the time as THE important element of the ceremony was not the music but the fact that the mayor was schedule to come. Of course, in the third grade, you don’t know a lot about mayors, but you do know that they are important people. 


    Moreover, I knew from family discussions that the previous mayor – a man named William O’Dwyer – was a Bad Mayor and his replacement was, therefore, an improvement. Googling O’Dwyer now reveals that he had doubled the subway fare from a nickel to a dime and that he had to step down in the midst of his second term due to some kind of scandal. (President Truman then conveniently appointed him ambassador to Mexico, thus getting him out of the city.) So it was the improved mayor – Vincent Impellitteri – that was due to appear at the PS 75 inauguration. Again, as far as I was concerned, the fact that the mayor was coming was going to be the highlight of the event.


    The day and then the evening of the great inauguration arrived. The audience dutifully assembled in the school auditorium. But then at the ceremony, it was announced that Mayor Impellitteri was not going to appear after all and that he had sent some underling in his place. Apparently, although the grass so little had to do, the mayor was too busy to show up.


    Of course, there was a valuable civics lesson at the inauguration of the Emily Dickinson School in being stood up by Mayor Impellitteri. It’s a lesson that many voters to this day seem never to have learned. Elected officials do not always do what they promise.


    But there may be a more general lesson that goes beyond civic affairs. As you go through life, expecting too much can lead to disappointment. Ms. Dickinson said as much:


    Disenchantment


    It dropped so low in my regard
    I heard it hit the ground,
    And go to pieces on the stones
    At bottom of my mind;

    Yet blamed the fate that fractured, less
    Than I reviled myself
    For entertaining plated wares
    Upon my silver shelf.


    ---

    [1] http://schools.nyc.gov/SchoolPortals/03/M075/default.htm

    [2] By the time I entered the first grade, no one was using inkwells. We had fountain pens and carried bottles of ink around to fill them by the second grade. Since the pens tended to splatter, and there also were spills in filling them, I often had bluish fingers. (Ballpoint pens, according to web sources, were invented in Hungary in 1931. But they had not fallen to a price point by the early 1950s so that children would have them.) 

    [3] The 1950 version of progressive education at PS 75 may not have accorded with what progressive education was supposed to be: https://www.youtube.com/watch?v=opXKmwg8VQM. However, all educational fads differ between theory and practice.  

    [4] The original (1946) version can be heard at https://www.youtube.com/watch?v=NT_j3psJWHI. A later, longer version was recorded in 1956. 

    [5] There are various versions of this poem set to music on YouTube. None of these versions involve the musical piece that we used. I can still sing the music, so we must have rehearsed quite a bit. But despite utilizing various apps that purport to allow you to hum a tune and find it on the web, I cannot tell you what music was used. The apps failed to find it. The words of the poem are at http://www.poetry.org/dickinson.htm

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