In “Après Rahm, Le Déluge” Bobo says the Chicago teachers’ strike is a test of who has a plan that can help the nation as a whole prosper. Prof. Krugman, in “The iPhone Stimulus,” says if you think sales of the latest iPhone will help the economy, then you should support the government stepping in and doing more, too. Here’s Bobo:
Modern nations have two economies, which exist side by side. Economy I is the tradable sector. This includes companies that make goods like planes, steel and pharmaceuticals. These companies face intense global competition and are compelled to constantly innovate and streamline. They’ve spent the last few decades figuring out ways to make more products with fewer workers.
Economy II is made up of organizations that do not face such intense global competition. They often fall into government-dominated sectors like health care, education, prisons and homeland security. People in this economy believe in innovation, but they don’t have the sword of Damocles hanging over them so they don’t pursue unpleasant streamlining as rigorously. As a result, Economy II institutions tend to get bloated and inefficient as time goes by.
For example, between 1960 and 2006, health care spending increased twice as fast as G.D.P., but there were no comparable gains in health outcomes. A study by the Institute of Medicine estimates that 30 cents of every $1 spent on health care is wasted — about $750 billion a year.
Over the past 50 years, spending on K-12 education has also skyrocketed. In 1960, Americans spent roughly $2,800 per student, in today’s dollars. Now we spend roughly $11,000 per student. This spending binge has not produced comparable gains in student outcomes. Education productivity is down, too.
If Economy I is great at generating output without generating employment, Economy II is great at generating employment without generating output.
The problem is that the bloated Economy II is becoming a burden that Economy I can no longer carry. Unless we reform Economy II and control its spending, the bloat will crush us. National productivity will slide. The economy will stagnate.
Republicans have a direct answer for this problem. Reform Economy II so it looks more like Economy I. Introduce vouchers and other consumer driven market mechanisms to health care and education.
Democrats reject that approach. Their counterargument is that Economy II can control costs using its own internal means. Strong mayors, governors and presidents can make these systems work.
The Democratic argument is nice in theory, but can it work in practice? Can Democrats confront their own special interests and deliver results?
The Chicago teachers’ strike is a test of this proposition. The Chicago school system is a classic case of a bloated, inefficient Economy II organization. The average Chicago teacher makes $76,000 a year in a city where the average worker makes $47,000 a year. Rising school costs have helped push the system deep into the red. Meanwhile, the outcomes are not good. Forty percent of students drop out and 8 percent of 11th graders meet college readiness standards.
Mayor Rahm Emanuel campaigned on real education reform, and, in office, he’s tried to push it through. The response? A strike.
By Thursday night, this strike seemed to be heading toward a resolution. Both sides are giving ground, but, as best as I can tell, Emanuel has successfully preserved the core of his reform agenda. There will be longer school days and a longer school year. A child who begins in the Chicago school system in kindergarten and goes all the way through high school will have an extra two-and-a-half years of learning time. That’s huge. There will also be no caps on parental choice. As more charters and different types of public schools are created, parents will have an array of options for their children.
Though the final details are still uncertain, there will also be a serious teacher evaluation process. The various elements of those evaluations will change for each teacher year by year, but, as teachers progress in their careers, student performance will become more and more important. That’s vital because various studies have shown that evaluations that rely in part on test scores really do identify the best teachers. Teachers who score well on these evaluations really do produce measurable improvements in their students’ performance for years to come. Rigorous teacher evaluations will give reformers a profound measuring tool.
Finally, principals will apparently be given discretion to hire who they want, and they will be held accountable for the performance of their schools. This, too, is a big win for Chicago’s children.
Emanuel’s willingness to hang tough and accept a strike was itself a hopeful sign that some Democrats are hardy enough to take on interests aligned with their own party. Emanuel certainly didn’t get everything he wanted. The unions won concessions, too. But if the final results resemble what I’ve been hearing in any way, then Chicago will move toward the forefront of the reform movement. That result would also be a national credibility booster for Emanuel’s party. It would be a sign that Democrats may be able to successfully reform ailing public institutions, so that the nation as a whole can prosper.
Now here’s Prof. Krugman:
Are you, or is someone you know, a gadget freak? If so, you doubtless know that Wednesday was iPhone 5 day, the day Apple unveiled its latest way for people to avoid actually speaking to or even looking at whoever they’re with.
So is the new phone as insanely great as Apple says? Hey, I’ll leave stuff like that to David Pogue. What I’m interested in, instead, are suggestions that the unveiling of the iPhone 5 might provide a significant boost to the U.S. economy, adding measurably to economic growth over the next quarter or two.
Do you find this plausible? If so, I have news for you: you are, whether you know it or not, a Keynesian — and you have implicitly accepted the case that the government should spend more, not less, in a depressed economy.
Before I get there, let’s talk about where the buzz is coming from.
A recent research note from JPMorgan argued that the new iPhone might add between a quarter- and a half-percentage point to G.D.P. growth in the last quarter of 2012. How so? First, the report argued that Apple was likely to sell a lot of phones in a short period of time. Second, it noted that although iPhones are manufactured overseas, most of the price you pay when you buy one is domestic value-added — retailing and wholesaling, advertising and profits — all of which counts as part of G.D.P. Finally, it took some plausible guesses about the price of each phone and the number of phones sold, and used those guesses to make an estimate of the impact on G.D.P.
It’s all pretty straightforward. But the implications are wider than most people realize.
The crucial thing to understand here is that these likely short-run benefits from the new phone have almost nothing to do with how good it is — with how much it improves the quality of buyers’ lives or their productivity. Such effects will kick in only over the longer run. Instead, the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more.
And to believe that more spending will provide an economic boost, you have to believe — as you should — that demand, not supply, is what’s holding the economy back. We don’t have high unemployment because Americans don’t want to work, and we don’t have high unemployment because workers lack the right skills. Instead, willing and able workers can’t find jobs because employers can’t sell enough to justify hiring them. And the solution is to find some way to increase overall spending so that the nation can get back to work.
So where can more spending come from? Businesses are sitting on lots of cash but, for the most part, have seen little reason to do a lot of investment. Why expand your capacity when you don’t have enough sales to make full use of the capacity you already have? And because businesses aren’t spending a lot, incomes are low, so consumer demand is low, which perpetuates those low sales.
Yet depressions do end, eventually, even without government policies to get the economy out of this trap. Why? Long ago, John Maynard Keynes suggested that the answer was “use, decay, and obsolescence”: even in a depressed economy, at some point businesses will start replacing equipment, either because the stuff they have has worn out, or because much better stuff has come along; and, once they start doing that, the economy perks up. Sure enough, that’s what Apple is doing. It’s bringing on the obsolescence. Good.
But why suffer through years of depressed output and high unemployment while waiting for enough obsolescence to accumulate? Why not have the government step in and spend more, say on education and infrastructure, to help the economy through its rough patch? Don’t say that the government can’t add to total spending, or that government spending can’t create jobs. If you believe that the iPhone 5 can give the economy a lift, you’ve already conceded both that the total amount of spending in the economy isn’t a fixed number and that more spending is what we need. And there’s no reason this spending has to be private.
Yet far from using public spending to support the economy in its time of trouble, our political system — driven by a combination of ideology, exaggerated deficit fears and Republican obstructionism — has moved to make the depression worse. Yes, unemployment benefits and food stamps are up, because so many more people are in need; but government employment has plunged, as has public investment.
Now, despite all this, we will eventually recover. Over time there will be more equipment that needs replacing, more iPhone-like innovations that boost spending, and, in the long run, we will exit this economic trap. But, as Keynes famously pointed out in another context, in the long run we are all dead. To borrow a phrase from myself, why not end this depression now?
