Thinking

Was the Great Recession a Natural Calamity?

Tip of the hat to Adam Tooze for flagging Annie Lowry’s excellent round-up of the Great Recession’s impact on American society. After ‘the economy tipped into the deepest contraction of the post–World War II era’, Lowry writes, ‘the Great Recession’s scars remain’. The recession exacerbated troubling movements already underway: erosion of middle-skilled jobs, vertical polarization of the labor market, decline in labor market participation, economic insecurity, racial polarization, vertical polarization, regional polarization, and the opioid crisis. ‘A sicker, more unequal, more racially divided country: This is the legacy of the Great Recession.’ Her conclusions are worth quoting in full and bring the framing into sharp relief.

When the next recession comes the data on what to do about it will be there. Economists have pulled together plenty of studies of the dollar-for-dollar effectiveness of initiatives like extending unemployment insurance and increasing the size of the food-stamp programs, and the relative ineffectiveness of things like corporate tax cuts. Social scientists, social workers, and local officials have urged the importance of acting as quickly as possible to intervene, with efforts to stabilize financial markets, increase the deficit, and make monetary policy more accommodative. The country has now gone through three consecutive jobless recoveries, with downturns tending to amplify long-existing trend to hollow out the middle class, polarize the labor market, and hit already ailing regions hard. It seems likely that the next recession will do much the same.

The question is whether policymakers will take such evidence of the pain and scars left by the Great Recession into account. Congress is today on the verge of pushing forward a tax cut aimed at rich families and profitable corporations that will add more than a trillion dollars to the debt, with no real need for new economic stimulus at the moment. Meanwhile, it has declined to do much for the poorer families that are still feeling the worst effects of the last recession and have not yet recovered. The risk is that next time, they will get left even further behind.

In short, recessions are naturally-occurring calamities like hurricanes or earthquakes. The policy questions they raise are about the effectiveness of various measures to deal with them. Macroeconomic studies provide insights into the shock; microeconomic studies allow us to explore the impact of the shock on different markets and social groups. We have learned a lot since 2008 and these acquired knowledges should be brought to bear ‘the next time’. A rational policy framework must incorporate all these insights to fight the next one. This is not Lowry’s personal frame of reference. This is the dominant frame used by economists and laypeople to think about the Great Recession.

All frames are necessarily partial; they illuminate some aspects of reality and leave others in the dark. The recessions as natural calamities frame is especially problematic. For the scale and virulence of the Great Recession was not the result of a random draw; nor was it independent of economic policies pursued. The scale and virulence of the Great Recession was due above all to the unprecedented amplitude of the financial cycle. The recessions as natural calamities frame leaves out the most important policy lesson to be learned from the catastrophe: financial booms are extremely dangerous and must be tamped down vigorously. The principal policy failure did not occur in 2009-2010; it occurred in 2004-2006. Policymakers and regulators failed to appreciate the build-up of great financial imbalances. And that failure led directly to the catastrophe of the Great Recession.

US financial cycle

Source: Claudio Borio.

 

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Thinking

Aung San Suu Kyi, René Girard and Kotkin

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Rohingya refugees.

Roger Cohen can’t bring himself to say it. Kofi Annan told him “We created a saint and the saint has become a politician, and we don’t like that.” That immediately raises the question: Why is it in her political interest to obfuscate the suffering of the Rohingya? What Cohen can’t bring himself to say; more generally, what remains unsaid in the Western discourse, is that collective violence has deep roots in mass politics; in mass psychology; that ethnic violence has a definite populist aspect to it. Aung San Suu Kyi cannot take on the monks because she risks undermining her own political support base. She is not alone. In the dominant model of modern political science, Wilkinson’s, a pogrom is driven by electoral calculation: the ethnic party at risk of losing power can generate a temporary electoral boost by engineering a pogrom. Why?

René Girard did not offer a theory of modern collective violence. The problem he struggled with concerned archaic culture; more precisely, pre-Axial Age religion. He sought to understand the central role of ritual sacrifice across archaic cultures. In his frame, sacrificial rituals were reenactments of actual acts of collective murder of scapegoats that solved the central problem of archaic society: How to prevent the breakdown of the social order and the onset of Hobbesian instability. In his theory, the intensification of mimetic rivalry sets off the ‘sacrificial crisis’; man turns against man; brother against brother. The universal solution to sacrificial crises—across archaic societies—was the scapegoat mechanism. It was the collective murder of the scapegoat that restored the social peace.

I submit that collective violence against social pariahs performs the same function down to the present day. The Axial revolution did not do away with the need to gang up against a defenseless victim. The Enlightenment did not transform mass psychology. Modernity too failed to dispel the darkness. If anything, mass politics exacerbated it; combined and uneven development exacerbated it. This is what breathes life into Wilkinson’s theory. This is the frame in which we must soberly grapple with the traumas of the twentieth century. In particular, this is how we ought to frame the greatest explanandum of Stalinism: the communist great power’s attempt to castrate itself in 1936-1938.

In Magnetic Mountain, Kotkin famously framed the terror as an inquisition in a Bolshevik theocracy. Fitzpatrick emphasized the bottom-up, populist aspect of the purges; that she framed as the attendant of the coming of age of the Stalinist generation. In Waiting for Hitler, the 1200-page second volume of his biography of Stalin, Kotkin presents an entirely different theory of the terror. Looking at the world through Stalin’s office, Kotkin posits that Stalin engineered the terror to liquidate the Soviet upper class. Stalin’s ‘theory of rule’, says his biographer, was that the old guard had to go so that the Stalinist revolution could be consummated. This is framed as a top-down, intentional strategy emerging from the mind of the despot.

Kotkin spends a lot of time on Stalin’s turn to despotism—no more ‘first among equals’—and explores the mass politics of the Stalinist dictatorship. But he fails to connect the two or tie them to the terror. An entirely different account of the terror is called for; one that ties the bottom-up with the top-down.

With the liquidation of the kulaks, the Bolshevik party-state ran out of class aliens. But that did not do away with the need for internal enemies. If anything, forced-pace modernization exacerbated the sacrificial crisis. It is this vacuum that must be appreciated to accurately frame the attempt at self-castration. An enemy had to be found. In the Bolshevik theocracy, it had to be an enemy of the toiling masses. Moreover, social space had to be created for the Stalinist generation. That’s why the bosses had to go. The terror was not a sign of Stalin’s strength but rather of his weakness. After Kirov’s assassination, Stalin was scared; whence the turn to despotism. The terror must be seen as mass politics; as Stalin indulging in populism to strengthen his hand against his rivals and provide a cover for their elimination in his bid to perfect his despotism.

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Thinking

Why Stalingrad was the Real Turning Point of the Soviet-German War

Glantz identified three turning points of the Soviet-German War. The Battle of Moscow  in the winter of 1941-1942 proved that Germany’s attempt to knock the Soviet Union out of the war in a single mighty blow had failed and that the struggle had become a war of attrition that the Soviets were rigged to win. The Battle of Stalingrad in the winter of 1942-1943 proved that Soviet tank armies (ie, combined arms mechanized armies) were capable of operational maneuvers of similar scale, tempo and depth as the German Panzer armies. Finally, the Battle of Kursk in the summer of 1943 broke the pattern of the winter being owned by the Soviets and the summer by the Germans; proved the operational superiority of the Red Army; and ensured that Germany would be conquered by Soviet arms.

Different scholars put different weights on these three turning points. Virtually all historians agree that the decision was clear after the third. The Germans themselves became convinced that they could no longer win after the second. Klaus Reinhardt argued forcefully in Moscow: The Turning Point that the first of these was decisive. Hitler’s strategy of conquest, he argued, could no longer succeed after the failure of Operation Barbarossa. There is merit to the early position. The Soviet Union had managed to evacuate a thousand factories and 20 million people beyond the Urals, so that the bulk of Soviet industry and war potential now lay beyond the operational reach of Germany’s eastern armies. This meant that the Soviet Union was now robust to operational solutions. The struggle had thus become a true war of attrition that Germany could not hope to win given the Soviet preponderance in armament and the American credit line.

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The evacuation of Soviet industry from the western Soviet Union in 1941.

While that is largely right, I’d like to temper that conclusion. It is true that, after the great evacuations, the bulk of Soviet war potential lay beyond the operational reach of Germany’s eastern armies. I will argue however that there was still the possibility of an operational breakthrough that had the potential to even the odds, or perhaps even reverse the odds.

Given the primacy of mechanized armies, oil was absolutely critical to the war effort. Baku on the Caspian Sea supplied 90 percent of Soviet oil. The capture of Baku would not only solve the German oil problem—a binding constraint—it would also deny this stupendous resource to the Red Army. The US was supplying the Soviet Union through three routes: the northern route through Archangel, the southern Persian Gulf-Caspian Sea route, and the eastern route through Vladivostok. Control of the Caspian Sea would not have cut-off the Soviet Union entirely from US oil supply. But it would have severely hampered it because the northern and eastern routes had limited carrying capacity. Archangel was only ice-free for a part of the year and there was a single, six thousand kilometer rail link between Moscow and Vladivostok.

Routes

US supply routes to the USSR.

Capturing Baku and cutting off the southern route could thus have had a decisive effect on the odds. This was the goal of Operation Blau. The operational targets were the two ports on the Volga, Stalingrad and Astrakhan. (The location of Stalingrad is marked by a swastika in the map below.) If the eastern armies could extend their control to the Volga from Stalingrad to Astrakhan, that would sever Soviet access to Baku. The Soviet armies trapped to the south could then be reduced in detail ensuring German control over the prize.

Stalingrad strategic location

The strategic importance of Stalingrad.

The objective was within the operational depth of the eastern armies. The German offensive did succeed in reaching the Volga; in the process destroying Soviet armies on the Don. The war hung in the balance as the Soviets mobilized their forces for a major counteroffensive.

blau

German advance to the Volga, 1942.

Many accounts of the battle, such as the one on Wikipedia, focus attention to the battle for the city. While close-quarter urban combat was brutal and of great human interest, the battle was decided far away from the city. The Soviets launched pincer maneuvers to cut off the Sixth Army from its western supply lines and simultaneously attacked the German armies located west of the Don.

Soviet counteroffensive

Soviet Counteroffensive in the Battle of Stalingrad.

My argument is not so much that the eastern armies could have won the Battle of Stalingrad. Given the forces arrayed against them, that’s a tenuous claim. My argument is rather that, having reached the Volga, the Germans came close to severing the communication lines between Moscow and Baku. Had they managed to pull that off, the odds of the war would surely have evened out if not reversed outright. So, contrary to Reinhardt and my earlier claims, an operational solution of strategic significance was still on the cards in 1942. And it was only with the destruction of the Sixth Army that such operational solutions could be ruled out and one could therefore be certain of Allied victory against National Socialist Germany.

Stalingrad

Soviet Counteroffensive at the Battle of Stalingrad.

 

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Thinking

Brenner’s response to “The Empirical Evidence for the Brenner Hypothesis”

Michael Lind introduced me to Robert Brenner, who has kindly permitted me to publish his response to my post. His response follows.


Anusar Farooqui takes me to task for arguing that the fall in the manufacturing profit rate took place mainly between the mid 1960s and early 1980s, by bringing forward the fundamental point that the buildup of overcapacity in manufacturing did not end then, in the 1980s, but has continued to heighten virtually into the present.   That is of course what I said–viz. that the buildup overcapacity resulting from the continuing intensification of international competition in manufacturing has continued to intensify, with the virtual collapse of investment on a world scale as perhaps its most striking and significant consequence.   But, as Farooqui quickly also concludes, formally contradicting what he just said, the ongoing intensification of international competition and resulting buildup of overcapacity did NOT actually lead to much, if any, further fall in the rate of profit in manufacturing after the early 1980s, which was my contention. Yet, finally, despite the leveling off–not further fall– of the profit rate, there was nonetheless, a deep falloff of capital accumulation, as the overcapacity, intensified competition, and the expectation of the continuation of same profoundly discouraged new investment.

One could say that, in the first instance, the Japanese, then Koreans and Taiwanese, and then their East Asian cohorts above all China, stepped up capital accumulation far more than was justified by the immediate/static profit rate, because they knew that, given that US and other earlier developing producers could not much reduce costs because production technology was frozen in the existing capital stock and wages were pretty inflexible, they could sell more cheaply than the Americans on the world market for as far as the eye could see (in practice, until the huge devaluation of the dollar from 1971-1973-1979).   On the other hand, world producers have, over time, reduced investment growth to an ever greater extent, because they have known that, at whatever costs they are able to produce at, will soon be bettered by lower cost producers coming on line.   Capital accumulation was amplified because the Japanese especially but other latecoming investors knew that the earlier comers could not match the latecomers costs.   Capital accumulation slowed down because all manufacturing producers knew that later developing entrants would be able to throw commodities onto the world market that were cheaper than they could possible match.   So after the Great Recession of 2007-2009, even the Chinese, overwhelmed by over-capacity and the collapse of world demand growth, could not prevent investment in China from plunging, because the firms there knew they could not match the costs of even later entrants (Vietnamese, etc) and could never make up for the drop off of US borrowing and US debt-driven purchases of Chinese goods.

Farooqui goes on to tax me for seemingly failing to register that, while the manufacturing rate of profit fell sharply, manufacturing makes up only 12% of value added, and the overall rate of profit did not fall.   To show this, he adduces a graph that shows a major recovery, if still incomplete recovery, of the corporate rate of profit.     But I think he is wrong about this, because I don’t think that the corporate rate of profit is a good measure of economy-wide profitability, since it includes the profit rate of the corporate financial sector.   The financial sector rate of profit can’t be properly included in the measure of the corporate rate of profit, because the financial rate of profit is not properly measured, as it is in the BEA data (and Farooqui), as financial profits over financial capital stock; it should rather be measured as returns from investment in financial assets (mostly on paper).   So, the corporate financial rate of profit must have financial assets overall, not the corporate financial capital stock, in the denominator, just as it must have financial returns in the numerator.

So, to properly get an idea of profitability or the rate of return for the economy as a whole, one must confine oneself to the profit rate for the non-financial corporate sector, which is properly measured by non-financial corporate profits/non-financial capital stock. If one consults this latter measure one can see that, properly measured, the recovery of the profit rate for the economy as a whole is still pretty far from complete.   What has happened is that the fall and failure of the manufacturing rate of profit has brought down the overall rate of profit, but not nearly as much as in manufacturing itself, because there was no significant fall in the rate of profit outside of manufacturing.   It is the divergence between the trajectories of the manufacturing rate of profit (sharp fall) and the non-manufacturing rate of profit (basically flat/stable) that was my main evidence for arguing that the fall in the rate of profit were the result of what happened in manufacturing almost by itself…and thus an intensification of international competition that obtained only in manufacturing but not in nonmanufacturing. Bottom line is that the economy wide rate of profit did fall, if not nearly as much as did the manufacturing rate of profit.

Farooqui, in bringing his article to conclusion, puts a big emphasis on the big shift in the wage share against labor and in favor of capital, which began in the 1970s (if not a bit earlier).   Here I agree with him completely, even if I think that this rise in the profit share does not fully restore the rate of profit for the economy as a whole.   Indeed, I would take this point much much further, arguing that the gains for capitalists (and the rich) are nowhere near fully accounted for by what might be called the effect of austerity on wages (and government services), but are, especially from around 1980, to be found above all in the direct political interventions of both political parties in alliances with top corporate managers (especially in finance) to radically shift– by way of taxation, returns to lending to government, etc etc– income and wealth upward to the one per cent or, really, top 0.1% or top 0.01%   At least that’s what I tried to argue in the section on neoliberalism in my editorial in Catalyst, number 1.

 

 

 

 

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Thinking

What explains the tactical superiority of the Wehrmacht?

exchange_ratios

The tactical superiority of the Wehrmacht is evident from the fact that while the loss exchange ratios became more favorable to the Soviets during to the course of the Soviet-German War, the Soviets did not, in fact, manage to close the gap. Why might that be? Glantz and House have shown convincingly that by 1944 the Red Army had mastered the operational art of combined arms mechanized warfare. Red Army operations acquired a tempo, depth and confidence that Guderian surely envied. Why then did the exchange ratios not become favorable to the Soviets in the third period of the war?

Traditional explanations of German tactical superiority over Allied armies appeal to the quality of German officers and to institutional features of the German army. Commanders in the field were issued missions to be accomplished instead of detailed instructions. The exact means of accomplishing the missions were left to the field officer. This encouraged initiative and was more efficient than micromanagement of army operations from faraway headquarters. The quality of the German officer corps was thought to be superior, both on account of Prussian military culture as well as the special experience of the Versailles era. The latter idea being that since the Reichswehr was limited to 100,000 personnel and hence useless for actual defense, it essentially became a training institution for future officers. I am not entirely unsympathetic to these explanations. But I think there is a more straightforward one.

The main light machine gun of the Wehrmacht was the MG-34, later replaced by the MG-42. The latter was so successful that when the Bundeswehr was founded in 1955 and issued American firearms, experienced German soldiers found them wanting. But all existing designs had been destroyed in 1945, so Rheinmetall was forced to reverse-engineer the MG-42 from existing specimens. Modern variants of the MG-42 continues to be used by the Bundeswehr. And the machine gun continues to see action in places like Syria. The history of this weapon is so interesting that Adam Tooze wrote a paper on it.

The MG-42 was a 7.92mm caliber gun. It was 1.2 meters long and weighed 11.5 kilos with the bipod; which meant that it could be carried on the shoulder. It had a high muzzle velocity of 755 meters per second. But what made the MG-42 a supremely effective machine gun were three features. First, it had a very high rate of fire; about 1,200 rounds per minute. Second, it had an effective range of 2,000 meters with a bipod, and 3,000 tripod. And with a tripod, it could even be used to deliver indirect fire. Third, and perhaps most importantly, it was belt-fed. Moreover, the belts could be linked to maintain continuous suppressive fire. This made the MG-42 (and the MG-34 before it) an excellent universal machine gun. That is, it was light enough to be carried by one man; thus serving as a light machine gun. But when used with a tripod or mounted on tanks or combat aircraft, it became a heavy machine gun that could project continuous suppressive fire at a great distance. With a special mount, it even doubled up as an effective anti-aircraft weapon. And above all, it could sustain suppressive fire indefinitely; constrained only by ammunition supply.

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MG 42

The Soviets had combat aircraft, tanks, and artillery guns that were comparable or even superior to the Germans. They even had light machine guns that could be carried but they were fed by 71-round drums (the Finns called them ‘record players’). They also had heavy machine guns. But none could be carried into battle. The big ones had to be pulled by horses; the smaller ones had to be dragged on wheels. The Soviets did not make a single belt-fed machine gun that could be carried into battle throughout the Soviet-German War. It was only in 1946 that the Soviets finally introduced their first such machine, the RP-46.

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The Red Army’s SG-43.

The German Army built the MG 34 and MG 42 into the core of its infantry organization, right down to the Gruppe (squad) level. The most basic fighting unit was the rifle squad. The rifle squad’s primary firepower did not come from rifles; it came from the machine gun. The job of the squad leader was to direct the emplacement and fire of the machine gun. The machine-gunner (No 1 Man) was responsible for carrying, firing and maintaining the light machine gun. He also had to carry a 50-round belt drum. The assistant machine-gunner (No 2 Man) carried a spare machine gun barrel, four 50-round belt drums, and one 300-round ammunition can. Another spare barrel would be carried by the ammunition carrier (No 3 Man), together with two 300-round ammunition cans. The other six riflemen often carried additional ammunition for the machine gun. In total, the squad could carry 5,000 rounds on their persons. The MG-42’s reload mechanism made it run faster and faster as you sustained fire; until it approached about 1,500 rounds per min. To be sustained at this rate for any appreciable length of time required prepared positions with stocks of ammunition; whence the dramatic tactical advantage of strong points at the ends of effective supply lines; and, of course, back to the great machine working behind it to reproduce the whole show.

german-infantry-squad

Adam Tooze notes that the job of the German rifle squad was to work the machine. It was the reason for their existence as a unit. The survival of the riflemen depended on their working together to feed the machine whose fire protected them on the battlefield. This is what accounts for their cohesion. An answer to why did the Wehrmacht have to annihilated? Why did it hold together? Did National Socialist Germany hold together until the Battle of Berlin because it was a machine civilization?

My question is low-stakes. What explains the exchange ratios in the Soviet-German War? At the basic tactical level, whereas the Germans ran their factories of firepower, the Soviets did not even have an infantry squad (their basic tactical unit was too large; the size of a German company) for the obvious reason that they did not have a real machine gun. But Stalinist USSR was also a machine civilization.

German superiority at the tactical level (roughly, squad-company) was defeated not only by the Soviets’ superior performance as a machine civilization, but also by the fact that the Red Army became better than the Wehrmacht at the operational level that came to dominated by combined arms mechanized warfare. The Red Army rediscovered ‘deep operations’ in early 1942. Glantz and House show how the Soviets and the Germans exchanged places in mechanized warfare during 1942-1943.

During the Battle of Stalingrad and the ensuing winter campaign, the tank and mechanized corps organized in 1942 had proven their worth as instruments for the limited tactical exploitation of enemy rear areas. For the remainder of the war, high-priority combined-arms armies such as the guards armies would control one or two tank or mechanized corps for the purpose of encircling German defenders to a depth of 50 to 200 kilometers behind the front lines.
         However, the Red Army needed a larger mechanized formation, analogous to a panzer corps or panzer army, of deeper operational exploitations up to 500 kilometers. The result was the 1943 tank army.…The depths to which these armies penetrated increased steadily throughout the war.…For the remainder of the war, the five (later six) tank armies were the spearhead of Soviet deep attacks, conducting operational maneuver and seeking objectives deep in the German rear areas. On a map, Soviet offensive plans often resembled a set of nesting dolls, with shallow encirclements inside of other deeper encirclements. The separate tank and mechanized corps, sometimes replaced by cavalry-mechanized groups in difficult terrain, were attached to the forward combined-arms armies so that they could encircle one or more German corps immediately behind the German main defense lines. Meanwhile, operating under front control [a front is the equivalent of a German army group], the tank armies bypassed these struggles, straining to penetrate as far as possible into the operational depths and thereby achieve larger encirclements.

Glantz and House (When Titans Clashed, p. 207)

The persistence of the Germans’ tactical superiority even as Soviet ‘tank armies’ gained operational superiority is interesting from the point of view of struggling machine civilizations. Perhaps even in purely tactical terms, the Germans were saved by the bell as it were for the RP-46 production came online in 1946. But in the lived experience of Soviet-German war, only one side had the machine gun. And that is an efficient explanation of German tactical superiority.

P.S. Why, of course, the material culture of the Wehrmacht is fascinating! Look at these men covered with food for their hungry machine.

MG42

A work gang covered in raw material.

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Thinking

Thinking through connections between inequality, home prices, schooling, and taxation.

(Thanks to the Policy Tensor for welcoming this guest post.)

 

I have a strong intimation that one of the major drivers of inequality in American society relates to land use. Here is how it works.

Let’s start with labor markets.

We live in a world characterized by extremely high returns to certain forms of educational achievement. (Whether that achievement has to do with ability, or with social/cultural capital credentialing, I do not venture to say.) Individuals who have passed through certain schools and acquired certain degrees have open to them employment in extremely high paying jobs. Indeed not only are the incomes of those at the top high, they are also increasing at a rapid rate, creating an ever-growing gap between those in the highest paying jobs and those in nearly all other jobs in the economy, where wages have stagnated, if not declined.[1]

The increasing returns to those credentials, in a world where their supply is effectively fixed, naturally increases competition for access to those credentials.

Beyond the very top earners, throughout the economy there is a widely documented increase in the premium to education – that is, the wage differential between college graduates and those without a college degree is large and growing. (Autor, 2014) Though I have not seen direct evidence documenting it, this premium must increase markedly with the imputed quality of the college education received, almost certainly proxied by “brand.” Combined with the fact that since 2000 the only sector of the economy in which total employment has increased is the low-wage sector (Autor, 2015; Mishel and Bivens, 2017), it’s easy to account for a sense of scarcity among parents over the supply of future remunerative employment for their children.

In theory it is high school aged kids who are competing for these scarce college placements, and in turn for scarce jobs. But in practice children have very little say over how they perform in this competition. Instead the key factor is their parents.

If parents detect that there are increasing returns to certain forms of credentials, and perhaps correspondingly fear that failure to gain access to those credentials may doom their children to low wages (setting aside for the moment status competition between the parents and their peers, which may account for a great deal), then a rational parent wants to undertake whatever investments in their children’s education will best position them for access to these highly coveted spots.

What are the key investments that parents can make?

Some of the most valuable investments are likely to have been made a long time ago – for example, the parents’ own education, as well as the parents’ health, incomes, etc. But from the time the children are born, one of the most important factors that parents can control is where they send their kids to school. High quality schools correlate with better college placements. (At least I think so – I have not seen direct evidence of this but spend 10 minutes with any parent today and you can be sure that parents think this correlation exists.) Most American children go to public schools, and most of those public schools are in the same neighborhood or school district as the household’s residence (75% in 2007, at least, according to US Department of Education, 2010). Therefore the mechanism by which most parents invest in their children’s schooling is by choosing where to spend the portion of their income that they devote to housing services. Since most American households own rather than rent their homes, this is predominantly a question of where to buy a home. It stands to reason that home prices should be higher in places that have good schools.

Indeed, studies show strong correlations between school quality (measured for example in terms of average test scores, which happens to be the data generally most easily accessed by parents comparing schools) and a premium paid on home prices (e.g. Chiodo et al., 2010; Nguyen-Hoang and Yinger, 2011). Since Tiebout’s famous paper in 1956, the principle way to model home prices has been as a function of a distribution of demand for amenities, including government services. Those amenities that are most valued translate into the highest home prices. Schools are clearly one of them.

The sociologists Reardon and Bischoff (2011) have done some very interesting work showing that as income inequality has increased in the US, so has the residential segregation of affluence. Since income inequality in the US has a pronounced “upper-tail” quality – that is, it has rapid growth in earnings at the very high end – the small numbers of very high earners increasingly bid to live in a small number of highly desirable locales, one aspect of which is the presence of very good schools.

In a 2016 article, the education sociologist Ann Owens makes the striking finding that residential segregation by income in America is increasing – but that the effect is overwhelmingly limited to households with children, which make up only 1/3 of American households. (Owens, 2016) Households without children seem relatively content to stay where they are. Families with children move, and they move in ways that segregate them. In combination with the results of Owens, Reardon, and Jenks (2016), which shows growing income segregation between schools and school districts, it seems clear (and, again, is intuitive to anyone who has spent time with the parents of young children) that parents who intend to enroll their children in the rat race of educational achievement make very careful decisions about where to live so as to ensure that their children go to good schools. They pay a premium to be able to live in such places. The more income inequality there is, the higher the premium to be able to live in the places with the best schools, the more segregated those communities and their schools become, and – and here is of course the kicker – the more that those already successful are able to monopolize access to those public goods which are likely to make their children successful.

So if you are someone who thinks that this is a perverse state of affairs, what types of remedies might be available?

1) Big picture you would want to do something about the organization of the American economy that produces such lopsided, pre-tax and transfer income distribution in the first place. But let’s set that aside for now.

2) If you could not change (1) you would at least want to have a radically progressive tax system such that even a skewed pre-tax and transfer income distribution became less skewed post-tax. If you taxed away much of high earners’ incomes, it would presumably limit the extent to which they could bid up house prices, and this might in turn limit their ability to exclude those who earn less. But let’s even set this aside for now.

3) One thing you might do is build affordable housing (or create large numbers of housing vouchers) for poor and working-class families to be able to move into affluent school districts. This would be a good thing, but as the land in question is already expensive, it would be a hugely costly proposition. If enough housing was built (all of which, incidentally, would have to be built over the screaming protests of the existing residents) it might turn out to be counterproductive, in that some portion of the affluent would choose to flee to further out suburbs, and by taking their property tax payments with them, they could contribute to a worsening of the schools they left behind. Still building affordable housing in affluent communities is almost surely a key ingredient in any overall recipe for reform.

4) Neoliberals (e.g. Glaeser, 2017) believe that one of the most important reforms you can make is to reduce land use restrictions that prevent the high demand to live in certain communities from resulting in the construction of more housing. So do away with local ordinances that require lots to be a certain size or that prohibit the construction of multifamily housing. Something like this could work in tandem with (3).

5) One thing you could definitely do is reform the tax code to reduce all of the provisions that incentivize taking on massive leverage to buy a home. The most obvious is the mortgage interest deduction, which if eliminated would substantially lower house prices. (Harris, 2013) (The Republican tax plan lowers the ceiling from $1,000,000 to $500,000, but only for new purchases. That probably has the effect of raising home prices by discouraging anyone who is currently taking advantage of a large deduction from moving, thus limiting the supply of houses for sale.) The best idea I’ve seen would be replacing the mortgage interest deduction with some sort of equity subsidy (as suggested by Stiglitz, 2014), especially if, as Stiglitz suggests, you just establish a blanket $100,000 income tax deduction for everyone. That would ensure that working and middle class homebuyers don’t lose out. Another thing it would be good to eliminate (again, as long as you have something like a $100,000 flat deduction) is the property tax deduction. If you were not able to write off part of the cost of paying for your children’s education, it should reduce the amount you are willing to pay for a house, and that should also slow home price appreciation.

6) What I am really trying to figure out is if there aren’t more draconian measures one could take to break the connection between where you live and the schools your children go to. There are of course (or, there have been) busing programs of various sorts. In the era of court-ordered desegregation, however, these programs tended to be limited to within-district integration. The result was to contribute to white flight, since parents who could afford to preferred to move out of cities rather than keep their kids in integrated schools. Today, there is the “Moving to Opportunity” program, which gives vouchers to low income families from high poverty neighborhoods to move to more affluent areas and go to school there. (Chetty et al., 2016) This is good for those kids, but does very little to limit the ability of affluent parents to segregate themselves for the purpose of attending segregated schools, which is their main objective.

What if you just ended local control of schools and instead created large, integrated regional districts, large enough that the distance affluent parents would have to move to get outside them created a disamenity so great that it overwhelmed the gains to accessing segregated schools? One can imagine a general equilibrium scenario in which the response to this sort of a change is employers moving jobs really far outside of metropolitan areas in response to the demand of high-skill workers to live in segregated communities. But employers want to attract workers without kids as well as workers with them, and workers without kids want to live in the heart of thriving cities, not in ranch houses 100 miles outside them. So there would be a lot of forces working against an outcome like that. In the meantime, genuinely integrated regional school districts could create a degree of randomization in school assignment. In a “veil of ignorance” type situation, affluent households should support a tax regime that ensures that all schools have adequate funding.

So, those are my proposals for today: build affordable housing in affluent communities; reform the tax code to eliminate those features which incentivize bidding up home prices; regionalize metropolitan schools and randomize school assignment within them.

What am I getting wrong?

[1] Interestingly, the perception itself may be anachronistic. In their recent work on distributional national accounts, Piketty, Saez and Zucman (2016) find that between the 1970s and the 1990s the growth in the incomes of the top 1% of earners was driven by increases in labor income (e.g. salaries). Since 2000 it has been driven by growth in capital income (e.g. primarily earnings on stocks, bonds, and real estate). Some of this may be misleading – for example many high earners are paid in part in stock options and the like, which look like capital, but are in effect labor compensation. Either way it probably does not make much of a difference from the point of view of parents investing in human capital. There are still only a small number of jobs that will pay your children big enough salaries to be able to accumulate the capital assets from which they will then derive capital income.

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Thinking

Does Mohammad bin Salman want to be a Sultan or a Despot?

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After the oil price revolution what emerged in the gulf was a distinct model of a ‘rentier state’ that Gause called the ‘Oil Monarchy’. The oil windfall meant that the state came to enjoy a radical autonomy from society. With more than half the population on the state payroll, 100 percent of Saudi citizens dependent on ‘cradle-to-grave’ welfare, and almost all Saudi businesses feeding directly or indirectly at the state’s tits, the Al Saud came to exercise uncontested control over the country. The Wahhabi clerics seemed to enjoy a degree of autonomy but in reality they too were tamed. Power in Saudi Arabia rested firmly in the corporate body of the ruing family, with different factions or subbranches competing for influence in what was effectively a ‘ruling oligarchy’ à la Winters. Inside the corporate body of the family, the King was no more than a ‘first among equals’. American protection after the Islamic Revolution provided external security, letting the Al Saud concentrate on family politics, propagating salafism worldwide, patronizing clients like Pakistan, and playing the regional game.

Crown Prince Mohammad bin Salman has moved decisively to consolidate all power in his own hands. There are two theoretical models available to understand these developments. In Winters’ frame, what we have is a shift from a ‘ruling oligarchy’ to a ‘sultanistic oligarchy’. Such shifts are attended by purges and highly public disciplinary attacks by the dominant oligarch against his rivals. When a dominant oligarch manages to establish his supremacy, he can arbitrate disputes amongst the oligarchs, thereby generating consent and stabilizing his rule. If he fails, the bid is likely to be generate instability. We have seen this process unfold more or less transparently in Russia under Putin, India under Modi, and China under Xi. It remains to be seen whether Salman can pull it off in Saudi Arabia.

The other theoretical model I have in mind is developed by Kotkin in Waiting for Hitler, the 1200-page second volume of his biography of Stalin. In that frame, the shift is from dictatorship to despotism. A dictatorship is established when a clique gains unchallenged control in an autocracy; instead of power being dispersed in multiple institutions as in legal-authoritarian orders such as Singapore, power in a dictatorship is unchecked and concentrated in an informal network at the very top of the hierarchy. In Stalinist USSR, this clique was a ruling group of fewer than a dozen individuals who usually met at Stalin’s dacha. They constituted a veritable ‘state within the state’ and made all the important decisions of the party-state in the name of the Politburo. The shift from dictatorship to despotism occurs when the dictator effectively neutralizes all his rivals in the ruling group. No more ‘first among equals’, the despot consolidates his power at the expense of the rest of the ruling group. Stalin moved towards despotism after the assasination of his closest friend Kirov. In order to do so, he had to unleash the terror.

Although both lenses are illuminating, I find Kotkin’s frame more useful. For it allows us to go beyond the oligarchy and view the shift in a larger frame. Specifically, it allows us to also triangulate the mass politics of dictatorship. Mass politics means that the dictator appeals directly to ‘the people’ for support, bypassing mediating interests. Often this takes the form of populism and a ‘cult of the leader’. Moving from dictatorship to despotism exposes the dictator to conspiracy by his threatened rivals—it must therefore be seen as a sign of weakness; whose origins lie in the dictator’s real or imagined insecurity. A resort to populism increases the dictator’s personal power relative to his rivals in the ruling clique. The interaction of the bottom-up politics of resentment of the elite with the dictator’s bid to achieve despotism can generate tremendous violence and instability. Herein lie the origins of the terror.

At this early stage it is not in fact clear whether Salman wants to a sultan or a despot. Perhaps he himself doesn’t have a specific end-state in mind. But the will to power is strong in this one so it is inadvisable to assume that he has moderate ambitions. What we can say is that, as we watch the shift unfold in Saudi Arabia, we need to pay attention not just to the Crown Prince’s consolidation of power within the ruling family and over the Saudi rentier state, but also for signs of mass politics that attend a shift from dictatorship to despotism.

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