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Why Dems Are Doing Worse in Some States than Others: It’s Race, Not the Economy

Tuesday, March 15th, 2011
Lee Drutman


Lee Drutman is a senior fellow and the managing editor for the Progressive Policy Institute.

by Lee Drutman

In 2008, Democrats enjoyed a solid advantage in partisan identification. By 2010, that advantage had largely evaporated. As I detailed in a previous post, in every state, the Democratic partisan ID advantage has declined, and by an average of nine percentage points.

But the decline has not been equal across the nation. In fact, there is a good deal of variation in the change in Democratic identification across states, ranging from a ranging from a drop of 22.2 percent in New Hampshire (from +13.2% to -9.0%) to a drop of just 1.6 percent in Mississippi (see this table for state-by-state numbers).

Why should these changes vary so much from state to state? Are there demographics that might explain this?

As it turns out, the only statistically significant predictor of the decline in democratic partisan affiliation advantage is the percentage of white people in the state. Surprisingly, the state economy (at least as measured by unemployment rate or change in unemployment rate) doesn’t seem to matter.

Unemployment

Let’s begin with the unemployment rate, since a good deal of the analysis around the 2010 election was an “it’s the economy stupid” story: voters blamed Democrats for high unemployment, and voted Republican to express their anger and frustration.

Yet, what’s remarkable about this scatterplot (above) is that the story doesn’t hold up. If anything, the relationship seems to be slightly opposite what the conventional wisdom would lead us to expect: the Democrats appear to have lost more support in states that have relatively lower unemployment rates. However, it is not statistically significant.

Still, it’s possible that what matters is not the absolute unemployment rate, but rather the change. Yet, once again, the scatterplot (below) shows that this is not the case. The more unemployment dropped between November 2008 and November 2010, the less the average decline in Dems’ partisan ID advantage. Though the relationship is actually stronger than above, it is still not a statistically significant one.

These numbers just don’t fit with the story of voters turning against Democrats for a failing economy. Take Nevada: Unemployment jumped from 8.0 percent to 14.3 percent, yet Democrats partisan ID declined by only; Similarly, California: Unemployment goes up from 8.4 percent to 12.4 percent.

On the other side, consider New Hampshire: Unemployment goes up from 4.3 percent to 5.4 percent (both among the lowest in the nation), but Democrats lose 22.2 percentage points in partisan ID advantage; Or South Dakota: Enemployment up from just 3.4 percent to just 4.5 percent, but the Dem partisan ID advantage falls up 10.4 percent.

Manufacturing

Another possibility is that what matters is the economic make-up of the economy, and in particular, perhaps states that rely disproportionately on manufacturing are more likely to have a lot of anxious voters, since manufacturing is a dying industry. But if we plot the decline in Democratic partisan ID and the manufacturing as share of the state GDP, there is no relationship.

Seniors

Another possibility is that Democrats are losing out in states with more seniors, since senior citizens are reportedly turning against Democrats. A scatter-plot shows a clear relationship, though not quite a statistically significant one (but close!). Generally, the more seniors in a state, the more Democrats have lost in their partisan ID advantage. However, the number of seniors explains only three percent of the variation in the Democratic vote share decline.

Whites

Finally, we come to the share of white voters. Here we have a consistent pattern, and one that is statistically significant (and explains 13 percent of the state-level variation). For every ten percent increase in white voters as a share of the electorate, the predicted decline in Democratic ID advantage is almost one full percentage point (the one outlier in the lower left is Hawaii, which is highly Asian. Without that outlier, the relationship would be even stronger).

This re-emphasizes the problems that Democrats seem to be having with white voters. (Democrats have not enjoyed parity with Republicans among white voters in 20 years, but 2010 was especially bad, with white voters breaking 62-to-38 for Republicans in the mid-term elections.)

This explains why the Democratic decline in diverse states like California (47 percent white) and Nevada (66 percent white) is less than in lily-white states like South Dakota (90 percent white) and New Hampshire (95 percent white), even though California and Nevada have much higher levels of unemployment.

These results exist regardless of economic circumstances (these findings are robust even in a statistical model that controls for all the other possible factors discussed).

Conclusions

The brief summary of this analysis is that race may matter more than the economy for  why voters have been identifying more and more as Republicans for the last two years.

Of course, there are obvious caveats to this interpretation, most significantly the fact that I am playing around with state-level data, as opposed to individual-level data.

But the patterns are discouraging for Obama and the Democrats. Much prognostication has argued that the number one factor for 2012 will be the unemployment rate, because historically, the unemployment rate has been a very strong predictor of whether the incumbent party wins or not. This analysis suggests that something else is going on as well. Democrats are having a hard time with seniors and particularly white voters, and it’s not just a story about the state of the economy.  Democrats ignore these scatterplots at their peril.

Update: I’ve written a response to some of the comments entitled “Am I a Race-Baiter?”

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Evening Fix

Friday, February 18th, 2011
Lee Drutman


Lee Drutman is a senior fellow and the managing editor for the Progressive Policy Institute.

by Lee Drutman

Our top five reads of the day:

  • Eric Jaffe highlights the importance of declining infrastructure in the McKinsey Global Institute on the U.S. economy:  “Drawing figures from the American Society of Civil Engineers, which recently issued U.S. infrastructure a D grade, the report estimates that the country needs to invest more than $2 trillion over the next five years just to catch up. Considering the partisan fury that followed Obama’s six-year, $556 billion transportation budget plan, such a goal is politically impossible.”
  • Emilia Istrate has some ideas on how to expand our exports: “One of the defining characteristics of the Next Economy is the essential role played by exports. If the United States is to fully benefit from the transformational changes taking place in world markets, we must re-orient our economy and the policies that shape it towards increasing our exports.”
  • Joseph S. Nye Jr. puzzles through what the Twitter/Facebook revolution in Egypt means for the future of power: “Yet, while governments and large states still have larger resources, thanks to the new power diffusion, the stage on which these entities play is more crowded with information-empowered private actors. How will this all play out? Who will win, and who will lose? As recent events in Egypt and elsewhere have shown, we are only just beginning to comprehend the effects of the information revolution on power in this century.”
  • Andrew J. Rotherham debunks myths about school vouchers: “What does the renewed push for vouchers mean for our education system? That is of course a matter of debate. Proponents and opponents make a lot of overblown claims about what vouchers will or won’t do. But with a number of programs already in force, we actually know quite a bit about how they work.
  • Lori Montgomery reports on the bipartisan “Gang of Six” trying to work out a budget deal: “The group hopes to advance the commission’s recommendations, which would reduce deficits by $4 trillion over the next decade. Doing so would require lawmakers to embrace some politically perilous policies, however, including raising the retirement age to 69, charging wealthy seniors more for Medicare and ending some cherished but expensive tax breaks.”

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When Did the Innovation Shortfall Start?

Monday, February 7th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

I’m responding to the posts by Arnold Kling and critiquing  Tyler’s The Great Stagnation. Let me just throw out some thoughts, from the perspective of someone who thinks that The Great Stagnation is a terrific book.

1. I agree wholeheartedly with Tyler that the current crisis is a supply-side rather than a demand-side problem. That explains why the economy has responded relatively weakly to demand-side intervention.

2. From my perspective,  the innovation slowdown started in 1998 or 2000, rather than 1973–sorry, Tyler.  The slowdown was mainly concentrated in the biosciences, reflected in statistics like a slowdown in new drug approvals, slow or no gains in death rates for many age groups (see my post here),  and low or negative productivity productivity in healthcare (see David Cutler on this and my post here).  This is a chart I ran in January 2010 (the 2007 death rate has been revised up a bit since then)–it shows a steady decline in the death rate for Americans aged 45-54 until the late 1990s.

The innovation slowdown was also reflected in the slow job growth in innovative industries, and the sharp decline in real wages for young college graduates (see my post here). (Young college grads, because they have no investment in legacy sectors, inevitably flock to the dynamic and innovative industries in the economy. If their real wages are falling, it’s because the innovative industries are few and far between).

3. The apparent productivity gains over the past ten years have been a statistical fluke caused in large part by the inability of our statistical system to cope with globalization, including: The lack of any direct price comparisons between imported and comparable domestic goods and services; systematic biases in the import price statistics (see Houseman et al  here, for example); and no tracking of knowledge capital flows. I’ve got several posts coming on this soon.

4. I agree with Tyler that regulation of innovation is a big problem.  That’s why I’ve suggested a new process, a Regulatory Improvement Commission, for reforming selected regulations.

5. I’m of the view that we may be close to another wave of innovation, centered in the biosciences, that will drive growth and job creation over the medium run.  If we want growth and rising living standards, we need to avoid adding on well-meaning regulations that drive up the cost of innovation.

Cross-posted at Mandel on Innovation and Growth

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Posted in A New Framework for Growth and Equity, Daily Fix | 2 Comments »

The Economist: Red Tape Rising

Thursday, January 27th, 2011
Brandon Biegert


Brandon Biegert is an intern at the Public Policy Institute and senior at the University of California, Berkeley majoring in political science.

by Brandon Biegert

PPI Senior Fellow Michael Mandel talks to The Economist about the interaction between excessive regulation and innovation:

Also unquantifiable is the innovation that may be deterred by regulation. Michael Mandel, a scholar at the Progressive Policy Institute, a think-tank, says some of Mr Obama’s rules, though well intentioned, interfere with the most dynamic parts of the economy. Rules meant to deter the abuse of student aid by for-profit colleges could stunt the growth of college courses taught over the internet; tighter conditions on drug approvals, prompted by much-publicised scandals, raise the cost of drug research, especially for small companies; and “net neutrality” rules could expose internet-access providers to stifling litigation.

Mr Obama’s regulatory surge would be less damaging if it had not followed one by Mr Bush, Mr Mandel says. Because of fears about national security, telecoms and internet companies came under pressure to accommodate federal eavesdroppers. The Sarbanes-Oxley accounting law has made it more expensive for start-up companies to list their stock publicly.

Read the full article.

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The Washington Post: Obama’s call for innovation follows slowdown in most sectors, scholars say

Thursday, January 27th, 2011
Brandon Biegert


Brandon Biegert is an intern at the Public Policy Institute and senior at the University of California, Berkeley majoring in political science.

by Brandon Biegert

PPI Senior Fellow Michael Mandel discusses the need to reinvest in American innovation with the Washington Post reporter Brian Vastag:

Innovation scholars point to a “valley of death” where new technologies go to die. The federal government funds basic research. Private industry commercializes technologies springing from that work. But crossing the chasm between the two can be hugely difficult.

“We have investors with lots of money, and we have entrepreneurs with ideas that can get you across the valley of death,” said Michael Mandel, an economist who tracks American innovation for the Progressive Policy Institute in Washington. “But it’s a lot easier when you have a big winner out there, a gleaming star in the distance.”

Read the full article

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State of the Union on High-Speed Rail: How to Pay for Fast Trains

Thursday, January 27th, 2011
Mark Reutter


PPI Fellow Mark Reutter is the former editor of Railroad History and author of Making Steel: Sparrows Point and the Rise and Ruin of American Industrial Might (2005, rev. ed.).

by Mark Reutter

In setting a national goal of providing high-speed train service to 80 percent of Americans by 2035, President Obama challenged himself and Congress to come up with a way to finance the biggest transportation program since the Interstate Highway System.

The president called on Congress to “redouble” efforts to rebuild the nation’s transportation infrastructure and advance high-speed rail (HSR) even as it cuts elsewhere. He framed the issue as part of our generation’s “Sputnik moment” where the world has changed and government investment is needed to generate growth and stimulate private innovation.

“We do big things,” he said, wrapping HSR in the mantle of other federal initiatives, such as Transcontinental Railroad initiated by Abraham Lincoln and the highway system inaugurated by Dwight Eisenhower, that transformed American life.

Obama can start by submitting to Congress a radically reformed six-year surface transportation appropriations bill to replace the expiring act known as SAFETEA-LU, as we argued in a recent memo.

SAFETEA-LU has already been lambasted by Congress’ own advisory group, the National Surface Transportation Policy and Revenue Study Commission, as directionless and dysfunctional.

The commission has pointed out that $24 billion was appropriated to more than 5,000 congressional “earmarks.” That means that each member of Congress got to pick an average of 10 projects for their districts without any outside review. Such earmarking has made highway funding a poster child of the kind of pork-barrel spending that House leaders – and many Tea Party-backed House Republicans – vow to slash.

So here’s the President’s chance to cut government waste while securing long-term HSR funding. The new bill should allow money collected through the Highway Trust Fund to flow to HSR. Eliminating earmarks and such peripheral programs as Safe Routes to Schools could free up $5 billion a year for rail construction – or $30 billion over the bill’s lifetime – without requiring an increase in the federal gas tax, which is an anathema to Congressional Republicans.

The administration should also think of creative ways to leverage public monies to seed private capital for HSR construction. It was great to hear the president allude in his speech to private investment as a way to finance his rail program. We need to hear more as Secretary of Transportation Ray LaHood develops tangible ways to leverage private capital, including capital promised by foreign train builders.

Using federal money to seed private-sector investment has long been advocated by John Mica (R-Fla.), the new chair of the House Transportation and Infrastructure Committee. Mica, who is responsible for drafting the next surface transportation bill, could be a constructive partner with the Obama administration.

Mica supports “true” high-speed rail as a transformational technology and has been critical of the administration’s allocations of federal stimulus funds to higher-speed conventional rail projects.

We have shared his concern that the administration, in its first round of grants a year ago, spread funds that would marginally improve passenger train speeds on shared track with freight railroads. Since then, the administration has placed much more emphasis on getting a dedicated high-speed route under construction between Tampa and Orlando and jumpstarting California’s high-speed line between Los Angeles and San Francisco.

Mica wants to use private capital to underwrite high-speed rail development in the Northeast Corridor. He is holding a hearing today in Manhattan where he will take testimony from New York Mayor Michael Bloomberg, former Pennsylvania governor Ed Rendell, Thomas Hart of the U.S. High Speed Rail Association and Petra Todorovich of the Business Alliance for Northeast Mobility.

Obama demonstrated on Tuesday his commitment to the vision of high-speed rail. Mica can turn this vision into funded reality in a divided government. And Ray LaHood, a former Republican congressman who knows Mica quite well, says he is open to finding common ground. How these gentlemen interact over the next six months will bear close attention.

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Posted in A New Framework for Growth and Equity, Daily Fix | 1 Comment »

The Right Growth Formula

Monday, January 24th, 2011
Will Marshall


Will Marshall is the president of the Progressive Policy Institute.

by Will Marshall

The specter of economic decline is haunting America. President Obama seeks to banish it by making jobs and U.S. competitiveness the centerpiece of his State of the Union report to Congress tomorrow. This sets the stage for a critical contest between dueling theories about how America can get its economic mojo back.

Over the weekend, Republicans flooded the media with preemptive strikes against Obama’s expected calls for boosting public investment to spur growth. “With all due respect to our Democratic friends, any time they want to spend, they call it investment, so I think you will hear the president talk about investing a lot Tuesday night,” GOP Senate leader Mitch McConnell told “Fox News Sunday.” “This is not a time to be looking at pumping up government spending in very many areas.”

True to form, Republicans have a very simple theory for rekindling jobs and growth: Cut federal spending. That’s why they’ve tapped their leading fiscal hawk, House Budget Committee Chairman Paul Ryan, to respond to Obama’s speech. And Rep. Michele Bachmann will offer an unofficial, “Tea Party” riposte to the President online.

Now, I’m all for fiscal discipline. I’ve chided progressives for posing a false choice between deficit reduction and economic growth. Restoring fiscal stability is an essential ingredient of any credible plan for robust growth.

But cutting spending by itself won’t help us rebuild our infrastructure (which is the foundation for productivity), strengthen our comparative advantage in science and technological innovation, or produce a highly skilled workforce. As virtually all serious economists recognize, these are tasks for government.

Yet today’s Republicans are so besotted by anti-government populism that you can’t even count on them to be good capitalists anymore. Perhaps conservative think tanks should organize seminars to reacquaint House Republicans with Adam Smith, whose defense of laissez faire economics did not blind him to government’s responsibility to supply public goods like roads, ports and education. As he wrote in the Wealth of Nations:

The third and last duty of the [government] is that of erecting or maintaining those public institutions and those public works, which, although they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could not repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain.

As PPI maintains in Getting America Moving Again, a new Memo to President Obama, it will take both more public investment and more dynamic markets to reinvigorate our economy. We need to boost spending on research and commercialization of new inventions. We also need to boost spending on modernizing the nation’s transport and energy infrastructure – for example, by building high speed rails and smart grids that can accommodate clean energy generation. This can and must be done within a new framework for restoring fiscal stability that cuts tax expenditures, caps spending on defense and domestic programs, and most importantly, slows the unsustainable growth of the big entitlement programs.

At the same time, we also need to revamp archaic tax and regulatory policies that dampen incentives for economic innovation and entrepreneurial risk-taking. To that end we have proposed a base-closing style commission charged with culling the accumulation over time of burdensome rules and regulation.

In truth, neither party’s economic orthodoxies are equal to the challenge facing our country. That’s why President Obama needs to challenge both sides tomorrow to unite behind a bold plan for a national economic resurgence.

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The Republicans Take Out Their Budget-Cutting Scissors

Friday, January 21st, 2011
Ed Kilgore


Ed Kilgore is a PPI senior fellow, as well as managing editor of The Democratic Strategist, an online forum.

by Ed Kilgore

Now that we’re past the Kabuki exercise of the health reform “repeal” vote (for the record, just three House Democrats voted for repeal); the attention of Congress is inevitably refocusing on spending issues.  And that intrepid group of very conservative folks, the House Republican Study Committee, has come forward with the year’s first semi-detailed list of non-defense discretionary cuts, which along with some pixie-dust math and a lot of TBD across-the-board measures, is said to amount to $2.5 trillion over ten years.

The proposed cuts fall into three basic categories: long-time deficit reduction targets that sound good but don’t accomplish much (the “mohair subsidy” and such small federal programs as the Economic Development Administration and the Appalachian Regional Commission); highly political targets closely associated with Democratic initiatives or constituencies (national and community service; Davis-Bacon “prevailing wage” rules; NEA and NEH; Title X Family Planning); and bigger-ticket items that involve massive reductions in federal or state employment and/or services (cancelling the enhanced Medicaid match rate).  There are also proposals that would raise some large foreign policy concerns, such as elimination of USAID and of economic assistance to Egypt.

It’s notable, of course, that these proposals do not touch the defense or homeland security sectors of federal spending—or Social Security and Medicare, for that matter.  According to an analysis by the Center for Budget and Policy Priorities, the RSC’s overall spending goals require an overall reduction of 42 percent in the areas it does not exempt.

One issue that conservatives will likely refuse to debate is the potential impact of such cuts on economic recovery, since they categorically reject Keynsianism these days and also refuse to accept public employment as real.  Said RSC member Tom McClintock (R-CA): “Presidents like Hoover and Roosevelt and Bush … and now Obama, who have increased government spending relative to GDP all produced or prolonged or deepened periods of economic hardship and malaise.” Democrats used to charge Republicans with wanting to bring back the fiscal policies of Herbert Hoover, but now Hoover himself is being rejected as a big-spending liberal, reflecting a view of the Great Depression that was exceptionally fringy until very recently.

The RSC package is probably intended as something of a mine canary for the official House Republican non-defense-discretionary spending offensive that will occur in conjunction with the expiration of the current continuing resolution for appropriations and a vote to increase the public debt limit.  It will be interesting to see exactly how many Republican lawmakers line up behind the package, and if any strongly object to provisions that will definitely cause them political heartburn.

In a related note, Republicans have chosen House Budget Committee chairman Paul Ryan of Wisconsin to present their response to the State of the Union Address.  This indicates the extent to which GOPers want the 2011 focus to remain on budget cuts.  Ryan’s success may also determine whether his name keeps coming up as a possible dark horse 2012 presidential possibility.  Ryan, of course, is closely identified with a budgetary approach (his famous 2010 “Road Map”) that includes significant changes in Social Security and Medicare.  Perhaps consideration of what a non-entitlement-reduction budgetary offensive like RSC’s would involve will revive Republican interest in Ryan’s original thinking.

In non-legislative political news, the big headline was Sen. Joe Lieberman’s decision against running for a fifth term in 2012.  With major rivals lining up in both parties, and with Lieberman’s approval ratings in Connecticut looking very poor, his retirement decision was no great surprise.  But the discussion of his legacy will be interesting, since few recent political figures have stimulated such widely disparate assessments, from centrist martyr to unprincipled backstabber.

On the 2012 presidential front, reports indicate that Sarah Palin is finally making some concrete inquiries about what it would take to start up a proto-campaign in Iowa, and pressure continues to mount on Mike Pence to eschew an Indiana gubernatorial run and give cultural conservatives a guaranteed champion in the White House field.  A new PPP poll shows Mike Huckabee opening up a comfortable national lead among Republicans for the 2012 nomination, with 24 percent of the vote, and Sarah Palin and Mitt Romney tied for second at 14 percent and Newt Gingrich not far behind at 11 percent.

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The History of Retrospective Regulatory Review

Thursday, January 20th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

As part of President Obama’s executive order on “Improving Regulation and Regulatory Review,” he called for agencies to conduct  ”Retrospective Analyses of Existing Rules,”  and to “modify, streamline, expand, or repeal” the ones that are  ”outmoded, ineffective, insufficient, or excessively burdensome.”

Definitely moving in the right direction….but the key is how to implement this requirement in a way that works. Unfortunately, the track record of agencies performing such mandatory retrospective analyses on their own rules is not dissimilar to the results of doctors conducting surgery on themselves.

I quote from a 2007 GAO report entitled  ”Reexamining Regulations: Opportunities Exist to Improve Effectiveness and Transparency of Retrospective Reviews.”

Every president since President Carter has directed agencies to evaluate or reconsider existing regulations. For example, President Carter’s Executive Order 12044 required agencies to periodically review existing rules; one charge of President Reagan’s task force on regulatory relief was to recommend changes to existing regulations; President George H.W. Bush instructed agencies to identify existing regulations to eliminate unnecessary regulatory burden; and President Clinton, under section 5 of Executive Order 12866, required agencies to develop a program to “periodically review” existing significant regulations.17 In 2001, 2002, and 2004, the administration of President George W. Bush asked the public to suggest reforms of existing regulations.

<snip>

For the mandatory reviews completed within our time frame, the most common result was a decision by the agency that no changes were needed to the regulation. There was a general consensus among officials across the agencies that the reviews were sometimes useful, even if no subsequent actions resulted, because they helped to confirm that existing regulations were working as intended.

<snip>

Our limited review of agency summaries and reports on completed retrospective reviews revealed that agencies’ reviews more often attempted to assess the effectiveness of their implementation of the regulation rather than the effectiveness of the regulation in achieving its goal.

<snip>

Agencies reported that the most critical barrier to their ability to conduct reviews was the difficulty in devoting the time and staff resources required for reviews while also carrying out other mission activities.

<snip>

Most agencies’ officials reported that they lack the information and data needed to conduct reviews. Officials reported that a major data barrier to conducting effective reviews is the lack of baseline data for assessing regulations that they promulgated many years ago. Because of this lack of data, agencies are unable to accurately measure the progress or true effect of those regulations.

<snip>

Agencies and nonfederal parties also considered PRA [Paperwork Reduction Act--MM]requirements to be a potential limiting factor in agencies’ ability to collect sufficient data to assess their regulations. For example, EPA officials reported that obtaining data was one of the biggest challenges the Office of Water faced in conducting its reviews of the effluent guideline and pretreatment standard under the Clean Water Act, and that as a result the Office of Water was hindered or unable to perform some analyses. According to the officials, while EPA has the authority to collect such data, the PRA requirements and associated information collection review approval process take more time to complete than the Office of Water’s mandated schedule for annual reviews of the effluent guideline and pretreatment standard allows.

This last one is especially fun, and shows up over and over again in the literature on retrospective regulatory review. Basically, the OMB has to review and approve data collection by the government, which means that collecting data to prove that a regulation doesn’t work requires more paperwork.

This piece is cross-posted at Mandel on Innovation and Growth

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Chinese-U.S. Exchange Rates and Knowledge Capital Flows: Why We Feel Poorer

Wednesday, January 19th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

The short summary:   The Chinese policy of buying dollars can be best understood as an indirect purchase of U.S. knowledge capital–technology and business know-how.  That, in a nutshell, is why we feel poorer today. Unless the Obama Administration understands the link between the undervalued yuan and the global  flows of knowledge capital,  negotiations with China are doomed to fail.

Viewed in the usual economic light, Chinese exchange rate policy in recent years looks like a gift to the U.S..   By buying up dollars to keep the yuan low, China–still a poor country– is effectively lending money to the U.S.–still a rich country–to buy Chinese products.  According to the official statistics, the U.S. has run a cumulative $1.4 trillion trade deficit with China since 2005. But over the same period, Chinese ownership of  dollar-denominated financial assets in the U.S. has risen by $1.3 trillion.

To put it another way, the conventional statistics seem to be saying that  the U.S. is getting $350+ billion a year in cheap clothing, electronics products, and toys at no real cost today.  What’s not to like?

But if this explanation was really correct–if  that purchase of dollars  was a gift from China–the U.S. would  be feeling happy and prosperous right now.  We have received all of these cheap goods and services, without having to give up very many of our own resources.

But of course, the U.S. doesn’t feel rich and happy right now–we feel poorer, while the Chinese are feeling more prosperous. How can we explain this?

The  reason why the Chinese purchase of dollars seems like a gift is  because we have a 20th century statistical system trying to track a 21st century  global economy. We can do a decent job tracking the flows of goods and services and a passable job tracking financial flows.  But there is no statistical agency tracking global knowledge capital flows–and that’s where the real story is. Take a look at this diagram.

The first three boxes represent the conventional view: The U.S. gets cheap goods and services, and then pays for them by selling financial  assets.

But that leaves out the  the transfer of knowledge capital  from the U.S. to China. In effect, the Chinese purchase of dollars is a mammoth subsidy for the transfer of technology and business-know into China.

Consider this. When China keeps the yuan low, that’s an inducement for U.S.-based companies to set up factories and research facilities in China, both for sale in China and for imports back to the U.S. .  And that, in turn, requires a transfer of  technology and business know-how from the U.S. to China.

My favorite example is furniture makers.  Over the years, U.S. furniture makers had accumulated this vast storehouse of knowledge–for example, how to make  coatings on dining room tables that are less likely to chip or discolor from heat or liquids. That’s one of the differences between a low-quality and a high-quality table.

As the manufacturing of furniture was offshored to China, the knowledge capital had to be transferred as well.   And that, in turn, helped turn the Chinese furniture industry into a global exporting powerhouse.

Now, let’s stop and make  three points here. First, we need to compliment China. It is not easy to absorb knowledge capital from the outside and make good use of it.  Frankly, all sorts of other countries could have tried the same exchange rate trick, and it wouldn’t have worked for them.

Second, the transfer of knowledge capital to China doesn’t mean that the same knowledge capital  disappears in the U.S. However, our knowledge capital  does become less valuable because there is more global competition–and that’s why we feel poorer. (see my earlier post on the writedown of knowledge capital)

Third, what’s needed from Washington is a sophisticated  response that both focuses on rebuilding our own knowledge capital, while at the same time slowing down the exchange-rate knowledge capital pump. More to come on this.

crossposted at Mandel on Innovation and Growth

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Posted in A New Framework for Growth and Equity, Daily Fix | 1 Comment »

Obama Endorses Innovation as Regulatory Principle

Tuesday, January 18th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

Today President Obama took a big step towards improving the federal regulatory process. In particular, he came out with an executive order that addresses two of my big concerns: The cumulative effect of regulations, and bringing innovation as a key goal in the regulatory process.

Sec. 3.  Integration and Innovation.  Some sectors and industries face a significant number of regulatory requirements, some of which may be redundant, inconsistent, or overlapping.  Greater coordination across agencies could reduce these requirements, thus reducing costs and simplifying and harmonizing rules.  In developing regulatory actions and identifying appropriate approaches, each agency shall attempt to promote such coordination, simplification, and harmonization.  Each agency shall also seek to identify, as appropriate, means to achieve regulatory goals that are designed to promote innovation.

This is very important.  Up to this point, innovation has just not been part of the regulatory assessment process at all. Similarly, the cumulative impact of regulation has not been taken into account at all. I applaud the Obama Administration for this change.

However, the Obama initiative doesn’t go far enough to set out the principle of countercyclical regulatory policy–that is, stressing the importance of encouraging  growing and innovating industries during this period of economic weakness, and only regulating if necessary.

In addition, at the Progressive Policy Institute, we’ve been working on a proposal for  a Regulatory Improvement Commission. The RIC,  modeled on the BRAC commission, will provide a transparent and systematic process for identifying regulations that can be improved or pruned, while  maintaining important social values. Stay tuned.

This piece is cross-posted at Mandel on Innovation and Growth

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The Washington Post Gets its Signals Wrong on High-Speed Rail

Friday, January 14th, 2011
Mark Reutter


PPI Fellow Mark Reutter is the former editor of Railroad History and author of Making Steel: Sparrows Point and the Rise and Ruin of American Industrial Might (2005, rev. ed.).

by Mark Reutter

One might expect, with a disastrous oil spill just behind us and gas prices predicted to soar to $5 a gallon by 2012, that the Washington Post would address the Obama administration’s alternative to oil-based transportation with nuanced understanding.

Sad to say the paper has instead served up an editorial full of misinformation about the administration’s high-speed rail project in California. The proposed 200-mph train system between southern California and the Bay Area has been in the crosshairs of House Republicans led by Jerry Lewis (R-Cal.), who has introduced a bill to force the return of $2 billion in federal stimulus funds awarded to the project.

The Post has placed its prestige behind Lewis (without saying so) by calling for a halt to the project until its costs, route alignment, potential ridership, and other details are studied to some unspecified level that meets the paper’s approval.

To justify such a draconian proposal, much at odds with the prevailing bipartisan support for rail in the state, the Post characterizes the project as a flakey California “experiment” – a suggestion that’s pretty far removed from reality.

The railway is based on technology that’s been in operation for 46 years in Japan (where it has carried three billion riders without a single fatality) and has spread throughout Europe and southeast Asia. China is committed to opening a dozen HSR lines equal in size and complexity to the California project.

The editorial says that “a series of skeptical blue-ribbon documents” have called into question the financial viability of the system. “Most damning” of these documents is a report by the California High-Speed Rail Peer Review Group calling official estimates of potential ridership so unreliable that they “offer little basis for proceeding.”

Those words would be damning if they weren’t yanked out of context. They come from a discussion of the methodology of the ridership study and the assertion by one consultant that, due to large “error bounds,” the projections might or might not be accurate. Either outcome was equally possible.

The Review Group called on the California High Speed Rail Authority to reexamine and refine the methodology, if needed. That’s it. There was no implication that the estimates were cooked to favor the project, as the Post implies. In fact, the Review Group went out of its way to say that no forecasting model can predict 100 percent accuracy.

The editorial continues by describing the first segment of the route, going from Bakersfield north to the small village of Borden, as the “train to nowhere.” This is plain nonsense. As explained at public hearings and on an internet posting by project CEO Roelof van Ark, the railway is not designed to terminate at Borden anymore than the Interstate Highway system planned to end in Missouri, where the first miles were laid.

Stopping temporarily at Borden was decided because the environmental review was nearly complete and the line could connect to existing rail track, allowing the new line to have “independent utility” (as required by the California legislature) before construction resumed north to Sacramento and northwest to San Francisco.

The editorial is similarly disingenuous when it says that the system “has attracted zero private capital” and has been “unable to guarantee any source – governmental or private – for almost half of the cost of completion.”

Rail consortiums in France, Germany, Japan, and Korea, as well as the U.S., have expressed interest in the project. China has told outgoing Gov. Arnold Schwarzenegger that it might underwrite California’s construction costs. But the project hasn’t yet reached the stage when companies have been invited to make bids.

If the Post read the Review Group report carefully, it would better understand why private capital has been reluctant to openly commit to the project. “The demonstration of firm public sector financial commitments will be an absolute necessity prior to approaching sources of private capital,” it stressed. In other words, investors won’t sink money into a project that’s under the threat of rescission by the likes of Rep. Lewis.

There’s more to suggest a willful ignorance of the facts pertaining to high-speed rail by the newspaper. For example, its statement that “in much of the country passenger rail can’t compete with car travel by interstate highways.” That’s only true because Amtrak trains run at 50 mph averages. As Robert Cruickshank points out, trains that zip passengers between LA and San Francisco in under three hours – or less than half the time it takes to drive between the cities on a good day – are going to change the way people travel.

The base projection of 65 million annual riders when the system is completed in 2030 may prove too low considering that California is expected to add 8-10 million more residents over the next 20 years. The Peer Review report says that the railway could “achieve high profits” once it’s finished.

That’s a bonny prospect for Californians, even if it doesn’t fit the prejudices of the Post, which ends its editorial with the revealing comment that it’s probably only in its own backyard, the Northeast Corridor, where federal rail investment “makes sense at all.”

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