There has been considerable debate in economics about the source of growing inequality. Is it from skill-based technological change, changes in union power, globalization, immigration, changes in tax rates favoring those at the top, changes in the minimum wage, or what? But no matter what the source of recent trends in inequality is, education is still important. You will do much better on average with more education than with less, education can help to offset inequality, education helps to ensure equal opportunity, and I believe that emphasis on education is required if we are going to compete successfully in the global marketplace.
Here's David Warsh:
Looking Forward, Economic Principles: Bull markets, it is said, like to climb a wall of worry. It is the same with political campaigns. In the wake of the Democratic National Convention, many stories are being written ... that Barack Obama just might lose the election. ...
Never mind what the polls and pundits are saying now. Barring something completely unexpected, Obama is going to be elected president in November. ... (I can't prove this, obviously. You'll just have to trust me for now.)
The really interesting question is what might Obama realistically hope to accomplish? He has made rising inequality the centerpiece of his campaign. But inequality cannot be redressed strictly, or even mainly, through taxation. What else is there? ...
As it happens, a provocative diagnosis ... has just appeared, offering a deep and durable metaphor with which to frame the problem, and an appealing new Rx with which to address it.
The Race between Education and Technology, by Claudia Goldin and Lawrence Katz, argues that it is American education that has fallen behind in its attempt to equip citizens to fit in smoothly with the new division of labor. ...
There's no doubt that inequality in the United States has increased dramatically since the late 1970s... Indeed, by 2005, the degree of inequality in the United States had reached levels not seen since before 1940... That was the beginning of the gradual evening-out of income between 1940 and 1980 known today among economists as The Great Compression of wages.
So what has caused the new inequality?
At first glance, the authors are concerned with knocking down an interpretation that has gained currency in recent years – that the advent of computers is sufficient to explain what happened. Clearly computerization is part of the story, the authors say. So are international trade, immigration and the decline in unionization. But dwelling on the demand for new skills is only half the equation. The other half is supply. And if the "supply of skills" increases apace, in the form of well-educated workers, there need be no increasing inequality.
Exhibit A, say Goldin and Katz, are the first few decades of the twentieth century. That's the period when electricity was widely adopted in manufacturing, when many new goods and services were introduced, when various "black-box" technologies emerged for manufacturing everything from paper to cigarettes. Technology raced ahead, requiring greater knowledge, skill and flexibility on the part of nearly all workers. Yet earnings inequality fell, for decades.
Why? Because, say the authors, a pool of skilled workers was available thanks to another new invention – the American high school.
The "high school movement," as it became known, is dated to 1910... All over America, the authors write, independent school districts raised taxes, hired teachers, built schools, designed curricula and enrolled students. "Americans were keenly aware that they were involved in a historic achievement and knew, as well, that they were setting America on a course far different from that being followed elsewhere in the world."
What happened to set those events in motion? The origins of the high school movement grew out of the experience of growing inequality of 1870s and 1880s, the authors say, in the decades after the Civil War, when new technology, big business, waves of immigration combined to conjure visions of a looming war between the rich and the poor. Bitter strikes and riots were hallmarks of the times. College was still mainly for clergy and lawyers... In 1888, Edward Bellamy published Looking Backward, a utopian vision of an egalitarian future of benevolent socialism whose power stemmed from its stinging indictment of the present day.
Parents in those days recognized the extent to which those who possessed some extra education were getting ahead. Increasing numbers sacrificed to send their children (mostly their sons) to a somewhat shadowy precursor of the high school, the academy. A few of the earliest examples of these institutions still survive as exclusive "prep" schools... Nearly all of them charged tuition.
It was the obvious success of the academies, coupled with a gradual thickening of demand for better-educated workers, that gave rise to the high school movement. Goldin and Katz take pains to enumerate and elucidate six characteristic "virtues" of the educational system that developed in the US after its revolution, as it gave rise to system of universal primary public education...
These would include:
1.) lots of decentralization and competition, thanks to a tradition of local control (districts as small as a township could go into the high school business, even if other nearby districts declined);
2.) public ownership of schools, financed mainly by property taxes;
3.) universal schooling, open to all and free (not until the 1950s would the legacy of slavery be tackled in this regard);
4.) separation of church and state;
5.) gender neutrality, with girls educated to about the same extent as boys;
6.) an open and forgiving system, far less forbidding than the systems of France and Germany, where rigorous examinations were required to advance.
The remarkable thing is that the invention of the high school required almost no top-down authority from the federal government, or even from the states... "An ameliorative policy," write Goldin and Katz, "in the form of the high school movement, was embraced by thousands of individual school districts, in one of the grandest grassroots movement in US history. ...
And then (for reasons about which the authors are not nearly so clear) the US education system somehow did it all again, extending "the right to a good education" ... to mean college, in the years after World War II. The GI Bill in 1944 ... and the National Defense Education Act in 1958 broadened considerably the opportunity to attend college. State support for education grew. And a steady stream of graduates poured forth – until about 1980.
But at that point, the growth in the educated American work forced slowed down. The high school graduation rate crested at around 78 percent in 1970 and has been flat ever since. The growth in average educational attainment, which averaged about a year of extra schooling per decade from 1930 until 1980, gained less than one year in the quarter century after 1980.
Again, why? ... [T]he authors say, that the "virtues" of the American educational system have turned against themselves in some degree. Decentralization led to much greater experimentation in the nineteenth century, but the logic of supporting schools almost solely through property taxation has led to much greater inequality in per-pupil expenditure among rich and poor districts than in the past. ... Today's proposals for reform include many that run counter to traditional ideals: vouchers, charter schools, public funding for church-based schools, and "high-stakes testing with real consequences." Yet the widespread bottom-up nature of these break-away institutes, charter and magnet schools, are reminiscent of the distant (and little remembered) outlines of the grassroots academy movement.
What now? Goldin and Katz offer three broad recommendations. Improve the operation of the schools themselves, so that students are better prepared by the time they are ready for college. Make financial aid more generous for college students once they arrive. Above all, spend more heavily on better pre-school interventions such as Head Start, since of the few things on which almost all expert economists can agree is that investments in early childhood education (and prenatal healthcare) pay off at a significantly higher rate than any other measure to reduce inequality. Couple these programs with some increased aid to workers at the bottom of the wage scale in the form of more generous Earned Income Tax Credits, payroll tax relief and better access to health insurance, and it would go a long way towards ameliorating the present situation.
So that's the task for Barack Obama, assuming he is elected — to find ways to "increase the stock of educated Americans," or, to put it slightly differently, to make sure that almost every young American goes to an appropriate school. What's wanted is not some lofty top-down No Child Left Behind rhetoric, but rather a considerable welling-up from the bottom, furthered in this day and age by federal dollars, such that schools once again become places of hope for poor people, not boredom and fear. It has happened before, say Goldin and Katz. Perhaps it can happen again.
The National Review, August 10, 1984. This all sounds very familiar:
II. The Ferraro Factor Walter Mondale had to do something to halt the hemorrhaging in the polls that had been taking place since he sewed up the nomination. Geraldine Ferraro appears to have accomplished this, at least for the time being. Walter Mondale, perhaps for the first time in his political career, has done something interesting, and everyone has paused to assess it.
Announcing a vice presidential choice prior to the convention was not an entirely new idea. Ronald Reagan made a similar dramatic move in 1976, and for roughly similar reasons. As it became clear that Reagan was narrowly failing to catch President Ford in the delegate count, erosion began to take place among Reagan's own delegates. He had to do something, and he named Richard Schweiker. This was so unexpected that it stopped the erosion and even added some suspense to the Kansas City Convention.
The preliminary assessment of Geraldine Ferraro among political professionals is that she probably represents a modest plus for the ticket, but that she is also capable of talking first and thinking about it only later, and is a potential embarrassment on that account. (See also "For the Record.") The choice of a woman in itself does add a touch of color to an otherwise drab Mondale operation, and Mrs. Ferraro at once appeases the feminists and appears to be acceptable to Hart, Jackson, and other assorted factions.
Like much else at the convention, Mrs. Ferraro, somewhat paradoxically, reflects the impact of Reagan. The week before the convention she made a speech in St. Paul, Minnesota, stressing the themes of "family, faith, neighboorhood, and hard work" that Reagan made popular in 1980 and has continued to stress as President. Like Mario Cuomo, Mrs. Ferraro is religious, even conspicuously so, and the word "God" was mentioned more often at this convention than at all the Democratic Conventions combined since 1960. Mrs. Ferraro, like Cuomo, is an ethnic American, and patriotic, and both serve up Horatio Alger with an ethnic twist. Mrs. Ferraro is an orthodox liberal, but with some differentiation: She opposes busing, favors tax credits for parents who send their children to private schools, and though she wants to cut defense spending sharply, did support the Trident submarine, the Pershing II, and draft registration. Cosmetically, at least, she represents an effort on the part of the Democrats to recapture their old middle-class and ethnic constituencies. She does not come across as a quiche-eating McGovernite or as an erstwhile admirer of Castro or Ho. That picture of her standing on a big tree stump with a plaid-shirted, outdoorsy-looking Mondale could also have been a nice middle-class couple in a Reagan TV ad.
If naming Geraldine Ferraro represents a modest psychological plus for the Mondale campaign, it has not, so far at least, produced anything dramatic in the polls. Prior to Mrs. Ferraro's emergence as the nominee, an NBC News poll found that while 11 per cent would be more likely to vote for a Democratic ticket with a woman on it, 15 per cent would be less likely to do so. Some politicians see her selection as amounting to a virtual write-off of the South, where Mondale desperately needs to carry at least some states, and the payoff to Bert Lance for resuscitating Mondale in the Georgia primary is not likely to repair his prospects there.
The Democrats will attempt to project the issue as "whether a woman can be Vice President," a point the Republicans can cheerfully concede, returning to the question of whether this woman in particular should be the Vice-President. There was no aroma of affirmative action about the elevation of either Jeane Kirkpatrick, a distinguished scholar and writer, or Sandra Day O'Connor, a distinguished lawyer and regional political figure. The performance in office of both women has abundantly validated their selection. But Mrs. Ferraro is manifestly an affirmative-action nominee. She has been in the House only since 1979 and cannot be said, on the record, to be as qualified to be President, if necessary, as, say John Glenn, Fritz Hollings, Mo Udall, or -- George Bush. Indeed, her inexperience may be the explanation for her gaffes about Reagan's Christianity and the absence of a woman at the Last Supper. Once the euphoria wears off, she will face tough scrutiny.
And Gus Hall is pretty sore about all the publicity Mondale has been getting for this "historic choice." After all, Angela Davis has been his running-mate for more than two months.
Consumer credit is drying up. If consumption begins to fall because of it, what will replace it, investment, government spending, net exports -- or nothing? With credit markets as they are, investment is unlikely to pick up the slack and may fall itself, and a sustained fiscal policy response seems unlikely (and monetary policy is already doing all it can to breathe new life into financial markets). That leaves net exports. So far, so good, but how much burden can it carry?:
The Death of the Credit Card Economy, by Daniel Gross: The most revolutionary notion in commerce today is one of the oldest. If you want to buy something, you may actually have to pay for it. We are reverting from a "borrow and buy" economy to the "cash and carry" model of our grandparents. ...
Students returning to college are finding that student loans have vanished. Retailers who freely extended credit to any customer with a pulse are deploying bean counters armed with sophisticated software to sniff out potential deadbeats. And when higher rates and fees don't deter their borrowers, credit-card companies resort to slashing credit lines. "We predicted there would be some degree of spillover from the mortgage meltdown," said Curtis Arnold, founder of CardRatings.com. "But the credit line reductions by big credit card companies in the last six months have been fairly unprecedented."
This shock to the system may further damage the already-fragile psychology of the consumer. Writing a check or deducting the price of a pair of shoes directly from your bank account packs a much more potent emotional punch than charging ... on your American Express platinum card. ...
The availability of credit also changes the calculus people use to determine what they can afford. Blowing $6,000 on a week in Tuscany might be tough to swing if you have to pay for it all next month. Convince yourself it's a once-in-a-lifetime experience that you can pay for over three years, and it becomes a bargain. With credit, Saturday night means dinner and a movie. When you pay cash and have a fixed budget, it's dinner or a movie.
The tightening of credit is forcing more people to confront these uncomfortable choices. ... In effect, the lack of credit makes things seem more expensive to consumers...
Do executive term limits increase the likelihood of inter-state conflicts? According to this research, the answer is yes:
Democracy and accountability: The perverse effects of term limits, by Paola Conconi, Nicolas Sahuguet, and Maurizio Zanardi, Vox EU: Economists have studied in depth how alternative forms of government can lead to systematic differences in outcomes (see Persson and Tabellini, 2004). Autocracies differ from democracies in their economic and political performances. In democracies, political leaders are accountable to the electorate, since periodic elections make it possible to reward or punish them for their actions at the voting booth. In autocracies, leaders escape this general scrutiny and usually rely on a military apparatus or on the support from key groups to sustain their rule.
However, this classification is too broad and does not do justice to the complexity and diversity of political regimes. As Tim Besley and Masa Kudamatsu argued last year on Vox, autocracies in which the leaders are subject to the control of key supporting groups have better economic performances than regimes in which such discipline is missing. This observation underlines the importance of checks and balances in providing incentives to guide the behaviour of political leaders. Conversely, if the fundamental principle common to all democracies is that the power resides in the people, there are a wide variety of democratic regimes. From presidential to parliamentary systems, with all possible shades in between, each democracy has its particularities that lead to large differences in leaders' accountability.
Many democracies with presidential or semi-presidential political systems impose restrictions on the tenure of their executives. Term limits may reduce the disciplining effect of electoral accountability, as politicians who cannot be re-elected have little to lose from displeasing voters and may thus behave in a more self-interested way. Term limits come in different varieties. Many countries impose "strong" term limits, which rule out re-election after a fixed number of terms. For example, since 1917 Mexico has had one-term limits, ruling out the possibility of re-election of the President altogether, while since 1951 the United States has had two-term limits, which allow re-election only once. Other countries impose "weak" term limits, which only restrict the number of consecutive terms a person can serve. For instance, since 1994 Panama has made re-election of the President possible after skipping two terms. Figure 1 shows that a significant number of countries impose strong term limits on their leaders, making it relevant to understand how this institutional feature affects policy choices.
Figure 1. Strong term limits in 2001 Source: Conconi, Sahuguet and Zanardi, 2008
Democratic peace and term limits
In a recent paper (Conconi, Sahuguet and Zanardi, 2008), we examine the importance of electoral accountability for international peace and cooperation, focusing on the impact of executive term limits on inter-state conflicts. One of the few stylised facts in international relations is that democratic states are much less likely to fight one another than other pairs of states. According to an often-quoted statement by Jack Levy (1988), the democratic peace phenomenon is "as close as anything we have to an empirical law in international relations." The idea that democracies do not fight each other can be traced back to Immanuel Kant's 1795 essay "Perpetual Peace". Kant's argument was that policymakers in non-democratic states are more likely to engage in conflicts because they are not constrained by electoral accountability.
What is the link between electoral accountability and the likelihood of inter-state conflicts? And if electoral accountability is the explanation for the democratic peace, is there any effect of term limits on the likelihood of conflicts? To address these questions, we describe a simple theoretical model of self-enforcing international peace. Our analysis is based on the fundamental observation that, without a supranational authority with direct powers to punish violations, governments will only refrain from aggressive behaviour if they perceive that doing so is in their interest. The use of military force is beneficial in the short-run but has long-term detrimental consequences. Each country can gain by launching an assault on another country to obtain a portion of its wealth and resources; however, once the attacked country responds by defending itself, being in a conflict is often costly for all countries involved compared to peace.
The incentives of leaders to maintain a cooperative attitude with their foreign partners differ with the type of political regime. In democracies, leaders who want to stay in power need to behave in the interest of the voters. This observation leads to predictions about the likelihood of conflict in different dyads (between autocracies, between democracies, and between democracies and autocracies). Electoral incentives create accountability and discipline policymakers. This explains the lower probability of conflict observed between democracies: the threat of losing office reduces politicians' willingness to break peaceful relations with other countries. From this perspective, term limits, which restrict the number of mandates a politician can serve in office, should hinder cooperation, since term limits reduce and can even eliminate the incumbent's benefits from future periods in office, which reduces voters' ability to punish leaders who engage in costly conflicts.
These results are intuitive and their policy implications possibly far reaching. Is there any empirical evidence to support them? To examine the impact of re-election motives on the likelihood of conflicts, we have collected information about the different types of executive term limits adopted by countries over time. Combining this information with a large dataset of inter-state conflicts over the period 1816-2001 for a total of 177 countries, we assess the validity of our theoretical predictions by comparing the conflict patterns of democracies with no term limits to those of democracies with one-term or two-term limits.
Our analysis of the determinants of inter-state conflicts provides strong support for the accountability argument. In line with the existing empirical literature on the democratic peace, we show that democratic dyads are significantly less likely to be in conflict than mixed or autocratic dyads. Crucially, however, this result does not hold for democracies in which the executive is in the last possible mandate, which are as likely to be involved in conflicts as autocracies. Thus the presence of binding term limits invalidates the democratic peace phenomenon.
There is another implication of term limits for the accountability of political leaders. Democratic leaders are accountable as long as they face election in the future. This means that in democracies with two-term limits, there should be more accountability when leaders are in their first mandate than when they are in their second mandate. We indeed find that the likelihood of conflicts in democracies with two-term limits depends on whether the executive is in the penultimate or in the last possible mandate.
Our analysis of the impact of term limits on inter-state conflicts confirms that domestic political institutions can have a crucial impact on economic and political outcomes. In democracies without term limits, periodic elections provide the means to hold opportunistic political leaders accountable for their foreign policy decisions. In autocracies and democracies with term limits, in which there is no need for "contract renewal", politicians can adopt unpopular policies with no repercussion on whether or not they are able to stay in power. Some caution is clearly warranted in interpreting these results. Though our analysis shows that political systems in which the leaders are subject to re-election are good for peace, this should not be taken to imply that democratisation of dictatorships will necessarily lead to peace. The take-home message, as pointed out by Daron Acemoglu, Davide Ticchi and Andrea Vindigni recently on Vox, is that policymakers should carefully consider the complexity of the political environment when trying to shape or guide the transition to democracy.
Acemoglu, D., D. Ticchi, and A. Vindigni (2008): "A Theory of Military Dictatorships," VoxEU.org.
Besely, T., and M. Kudamatsu (2007): "What Can We Learn from Successful Autocracies?," VoxEU.org.
Conconi, P., N. Sahuguet, and M. Zanardi (2008): "Democratic Peace and Electoral Accountability," CEPR Discussion Paper 6908.
Levy, J. S. (1988): "Domestic Politics and War," Journal of Interdisciplinary History 18, 653-673.
Persson, T., and G. Tabellini (2004): "Constitutions and Economic Policy," Journal of Economic Perspectives 18, 75-98.
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