Monthly Archives: January 2013

New publication date: 5/15/13

This is not carved in stone, but our publication date is firming up and very close to the original target. The new pub date is May 15, 2013. Ides of May.  

We also have a new subtitle.  I cannot remember what it is, but it includes the word economics.  I think it is “The Economics of Great Powers from Ancient Rome to Modern America.”

Designing a cover has been really interesting.  Simon & Schuster has access to some amazing design talent, and we have really liked all of the options. Can only pick one? We actually recommend a few months ago that a trillion dollar coin on the cover would be eye-catching, but the editors said we weren’t taking the national debt seriously enough. That kind of thing would barely work in fiction. Those silly economists!

Uncompromising: Obama’s 2nd Inaugural

President Obama’s second inaugural address was inspiring, the messages of inclusiveness most sweet, but I have to add my voice to the chorus of disappointment. I had a dream the day prior that some truly nonpartisan commitments would pass his lips along the lines of “Let us bind up the nation’s wounds.” With history offering this young president a second chance to carve some immortal words, to take a stand apart from partisans totems, he retreated to the easy path of slogans that sees the world divided into his allies and his small-minded opponents.

In a word, the President was uncompromising. That is the unmistakable subtext of his attitude since last year, which made sense during an election, but Obama has now affirmed that not compromising will be the essence of his second term in the White House. Key cabinet appointments confirm the uncompromising approach he intends on economic and defense matters.  Some might call it principled, but his weighty speech only poured more concrete into the extremist economic positions of the Democratic party: affirming a view of rich-versus-poor, claiming the economy has recovered (!), calling for more public goods as the thing-to-be-done with mere rhetorical gestures toward entrepreneurship and individual responsibility. The worst line, and one that will haunt the next four years, is his hard line against recognizing the fiscal imbalance of entitlements. I was shocked to hear it:

“The commitments we make to each other through Medicare and Medicaid and Social Security, these things do not sap our initiative, they strengthen us.”

The word deficit was mentioned only once, briefly, but not debt, not the scope of the problem, not the dark shadow that fiscal issues cast over America’s future. Obama is long overdue on his past promises to make hard choices, but he makes the same empty promise again, then proceeds to offer strawman choices:

“But we reject the belief that America must choose between caring for the generation that built this country and investing in the generation that will build its future.”

Who doesn’t reject that? What’s the point, then?

But that line was like so many others in the speech: logically impaired. I tend to read the text with a critical mind, but some lines make no sense. A sampling, just from the first section:

Together, we determined that a modern economy requires railroads and highways to speed travel and commerce, schools and colleges to train our workers.

Why this empty marker “modern economy?” Did ancient economies not enhance their productivity with roads? Did higher levels of human capital have no benefit in previous times or in non-democratic societies? No and no. But the implication is that government has a provisioning role–one that “we determined”–which is not logically coherent. If anything, there is an emerging recognition that centrally managing transportation and education through the government, insulated from market forces, is inefficient. In the two months that this speech was being drafted, the world famous beltway around DC was introducing new, dynamic toll lanes. The coincidence is almost funny. Meanwhile, public schools are transforming from command-oriented to market-oriented through the relentless expansion of charters and vouchers. Yet in DC, the Obama administration chose to let a very popular voucher program expire, leaving countless poor kids trapped in bad schools. A visionary president would have described the forces in play. We can imagine individualized learning and credentialing that displace industrial-era diploma factories. But no.

Together, we discovered that a free market only thrives when there are rules to ensure competition and fair play.

What does this sentence mean? Rules exist to define what ‘fair play’ is. Ensuring fair play is about enforcement of rules, not rules themselves. What the President seems to want to say is that the liberal orthodoxy of regulation is better than anarchy or what the left calls market fundamentalism. So? Again, who disagrees with that? As a statement here, he is asserting bluntly that more rules mean more fairness. That fails logically, and is disappointingly shallow. Why not a whisper about regulations that choke entrepreneurial dreams of the poorest Americans? Why is risk-taking the privy of well-connected venture capitalists with money for tax and regulatory compliance? His ideas here fail as badly as his words.

Together, we resolved that a great nation must care for the vulnerable, and protect its people from life’s worst hazards and misfortune.

The President trying to establish a marker that there was (and naturally is) a consensus that the government is the insurer of last resort. Because, we all know, private insurance fails, right? So what will Americans say when death (one of ‘life’s worst hazards’) keeps happening, and at more expense to the dying, in the wake of the federal government’s expansive new role as the health insurer of last resort? As a principle, insurance in this worldview is a blank check. It holds: the damage from any misfortune, especially in this era of man-made climate change, is surely not to be the responsibility of the individual who builds a home on a sandbar, but on his fellow citizens.

I appreciate the sleight of hand, to assert that these principles are fundamental liberties, to be found in the best intentions of the Framers. But they not. Liberty means freedom TO do things, not freedom FROM things.

I have to admit that Glenn and I were worried that our book would lose almost all of its relevance if the political climate in DC improved. Our prediction is that political compromise is becoming less possible. Woe to book sales if Obama overcame the baser pressures of our times. Well, not to worry for the book’s message — it is more valid today than when we first proposed it. But even more to worry for the country, as we embark on four years of an uncompromising White House.

Bleeding Talent coverage — Army of None

I’ve been fortunate to receive some media attention following the publication of Bleeding Talent (which effectively sold out on Amazon.com & is being filled on back order, but seems available at bn.com here). Foreign Policy had asked me weeks ago for permission to publish an excerpt, which they edited along with some extra remarks from me into an article on their website (it has been the #1 most read piece on their site since last Friday, and in my opinion is as good as anything in the book itself — that’s the power of good editors).  However, even before it was published, the New York Times ran a positive review in the weekend paper, which has opened many other doors. I never expected an academic book about personnel policy to get this much media attention, and I suspect the explanation is that it touches a nerve with the majority of enlistees and officers who serve.

I know there are a lot of folks who want to discuss the ideas in Bleeding Talent with me personally, which is great. I welcome comments here on this post and will be happy to interact. Two rules: first, no personal attacks or curse words. Second, the first rule shall be suspended for Navy football. Or you can write to me privately at tim AT hudson.org.

Here are some links:

  • New York Times book review, January 5, 2013 (excerpt below)
  • Forbes.com book review, January 8, 2013
    Foreign Policy, “An Army of None,” January 10, 2013
  • NPR “On Point” with Tom Ashbrook 11:00-11:40 AM, January 13
    (To listen: click here)
  • HUDSON Event : scheduled for January 31, 10 AM at Hudson HQ (you can register or watch live via web streaming via this link at hudson.org). The event will be hosted by my colleague Chris DeMuth, including a panel with GEN Jack Keane (USA, ret.), LGEN David Barno (USA, ret.), and COL Martha McSally (USAF, ret). May be covered by C-SPAN.

The Military Machine as a Management Wreck

By FRED ANDREWS
The New York Times
January 5, 2013

IT was once a wry joke that the military was designed by geniuses to be run by idiots. Not anymore, Tim Kane writes. As an all-volunteer force, the young men and women who serve these days are top drawer; it is the institution that is idiotic, he argues. And he has a drastic remedy in mind: a dose of classic economics.

… Mr. Kane knows whereof he speaks. An Air Force Academy graduate, he worked in military intelligence for five years before resigning, in the mid-1990s, after the Air Force declined to send him for graduate studies in economics. He is now chief economist at the Hudson Institute, a conservative research group. In the years between, he helped start a couple of small companies and picked up a taste for entrepreneurship.

… In 2005, Mr. Kane made a mark with empirical studies demonstrating that the “myth of the stupid soldier” is indeed a myth. His data showed that the enlisted ranks were brighter and better educated than their civilian counterparts.

… ACCORDING to Mr. Kane, “the root of all evil in this ecosystem” is the Defense Officer Personnel Management Act, enacted by Congress in 1980 to standardize military personnel policies. But the system has defied efforts by successive defense secretaries to bring about change. That act binds the military into a system that honors seniority over individual merit. It judges officers, hundreds at a time, in an up-or-out promotion process that relies on evaluations that have been almost laughably eroded by grade inflation. A zero-defect mentality punishes errors severely. The system discourages specialization — you can’t expect to stay a fighter jock or a cybersecurity expert — and pushes the career-minded up a tried-and-true ladder that, not surprisingly, produces lookalikes.

 

BBC radio

I was a guest on BBC  radio’s World Business News (MP3 link here) for what turned out to be a rather mild debate with CAP Action’s Tom Perriello. The segment is about 10 minutes long.

Our host asked, “Is this any way to run an economy?” I laughed that the alternative is a philosopher-king.  A better answer would have been what we say in the book: No. There are a variety of rule sets to organize a democracy, and the ones predominant in advanced countries are indeed dysfunctional. We can do better, short of dictatorship.  I wish I hadn’t been so glib on air, but I find myself defending the basic notion of democracy too often, so it was a reflex. What the U.S. really needs to do is constrain legislators’ capacity to make long-term spending commitments beyond the political consequence horizon.

 

National Affairs & the Political Prisoners’ Dilemma

National Affairs, issue number 14, Winter 2013 contains an essay that Glenn and I authored. This essay actually predates the book proposal, deal, and manuscript and formed the nucleus of our book BALANCE. Thanks to excellent editorial revisions, the essay reads much better than what we originally submitted. Here’s a lengthy excerpt with what I think is the main contribution – the idea of a political prisoners’ dilemma:

Why do the normal political motivations and institutional mechanisms of our constitutional system not enable a solution to this obvious fiscal imbalance? To grasp the answer, we must begin by recognizing that our politicians are acting rationally. And to illustrate the point, we can look at a famous example from game theory: the prisoners’ dilemma.

Hubbard-Kane Table 1 Small Winter 2013

Originating in the work of RAND Corporation scholars in the 1950s, the prisoners’ dilemma gets its name from a thought experiment involving two suspects arrested and questioned by the police regarding a crime they are accused of having committed together. Lacking much evidence, the police separate the suspects and present both of them with the same offer: If neither suspect confesses, both serve one month in jail. If both suspects confess, they both serve three months in jail. But if one suspect confesses and agrees to testify against his partner while the other does not, the betraying suspect will go free while the betrayed suspect receives the full one-year sentence. What should the prisoners do?

At first, it seems irrational for either to confess. After all, if both hold firm, both will serve short sentences. But when one considers all the potential outcomes of their situation, and assumes that each prisoner’s prime concern is reducing his own punishment, it turns out that each prisoner is actually better off confessing and betraying the other — regardless of what the other prisoner chooses to do.

American politics today is presented with a similar dilemma. There are two paths toward reducing deficits and debts of the magnitude we face: raising taxes or cutting spending. A balanced compromise would involve some amount of both, but the two political parties face strong electoral incentives to do neither. If Republicans push for reduced spending, they are criticized for taking away the benefits people rely on. If Democrats push for raising taxes, they are decried for swiping workers’ hard-earned dollars. Both solutions are seen as taking money away from voters, and are thus fraught with political peril.

Hubbard-Kane Table 2 Small Winter 2013

Consider the matrix above, in which both Republicans and Democrats in Congress have two policy choices. Republicans always promise lower taxes, so their choice is whether to cut or maintain spending levels. Democrats, in contrast, want to keep spending high, so their choice is whether to raise taxes or keep them low.

A close look at the matrix shows that it is politically rational for the Republicans to maintain today’s unsustainable levels of spending when faced with either behavior from Democrats. And, campaign rhetoric aside, that is what they tend to do. Republicans have learned that whenever they actually legislate spending cuts, they are attacked by their opponents and tend to lose elections. They are not keen to do the fiscally responsible thing when the price is giving up power.

Likewise, whether Republicans cut or maintain spending, Democrats are politically better off if they allow taxes to stay low. This explains why, despite President Obama’s rhetoric about raising taxes, he and other Democrats have generally refrained from actually doing so, especially at the levels needed to pay for their spending. That the expiration of the Bush tax cuts was postponed until after the 2012 election was not a coincidence.

To be sure, politicians in both parties make noises about good economic choices (from their perspectives) that balance the budget, but their actual behavior is what matters. President George W. Bush oversaw the expansion of spending on entitlements, as well as on defense, education, and other discretionary programs. President Obama serially preserved Bush’s tax cuts. Politicians know what is best for the country in the long term, but they have no easy way to change their behavior now during a period of polarization in which the institutions and incentives are set up for imbalance.

This amounts to an institutional failure. For most of the nation’s history, the rules of the budget game worked. Today, however, they no longer function. Politically rational behavior is now fiscally perverse. Addressing this institutional failure thus requires changing the rules of game. The only remedy to our political prisoners’ dilemma, therefore, is to change those rules so that they in fact rule out structural fiscal imbalance — by imposing painful penalties on lawmakers for failing to budget responsibly.

The Fiscal Cliff Hangover

In itself, the so-called fiscal cliff was always a poor metaphor, as if the nation’s economy was dangerously close to a fatal dive. There were some perils, but the fundamental implication of inaction would have been for the White House to get a clean slate for 2013. I assumed, wrongly it turns out, that President Obama would intentionally fail to reach a deal with Republicans in Congress because his incentives were weighted heavily that direction. Instead, a Senate deal and a conflicted House GOP led to a last-minute agreement. The House voted in favor of the Senate deal last night. On its face, the resolution is a major Obama win, but I really think that’s all wrong.

Think about Obama’s incentives.  Polls say that Republicans would get the bulk of the blame if no deal was reached. The sunset of all the “Bush tax cuts” meant that the White House would immediately reframe the fiscal conversation as a package of Obama proposals. The DC punditry would have spent the next many, many years talking about these as “Obama tax cuts” which is not a bad brand for the Dems to build on. Third, the sequester of defense expenditures is something that many extremists on the left dearly desire, and I am not sure the President disagrees. He got none of this. Instead, he’s played his ace card: his singular identity of wanting to tax the rich more will soon be law of the land. For what? Kicking the sequester can to March 1?True, tax rates went up on the rich, but again, that ace card has now been played. It cannot be played again.

Perhaps Senator McConnell outfoxed them all. Perhaps Obama thought that  forcing Republicans to vote for tax rate increases on incomes over $400,000 per year with nary a spending cut was such good politics that it was worth locking in bad economics. The whole thing seems like a wasted opportunity to me, as it does to many others (see Bob Samuelson, Bill Gale, and  Mssrs. Bowles & Simpson).

It’s a shame that Speaker Boehner is taking such a beating from all sides because his actions, to me at least, show more leadership than almost anyone. His incentive was to get a deal done, a genuine compromise. Boehner’s Plan B, and surely his private offers as described in press reports, embodied the principles of good, wonky, bipartisan, fundamental tax reform. Deduction caps to raise revenue!  Great idea! Modifying inflation of entitlements to actually reflect real inflation and trim the growth of entitlements.  Great idea! While the President promised the poetry of “Balance,” the Speaker actually made offer after offer with equal parts revenue and spending cuts. All this goodness was spurned by the White House, to its shame.

What stinks about the final bargain is that it reveals a President unwilling to countenance even the mildest of spending restraint in the most severe crisis with the most compelling economic environment. The fiscal cliff metaphor is overrated, but the long-term fiscal crisis is not. The cost of the ATRA bill, according to the CBO, is an additional $3.6 trillion in debt over ten years. The nation sits atop a mountain of unstable debt dynamite, and every year more is added to the mountain. A trillion dollars per year, funding principally by artificially low interest rates due to monetizing by the Fed. How long can the Federal Reserve bail out the fiscal ship of state?

Maybe Obama thinks the Fed is his ultimate ace card. But when the crisis comes, when the bond market hesitates to buy new T bills with vigor, the President and the nation will be caught empty-handed.