Mitchell's Musings

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  • 25 May 2018 8:38 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 5-28-2018: All Politics is Local – Except When It Isn’t


    Daniel J.B. Mitchell


    Former Democratic House Speaker Tip O’Neill supposedly said that “all politics is local.” What the phrase seems to mean is that issues in state and local races (essentially every race except for the presidency) are primarily determined by local conditions and issues. What it doesn’t mean, however, is that the impact of local races matters only locally. A few seats in the House or Senate, for example, can determine which party controls the chamber and – potentially – the national agenda.


    There is a problem when all politics is local, but the national agenda is a product of the collectivity of local races. In effect, the analogy is with externalities in economics. The incentives for candidates at the micro (state and local) level is to do what needs to be done to maximize their chances of winning. What they need to do is to focus on locally-based strategies. If there is a benefit or a cost to the national polity in following those strategies, such considerations are underweighted.


    In California at the present time, local conditions have occurred which could have national repercussions – particularly on which party will control the House after the 2018 election - but which seem to be left out of the calculation by Democrats. Of course, there is another quote that is attributed to humorist Will Rogers – “I don’t belong to any organized political party; I’m a Democrat.” Perhaps that approach, too, is playing out in California.


    I have in mind specifically the current gubernatorial race. Because Republicans have been marginalized as a party in California, there is virtually no doubt that the next governor of California will be a Democrat. Four major Democrats and two Republicans are running to succeed incumbent Democrat Jerry Brown who is termed out. All candidates must first compete in a nonpartisan “top-2” primary in early June. Whichever candidates come out first and second will then compete in the general election in November. If two Democrats come out in the top 2, there will be no Republican in the general election. But if a Republican comes in among the top 2, there will be a more traditional Democrat vs. Republican race (which the Democrat will go on to win).


    According to polls, the lead Democrat is the current Lieutenant Governor, Gavin Newsom, a former mayor of San Francisco. It appears that the second Democrat is former mayor of Los Angeles, Antonio Villaraigosa. (The other two Democrats don’t seem to have gotten traction.) Villaraigosa has the support of wealthy charter-school proponents who are providing significant monetary support. And he is a Latino in a state in which the Latino electorate is significant and growing. Finally, he is well-known in the more populous southern region of the state because of his two terms as mayor of LA. Nonetheless, he seems to be behind Newsom in the polls and the question is whether Villaraigosa or one of the Republicans will come in second – and thus proceed to the November general election.


    Among the Republicans, there is a wealthy businessman, John Cox who has confessed to not having voted for Donald Trump in 2016. (He says he voted for the Libertarian.) His opponent is a state assemblyman, Travis Allen, who styles himself as the real conservative. Allen was a Trump supporter in 2016. Nonetheless, Trump has officially endorsed Cox. I will come back to that anomaly in a moment.

    From the “all-politics-are-local” viewpoint, frontrunner Newsom would logically prefer that one of the Republicans win second place. If it’s Newsom vs. a Republican in the November general election, Newsom is virtually guaranteed to win. In contrast, if it is Newsom vs. Villaraigosa, i.e., a race between two Democrats, the outcome is less certain.


    Newsom’s calculation in preferring a Republican opponent doesn’t have to be surmised. He has said he prefers a Republican opponent. And since Cox seemed to be the stronger of the two Republicans, especially with the Trump endorsement, Newsom has run a TV ad which attacks Cox, alone among his Democratic and Republican primary opponents. The strategy seems to be to elevate Cox as THE true Republican opponent, thus getting Republicans united around Cox, and thus pushing Cox into second place, leaving Villaraigosa out of the running in November.


    Republicans know that they are not going to elect the next governor. But if there is no Republican in the gubernatorial race, Republican turnout could be low in the general election. In the background is the U.S. Senate race in which the Republicans have no major candidates in the primary, thus ensuring that in November, the Senate race will be between two Democrats. If there is no Republican candidate for governor and no candidate for U.S. senator, the lack of candidates could depress Republican turnout.[1]


    Why would that outcome matter to Republican party leaders? Because there are some key congressional races in California in potential “swing” districts. Those district elections could determine who controls the House. Republican turnout could be key in such districts. That consideration is not something that Newsom seems to be worried about – he is the all-politics-are-local example. What could guarantee his success in winning the governorship in November could also lead to continued Republican control of Congress. But the national repercussion is an underweighted externality in his calculation.


    For Republicans, in contrast, local and national strategies align. Getting more turnout by having a Republican in the gubernatorial race will likely increase the odds of retaining control of the House. But there are also swing districts in the state legislature. Democrats in recent years teeter on having two-thirds majorities in the state assembly and state senate. When they have such a supermajority, Republicans can be totally ignored. When they don’t, Republicans – even in their diminished condition in California – have some leverage. Thus, it’s no mystery why California Republicans prevailed on President Trump to endorse Cox, despite the latter’s non-support in 2016.  


    What has happened, in short, would be well understood by Tip O’Neill – even if he would be disappointed in the outcome. And probably Will Rogers would understand why Republicans seem to have a more coherent strategy than Democrats. Add in the economists’ views on underweighting externalities and you have a pretty good explanation of what has occurred in the California primary.

    ===

    Footnote:

    [1] Republicans have put proposition on the November 2018 ballot which would repeal a gasoline tax earmarked for roads and transportation. Part of their strategy is that by putting a tax repeal on the ballot, anti-tax Republicans will turn out in November. Still having a governor candidate to vote for would be an added incentive for Republican turnout.

  • 19 May 2018 2:14 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 5-21-2018: Single Payer


    Daniel J.B. Mitchell


    California will have its primary election in early June. In fact, because many Californians now vote by mail, that election is already in progress. California has a nonpartisan “top-2” primary system at the state level, thanks to voter-approved ballot propositions. Only presidential primaries retain the traditional partisan system.


    All political parties hate top-2. The two major parties hate it because in districts where they have low representation, their candidates may be excluded from the general election. You might have two Democrats facing off, for example, in districts where Republicans have low representation, if a Republican does not at least come in second in the primary. The same is true – in reverse – in heavily Republican areas. Minor third parties don’t like the top-2 system because they will almost never have a candidate in the general election. But apparently voters do like the system.


    Although the examples above refer to “districts,” when you take California as a whole, it has become in total a giant district in which Republicans are marginalized. The California Secretary of State’s latest estimates indicate that the proportion of registered voters who are Republicans is now only slightly above the proportion with no party affiliation. That is, “no party” may soon become the second largest party in California.[1] No statewide offices are held by Republicans in California.


    In the current gubernatorial race, there are four major Democrats, three of which currently hold statewide office and one of which is a former mayor of Los Angeles. The major Republicans are in fact minor political figures. One is a businessman (John Cox) who can self-finance a campaign but who has no political experience. The other is member of the state assembly from Orange County (Travis Allen).

    Polls indicate that one Democrat, Lieutenant Governor and former mayor of San Francisco Gavin Newsom, is substantially ahead of the other candidates and will finish first in the primary. So the question is whether the candidate who comes in second will be a Republican or one of the other three Democrats (former LA Mayor Antonio Villaraigosa, State Treasurer John Chiang, and State Superintendent of Schools Delaine Eastin). If it is a Democrat, the general election race could be substantive in terms of issues debated. If it is a Republican, the Democratic frontrunner will likely just coast to victory without much of a contest.[2] That is what happened four years ago when the incumbent Democrat, Jerry Brown (now termed out) ended up running against a minor Republican.[3] If a Democrat comes in second, the goal of that candidate will be to pick up Republican voters who will have to choose between two Democrats.


    The polls are quite fuzzy about who will come in second in the upcoming June primary. But if it is a Democrat, it appears that the likely second-ranked candidate will be the former mayor of Los Angeles. One of the issues that would then come up is a favorite among liberal Democrats, single payer health insurance. Newsom, at this stage, says he is for it. But he waffles about the timing and the details. Villaraigosa points to the complications and basically tilts toward infeasibility any time soon. What I would expect in a Newsom-Villaraigosa contest, if it occurs, is that Newsom would play down the complications and emphasize his conceptual support. Villaraigosa would need to appeal to independent centrists and to Republicans in the general election; he would be more emphatic about infeasibility. If a Republican comes in second – and that would likely be Cox – there would be a simple division. Newsom would say he is for single payer; Cox would be against it.


    Usually, when single payer is discussed, the emphasis is on funding. But there is often a focus on the budgetary cost to the government rather than the overall cost of the program, including insurance premiums. In effect, going to single payer means that insurance premiums would be relabeled as taxes that would be paid to the single government-run insurer. But the many existing government programs such as Medicaid (Medi-Cal in California) which receive federal funding would have to be folded into the single plan. That redirection of funds would require an agreement with Washington which is not likely under the present administration. And expansion of the program to universal coverage would presumably cost something. Proponents of single payer tend to assume that having one insurer would increase efficiency and decrease the cost of administration, thus providing the funds needed for the added coverage.


    Let’s put aside the funding aspect and look at political feasibility. And let’s even put aside the lack of feasibility of getting an agreement from Washington. There remains a neglected element, path dependency. While – as proponents of single payer often point out – the rest of the developed world has single payer and seems to spend less per capita on health than the U.S., the question for the U.S. (or California) is how you get from the current longstanding (entrenched) program to single payer.


    Recall back when Obama was first running for president and promised voters that they could keep their old plan under what became “Obamacare.” Of course, that promise was vague on what it was that you could keep, since any major change in the overall healthcare system inevitably would lead to changes in “your” plan. But aside from that qualification, the promise could be made because Obamacare was built on the existing system with its multiplicity of plans: employer-based, individual, public, etc. It was an add-on. Obamacare was basically expansion of the individual market (via the exchanges) and Medicaid along with an employer-based mandate.


    Going to single payer means scrapping almost everything we now have and starting something new. You couldn’t promise voters that they could keep their old plans; the old plans would disappear. Just to get a sense of what that would mean in California, I prowled around the web and came up with a listing of all the providers operating in California as of 2016 (the latest data available). You can find that list of 106 (!) providers in the Appendix. Some of these providers have only minor representation in California. But 57 of them cover at least 10,000 individuals and involve 99.7% of the total. If we go to a higher hurdle, say, at least 100,000 covered individuals, we still involve 97.2% of the total with 33 insurers. If we go to a hurdle of at least 1 million, we go to 70.7% of the total coverage with 7 plans.


    There are a lot of insurers out there, but not so many when you raise the hurdle for number of people insured. Still, it is important to note that big insurers, such as Blue Shield or Kaiser, in fact offer multiple plans. There is not just one Blue Shield plan; varying options are available to individuals and employers. All the commercial insurers, except for the very smallest, are likely to resent being put out of business in California, which is what single payer would do. And the few big ones in the state could easily organize to finance a considerable opposition campaign against single payer.


    Moreover, it would not be possible for proponents to make even the qualified Obama promise that you could keep your old plan. Thus, an opposition campaign could count on drumming up considerable voter fear of losing their existing coverage for something unknown. Maybe you as a voter are not totally happy with your existing plan. The notion applies here that the devil you know is likely to outweigh what you don’t know.


    In short, the political problem is not just one of an unfriendly regime in Washington. Perhaps there will be regime change in Washington someday. But there still would be plenty of opposition locally in California to single payer, even if – in the abstract – there appears to be voter support for the concept.[4] Polls on the subject tend to focus on cost, taxes, and budgets. A more important approach would be to ask the simple question: Would you favor single payer if you couldn’t keep your existing plan? I suspect abstract support for single payer would drop significantly if that question were asked.


    Countries around the world that have some version of single payer didn’t implement it after they had created a long-entrenched alternative. It’s another case of American exceptionalism.

    ====

    Appendix:

    California Health Insurance Providers & Number of Covered Persons (Public and Private): 2016


    {Due to technical problems, the Appendix cannot be displayed. To see it, go to:

    https://issuu.com/danieljbmitchell/docs/mitchellmusing5-21-18}


    ====

    Footnotes:

    [1] California has a minor American Independent Party and some voters apparently mistakenly join it thinking they are registering themselves as independents. See: http://www.latimes.com/politics/la-pol-ca-american-independent-party-california-voter-registration-card-20160419-story.html and http://static.latimes.com/american-independent-party-california-voters/. Thus, it is possible, if you add some incorrectly-registered American Independent members, that Republicans already represent a smaller group than intended no-party independents. Registration data are at http://elections.cdn.sos.ca.gov/ror/60day-stwddirprim-2018/historical-reg-stats.pdf.

    [2] Newsom admits to preferring that a Republican win the number 2 slot. Republicans also hope for a number 2, not because they expect to win the governorship, but because it would encourage their members to turn out in down-ticket races, notably in some potential congressional swing districts that could affect who controls the House of Representatives. President Trump has endorsed Cox.

    [3] One of the quirks of the top-2 system is that even if a candidate receives an absolute majority in the primary, the top two candidates still go to the general election. Other nonpartisan primaries – including those found in local elections in California - typically determine the final winner if one candidate receives over 50% of the vote. In 2014, Brown received an absolute majority in the primary, but still had to face his rival, Neel Kashkari, in the general election. (Kashkari was a former U.S. Treasury official who is now president of the Federal Reserve Bank of Minneapolis.)

    [4] http://www.ppic.org/press-release/health-care-most-oppose-house-bill-favor-single-payer-plan-unless-it-raises-taxes/.  Fifty-six percent of voters in California reportedly support abstract single payer.

  • 12 May 2018 11:21 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 5-14-2018: But What Are the Practical Implications?


    Daniel J.B. Mitchell


    Recently in the New York Times, a controversy arose surrounding an academic paper which suggested that Trump voters were not the stereotyped left-behind blue-collar workers. In fact, according to the study, they were motivated by something other than economics: a fear of loss of status due to increasing diversity of the U.S. population. The counter argument in subsequent Times’ pages is that economic circumstances may tilt people toward a fear of status loss and that the culture vs. economics debate is thus ultimately futile.[1]


    While this debate was playing out, opinion polls suggested that the so-called “blue wave” that some Democrats are counting on in the November 2018 midterm election is dissipating. One pollster – finding that declining trend – urged Democrats to focus more heavily on economic-type issues.[2] But, of course, if the key factor determining votes in swing districts is cultural/status rather than economic, such advice is useless. Or is it? The initial Times report (taking the cultural/status view) was not very clear on that point:


    What does it matter which kind of anxiety — cultural or economic — explains Mr. Trump’s appeal? If wrong, the prevailing economic theory lends unfounded virtue to his victory, crediting it to the disaffected masses… More important…, it would teach the wrong lesson to elected officials, who often look to voting patterns in enacting new policy. (underline added)[3]


    Let’s note that the outcome of the 2016 presidential election was decided by a handful of votes in a few key states. Statistical analysis inherently occurs within a margin of error. If a handful of people who were on the margin decided to go this way or that, and that decision decided the election, it is doubtful that one can say that THE cause was economic and not cultural or was cultural and not economic. Those same people might have voted differently a week before the election or a week later, depending on who-knows-what.


    The quote above seems to imply that if one concludes that THE cause was cultural – and therefore without “virtue” – focusing on economics would lead to the wrong policy choice (presumably a choice by Democrats seeking to win back the lost votes). As political advice, however, the virtue/culture observation is not particularly useful. It might even seem to suggest that Democrats should become more racist or nativist if they want to win. Such a strategy would likely cost Democrats more votes than it could gain. Nor is it likely that labeling the voters the Democrats need to convince as white-privileged racists would be a winning tactic.


    For 2018, elections are mainly local affairs (since President Trump is not on the ballot). The old saying that all politics is local would seem to be particularly apt. Waiting for a supposed inevitable blue wave was never a good approach to the 2018 elections. Overall unemployment below 4%. There is the prospect that that President Trump might emerge from the North Korean affair with something he could brag about (whether or not it truly deals with the issue). So local economic conditions – not macroeconomics or foreign policy – are the main lever available in “swing” districts. Broad statistical studies - where you need to be 95% confident to assert an association - are of limited value in finding the issues that might induce the needed handful of voters to vote for a change in this district or that one.

    ===

    Footnotes:

    [1] http://www.pnas.org/content/pnas/early/2018/04/18/1718155115.full.pdf; https://www.nytimes.com/2018/05/06/opinion/trump-supporters-economy-racism.html; https://www.nytimes.com/2018/05/03/opinion/trump-industrial-revolutions.html.   

    [2] https://www.huffingtonpost.com/entry/democratic-momentum-poll_us_5ae789a7e4b055fd7fcedaac. See also http://www.rollcall.com/news/politics/poll-millennial-support-democrats-slips-9-points-two-years

    [3] https://www.nytimes.com/2018/04/24/us/politics/trump-economic-anxiety.html.

  • 05 May 2018 11:49 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 4-23-2018: Grandma is the Unfunded Liability


    Daniel J.B. Mitchell


    A recent op ed in the LA Times points out that the Trump tax cuts are the first stage of a larger strategy:


    Tax cuts do not pay for themselves — not the Trump tax cuts, nor in any other case in modern U.S. practice. So we face only two possible courses of action: Either we tax ourselves more, or we dismantle the social safety net (in particular, Social Security, Medicare and Medicaid) that protects Americans from destitution or disability. Which is the right direction for our country to pursue?


    One political movement has its answer at the ready: Slash the safety net.


    Five fellows at the conservative Hoover Institution recently laid bare in a Washington Post opinion piece how the Tax Cut and Jobs Act of 2017 was just the first step in a two-step dance. The full tango goes like this: Note that our deficits are unsustainable. Blame "entitlement spending" (code for Social Security and Medicare) rather than tax cuts. Demand cuts to social spending on the pretext that some imaginary iron laws of reduced tax collections and deficit concerns require it…[1]


    This strategy did not originate in 2017, nor is it confined to the Hoover Institution. It usually is accompanied by calculations of the “unfunded liability” of Social Security and Medicare which is viewed with alarm. And it assumes that if you cut entitlements, the unfunded liability will go away somehow. But that assumption ignores the demographics – particularly the demographics of the population bulge known as the baby boom.


    Do you want to see the actual unfunded liability? You don’t need to wade through government reports. Here it is below. Grandma and grandpa are the unfunded liability.

    ===

    Image not available for technical reasons. To see the chart go to:

    https://issuu.com/danieljbmitchell/docs/mitchellmusing4-23-18

    ===

    The aging boomers that are the unfunded liability will eventually go away through the natural process, of course, but not because of tax cuts or budgetary calculations. So taking them out of the federal budget solves nothing. They exist and somehow society will have to fund their consumption.


    Issues regarding “entitlements” involve how the GDP of 2030, 2040, 2050, 2060, etc., will be split between active workers, retirees, and other dependents (mainly children). We can have a sensible conversation about that division and come up with solutions. Or we can wait until the “strategy” described earlier creates a political crisis. As the chart below shows, the demographics are coming, tax cut or not.[2]

    ===

    Image not available for technical reasons. To see the chart go to:

    https://issuu.com/danieljbmitchell/docs/mitchellmusing4-23-18

    ===

    Years ago, I wrote a book describing political turmoil in the 1930s and 1940s in California which was then an elderly state.[3] Many of the elderly in California in that era, absent an adequate safety net, supported hair-brained plans and backed political con artists promising pie-in-the-sky solutions. If we get such results in the coming years at the national level, I suspect the folks at the Hoover Institution and other conservative think-tanks won’t like the outcome of their planned crisis. One thing about the elderly; they vote in large numbers.

    ===

    Footnotes:

    [1] http://www.latimes.com/opinion/op-ed/la-oe-kleinbard-tax-health-20180415-story.html

    [2] The chart is from https://www.census.gov/content/dam/Census/library/publications/2015/demo/p25-1143.pdf

    [3] Daniel J.B. Mitchell, Pensions, Politics, and the Elderly: Historic Social Movements and Their Lessons for Our Aging Society (M.E. Sharpe, 2000). Now available as an eBook and through Routledge.

  • 05 May 2018 11:34 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 5-7-2018: The Pay-Unemployment Connection


    Daniel J.B. Mitchell


    The unemployment rate has now declined below 4%. As a result, a New York Times website headline of May 4, 2018 has declared the labor market to be “competitive.”[1] (See below.) In one sense, that characterization is correct. Employers increasingly find themselves needing to cater - more than they did not so long ago - to employee concerns and availability. An earlier New York Times article carried the headline “A Fast-Food Problem: Where Have All the Teenagers Gone?” It contained examples of the problems employers were having staffing and managing their fast-food operations, including this anecdote:


    “Thirty years ago, I would not put up with the stuff I put up with today,” said John Motta, a longtime Dunkin’ Donuts franchisee in Nashua, N.H. When an employee recently missed a shift, one of his stores could serve only drive-through customers for about an hour. “You try not to be too harsh on them,” he said, “because you’re afraid tomorrow they’re not going to show up.”[2]

    ===

    Image not available for technical reasons. To see image, go to:

    https://issuu.com/danieljbmitchell/docs/mitchellmusing5-7-18

    ===

    But analysts looking at the low rate of unemployment note that despite the pressure on employers to recruit and retain workers, they haven’t done much about raising wages. On a total compensation basis, private-sector pay has risen 2.8% over the year ending March 2018; a year before, the figure was 2.3%.[3] According to usual demand/supply analysis, or to the somewhat-related Phillips Curve notion, the limited wage response is surprising. But let’s hold off on explanations for the moment and note a related observation. If, for whatever reason, the demand for labor rises and wages don’t (or don’t much), you should expect a labor shortage. And, indeed, as we have noted in prior musings - and as the anecdote above illustrates, in a shortage environment, employers overlook deficiencies in worker applicants and existing workers that wouldn’t have been tolerated in less extreme circumstances.


    As noted, the Times’ headline describes current conditions as becoming “more competitive.” You might want to argue with that description, since if wages are not going up (or not going up much) it appears the competition is being confined to non-wage aspects of employment. And if employers are collectively limiting their behavior, that sounds like non-competition.

    ===

    Image not available for technical reasons. To see image, go to:

    https://issuu.com/danieljbmitchell/docs/mitchellmusing5-7-18

    ===

    Back in the 1980s, economist Martin Weitzman proposed incentives for profit-sharing plans, plans which had the effect of making and keeping the marginal cost of labor, thus provoking a labor shortage with the result that the economy had an automatic tendency toward full employment.[4] We need not get into the technical details here, but with profit sharing, even though the marginal cost of labor was kept low, workers also got their profit-share payments. There were aspects of the Weitzman proposal that were similar to employer monopsony situations – which also produce de facto labor shortages (but which don’t involve giving workers an added share).


    The classic examples of monopsony, e.g., coal mining company towns with a single employer, are relatively rare. However, as Chris Erickson and I pointed out in the 2000s before the Great Recession, actual and ordinary labor markets have information barriers. Workers have to search for jobs and firms have to search for workers. These search requirements produce monopsonistic characteristics that don’t require company towns and the like.[5] (But as in the company town story, workers don’t get a share payment.)


    There seems to be a revival of interest in labor-market monopsony of late. But you don’t have to search far for an explanation of why contemporary wage response to increased labor demand is sluggish. The one universal constant when it comes to how employers set wages is that, in one form or another, they look to see what other employers in the relevant area, industry, or occupational group are doing on pay. If everyone is looking at everyone, there is a momentum of the status quo that is resistant to change. Add to this general observation the fact that the recovery from the Great Recession was slow so that labor markets were soft for a long time, and the fact that private-sector unions are a shadow of their former selves, and you get a kind of employer collusion on pay. I don’t raise pay unless you do. You don’t raise pay unless I do. The bottom line here is that the low unemployment rate and the limited movement in pay are connected. The latter helps explain the former.

    ===

    Footnotes:

    [1] https://www.nytimes.com/2018/05/04/business/economy/jobs-report.html

    [2] https://www.nytimes.com/2018/05/03/upshot/fast-food-jobs-teenagers-shortage.html. Actually, thirty years ago (1988), the employer probably would have been equally tolerant. There was a labor shortage in that era in New England, too. See https://www.youtube.com/watch?v=zO2ppa5iUEI.

    [3] Benefit costs can be noisy in the short term. On wages alone, the figures are 2.9% for the year ending March 2018 versus 2.6% for the year before. (Figures from the U.S. Bureau of Labor Statistics.)

    [4] Martin L. Weitzman, The Share Economy: Conquering Stagflation (Harvard University Press, 1986).

    [5] Christopher L. Erickson and Daniel J.B. Mitchell. (2007). “Monopsony as a metaphor for the emerging post-union labour market.” International Labour Review, Vol. 146, No. 3-4. Available at: http://www.anderson.ucla.edu/documents/areas/fac/hrob/mitchell_erickson_monopsony.pdf. Basically, the labor supply curve slopes upward.

  • 05 May 2018 11:23 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 4-30-2018: Oil in Troubled Waters Can Dampen Blue Waves


    Daniel J.B. Mitchell


    Sometimes, a bunch of seemingly-unrelated things come together. Consider these events. There is the me-too movement linked to sexual harassment. There is California as a very blue state that is particularly sensitive to the sexual harassment issue and to ethnic minority concerns. It is also sensitive to environmental issues. There is the long-term decline of “good” blue-collar jobs. There is the decline of unions long term, especially in the private sector. There is the link between unions and the Democratic Party in California. And there is the fact that direct extraction of oil and gas in California involves something over 5,000 employees. Refining of petroleum involves another 13,000+ employees.


    Some observers have forecast, based on national demographic trends, that U.S. politics will – in the long run – grow to look like California’s. The proportion of the population with immigrant roots will increase, white males (stereotyped as Trump/Republican voters) will die off, liberal millennials will come to dominate, etc. The nation will turn blue and Republicans will be marginalized, as they have been in California. Demography is political destiny in this scenario. But there is a problem.


    First, it is true that California demographics (minority-majority or maybe majority-minority) will eventually be followed by the rest of the U.S. However, voting patterns are not simply demographically determined. Estimates for California are that at present, about 6 out of 10 “likely voters” are white, non-Hispanics. So roughly 3 in 10 are white male, non-Hispanics in the state.[1] Let’s just call it 30%. Census estimates for the proportion of folks who were white, non-Hispanic nationally and who voted in 2016 was a little over 73%. Thus, the male piece of that total was maybe 36-37%. You can’t explain the difference between California – where Republicans in statewide elected office have zero presence – and the rest of the U.S. by that 6-7% difference among white, non-Hispanic males.


    Second, the long-run demographic tale assumes that voting patterns by demographic group will remain stable over decades. But many of the white male Trump voters are the descendants of immigrants who came in the last big immigration wave in the late 19th and early 20th centuries. There is the old saying, “the last one in says shut the door; we’re all here.” Who is to say what Hispanic and Asian-origin populations will have as their political leanings in 2050?


    Third, even if you lean towards some version of demographics-is-political-destiny, you need to show a path between now and that future. And just as there are contradictory elements in the Republican electorate, e.g., libertarians versus social conservatives, there are analogous conflicts among Democrats. So let’s look at some of the seemingly-unrelated events described earlier as an illustration of the latter.


    As noted, “blue” California embraces such social trends as the me-too movement. One member of the California legislature who was initially seen as a big supporter of me-too was Assemblywoman Cristina Garcia. She was also a big supporter of other “progressive” causes, notably environmental. However, accusations began to surface that she had engaged in sexual harassment and related behavior, ultimately forcing her to take a leave of absence from the legislature. Garcia is nonetheless currently running for re-election. But as she campaigned, a full-page ad ran in the LA Times which we reproduce below.

    ===

    Image not available here due to technical issues. To see image, go to:

    https://issuu.com/danieljbmitchell/docs/mitchellmusing4-30-18

    ===

    You’ll note that the ad does not mention Garcia. Still, at about the same time as it appeared, new accusations surfaced; this time it was said that Garcia had made homophobic slurs and anti-Asian remarks. Finally, this report appeared in the Los Angeles Times:


    The decision by a politically powerful labor group to openly campaign against an embattled Los Angeles-area lawmaker drew a sharp rebuke on Friday from Assembly Speaker Anthony Rendon. The Lakewood Democrat lashed out hours after the State Building and Construction Trades Council of California filed paperwork for a political action committee to defeat Assemblywoman Cristina Garcia (D-Bell Gardens). Garcia, who’s seeking her fourth term, took an unpaid leave of absence in February following allegations of sexual misconduct. She has denied the reports and an Assembly investigation remains underway.


    Rendon didn’t criticize the labor group by name, insisting instead that the decision was driven by oil and gas industry interests. "This is a thinly veiled attempt by Big Oil and polluters to intimidate me and my members. It is an affront to my speakership,” Rendon said in a statement. “We are proud of the work that the Assembly has done to increase jobs and wages while defending our environment. We will vigorously defend the members of our caucus from any ill-advised political attack."


    A statement from the labor group, which sparred with Garcia last year on her effort to link new climate change policies with a crackdown on air pollution, said it had decided to “reverse” past support for her. “The Trades have thousands of hard working members in Garcia’s district, and we look forward to lifting up another Democrat in the 58th Assembly to better represent them and their families,” said the statement…[2]


    Even if Assemblywoman Garcia is replaced, another Democrat will be elected in her place - so there will be no changes in the balance of the two parties in the California legislature. You can decide for yourself whether the steady surfacing of the various accusations against Garcia and the campaign by labor groups to replace her is just a coincidence. We have noted in past musings that in the current social climate, me-too accusations can be weaponized for political purposes.


    In any event, the Garcia brouhaha illustrates the tension that exists between organized labor – a significant funding source for Democrats – and the wing of the party that is particularly concerned about quality-of-life type issues as opposed to “bread-and-butter” job-related issues. Democrats are poised to lose support from public-sector unions due to a pending U.S. Supreme Court case. Defections of private-sector unions, such as those behind the LA Times ad, would be a further blow to Democrats, especially in potential swing states and districts.


    Consider, too, the gerrymandering in many states by GOP-dominated legislatures, the planned inclusion in the 2020 Census of a question on citizenship that may reduce response rates in states such as California with large immigrant populations, and various voter suppression efforts. Given those considerations, the blue path running from now to the future based on purely demographic factors must be seen to be strewn with pitfalls. And, in the near term, the 2018 election appears likely to be fought out against a background of very low unemployment. Yes, the labor-force participation rate is several percentage points below where it was at the turn of the century, but its downward trend ended several years ago. Labor-market conditions have to be seen overall as pretty good. Counting on an inevitable blue wave election in 2018, or on a gradually rising demographic blue tide, would be a risky strategy for Democrats.

    ===

    Footnotes:

    [1] http://www.ppic.org/publication/californias-likely-voters/. Males and females don’t differ much in propensity to vote.

    [2] http://www.latimes.com/politics/essential/la-pol-ca-essential-politics-updates-assembly-speaker-rebukes-building-trades-1524280376-htmlstory.html

    https://www.nytimes.com/2018/04/19/opinion/democrats-gentrification-cities-voters.html

  • 11 Apr 2018 4:07 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 4-16-2018: Labeling What is Abnormal as the New Normal


    Daniel J.B. Mitchell


    In recent weeks, there have been some very large swings in the stock market. So what do we read about these developments?


    …The era of calm markets and small price swings is over. The new normal on Wall Street is all about wild fluctuations, mammoth moves like the Dow Jones industrial average's 1,000-point drops earlier this year, and rapid-fire price reversals that can shift the mood of the market from optimism to pessimism in a matter of minutes — and sometime seconds…[1]


    The implication of the phrase “new normal” as used in the quote above is that the big fluctuations, which seem to be a departure from what has been the case in the past, will go on indefinitely or at least for a long time. And that proposition raises a question: Whatever happened to such notions as regression to the mean? Regression to the mean suggests that things that deviate from the way they have been in the past are just aberrations that will disappear. Why not assume that the recent “wild fluctuations” on Wall Street are destined to diminish?


    I have no special insight as to whether there is or isn’t a new normal on Wall Street, but my predilection would be that the current fluctuations will not go on indefinitely. Of course, there are breaks in history in which things that seem unusual based on past history in fact herald a new situation that will endure. But my sense is that the “payoffs” for predicting a break in trend that actually occurs are large compared to the payoff for calling an abnormal development a blip. There is a bigger payoff in predicting a new normal, and then hoping that your prediction turns out to be true.


    It’s like the reward system in economic forecasting. If you predict a recession – and one actually develops – you will be remembered as the genius who called it correctly, at least until the next recession. On the other hand, saying quarter after quarter that there won’t be a recession will be correct most of the time, but not something that will enhance your reputation for prognostication. Breaks in trend are unusual (or we wouldn’t call what was happening before a trend). So there are only a few opportunities to be seen as a genius. Getting it right most of the time – saying that there won’t be a recession – is easy and boring and not notable. It won’t get headlines and recognition.


    Now let’s think back about the labor market discussion that characterized the aftermath of the Great Recession. We were told that high unemployment was the new normal. All kinds of explanations were offered for that conclusion. Employers wanted skills that the workforce didn’t offer, so the unemployment was largely structural. Exactly why the burst in a structural problem just happened to coincide with a financial crisis was never entirely clear. The fact that the recovery was slow – so the unemployment rate remained high relative to trend – gave the new normal stories some surface validity. Here’s an example from 2012 (when the unemployment rate averaged over 8%):


    Bill Gross, manager of the world’s largest mutual fund, said U.S. unemployment is now a structural, and not cyclical, problem stemming from technology advances and the lack of retraining. “Jobs are being structurally destroyed,” Gross said in an interview today with Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.” Employment figures released today reflect “the inability of the U.S. economy to provide jobs...”[2]


    But now the unemployment rate has somehow arrived at a low level, a little over 4%, despite the structural/new normal stories. And what do we read about employer behavior? Here’s a recent anecdote from Springfield, Massachusetts:


    Long before MGM Resorts International got the green light to build a nearly $1 billion casino and hotel downtown, it analyzed the local labor market to figure out what it would take to fill 3,000 jobs in a state new to gambling. The socioeconomic snapshot that emerged became a road map for creating a workforce from scratch.


    Census data and labor reports revealed a higher-than-average number of single parents and former offenders. So MGM Springfield added federally funded day care to the resort and lobbied to loosen a state law that restricts casinos from hiring people with criminal records. A lack of experienced blackjack and poker dealers in the area led to the creation of a gaming school.


    Managers also fanned out to senior centers, veterans clubs, vocational high schools, even churches to talk up casino jobs. They pored over layoff data from the state, including from a Springfield hospital and a nearby Sam’s Club that had recently closed, to pursue workers who might be good fits.


    Now, months before its scheduled opening in late summer, MGM Springfield is embarking on a major hiring spree to staff its hotel, restaurants, bowling alley, movie theater, spa, retail shops, and 125,000 square feet of gambling space, all of which take up three city blocks.


    On Monday, the resort is set to announce openings for about 1,000 of its 3,000 jobs, mainly in food and beverage service. Just over 100 employees have been hired so far.


    Overall, roughly 80 percent of MGM’s jobs will be full time, with the company helping to provide local training for many of them. Given MGM’s good relationship with organized labor at its other resorts, a fair share will probably have union protections.


    Wynn Boston Harbor has been undertaking similar workforce development efforts, including analyzing demographics and partnering with nonprofits and community colleges, as it looks toward opening in Everett next year…[3]


    The current story is that with low unemployment, employers are being less picky about who they choose to hire than they were in 2012, and are providing training for those whose skills are lacking. Is this a surprise? It is a new normal? Not really. Brookings economist Arthur M. Okun described what happens in such circumstances back in 1972. He also noted then that when unemployment is high (as it was for several years after the Great Recession), “society (is able to) salve its conscience by concluding that the fault of the unemployed and the underemployed lay in themselves and not in the economic system.”[4]


    In short, what happened after the Great Recession wasn’t the new normal. It was the old normal. When the unemployment rate is high and has been so for a few years, experts will declare it to be structural. The potential payoff was small at that time for saying that eventually the unemployment rate would fall and that when that that day arrived, employers would cease to be picky about who they hired. Making a more dramatic prediction and structural interpretation of what had happened got the headlines. Nothing new about that result, either.

    ====

    Footnotes:

    [1] https://www.usatoday.com/story/money/2018/04/08/stock-market-2018-expect-dow-jones-volatility-trade-war-trump-talk/493234002/

    [2] http://www.atlantatribune.com/2012/10/02/bill-gross-u-s-economy-suffering-from-structural-unemployment/

    [3] https://www.bostonglobe.com/business/2018/04/01/mgm-springfield-embarks-hiring-spree/fLAXdBSOIul4ydsobAfKqK/story.html

    [4] https://www.brookings.edu/wp-content/uploads/1973/01/1973a_bpea_okun_fellner_greenspan.pdf. The quote is from p. 245. 

  • 03 Apr 2018 4:08 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 4-9-2018: Seems Reasonable, But Isn’t


    Daniel J.B. Mitchell


    Let’s start with some data points. As the charts below show, the U.S. ended the calendar year 2017 with gross liabilities to the world of $35.5 trillion.[1] But it held gross claims on the world of $27.6 trillion. The difference between U.S. liabilities to the world and U.S. assets abroad was $7.8 trillion, a negative net international investment position. As the charts also show, all these figures bounce around, but all have generally risen over the past decade (and before).

    ===

    Current capacity limit on EPRN prevents charts from being included here. To see the two charts, go to:

    https://issuu.com/danieljbmitchell/docs/mitchellmusing4-9-18

    ===

    Much of international investment involves portfolio investment, official reserves, and other such assets and liabilities that do not involve controlling ownership or real assets (such as real estate). Direct investment, however, does involve controlling ownership and real assets. The U.S. had such direct investments abroad to the tune of $8.9 trillion at the end of 2017. Foreign direct investment in the U.S. was also $8.9 trillion. In short, there is lots of investment, including direct investment, in both directions.


    At the time of the recent tax cuts, you probably read news accounts such as this one:


    President Donald Trump's new tax plan could cause a tidal wave of internationally held cash to flood back into the US. The repatriation tax holiday outlined in the plan, which has officially passed both chambers of Congress and is awaiting Trump's signature, is designed to incentivize US-based companies that do big business overseas to bring those profits back home. By Goldman Sachs' calculation, S&P 500 companies hold $920 billion of untaxed overseas cash, and the firm estimates that $250 billion of that would be repatriated. Looking at all US-based companies, Citigroup says there's a whopping $2.5 trillion of capital stashed internationally…[2]


    The implication was that the tax system was inducing firms to arrange their affairs so that profits would appear abroad rather than in the U.S. and thus escape U.S. taxation. Clever lawyers and accountants put these arrangements together. That part of the story was undoubtedly true. It’s hardly controversial that firms seek to be “tax efficient.” If you change their tax incentives, the same clever lawyers and accountants will now advise firms to alter their arrangements. The advice could well be to repatriate some of the assets that were held abroad.


    But what is the implication if they do? The assumption, particularly of the president, seemed to be that these were funds that would go into real investment in the U.S. There would be a real investment boom in the U.S. that would create lots of jobs, if only all that money abroad would return to the U.S. So let’s look at that idea.


    When people talk about money stashed abroad, it sounds as if there was a vault stuffed with dollar bills somewhere across the sea. In fact, assets held abroad are largely investments in securities and claims of various types. For example, the assets could be claims on a financial institution (a bank) which in turn invests the assets around the world including in the U.S. And we know that at the end of the day in 2017, the U.S. had a net international debt of $7.8 trillion, as per the data and charts noted earlier. There is nothing in the new tax law that says that, as a first approximation, had the law been in effect in 2017, the net debt of the U.S. would have been any different (although as perhaps the gross assets and liabilities would have been different).


    Would there have been more real investment in the U.S.? Let’s consider Apple, since it figured prominently in the discussion of tax avoidance:


    When Apple’s efforts to reduce its taxes around the world came under fire in Congress a few years ago, CEO Tim Cook fired back. “We do not depend on tax gimmicks,” Cook said. “We do not stash money on some Caribbean island.” The first statement depends on the definition of a “gimmick.” Apple was certainly using loopholes and openings in different countries’ tax laws to minimize its own obligations. But he was telling the truth in saying the iPhone maker had no money stashed in the Caribbean. The company didn’t need to – its funds were stashed in subsidiaries incorporated in Ireland, but that, on paper at least, had no home country for tax purposes…[3]


    Let’s suppose Apple really wanted to produce iPhones in, say, Detroit instead of contracting out the task to Chinese and other foreign manufacturers (as it does). Would the fact that it has made accounting arrangements so that its profits show up in Ireland – or anywhere else – have prevented it from opening a Detroit plant? A firm’s investment in a new plant does not have to be financed directly from accumulated past profits. It can borrow the necessary funds locally from financial institutions. And one suspects that if Apple wanted to finance its hypothetical Detroit plant out of its own past profits in Ireland, the same clever lawyers and accountants that made those profits show up in Ireland could find a way to funnel the funds to Detroit through some sort of dummy intermediary.


    The reason Apple doesn’t produce the iPhones it sells in the U.S. in a Detroit plant is that it is cheaper to make them in places such as China and then import them into the U.S. Giving Apple tax incentives to make profits show up in the U.S. is unlikely to change that calculation. If it were the case that where profits show up determines production location, then iPhones would be produced in Ireland, not China. Researchers who have traced iPhone parts manufacturing and assembly have found production sites all over the world. But Ireland doesn’t appear on the list.[4]


    In short, it may seem reasonable to think that if past profits are repatriated to the U.S., there will be more manufacturing in the U.S. by the firms affected. It may seem reasonable to think that where accounting profits are, so goes production. But, sadly, it just happens not to be so.

    ===

    Footnotes:

    [1] Source:

    https://www.bea.gov/newsreleases/international/intinv/2018/pdf/intinv417.pdf.  

    [2] http://www.businessinsider.com/trump-tax-reform-plan-repatriation-14-us-companies-with-most-cash-overseas-2017-9

    [3] http://fortune.com/2017/11/06/apple-tax-avoidance-jersey/.  

    [4] https://www.lifewire.com/where-is-the-iphone-made-1999503

  • 28 Mar 2018 9:57 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 4-2-2018: Identity vs. Behavior


    Daniel J.B. Mitchell


    As we resume these musings after the end of the winter quarter at UCLA (when I am teaching and too busy to write them), it’s worth looking back at events of that period. And it’s worth looking back at some confusions that arose in that period, too. One of those events was the announced imposition of steel and aluminum tariffs. Let’s put aside the question of whether those tariffs were a good idea, either politically or economically. There has been much confusion in the popular news media as experts – who generally opposed the tariffs - were interviewed. From Forbes:


    …Our deficit will not be reduced by enforcing trade rules, renegotiating existing trade pacts, or forming new ones. While these policies might shuffle the deck and alter the bilateral trade balances the U.S. has with other countries, they will not alter the overall U.S. trade balance. Indeed, policies aimed at eliminating so-called “unfair trade practices” — while attractive to many businessmen, trade unionists, most progressive activists and all who harbor mercantilist sentiments — are wrongheaded and futile.


    Why? The simple analytics of the trade deficit prove the utter futility of the Trump administration’s trade policies. In economics, identities play an important role. These identities are obtained by equating two different breakdowns of a single aggregate. Identities are interesting, and usually important, by definition. In national income accounting, the following identity can be derived. It is the key to understanding the trade deficit:


    (Imports - Exports) ≡ (Private Investment - Private Savings) + (Government Spending - Taxes)


    Given this identity, which must hold, the trade deficit is equal to the excess of private sector investment over savings, plus the excess of government spending over tax revenue. So the counterpart of the trade deficit is the sum of the private sector deficit and the government deficit (federal + state and local). Therefore, the U.S. trade deficit is just the mirror image of what is happening in the U.S. domestic economy. If expenditures in the U.S. exceed the incomes produced in the U.S., which they do, the excess expenditures will be met by an excess of imports over exports (read: a trade deficit)…[1]


    The implication of this observation seems to be that if the ultimate objective of the Trump administration was to improve the U.S. trade balance (make it less negative than it is), raising tariffs is a fool’s errand. If you don’t change saving and investment behavior, the trade deficit will remain the same. Similar objections have been raised when the question of doing something with exchange rates is the issue.


    It is true that as a matter of national income accounting, the balance of saving vs. investment is the reverse of the trade balance. One is the mirror image of the other. So it is true that if you raise tariffs while saving and investment remain the same, the trade balance will be unaltered. If the tariffs you raise cut down on imports, but the trade balance is unaltered, then it must be the case that exports will have (somehow) dropped by the same amount. Again, this observation is pure accounting. The observation is true by construction.


    You can say the same thing about exchange rates. If the dollar is devalued and imports fall as a result – and if saving and investment are unaltered – then it must be the case that exports will fall by the same amount.


    But there is a fundamental problem here. Who says that changing tariffs in a big way, or changing exchange rates in a big way, will leave saving behavior and investment behavior unchanged? Perhaps a thought experiment will be helpful. Imagine we raise tariffs on everything and keep raising them higher and higher. Imported goods and their domestic substitutes are thus becoming more and more expensive, both relative to non-traded goods, e.g., haircuts, and relative to exported goods. And imagine that saving and investment are unaltered. Surely, at some point – maybe a 500% tariff, maybe a 1000% tariff – imports become prohibitive. If we started with a negative trade balance and now imports are reduced to zero, in order to preserve the negative trade balance, exports would have to be negative! But there is no such thing as a negative export. Something is clearly wrong here. And what is wrong is the idea that tariffs (or exchange rates) don’t affect saving and investment.


    Here’s a different scenario, one more realistic than the extreme case above, but also more realistic than the assumption that saving and investment are immutable. Suppose there is a big increase in tariffs (or a big dollar devaluation). Prices tend to rise a result. Particularly if the economy is at or near full employment (as it currently is), the Federal Reserve will raise interest rates to resist the price effect. Investment will likely fall. It’s likely that saving will rise.


    In past musings and elsewhere, I have noted that if the Trump administration really wants a zero-trade balance, it could achieve it with the Warren Buffett plan – a kind of cap-and-trade approach that relies on a market mechanism to bring about balanced trade.[2] If that were done – and there is no sign that my advice is being taken – since exports would be equal to imports – there would also be behavioral responses in saving behavior and investment behavior such that in the end, saving would = investment.


    To repeat, this musing is not focused on whether Trump policies with regard to tariffs on steel and aluminum are wise. However, I will say that those tariffs appear to be based more on political symbolism than anything else. And I am not saying that pointing to national accounting identities is useless. For example, you can certainly argue, based on the identities, that the Trump tax cuts – which create governmental dissaving – will tend to worsen the trade balance. For them not to do so, they would have to raise private saving (by some magic) or reduce investment (which Trump doesn’t want). But that is another story. The simple point here is that in evaluating any major policy change, you can’t assume that key macro variables such as the rates of saving and investment are going to be unaffected. Nor can you ignore likely responses from policy actors such as the Fed.

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

    Footnotes:

    [1] https://www.forbes.com/sites/stevehanke/2018/03/02/trumps-tariffs-ive-seen-this-horror-show-before-reagans-terrible-trade-policies/#3d8bd21a7329.

    [2] http://www.zocalopublicsquare.org/2017/01/09/cap-trade-solution-trade-dispute-china/ideas/nexus/

  • 21 Dec 2017 7:29 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 12-25-2017: At the Margin


    Daniel J.B. Mitchell

    ===

    NOTE TO READERS OF THIS BLOG: I have become aware of a quirk in the EPRN system that can cause incorrect graphics to appear in past musings. Essentially, if an image file was used with a filename such as "Figure 1," and then a later post uses a different image file with the same name, the most recent version ends up in both musings. I will try to correct past errors that may have accumulated in past musings, if time permits. However, all past musings are also posted at:

    https://issuu.com/danieljbmitchell/stacks/fa21c67c714745f79a0ab2fc5c6d6ff7.

    You should be able to find a correct version at that link.

    ===

    Note: As was the case last year, there will be no further musings until April 2018, since I teach January-March and time is a limited resource.

    ===

    Economists in the late 19th and early 20th centuries developed the idea of marginal analysis. It explained basic concepts that are now routinely presented in Economics 1 such as demand and supply curves. In essence, it distinguishes between average and marginal.


    For example, when gasoline prices shoot up because of some disturbance in world oil markets, reporters will routinely interview consumers who say that they have to get to work, that they have no alternative but to pay the higher price, that they can’t take the bus because it’s too slow, etc. But somehow, transit usage inevitably goes up, despite these interviews. [https://www.youtube.com/watch?v=MPtPQPGlbyI] And if the high prices persist for an extended period, people start buying smaller, gas-efficient cars and making other cost-saving adjustments.


    Why? Because at the margin, there are people for whom the choice between driving and taking the bus is not so dramatically different. They could go one way or the other. They are different in that respect from the average driver. And the high price of gasoline tilts them toward public transit. Not everyone responds. But some folks do. And, over time, the response is bigger as the opportunity to change behavior becomes greater. In economics terminology, the price elasticity is higher in the long-run than immediately.


    Similarly, journalists have been in the habit of interviewing people about their political preferences and then noting that some folks won’t – and seemingly can’t - change their minds despite extreme contradictions to their beliefs. It’s partially that people don’t like admitting past error and partly confirmation bias. They believe messages that confirm their beliefs and filter out contradictory messages. So particularly with Trump supporters during the past year, journalists find lack of movement in his “base” of average, not marginal, supporters.


    The problem with that kind of analysis is that the electorate also contains “swing” voters – people at the margin who can move one way or the other. The fact that some people are immovable doesn’t mean that everyone is. And following the gasoline price example, over the long term – if there is a stream of contradictory information – more people will change their minds than in the short run. The challenge for the opposition is to influence the marginal voter. But that task may be more difficult than some folks imagine.


    In prior posts, I have noted that there is no reason to expect a faltering economy between now and the November 2018 elections. Of course, some world crisis could change that outlook so any forecast has to be qualified. Still, real GDP has been growing at something like 3%/annum. You can argue about measurement. But as we measure it, all that it takes to grow at 3% is labor force growth at around 1% and productivity growth around 2%. There is nothing outlandish about either figure. (Of course, the much higher numbers used to justify the idea that the tax cuts recently enacted will pay for themselves are not plausible.)


    The outlook for 2020 is less clear, but only because forecasting out that far has too many unknowns. If you want to justify a substantial slowdown or even recession by then, you have to sketch out some scenario of an overheated economy leading to inflation and a Federal Reserve reaction that goes too far. But inflation has not been behaving as expected for some time. So counting on such a scenario would be risky at best.


    Reasonable performance of the economy tends to reward incumbents. So the idea that President Trump’s low poll ratings will hand Congress or even the Senate to Democrats represents excess optimism on the part of Trump opponents. For there to be change, those folks at the margin in swing districts and states have to be persuaded that they made a mistake in 2016.


    Persuasion of that type is a delicate balance. It is surely not accomplished by alienating potential allies. Excessive identity politics are not going to have the desired effect. Such politics don’t stop at making folks proud of their heritage; instead they castigate others – particularly the others who made the Trump victory in 2016 possible (and carried along the Senate with him). Even the current focus on sexual harassment and assault, as noted in a prior post, has led to excesses and a potential backlash. You can argue that the excesses are rare, but one thing of which you can be sure is that they will be highlighted on the right.


    Here is a recent example of excess. Actor Matt Damon opined that there are gradations between Weinstein-type sexual assault and predation and just coarse behavior. Minnie Driver, another movie celebrity, castigated him for his remarks. Because of the prominence of both individuals, their spat received notable publicity. The essence of the complaints against Damon was that men shouldn’t talk about the issue. But as Joan Vennochi, a Boston Globe columnist pointed out, “for the first time, we are talking about male behavior with colleagues and family members. Why shut it down with across-the-board man-shaming?”[1] Ask yourself, on the margin, does this Hollywood tempest make voters in critical districts net more or less likely to vote for politically-correct Democrats? Under what set of assumptions does castigating potential allies attract their support (and votes)?


    Do you think the Hollywood upheaval is irrelevant for political outcomes? In a musing two weeks ago, I wrote about Senator Al Franken and what could be the result of his forced resignation; that was a clear case of Hollywood spillover into politics. Here’s another: Democrat Doug Jones recently beat Roy Moore – a candidate with extreme negatives in the sexual harassment area – in Alabama by a small margin.  Jones – who has yet to take office - was promptly criticized on the left for not calling for Trump to be removed based on his (Trump’s) harassment allegations.[2]


    Jones – it must be emphasized – is from Alabama, i.e., Trump-land. It was a miracle he was elected, and yet he is apparently not to be allowed leeway to consolidate support. If that pattern of internal conflict persists, and if the economy continues as it is, is a dramatic political shift to the left really likely between now and November? Sometimes, if you want to win, you need to rise above principle.


    There is a lesson from California that might be relevant. In 2003, Republican Arnold Schwarzenegger won a recall election against incumbent Governor (and Democrat) Gray Davis. The main issue in Davis’ demise was a state budget crisis.


    Schwarzenegger had considerable popularity from his film career and promised to make California great again in a nonpartisan way.[3] He temporarily dealt with the budget crisis by borrowing and got the electorate to endorse his solution via ballot propositions needed to accomplish his “fix” in 2004. But in 2005, he called a special election and put on the ballot four propositions that essentially mirrored Republican priorities at the time. It’s a long story and the details are not important here.[4]


    In the end, however, all of the Schwarzenegger propositions were defeated. How did that result come about? It did not come about by alienating voters who, only two years before, had voted for Schwarzenegger in the recall election. The battle was largely fought on TV and consisted of ads that focused on the idea that Schwarzenegger was at fault for not doing what voters had expected of him back in 2003. In other words, it was not the voters’ fault; it was the governor’s fault. Voters were not deficient. The new governor was deficient. There were many ads aired, but take a look at this one:


    https://www.youtube.com/watch?v=jgK2JJFJ2pA


    In short, for potential voters: no blame, no shame, and a simple message back in 2005 in California changed a political outcome. Can Democrats do it again in the national context in 2018 (or 2020)? Their contemporary problem is having constituencies that are not focused on the election or that, because of group-think, can’t imagine others with contrary views (or don’t care if they offend them). There is the old Will Rogers quote which seems applicable: "I'm not a member of any organized political party... I'm a Democrat."[5]


    In contrast, Republicans have long been seen as the party of business. And the business of politics is winning. So the notion that Trump’s low poll ratings, or the recent tax legislation, or the undermining of Obamacare, or changing national demographics is guaranteed to upend the political scene in 2018 (or 2020) is wishful thinking. It will require an organized no-blame/no-shame, focused campaign aimed at appealing to those voters on the margin and on not offending them.


    Of course, I could be wrong. And there is the Russia-thing. But can you count on it?

    ===

    Footnotes:

    [1] http://www.bostonglobe.com/opinion/2017/12/19/matt-damon-right-about-sexual-misconduct/tQeemaoxJXV2283pg3TPMK/story.html

    [2] https://www.gq.com/story/jones-damon-opinion-harassment

    [3] See the first TV ad at https://www.youtube.com/watch?v=CkE11Egb_7Q

    [4] For those details, see http://www.anderson.ucla.edu/documents/areas/fac/hrob/mitchell_califwusa.pdf

    [5] https://www.willrogerstoday.com/will_rogers_quotes/quotes.cfm?qID=4

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12/30/13 12/24/12 12/26/11
12/21/15
12/22/14
12/23/13 12/17/12 12/19/11
12/14/15
12/15/14
12/15/13 12/10/12 12/12/11
12/7/15
12/8/14
12/9/13 12/1/12 12/5/11
11/30/15
12/1/14
12/2/13 11/26/12 11/28/11
11/23/15
11/24/14
11/25/13 11/19/12 11/21/11
11/16/15
11/17/14
11/18/13 11/12/12 11/7/11
11/9/15
11/10/14
11/11/13 11/5/12 10/31/11
11/2/15
11/3/14
11/4/13 10/29/12 10/24/11
10/26/15
10/27/14
10/28/13 10/22/12 10/17/11
10/19/15
10/20/14
10/21/13 10/15/12 10/10/11
10/12/15
10/13/14
10/14/13 10/8/12 10/3/11
10/5/15
10/6/14
10/7/13 10/1/12 9/26/11
9/28/15
9/29/14
9/30/13 9/24/12 9/19/11
9/21/15
9/22/14 9/23/13 9/17/12 9/12/11
 9/14/159/15/14 9/16/13 9/10/12 9/5/11
9/7/15
9/8/14 9/9/13 9/3/12 8/29/11
8/31/15
9/1/14 9/2/13 8/27/12 8/22/11
8/24/15
8/25/14 8/26/13 8/20/12 8/15/11
8/17/15
8/18/14 8/19/13 8/13/12 8/8/11
8/10/15
8/11/14 8/12/13 8/6/12 7/25/11
8/3/15
8/4/2014 8/5/13 7/30/12 7/18/11
7/27/15
7/28/14 7/29/13 7/23/12 7/11/11
7/20/15
7/21/14 7/22/13 7/16/12 7/4/11
7/13/15
7/14/14 7/15/13 7/9/12 6/20/11
7/6/2015
7/7/14 7/8/13 7/2/12 6/13/11
6/29/15
6/30/14 7/1/13 6/25/12 6/6/11
6/22/15
6/23/14 6/24/13 6/18/12 5/30/11
6/15/15
6/16/14 6/17/13 6/11/12 5/23/11
6/8/15
6/9/14 6/10/13 6/4/12 5/16/11
6/1/15
6/2/14 6/3/13 5/28/12 5/9/11
5/25/15

5/27/13 5/21/12 5/2/11
5/18/15

5/20/13 5/14/12 4/25/11
5/11/15

5/13/13 5/7/12 4/18/11
5/4/15

5/6/13 4/30/12 4/11/11
4/27/15

4/29/13 4/23/12 4/4/11
4/20/15

4/22/13 4/16/12 3/28/11
4/13/15

4/15/13 4/9/12 3/21/11
4/6/15

4/8/13 4/2/12 3/14/11
3/30/15

4/1/13 3/26/12 3/7/11
3/23/15

3/25/13 3/19/12 2/28/11
3/16/15

3/18/13 3/12/12 2/21/11
3/9/15

3/11/13 3/5/12 2/14/11
3/2/15

3/4/13 2/27/12 2/7/11
2/23/15

2/25/13 2/20/12 1/31/11
 2/16/152/17/14 2/18/13 2/13/12 1/24/11
2/9/15
2/10/14 2/11/13 2/6/12 12/15/10
2/2/15
2/3/14 2/4/13 1/30/12 12/9/10
1/26/15
1/27/14 1/28/13 1/23/12
1/19/15
1/20/14 1/21/13 1/16/12
1/12/15
1/13/14 1/14/13 1/9/12
1/5/15
1/6/14 1/7/13 1/2/12
Employment Policy Research Network (A member-driven project of the Labor and Employment Relations Association)

121 Labor and Employment Relations Bldg.

 

121 LER Building

504 East Armory Ave.

Champaign, IL 61820

 

The EPRN began with generous grants from the Rockefeller, Russell Sage, and Ewing Marion Kauffman Foundations

 

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