Is President Obama Taking Credit for Austerity?

Let’s put together two recent tidbits. First Justin Lahart documents the decline in government employment since December 2008 as he writes:

One reason the unemployment rate may have remained persistently high: The sharp cuts in state and local government spending in the wake of the 2008 financial crisis, and the layoffs those cuts wrought … The unemployment rate would be far lower if it hadn’t been for those cuts: If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%.

Evan McMorris-Santoro catches President Obama saying:

It’s worth noting, by the way – this is just a little aside – after there was a recession under Ronald Reagan, government employment went way up. It went up after the recessions under the first George Bush and the second George Bush. So each time there was a recession with a republican president, we compensated by making sure that government didn’t see a drastic reduction in employment. The only time government employment has gone down during a recession has been under me. So I make that point just so you don’t buy into this whole bloated government argument that you’re hearing.

I find this statement a little puzzling. OK, it is factually true. And the Republican Party along with its presumption Presidential nominee is currently calling for even more austerity, which would make the Great Recession even worse. But I hope the President is not citing this as one of his successes. No, it is a failure of our policymakers. Now it may be true that Republican opposition to sane fiscal policy has put our government on this destructive course. I guess the President is working on the presumption that his political opponent is not attacking him from the progressive side of the political spectrum as such a statement would be horribly damaging politically. But with Mitt Romney being the serial flip flopper of all time, you never know what he is going to say next. And if he claims that fiscal policy under the Obama Administration has not been stimulative enough – for once, Mr. Romney would be telling the truth.

How to Rebalance the European Fiscal Compact

Here is the problem: on the one hand, it is urgent to get countercyclical funds flowing in the Eurozone, particularly in regions hit by double-digit unemployment.  Dealing with trade imbalances and placing the banking sector on more secure footing are longer term objectives; growth needs to be restarted within months or the European project at a whole is in serious danger of collapse.  On the other hand, however, there is neither the institutional framework nor political support from Germany (a sine qua non) for either a relaxation of fiscal targets or central underwriting of sovereign debt.

Nevertheless, there is a way out.

(1) Keep the current fiscal targets.  Perhaps provide some form of central underwriting for a portion of old debt, to cap interest costs, but not for new debt.

(2) Create a European-level investment authority, linked to the European Investment Fund (or the Bank) with a mandate to conduct countercyclical public investment, financed by loans, most of which would be purchased by the ECB.  This authority would spend directly, not lend, and it should target its spending in regions in greatest need of fiscal stimulus.  Decisions regarding the overall size of its program and its distribution across countries would be taken on a supermajority basis of national representatives.  Thus the political conundrum of national sovereignty over fiscal policy and the necessity for interregional transfers would be overcome at the level of the Eurozone as a whole: it would be the Eurozone as an entity that takes on burden of countercyclical deficits and turns to the ECB for accommodation.

Note that this loosely parallels the institutional framework used in the currency zone called the United States.  Individual states do not have the ability to run operating deficits, nor do they normally look to the Fed for finance; this function is federal only.

In this way the emerging European growth consensus can move quickly to expand public spending in the most affected regions, while avoiding the perceived moral hazard of backstopping the deficit policies of some countries with the savings of others.

Austerity Economics: Tied Up in Knots?

A core element of neoclassical economics was to emphasize transactions rather than work, workers, or working conditions. The idea was that the justification of the system was the utility enjoyed by consumers. All considerations of work, workers or working conditions were to be swept aside. Production is relevant only insofar as serves to satisfy consumer needs.




Macroeconomics was expected to depend upon this neoclassical micro foundation. Nonetheless, macroeconomics centered on demand is rejected by all good austerians. Instead, the current fad is to emphasize supply-side economics. Trading the social safety net encourages hard work. Tax cuts ensure more employment.



Over and above the self-destructive consequences of austerity, the recent wave of austerian nonsense has the unintended consequence of contradicting the intellectual foundation of neoliberal economics.

Limitations of Raising Expected Inflation to Increase Aggregate Demand

Robert Samuelson is getting a bit of praise for this Battle of the Beards:

What we need now — and what the Fed could supply, says Krugman — is a bit more inflation. This would spur growth and job creation, he argues. The Fed now strives to keep inflation around 2 percent annually, a low level that it views as reassuring the public. Krugman wants the Fed to raise its target range to 3 to 4 percent for five years.

I’m for anything we can go to get our currently anemic aggregate demand to increase. But note that at current market rates for 10-year government bonds – nominal being just under 2% and real being around a negative quarter percent – we have already passed this 2% inflation target at least for now. OK, telling markets we will tolerate 3% inflation for the next 5 years could further reduce real borrowing costs even as short-term nominal rates hover around zero. I think, however, that James Hamilton has a point here:

I pointed out that the direct stimulative effects of a debt maturity swap were decidedly minor. The conclusion I draw from these two observations is that we might have to push on this lever extremely hard to get anything accomplished, and that pushing on the lever is not without its own dangers. My position is therefore that the Fed is correct in viewing this particular tool as one that should be used with caution.

Even if the Federal Reserve could further reduce real interest rates to 1% by letting expected inflation be 3%, how much extra private demand will this really create? This type of liquidity trap where national savings at full employment greatly outstrips private investment even at negative real interest rates calls for an outward shift of the IS curve more than a movement along the current IS curve. Of course, a more expansionary fiscal policy is clearly called for – an issue where both Bernanke and Krugman have agreed repeatedly. Alas, some powerful members of Congress choose not to listen.

Indiana Republicans "Choose Between Party And Country"

So says Dana Milbank in Sunday's Washington Post in regards to the Tuesday GOP Senate primary between 36 year incumbent Richar Lugar and tea party fave Richard Mourduck.  Lugar, who has a 77% conservative rating according to the American Conservative Union (more conservative than the Maine Senate Republicans who are around 50%) is behind by 10% according to recent polls, and Mourduck is running ads about how Lugar is Obama's "favorite Republican," which have been effective.

What Lugar has done over a long stretch of his career has been a leading GOP voice for sane policy regarding nuclear weapons.  What was the source of these ads was his support in late 2010 for Obama's push for a renewal of the SALT with Russia, something supported by all living previous Republican Secretaries of State and Defense.  This is the main framework for the post-Cold War control of the US and Russian nuclear arsenals, still large enough to wipe out humanity if  all set off in a full exchange.  This is not just country, but the entire world, and whatever else he has done, his announcement after the 2010 election that passing this was his top priority was one of the most intelligent and wise things Obama has supported, something that should be slam dunk obvious. 

In addition, Lugar coauthored the Nunn-Lugar Act in 1993, which provided for the initial monitoring of the post-Soviet nuclear weapons arsenal, again about as important a thing there is.  It really is easy to forget that no other issue comes close to being as significant as this one, although withoug regular drills for school kids to hide under their desks or people building fallout shelters in their backyards, it is easy to forget this.  Whatever we do with our economy or social or even environmental policy does not involve threats that could wipe out humanity entirely, certainly not anytime soon (maybe runaway global warming in the distant future). 

Anyway, while some Dems think it will be great if Lugar goes down because they might have a better chance of defeating Mourduck than Lugar in the general election, I think that if  Lugar goes down on Tuesday as appears likely, this will be one more serious nail in the coffin of any sort of intelligent discourse on the US national political scene, where complete fantasies triumph in a miasma of propagandizing that is so incoherent it cannot even be called ideological, because that would suggest that there might actually be some ideas involved beyond just the worst sort of knee jerk partisanship and looney bin cage rattling.

The French Election, As Seen Through the Lens of the New York Times

Has anyone else noticed that the Times’ backgrounder on the Hollande victory begins with speculation about a possible confrontation with Merkel and ends by envisioning a future confrontation with the unions?  Prescience or wishful thinking?

The Origins of Orthodoxy

I’ve been thinking a lot recently about the differences that flow from whether you have an income or a wealth perspective on economics.  In a nutshell, an income perspective is concerned primarily with the production of new goods and services, the incomes that are generated by that production, and the employment it requires.  Roughly speaking, we can call it Keynesian.  The wealth perspective is oriented toward the preservation and expansion of wealth: the protection of existing wealth against the threat of default or its confiscation by taxes or inflation, and the accumulation of additional wealth through sufficient returns on financial investment.  I identify this orientation with orthodoxy.  Each is rooted in particular social interests, and each has been elaborated in the form of economic theories and rhetorical motifs.

In fact, the origins of macroeconomics, at least in the English-speaking world, belong to orthodoxy.  Why is this?  My speculation is that the key institution that structured how thoughtful people looked at the economic system back then, and the lens through which many still see it today, is banking.  Banks are nodal points in the economic network, and the banking system spans the economic system as a whole.  Banks are in a position to gage the economic health of a community, and the decisions made by bankers profoundly affect this health.  Before the advent of publicly collected economic statistics, not to mention the emergence of economics as a profession, banking was, along with tax collection, the only feasible basis for thinking about economic processes on a large scale.  Even today, it is one of the best.

Banks are in the business of wealth preservation and expansion.  It is not an aspect of what they do; it is everything.  To look at the economy through the eyes of a bank is to observe the impact of events and policies on wealth; it means being orthodox.  From a bank’s point of view, how could Argentina and Iceland, who have defaulted on debt obligations, possibly be regarded as more worthy than Brazil and Ireland, who have not?  national income data, which point to the benefits of default for future growth, would be an afterthought, perhaps off the radar entirely.

The irony is that a banker’s eye-view of the economy is indispensable.  It really is essential to see an economy as made up of interconnected balance sheets.  The best economic analysis from Keynes onward has been cognizant of this.  The problem is how to take this practical insight without being derailed by the banker’s attachment to wealth at the expense of incomes when the policies that promote them diverge.

Argentina and Brazil, Income and Wealth

Paul Krugman compares the economic record of Argentina and Brazil, giving us an Excel chart of real GDP growth:

Yes, it’s true: wicked Argentina, which has violated every rule in the book, is growing more robustly than virtuous Brazil.  From the standpoint of employment and income generation, this is the main event.  Says Paul:

Just to be clear, I think Brazil is going pretty well, and has had good leadership. But why exactly is Brazil an impressive “BRIC” while Argentina is always disparaged?

But here is another case of focusing on income versus wealth.  From an income point of view, Argentina looks good, but what about wealth?  Argentina defaulted on its sovereign debt, Brazil didn't.  For a Keynesian, this is important only in terms of its impact on future growth, and clearly Argentina’s default was a constructive policy move.  If your perspective is the preservation of wealth, however, it’s a huge, huge deal.

And the confiscation of wealth was not a one-time event.  Here, courtesy of the World Bank’s Development Indicator database, is the record over the same years of “the real interest rate”.  (This is a measure of the private sector lending rate minus the concurrent rate of inflation—not ideal, but a reasonable indication of the real return on capital.)

In Brazil wealth-holders can count on rapid accumulation of more wealth.  In Argentina the situation for wealth is dire.  In fact, if Argentina’s inflation is underreported as some claim, the real return is even more negative than what we see.  In essence, claims on output are being reallocated from current wealth-holders to net borrowers and the state.  It is no surprise that people with money are trying to take it out of the country, which is why the Argentine government deploys a canine corps to sniff out suitcases of cash at the Buenos Aires airport.  Are all the folks trying to give their money a Swiss vacation rich?  The rich are certainly the most influential of the lot, but many are likely to be middle class as well.  When they worry about what the country is doing to their personal finances they are not hallucinating.

Just to be clear, I think that producing more of the goods that sustain a high quality of life and providing productive, decently paying work to those who need it should be light years ahead of wealth preservation in priority.  Nevertheless, from a political point of view, the balance of priority between income and wealth is rather different.  Opposition to the Kirchners is based primarily on their confiscation of wealth, and it will not disappear because Argentina’s GDP is growing faster than Brazil’s.

Footnote: Even from a Keynesian point of view there is some cause for concern.  Inflation in Argentina has drifted upward to the point where a takeoff into hyperinflation is no longer a negligible risk.  At some point soon the policy will have to turn toward disinflation, and unless they can pull off an incomes policy miracle, it will take the form of reduced growth.  Even so, of course, the decade-long run of rapid growth is almost certainly worth it.

Footnote #2.  For another example, consider Ireland and Iceland.  If your main concern is stemming the slump and restoring GDP growth, Iceland beats Ireland hands down.  But Iceland defaulted on the obligations of its banking system, while Ireland has gone profoundly into hock in order to avoid defaulting on theirs.  From a wealth point of view, it’s like comparing saints and criminals.

Confidence in What?

“A widespread lack of trust in public finances weighs heavily on growth: there is uncertainty regarding potential future tax increases, while funding costs are rising for private and public creditors alike. In such a situation, consolidation might inspire confidence and actually help the economy to grow.”  – Jens Weidmann, President of the Bundesbank

Confidence.  This is the main argument for austerity, repeated in a thousand forms but always more or less the same.  Wealthy people, who hold the reigns of the global economy, have to be propitiated, and if we can manage to ease their stress they will reward us with low interest rates and high levels of investment.  If you put it that way, it has the feel of a hostage syndrome.

But Keynesians also argue from confidence.  In a slump, investors lose their urge to invest, their animal spirits.  Low investment reduces the demand for output, which validates low investment in a vicious circle.  The way to break out of it is to visibly stimulate the economy, even if temporarily.  This is the rational notion behind the old priming-the-pump metaphor.

Taken at face value, this is an uneven contest.  The problem with the austerian confidence story is that it is entirely speculative, for two reasons.  First, there is no way to measure it.  One could administer a survey to rich people and ask them to rank their worries, but a survey of investor sentiments alone would not be enough to establish the link between mood and action (or inaction).  Just because I don’t like current government policy doesn’t mean I’m going to cut production.  Second, there isn’t really a formal argument that connects the diffuse sentiment encapsulated by the orthodox notion of confidence to outcomes that show up in the national income accounts.  Just perhaps, you could model in a general way how cascading anxieties could set off a financial panic, although calibrating it (being able to call the tipping point) is in the realm of sci-fi, and in any case this is about a liquidity crunch, not generally dampened investment.  How exactly do you go from “uncertainty regarding future tax increases” to reduced investment outlays?  (Investment has at most a weak relationship to actual taxes.)

Meanwhile, the Keynesian version of confidence has a plausible theoretical basis that also permits measurement.  The idea is simply that firms care most about the potential market for their output.  If they think consumers will be flush with income and eager to spend it, they will invest more; if they think otherwise, they invest less.  To a large extent, the PMI index captures exactly this; it is Keynesian confidence in action.  There are disputes among Keynesians as to why the instabilities to which investors respond arise, but at the policy level the dynamic is approximately the same.

So what is it that leads some people to embrace the Keynesian understanding of confidence and others to enlist with orthodoxy?  Noah Smith thinks it comes from somewhere in the digestive system.  He could be right.  My view, which I set out a few days ago, is that it is really about different primary objectives.

Keynesians care mainly about flows.  Income growth.  Output gaps.  Employment.   The production of new goods and services.  Their theories are optimized, so to speak, to elucidate the causes of interruptions to these flows and make the case for policies to keep them flowing.  The followers of orthodoxy, on the other hand, are primarily concerned with the protection and expansion of wealth.  They fear inflation, default, and various forms of expropriation, while promoting conditions that favor more profit-making.  There is a bit of overlap, insofar as both see a link between income and wealth via profitable investment, but the difference in perspective is even larger.  Each side is better at arguing for its own core concerns and weaker in making the case for the other’s concerns.  The problem is that political reality demands that both issues be addressed.

Supporters of economic orthodoxy speak naturally in a way that makes sense to wealth-holders.  Don’t add more debt and run the risk of default.  Don’t try to pay for stimulus programs with higher taxes on the rich.  Don’t accommodate populist experiments by printing money and inviting inflation.  Alas, an appeal to wealth-holders alone would be politically stupid.  The argument has to be extended to address concerns about employment and growth.  That’s the function of the “confidence” trope: it connects the entirely understandable concern about wealth-erosion to the world of income determination.  It bears a ton of weight because it has to do this, but not because there is any particular reason why actions that make wealth-holders more comfortable also make economies grow.  That’s why the confidence touted by austerians is a fairy.

Keynesians are not flawless either, however.  They can make an excellent case for policies that promote growth, but political reality requires them to win over the wealthy too.  Thus, they also argue that expansionary policies in a slump will be good for assets, or at least not bad.  More borrowing to promote near-term growth will reduce the risk of public and private default, while better economic conditions will be peachy for equities too.  Redistributive taxes?  Well yes, but this will produce a warm glow in the hearts of the well-to-do, since money buys the most happiness when it is given away.  And don’t worry about that “euthanasia of the rentier” bit.  I am being facetious, but is it really so different?  The point is that the argument for Keynesian policies being favorable to wealth is much, much weaker than the argument about incomes.

Where am I going with this?  In part, I just want to understand the intellectual environment we live in, and my starting point is always the classical theory of ideology: different people have different interests, and this causes them to see the world in different ways.  The second part is that, if I am right, this way of framing the debate disabuses us of the naive notion that a smarter or more precise argument will win the day, and leads us to the political transformation that’s needed instead.

Ron Paul Praises the Post World War II Economy for Its Reduction in Government Spending

Paul Krugman notes his debate with Ron Paul:

he insisted (if I understood him correctly) that currency debasement and price controls destroyed the Roman Empire. I responded that I am not a defender of the economic policies of the Emperor Diocletian.

I studied ancient history as well as economics in college but I don’t profess to know much about the policies of Emperor Diocletian either. Paul’s performance was strange in so many ways. For example, he pretended to be the defender of free markets as accused Dr. Krugman of not being in favor of market based economies. Yet, Ron Paul was the one who does not want the market to determine exchange rates, which is just one of many ways we know he is not very familiar with the writings of Milton Friedman. I guess there was one subtle point of concession between the two debaters. Both seemed to think the economy that followed World War II was a good one. But Ron Paul’s praise of this period struck me as odd as he claimed that the reason that the government debt to GDP ratio fell was an alleged decline in government spending. Our graph does show that government spending as a share of GDP was still high in 1945 so this ratio had to decline as we reduced defense spending as World War II ended. But our graph shows that government spending rose as a share of GDP for much of the latter half of last century. So maybe Ron Paul knows more about the Roman Empire than I do but his knowledge of recent history is suspect.

Robert Samuelson Playing Anti-Robin Hood Again

In today's Washington Post, Robert J. Samuelson is at it again with a column called "The real Washington," in which he admonishes his readers for not realizing that we are a democracy and that the rich are paying for huge increases in aid to the poor, up from $126 billion in 1980 in real terms to $626  billion today, even while the suffering top income quintile are supposedly paying "70%" of federal taxes, poor things.  He clearly decries this and thinks that aid to the poor along with his usual favorite target, Social  Security,  should if not be cut at least capped.  The rich ae doing enough, more than enough, poor things, and here we are facing the "terrible threat of long term deficits," even though he only once manages to mention that "More promises were made than can be kept without raising taxes, which -- for the most part -- were also  subject to bipartisan promises against increases."  That this last remark is ridiculously lopsided  should go without saying, but RJS is keen to maintain his position as a Very Serious Centrist.

Dean Baker does a good job on pulling some of this mess apart, pointing out how much income has concentrated to the very top of the income distribution, with RJS emphasizing the top 20% rather than the top 1% or top 1/10% - http://www.cepr.net/index.php/blogs/beat-the-press/the-power-of-the-rich-is-measured-by -their-income-not-just-their-taxes .  Anyway, even looking at RJS's numbers, they are not as dramatic as they look.  While indeed the top quintile does pay 67.2% of federal taxes (not RJS's apparently rounded off 70%), the same top quintile earns 53.4% of income.  So, yes, indeed, the federal tax code is mildly progressive.  But in fact it used to be more so than it is now.  The average federal tax rate for that top quintile has been lower since 2001 than it was for any years since the end of WW II except for 1982 and 1983.  This moaning about the poor rich on taxes just looks silly.

Furthermore, RJS's numbers overstate what has gone on regarding aid for the poor.  Yes, indeed, it has indeed risen in real terms since 1980.  But this increase is certainly overstated.  The problem as almost always with RJS is that he ignores the outsize price increases in healthcare costs.  His calculation of real payments seems to be deflated by the general CPI rather than the sector-specific ones.  While from 1980 to 2010, the overall CPI rose 141%, the medical care one has risen 394%.  The 1980 "real" number for Medicaid was about $60 billion, rising to $275 billion in 2011 out of the $621 billion for the poor.  This seems like a massive increase, but when one corrects for the far greater increase in medical care costs than overall prices, the real increase in this is relatively modest, and this increase supposedly constitutes nearly half the overall increase.

While we are at it, expenditures on TANF have not risen since welfare reform, and the number of enrollees has barely budged during the Great Recession.  This part of the system for helping the poor has been nearly useless in the recent crisis.  I am glad that food stamps (SNAP) have been way up, but Samuelson is just missing it when he tries to paint a picture of the rich being snagged badly by a bunch of overcovered  poor people (along with ignoring the skewing to the rich of the tax code, not to mention the role of rising medical care costs in the spending patterns).

Apple’s Effective Tax Rate: New York Times versus Fox Business

Fox Business is claiming that the New York Times got the story as to how Apple avoids paying taxes in the US wrong:

But using Apple’s corporate accounting profit to arrive at its effective global rate of 9.8% is dubious because profit figures are different numbers versus the taxable income figures companies report to the Internal Revenue Service. A look at Apple’s filings with the Securities and Exchange Commission shows the more appropriate effective rate for Apple is likely more than double the 9.8% effective rate the Times reported. Apple already reports in its filings that its global effective rate for both 2011 and 2010 is 24%, and its effective U.S. federal rate is likely 20.1%. Moreover, its global effective rate for 2009 was 31.8%.

I did look at Apple’s 10K filing for fiscal year ended September 24, 2011 and some of what the New York Times wrote is basically correct:

Apple’s accountants have found legal ways to allocate about 70 percent of its profits overseas, where tax rates are often much lower ... In Apple’s last annual disclosure, the company listed its worldwide taxes — which includes cash taxes paid as well as deferred taxes and other charges — at $8.3 billion, an effective tax rate of almost a quarter of profits … tax experts say that strategies like the Double Irish help explain how Apple has managed to keep its international taxes to 3.2 percent of foreign profits last year, to 2.2 percent in 2010

Income before provision for income taxes was $34.2 billion while the tax provision was almost $8.3 billion. So the reported effective tax rate was over 24% not less than 10%. But the New York Times article noted that. So let’s go to the details as reported in Note 5 (Income Taxes), which notes that foreign pretax income was $24 billion with about $10 billion in reported US taxes. In other words, Apple did allocate 70% of its profits overseas. Foreign taxes were only $0.6 billion or 2.5% of its foreign pretax income. So why was its tax provision so high? The Federal portion was almost $6.9 billion due to almost $3 billion in deferred Federal taxes. The one thing that troubled me about the New York Times article was its claim that Apple avoided California taxes with its Nevada operations. This not only ran contrary to my understanding of how California tax law works but seems to be contradicted by the fact that the state tax provision was almost $0.8 billion or just under 8% of US pretax income. Two parables I guess – (a) understanding tax provisions isn’t always easy; and (b) don’t trust everything you read in the news especially if it is from Fox.

Paul Ryan – Imposing Austerity in order to Avoid It?

Paul Ryan’s interview with Jonathan Weisman included a passage that shows how utterly clueless he is noting that the Republican fiscal policy objective is to:

preempt austerity – we want to prevent that bitter kind of European austerity mode which is what we will have if we have a debt crisis.

In other words, cut government spending now to avoid fiscal restraint later? Does he not know that we currently suffer from a lack of aggregate demand? We should be avoiding fiscal restraint now but considering long-term measures to reduce government deficits. Then again – the prime minister of the UK seems to be just as clueless as Congressman Ryan. How well is that working out?

Are the Republicans Denying Gender Pay Disparity?

Meet the Press featured a debate between Rachel Maddow and Alex Castellanos. When Ms. Maddow noted a recent finding by the Institute for Women’s Policy Research noting that women earn 77 cents to every dollar earned by men, Mr. Castellanos first denied there was any disparity and then argued factors such as the choices when make about how much to work or what professions to enter explain all of any alleged difference. Really? What evidence did Mr. Castellanos offer for this claim? None apparently - even though there has been substantial research on this issue. This 2008 OECD chapter summarizes much of this research:

Regression-based decompositions have been used in the literature to try to identify the sources of wage gaps between men and women. These decompositions allow assessing how much of the gap is explained by observed gender differences in terms of individual productive characteristics, the remaining unexplained portion being ascribed to differences in unobserved characteristics and/or asymmetries in labour demand (see OECD, 2008a). Educational attainment and labour market experience typically explains only a small or even negligible portion of the gender wage gap. By contrast, labour market segmentation by occupation, type of contract, industry as well as firms and establishments typically explain a far larger share (see e.g. Altonji and Blank, 1999; Reilly and Wirjanto, 1999; Datta Gupta and Rothstein, 2005; Heinze and Wolf, 2006). However, evidence based on large-scale matched employer-employee data shows that even taking into account a fine disaggregation of occupations, industries and establishments, more than 50% of the wage gap remains unexplained (e.g. Bayard et al., 2003). More important, the gender distribution of jobs is itself the outcome of the equilibrium in the labour market. It provides therefore some indication of the channels through which a gender wage gap arises, but sheds no light on the ultimate causes of the gap.

Crit Quant

Frank Bruni addresses an issue in his New York Times column this morning that colleges and universities across the country are confronting: how to adapt to a world in which technological skills are in greater demand while hanging on to as much of their traditional mission as possible.  Let’s put it starkly: higher ed needs to turn out more engineers and number crunchers, and it also needs to keep the fires (embers?) of critical consciousness burning.

In my state of Washington, and maybe yours, this takes the form of increasing political pressure for universities to crank out “high demand” majors.  This doesn’t refer to student demand—quite the opposite—but demand from the state’s largest and most politically connected employers.  This includes STEM, of course, but also nursing.  (Beleaguered and underpaid nurses abandon their profession en masse each year, and this is seen as a reason to train ever more of them.)  But let’s talk about STEM.

The pushback from defenders of the liberal arts is that education is not just about filling job slots, but about citizenship.  The future of our country, nay the human race, depends on the cultivation of new generations who can see past the shiny surfaces to the deep questions of life, who are habituated to critique, whose perceptions are heightened by aesthetic acuity, etc.  The call for STEM is really an effort to eviscerate society’s main sanctuary for critical consciousness.

I think this is not an either/or question, but both/and.  We need to think deeply and also be productive.  Critical consciousness has to pay its way.  To get from platitude to program, however, we have to consider what this means in practice.

The obvious answer, and the one most of the attention is now focused on, is rebalancing.  We need somewhat more STEM students and somewhat less in the other fields.  To the extent that there is intellectual fat in a university’s catalog, it can be cut without harm to the liberal arts bone, so to speak.  Hire a few more STEM PhD’s a few less of the other sort.  Adjust and carry on.

To my way of thinking, this approach evades the real issue.  Engineers need to be critical thinkers, and critical thinkers need to be quantitative.  Not each and every one (reject corner solutions!), but lots of them.  The democratic and transformative agenda of higher education has to pervade its economic agenda, and also, to a large extent, vice versa.

This translates to increased traffic between the technical fields and the rest of the liberal arts.  Engineering curricula should include industrial design to develop aesthetic appreciation for objects, along with historical and social approaches to technology to promote a critical, questioning spirit.  (Engineers may also benefit  personally in their future careers from studying labor history.)  Meanwhile, philosophers should be learning game theory and historians more rigorous methods of quantitative data analysis.  Ideally these would be bottom-up reforms, arising voluntary, even enthusiastically, from the faculty themselves.  In practice, they will have to be elicited and nurtured, with strategic reallocation of funds and pressure on new hiring.

Perhaps this is the easy part.  To make it all work there also needs to be a fundamental change in the place of quantitative reasoning in our culture—in the schools, the media and daily life.  The faculty and students who, in my dreams, will meld critical thinking and quantitative adeptness will not materialize spontaneously because a new course offering has been inserted into the catalog.  Somehow we have to challenge the view that the ability to do math is confined to a small subset of our species, and that it’s OK for the rest to just opt out.  Math classes have to do a lot more teaching and a lot less sorting; would we accept writing classes that allowed the great majority of students to come to terms with their inability to write by believing that they don’t have that special writing gene?

But this is another rant for another day.