Did we choose the right seven (eight if you count California) case studies?  My favorite chapter may well be the one about Britain, especially our offhand comment that it never really declined, but we knew that its exclusion would be met by howls. So, fine, there it is.

Thanks and enjoy!

The IRS actions – from targeting conservative tax-exempt organization to lying to members of Congress – were outrageous. … An increasingly polarized Washington is devouring its own. Ceaseless, take-no-prisoners political warfare, not nefarious White House plots, ravages government.

and Peggy Noonan in WSJ,

We are in the midst of the worst Washington scandal since Watergate. … The IRS case deserves and calls out for an independent counsel, fully armed with all that position’s powers. Only then will stables that badly need to be cleaned, be cleaned. Everyone involved in this abuse of power should pay a price, because if they don’t, the politicization of the IRS will continue—forever. If it is not stopped now, it will never stop. And if it isn’t stopped, no one will ever respect or have even minimal faith in the revenue-gathering arm of the U.S. government again.

Of course, I am deeply disturbed by the IRS scandal. Glenn and I are working on some op-eds to coincide with the launch that will go into more detail, not to mention the remedies we discuss in the final two chapters of BALANCE, and we are eager to talk about the real root of America’s political dysfunction in the weeks and months ahead. As a White House chief of staff once said, we shouldn’t let a crisis go to waste. Good can come of this.

A warning: Even if there are some bad Democratic apples, this scandal is more complicated than a left-right battle, no matter how criminal the actions may be. Let’s keep our eye on the nonpartisan, structural causes of political polarization.

Doubts are growing about whether China can pass the US to become the world’s biggest economy this century amid warnings that the country’s 30-year miracle is nearing exhaustion. … As of last year US GDP was roughly $15.7 trillion, compared to $8 trillion for China on a nominal exchange rate basis, the measure that matters for gauging economic power.

It helps answer one of the great questions for the future of the world. Namely, what sort of economic power will China be? Will it remain an inwardly focused nation concerned only with attaining rising incomes for its own population? Or will it become a major force in international finance, with Shanghai one day emerging as a financial center on par with New York or London?

Dr. Kane -

I happened upon your recent Palantir Night Live talk about the personnel issues in the military. The talk resonated with me because I’m facing a decision right now about continuing my recruiting process with the Air Force.  I want to defend my country and protect national security. The military sounded, to the college version of me, like the best way to do that – especially after sequestration locked down hiring at many of the three-letter agencies.

The process has raised some serious red flags, though:

1. At the officer recruiting talk at a local university, the recruiter only talked about money – how much we would make, how much we would save, what a fancy car he could drive, the marble countertops in his house, how he could buy steaks at the grocery store for $7.50. That was the whole pitch. For a lot of top performers who might enter the military, I think that money is only a small part of the picture. The recruiter wouldn’t directly answer questions about how jobs were chosen once a person entered the military, or why his boss, a top-notch fire rescue strategist, has to spend two years doing human resources before he can get promoted. In fact, he didn’t seem to understand why that even mattered to anyone.

2. I told my high school physics professor (retired Air Force) that I was applying to OTS, thinking he would be all proud and excited. He said I needed to seriously reconsider. I have another four years until I hit the maximum age to apply to OTS, so he recommended that I look for more entrepreneurial opportunities to serve my country – and only apply to OTS if I still hadn’t found a way to do that by age 26. 

It also didn’t help that the Air Force’s top guy on sexual assault prevention got arrested for sexual assault this week.

Your talk at Palantir confirmed my misgivings. Given the circumstances, would you discourage someone from entering the Air Force?

Kandace,

I will give you the same advice I would give my daughters.  Yes, you should join the military and serve for a few years if you are able, either as an officer or enlistee. I would recommend this kind of service to any young American for any one of many reasons. Just to limit the discussion to your career, and whether accepting an offer will benefit your occupational journey, the answer is still yes.

The lifelong pride you will feel, and the respect that others have for military veterans, are net pluses for your future. Basic Training alone is an invaluable experience that will enhance your life. It will boost your confidence, your awareness of selfless service and orientation towards the team & mission, and your toughness in negotiating hurdles. No bureaucracy or challenge has ever struck me as troublesome after my half decade on active duty.

Are there jerks and toxic leaders in uniform?  Yes, but welcome to the real world. Jerks are everywhere in life. My sense is that the ratio of heroes to jerks is much higher in the armed forces — great friends, great commanders, and great subordinates, too. I would not give up my time in the USAF for anything.

It’s too bad your recruiter is a dunce. That happens. Unlike you, a lot of people are worried that military service means less compensation, but maybe your recruiter overemphasized that aspect. But he’s right: the compensation is fine & higher than many realize. Unfortunately, military compensation is not very flexible or merit-based, which will chafe after a few years. And yes, the downsides of inflexible military HR are ridiculous, and there is a terrible to randomness to who gets caught up in its dysfunction. The senior ranks at the Pentagon know it and are working on that. Still, even if you get one or two bad assignments, the net positives outweigh the negatives.

My advice is to do what you can to serve for the initial 4-5 years in the Air Force, Navy, Army, or Marines … and don’t forget the Coast Guard. If another stint at that 5-year point is appealing, proceed, but you should always be thinking about what’s next (true in all careers). There is no dishonor in serving for the basic 4-year commission, then applying yourself elsewhere.

Hope that helps, Kandace.  Aim High!

Tim

Update: changed “write” to “right”.  A righter should know this!

If not, click http://www.cato.org/multimedia/events/fixing-guest-worker-visas

Adam Davidson writes a stellar NYT magazine cover story about Glenn & Larry Summers. I cannot clip and do it justice here, so please click to read directly.  There is one paragraph I’d like to deconstruct, as they say:

Summers, who once told me “I don’t do apocalypse,” acknowledged that some entitlement reform is inevitable, but that it is not the real adjustment that needs to be made. “That is playing defense,” he said. “It is essential but insufficient.” Instead, Summers wants the country to start playing offense: the crisis that demands our attention now, he says, is long-term unemployment. Millions of Americans have been out of work for more than half a year, many for much longer; not only are they suffering, but the overall economy is poorer without their contribution. Summers argues that the U.S. government can address this problem in several ways, especially by committing to more government spending, notably on infrastructure.

My longtime friend and onetime boss Donald Marron once said something almost identical to “I don’t do apocalypse,” and I respect that. But I grew up thinking a lot about nuclear war, served in a cold war U.S. Air Force, worked in HUMINT before it was cool, and so thinking about the big risks is more appealing and perhaps natural for me. I find the confidence of many peers quaint, and would say that they suffer from a failure of imagination. The Romans, too, never imagined a world without Rome.

“Some reform is inevitable … and essential.”  That’s an important line: not just a concession but a demand. Our friends on the right need to read stuff like this and recognize that Larry Summers and Democrats like him are our ALLIES.  We would do well to treat them that way.

“The crisis that demands our attention now, he says, is long-term unemployment.” Yes, weak labor demand is THE problem, agreed, but it is a symptom not a cause. So when he discusses remedy, it is superficial instead of structural. Oddly, Davidson describes the long-term unemployed out of work for half a year or longer, when the dysfunctional labor market has been broken for nearly half a decade. And we have discussed the root issue here many times: labor force participation is plummeting.

Summers big solution: “more government spending, notably on infrastructure.” This is such a tired idea, but let’s break it down.  Why infrastructure spending?  There is some underlying model in Summers’ brain about how growth happens, and I think he thinks growth is a function of scale. More infrastructure yields more tightly connected markets, hence more scale, more specialization, more productivity. Viola!  Where this reasoning fails is that there are lots of ways to generate scale that don’t cost the government money. Why don’t we do THOSE things, easy things that Republican and Democratic economists agree on?  More international trade, for starters: let’s lower barriers, tariffs, quotas, and subsidies to commodity industries (e.g., most agriculture). And why not do some the easy thing on immigration: green cards for foreign-born, American-educated scientists and engineers?

The reasons liberal economists talk about infrastructure is NOT because of scale, but because it is a vehicle to advocate for more aggregate demand stimulus through fiscal deficit spending. And there’s the rub. That is not part of any growth model. It is a stability model, at best, and temporary.

Keynes quipped: In the long run we are all dead.

I quip: When does temporary end?

It must be remembered that the same analysis was done by the same author in 2007, then warning the cost of amnesty was $2.6 Trillion (HT Andrew Stiles). But the current report indicates that the status quo cost of unlawful immigrant households is roughly half of the amnesty cost, which means YOU are already paying $3.15 Trillion. By this logic, the status quo (thanks to inaction six years ago) is more expensive than if reform had passed in 2007, to the tune of half a trillion dollars. The pileup of outlandish Heritage estimates presents a credibility hurdle.

The report’s authors may sincerely believe that unlawful immigrants are costly, but their study clearly makes assumptions to prove that point, while ignoring research to the contrary. Here are just a few observations:

1. The most glaring error is the weak alternatives comparison. This paper asserts a cost of “amnesty” as if migrants are only costly if a new piece of legislation passes. What is the cost of the status quo?  Table 8 (p 24) purports to make this comparison but it is confusing (calling it a phase) and sketchy — avoiding a direct comparison of the bottom line cost.  The 3.15 T number is my own estimate … it really is incumbent on the authors to provide this themselves, and not offering such a number raises questions. The details are no better: no Obamacare costs for the status quo? A tripling of direct welfare costs after legislation passes yet tax revenues hardly budge?

2. There is no dynamic analysis. The authors estimate fiscal benefits only (and weakly), but ignore economic benefits entirely. This fails the longtime Heritage claim to support dynamic analysis in tax and security policy. Charts 5 and 6 on page 16 show a net UIHH (unlawful immigrant household) fiscal deficit of $14,387.  Note that this is based on annual UIHH earnings of $38,988.  Unless they expect readers to believe all this household income (a) generates no productive work (e.g., makes product, mows lawns, nurses the sick, and starts businesses that hire other Americans) and (b) is 100% remitted abroad, consuming nothing in the U.S. macro economy, then the report is misleading. Millions of migrants cannot help but add to the GDP, and more importantly to specialization and growth. Dynamically, there are at least two huge channels of positive feedback into the productive side of U.S. economy – think of less expensive farm produce and greater demand for housing.  

At best, the authors make a compelling case that the U.S. welfare system is dysfunctional. That is true with or without a guest worker program, or with green cards for STEM, or with much of anything to do with immigration.

The net effect of this Special Report does real damage to the cause of dynamic analysis. For more than a decade, Heritage has called on CBO to add dynamic analysis to its tax reform studies. I could not agree more. And now, ironically, I can only hope CBO does an analysis of immigration reform that will show how skewed the Heritage immigration work has become.  Will it be a plus or minus for reform?  I don’t know, but I trust it will be honest even if undynamic.

UPDATE: A friend from Heritage kindly pointed out to me some pages in the study that address my objection #1. I stand corrected. Unfortunately, the fact that the report’s authors actually did a status quo comparison does not help the credibility of the report. It demolishes it.  The key material is all on page 30. Let me quote two sections:

As noted, there currently are few unlawful immigrants over age 50. … If one assumes that under current law, most unlawful immigrants will return to their country of origin around age 55, the lifetime fiscal costs of unlawful immigrants under current law are comparatively low: only around $1 trillion.

Okay … but who would seriously assume that?  No evidence suggests illegal immigrants have their 55th birthday party and, like it’s Logan’s Run or something, head across to Tijuana or Toronto. This is the equivalent of “if we just assume Syrians and Israelis wake up tomorrow and realize they’re just one big happy family, we can disband the U.S. Navy and all its costs.” Later, the text says:

However, there is a loophole in existing law that may allow many or most current unlawful immigrants to achieve lawful status … the open-ended provision of green cards to the foreign-born parents of U.S. citizens. A majority of adult unlawful immigrants have children who were born in the U.S.

So, the report admits it is making a flawed assumption and its $1T status quo cost estimate is baloney. What exists is de facto amnesty, exactly what Senator Marco Rubio said was the justification for a comprehensive reform, with triggers, with e-verify, etc. Make realistic assumptions and Poof! there are no net costs to comprehensive reform.

Political paralysis leading to fiscal collapse is the “existential threat” facing America, argues this stimulating, contentious economic history. … Theirs is political economy with a grand historical sweep—and provocative implications for the present.

We will try to get word to PW that the publication date was accelerated by Simon & Schuster to May 21.