« October 2005 |
| December 2005 »
Gary Becker, Nobel laureate in economics, Professor
of Economics and Sociology at the University of Chicago, and a Senior Fellow at Stanford's Hoover Institution argues for increased legal immigration of skilled workers:
Give Us Your Skilled Masses, by Gary S. Becker, Commentary, WSJ: With
border security and proposals for a guest-worker program back on the front
page, it is vital that the U.S. ... does not overlook legal immigration. The
number of people allowed in is far too small... Only 140,000 green cards are issued annually,
with the result that scientists, engineers and other highly skilled workers
often must wait years before receiving the ticket allowing them to stay
permanently in the U.S. An alternate route for highly skilled professionals
... has been temporary H-1B visas... But Congress foolishly cut the annual quota of
H-1B visas in 2003 ... to well under 100,000. The small quota of 65,000 for
the current fiscal year that began on Oct. 1 is already exhausted!
This is mistaken policy. ... Skilled immigrants such
as engineers and scientists are in fields not attracting many Americans, and
they work in IT industries ... which have become the backbone of the economy.
... These immigrants create jobs and opportunities for native-born Americans of
all types and levels of skills. ... The annual quota should be multiplied
many times beyond present limits, and there should be no upper bound on the
numbers from any single country. Such upper bounds place large countries like
India and China ... at a considerable and unfair disadvantage -- at no gain to
To be sure, the annual admission of a million or more highly skilled
workers ... would lower the earnings of the American workers they compete
against. The opposition from competing American workers is probably the main
reason for the sharp restrictions on the number of immigrant workers admitted
today. That opposition is understandable, but does not make it good for the
country as a whole. Doesn't the U.S. clearly benefit if ... India's government
spends a lot on the highly esteemed Indian Institutes of Technology to train
scientists and engineers who leave to work in America? ...
Experience also shows that if America does not accept greatly increased
numbers of highly skilled professionals, they might go elsewhere ... [where] they
may compete against us through outsourcing and similar forms of international
trade in services. The U.S. would be much better off by having such skilled
workers become residents and citizens -- thus contributing to our
productivity, culture, tax revenues and education rather than to the
productivity and tax revenues of other countries. I do ... advocate that we be careful about admitting students and
skilled workers from countries that have produced many terrorists... But the legitimate concern about admitting
terrorists should not be allowed, as it is now doing, to deny or discourage
the admission of skilled immigrants who pose little terrorist threat.
Nothing in my discussion should be interpreted as arguing against the
admission of unskilled immigrants. ...
But if the number to be admitted is subject to ... limits, there is a strong
case for giving preference to skilled immigrants... Other countries, too,
should liberalize their policies toward the immigration of skilled workers. I
particularly think of Japan and Germany... America still has a major advantage
in attracting skilled workers, because this is the preferred destination of
the vast majority of them. So why not take advantage of their preference to
come here, rather than force them to look elsewhere?
I agree. If the people in the world with the most skills and talent want to come here, let them.
Posted by Mark Thoma on Wednesday, November 30, 2005 at 12:36 AM in Economics, International Trade, Unemployment |
Robert Samuelson acknowledges that labor costs at GM have been high. But he believes the source of GM's troubles is poor management:
Ghosts That Still Haunt GM, by Robert J. Samuelson, Washington Post: ...General Motors ... recently announced it would close 12 facilities and cut 30,000 jobs by 2008. Granted, GM is burdened with costly labor contracts and huge numbers of retirees... But GM also inherits a self-defeating management style formed during its glory days. It presumed that superior managers could always anticipate and control change. By contrast, many top managers in younger companies accept that they will face disruptive surprises that could, unless successfully countered, destroy them. The difference has consistently disadvantaged GM. Its latest downsizing is the company's third since the early 1980s. With each, GM has struggled to catch up with changes that it badly misjudged -- the demand for smaller cars in the late 1970s; the superior quality and production techniques of Japanese manufacturers in the 1980s; and now the demand for snazzier cars and ... better fuel efficiency. ...
Alfred P. Sloan Jr.... was GM's chief executive from 1923 to 1946 ... In 1921 Ford had 60 percent of U.S. car sales. GM overtook Ford because "the old master [Henry Ford] had failed to master change," Sloan wrote. Ford stuck too long with the Model T ... even as the car market shifted. ... Aside from fighting Ford, Sloan had to fashion a huge industrial enterprise that would not collapse under the weight of its own complexity. ... Sloan solved this problem by decentralizing operations ... among separate divisions while centralizing policy matters ... at the top. ... Unfortunately at GM, it ... fostered overconfidence and inertia. "Management" became an exercise in ensuring stability. GM's market power made it less sensitive to cost increases, especially labor costs, because these could usually be recovered in higher prices. ... But that is only half the problem. The other half is that GM does not have the vehicles that command good prices. To move in volume, they require steep discounts. This is a management failing that can't be blamed on unions or retirees, and it's now compounded by the impact of high gasoline prices on SUV sales. Within GM, there are pockets of vitality. ... But too often, GM's deliberate management style has produced mediocre vehicles that fare poorly in today's hyper-competitive market. Since its peak, GM's market share has fallen by half. ...
Sloan shrewdly foresaw that too much success could be fatal. It might dull "the urge for competitive survival," which is "the strongest of all economic incentives." Companies might fail "to recognize advancing technology or altered consumer needs." Avoiding these traps, he said, was GM's challenge. There is now talk that GM could go bankrupt. Although that isn't inevitable, even the talk measures how poorly GM met the challenge.
Posted by Mark Thoma on Wednesday, November 30, 2005 at 12:24 AM in Economics |
The Coalition for Rainforest Nations has a proposal to reduce deforestation:
A solution to climate change in the world’s rainforests, by Geoffrey Heal and
Kevin Conrad, Financial Times: A novel economic model for reducing deforestation is being
proposed by the Coalition for Rainforest Nations at the current United Nations
climate change conference in Montreal. ... [T]he coalition is proposing economic
incentives for conserving tropical forests while contributing to climate
stability. Deforestation is a big source of carbon dioxide emissions ... In what
could be crucial to current climate negotiations, coalition countries may accept
binding caps on their emissions levels in exchange for tradable emission
reduction credits. In fact, these countries are being drawn toward pledging
“voluntary reductions” by the prospect of access to now viable emissions
reductions markets. This is the first time for any developing countries to
consider mechanisms to cap carbon emissions, and the first real global move to
address the growing and critical issue of deforestation.
Deforestation contributes almost as much to climate change as does US fossil
fuel use. ... Curbing deforestation reduces CO2 emissions just as surely as
replacing coal by nuclear or renewable energy. Emission reductions from
deforestation are not yet eligible for financial compensation under the Kyoto
protocol, while replacing coal with renewable energy sources is. This gaping
hole in the Kyoto protocol defies logic, is scientifically unsound and throws
doubt on the efficacy of the entire framework. To help level the playing field,
the rules must be revised to make carbon credits from reduced deforestation
tradable in carbon markets on a par with other offsets. This would value them at
present in the range of $25 (€21) per ton of CO2. Such a price is high enough to
transform the economic incentives to conserve forests and is quite competitive
with the lumber prices currently received by local communities from logging
companies. Recognising carbon credits from avoiding deforestation makes standing
timber an income-earning asset worthy of conservation. ...
The coalition’s proposal seeks to create new markets while reforming outmoded
market and regulatory mechanisms. From the perspective of tropical countries,
this change would make conservation a financially viable policy, with real
economic returns. ... Instead of pitting the traditional conservation groups
against industrial countries and business, this model appeals to all
[Dual posted at Environmental Economics.]
Posted by Mark Thoma on Wednesday, November 30, 2005 at 12:19 AM in Economics, Environment, Policy |
If you are interested in enterprise zones, this company seeks areas where it can get the best deal from local officials:
Sporting Goods and Its Own Business Model, by Kate Murphy, NY Times: Since
it opened in June 2005, it's been hard to find a parking space at the Cabela's
in this tiny town, halfway between Austin and San Antonio. A shuttle like those
that ferry travelers between gates at airports zips around Cabela's stadium-size
parking lot taking people from their cars to the outdoor equipment retailer's
rough-hewn entrance. In their sensible shoes and fanny packs, looking like
tourists instead of shoppers, many reach for their cameras to take pictures ...
But there would be no bustle in Buda, which has a municipal budget of $4.5
million, if the town had not secured a $40 million bond to make the
infrastructure improvements Cabela's demanded. As it has done in other
communities, the company then bought the debt in exchange for a sales tax
exemption. The state of Texas also awarded Cabela's a $600,000 enterprise grant
and made $19.5 million in Interstate and overpass improvements. ... Locating in
small towns like Buda and Lehi, where locals are more likely to offer such
sweetheart deals, is part of Cabela's strategy. The company's senior vice
president for retail operations, Mike Callahan, said, "They are more eager to
work with us because we are a huge driver for economic growth," ...
Posted by Mark Thoma on Wednesday, November 30, 2005 at 12:07 AM in Economics, Taxes |
The debate among those on the left noted in this commentary appears often in the comments here:
Labor's Lost Story, by E. J. Dionne Jr., Washington Post: ...General Motors'
layoffs of 30,000 workers... [has] become a new litmus test in
American politics. Almost everybody right of center sees the job losses as
inevitable, the result of the American auto industry's failure to meet foreign
competition and the "excessively" generous wages, health benefits and,
especially, retirement programs... The believers in inevitability inevitably
cite the economist Joseph Schumpeter to the effect that ... It is capitalism's
gift for "creative destruction," ... that guaranteed new consumer goods, new
methods of production and new forms of organization.
A different story is told left of center, though ... progressives can't quite agree on a single narrative. The left is united in
talking about rising health care costs and the fact that most of our foreign
competitors have government-run health insurance systems that take the burden of
health care off employers. ... Critics of globalization tell an additional story
of how free trade is sending many of our best-paying blue-collar jobs offshore.
... The contrast between these two accounts explains why economic conservatives
currently hold the upper hand in America's political debate. The conservatives
have a single, coherent story and stick to it: Economic change is good for
The left's narrative is less compelling not only because there is no single
story but also because few on the left attack the current system with the same
gusto the right brings to defending it. ... Much of the left accepts a certain
amount of creative destruction because, in Margaret Thatcher's famous phrase,
there is no alternative. But this muddle reflects a default on parts of the left
... [S]o many Democrats fear that they might sound like -- God forbid! --
socialists, they are unwilling to challenge the right's core story. Capitalism,
all by itself, would never have achieved the rising living standards that were
the pride of the United States in [the] 1950s and still are today. ... As
medical costs rise, more Americans will need government help. ... Yes, that's
"socialized medicine," just like Medicare. But don't tell anyone. The phrase
plays terribly in focus groups.
For 60 years New Dealers and social democrats, liberals and progressives,
turned Schumpeter on his head. They insisted that few would embrace capitalism's
innovations if the system's tendency toward creative destruction was not
balanced by public innovations to spread the bounty and protect millions from
being injured by change. It's a compelling story. ... Too bad it isn't told very
Here are the rules I try and play by. I advocate government intervention only
when I can justify it through economics, otherwise I believe in the market's
ability to do what we expect it to do, deliver goods as cheap as possible in the
correct quantities. My default is a laissez faire approach. I don't advocate government
sponsored healthcare and social insurance because I like bloated government, I
do it because I believe these are instances where the private market cannot,
without regulation or intervention, provide the proper quantities of goods and
services at the lowest possible price. I don't think the government should be
more active in preventing monopoly power because I dislike big business, I say
that because I want a competitive marketplace. I don't want to hug trees of
infinite utility, I want market based solutions to environmental problems
whenever possible. Simple market principles can do wonders for recycling and
conservation programs. I want efficient taxes that minimize distortions. I believe in equal marginal sacrifice to fund government, but that is a normative choice, not something derived from economics. Government should not be any larger than necessary. I don't advocate redistribution
of income for the sake of "equity," but I do believe the government should ensure that
everyone has an equal chance in life, not an equal outcome but an equal start,
and that may involve redistributive policies.
It's quite possible to be a liberal and not abandon economics and not abandon
capitalism in particular. We can argue over whether there truly is market
failure in this instance or that, I will admit to seeing market failure more
often than those on the right. We can debate contestable markets and whether it
applies to a particular market, we can debate price cap versus rate of return
regulation (no contest, price caps win, but what type of price cap is best?) and how best to make markets competitive (how do you get
public utility regulators to understand you have to allow profit to attract
entry?), we can debate the economics until the Gateway cows come home. But don't
accuse me of being a socialist just because I believe the government is, in its
heart of hearts, made up of good people who want to help, because I believe
there are times when government is the solution rather than the problem. I don't
want to "sound like -- God forbid! -- socialists," the economics of capitalism is the proper
battleground for me.
Posted by Mark Thoma on Tuesday, November 29, 2005 at 01:28 AM in Income Distribution, Market Failure, Policy, Politics, Regulation |
Robert Reich and Glenn Hubbard debate how to address impending budget deficit
issues. This is somewhat long, but worth it:
Big Issues - Guns, Butter and Retired Boomers: How Do We Pay for It All?, WSJ
(free): This is the first of three online debates ... The federal budget
deficit is the topic ... Joining the debate are Robert B. Reich, who was
secretary of labor in the Clinton administration, and R. Glenn Hubbard, who
served as chairman of the Council of Economic Advisers for two years under
President Bush. ...
MR. WESSEL begins the debate: Has the federal government bitten off
more than it can chew by reducing tax rates ... and subsequently -- despite the
costs of responding to 9-11, fighting the war in Iraq, rescuing and repairing
New Orleans and environs and expanding Medicare to cover prescription drugs? Is
current fiscal policy sustainable ...?
MR. HUBBARD: The U.S. economy... is in excellent shape, and it
can absorb the tax changes, military and homeland security changes, and disaster
relief. Two points are in order, though: More restraint is needed to ensure that
domestic spending growth does not continue, and tax reform is needed to codify
pro-growth policy that can raise the revenue required to fund the federal
government. The problem is not the next three or even five years; the problem is
the long-run fiscal picture. ... [T]he Medicare expansion without substantial
reform of the system was unwise fiscal policy. The current Social Security and
Medicare systems are on an unsustainable path. In both cases, sound fiscal
reform should involve slower benefit growth for high-income households. ...
accompanied by reform of health-care markets. The bottom line issue is less guns
v. butter today (the next three to five years) than whether the butter will
crowd out guns tomorrow ... or indeed whether the butter itself will be
affordable on the same terms tomorrow.
MR. REICH: Undoubtedly yes. But we should distinguish between
deficits that occur when the economy has lots of unused capacity ... and
deficits that become part of the long-term structure of the federal budget. If
the tax cuts and spending increases ... at the start of the administration were
temporary and stayed temporary, there'd be little to complain about. In fact,
they might have helped get the American economy moving. But the administration
wants to make the tax cuts permanent. And much of its new spending ... will go
on for years. ... This isn't sustainable over the long haul and I don't think
it's sustainable even over the next five years.
MR. HUBBARD: I agree wholeheartedly with Bob that dividing the
timeline of fiscal worries into two parts -- short-run and long-run is
important. I also agree that we must distinguish between running deficits when
the economy is not at full employment versus when it is (read now). Tax cuts
that add to the nation's productive capacity include reductions in the tax
burden on saving and investment and reductions in marginal tax rates on
entrepreneurial activity. ... The near-term tax debate should be about tax
reform so that we can maximize ... pro-growth policy. On the spending side, a
strong case can be made for continued basic research support and support for
individualized training programs. What often goes under the heading of
investment -- highways, for example -- is a tougher case to make from an
Where Bob and I disagree regards his characterization of "tax cuts that
mostly benefit the wealthy." Reductions in the taxation of saving and investment
show up in current tax distribution analysis as benefiting savers -- generally
well-to-do savers. Yet, over the long run, those tax changes raise capital
accumulation, productivity, and wages. ... It is hard to imagine what tax
changes ... would add more to the nation's productive capacity.
MR. REICH: I'm not adverse to tax cuts on savings and
investment, but in my view the growth we get from such tax cuts is far less than
the growth we get from well-targeted public investments in education at all
levels, on health care .., infrastructure, and basic research and development.
... Over the long term, capital flows to places around the world where it can
get the highest return -- either because production is very inexpensive there,
or because of natural resources located there, or ... because people there are
enormously productive. And they're productive because they have high skills,
good health, good infrastructure linking them together, and an excellent
scientific base from which to draw.
Obviously, we can't do it all. We can't extend the tax cuts and at the same
time carry out all the public investments that are necessary -- while at the
same time we fight wars in Iraq and Afghanistan, build up homeland security,
give the middle class some relief from the Alternative Minimum Tax, and dole out
Medicare drug benefits (not to mention the rest of Medicare) to early boomers.
Deficits do matter, and choices do have to be made. I'm skeptical of claims that
continued tax cuts on capital gains and dividends have such a hugely positive
effect on the economy ... This recovery ... is weaker than the average
post-World War II recovery.... So I see no reason to extend them. ...
MR. WESSEL, Moderator, asks: On taxes, do either of you believe that a
significant tax increase is either wise or inevitable either in President Bush's
term or in the first term of his predecessor? If so, what tax and on whom? And
on spending, what one or two things would you have the government spend more ...
on? And what one or two things would have the government spend less ... on?
MR. REICH: ...I don't anticipate any concerted move by this
administration to tame the deficit ... unless bond markets get so rattled by the
size of pending deficits that the White House is forced to come up with
something. .... That will ... leave a fiscal mess for the president's
successor... What would I have the government spend more on, notwithstanding the
above? Early-childhood education. The evidence is clear and compelling that
these expenditures provide very large social returns... I'd also have the
government spend more on K through 12 in poor communities .... I'd even be in
favor of a progressive voucher system, ... What spending to cut? Start with
subsidies and tax breaks directed to specific companies and industries ...
"corporate welfare." ... Also, get rid of all earmarked spending on specific
projects. It's pork. ... We need a capital budget that establishes clear
priorities for infrastructure spending. Medicare savings are possible ... I'd
also amend the new Medicare drug benefit to allow the government to use its huge
bargaining power with pharmaceutical companies to push down costs.
MR. HUBBARD: Let me echo Bob's call for a reduction in
corporate subsidies and earmarked spending projects. ... I think the
administration is missing an important opportunity to talk ... about the
enormous looming entitlement liabilities and the large implicit flow deficits
... that go with them. If we cannot bring these deficits ... under control, we
will have to raise taxes, with significant adverse consequences for economic
growth. I do not believe that a significant tax increase is wise or inevitable.
... I say this because I believe we should and will scale back the growth in the
entitlement programs that are the clear and present fiscal danger. I would like
to see the government spend more on basic research and on training (because our
employment policies are outdated) -- but these $$$ are not large in the context
of the overall federal budget. ... [T]he real area for spending restraint is the
Re: Bob's second reply: Blanket spending increases on health care,
infrastructure, and education strike me as unwise. Our goal for health care
should be to improve value ... The evidence on the effectiveness of
infrastructure spending is, to put it mildly, mixed, ... Even with education,
... structural reform is a bigger deal here than a cry for more money. ...
MR. REICH: I'm not suggesting "blanket spending increases" ...
To the contrary, I'm urging more and better-targeted spending in these vital
areas. ... As to health care, I'd recommend that the federal employee's health
insurance system be made broadly accessible and affordable to all small
businesses wishing to enroll their employees -- thereby giving the federal
system far more bargaining leverage with providers and drug manufacturers, while
at the same time enrolling a large portion of Americans currently without health
care. This would be a first step toward a single-payer system.
As to entitlement spending, and contrary to what we've heard from the White
House, Social Security isn't the biggest entitlement problem. It's Medicare. ...
The reason Medicare spending is rising so quickly -- apart from the aging of the
population -- is double-digit increases in annual health-care expenditures
across the economy. So the key to containing Medicare is streamlining our whole
health-care system. That's a big enough topic for a discussion all its own.
MR. HUBBARD: I couldn't agree with you more on Medicare being
the more significant problem and that reform of health care markets is central.
Posted by Mark Thoma on Tuesday, November 29, 2005 at 12:05 AM in Budget Deficit, Economics, Health Care, Policy, Social Security |
The natural rate of unemployment varies
through time with structural change, demographic change, and so on. This
released today on existing home sales and recent reports on inventories are a reminder that a
similar concept exists for homes and machinery.
The vacancy rate in housing is similar to the unemployment rate in labor
markets. Why isn't 0% unemployment for labor optimal? Some unemployment is optimal because
it allows people to change jobs and allows new entrants to enter the labor market
without a "double coincidence of wants." Without vacancies, to change jobs you
would need to find someone who has the job you want and wants the job you have,
and then trade. Those entering the labor market would have to find someone who
is leaving the labor market and has an acceptable job, and they in turn must be
acceptable to the employer. The matching costs are
high with such an arrangement. With some unemployment, costs fall
since finding an offsetting match is unnecessary.
Housing is no different. Without vacancies, to move from New York to Los
Angeles would require finding someone moving in the other direction who has a
house you are willing to buy and is also willing to buy your house, a difficult
would be similar). But with vacancies, the task is much easier.
But what should the optimal vacancy rate be and what causes it to change? If
the actual vacancy rate is below the natural rate, prices should rise. If the
vacancy rate is above the natural rate, prices should fall, so knowledge of the
natural vacancy rate is helpful in understanding markets. The natural rate of vacancy is not a constant. It varies over time and there is no reason to think that one
natural rate exists for all areas, for all housing types, and so on, so what causes the natural vacancy rate
to change? One approach is to break it down much like unemployment. There are cyclical
factors from the macroeconomy and local economy that make the vacancy rate rise
and fall over time, but these aren't changes in the natural rate, these are
variations around the natural rate. There are
structural factors that cause increased job turnover that would presumably
change the optimal vacancy rate, i.e. the more dynamic the labor market,
particularly if labor is coming from outside or moving away from the local area, the
higher the natural rate. And there are frictional factors as people change
houses and move up or down depending upon their stage in the life-cycle, and
as with unemployment, some of this is driven by demographics. I just started
thinking about this, so I have surely overlooked important reasons for variation
in natural vacancy rates. What other factors are important?
Will the data identify a natural rate? These graphs (Census data here) show housing and rental vacancy rates since 1956.
The rates vary considerably through time:
A few observations. The turnover rate is higher for rentals and this is clearly reflected in the difference in mean vacancy rates. The vacancy rate averages 7.0% for rentals which is quite a bit higher
than the 1.4% rate for owner-occupied housing. Second, there are both high
frequency and low frequency cycles in the data and the low frequency cycles are,
to me, surprisingly long. Third, for both series there has been an upward trend
in vacancies over the last 25 years with the most pronounced increases occurring from around 1980-1990
and after 2000. This is most evident in rentals, but owner-occupied shows
similar, but less discernable trends (the top graph appears noisier because it
is on a smaller scale). This is not what I expected. I anticipated that that
factors such as better search technology and more creative financial instruments
would have lowered average vacancy rates. Anyone have ideas why the
natural vacancy rate appears to be drifting upward over the last 25 years?
Were their tax changes, demographic changes, changes in second homes purchases and speculation, or is it just weak demand in some time periods? There is a caution in the footnote about comparing pre and post 1986 rates, and the data do change at this point, but the upward trend exists both before and after this breakpoint. Finally, this leads me to wonder how much variation there is in the natural rate
of unemployment over subgroups in labor markets. For example, is the
unemployment rate for temporary workers (corresponding to rentals)
substantially different from full time employees (corresponding to
owner-occupied)? Are we missing anything important by focusing on a single
national rate in policy applications such as the Taylor rule, or does that capture the national trend adequately?
Posted by Mark Thoma on Tuesday, November 29, 2005 at 12:03 AM in Economics, Housing, Unemployment |
By using the word externality, it makes this economics instead of science and posting it feels a little less off topic:
Cold War Clues - Atomic Tests Allow Carbon Dating of Baby Boomers, by Christine
Soares , Scientific American: Frustration was the mother of invention for
Jonas Frisén of the Medical Nobel Institute in Stockholm.... As a neuroscientist
working toward regenerating brain tissue, he would have found it handy to know
whether some or all of the human brain ever regenerates naturally and, if so,
how often. ... [T]he question was unanswerable for humans: the techniques used
to tag cells and watch their life cycles in animals employ toxic chemicals...
Then Frisén learned of a natural tag unique to people born after 1955, when
aboveground testing of nuclear weapons increased substantially. The explosions,
which stopped after the 1963 Limited Test Ban Treaty, threw enormous amounts of
carbon 14 isotope into the atmosphere ... Plants incorporated the carbon 14 into
their cells, animals ate the plants, and people ate both, absorbing the isotope
into their own cells and creating a trail Frisén could follow. ...
As ... the team reported in the journal Cell..., many parts of our
bodies are much younger than the whole. Jejunum cells from the gut tissue of
subjects in their mid-30s were less than 16 years old. Skeletal muscle from two
subjects in their late 30s was just over 15 years old. But the big surprises
were in the brain.... Neurons ... dated to a period at or near the subjects'
birth, indicating that those parts of the brain are formed at the beginning of
life and do not normally turn over. Frisén thinks it is too soon to know whether
his finding means less hope for therapeutic approaches to regenerating damaged
brain tissue. ...
There goes any hope of getting that regenerated brain I wanted for Christmas. I guess my days of doing things like stopping in the middle of a sentence during lectures and asking "What was I just talking about?" aren't going to end anytime soon. At least I can still find my way home.
Posted by Mark Thoma on Monday, November 28, 2005 at 03:23 PM in Economics, Market Failure, Science |
With the caution that this is a single monthly data point, sales of previously owned homes fell, a potential sign of a cooling market. The fall would have been larger
without increases in sales brought about by Katrina:
Existing Home Sales Dip, Prices Climb, by Martin Crutsinger, AP: ...The
National Association of Realtors reported Monday that sales of existing homes
and condominiums declined by 2.7 percent last month ... The decline would have
been an even larger ... without a spurt in sales in areas where people displaced
by the Gulf Coast hurricanes have moved. ... Even with the decline in sales, the
median price of an existing home sold last month rose by 16.6 percent to
$218,000 compared to the median ... price in October 2004. ...
increases have contributed to a rise in mortgage rates [I misread this - the article meant the rise in energy costs induced a rise in interest rates.]
One part is puzzling. An increase in prices is not consistent with an
increase in long-term interest rates and a decline in demand. Help me out - why are prices going up if the market is weak
and long-term rates are inching upward? Is it just price inertia? [See also
CNN/Money, Financial Times, and the
WSJ (AP report)] [NAR Report]
Update: See Calculate Risk who, of course, has this covered.
Posted by Mark Thoma on Monday, November 28, 2005 at 09:50 AM in Economics, Housing |
This is what I was trying to say in The Old Deal is Broken, but Krugman says it so much better:
of Anxiety and Job Insecurity, by Paul Krugman, NY Times: Many eulogies were published
following the recent death of Peter Drucker, ... however, ... few ... mentioned his book "The Age
of Discontinuity," a prophetic work that speaks directly to today's ... economic anxieties. Mr. Drucker wrote "The Age of Discontinuity"
in the late 1960's, a time when most people assumed that the big corporations ... like General Motors and U.S. Steel would dominate the
economy for the foreseeable future. He argued that this assumption was all
It was true, he acknowledged, that the dominant industries ...
of 1968 were pretty much the same as the dominant industries ... of
1945, and for that matter of decades earlier. ... But all of that, said Mr. Drucker, was about to change. New technologies would usher in an era of
"turbulence" ... and the dominance of the major industries ... of 1968 would soon come to an end. He
was right. ... Many of the corporate giants of the 1960's ... have fallen on
hard times, their places in the business hierarchy taken by new players. General
Motors is only the most famous example. So what? ...: why does it matter if the list of leading corporations turns over
every couple of decades, as long as the total number of jobs continues to grow?
The answer is the reason Mr. Drucker's old book is so relevant...:
corporations can't provide their workers with economic security if the
companies' own future is highly insecure. American workers at big companies used
to think they had made a deal. They would be loyal to their employers, and the
companies in turn would be loyal to them, guaranteeing job security, health care
and a dignified retirement. Such deals were, in a real sense, the basis of
America's postwar social order. We like to think of ourselves as rugged
individualists, not like those coddled Europeans with their oversized welfare
states. But as Jacob Hacker of Yale points out in his book "The Divided Welfare
State," if you add in corporate spending on health care and pensions ... we
actually have a welfare state that's about as large relative to our economy as
those of other advanced countries. ...
[T]hose who don't work for companies with good benefits are, in effect, second-class citizens. Still, the system more or
less worked for several decades after World War II. Now, however, deals are
being broken ... What went wrong? An important part of the answer is that
America's semi-privatized welfare state worked in the first place only because
we had a stable corporate order. And that stability - along with any semblance
of economic security for many workers - is now gone.
Regular readers ... know what I think we should do: instead of
trying to provide economic security through the back door, via tax breaks
designed to encourage corporations to provide health care and pensions, we
should provide it through the front door, starting with national health
insurance. You may disagree. But one thing is clear: Mr. Drucker's age of
discontinuity is also an age of anxiety, in which workers can no longer count on
loyalty from their employers.
Previous (11/25) column:
Paul Krugman: Bad for the Country
Next (12/2) column:
Paul Krugman: Bullet Points Over Baghdad
Posted by Mark Thoma on Monday, November 28, 2005 at 12:21 AM in Economics, Health Care, Social Security |
Discussions of the Fed between now and the meeting in December will be concerned
with a few dominant issues such as potential changes in the language in the
minutes, the transition to a new chair, explicit inflation targets, transparency, and what rate will be considered neutral
by the FOMC. Caroline Baum of Bloomberg covers the
change in the Fed statement and Kevin Hassett of Bloomberg has advice on
how to avoid roiling markets during the transition. The Financial Times
believes we are close to neutral. Jim Hamilton wonders if
inverted yield curve edges closer and hopes the Fed will pause in time. Tim Duy's Fed Watch looks at Fed signals regarding a pause. And,
for something different, Bloomberg discusses outspoken Dallas
Fed president Richard Fisher,
the Fed's 'Weakest Member'. An earlier Houston Chronicle report
Posted by Mark Thoma on Monday, November 28, 2005 at 12:15 AM in Economics, Monetary Policy |
One thing I have always liked about economics is its attempt to separate
positive and normative analysis to be as scientific as possible. Here are
definitions of positive and normative economics from Wikipedia:
Continue reading "Positively Normative Economic Analysis" »
Posted by Mark Thoma on Monday, November 28, 2005 at 12:06 AM in Economics, Methodology, Politics |
This fits well with recent discussions here on health care. I couldn't have
said it better:
The monsters who eat escargot, by Jonathan Chait, LA Times: One of the
iron laws of U.S. history is that there always has to be a foreign boogeyman
that conservatives can hold up to demonstrate the dangers of domestic
liberalism. When progressive Californians tried to implement a sweeping
healthcare reform in 1917, a conservative group attacked it as "a dangerous
device invented in Germany announced by the German emperor from the throne the
same year he started plotting and preparing to conquer the world." First
you're offering universal health insurance, and next thing you know you're
For many decades thereafter, the Soviet Union served admirably as foreign
boogeyman, serving to warn us of the dangers of anything from Social Security
to progressive taxation. Since the Cold War ended, this role has fallen upon
Western Europe in general and France in particular. For a few years now,
conservatives have been throwing Europe's slow economic growth in the face of
American liberals. The recent riots in Paris have naturally offered them an
irresistible opportunity. The Cato Institute's Michael Tanner recently articulated this taunt in the
conservative Washington Times. "There are important lessons for U.S.
policymakers" from the riots, he wrote. "American liberals often look fondly
to the European welfare state as a model for U.S. social policy." First you're
opposing President Bush's plan to privatize Social Security, and next thing
you know you're invading Fran … er, I meant to say, you are France.
The funny thing is that when Europe is doing well, conservatives tend to
uphold it as a vindication of their own policies. Fifteen years ago, Germany
was an economic powerhouse, and righties routinely claimed this was because of
its low capital gains taxes. (After the 1990 upper-bracket tax hike, a
National Review editorial sulked: "The dollar has sunk to new lows against the
German mark…. It seems that capital is flowing out of the United States to
nations where 'from each according to his ability, to each according to his
need' has lost its allure.") And when Russia imposed a flat tax, conservatives responded in the
rapturous tones of a 1930s fellow traveler recounting Stalin's worker's
paradise. Heritage Foundation scholar and flat-tax buff Daniel Mitchell wrote,
"Russia's flat tax already beats America's punitive redistribution- oriented
tax code hands down." Conservative columnist Deroy Murdock noted how
"ex-Communist states confidently reject progressive taxation" and lamented,
"Too bad this isn't Russia." Need I point out that Russia is a bleak hellhole
of corruption, decay and political repression, and a far less pleasant place
to live than France?
Instead of just ridiculing the conservative argument, let's take it
seriously for a moment. Near as I can tell, they seem to be saying this:
Liberals want bigger government. Europe has bigger government. Bad things are
happening to Europe. Q.E.D.
Do conservatives have even a germ of a point here? No. It's true that
liberals admire some things that Europe does, and it's also true that Europe
has some highly destructive policies. But there's almost no overlap between
the two. By almost all accounts, the single most damaging aspect of European
and French policy is the absurdly restrictive rules on firing employees, which
discourage businesses from hiring anybody and result in high unemployment. I've never, ever heard an American liberal call for emulating French labor
regulations. You do, on the other hand, hear liberals praising France's
effective public transportation and, above all, its healthcare system.
Tanner's column doesn't try to cite France's advanced rapid transit as a cause
of social decay, but it does mention its "universal national healthcare
This is particularly laughable. France's healthcare system does cover
everybody, has far more doctors per capita than the U.S. and produces better
health outcomes. Is this lavish socialist system bankrupting the country? Far
from it. France spends about 10% of its national income on healthcare, as
opposed to 15% in the U.S. In fact, we're the country being bankrupted by its
healthcare system, which is by far the most market-intensive in the advanced
world. Skyrocketing healthcare costs are discouraging job growth and
strangling the automobile industry, among others.
Maybe we should address that problem, and maybe we shouldn't. (I subscribe
to the former view.) Either way, we shouldn't be held back by the fear that
reform will lead to marauding Islamic youth taking over our streets.
Posted by Mark Thoma on Sunday, November 27, 2005 at 02:02 AM in Economics, Health Care, Politics |
The administration is having trouble finding academic economists willing to fill
vacancies on its economic team. See this
Times Economic View.
Posted by Mark Thoma on Sunday, November 27, 2005 at 01:36 AM in Economics, Politics, Unemployment |
Another economist wannabee from the sciences. We get these every so often. This is from Discover magazine:
Discover Dialogue: Geophysicist Didier Sornette, The Dauphin of Disasters, by Jocelyn
Selim, Discover: Didier Sornette is a professor of geophysics at UCLA ...
He uses complexity theory to study the myriad causes and effects of catastrophic
events, ranging from earthquakes to stock market crashes.
Is there a simple way to explain complexity theory?
S: It's an attempt to understand the organization of all the stuff of
interest around us, from galaxies down to bacteria, by understanding the
interplay between the positive and negative feedbacks of the various interacting
elements. Negative feedback is often obvious—if there are too many rabbits, they
eat all the grass, and the population goes down. Positive feedback is much less
well appreciated and understood. For example, the more fax machines there are,
the more attractive they become because you have more people sharing and
extending information. ... We use empirical observation. ... [to develop] a
complex system ... reflecting
the interplay of positive and negative feedbacks ...
How can you extend that thinking to human behavior?
S: Systems influenced by behavior, like the stock market, are surprisingly
simpler to predict because we have an extraordinarily large base of ... very good quality data. We now know, for example, that if people
believe in incorrect things, they can influence events. If everybody believes
that the stock market is going to go up, the stock market will go up ..., even if this is completely wrong on
the basis of fundamental analysis ...
Is that how bubbles happen?
S: When prices skyrocket above a reasonable bracket, they become unstable
because eventually they must return to a reasonable level. So ... a crash ... is not due to a specific event; it's the result of an instability
that has matured over months or years. Think of putting a pen on your finger
vertically. You may be able to hold it for a while, but it is a very unstable
situation. ... [T]he fundamental explanation is that the pen was put in an unstable
Continue reading "Who Ya Gonna Call?" »
Posted by Mark Thoma on Sunday, November 27, 2005 at 12:51 AM in Economics, Housing, Science |
Posts at this site, from Kash at Angry Bear, and many others have been talking about the
value of education in the emerging global marketplace, often to a less than fully receptive audience. At the risk of overdoing
this topic and of diverting attention from the health care discussion below which I'd rather not do just yet, here is
a follow up to two recent posts from Kash on
Education and Earnings and
Skills Needed. First, California is often a trend-setter,
but the trends are not always good:
California's going to get a shocking education, by Patrick M. Callan,
Commentary, LA Times: ...If current education policies continue unchanged, the
California workforce of 2020 is going to be less educated than today's,
according to a recent report ... and the state's per-capita income will drop
more substantially than elsewhere in the country. The transformation will
occur as baby boomers, the most highly educated generation in U.S. history,
retire. Across the country they will be replaced by a growing population of
young workers from the nation's least-educated minority groups. The share of
the workforce that is college educated will shrink accordingly, losing the
U.S. much of its advantage in the global marketplace. The problem is national, but in California it will be particularly severe.
... The Latino population, by far the least educated of any of the state's
large minority groups, is expanding dramatically. By 2020, Latinos will make
up as large a share of the state's working-age population ... as whites...
This is a seismic shift; in 1990, only 22% of working-age adults were Latino
and 61% were white. ... [T]he state is making only limited progress with its
current students. ... the gaps between
young Latinos ... and young whites, blacks and Asian Americans
remain large. To some extent, the problem may be one of inadequate preparation in
California's schools. ... But preparation is not the whole story. The expense
of higher education can also be prohibitive. California provides more low-cost
college options than most states and has recently increased ...
need-based financial aid. But for the poorest 40% of California families, the
cost each year of sending a child to community college still amounts to more
than a third of the average family income. The cost of sending a child to a
public four-year college, even after figuring in financial aid, amounts to
nearly half of such a family's income. If California does nothing more to
raise the education level of its residents, and particularly of its largest,
fastest-growing and least-educated minority group, it can expect to lose
economic ground against the world and other states. ...
Next, here's more
from the St. Louis Fed:
Employment Growth in America
Determines Good Jobs?
Employment growth is one of the most fundamental aspects of a
strong economy. Yet not all jobs are created equal. Some pay generously and
offer desirable working conditions, while others do not. A study by Federal
Reserve Bank of St. Louis economist Christopher H. Wheeler examined the growth
of high-paying (“good”) and low-paying (“bad”) jobs across a sample of 206
metropolitan areas in the United States. This study suggests that ... [c]ities that experience rapid growth in high-wage employment also tend to see
increasing incomes throughout the entire labor market, not just among those who
happen to hold high-paying jobs...
Does Education Matter? One of the fundamental sources of good job growth
is an educated labor force. Within the past three decades, the demand for highly
educated workers has grown dramatically in the United States. In 1980, the
average proportion of workers across 200 industries with some education at the
college level was 32 percent. By 2000, it had risen to 51 percent. In fact, no
industry saw its proportion of college-educated workers decrease over this
period. At the same time, high-paying jobs also tend to
have a particularly strong demand for college-educated workers. Among the top 25
percent of jobs in the sample, the average proportion of workers with a
bachelor’s degree rose from 18 percent in 1980 to 36 percent in 2000. There is
also a strong positive association between an industry’s average hourly rate of
pay and the fraction of its workers with a bachelor’s degree. ... Why is the general level of education so
important? ... Not only is education
associated with higher earnings for individuals, but as the general level of
education within a city rises, the average labor earnings of all workers tend to
rise. An additional benefit of a more-educated work force concerns the potential
for future job growth. The level of education among a city’s population is
strongly associated with subsequent rates of growth among high-paying sectors.
... [C]ities with
more-educated populations tend to see the ratio of good to bad jobs increase
Here are the top 5 and bottom 5 industries identified in the article:
the U.S.: Average Hourly Pay and Total Employment
Average Hourly Wage ($)
||Security, Commodity Brokerage and Investment Companies
||Business Management and Consulting Services
||Computer and Data Processing Services
||Gasoline Service Stations
||Eating and Drinking Places
||Bowling Alleys, Billiard and Pool Parlors
This article was adapted from “Employment Growth in
America” ... by Christopher H. Wheeler ... published ... in July 2005.
a link to the July
2005 paper. It has quite a bit more information on the topic of growth in good/bad jobs for those who want to follow up.
Posted by Mark Thoma on Saturday, November 26, 2005 at 03:13 PM in Economics, Income Distribution, Unemployment, Universities |
Here is a summary of the symposium The Bretton Woods System: Are We Experiencing a Revival? from a San Francisco Federal Reserve Bank Economic Letter by Reuven Glick and Mark Spiegel:
At the center of this symposium was a presentation by Michael Dooley (UC Santa Cruz and Deutschebank) and Peter Garber (Deutschebank) based on their papers with David Folkerts-Landau (2003a, b, 2004). ... on the current international exchange rate system, the sustainability of global trade imbalances, and the implications for development by emerging markets, such as China. Other participants presented papers that questioned ... the extent to which those arguments account for current developments. [The papers listed at the end are available here].
Continue reading "Revived Bretton Woods System: A New Paradigm for Asian Development?" »
Posted by Mark Thoma on Saturday, November 26, 2005 at 01:05 AM in Academic Papers, China, Economics, Financial System, International Finance, International Trade, Monetary Policy |
Globalization of economic activity makes national borders less important to
the worldwide distribution of economic activity. As the global marketplace
emerges, businesses face increasing competition and the ability to compete
effectively in this environment requires reducing costs however and wherever
possible. Since labor is the largest cost for most goods, it is an obvious
target for cost reduction.
Costs can be reduced by enhancing labor's
productivity through training, better equipment and tools, and so on. Costs can
also be reduced by replacing people with machines. Yet another way to reduce
costs is to pay
labor less. All of these strategies have been pursued by businesses in recent
years, both through adjustment of existing businesses and through location
decisions, but I want to focus on the pay labor less option.
Labor compensation can be reduced by limiting or eliminating benefits. Firms
often put forth a stark choice in this regard: Either agree to give up
benefits or we will go bankrupt and you won't have a job at all. Other countries
don't face these costs and if we are to compete we must shed them as well.
What's a worker to do?
The problem is that the old deal is broken. Firms no longer feel, due to the
pressures of international competition, a long-run obligation to their workers.
And even if they do, competition makes such obligations difficult to fulfill. They need flexibility, the ability to expand and contract quickly and
efficiently, to relocate, to retool, to change prices, and so on, to meet the
competitive challenges they face.
In this world of increasing flexibility, workers as opposed to jobs need protection. If
workers are expected to flexibly change employment, they need health care that
travels with them from job to job. If they are expected to show flexibility and relocate as
necessary, workers need institutions that support and ease such transitions. We
can be flexible and still be decent to those who are affected.
Flexibility is a safe increase in volatility. An employee who comes to work every day and
works hard to support a family, a model employee perhaps, can suddenly be left
jobless as a company pursues the flexibility to adapt to changing conditions.
The worker has done nothing wrong but choose the wrong job or the wrong major in
That worker, not the worker's job, needs protection from the risk brought
about by enhanced flexibility and
there are questions as to whether the private sector can provide efficient
levels of insurance to workers against these risks. In addition to the efficiency question, there may not be a private
large enough to assume the sheer magnitude of risk that would be required. The
Great Depression was like a hurricane hitting the entire economy and the ability
of private insurance carriers to withstand such a large shock is
The efficiency question has been widely discussed and adverse selection and
moral hazard problems, as usual in insurance markets, are the barriers to
efficient provision of insurance against economic risk. Government regulation
and intervention into the markets is a solution to this problem. In addition,
the federal government is perhaps the only carrier capable of assuming such a
large magnitude of risk.
Workers need unemployment compensation, they need health care that follows
them from job to job, they need support for moving to find new jobs, they need
support for retraining, they need to know their children are safe if both
parents work, that their children can still attend college if their parents are
unemployed, this type of support will also make workers more flexible and aid in
the ability of the economy to respond quickly and efficiently to changing
As the long-term mutual obligations between workers and firms break down
under the pressures of globalization, it's time to think about protecting
workers and their families in a different and better way than we have in the past.
Capitalism is a societal choice to organize ourselves in a way that efficiently
provides goods and services. Because of that, the economic risks associated with
the economic system we choose are a societal obligation as well. For capitalism
to work well, it needs as much flexibility as possible from all sides, but
workers need protection from the risks that capitalism thrusts upon them.
We can start down this path by rethinking how we provide health care. The
current system is not functioning for either side. Workers are not receiving the
care they need, I don't think there is much doubt about that, and we have to
also acknowledge that firms are increasingly burdened and disadvantaged in the
international marketplace by health insurance costs.
For those worried about flexibility, it is not obvious that such steps make
workers or the economy less flexible. Worker's job choices can be distorted by
health care considerations both in the jobs they choose and in how long they
stay. Have you ever heard people talk about working for the government or a large business because of health coverage considerations, or hold onto a job they hate just to keep health care?
That's not efficient.
We can do better, but we must be willing to admit that the existing system isn't working, and
be willing to consider the full range of solutions, including a
national health care system. The old deal is broken and its time for a new and
better deal to take its place.
Posted by Mark Thoma on Friday, November 25, 2005 at 03:18 PM in Economics, Health Care, Market Failure, Policy, Social Security |
Paul Krugman continues his series on the need to fix our health care system. Here's a condensed version:
the Country, by Paul Krugman, NY Times: "What was good for our country," a former president of General
Motors once declared, "was good for General Motors, and vice versa." G.M.
... has announced that it will eliminate 30,000 jobs. Is what's bad for General
Motors bad for America? In this case, yes. ... I
won't defend the many bad decisions of G.M.'s management, or every demand made
by the United Automobile Workers. But job losses at General Motors are part of
the broader weakness of U.S. manufacturing, especially ... manufacturing that
offers workers decent wages and benefits. And some of that weakness reflects two
big distortions in our economy: a dysfunctional health care system and an
unsustainable trade deficit. ...
[L]ast year General Motors spent $1,500 per vehicle on health care. By
contrast, Toyota spent only $201 per vehicle in North America, and $97 in Japan. If the United States had national health insurance, G.M. would be in much better
shape ... Wouldn't taxpayer-financed health insurance amount to a subsidy to the
auto industry? Not really. ...[T]ying health insurance to employment distorts
the economy: it systematically discourages the creation of good jobs, the type
of jobs that come with good benefits. And somebody ends up paying for health
care anyway. ... either ... taxpayers or ...those with insurance. Moreover,
G.M.'s health care costs are so high in part because of the inefficiency of
America's fragmented health care system. We
spend far more per person on medical care than countries with national health
insurance, while getting worse results.
About the trade deficit: ... The flip side of the trade deficit is a
reorientation of our economy away from ... manufacturing, to industries that are
insulated from foreign competition, such as housing. ... The trade deficit isn't sustainable. ... [O]ne
of these days the easy credit will come to an end, and the United States will
have to start paying its way in the world economy. To do that, we'll have to
reorient our economy back toward producing things we can export or use to
replace imports. And that will mean pulling a lot of workers back into
manufacturing. So the rapid downsizing of manufacturing since 2000 ... amounts
to dismantling a sector we'll just have to rebuild a few years from now.
I don't want to attribute all of G.M.'s problems to our distorted economy.
One of the plants G.M. plans to close is in Canada, which has national health
insurance and ran a trade surplus last year. But the distortions in our economy
clearly make G.M.'s problems worse. ... G.M.'s woes are yet another reminder of
the urgent need to fix our health care system. It's long past time to move to a
national system that would reduce cost, diminish the burden on employers who try
to do the right thing and relieve working American families from the fear of
lost coverage. Fixing health care would be good for General Motors, and good for the country.
Paul Krugman in Money Talks: Denial and Deception.]
Previous (11/21) column:
Paul Krugman: Time to Leave
Next (11/28) column: Paul Krugman: Age of Anxiety
Posted by Mark Thoma on Friday, November 25, 2005 at 12:23 AM in Economics, Health Care, Market Failure |
Here's Tim Duy's latest Fed Watch:
Nothing like the
Fed minutes to liven up the debate! The minutes generated a buzz
bloggers as well as the financial community, with stocks and
bonds gaining on news that the Fed may be looking at a pause in the near future.
Is this the correct interpretation? Is this one of the little shifts in
sentiment that I am looking for? Very possibly the first salvo in the inevitable
move toward changing the statement and policy – but I think the Fed still sees
plenty of reason to keep raising rates into next year.
The market moving section of the minutes was:
In that context, all members believed it important to continue removing
monetary policy accommodation in order to check upside risks to inflation and
keep inflation expectations contained, but noted that policy setting would
need to be increasingly sensitive to incoming economic data. Some members
cautioned that risks of going too far with the tightening process could also
…Several aspects of the statement language would have to be changed before
long, particularly those related to the characterization of and outlook for
policy…Participants noted that any forward-looking elements of the statement
should clearly be conditioned on the outlook for inflation and economic
The Fed believes in fostering a healthy relationship with markets, which in
practice translates into providing clear signals about the path of policy. At
the same time, policymakers do not like to be roped into a policy path. And I
believe the latter is the current concern on Constitution Ave. When the Fed
Funds rate was 1%, there was little question about the path of policy. As long
as inflation remained tame, the Fed could remove policy in 25bp increments and
rest easy with the markets convinced that they would follow that path. But now
that rates have been mostly “normalized” in the neutral range, the fact of the
matter is that policy is no longer so straightforward.
Instead, policy is increasingly data dependent. Recognizing this, a growing
number of Fed officials believe they need more flexibility – ability to shift
without surprising financial markets – to react to incoming data.
The problem is trying to achieve that flexibility. Leaving the language as it is implies the path is set for the next meeting. But changing the message
apparently means that the path is set as well – to a pause in the cycle. Market
participants might take that to mean not just pause, but done raising rates
entirely. Consequently, the attempt to increase flexibility could trigger
reduced flexibility in the opposite direction. Something of a conundrum and one
that I believe has been a persistent problem with the statement over time.
A problem that is not without a solution, of course. Policymakers could
clarify their intentions with Fedspeak. And indeed they have –
Mark Thoma reports that Fedspeak remains
convincingly hawkish. This suggests that policymakers want to regain
flexibility, not necessarily signal a pause in rates is imminent.
Moreover, the staff’s expectation is that the impact of higher energy prices
on core inflation fades, this does not necessarily argue for a pause. Why?
Because the outlook for growth holds strong. Notably, look at the staff’s
forecast (italics mine):
Output growth was expected to pick up in 2006, as the boost from
hurricane-related rebuilding activity more than offset the effects of somewhat
tighter financial conditions, and then slow in 2007, as the impetus from
Growth is expected to accelerate – but Chicago Fed President Michael Moskow
claims growth is already above potential and excess slack in the economy has
been largely eliminated. Slowing in 2007 is not much comfort to someone worrying
about inflationary pressures now. So I don’t sense that he is going to be
arguing for a pause in the near future.
Also notice that despite 300bp of tightening, financial conditions are only
“somewhat tighter.” This reflects the fact that Fed tightening to date appears
to have had minimal impact on the long end of the yield curve. This lack of pass
through is likely the reason for the staff’s optimistic outlook despite a long
series of rates hikes. If markets take a pause to mean that hikes are over and
start looking for a rate cut, financial conditions could loosen back up in a
period of what staff expects to be accelerating activity. This appears to be
counterproductive given the Fed’s inflation worries.
In short, I think you can focus on the expected “pickup in growth side” or
the “risk of going too far” side of the minutes. I will stick to the midpoint of
these interpretations: The Fed is increasingly worried that policy is being
taken for granted. They want more flexibility in policy, more recognition that incoming data is
increasingly important, they need to communicate the possibility of change while
sticking to the current path, and convey that a pause does not necessarily mean the
tightening cycle is over. Looks like a big communication challenge ahead.
Overall, I am not surprised that officials are ready to revisit their message
– but we are still looking for the data and Fedspeak to tell us that more
flexibility means a pause. [All Fed Watch posts.]
[Update: See also The End To Measured Pace? by David Altig at macroblog and Inverted yield curve edges closer by Jim Hamilton at econbrowser.]
Posted by Mark Thoma on Friday, November 25, 2005 at 12:16 AM in Economics, Fed Watch, Monetary Policy |
From the Census:
Thanksgiving Day - Nov. 24, 2005
What many regard as the nation’s first Thanksgiving took place in December 1621 as the religious separatist Pilgrims held a three-day feast to celebrate a bountiful harvest. The day did not become a national holiday until 1863 when President Abraham Lincoln proclaimed the last Thursday of November as a national day of thanksgiving. Later, President Franklin Roosevelt clarified that Thanksgiving should always be celebrated on the fourth Thursday of the month to encourage earlier holiday shopping, never on the occasional fifth Thursday.
256 million The preliminary estimate of the number of turkeys raised in the United States in 2005. That’s down 3 percent from 2004. The turkeys produced in 2004 weighed 7.3 billion pounds altogether and were valued at $3.1 billion.
Weighing in With a Menu of Culinary Delight
44.5 million The preliminary estimate of the number of turkeys Minnesota expects to raise in 2005. The Gopher State is tops in turkey production. It is followed by North Carolina (36.0 million), Arkansas (29.0 million), Virginia (21.0 million), Missouri (20.5 million) and California (15.1 million). These six states together will probably account for about 65 percent of U. S. turkeys produced in 2005.
649 million pounds The forecast for U.S. cranberry production in 2005, up 5 percent from 2004. Wisconsin is expected to lead all states in the production of cranberries, with 367 million pounds, followed by Massachusetts (170 million). Oregon, New Jersey and Washington are also expected to have substantial production, ranging from 18 million to 52 million pounds.
1.6 billion pounds The total weight of sweet potatoes — another popular Thanksgiving side dish — produced in the United States in 2004. North Carolina (688 million pounds) produced more sweet potatoes than any other state. It was followed by California (339 million pounds). Mississippi and Louisiana also produced large amounts: at least 200 million pounds each.
998 million pounds Total pumpkin production of major pumpkin-producing states in 2004. Illinois, with a production of 457 million pounds, led the country. Pumpkin patches in California, Ohio, Michigan, Pennsylvania and New York also produced a lot of pumpkins: each state produced at least 70 million pounds worth. The value of all the pumpkins produced by these states was about $100 million.
2.1 billion bushels The total volume of wheat — the essential ingredient of bread, rolls and pies — produced in the United States in 2005. Kansas and North Dakota — combined — accounted for about 33 percent of the nation’s wheat production.
$5.2 million The value of U.S. imports of live turkeys during the first half of 2005 — all from Canada. Our northern neighbors also accounted for all of the cranberries the United States imported ($2.2 million). When it comes to sweet potatoes, however, the Dominican Republic was the source of most ($2.3 million) of total imports ($2.6 million). The United States ran a $1.7 million trade deficit in live turkeys over the period, but surpluses of $3.5 million in cranberries and $10.6 million in sweet potatoes.
13.7 pounds The quantity of turkey consumed by the typical American in 2003 and, if tradition be true, a hearty helping of it was devoured at Thanksgiving time. On the other hand, per capita sweet potato consumption was 4.7 pounds.
The Turkey Industry
$3.6 billion The value of turkeys shipped by the nation’s poultry processors in 2002. Those located in Arkansas led the way with $581.5 million in shipments, followed by processors in Virginia ($544.2 million) and North Carolina ($453.0 million). Businesses that primarily processed turkeys operated out of 35 establishments, employing about 17,000 people.
The Price is Right
$1.00 Cost per pound of a frozen whole turkey in December 2004.
Where to Feast
3 Number of places in the United States named after the holiday’s traditional main course. Turkey, Texas, was the most populous in 2004, with 496 residents; followed by Turkey Creek, La. (357); and Turkey, N.C. (267). There also are 16 townships around the country named “Turkey,” three in Kansas.
8 Number of places and townships in the United States that are named “Cranberry” or some spelling variation of the name we call the red, acidic berry (e.g., Cranbury, N.J.), a popular side dish at Thanksgiving.
20 Number of places in the United States named Plymouth, as in “Plymouth Rock,” legendary location of the first Thanksgiving. Plymouth, Minn., is the most populous, with 69,797 residents in 2004; Plymouth, Mass., had 54,604. Speaking of Plymouth Rock, there is just one township in the United States named “Pilgrim.” Located in Dade County, Mo., its population was 135.
107 million Number of occupied housing units across the nation — all potential gathering places for people to celebrate the holiday.
Finally, thanks to everyone who visits this site. I started writing one day around nine months ago not expecting much. This has exceeded, by a substantial margin, even my wildest expectations and I'm very, very grateful for that (and astounded to be honest). I owe a big thanks to all who visit and to all of the other bloggers who have helped people find Economist's View as they agree or take issue with the things I post. I plan to continue and to do my best to improve the site over time. So whether you comment regularly, occasionally, or not at all, whether you agree with what I say or straighten me out when you don't:
Posted by Mark Thoma on Thursday, November 24, 2005 at 09:44 AM in Economics, Miscellaneous |
James E. McWilliams, a history professor at Texas State University at San
Marcos, on the social and cultural adjustments required of the Pilgrims before a self-sustaining mode of production could emerge:
Held Their Noses, and Ate, by James E. McWilliams, Commentary, NY Times:
No contemporary American holiday is as deeply steeped in culinary tradition as
Thanksgiving. ... [It's] a feast with a narrowly proscribed list of foods -
usually some combination of turkey, corn, cranberries, squash and pumpkin pie.
Decorated with these dishes, the Thanksgiving table has become a secular altar
upon which we worship America's pioneering character, a place to show
reverence for the rugged Pilgrims who came to Plymouth in peace, sat with the
Indians as equals and indulged in the New World's cornucopia with gusto. But
you might call this comfort food for a comfort myth.
The native American food that the Pilgrims supposedly enjoyed would have
offended the palate of any self-respecting English colonist ... Our comfort
food ... was the bane of the settlers' culinary existence. Understanding this
paradox requires acknowledging that there's no evidence to support the
holiday's early association with food - much less foods native to North
America. ... It wasn't until the mid-19th century that domestic writers began
to play down Thanksgiving's religious emphasis and invest the holiday with
familiar culinary values. Sarah Josepha Hale and her fellow Martha Stewarts of
the day implored families to "sit down together at the feast of fat things"
and raise a toast to the Thanksgiving holiday. When Abraham Lincoln declared
Thanksgiving a national holiday in 1863, the cornucopia-inspired myth was, as
a result of these literary efforts, in full bloom. ... [H]owever, the earthy
victuals that Thanksgiving revisionists arranged on the Pilgrims' fictional
table were foods that Pilgrims and their descendants would have rather
The reason is fairly simple. Hale and her fellow writers seem to have
forgotten ... their Puritan forebears ... strict notions about food production
and preparation. Proper notions of English husbandry generally demanded that
flesh be domesticated, grain neatly planted and fruit and vegetables
cultivated in gardens and orchards. Given these expectations, English migrants
recoiled upon discovering that the native inhabitants hunted their game, grew
their grain haphazardly and foraged for fruit and vegetables. ... [T]he
English deemed the native manner of acquiring these goods nothing short of
barbaric. ... They typically prepared fields by setting fire to the underbrush
and girdling surrounding trees. Afterward, they planted corn, gourds and beans
willy-nilly across charred ground, possibly throwing in fish as fertilizer. To
the Indian women who tended the plants with clamshell hoes, the ecological
brilliance of this arrangement was abundantly clear: the cornstalks stretched
into sturdy poles for the beans to climb upon, the corn leaves fanned out to
provide squash with shade, and the beans enriched the soil with extra
nitrogen. But the English, blinded by tradition, never got it - they just
looked on in horror. Where were the fences? The neat rows of cross-sectioned
grain? The plows? ... The team of oxen? ... Why were perfectly good trees left
to rot? ... And those fish! Why not salt them down and export them to Europe
for a tidy profit? What was wrong with these people? The collective English
answer - "everything" - honed the colonists' distaste for foods, especially
corn and squash, that they quickly judged best for farm animals.
A similar culinary misunderstanding developed over meat. To be sure, the
English frequently hunted for their meals. But hunting was preferably a sport.
When the English farmer chased game to feed his family, he did so with pangs
of shame. To resort to the hunt was, after all, indicative of agricultural
failure... Thus the colonists reacted with extreme disapproval when they saw
Indian men ... disappearing into the woods for weeks at a time to track down
protein. Making the scene even more primitive was that the women who stayed
behind ... toiling away at odd jobs that the English valiantly considered
men's work. The elk, bear, raccoon, possum and indeed the wild turkeys that
the men hauled back to the village were, for all these reasons, tainted goods
reflective of multiple agricultural perversions.
They were also ... unavoidable. The methods that colonists condemned as
agriculturally backwards ... became necessary to their survival. No matter how
hard they tried, no matter how carefully they tended their crops and repaired
their fences ... and furrowed their fields, colonial Americans failed to
replicate European husbandry practices. Geography alone wouldn't allow it. The
adaptation of Indian agricultural techniques ... provoked severe cultural
insecurity. This insecurity turned to conspicuous dread when the colonists
were mocked by their metropolitan cousins as living, in the words of one
haughty Englishman, "in a state of ignorance and barbarism, not much superior
to those of the native Indians." This hurt. And under the circumstances no
status-minded English colonist would have possibly highlighted his adherence
to native American victuals ... Indeed, it wasn't until after the Revolution,
when the new nation was seeking ways to differentiate itself from the Old
World, that these foods became celebrated as a reflection of emerging ideals
like simplicity, manifest destiny and rugged individualism. ...
Caroline Baum at Bloomberg also talks about early Thanksgivings:
Give Thanks for Incentives Along With the Feast, by Caroline Baum, Bloomberg:
It is the tradition of this column every year at this time to relate the story
of Thanksgiving. For source material, I relied on the accounts of William
Bradford, governor of the Plymouth Bay Colony beginning in 1621 (Bradford's
History ''Of Plimoth Plantation'').
Most Americans think of Thanksgiving as a day off from school or work, a
time to gather with friends and family and celebrate with a huge feast. If
children know anything about the origins of this national holiday, ... it's
that the Pilgrims, grateful for a good harvest in their new land, set aside
this day to give thanks. What they and many adults don't know is that
conditions weren't always good for the Pilgrims... Their first winters after
they landed at Plymouth Rock in 1620 and established the Plymouth Bay Colony
were harsh. The weather and crop yields were poor. Half the Pilgrims died or
returned to England in the first year. Those who remained went hungry. Despite
their deep religious convictions, the Pilgrims took to stealing from one
One of the traditions the Pilgrims had brought with them from England was a
practice known as ''farming in common.'' Everything they produced was put into
a common pool; the harvest was rationed among them according to need. They had
thought ''that the taking away of property, and bringing in community into a
common wealth, would make them happy and flourishing,'' Bradford recounts.
They were wrong. ''For this community (so far as it was) was found to breed
much confusion and discontent, and retard much imployment that would have been
to their benefite and comforte,'' Bradford writes. Young, able-bodied men
resented working for others without compensation. They thought it an ''injuestice''
to receive the same allotment of food and clothing as those who didn't pull
their weight. What they lacked were proper incentives.
After the Pilgrims had endured near-starvation for three winters, Bradford
decided to experiment when it came time to plant in the spring of 1623. He set
aside a plot of land for each family, that ''they should set corne every man
for his owne perticuler, and in that regard trust to themselves.'' The results
were nothing short of miraculous. Bradford writes: ''This had very good
success; for it made all hands very industrious, so as much more corne was
planted than other waise would have bene by any means the Govr or any other
could use, and saved him a great deall of trouble, and gave far better
content.'' The women now went willingly into the field, carrying their young
children on their backs. Those who previously claimed they were too old or ill
to work embraced the idea of private property and enjoyed the fruits of their
labor, eventually producing enough to trade their excess corn for furs and
other desired commodities.
Given appropriate incentives, the Pilgrims produced and enjoyed a bountiful
harvest in the fall of 1623 and set aside ''a day of thanksgiving'' to thank
God for their good fortune. ''Any generall wante or famine hath not been
amongst them since to this day,'' Bradford writes in an entry from 1647, the
last year covered by his History. With the benefit of hindsight, we know that
the Pilgrims' good fortune was not a matter of luck. In 1623, they were
responding to the same incentives that, almost four centuries later, have come
to be regarded as necessary for a free and prosperous society.
Interesting contrast in views.
Posted by Mark Thoma on Thursday, November 24, 2005 at 02:22 AM in Economics |
Robert Frank of Cornell University, co-author with Ben S. Bernanke of
"Principles of Microeconomics," looks at the costs and benefits of recent tax
cuts for those at the higher end of the income distribution. When the costs are
fully accounted for, he comes to the conclusion that recent tax cuts for the
wealthy have made them worse off:
24, 2005 Economic Scene Sometimes, a Tax Cut for the Wealthy Can Hurt the
Wealthy, by Robert H. Frank, NY Times: ...A careful reading of the evidence
suggests that even the wealthy have been made worse off, on balance, by recent
tax cuts. The private benefits ... have been much smaller, and their indirect
costs much larger, than many recipients appear to have anticipated. On the
benefit side, tax cuts have led the wealthy to buy larger houses in the ...
expectation that doing so would make them happier. ...[H]owever, ... for the
wealthy in particular, when everyone's house grows larger, the primary effect is
merely to redefine what qualifies as an acceptable dwelling. So, ... these
purchases appear to have had little impact. As the economist Richard Layard has
written, "In a poor country, a man proves to his wife that he loves her by
giving her a rose, but in a rich country, he must give a dozen roses."
On the cost side of the ledger, the federal budget deficits ... will exceed
$300 billion for each of the next six years... [S]ince the wealthy are well
represented in our political system, their favored programs may seem safe from
the budget ax. Wealthy families have further insulated themselves by living in
gated communities and sending their children to private schools. Yet such steps
go only so far. For example, deficits have led to cuts in federal financing for
basic scientific research... Such cuts threaten the very basis of our long-term
economic prosperity. As Senator Pete Domenici, Republican of New Mexico, said:
"We thought we'd keep the high-end jobs, and others would take the low-end jobs.
We're now on track to a second-rate economy and a second-rate country." Large
deficits also threaten our public health. Thus, despite the increasing threat
from micro-organisms like E. coli ..., the government inspects beef processing
plants at only a quarter the rate it did in the early 1980's. Poor people have
died from eating contaminated beef but so have rich people. Citing revenue
shortfalls, the nation postpones maintenance of its streets and highways, even
though doing so means having to spend two to five times as much on repairs in
the long run. In the short run, bad roads cause thousands of accidents each
year... Poor people die in these accidents but so do rich people. When a pothole
destroys a tire and wheel, replacements cost only $63 for a Ford Escort but
$1,569 for a Porsche 911.
Deficits have also compromised the nation's security. In 2004, for example,
the Bush administration reduced financing ... to secure loosely guarded nuclear
stockpiles in the former Soviet Union by 8 percent. ... And despite the rational
fear that terrorists may try to detonate a nuclear bomb in an American city,
most cargo containers continue to enter the nation's ports without inspection.
Large federal budget deficits and low household savings rates have also forced
our government to borrow more than $650 billion each year, primarily from China,
Japan and South Korea. These loans must be repaid in full, with interest. The
resulting financial burden, plus the risks associated with increased
international monetary instability, fall disproportionately on the rich.
At the president's behest, Congress has already enacted tax cuts that will
result in some $2 trillion in revenue losses by 2010. ... Republicans in
Congress are now calling for an additional $69 billion in tax cuts aimed largely
at high-income families. With the economy already at full employment, no one
pretends these cuts are needed to stimulate spending. ... Moralists often urge
the wealthy to imagine how easily their lives could have turned out differently,
to adopt a more forgiving posture toward those less prosperous. But top earners
might also wish to consider evidence that their own families would have been
better off, in purely practical terms, had it not been for the tax cuts of
[Update: See Kash at Angry Bear who disagrees with Frank's conclusion. I don't know for sure how the numbers would net out, but for me, the net effect isn't as important as the idea that costs must be fully accounted for when asking how benefits from tax cuts are distributed, and that includes any costs that accrue to other income classes as well. The exact quantification will always be controversial.]
Posted by Mark Thoma on Thursday, November 24, 2005 at 01:30 AM in Budget Deficit, Economics, Income Distribution, Taxes |
Here's Paul Krugman in Money Talks with a blast from the past, and a thought about the present. Krugman asks "Why now? Why has the question of whether we were misled into war sprung
into the forefront of our political debate, more than two years after it became
clear that there were no W.M.D.?":
Denial and Deception, Revisited, by Paul Krugman, NY Times: I’m trying not to write too much about the Iraq war these days. It’s an issue
I’m passionate about, and there was a long time when I felt I had to speak out,
even though I have no special expertise in national security, because it seemed
that so few people in major news organizations were willing to say the obvious.
But now there are many voices talking about how we got into this disastrous war
and how we might get out, so by and large it makes sense for me to focus more on
the economic issues The Times originally hired me to cover.
There is one question about Iraq, however, on which I think I can shed some
light: Why now? Why has the question of whether we were misled into war sprung
into the forefront of our political debate, more than two years after it became
clear that there were no W.M.D.? Part of the answer is that some new information has emerged about how the
White House misrepresented the intelligence it had. But the truth is that by the
summer of 2003 there was ample evidence that the administration had deliberately
misled the public to promote a war it wanted.
So why didn’t the public read and hear more about this evidence until very
recently? The answer, I’m afraid, is that the polls led the discussion, rather
than following it. With some honorable exceptions, politicians and the news
media weren’t willing to take the issue on until President Bush had already been
politically wounded by the failure of his Social Security plans and his hapless
response to Hurricane Katrina – and a majority of the public had already come to
the conclusion that we were misled into war.
And I’m sorry to say that I saw it coming. What follows is a column I
published in The Times on June 24, 2003, under the headline “Denial and
Deception.” I think the piece speaks for itself.
DENIAL AND DECEPTION (June 24, 2003): Politics is full of ironies. On the White House Web site, George W. Bush's
speech from Oct. 7, 2002 — in which he made the case for war with Iraq – bears
the headline ''Denial and Deception.'' Indeed.
There is no longer any serious doubt that Bush administration officials
deceived us into war. The key question now is why so many influential people are
in denial, unwilling to admit the obvious.
About the deception: Leaks from professional intelligence analysts, who are
furious over the way their work was abused, have given us a far more complete
picture of how America went to war. Thanks to reporting by my colleague Nicholas
Kristof, other reports in The New York Times and The Washington Post, and a
magisterial article by John Judis and Spencer Ackerman in The New Republic, we
now know that top officials, including Mr. Bush, sought to convey an impression
about the Iraqi threat that was not supported by actual intelligence reports.
In particular, there was never any evidence linking Saddam Hussein to Al
Qaeda; yet administration officials repeatedly suggested the existence of a
link. Supposed evidence of an active Iraqi nuclear program was thoroughly
debunked by the administration's own experts; yet administration officials
continued to cite that evidence and warn of Iraq's nuclear threat.
And yet the political and media establishment is in denial, finding excuses
for the administration's efforts to mislead both Congress and the public.
For example, some commentators have suggested that Mr. Bush should be let off
the hook as long as there is some interpretation of his prewar statements that
is technically true. Really? We're not talking about a business dispute that
hinges on the fine print of the contract; we're talking about the most solemn
decision a nation can make. If Mr. Bush's speeches gave the nation a misleading
impression about the case for war, close textual analysis showing that he didn't
literally say what he seemed to be saying is no excuse. On the contrary, it
suggests that he knew that his case couldn't stand close scrutiny.
Consider, for example, what Mr. Bush said in his ''denial and deception''
speech about the supposed Saddam-Osama link: that there were ''high-level
contacts that go back a decade.'' In fact, intelligence agencies knew of
tentative contacts between Saddam and an infant Al Qaeda in the early 1990's,
but found no good evidence of a continuing relationship. So Mr. Bush made what
sounded like an assertion of an ongoing relationship between Iraq and Al Qaeda,
but phrased it cagily – suggesting that he or his speechwriter knew full well
that his case was shaky.
Other commentators suggest that Mr. Bush may have sincerely believed, despite
the lack of evidence, that Saddam was working with Osama and developing nuclear
weapons. Actually, that's unlikely: why did he use such evasive wording if he
didn't know that he was improving on the truth? In any case, however, somebody
was at fault. If top administration officials somehow failed to apprise Mr. Bush
of intelligence reports refuting key pieces of his case against Iraq, they
weren't doing their jobs. And Mr. Bush should be the first person to demand
So why are so many people making excuses for Mr. Bush and his officials?
Part of the answer, of course, is raw partisanship. One important difference
between our current scandal and the Watergate affair is that it's almost
impossible now to imagine a Republican senator asking, ''What did the president
know, and when did he know it?''
But even people who aren't partisan Republicans shy away from confronting the
administration's dishonest case for war, because they don't want to face the
After all, suppose that a politician – or a journalist – admits to himself
that Mr. Bush bamboozled the nation into war. Well, launching a war on false
pretenses is, to say the least, a breach of trust. So if you admit to yourself
that such a thing happened, you have a moral obligation to demand accountability
– and to do so not only in the face of a powerful, ruthless political machine
but in the face of a country not yet ready to believe that its leaders have
exploited 9/11 for political gain. It's a scary prospect.
Yet if we can't find people willing to take the risk – to face the truth and
act on it – what will happen to our democracy?
Posted by Mark Thoma on Thursday, November 24, 2005 at 01:23 AM in Iraq and Afghanistan, Politics |
Robert Gordon explores the reasons for the decline in business cycle
volatility since the mid-1980s:
What Caused the Decline in
U.S. Business Cycle Volatility?, by Robert J. Gordon , NBER WP 11777, November
2005: Abstract This paper investigates the sources of the widely
noticed reduction in the volatility of American business cycles since the mid
1980s. Our analysis of reduced volatility emphasizes the sharp decline in the
standard deviation of changes in real GDP, of the output gap, and of the
inflation rate. The primary results of the paper are based on a small
three-equation macro model that includes equations for the inflation rate, the
nominal Federal Funds rate, and the change in the output gap. The development
and analysis of the model goes beyond the previous literature in two directions.
First, instead of quantifying the role of shocks-in-general, it decomposes the
effect of shocks between a specific set of supply shock variables in the model’s
inflation equation, and the error term in the output gap equation that is
interpreted as representing “IS” shifts or “demand shocks”. It concludes that
the reduced variance of shocks was the dominant source of reduced business-cycle
volatility. Supply shocks accounted for 80 percent of the volatility of
inflation before 1984 and demand shocks the remainder. The high level of output
volatility before 1984 is accounted for roughly two-thirds by the output errors
(demand shocks) and the remainder by supply shocks. The output errors are tied
to the paper’s initial decomposition of the demand side of the economy, which
concludes that three sectors - residential and inventory investment and Federal
government spending, account for 50 percent in the reduction in the average
standard deviation of real GDP when the 1950-83 and 1984-2004 intervals are
compared. The second innovation in this paper is to reinterpret the role of
changes in Fed monetary policy. Previous research on Taylor rule reaction
functions identifies a shift after 1979 in the Volcker era toward inflation
fighting with no concern about output, and then a shift in the Greenspan era to
a combination of inflation fighting along with strong countercyclical responses
to positive or negative output gaps. Our results accept this characterization of
the Volcker era but find that previous estimates of Greenspan-era reaction
functions are plagued by positive serial correlation. Once a correction for
serial correlation is applied, the Greenspan-era reaction function looks almost
identical to the pre-1979 “Burns” reaction function! [Open link to conference version of paper.]
Robert Gordon and Todd vanGoethem ask if there is a downward bias in the CPI:
A Century of Housing Shelter
Prices: Is There a Downward Bias in the CPI?, by Robert J. Gordon, Todd
vanGoethem, NBER WP 11776, November 2005: Abstract Tenant rental
shelter is by far the most important component of the CPI, because it is used as
a proxy for owner-occupied housing. This paper develops a wide variety of
current and historical evidence dating back to 1914 to demonstrate that the CPI
rent index is biased downward for all of the last century. The CPI rises roughly
2 percent per year slower than quality-unadjusted indexes of gross rent, setting
a challenge for this research of measuring the rate of quality change in rental
apartments. If quality increased at a rate of 2 percent per year, the CPI was
not biased downward at all, but if quality increased at a slower rate of 1
percent per year, then the CPI was biased downward at a rate of 1 percent. Our
analysis of a rich set of data sources goes backward chronologically, starting
with a hedonic regression analysis on a large set of panel data from the
American Housing Survey (AHS) covering 1975-2003. Prior to 1975, we have large
micro data files from the U. S. Census of Housing extending back to 1930. In
addition to the hedonic regression data, we stitch together data on the
diffusion of important quality attributes of rental units, including plumbing,
heating, and electrification, over the period 1918-73. Our final piece of
evidence is based on a study of quality-adjusted rents in a single local
community, Evanston IL, covering the period 1925-99. Our overall conclusions are
surprisingly consistent across sources and eras, that the CPI bias was roughly
-1.0 percent prior to the methodological improvements in the CPI that date from
the mid-1980s. Our reliance on a wide variety of methodologies and evidence on
types of quality change and their importance, while leaving the outcome still
uncertain, at least in our view substantially narrows the range of possibilities
regarding the history of CPI bias for rental shelter over the twentieth century.
link to earlier version.]
Posted by Mark Thoma on Thursday, November 24, 2005 at 01:01 AM in Academic Papers, Economics, Inflation |
Robert Samuelson agrees with
Paul Krugman on the economics and politics of Medicare:
Drug Benefit Disaster, by Robert J. Samuelson, Washington Post: Good
policy can make for good politics, and bad policy can make for bad politics.
Republicans may be about to discover this truism with their Medicare drug
benefit... scheduled to take effect in January. As policy, the drug benefit is
a calamity. It worsens one of the nation's major problems (paying baby
boomers' retirement costs) while addressing a nonexistent "crisis" (allegedly
oppressive drug costs for retirees). Its purpose was mostly political: to
bribe the elderly or soon-to-be-elderly to vote for Republicans in 2004. Now
it may backfire on Republicans. ... Here, Republicans created grief for
themselves. They rejected a simple add-on of drug coverage to Medicare.
Instead, they preferred a "market-based" system that has private insurance
companies offer plans that are, in turn, subsidized by Medicare. Congress set
a minimum benefit ... and invited insurers to provide that plan or something
"actuarially equivalent." The result: many plans -- and much confusion. In 46
states, Medicare beneficiaries can choose from at least 40 plans, reports the
Kaiser Family Foundation. People feel overwhelmed. It's hard to compare
plans... One monthly premium is $1.87, another $99.90. ...
For Republicans, there's a second political problem -- outrage among
conservatives over the new spending and the biggest expansion of Medicare
since its creation in 1965. From 2005 to 2015, the drug benefit will cost $858
billion, estimates the Congressional Budget Office. Similarly, many
conservatives ridicule the role of private insurance companies. "This is not a
market-based system. It's central planning," says Robert Moffit of the
Heritage Foundation. ... Republicans deserve the backlash, because their
motives were so blatantly political. ... [T]he drug plan's features confirm
its political nature. First, Republicans declined to pay for it; most costs
(literally trillions of dollars) must be covered by borrowing or future tax
increases. Second, there's the "doughnut hole" -- the standard benefit
provides coverage up to $2,250 of drug costs and then no coverage for the next
$2,850. Of course, this makes no sense as health or social policy. The purpose
was political: to provide benefits for lots of people while limiting total
This administration reminds me of the comic-strip husband turned
plumber who invariably, while trying to fix a leak, ends up flooding
the basement and making things worse. Even when there are problems that everyone wants fixed, you are reluctant to turn this group loose with the pipe wrench.
Posted by Mark Thoma on Wednesday, November 23, 2005 at 02:21 AM in Economics, Health Care, Politics |
Bill Clinton, 42nd president of the
American Engagement, by Bill Clinton, Wall Street Journal Commentary:
Ten years ago, at the Wright-Patterson Air Force Base outside Dayton, Ohio, the
leaders who had waged a brutal four-year war in Bosnia ... finally agreed to
peace... after intense international
military and diplomatic pressure led by the United States. At the time, almost
everyone predicted that the Dayton Peace Agreement would fail. To enforce the agreement, I sent 20,000 U.S. soldiers to Bosnia
as part of a 60,000-troop NATO peacekeeping force... After the genocide of 1995, when more
than 7,000 men were murdered in Srebrenica, it was clear that only NATO under
America's leadership could ensure peace. Still, a large majority of the American public opposed my
decision. Some expected heavy casualties; some feared another round of war, with
Bosnia split in two and the need for our troops never-ending. On the day before
the Dayton Agreement was to take effect, the House of Representatives voted
three-to-one against an American troop deployment to Bosnia. Despite this
opposition, I felt the United States had to act in order to stop the atrocities
and try to bring peace and stability to the region. ...
Dayton ended the war. It will not resume. The region is now
stable and peaceful... Bosnia is one country. It does have two distinct entities, one
Serb and one a Croat-Muslim Federation, but movement is unimpeded across the
boundary line... The country
has a single currency and a single economy. ... Almost no one dared to predict these successes a decade ago. To be sure, Dayton was not a perfect peace.
... But it achieved vital national security interests. It
ended the worst war in Europe in half a century, which threatened the peaceful
integration of Europe after the Cold War. It, and subsequent events in Kosovo,
laid the basis for a multiethnic state, which has lived in peace for a decade
with its neighbors. It triggered the events that led to the dictator Slobodan
Milosevic's removal and trial at The Hague for war crimes. Additionally, at the time of Dayton we estimated that there
were more than 1,000 Islamic extremist fighters in Bosnia, and Iran had forged
close ties to some in Bosnia's government. Special provisions that we wrote into
the military annex of the Dayton Agreement gave us the opportunity to use NATO
troops to clean out those cells, even as al Qaeda was building its organization
in the heart of Europe.
We were well aware of Dayton's shortcomings. ... Regrettably, one major
Dayton task remains to be met. While this year the authorities in the Serb
republic of Bosnia and Herzegovina have assisted in the transferal of some 12
indicted war criminals to the International War Crimes Tribunal, ... Without the arrest and transfer of
all indicted war criminals, especially Radovan Karadzic and Ratko Mladic,
justice will not have been done and the Balkans will be unable to leave the past
Bosnia's 10-year path since Dayton reminds all of us privileged to lead U.S.
foreign policy of a simple truth: Every one of us who starts a large initiative
will be out of office before America's job is done. Progress takes time...
Therefore, we cannot undertake an initiative without preparing to hand it off --
by building support across the aisle at home, and by finding international
partners who will pick up the job when America is occupied by new challenges. To
this end, my administration built our policy around gaining allied support and
adding international help over time. ... Today Bosnia and its neighbors
are on their way to becoming part of a Europe whole and free -- something every
American president since Harry Truman has wanted. This could not have happened
had America not sustained our partnership with Europe during the difficult
process of making peace. ...
Today, the United States is again showing leadership in the
region. ... After this week's focus
on Bosnia, I look forward to the far more daunting task that lies ahead for
... resolving the final status of Kosovo. The long delay and
rising tensions will make negotiations harder, but they must proceed with strong
American involvement. Looking back, it is clear that the United States and our
European allies should have acted in Bosnia earlier. But when America did act,
with bombings followed by the diplomatic initiative that culminated in Dayton,
we made a decisive difference. ... Was it worth it? Absolutely. While there is
still work to be done, ... the dream of a Europe united,
free and at peace, is still alive.
Posted by Mark Thoma on Wednesday, November 23, 2005 at 01:41 AM in Politics |
This paper by Gali, Gertler, and Lopez-Salido is in response to papers such as
Modeling Inflation Dynamics: A Critical Survey of Recent Research, by Jeremy B.
Rudd and Karl Whelan which states:
Gali and Gertler’s  conclusion that rational forward looking behavior
plays the dominant role in these models is widely cited as a stylized fact in
this literature. We provide an alternative interpretation of the empirical
estimates obtained from these models, and argue that the data actually provide
very little evidence of an important role for rational forward-looking behavior
of the sort implied by these models.
Gali, Gertler, and Lopez-Salido respond with:
Robustness of the Estimates of
the Hybrid New Keynesian Phillips Curve, by Jordi Gali, Mark Gertler, David
Lopez-Salido, NBER WP 11788, November 2005: Abstract Galí and Gertler
(1999) developed a hybrid variant of the New Keynesian Phillips curve that
relates inflation to real marginal cost, expected future inflation and lagged
inflation. GMM estimates of the model suggest that forward looking behavior is
dominant: The coefficient on expected future inflation substantially exceeds
the coefficient on lagged inflation. While the latter differs significantly
from zero, it is quantitatively modest. Several authors have suggested that
our results are the product of specification bias or suspect estimation
methods. Here we show that these claims are incorrect, and that our results
are robust to a variety of estimation procedures, including GMM estimation of
the closed form, and nonlinear instrumental variables. Also, as we discuss,
many others have obtained very similar results to ours using a systems
approach, including FIML techniques. Hence, the conclusions of GG and others
regarding the importance of forward looking behavior remain robust. Introduction In this paper we show that the estimates of the hybrid New
Keynesian Phillips curve presented in Gali and Gertler (1999; henceforth GG) and
refined in Gali, Gertler and Lopez- Salido (2001; 2003; henceforth, GGLS) are
completely robust to recent criticisms by Rudd and Whelan (2005) and Linde
(2005). It follows that the main conclusions in GG and GGLS remain intact. In
this section, we first summarize the results in GG and GGLS and then provide a
brief summary of the response to our critics. In the sections that follow we
offer a more detailed response and also present some new results based on
alternative estimation approaches. [Free
author web site
and Bank of Spain
versions. Linde paper here.]
Posted by Mark Thoma on Wednesday, November 23, 2005 at 01:32 AM in Academic Papers, Economics, Inflation, Macroeconomics, Unemployment |
The Fed is beginning to think about how to signal a pause in its long campaign of measured increases in the
federal funds rate. I don't read this as saying a pause in the immediate
future is imminent (see the
comments from Jeffrey Lacker at macroblog and the comments here from Michael Moskow), but rather as a means of getting
ready to communicate a pause when the time does come. In this era of increasing transparency, a
communications strategy must develop that allows the Fed to signal its
intentions as clearly as possible. This is an institution that will, of course,
evolve over time and this committee must develop the foundations that allow an
effective communications strategy to emerge:
Minutes of the Federal Open Market Committee, November 1, 2005:
...In the Committee's discussion of monetary policy for the intermeeting
period, all members favored raising the target federal funds rate 25 basis
points to 4 percent at this meeting. The economy seemed to be growing at a
fairly strong pace, despite the temporary disruptions associated with the
hurricanes, and underlying economic slack was likely quite limited. In
that context, all members believed it important to continue removing
monetary policy accommodation in order to check upside risks to inflation
and keep inflation expectations contained, but noted that policy setting
would need to be increasingly sensitive to incoming economic data. Some
members cautioned that risks of going too far with the tightening process
could also eventually emerge. Nonetheless, all members agreed to indicate
at the conclusion of this meeting that a continued measured pace of policy
firming remained likely.
In their ongoing discussion of the Committee's communication strategy,
participants expressed a variety of perspectives about how the policy
statement issued at the end of FOMC meetings might evolve over time.
Several aspects of the statement language would have to be changed before
long, particularly those related to the characterization of and outlook
for policy. Possible future changes in the sentence on the balance of
risks to the Committee's objectives were also discussed. Participants
noted that any forward-looking elements of the statement should clearly be
conditioned on the outlook for inflation and economic growth. For this
meeting, members concurred that the current statement structure could be
retained, as it accurately conveyed their near-term economic and policy
I am not reading as much into this as some. We knew rates would stop
increasing at some point and this, to me, is just the Fed doing its best to be
ready when the day comes.
As noted above,
David Altig at macroblog also comments.
Update: See also Tim Duy's Fed Watch and Inverted yield curve edges closer by Jim Hamilton at econbrowser.
Posted by Mark Thoma on Wednesday, November 23, 2005 at 01:01 AM in Economics, Monetary Policy |
This report surprised me:
US manufacturing ‘undermined by skills gap’, Financial Times: America’s
ability to compete in the global economy is being undermined by a “serious
shortage”, of skilled workers in manufacturing industries, according to a survey
released on Tuesday. More than 80 per cent of US manufacturers are now
experiencing a shortage of qualified workers, which is taking an increasingly
negative toll on their ability to compete with global rivals, says the report by
the National Association of Manufacturers, the Manufacturing Institute and
Deloitte Consulting LLP. “The pain is most acute on the front line, where 90 per
cent report a moderate to severe shortage of qualified skilled production
employees including machinists, operators, craft workers, distributors and
technicians... Engineers and
scientists were also in short supply, with 65 per cent of respondents reporting
The survey exposes “a widening gap between the dwindling supply of skilled
workers in America and the growing technical demands of the modern manufacturing
workplace,” said John Engler, NAM president. “It is essential that America close
this skills gap if we are to maintain our edge in the global marketplace and
remain the world’s leader in innovation.” Mr Engler said both the public and
private sectors had to take “urgent action“ to improve skills and
competitiveness. ... If manufacturers are to remain competitive,
the issues of education and training reform must be given at least as much
attention as other top business concerns like trade, taxes, energy and
Manufacturers face the additional challenge of poor skill levels among
current employees, according to the report. The skills gap threatens America’s
ability to compete “in today’s fast-paced and increasingly demanding” global
economy. “It is emerging as our nation’s most pressing business issue,” stated
Manufacturing Institute President Jerry Jasinowski. “Nearly three out of four
manufacturers surveyed believe that a high performance workforce is the most
important driver of future business success. “
I'll say it again. Education is a key factor in our ability to compete in the emerging global marketplace.
Posted by Mark Thoma on Tuesday, November 22, 2005 at 09:33 AM in Economics, Unemployment, Universities |
The Bush administration motivates our neighbors to the south to help low-income U.S. residents pay for heating:
Chavez Pushes Petro-Diplomacy High Oil Profit Leads to Venezuela's Plan to
Subsidize Heating in United States, by Justin Blum, Washington Post:
...Citgo Petroleum Corp., a company controlled by the Venezuelan government of
President Hugo Chavez, a nettlesome adversary of the United States who has
accused the Bush administration of plotting to assassinate him and invade his
oil-rich country... is planning to announce today that it will provide
discounted heating oil this winter to many low-income residents of
Massachusetts... The company also plans to offer similar aid in New York. ... The populist South American president
would relish being able to show that Venezuela, far less wealthy than the United
States, had come to the rescue of low-income people here. ...
This is the second time in recent months that Chavez has used oil to tweak the
United States... In September, Venezuela made a very public announcement about
diverting shipments of gasoline to the United States to help prevent shortages
after hurricanes Katrina and Rita...
The assistance might be viewed as altruistic by the United States, if not for
the history of tension between the Bush administration and Chavez. In a
September appearance at the United Nations, Chavez attacked the Bush
administration for not doing more for the poor residents of New Orleans... He
also said the United States was abetting "international terrorism" because it
failed to arrest the Rev. Pat Robertson for saying that the United States should
consider assassinating Chavez. ... Chavez ... concerns U.S. officials
because he has repeatedly threatened to cut off oil shipments. Venezuela is one
of the largest suppliers to the United States, providing about 1.5 million
barrels a day of oil and oil products. Chavez has been seeking new markets for
his oil, including energy-hungry China. ... The Venezuelan government said the
oil-related initiatives ... are for humanitarian
purposes and regional unity. ... Fadi Kabboul, minister-counselor for petroleum
affairs ... [said] "Venezuela never used oil as a political
weapon. Venezuela is not going to use oil against the U.S. as a political weapon
Posted by Mark Thoma on Tuesday, November 22, 2005 at 02:26 AM in Economics, Income Distribution, Oil, Politics |
Paul Blustein of the Washington Post discusses the trade deficit:
Trade Gap, by Paul Blustein, Washington Post: Newark, Del.: A $700 billion $ per year current account deficit sounds
incredibly huge. How is this going to end?
Paul Blustein: This is a good question ... Some think it will be a "hard landing"--a financial crisis
in which foreign investors dump U.S. securities en masse. Some think it will be
a "softer" landing, in which foreigners just gradually insist on higher rates on
their U.S. investments. And some people think the landing will be softer still,
with the dollar just gradually easing down and trade flows reversing over time. ... I have to admit
I find myself nodding my head when I hear economists say that the risks of a bad
outcome are unacceptably high.
Virginia: ...[O]ne could make the
argument that there are states in the U.S. that run trade deficits with other
states or that there are U.S. cities that have trade deficits with other U.S.
cities, and yet nobody worries or cares. So, why should one worry?
Paul Blustein: You're right to say that just because a country is
running a trade deficit, or a budget deficit, or almost any other kind of
deficit, that's not necessarily a reason to worry. ... Just like a company that borrows to finance the building of a
profitable factory, there is no reason why governments and countries shouldn't
borrow. However, ... when it comes to the U.S. trade deficit... the U.S. has a very high consumption rate and rather low investment rate
at the moment. That means that instead of investing the foreign inflows in ways
that will give us higher living standards in the future ...
we're consuming most of the money. The second reason is the sheer size of the
deficits, and the accumulated debt. ... That could certainly start to worry
foreign creditors at some point if they see little chance that it will be turned
Washington, D.C.: Not a question--just a comment. These two pieces
were terrific! Easily the best description and explanation of the inter-relation
of the trade and saving questions that I have seen anywhere! Congratulations! Alice M. Rivlin
Paul Blustein: Well, I can't resist posting this--for those of you who
don't know, Ms. Rivlin is a former vice chairman of the Federal Reserve. Thanks
very much... [Here are the links:
U.S. Trade Deficit Hangs In a Delicate Imbalance,
As U.S. Trade Gap Grows, So Do Asian Banks' Foreign Reserves, Mark]
Northville, Mich.: Why is it the U.S.A. deficit has gone so long
uncheck that we now owe every country around the world boat loads of money. Is
it that this administration is so corrupt and greedy it does not care?
Paul Blustein: Actually, I think some people in the administration
care quite a bit about the problem. Not all--some think the problem is
overblown, and some of their rhetoric has certainly reflected that. But in
talking to people like Tim Adams, the undersecretary of the treasury for
international affairs, I'm quite struck by the fact that he seems determined to
take measures that will ameliorate the global imbalances. ...
Monroe Township, N.J.: Why is China willing to hold a large part of US
debt? Can they use the debt aggressively against us?
Paul Blustein: ...The
Chinese are "willing" to hold our Treasury securities for one important
reason--for the past decade or so, they have rigidly linked their currency, the
yuan, to the U.S. dollar, ... As for the second part of your question, if you
read Saturday's story, ... I quoted from a
Foreign Affairs article by Nouriel Roubini and Brad Setser. They pointed out
that the Chinese COULD use their vast holdings of Treasury securities against
us, by threatening to dump them, in some sort of foreign policy confrontation.
Of course, that would hurt the Chinese a lot--perhaps more than it would hurt
us; it's hard to say. But one way of thinking about this is that it's a sort of
"balance of mutual terror"--a term used by former Treasury Secretary Larry
Summers. It's not a very healthy situation, in other words.
Burke, Va.: In his recent book recent book "Three Billion New
Capitalists" Clyde Prestowitz's argues that the trade deficit in combination
with budget deficits and a debt-dependent economy will result in an "economic
9/11" where the dollar collapses and interest rates sky-rocket. What ...
changes in policy would be necessary to avert these sequences of events?
Paul Blustein: ...I think there's pretty broad agreement among
economists on both the right and left about what ought to be done. First of all,
the U.S. needs to increase its savings... Second, Asian countries need to raise
the value of their currencies. ... Third, Europe needs to take steps to increase
its growth, so that Europeans would import more too. But Europe is a far smaller
part of the global imbalance problem than is Asia. ... Not all economists agree,
of course, but the consensus is pretty broad. ...
Posted by Mark Thoma on Tuesday, November 22, 2005 at 12:57 AM in Economics, International Finance, International Trade |
I think this commentary misses something. The theme is that Bernanke's use of
his initial honeymoon period to push inflation targeting will cause a loss of focus on more important issues such as whether Fed creates, through
accommodative policy, asset price bubbles and if it does the extent to which
policy ought to be directed at them:
Bernanke should rethink his monetary ‘Maginot Line’, by Peter Hartcher,
Financial Times: Ben Bernanke... earnestly pledged to continue the policies
of Alan Greenspan... But ... [i]n his Senate confirmation hearing ..., Mr Bernanke
began a campaign to give the Fed an explicit, public target for its inflation
rate... He appeared to be committing his honeymoon period, and all the goodwill
and latitude that come with it, to imposing this one reform. Is this a good
idea? ... For the US to introduce one today ... would be like creating a
monetary Maginot Line. An inflation target for the US, like the famous line of
French defences in the second world war, would do no real harm. But, like the
fixed defensive artillery that was supposed to keep the Germans out of France,
it would not be very useful either. ... At first glance, it is hard to see why
the incoming Fed governor feels the need to install an inflation-targeting
regime. The Fed already has one, although it is undeclared, or “covert”. ... Now Mr Bernanke has
arrived proposing the Fed publicly disclose its inflation target and ... “From
his earlier speeches he wants an inflation target of 1 to 2 per cent,” said Bill
Dudley, chief US economist for Goldman Sachs. ...
It is hard to see why Mr Bernanke is devoting all his initial political
capital to this issue. Perhaps, like the Maginot Line, it is all about the last
war. ... The clue to what is driving Mr Bernanke may be found in a speech he
gave in March 2003: “Credibility is not a permanent characteristic of a central
bank; it must be continuously earned.” In effect, an untested Fed chairman is
seeking to establish through a formal arrangement the credibility that his two
towering predecessors won through action. But in the meantime, ... there are other defensive works left undone. The experience of
Japan in the 1980s, and the US in the 1990s until today, is that easy money no
longer flows into traditional inflation, but into asset price inflation. ... [O]ther
central banks around the world – including those of Britain, Australia, Canada,
New Zealand and Norway – started publicly addressing the question of how to deal
appropriately with bubbles. The US central bank, under Mr Greenspan and,
shortly, Mr Bernanke, avoids focusing on it. ... What will happen when, as there
inevitably will be, there is another bubble in asset prices but no clear threat
of inflation? Under current Fed doctrine, the Fed would do what it did during
dotcom mania – wait for the burst and the recession that follows. Is there a
better way? This is the big new agenda item for central banks, but Mr Bernanke
is preoccupied with the old agenda. An inflation target does not hold any
The choice to move to explicit inflation targets depends, of course, on the costs and benefits of doing so. Rather than debate the benefits of explicit targets, I want to focus on the cost. In this commentary, the
main criticism of Bernanke pushing explicit inflation targets is that the opportunity cost, a potential loss of focus on asset bubbles, is
large. First, plenty of academic research is underway on the question of
how best to respond to asset price bubbles, research
Bernanke knows well, and this large body of research is relatively unaffected by
what Bernanke does or does not push within the narrow confines of the Board of Governors and the FOMC. But
in addition, there is no necessary inconsistency between an explicit inflation
target and combating asset price bubbles. The commentary talks about an explicit consumer price index target, but there are many potential price indexes to use as a target and this
too is an active area of research. If you do use an explicit target, what index should be used? Core inflation? In measuring
core inflation, what prices are thrown out? Where is the line between including and excluding a price? Should the index include (or be limited to) wage inflation? Should asset
prices be included in the index? If asset prices are included, then bubbles are addressed within the explicit target and the concerns in the commentary are alleviated.
There are lots of misperceptions about why the Fed focuses on core inflation and what core inflation represents. Here's one line of thinking in this area. When there are wage and price
rigidities, inflation distorts relative prices. This causes both resource losses
and resource misallocations both of which lower welfare. The goal of policy is
to remove these welfare reducing distortions and one way to do that is to stabilize
What this means is that the prices to focus on in stabilization policy are the
prices that are the most sluggish because these are the prices most likely to be
distorted by inflation. In general these are not oil prices, stock prices,
housing prices, food prices, and so on, all of which are very flexible. This
explains why a policy maker may want to focus on core inflation rather than total
inflation (and also suggests how core inflation might be defined), and why asset and other flexible prices may not be
included in the core measure. But there are other points of view and, as I
noted, this is an active research area, one I have no doubt whatsoever Bernanke will keep up with.
Posted by Mark Thoma on Tuesday, November 22, 2005 at 12:43 AM in Economics, Monetary Policy |
This looks interesting:
Creative Careers: The Life Cycles
of Nobel Laureates in Economics, by Bruce A. Weinberg and David W. Galenson,
NBER WP 11799, November 2005: Abstract This paper studies life cycle
creativity among Nobel laureate economists using citation data. We identify two
distinct life cycles of scholarly creativity. Experimental innovators work
inductively, accumulating knowledge from experience. Conceptual innovators work
deductively, applying abstract principles. We find that conceptual innovators do
their most important work earlier in their careers than experimental laureates.
For instance, 75% of the most extreme conceptual laureates published their
single best work in the first 10 years of their career, while none of the
experimental laureates did. Thus while experience benefits experimental
innovators, newness to a field benefits conceptual innovators. [Free
version on author web page.]
Posted by Mark Thoma on Tuesday, November 22, 2005 at 12:38 AM in Economics, Technology |
If you are looking for news on the course of interest rates, this speech by
Chicago Fed president Michael Moskow is fairly hawkish with respect to battling
inflation. Combined with the
evidence presented at macroblog, it seems a safe bet that rates will
continue to rise at a measured pace in the near future unless incoming data
alter the economic picture substantially. Many parts of the today's speech are
almost identical to the
speech Moskow gave on November 15 in which he supported the conclusion that
further rate hikes are justified by noting:
- GDP growth is above potential growth
- Much of the slack in the economy has been eliminated
- There are two risks to growth, a slowing of the housing market and high
- He is not particularly worried about housing since the effects of a
decline are slow allowing time for a policy reversal
- He is not particularly worried about energy prices either since they've
been higher in the past and are showing signs of moderating
- Inflation is at high end of the comfortable range and inflation
expectations are okay for now, but a worry going forward
There were also new parts in today's speech on the strength of the labor
market, why it is sometimes necessary in the short-run to increase the interest
rate beyond the long-run neutral rate, and longer term economic challenges of
maintaining human and physical capital at optimal levels. Here's the part on the
strength of the labor market where he spends
quite a bit of time trying to convince us that slack in labor markets has been
mostly eliminated and that statistics such as labor force
participation rates do not alter this view:
U.S. Economic Outlook, by Michael H. Moskow, Chicago Fed President: ... The
unemployment rate deserves a bit of elaboration. Some analysts question whether
that rate accurately reflects the "true" degree of labor market slack. Their
concern is that an unusual number of those who want to work may have become so
discouraged about their prospects of finding a job that they have given up
looking for work. ... Indeed, the labor force
participation rate, which is the fraction of the population either working or
actively looking for work, is well below where it was prior to the 2001
recession. In contrast, 4 years after the 1990-91 recession, the labor force
participation rate had returned to its prerecession level. So the question is, do we think the participation rate will return to its
prerecession level? At the Chicago Fed, ... our best judgment is that we
will not see a big rebound in participation. This suggests that the current
low levels of labor force participation are not indicative of a slack labor
First, much of the unusual behavior of labor force participation during
this cycle has been caused by a sharp decline in the percentage of teenagers
in the labor force. This has occurred at the same time that there have been
notable increases in summer school enrollments—a development that is unlikely
to be reversed any time soon... Therefore, we don't expect to see teenagers flood back into the labor
force. Trends in adult labor force participation are also important. While we
have seen large secular increases in women's labor force participation for
several decades, this was mostly due to differences in behavior between women
born before and after 1960. ... So the increase in
women's labor force participation appears to have largely run its course.
Men's labor force participation, in contrast, has been declining since the
1950s, and we do not see any reason to expect a strong reversal. Finally, and
perhaps most importantly, the aging of the baby boomers is putting downward
pressure on labor force participation, because it increases the share of the
population that is retired. Putting all these pieces together, I do not expect a large increase in
labor force participation. Accordingly, the current unemployment rate is
probably close to the level associated with a healthy economy and little labor
The next new part relative to the previous speech begins with the third
sentence where he explains why, in the short-run, it can be necessary to
increase the federal funds rate beyond what is required for long-run neutrality:
Nonetheless, it will take appropriate monetary policy to keep inflation and
inflation expectations contained. For me, at this time such policy likely
entails further removal of policy accommodation. [start of new part] ... Conceptually, it's easiest to think about the neutral—or equilibrium—rate
as being the rate consistent with an economy growing steadily along its
potential growth path over a long period of time. ... we're currently near the
bottom of this range. Of course, ... we have to recognize that many factors
can cause differences between the longer-run concept of neutral policy and
what may be neutral policy over the short or medium term. For example, ... [e]ven
if the funds rate were at neutral, further changes in policy may be
appropriate. ... With inflation at the upper end of my comfort zone, an unexpected
increase in inflation would be a serious concern, while a decline in inflation
would be beneficial. My views about policy will depend importantly on how
these cost factors play out and affect the outlook for inflation. ... or
inflation expectations ... What I've just described is the conditionality of monetary policy. As we've
said many times, the FOMC will react to changes in economic prospects. Future
policy will not be a mechanical reaction to the next number on inflation and
This last substantive change is the addition of a section on the longer term
challenges of how to maintain sufficient investment in both physical and human
capital in with economic
issues such as low savings rates and growing budget deficits making this task
The risks I've talked about so far primarily relate to the near-term
economic outlook. But in the long term, we face a different set of challenges.
In order to support productivity growth and maintain a solid trend in economic
growth, we need to continue to invest in physical and human capital at
sufficiently high rates. In the case of physical investment in plant and
equipment, the long-term challenge will be financing. Spending on physical
capital must be financed by our national savings... [O]verall national saving has fallen in recent
years. Fortunately, the rest of the world has viewed the United States as a
good place to invest. ... Unfortunately, such deficits are not sustainable indefinitely. ... This
means that if we are to maintain our current rates of capital investment,
national saving will have to rise ... This will be
happening at the same time that the aging of our population will put
increasing pressure on our Social Security and Medicare spending. ... Medicare outlays
will account for a rapidly expanding share of the national budget. Without
changes in spending or taxes or both, this increased demand for social
insurance will further increase government deficits and decrease net national
Finally, another factor that will affect our future economic growth is our
ability to improve the quality of our workforce. This requires us to do a better
job educating our school age population and providing further opportunities for
training and retraining of those already in the workforce. Education has
historically been a strength of the United States, but some current trends are
Given that the economy currently looks healthy, now is a good time to attack
some of our longer-term challenges. How we generate increases in national
savings and improve education are important issues for our nation. ...
Posted by Mark Thoma on Tuesday, November 22, 2005 at 12:12 AM in Economics, Fed Speeches, Monetary Policy, Unemployment |
All those churned real estate agents won't be selling cars instead of
houses. Workers in the auto industry are getting churned too:
GM Chief Wagoner to Announce Plant Closings Today, People Say, Bloomberg:
General Motors Corp. Chief Executive Rick Wagoner... today will
announce ... efforts to reduce costs... The world's largest automaker will idle or reduce
operations at about nine manufacturing sites and close other non-manufacturing
facilities such as parts depots... GM will likely
eliminate at least 32,000 jobs ... by 2007, said Rod Lache, an
analyst at Deutsche Bank Securities Inc. in New York. That's a bigger and
faster cut than the 25,000 jobs Wagoner promised to cut five months ago... Coupled with the idling of GM factories [elsewhere] this year, it would ... lower ...
North American assembly capacity to 4.4 million vehicles by 2007, compared
with 5.8 million at the beginning of 2005. ... ''Over the long
term, if GM keeps losing market share, everything is up in the air,'' Hargrove
said. The CAW agreed to more than 1,000 GM jobs cuts last month. ''The October
numbers were just horrible.''...
Posted by Mark Thoma on Monday, November 21, 2005 at 12:42 AM in Economics |
Krugman delves into politics this week and concludes that Representative John
Murtha is right:
to Leave, by Paul Krugman, NY Times: ...Representative John Murtha's speech
calling for a quick departure from Iraq was full of passion, but it was also
serious and specific in a way rarely seen on the other side of the debate.
President Bush and his apologists speak in vague generalities about staying the
course... But Mr. Murtha spoke of mounting casualties and lagging recruiting,
the rising frequency of insurgent attacks, stagnant oil production and lack of
clean water. Mr. Murtha - a much-decorated veteran who cares deeply about
America's fighting men and women - argued that our presence in Iraq is making
things worse, not better. Meanwhile, the war is destroying the military he
loves. ... I'd add that the war is also destroying America's moral authority.
When Mr. Bush speaks of human rights, the world thinks of Abu Ghraib. ... When
administration officials talk of spreading freedom, the world thinks about ...
much of Iraq ... ruled by theocrats and their militias. Some administration
officials accused Mr. Murtha of undermining the troops and giving comfort to the
enemy. But that sort of thing no longer works, now that the administration has
lost the public's trust.
Instead, defenders of our current policy have had to make a substantive
argument: we can't leave Iraq now, because a civil war will break out... But the
real question is ... When, exactly, would be a good time to leave Iraq? ...[W]e're not going to stay in Iraq until we achieve victory, ... At most,
we'll stay until the American military can take no more. Mr. Bush never asked
the nation for the sacrifices - higher taxes, a bigger military and, possibly, a
revived draft - that might have made a long-term commitment ... possible.
Instead, the war has been fought on borrowed money and borrowed time. And time
is running out. With some military units on their third tour of duty...,
the superb volunteer army that Mr. Bush inherited is in increasing danger of ...
collapse in quality and morale similar to the collapse of the officer corps in
the early 1970's. So the question isn't whether things will be ugly after
American forces leave Iraq. They probably will. The question... is
whether it makes sense to keep the war going for another year or two, which is
all the time we realistically have. ... And there's a good case to be made that
our departure will actually improve matters. As Mr. Murtha pointed out..., the insurgency derives much of its support from the perception that it's
resisting a foreign occupier. Once we're gone, the odds are that Iraqis, who
don't have a tradition of religious extremism, will turn on fanatical foreigners
The only way to justify staying in Iraq is to make the case that stretching
the U.S. army to its breaking point will buy time for something good to happen.
I don't think you can make that case convincingly. So Mr. Murtha is right: it's
time to leave.
Previous (11/18) column:
Paul Krugman: A Private Obsession
Next (11/25) column:
Paul Krugman: Bad for the Country
Posted by Mark Thoma on Monday, November 21, 2005 at 12:11 AM in Iraq and Afghanistan, Politics |
It almost seems like the expectation of a housing slowdown is turning into a
self-fulfilling prophecy. But fundamentals such as the slow increase in mortgage
interest rates in recent weeks are also at play:
Real-Estate Speculators, Pulling Back, Help Fed Remove 'Froth', Bloomberg:
...Investors who helped fuel the U.S. housing boom by bidding up prices are now
so desperate for buyers that some are offering cash bonuses in such markets as
Washington. That's a sign the Federal Reserve is succeeding in removing some of
what Chairman Alan Greenspan called ''froth'' from the market. Inventories of
unsold single-family homes are near a 17-year high as demand from speculators
wanes and mortgage rates have risen more than a percentage point from a
four-decade low reached in 2003. ''We're at the turning point,'' says Susan
Wachter, professor of real estate at the University of Pennsylvania in
Philadelphia. ''We're all hoping for a flat market, and not a plummeting
market.'' That would be welcomed by Fed policy makers as a sign that they are
succeeding in slowing the economy to a sustainable pace of growth...
Applications for loans to purchase real estate are down 12 percent from the
record set in June, the Mortgage Bankers Association reports. ... The falloff in
demand is already being felt in regions such as Las Vegas, the fastest-growing
housing market in the U.S. a year earlier. ''The mom-and-pop investors are
unloading their properties,'' says Greg Sullivan, 42, a partner in Cash Now
Vegas LLC, a Las Vegas company that buys homes from investors and resells them.
''When home values were going up $10,000 a month, everyone wanted in. Now, all
those properties are sitting empty.'' ... Investment buying accounted for almost
a quarter of U.S. home transactions last year, according to the Realtors group.
... ''This is the sign of a soft landing in the marketplace,'' Nicolas Retsinas,
director of housing studies at Harvard University in Cambridge, Massachusetts,
said in an interview. ''I do believe the levels of price appreciation in some of
the markets, particularly the two coasts, were unsustainable. At some point they
had to moderate.''
Still, demand for less expensive housing remains strong. ... The Fed is
''getting exactly what they wanted, and that is a little bit of the froth taken
away, but still the economic growth, and growth that supports housing,'' Bob
Walters, chief economist at Quicken Loans Inc. in Livonia, Michigan, said in an
interview. Lyle Gramley, a former Fed governor ... says market forces played a
larger role than speculation in pushing up home prices. Prices rose because of
economic growth, low interest rates and a shortage of building lots in some
markets, he says. ''When fundamental factors drive prices up, it certainly does
encourage speculation and more buying by investors,'' ... ''And when the froth
begins to come out of the market, those are the first people who run for the
hills.'' ... Gramley foresees ''declines in home prices of maybe 10, 15 or 20
percent on both coasts on a year-over-year basis.'' ''The economy can take
that,'' he says. ''It won't cause a major problem, but we don't know if it will
Posted by Mark Thoma on Monday, November 21, 2005 at 12:10 AM in Economics, Housing |
Here's a link to a report on the determination of gasoline prices. These graphs are from the GAO report "Understanding the Factors that Influence the Retail Price of Gasoline":
There is quite a bit more in the report.
Posted by Mark Thoma on Monday, November 21, 2005 at 12:09 AM in Economics, Oil |
"I just got my home equity loan so I needed a bigger cart.
You must live in an apartment. Sorry about that lady!"
Posted by Mark Thoma on Sunday, November 20, 2005 at 01:25 AM in Economics, Housing |
Alan S. Blinder of Princeton University was vice chairman of the Federal
Reserve Board from 1994 to 1996. He explains why the Fed as not as prominent in the national news as it once was:
Fed Fights Over? By Aan S. Blinder, Commentary, NY Times: Something rare and
important happened in Washington on Tuesday. ... The Senate held a hearing on
the nomination of Ben Bernanke to be the new chairman of the Federal Reserve
Board. The last time that happened was in July 1987, when Alan Greenspan was
first confirmed. Before that, it was Paul Volcker in July 1979. This newspaper's
own coverage offers a revealing historical progression. On the morning after Mr.
Volcker's hearing, the paper ran a Page 1 article ...
Eight years later, the article on Mr. Greenspan's confirmation hearing appeared
on the first business page. And... the account of Mr. Bernanke's
hearing was on Page 4 of the business section...
The Federal Reserve chairman is widely agreed to have more influence on the
national economy than does the president of the United States. Yet the national
news media - as opposed to the specialized financial news media, which dote on
the Fed - seem to find monetary policy less engaging than they did in 1979 or
1987. Why? One reason is clearly Mr. Bernanke's ability and qualifications,
which make him a stellar choice in the eyes of Republicans and Democrats alike.
... But that cannot be the whole story, for Mr. Volcker and Mr. Greenspan were
also widely acclaimed at the times of their confirmations. A second reason is
that these are pretty placid times for the nation's central bank. The United
States has not had an inflation scare for 15 years. While the Fed is now raising
interest rates, it is merely bringing them up from their previous abnormally low
levels ... at a pace it calls "measured," with clear warnings at each step. No
fuss, no muss, no bother - and limited public interest.
The situation was different when Paul Volcker went up for confirmation in
July 1979. High inflation had plagued the country for years and was about to get
worse. Taming it ranked high on the national agenda, maybe at the top. So the
Federal Reserve's monetary policy claimed the public's and the news media's
attention. By the time Alan Greenspan was confirmed in 1987, inflation had been
under control for several years, and the Fed's policy interest rate had barely
changed over the previous 15 months. Both inflation and the Fed therefore
commanded much less of the limelight. If you read the hearing transcript, you
will find that as much attention was paid to the federal budget deficit and the
trade deficit as to inflation and the Fed's interest rate policy. (Sound
familiar?) ... But there is a third, and very important, reason that Mr.
Bernanke's nomination and confirmation have received so little press attention.
The happy truth is that monetary policy is not very controversial - and is
certainly not very political - these days.
Instead, there is a strong intellectual and political consensus that the
central bank should be free of political interference, should keep inflation low
and should promote high employment. Furthermore, while central banking remains
part art, part science, the science has clearly been gaining on the art in
recent decades. Central bankers around the world are increasingly thought of as
technocrats, not as philosopher-kings or sorcerers. It was not always thus. In
the early days of the republic, Hamilton and Jefferson battled over whether the
young country should have a central bank at all. No one was thinking about
"monetary policy" back then, but they were thinking about "sound money." While
Hamilton won that debate, the first Bank of the United States lasted only 20
years before falling prey to populist politics. A similar fate befell the second
Bank of the United States under Andrew Jackson. These were intense political
struggles. .. In fact, ... [Bernanke's] hearing illustrated a new reality: that debates
over monetary policy are now apt to be boring and technical - and far removed
These are salutary developments. John Maynard Keynes once longed for the day
when economists would be "humble, competent people, on a level with dentists."
At least as far as central bankers are concerned, we are not quite there yet.
Mr. Bush's choice of Mr. Bernanke remains far more important than his choice of
a dentist. But not important enough to make Page 1.
The underlying theoretical support for inflation targeting in the conduct of monetary policy and the more technocratic approach that comes out of it may owe part of its success to the fact that such an automated rule-like transparent process helps to remove politics from the process. Commitment to a particular course of action that is known in advance and enjoys theoretical support makes it easier to resist political pressure to change course and, as noted in the article, helps to confine the debate to the technical merits of the approach.
Posted by Mark Thoma on Sunday, November 20, 2005 at 12:33 AM in Economics, Monetary Policy, Politics |
Signs of rebalancing across sectors as housing slows?:
the McMansions Go, So Goes Job Growth, Commentary, Daniel Gross, NY Times: ...But there's some good news. Ms. Bangalore notes that while housing's
contribution to job growth has declined in recent months, "other sectors are
picking up the slack."
For four stories on housing and employment, including more on this one, see Calculated Risk.
Posted by Mark Thoma on Sunday, November 20, 2005 at 12:27 AM in Economics, Housing |
More on the U.S. and European labor market comparison:
and leisure in the U.S. and Europe: Why so different?, Alberto Alesina, Edward Glaeser, and Bruce Sacerdote NBER Macroeconomics Annual vol. 20,
Revised: June 2005: Abstract Americans average 25.1 working hours per person in working age per week, but the Germans average 18.6 hours. The average American works 46.2 weeks per year, while the French average 40 weeks per year. Why do western Europeans work so much less than Americans? Recent work argues that these differences result from higher European tax rates, but the vast empirical labor supply literature suggests that tax rates can explain only a small amount of the differences in hours between the U.S. and Europe. Another popular view is that these differences are explained by long-standing European "culture," but Europeans worked more than Americans as late as the 1960s. In this paper, we argue that European labor market regulations, advocated by unions in declining European industries who argued "work less, work all" explain the bulk of the difference between the U.S. and Europe. These policies do not seem to have increased employment, but they may have had a more society-wide influence on leisure patterns because of a social multiplier where the returns to leisure increase as more people are taking longer vacations. [Free earlier version on author web site.]
Posted by Mark Thoma on Sunday, November 20, 2005 at 12:14 AM in Economics, Unemployment |
From "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," by Alberto Alesina and Lawrence H. Summers, Journal of Money, Credit and Banking, Vol. 25, No. 2. (May, 1993), pp. 151-162:
This has changed with the adoption of inflation targeting by central banks. Note also that Adam Posen casts doubt on whether causality runs from central bank independence to improved macroeconomic performance in Central Bank Independence and Disinflationary Credibility: A Missing Link?, NY Fed Staff Report, May 1995.
Posted by Mark Thoma on Sunday, November 20, 2005 at 12:05 AM in Academic Papers, Economics, Inflation, Monetary Policy, Politics |
This discussion from the Minnesota Fed looks at job churning at the county level. The
variation in job growth across counties is larger than I would have guessed:
The macro view on job loss and growth, by Terry Fitzgerald, Mark Holland:
...This fedgazette looks through a ... window of time ... to
see what might be learned about the sources and effects of employment shocks
during this period. ... From a longer-run perspective, it is clear that
employment shocks are not rare. In any given year, even with a hot national
economy, some counties will experience a major decline in employment. The reason for this is an often overlooked feature of
market economies called “churn.” Simply, market economies tend to create and
destroy a lot of jobs simultaneously, as employers collectively allocate
scarce resources for additional labor in some sectors and occupations while
cutting back in others. Even in strong job markets, some jobs are being
lost, just as some jobs are gained in the midst of a recession. ...
Data on all district counties from 1969 to 2002 show that major job loss
happens ... often... In three-plus decades, there were more
than 900 instances where one of the district's 303 counties experienced an
employment decline of 3 percent or more—roughly, one every decade for each
county in the district. ... Are the same counties getting endlessly
sucker-punched? In general, no. During the 1969-2002 period, every district
county except one experienced a net employment decline in at least one year, and
better than 80 percent of district counties endured a 3 percent employment
loss in at least one year. ...
But some counties certainly experience more than their share of shocks. Though
all counties have some probability of employment shock, small counties are more
prone. Counties with fewer than 4,000 workers make up 44 percent of district
counties ... But these counties experienced 66 percent of the 905 employment
shocks... At the other end, 7 percent of district
counties have more than 32,000 workers, but they experienced just 1 percent of
Flip side: The boom Before getting too gloomy about the employment picture in the district,
remember that counties also experience employment booms more frequently than you
From 1969 to 2002, 86 percent of district counties experienced at least
one year of 5 percent employment growth. Furthermore, a majority of counties saw
at least one year of 7 percent employment growth, and all but one county had at
least one year of 3 percent growth. ... The moral of the story? A
central feature of U.S., state and county labor markets is job churn. Each year
millions of people nationally lose their jobs. But in most years, an even larger
number of people find new jobs. The same is true on a smaller scale at the
county level. Jobs are gained and lost within a county, and oftentimes other
counties offer an employment counterbalance. Again, however, counties with fewer
than 4,000 workers experienced proportionately more shocks than booms from 1969
Job churn can often be messy, unpleasant—even gut-wrenching—particularly at the
household and community level. But over time, it is this very churn that helps
struggling economies transfer resources to better uses, while keeping healthy
economies robust in an ever changing world.
The positive correlation between "booms" and "shocks" that emerges around 1995 in the graph is interesting. Prior to 1995 the correlation appears to be negative - when more counties are booming, fewer are experiencing shocks. After 1995 it is reversed - when more counties are booming, more are also experiencing shocks.
Posted by Mark Thoma on Saturday, November 19, 2005 at 12:54 AM in Economics, Unemployment |
Calculated Risk says "Hardly a plunge":
Calculated Risk: Thoughts on Housing Starts: Much has been made about the
Seasonally Adjusted October drop in housing starts and permits reported
yesterday. As an example, Reuters
"A sharp drop in U.S. housing starts and permits for new building in October
pointed to some cooling in the red-hot real estate market...".
And the Indianopolis Star headline
"Housing starts plunge in October"
But did starts really "plunge"?
Click on graphs for larger image.
This graph shows the NSA housing starts for the last four years. Every year
housing starts decline in the fall, yet the October housing starts are still
near the peak summer pace for 2004. That is hardly a plunge.
The second graph shows October housing starts since 1980.
Total starts in Oct, 2005 showed a small decline from Oct, 2004. But for one
unit structures (SFR), 2005 was an all time record for October starts.
Hardly a plunge.
With rising inventories and rising interest rates, it is understandable that
analysts are looking for confirmation that the housing market has slowed
substantially. This isn't it.
Besides, permits and housing starts are historically lagging indicators for a
housing slowdown. In addition to rising inventories, I believe the more timely
indicators are falling mortgage applications and declining sales.
Posted by Mark Thoma on Saturday, November 19, 2005 at 12:35 AM in Economics, Housing |
This editorial is a reminder that a central bank's independence is not
Editorial/ Bank of Japan, The Asahi Shimbun, Nov. 19: All of a sudden,
senior government and ruling Liberal Democratic Party officials are speaking out
against the Bank of Japan's monetary policy. Hidenao Nakagawa, chairman of the
LDP Policy Research Council, noted: "The central bank needs to constantly
coordinate its policy target with that of the administration. If the bank
doesn't understand that, we ought to consider revising the Bank of Japan Law."
On doing away with the policy of quantitative monetary easing, Prime Minister
Junichiro Koizumi said: "It's premature. The price rise index ought to be above
zero. We are still in a period of deflation." It is rare for Koizumi to comment
on central bank policy. ... The ... government and LDP officials should not be
blatantly meddling in the central bank's policy. Those officials ought to recall
why the Bank of Japan Law was revised in 1998 to give it independence. The law
had to be revised because the government and ruling party admitted they had put
undue pressure on the central bank with the result it could not implement
appropriate policy. The BOJ jeopardized its hard-won independence with its 2000
In the United States, ... It is practically unheard of for any ranking public
official to complain about Fed policy in public. ... The Bank of Japan's
independence is a matter that could affect the nation's economic activity in
real terms. The government is now trying to wield its influence over the central
bank because it is afraid that higher long-term interest rates will bloat its
bond payments, which in turn would set back fiscal rehabilitation plans. But
basically, long-tern interest rates are tied to long-term economic and inflation
forecasts. If the Bank of Japan is viewed as unable to resist government
pressure and control inflation, that could cause long-term interest rates to
rise. Politicians be warned: You may be inviting misfortunes if you continue to
loudly proclaim what the Bank of Japan should be doing.
Politicians, economists, lots of people complain about Fed policy.
The hope is that none of them believe it has any influence
whatsoever on the Fed, even if, or perhaps particularly if,
politicians threaten to take away or limit the Fed's independence. Is this relevant
for the U.S.? Some recent examples include a call from Senators Dorgan
and Reid in 1996 for the non-monetary activities of the Fed to be
subject to budget oversight giving them the power of the purse string.
In addition, in 1975 congress required the Fed to announce its money
growth targets. This was followed by the Full Employment and Balanced
Growth Act in 1978 requiring the Fed to explain how its monetary plans
are consistent with the plans of the president. In effect, though, this
has had little effect on Fed behavior.
Posted by Mark Thoma on Saturday, November 19, 2005 at 12:12 AM in Economics, Monetary Policy, Policy |
Via the San Francisco Fed:
FRBSF Economic Letter, Why Hasn't the Jump in Oil Prices Led to a Recession?, by John Fernald and Bharat Trehan: Oil prices have increased substantially over the last several years. When oil
price increases of this magnitude occurred during the 1970s, they were
associated with severe recessions. Why hasn't that happened this time around?
This Letter explores some answers to that question.
Why should oil affect the economy?
When the price of oil rises, U.S. households and businesses who purchase fuel
oil, gasoline, and other petroleum-based products have less disposable income to
spend on other goods and services. However, for domestically produced oil, oil
producers receive the extra income from the products they sell, so total U.S.
income is not directly affected. Therefore, for domestic oil, a price increase
represents a transfer from one group of U.S. residents (oil users) to another
group of U.S. residents (oil producers).
The story is different for imported oil. An intuitive way to think about the
initial effects of an increase in the price of imported oil on the economy is to
consider it as a tax on domestic users. In 2004, the U.S. imported almost 5
billion barrels of energy-related petroleum products, amounting to about
two-thirds of domestic petroleum use. Of these imports, 3.8 billion barrels were
crude petroleum, or an average of 10.4 million barrels per day. For each
$10/barrel increase in oil prices, the United States pays an effective "tax" of
about $50 billion (5 billion barrels times $10), or 0.4% of GDP.
This is not the same thing as saying that GDP will fall by 0.4%. For
instance, this estimate does not take into account what the foreign oil
producers do with the additional income. It is likely that they would use at
least part of this income to purchase goods from other countries. To the extent
that these purchases consist of goods made in the U.S., they will help support
U.S. GDP. Indeed, it is possible—in theory—to conceive of a situation where
foreign oil producers purchase enough from the U.S. that U.S. GDP does not
decline much, even though consumers are paying a higher price for oil and
therefore can afford fewer goods and services themselves.
How big is the effect in practice?
mentioned earlier, the experience of the 1970s suggests that oil shocks have a
substantial effect on output. Indeed, Figure 1, which plots the real,
inflation-adjusted price of imported petroleum, shows that high oil prices have
frequently coincided with recessions. In a series of papers, Hamilton (1983,
1996, 2003) has argued forcefully that the oil shocks were responsible for these
recessions. However, he argues that not all changes in the price of oil have the
same effect on the economy. For instance, a fall in oil prices is unlikely to
boost the economy in the same way that an increase can drag it down. In
addition, he argues that oil price increases that simply reverse previous price
decreases are unlikely to have a significant effect. One approach he recommends
to isolate the kinds of price changes that can affect the economy is to record
an oil shock only if the prevailing price of oil is higher than it has been over
the past three years.
2 plots oil price shocks according to this recommendation. The spikes line up
closely with recessions. From the figure, it is easy to find a clear statistical
relationship between this oil-shock variable and output. Indeed, the magnitude
of the predicted effect is much larger than the simple tax analogy suggests.
This could reflect some sort of multiplier, as the loss in income in the first
round would lead to a reduction in spending, which would imply a further loss in
income, and so on. However, a simple statistical analysis does not provide
insight into why the magnitude is so much larger than the direct income loss.
Moreover, the statistical evidence is not necessarily as strong as Figure 2
might suggest. Because an oil price shock is recorded if and only if oil reaches
a three-year high, a temporary increase in the price of oil is treated as having
the same impact as a permanent increase. But if the spike is temporary, then the
effects on income are fleeting, and one would expect that many consumers will
reduce their saving in order to avoid a big hit to consumption.
To see the point, compare the 1990 experience in Figures 1 and 2. Figure 1
shows that the price of oil spiked only briefly. But in Figure 2, which uses the
Hamilton price-increase transformation, the 1990 spike was one of the largest.
In Figure 2, this spike is followed by a long series of zeros. In Figure 1,
however, more than 95% of the oil price increase is reversed next quarter and
oil prices over the next year or two appear no different from the period
preceding the spike. Indeed, more formal statistical analysis shows that over
the post-1982 period the Hamilton oil shock variable has a significant negative
impact on output only because of the spike in 1990. If the 1990 spike is set to
zero, there is no evidence of a statistically important relationship.
Note also that the timing is suspect in several cases. The 1973-1975
recession began in November 1973; but oil prices surged in January 1974. The
1990-1991 recession began in July 1990; but oil prices surged in August.
Another way to get a sense of how large the effect of oil shocks may be is to
consider the implications of more fully specified models, which incorporate the
direct expenditure effects but then allow for additional, second round effects.
These tend to suggest that the ultimate effects are roughly in line with the
direct expenditure shares. In a recent paper, Guerrieri (2005) finds that a 50%
increase in the price of oil starting in the first quarter of 2004 causes output
to fall about 0.4% below what it would otherwise be in the long run (assuming
that the Fed conducts policy using the well-known Taylor rule). The effects are
likely to have been larger in the 1970s, when the economy was more
energy-intensive; however, even if we assume that the economy's energy-intensity
is unchanged since the 1970s, the effect is not likely to be huge.
Other explanations for the 1970s
Considerations like these have led a number of economists to suggest that the
recessions of the 1970s reflected other kinds of shocks. For instance, Barsky
and Killian (2001) argue that the great stagflation of the 1970s was the result
of monetary policy alternating between periods of stimulation and restraint and
not oil price shocks. Similarly, Burbidge and Harrison (1984) examine
developments in five major industrial economies including the U.S. and conclude
that even though the oil shocks in the early 1970s did have a significant
effect, recessions were already on the way even before the jump in oil prices.
They also find that the 1979-1980 oil shocks had a minimal effect on all these
countries except Japan.
Others have argued that the recessions may have been caused by the Fed's
reaction to the oil shocks. Bernanke, Gertler, and Watson (1997) show that
postwar recessions have been preceded not only by rising oil prices but also by
a tightening of monetary policy, which makes it difficult to distinguish between
the effects of the two. According to them, the confusion between oil shocks and
the response of monetary policy explains why oil shocks appear to have an effect
that far exceeds what is expected based on a comparison of energy costs to total
production costs. Their own analysis leads them to conclude that oil shocks have
not played a major role in recessions and that endogenous monetary policy can
account for a major portion (and sometimes all) of the effects attributed to oil
Is the current episode different?
It has also been suggested that the latest jump in oil prices has not had the
usual effect on the economy because the price of oil has jumped for different
reasons. For example, in the 1970s, the OPEC oil embargo and the fall of the
Shah of Iran led to substantial reductions in the world supply of oil;
similarly, the world supply fell in 1990 after Iraq's invasion of Kuwait. These
seem like exogenous shocks to the world supply.
But much of the run-up in oil prices in the past few years seems to reflect
the endogenous response of prices to the strength of global demand. The source
of this higher demand turns out to be important. If the higher prices were the
result of higher U.S. demand, then there would be little reason to fear a
recession. It is hard to believe that the "tax" imposed by the oil price
increase would exceed the increase in income that was the cause of the higher
oil demand. But if the increase in demand originates abroad, things get more
complicated. For instance, high oil prices which reflected rapid growth in China
would have the same direct impact on the U.S. as a price increase engineered by
OPEC, basically because higher oil consumption in China coupled with a
relatively inelastic supply means that less oil is available to the U.S. There
is a potential offset to this effect, as more rapid growth in China is likely to
be accompanied by higher imports. Thus, countries that export significant
amounts to China relative to their size will benefit from the rapid Chinese
growth. The U.S. is not one of these countries, however, so that for the U.S. an
increase in the price of oil due to higher demand from China is probably similar
to an increase due to a reduction in supply.
Our discussion suggests that the answer to the question posed in the title
has two parts. First, looking only at the correlation between some measure of
the price of oil and output tends to exaggerate the role that oil price shocks
played in the recessions of the 1970s, at least partly because one ends up
ignoring the other things that were going on at that time. Second, an increase
in the price of oil that reflects higher demand will not have the same effect as
a decrease in supply. Here, though, it is useful to keep in mind that price
increases that reflect higher growth in other countries will have the same
effect on the U.S. as price increases that reflect a reduction in the worldwide
supply of oil—unless U.S. exports to these fast growing countries account for a
significant share of U.S. output.
Posted by Mark Thoma on Friday, November 18, 2005 at 01:18 PM in Economics, Inflation, Oil |
It would be nice to have this written about the outgoing Fed chair:
Straight With the Numbers, Editorial, Washington Post: When Douglas
Holtz-Eakin was named to head the Congressional Budget Office almost three
years ago, we were ... a bit jittery. Mr. Holtz-Eakin was going to the
nonpartisan budget office from a stint as the White House chief economist, ...
Now Mr. Holtz-Eakin is leaving ... and we're sorry to see him go. He has been
an honest and clear-thinking director who has resisted political pressures to
skew or sugarcoat the difficult policy choices confronting Congress; he's
maintained the office's credibility and independence. ... Mr. Holtz-Eakin ...
insisted that the president's proposed personal Social Security accounts had a
cost that had to be reflected on the books; he disputed administration claims
that limiting medical malpractice lawsuits would curb health care costs. When
the administration started to crow about falling deficits, Mr. Holtz-Eakin
urged that the improvement be taken "with a grain of salt," noting the
continuing grimness of the long-term outlook. Mr. Holtz-Eakin's record
underlined the value of maintaining at least one nonpartisan broker of budget
information in an increasingly partisan town.
I haven't yet figured out exactly how many years Ben Bernanke will have as
Fed chair, but when he does retire I hope similar things are written. With regard to the length of his term, does Bernanke's
previous time on the Board count against his new term, or will he have a full fourteen years? How does it work legally given that he
resigned and Board members cannot be reappointed (unless, like Olson, you are
filling an unexpired term for someone else, see here)? Does Bernanke have to resume his previous term? Can a Board member resign after 13 years and 364 days and then be reappointed to a new fourteen year term? Can you take a time-out by resigning and then go back and finish your term later? It's probably all very simple - does anyone know how this will
work? Will he have a full fourteen years?
Posted by Mark Thoma on Friday, November 18, 2005 at 12:32 AM in Budget Deficit, Economics, Monetary Policy, Politics |
Paul Krugman continues his series on health care. In this column, he examines the
way in which the drive for privatization has resulted in confusion and higher
costs. He starts by taking a look at the new Medicare plan:
Brad DeLong: Paul Krugman Keeps on Writing About Health Insurance: Here is today's installment:
A Private Obsession - New York Times: By PAUL KRUGMAN: "Lots of things in life are complicated." So
declared Michael Leavitt, the secretary of health and human services,
in response to the mass confusion as registration for the new Medicare
drug benefit began. But the complexity of the program - which has
reduced some retirees to tears as they try to make what may be
life-or-death decisions - is far greater than necessary.
One reason the drug benefit is so confusing is that older
Americans can't simply sign up with Medicare, as they can for other
benefits. They must, instead, choose from a baffling array of plans
offered by private middlemen. Why?
Here's a parallel. Earlier this year Senator Rick Santorum
introduced a bill that would have forced the National Weather Service
to limit the weather information directly available to the public.
Although he didn't say so explicitly, he wanted the service to funnel
that information through private forecasters instead.
Mr. Santorum's bill didn't go anywhere. But it was a classic
attempt to force gratuitous privatization: involving private
corporations in the delivery of public services even when those
corporations have no useful role to play.
The Medicare drug benefit is an example of gratuitous privatization on a grand scale.
Here's some background: the elderly have long been offered a
choice between standard Medicare, in which the government pays medical
bills directly, and plans in which the government pays a middleman,
like an H.M.O., to deliver health care. The theory was that the private
sector would find innovative ways to lower costs while providing better
The theory was wrong. A number of studies have found that
managed-care plans, which have much higher administrative costs than
government-managed Medicare, end up costing the system money, not
But privatization, once promoted as a way to save money, has
become a goal in itself. The 2003 bill that established the
prescription drug benefit also locked in large subsidies for managed
And on drug coverage, the 2003 bill went even further: rather
than merely subsidizing private plans, it made them mandatory. To
receive the drug benefit, one must sign up with a plan offered by a
private company. As people are discovering, the result is a deeply
confusing system because the competing private plans differ in ways
that are very hard to assess.
The peculiar structure of the drug benefit, with its huge gap
in coverage - the famous "doughnut hole" I wrote about last week - adds
to the confusion. Many better-off retirees have relied on Medigap
policies to cover gaps in traditional Medicare, including prescription
drugs. But that straightforward approach, which would make it
relatively easy to compare drug plans, can't be used to fill the
doughnut hole because Medigap policies are no longer allowed to cover
The only way to get some coverage in the gap is as part of a
package in which you pay extra - a lot extra - to one of the private
drug plans delivering the basic benefit. And because this coverage is
bundled with other aspects of the plans, it's very difficult to figure
out which plans offer the best deal.
But confusion isn't the only, or even the main, reason why the
privatization of drug benefits is bad for America. The real problem is
that we'll end up spending too much and getting too little.
Everything we know about health economics indicates that
private drug plans will have much higher administrative costs than
would have been incurred if Medicare had administered the benefit
It's also clear that the private plans will spend large sums on
marketing rather than on medicine. I have nothing against Don Shula,
the former head coach of the Miami Dolphins, who is promoting a drug
plan offered by Humana. But do we really want people choosing drug
plans based on which one hires the most persuasive celebrity?
Last but not least, competing private drug plans will have
less clout in negotiating lower drug prices than Medicare as a whole
would have. And the law explicitly forbids Medicare from intervening to
help the private plans negotiate better deals.
Last week I explained that the Medicare drug bill was devised
by people who don't believe in a positive role for government. An
insistence on gratuitous privatization is a byproduct of the same
ideology. And the result of that ideology is a piece of legislation so
bad it's almost surreal.
Previous (11/14) column:
Paul Krugman: Health Economics 101
Next (11/21) column: Paul Krugman: Time to Leave
Posted by Mark Thoma on Friday, November 18, 2005 at 12:15 AM in Economics, Health Care, Market Failure |