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| February 2006 »
FOMC decided to raise the target federal funds rate from 4.25% to 4.50%.
Here are the differences from the previous statement:
- The Fed still sees the expansion as solid, but altered its statement to
indicate a bit more uncertainty going forward due to recent data. The phrase
"Despite elevated energy prices and hurricane-related disruptions, the expansion
in economic activity appears solid" was replaced by "Although recent economic
data have been uneven, the expansion in economic activity appears solid."
- The long awaited removal of the word measured has been occurred. The
phrase "some further measured policy firming is likely to be needed" is replaced
by "some further policy firming may be needed." The change from "likely"
to "may" is notable.
- The voting representatives on the Committee have changed, but the vote was
still unanimous. San Francisco, Cleveland, Richmond, and Atlanta replace Dallas,
Chicago, Philadelphia, and Minneapolis as voting members.
- Finally, and worthy of attention, Minneapolis did not request an increase
in the discount rate potentially signaling the Minneapolis Fed was not in favor of further
rate increases. We won't know for sure until the minutes are released.
Thus, it's likely that rates will go up again, but by no means assured. The
December 13 FOMC statement is in italics. Here's the
January 31st FOMC statement with substantive changes in bold:
For immediate release
The Federal Open Market Committee decided today to raise its target for the
federal funds rate by 25 basis points to 4-1/2 percent.
[No substantive change from previous statement]
Although recent economic data have been uneven, the expansion in
economic activity appears solid. Core inflation has stayed relatively low in
recent months and longer-term inflation expectations remain contained.
Nevertheless, possible increases in resource utilization as well as elevated
energy prices have the potential to add to inflation pressures.
Despite elevated energy prices and hurricane-related disruptions,
the expansion in economic activity appears solid. [After the first sentence, the
statement is identical].
The Committee judges that some further policy firming may be needed to
keep the risks to the attainment of both sustainable economic growth and price
stability roughly in balance. In any event, the Committee will respond to
changes in economic prospects as needed to foster these objectives.
The Committee judges that some further measured policy firming is
likely to be needed to keep the risks to the attainment of both sustainable
economic growth and price stability roughly in balance. [Second sentence
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman;
Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Jack
Guynn; Donald L. Kohn; Jeffrey M. Lacker; Mark W. Olson; Sandra
Pianalto; and Janet L. Yellen.
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman;
Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.;
Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson;
Anthony M. Santomero; and Gary H. Stern.
In a related action, the Board of Governors unanimously approved a
25-basis-point increase in the discount rate to 5-1/2 percent. In taking this
action, the Board approved the requests submitted by the Boards of Directors of
the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland,
Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco.
[No substantive change in first sentence]. In taking this action, the
Board approved the requests submitted by the Boards of Directors of the Federal
Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta,
Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
New York Times,
Posted by Mark Thoma on Tuesday, January 31, 2006 at 11:51 AM in Economics, Monetary Policy |
"For Mr. Bush, the ownership society initiative is temporarily gone -- but
We Are What We Own, by Fred Barnes, Commentary, WSJ: When running for
re-election in 2004, and again last year as he campaigned for Social Security
reform, President Bush repeatedly advocated an "ownership society." ... But
"ownership society" is not a phrase you're likely to hear from him tonight in
his State of the Union address. ...
At best, there will be faint echoes. ... But after failing in his drive for
Social Security reform last year, Mr. Bush has now gone incremental, hoping
small steps will lead to bigger ones later. For 2006, however, he's reconciled
himself to the fact that overhauling Social Security is an impossibility. And
since Social Security reform is a necessary element of an ownership society,
that idea is off the table this year, too.
But that's not the end of the matter. For Mr. Bush, the ownership society
initiative is temporarily gone -- but hardly forgotten. ... Where the phrase
"ownership society" came from, nobody knows, not even Mr. Bush or political
adviser Karl Rove. Nor did the program emerge in full form. Rather, it was
patched together, ... from a handful of programs. By 2004, it consisted of five
separate proposals: Social Security private accounts, flexible "lifetime" IRAs,
HSAs, tax reform and home ownership assistance. ...
Mr. Bush still yearns to modernize Social Security and create private
investment accounts funded by payroll taxes. When informed last year that
congressional Republicans wouldn't "scout" the political terrain ahead of him,
he went ahead with his campaign for reform -- alone. Now, an aide insists, "If
the president sees a political opportunity [for Social Security reform], he'll
seize it in an instant." He brought it up again in a private White House meeting
last week. ... Indeed, he's likely to keep talking about Social Security and
private accounts and perhaps even an ownership society. But not tonight, when he
addresses the nation.
Posted by Mark Thoma on Tuesday, January 31, 2006 at 01:09 AM in Economics, Politics, Social Security |
Milton Friedman is impressed that Alan Greenspan was able to achieve price
stability without committing to a strict money rule:
'He Has Set a Standard', by Milton Friedman, Commentary, WSJ: Over the
course of a long friendship, Alan Greenspan and I have generally found ourselves
in accord on monetary theory and policy, with one major exception. I have long
favored the use of strict rules to control the amount of money created. Alan
says I am wrong and that discretion is preferable, indeed essential. Now that
his 18-year stint as chairman of the Fed is finished, I must confess that his
performance has persuaded me that he is right -- in his own case.
His performance has indeed been remarkable. There is no other period of
comparable length in which the Federal Reserve System has performed so well. It
is more than a difference of degree; it approaches a difference of kind. For the
first 70 years after it opened in 1914, the Fed did far more harm than good...
We would clearly have been better off for those 70 years if the Federal Reserve
System had never been established.
In 1979, Paul Volker was named chairman of the Fed... The great inflation of
the 1970s was still raging ... Supported by President Reagan, Mr. Volker broke
the back of inflation, in the process producing a recession. The recession
produced a public reaction that seriously lowered the president's popular
standing. Fortunately, President Reagan did not waver in his support,
reappointing Mr. Volker to a second term. He later appointed Alan to succeed him
as chairman. ...
Inflation averaged 3.7% per year from the end of World War II to the Volker
era, but only 2.4% per year during the Greenspan era. Even more important,
inflation was much less variable. ... Greater price stability had far-reaching
effects. By greatly reducing the uncertainties, enterprises could use their
resources more efficiently and steadily. Price stability fostered innovation and
supported a high level of productivity. ...
It has long been an open question whether central banks have the technical
ability to maintain stable prices. Their repeated failures to do so suggested
that they did not -- whence, in part, my preference for rigid rules. Alan
Greenspan's great achievement is to have demonstrated that it is possible to
maintain stable prices. He has set a standard. Other central banks around the
world, whether independently or by following his example, are following suit.
The timeworn excuses for central bank failure to stem inflation will no longer
do. They will have to put up or shut up.
Posted by Mark Thoma on Tuesday, January 31, 2006 at 12:26 AM in Economics, Monetary Policy |
The chairman of Intel, Craig Barrett, joins Gary Becker in saying we need to open our doors to the “best and
America should open its doors wide to foreign talent, by Craig Barrett,
Commentary, Financial Times: America is experiencing a profound immigration
crisis but it is not about the 11m illegal immigrants... The real crisis is that
the US is closing its doors to immigrants with degrees in science, maths and
engineering – the “best and brightest” ... who flock to the country for its
educational and employment opportunities. ... This is not a new issue; the US
has been partially dependent on foreign scientists and engineers ... for several
decades. After the second world war, an influx of German engineers bolstered our
efforts in aviation and space research. During the 1960s and 1970s, a brain
drain from western Europe supplemented our own production of talent. In the
1980s and 1990s, our ranks of scientists and engineers were swelled by Asian
immigrants who came to study in our universities, then stayed to pursue
The US simply does not produce enough home-grown graduates in engineering and
the hard sciences to meet our needs. ... So while Congress debates how to stem
the flood of illegal immigrants across our southern border, it is actually our
policies on highly skilled immigration that may most negatively affect the
The US does have a specified process for granting admission or permanent
residency to foreign engineers and scientists. The H1-B visa programme sets a
cap – currently at 65,000... But the programme is oversubscribed because the cap
is insufficient to meet the demands of the knowledge-based US economy. The
system does not grant automatic entry to all foreign students who study
engineering and science at US universities. I have often said, only half in
jest, that we should staple a green card to the diploma of every foreign student
who graduates from an advanced technical degree programme here.
At a time when we need more science and technology professionals, it makes no
sense to invite foreign students to study at our universities, educate them
partially at taxpayer expense and then tell them to go home and take the jobs
those talents will create home with them. ... Certainly ... security must always
be a foremost concern. But that concern should not prevent us from having access
to the highly skilled workers we need. ..
In a global, knowledge-based economy, businesses will naturally gravitate to
locations with a ready supply of knowledge-based workers. ... Deciding to
compete means reforming the appalling state of primary and secondary education,
... and urgently expanding science education in colleges and universities – much
as we did in the 1950s after the Soviet launch of Sputnik gave our nation a
needed wake-up call. ...
At a minimum the US should vastly increase the number of permanent visas for
highly educated foreigners, streamline the process for those already working
here and allow foreign students in the hard sciences and engineering to move
directly to permanent resident status. Any country that wants to remain
competitive has to start competing for the best minds in the world. Without that
we may be unable to maintain economic leadership in the 21st century.
If they had a 95 mph fastball or the talent to play in the NBA, we'd find a way to let them in.
Posted by Mark Thoma on Tuesday, January 31, 2006 at 12:18 AM in Economics, Policy, Unemployment |
Gene Sperling looks at inefficiencies and inequities in our tax system by
comparing twin brothers, one with labor income, the other with investment
income, and looking at how the tax code treats each:
How to reform a winner-takes-all economy, by Gene Sperling, Financial Times:
...Lawrence Katz, the Harvard economist, has documented the increasing
polarisation in the US labour market as earnings grow at the high end while
opportunities for middle-class jobs dry up. Such extreme gains and losses are
often due to significant differences in education or skill but as Robert Shiller
... has written, the unpredictability, speed and vastness of global markets have
also enhanced the role of luck ... in determining who falls into the winners’ or
Consider twin brothers with [identical] ... histories, who each took good
jobs six years ago – one, fortunately, with Google, the other, less fortunately,
with Lucent. Since the investment community was still betting on Lucent in early
2000 and Google was just getting established, it is hard to say that skill led
one worker to $2m in stock options and the other to a pink slip and a job
Even though such differential outcomes can seem unfair ..., this is a price
we gladly pay for a free market economy. Our progressive tax system has been
part of the way the US has balanced the desire for a free economy with the
values of equity. Yet, eliminating taxation on investment income exacerbates –
not moderates – winner-takes-all outcomes. Consider our brothers. If the one at
Lucent finds a new, $60,000 a year job, he could pay about 25 per cent in
federal taxes (including payroll taxes). Yet, ... if his twin at Google can find
a solid 6 per cent return investing his $2m, he can make at least $120,000 a
year while paying a lower 15 per cent tax rate. If we move closer ... to zero taxes
on dividends, capital gains and inheritances, the Google twin could watch his
gains accumulate tax-free year after year and then pass on his wealth to an
heir, tax free.
Moving the US tax code in this direction is wrongheaded on both economic
growth and value grounds. ... [A] tax system that eases the Googler’s tax-free
wealth accumulation but forces his brother to pay higher taxes on income earned
through labour betrays American values that honour the hard work of the middle
class... A better tax reform plan would prevent the most privileged Americans
from paying lower taxes on their investment than typical families pay on their
Posted by Mark Thoma on Monday, January 30, 2006 at 04:22 PM in Economics, Income Distribution, Taxes |
reported here in early November when his name first came up, Bush will
nominate Edward P. Lazear to replace Ben Bernanke as head of the White House Council of Economic Advisers. The link
has a picture, links to his website, and covers his background. To me, the important factor to note is
that he is a microeconomist, not a macroeconomist, an indication that issues
such as tax reform will be on the future agenda. Here's a
link to the Washington Post story, the
Bloomberg report, and to
Delong's favorable comments on Lazear's selection from November.
Posted by Mark Thoma on Monday, January 30, 2006 at 11:55 AM in Economics, Politics |
We've heard a lot about the environmental costs of China's industrialization,
and of social unrest in rural areas and other problems, but less about how industrialization
affects the army of migrant workers who come from the country to the cities in
search of work:
In China, a Rare Return , by Peter S. Goodman, Washington Post: On almost
every other day, Cai Weilan wakes up hundreds of miles away in a cramped factory
dormitory, facing another long shift making sweaters... On this day, she wakes
up at home. She ... lifts a pair of knitting needles and a ball of green wool to
begin making a single sweater for her 2-year-old daughter... For one brief
stretch -- this week's Chinese Lunar New Year festival -- mother and daughter
are reunited. "Of course I miss her," says Cai, 23, who has been gone for a full
year, leaving her daughter behind in the care of her mother-in-law while she
endures the factory life for $80 a month. "At home, there is nothing for me to
do. My family needs this money."
In this village ... as throughout most of China, migrant workers are heading
home this week on packed overnight trains and buses for the most important
holiday of the year. They are carrying home to their families things they did
not have before -- televisions, sacks of clothing and cooking pots. They are
bringing along glimpses of China's burgeoning urban wealth and tales of street
hustlers and bosses who cheat them out of wages. They are bearing new
expectations for their own lives and those of their children.
In this rapidly industrializing country ..., these workers send home nearly
$80 billion a year... Many villages in bitterly poor interior regions have seen
their incomes doubled and tripled by this flow of wages. ... "In many counties,
as long as there is one migrant worker in the family, the whole family is lifted
out of poverty."
But not without wrenching social costs. Migration has separated families,
delivering a generation of rural children raised largely by grandparents. For
many migrants, round-trip bus and train fare home can exceed $60 -- more than
some monthly wages. ... The New Year is typically the only time workers go home.
... Wherever they sleep the rest of the year, migrant workers are clear that
home remains home -- a concept laden with significance in Chinese culture. ...
Cai has been working in Guangdong province since she was 14, returning only
to get married, give birth to her daughter and celebrate the Lunar New Year. She
speaks of forced unpaid overtime and wages that have stayed flat for almost a
decade in factories without air conditioning. But her eyes light up when she
speaks of how her income has kept her younger sister in high school and how she
and her husband are saving about $1,200 a year to build a brick home in the
village. Some day. They figure they need $12,000.
Next door, Huang Meiyun, 28, and his father have returned from their jobs as
carpenters in Guangzhou, where they occupy plywood bunks in a shed with seven
other men. Huang's wife works at a factory in another city ... Their son, 6,
stays here in the village with Huang's mother. "I will definitely return," Huang
said... He will come back changed. In the city, Huang has grown accustomed to
reading news and communicating with people all over China on chat boards at
Internet cafes ... He wants a computer at home now... He graduated from high
school. He wants his son to make it to university. "We see the other villagers
going out to the city and their houses getting better, more money in their
pockets," Huang said. "We need to keep up."
Posted by Mark Thoma on Monday, January 30, 2006 at 12:42 AM in China, Economics |
Will the Fed will become more
democratic under Bernanke?:
New Chairman Will Take Over An Increasingly Democratic Fed, by Greg Ip, WSJ:
...An early glimpse of this democracy in action unfolded ... in the run up to
the Fed's Dec. 13 policy meeting. Virtually all ... economists expected the
Fed to raise interest rates ... Still unclear, however, was whether the Fed
would signal a change in the future course of rates. For FOMC members, most of
the suspense ended long before they gathered ... at Fed headquarters ...,
according to people familiar with the process. About a week earlier, the five
Fed governors and 12 regional reserve bank presidents ... had received three
drafts of the statement from the Fed's staff. A debate ensued... Several
presidents circulated extensive comments via encrypted email. By the day of
the meeting, the FOMC had largely agreed on what the statement should say. The
key point: it would no longer call interest rates "accommodative"...
This is not at all unusual, but the formal process is still evolving. It grew
out of protests by Reserve Bank presidents that they did not have enough input
on the wording of the statement. Initially, the process was:
Before meetings, Mr. Greenspan drafted the statement with a
handful of advisers, primarily Donald Kohn... Governors sometimes discussed
the draft the Monday before an FOMC meeting. At the midmorning coffee break on
the day of the meeting, Mr. Greenspan huddled in his office with Mr. Kohn,
along with the president of the New York Fed, the Fed board's vice chairman
and its director of public affairs to decide if the morning discussion
required changing the draft. The final statement was distributed to FOMC
members after they voted on rates and released to the media at 2:15 p.m.
But that has changed:
Beginning in 2004, the presidents would receive drafts of the
statement a few days before a meeting. Typically, there were three versions.
Version A was dovish, version C hawkish, and version B ... somewhere in the
middle. ... The consultation last December was the most extensive so far. ...
December's process went smoothly in part because FOMC members broadly agreed
on what to say. But if their views diverge, the process may take longer. ...
Another big unanswered question is how Mr. Bernanke will deal with this ...
On the editorial page, Robert Barro says goodbye to Greenspan and congraulates him on a great overall job. He also says:
Despite Mr. Greenspan's strengths, there is something akin to Peter
Sellers's Chance the Gardener in the exaggerated popular view of his
economic prowess. ... Fortunately, setting interest rates to ensure low and stable inflation does not require much economic sophistication.
This is as Barro is noting that his strength as a policy maker was his leadership ability, not his abilities as a research econmist.
If you just can't get enough of Greenspan farewells, here's John M. Berry defending his record. He says "...a cottage
industry has sprung up questioning the strength of [Greenspan's] legacy.
Most of the criticism is off base..." Kevin Hassett weighs in too with advice for Bernanke. The NY Times has a piece here. Update: William Polley has
more on the Greg Ip WSJ story...
Posted by Mark Thoma on Monday, January 30, 2006 at 12:33 AM in Economics, Monetary Policy |
Paul Krugman wonders why some members of the media find it necessary to paint
the Abramoff scandal as bipartisan when there is no evidence that it is:
False Balance, by Paul Krugman, Media Imbalance, Commentary, NY Times: How
does one report the facts," asked Rob Corddry on "The Daily Show," "when the
facts themselves are biased?" He explained to Jon Stewart, who played straight
man, that "facts in Iraq have an anti-Bush agenda," and therefore can't be
reported. Mr. Corddry's parody of journalists who believe they must be
"balanced" even when the truth isn't balanced continues, alas, to ring true. The
most recent example is the peculiar determination of some news organizations to
cast the scandal surrounding Jack Abramoff as "bipartisan." ...
Here's how a 2004 Washington Post article described Mr. Abramoff's
background: "Abramoff's conservative-movement credentials date back more than
two decades to his days as a national leader of the College Republicans." In the
1990's, reports the article, he found his "niche" as a lobbyist "with entree to
the conservatives who were taking control of Congress. He enjoys a close bond
with [Tom] DeLay." ...
Mr. Abramoff is a movement conservative whose lobbying career was based on
his connections with other movement conservatives. His big coup was persuading
gullible Indian tribes to hire him as an adviser; his advice was to give less
money to Democrats and more to Republicans. There's nothing bipartisan about
this tale, which is all about the use and abuse of Republican connections.
Yet over the past few weeks a number of journalists, ranging from The
Washington Post's ombudsman to the "Today" show's Katie Couric, have declared
that Mr. Abramoff gave money to both parties. In each case the journalists or
their news organization, when challenged, grudgingly conceded that Mr. Abramoff
himself hasn't given a penny to Democrats. But in each case they claimed that
this is only a technical point, because Mr. Abramoff's clients ... gave money to
Democrats as well as Republicans...
But the tribes were already giving money to Democrats before Mr. Abramoff
entered the picture; he persuaded them to reduce those Democratic donations,
while giving much more money to Republicans. ... donations to Democrats fell by
9 percent after they hired Mr. Abramoff, while their contributions to
Republicans more than doubled. So in any normal sense of the word "directed,"
Mr. Abramoff directed funds away from Democrats, not toward them. ... Bear in
mind that no Democrat has been indicted or is rumored to be facing indictment in
the Abramoff scandal, nor has any Democrat been credibly accused of doing Mr.
Abramoff questionable favors.
There have been both bipartisan and purely Democratic scandals in the past.
Based on everything we know so far, however, the Abramoff affair is a purely
Republican scandal. Why does [this] matter? For one thing, the public is led to
believe that the Abramoff affair is just Washington business as usual, which it
isn't. The scale of the scandals now coming to light, of which the Abramoff
affair is just a part, dwarfs anything in living memory.
More important, this kind of misreporting makes the public feel helpless.
Voters who are told, falsely, that both parties were drawn into Mr. Abramoff's
web are likely to become passive and shrug their shoulders instead of demanding
reform. So the reluctance of some journalists to report facts that, in this
case, happen to have an anti-Republican agenda is a serious matter. It's not a
stretch to say that these journalists are acting as enablers for the rampant
corruption that has emerged in Washington over the last decade.
I wish the media would show more courage and stand up to the pressure that brings this about. Reporting the unpleasant truth will bring howls of protest, cries of bias, the usual chorus of voices attacking the credibility of the messenger. By some measure, some count of the number of words on the topic assessed subjectively as favorable or unfavorable, the number of guests on certain T.V. or radio programs, the particular page in the newspaper that stories appear on, how many minutes were devoted to reporting this or that, bias will be found in most any direction one is looking. I have the impression that fear of being attacked by the smear machine, fear of being labeled as biased or of some other tactic, has affected the way the news gets reported.
Previous (1/26) column: Paul Krugman: Health Care Confidential
Next (2/3) column: Paul Krugman: State of Delusion
Posted by Mark Thoma on Monday, January 30, 2006 at 12:15 AM in Economics, Politics, Press |
Tim Duy with a Fed Watch:
For the Fed watcher, the 4Q05 GDP report is a real brainteaser. The central
focus of the many, many blogs covering Friday’s news was the disappointing
growth numbers (see
William Polley’s and
James Hamilton’s views, the latter
including a long list of similar concerns). To be sure, the weak headline number
deserved attention. But I was surprised by the relatively little attention
placed on the inflation reading. I doubt the Fed is going to let that number
slip by so lightly. Weak growth and higher inflation? Now that’s interesting.
But before I get ahead of myself on the inflation topic, we need to think
about how rattled the Fed will be by the growth decline. For this slice of the
data, I will concentrate on the contributions to GDP, following in Hamilton’s
footsteps with a closer look at the underlying numbers. Let’s toss out the
consumption side of the story:
Pctg. pts. (annual): 2004 2005 05Q3 05Q4
Personal Cons. Exp. 2.71 2.49 2.85 0.79
Durable goods...... 0.51 0.37 0.76 -1.56
Motor veh./parts. 0.06 -0.04 0.45 -2.06
household equip. 0.34 0.28 0.37 0.35
Other............ 0.10 0.13 -0.06 0.14
Nondurable goods... 0.94 0.90 0.73 1.04
Food............. 0.48 0.49 0.61 0.51
Clothing/shoes... 0.17 0.17 0.08 0.28
Gas, fuel oil, and
energy goods.... 0.03 0.04 -0.11 0.07
Other............ 0.26 0.20 0.15 0.17
Services........... 1.27 1.22 1.36 1.32
Housing.......... 0.30 0.24 0.20 0.18
Household oper... 0.07 0.11 0.17 0.08
Elect./gas..... 0.03 0.06 0.10 0.02
Other.......... 0.05 0.05 0.08 0.06
Transportation... 0.03 0.04 0.05 0.11
Medical care..... 0.49 0.56 0.66 0.61
Recreation....... 0.11 0.06 0.02 0.08
Other............ 0.26 0.21 0.26 0.26
The end of the consumer? Oh, don’t get me wrong, the household spending
slowdown will be coming. I am not sure how else the imbalances in the economy,
summarized by the current account deficit, are resolved. But I am not so
confident I see that adjustment in these numbers. No, seriously – the only
component that looks out of whack is motor vehicles and parts. And none of us
are really surprised too much here. Moreover, the Fed will look at that and note
that if car sales simply stabilize in 1Q06, they will contribute nothing to GDP
growth, about what they contributed in 2004 and 2005. This is not a make it or
break it issue for Greenspan & Co.
For a very different perspective on the importance of the auto industry, see
Jim Hamilton. I will only add that if
you think it important that some rebalancing of economic activity occur to
resolve the US current account deficit, then some category of household spending
is going to have to take a hit. Perhaps others see a different way out, but I
tend to think any rebalancing is going to involve some…how does one put
Much more important is the investment side of the story. Conventional wisdom,
which I believe the Fed shares, is that investment swings drive business cycle
fluctuations. And Fedspeak has clearly revealed policymaker’s expectation that
investment spending will hold strong in 2006. They will be surprised if a
different story evolves. More specifically, nonresidential fixed investment is
the key here – the expectation at the Fed is that residential investment will
ease this year. On to the tables:
Pctg. pts. (annual): 2004 2005 05Q3 05Q4
Fixed investment... 1.47 1.28 1.31 0.51
Nonresidential... 0.92 0.87 0.88 0.30
Structures..... 0.06 0.05 0.06 0.02
Equip./soft.... 0.86 0.82 0.82 0.28
equip./soft. 0.49 0.48 0.42 0.34
Comp./equip. 0.19 0.24 0.11 0.26
Software... 0.11 0.17 0.14 0.13
Other...... 0.19 0.08 0.17 -0.05
Ind. equip.... 0.04 0.08 0.20 0.13
Trans. equip. 0.15 0.16 0.18 -0.27
Other equip. 0.18 0.09 0.02 0.07
Residential..... 0.55 0.42 0.43 0.21
I suspect this will puzzle policymakers more than the consumption figures. Is
the weakness in nonres investment a fluke? The weakness is not widespread, and
not like the massive swing in 3Q00 (was it that long ago?) in the equipment and
software category. What about the transportation component? Is that related to
the auto fallout we saw in consumption? Note that the
Beige Book reported tight transportation
markets, and expectations of more capital spending. Also, the story in the GDP
report is just not consistent with last Thursday’s durable goods release, which
revealed strong shipments of capital goods in 4Q and, bolstering the expectation
that this was a one off event, a solid 3.5% gain in non defense, non aircraft
capital goods orders in December. All in all, I think the Fed will be
cautiously optimistic that the weak investment figure was an aberration.
Given the other data, it won’t put them on hold this week, but they will be
watching a bit more closely during the run up to the March meeting.
I will refrain from a long analysis on the inventory adjustment. If you are
bearish, the inventory gain signals that the end is near with firms seriously
misjudging demand. If you are more on the optimistic side, firms are confident
about the future. The Fed will not likely place much emphasis on either story;
instead, they will simply note that inventories were drawn down the previous two
quarters, and many expected that trend would be reversed in the fourth quarter –
nothing ominous, nothing exciting.
The swing in defense spending was hurricane related – see Gerald Prante via
Mark Thoma. Not much policymaking meat
For some analysis of the trade figures, see
Brad Setser and
Menzie Chinn. At least one policymaker,
New York Fed President Timothy Geithner,
views the current situation as unsustainable (others do as well), but notes that
it is not an appropriate focus of monetary policy. The solutions lie outside,
far outside, those hallowed halls on Constitution Ave:
For global growth to be sustained at a reasonably strong pace during
this period of adjustment, the desirable increase in U.S. savings, and the
necessary slowing in U.S. domestic demand growth relative to growth of U.S.
output, would have to be complemented by stronger domestic demand growth
outside the United States, absorbing a larger share of national savings.
Exchange rate regimes, where they are currently closely tied to the dollar,
will have to become more flexible, allowing exchange rates to adjust in
response to changing fundamentals. Reforms to financial systems and to
social safety nets over time would help reduce the need for exceptionally
high levels of domestic saving we see in many countries.
The global nature of these requirements does not imply that the United
States can put the principal burden for adjustment on others. If we focus
adequate political capital on the factors within our control, we will have
more credibility internationally in encouraging policy changes outside the
United States that might reduce our collective risks in the adjustment
Is that all?
Monetary policy doesn’t have a direct role in addressing this imbalance,
according to Geithner. Of course, the Fed needs to be aware that the
globalization of capital flows may be holding longer term interest rates lower
than normal, complicating efforts to calibrate monetary policy (read as: the
yield curve is no longer an accurate predictor of recessions). But that’s about
it – policymakers are left with the chore of maintaining credibility in the
event the US current account adjusts in a disruptive fashion. And maintaining
credibility means keeping your eye on the prize, a focus on low and stable
(I know that many feel the Fed had a role in the creating role in creating
the deficit by flooding the world with cheap money, and Geithner’s speech leaves
the Fed unaccountable. I am only the messenger.)
Ah yes, it all comes down to inflation. And now, after two quarters of
declining core-PCE inflation, we pop back up to an annualized 2.2% rate. If you
saw weak growth in this GDP report, you should be especially unhappy with this
inflation reading – it suggests that visions of a Fed pause are not quite as
simple as a disappointing headline number. As
Greg Ip at the WSJ notes, this is “around
the top of incoming Fed chairman Ben Bernanke's comfort zone of 1% to 2%.”
Are we seeing some pass through of this summer’s high energy costs? Very
possibly, and policymakers will not like this, especially with oil within
striking distance of $70. Firms that thought this summer’s energy surge a
temporary phenomenon may start thinking that it is time to get more forceful
about pushing higher prices onto customers. So far, pushing higher prices down
the line hasn’t been easy, and the Fed will want to keep it that way –
especially with signs that some firms, like
Proctor & Gamble (WSJ subscription) are
getting away with it.
I think the bond markets summed this up nicely on Friday. Interest rates
ended just about where they began. Yes, headline GDP was weak, and red flags
were raised, particularly in investment spending. But, from the Fed’s
perspective, no smoking gun, especially when placed in light of higher frequency
data. Couple that with higher inflation and the combination suggests little
change in the course of policy – one more tomorrow, with slightly better than
even odds on a March hike.
Hopefully the final statement of the Greenspan era will provide a clearer
path to March. But I tend to think they will be waiting on data to guide them,
just like the rest of us. [All
Fed Watch posts.]
Posted by Mark Thoma on Sunday, January 29, 2006 at 02:11 PM in Economics, Fed Watch, Monetary Policy |
Here are scatter plots of monthly non-borrowed reserves (horizontal axis) and the monthly federal funds rate
(vertical axis) for the full sample from 1959-2005 and before and after 1982:
I was looking for a dummy variable and piecewise linear regression example
for my introductory econometrics course. This ought to do the trick, though piecewise might be a bit of a stretch. I can also ask about potential problems with the approach, e.g., for one, ask how the presence of a trend in NBR might affect the conclusions. For example, here's what happens with a very quick, very simple (and crude) linear detrending of NBR:
Looks like two different policy regimes to me. Finally, here's the last diagram with the observations connected through time:
The one obvious outlier (FF=3.07, NBR=6.68) is September 2001 when reserves were increased following the terrorist attacks.
Posted by Mark Thoma on Sunday, January 29, 2006 at 02:52 AM in Economics, Monetary Policy |
Alex Gerber, M.D., clinical professor of surgery emeritus at the University
of Southern California, adds his voice to those calling for universal health
insurance, the only viable replacement he sees for a Medicaid program in danger
Medicaid, by Alex Gerber, Commentary Washington Times: Medicaid, the
government health-care plan for low-income people, has been targeted ... as a
prime source for savings in a bloated federal budget. ... A lowering of Medicaid
costs by $6.9 billion is proposed over the next five years, which will decrease
benefits and raise out-of-pocket expenses for the 47 million Americans... The
nonpartisan Congressional Budget Office predicts an appreciable number of
Medicaid recipients ... will join the ranks of the medically uninsured. The
adverse morbidity and mortality statistics of the uninsured are well
Few are happy with Medicaid today. Patients are unhappy with eligibility red
tape and the declining number of doctors willing to treat them. Doctors are
unhappy with the mountains of paper work and unrealistically low fees. Most
hospitals are unhappy because Medicaid's reimbursement doesn't cover the cost of
patient care.... But unhappiest of all are government agencies struggling to
control costs... Meanwhile, the public hospitals are alive but not well. ...
After 40 years, we must reluctantly conclude Medicaid has been a
well-intentioned program that has fallen short of expectations....
The great majority of Americans ... believe health care should be a
fundamental right and a public rather than a private good. A single standard of
health care, regardless of ability to pay... What, then, should replace
Our outmoded, employer-based, privately financed, multipayer health-care
system ... is an anachronism in the 21st century. The world's richest and most
powerful nation is unique in not sponsoring government-controlled Universal
Health Insurance (UHI) other industrialized nations have enjoyed for decades.
Unlike Medicaid, Medicare -- UHI for the elderly -- has been a resounding
success. Medicare, though also targeted by Congress for budget cuts by
increasing patient-out-of pocket payments, is indeed widely recognized as the
most important advance of the last century in our health-care socioeconomics.
Medicare for our entire population is probably the most likely answer to
I have previously advocated on these pages a change to the Canadian,
single-payer health-care plan funded by national health insurance. ... Canada's
medical results equal ours at a huge savings. Perhaps the superiority of
Canada's health-care system was best expressed by a Harris Interactive Poll
among the leading industrial societies that evaluated patient satisfaction with
their system: Canada ranked first and the U.S. last. ... Significantly, The new
Conservative government in Canada did not advocate major changes in the UHI
Of interest is a comparison of prescription drug prices in the U.S. and
Canada. ... The attempt to constrain skyrocketing drug prices was hamstrung ...
by President Bush's insistence there be no price negotiations with
pharmaceutical companies. Thus, our Medicare population, ... has been denied the
advantage of bulk-buying economies of scale. Imagine the uproar if Hertz and
Avis were, by law, denied discounted prices on autos they purchased in huge
The future for national health insurance looks bleak. The issue has never
been on President Bush's agenda. ... A major reform of our wasteful health-care
system will help put the brakes on an inexorably rising national debt that will
eventually fall on our children and grandchildren. It would be well to recall an
admonition from George Washington's 1796 Farewell address: "by vigorous exertion
to discharge the debt" -- not ungenerously throwing upon posterity the burden
which we ourselves ought to bear.
Posted by Mark Thoma on Sunday, January 29, 2006 at 02:06 AM in Economics, Health Care |
Following up on "The Evolution of Top Incomes" which
Brad DeLong comments on here, new government statistics show that
the concentration of corporate wealth at the high end of the income distribution is
continuing to increase:
Corporate Wealth Share Rises for Top-Income Americans,
by David Cay Johnston, NY Times:
New government data indicate that the concentration of corporate wealth among
the highest-income Americans grew significantly in 2003, .. a trend that began
in 1991 [and] accelerated in the first year that President Bush and Congress cut taxes
on capital. In 2003 the top 1 percent of households owned 57.5 percent of
corporate wealth, ... The top group's share ... has grown ... since 1991, when
it was 38.7 percent. ... according to a Congressional Budget Office analysis of
the latest income tax data. ... In 2003, incomes in the top 1 percent of households ranged from $237,000 to
several billion dollars. For every group below the top 1 percent, shares of
corporate wealth have declined since 1991. ...
Posted by Mark Thoma on Sunday, January 29, 2006 at 01:59 AM in Economics, Income Distribution |
Another follow up, this time to
Technology and Class Attendance:
Apple Offers College Lectures Via Podcasts, AP/NYT: In its latest move to
broaden its iPod and iTunes franchises, Apple Computer Inc. has introduced
''iTunes U,'' a nationwide expansion of a service that makes course lectures and
other educational materials accessible via Apple's iTunes software. The company
... had been working with six universities on the pilot project for more than a
year and expanded the educational program this week, inviting other universities
to sign up. ... Apple's service offers universities a customized version of the
iTunes software, allowing schools to post podcasts, audio books or video content
on their iTunes-affiliated Web sites. ...
I *guess* this is a good thing...
Posted by Mark Thoma on Sunday, January 29, 2006 at 01:24 AM in Economics, Universities |
Do customers care about business ethics? They say they do, mostly anyway:
Company's Ethics Do Concern Shoppers (or So They Say), by Hubert B. Herring, NY
Times: ...[D]o more modest ethical taints affect buying behavior? On the eve of the
biggest Enron trial, that's an intriguing question — and one asked in a survey
by Opinion Research for LRN, which consults on business ethics and governance. ... Nearly three-quarters of shoppers said they would prefer to buy stuff from a
company with ethical practices, even if it meant paying more [graph]. That's what they
said, at any rate. Given Americans' passion for rooting out bargains, their
resolutions just might teeter when spying an alluring price tag. Shaky ethics seem far from rare. Nearly half of working Americans say that at
some point they've had to choose between what a supervisor ordered and what they
thought was right...
Posted by Mark Thoma on Sunday, January 29, 2006 at 01:01 AM in Economics, Market Failure |
On the PBS web site is "You in 1905," part of Manor House:
You in 1905
Get a snapshot of your life as it might have been had you been living
in Britain 100 years ago. Just enter your gender and your fathers profession.
So I entered:
Continue reading "You in 1905" »
Posted by Mark Thoma on Sunday, January 29, 2006 at 12:15 AM in Economics, Miscellaneous |
The administration does not like the results of greenhouse gas and global warming research from a leading researcher in the area and, according to this report, is attempting to control what he is allowed to say in public:
Climate Expert Says NASA Tried to Silence Him, by Andrew C. Revkin, Washington
Post: The top climate scientist at NASA says the Bush administration has
tried to stop him from speaking out since he gave a lecture last month calling
for prompt reductions in emissions of greenhouse gases linked to global warming.
The scientist, James E. Hansen, longtime director of the agency's Goddard
Institute for Space Studies, said ... officials at NASA headquarters had ordered
the public affairs staff to review his coming lectures, papers, postings on the
Goddard Web site and requests for interviews from journalists. Dr. Hansen said
he would ignore the restrictions. "They feel their job is to be this censor of
information going out to the public," he said. ...
Dr. Hansen said that nothing in 30 years equaled the push made since
early December to keep him from publicly discussing ... clear-cut
dangers from further delay in curbing carbon dioxide. ... He said he was
particularly incensed that the directives affecting his statements had come
through informal telephone conversations and not through formal channels,
leaving no significant trails of documents. Dr. Hansen's supervisor, Franco
Einaudi, said there had been no official "order or pressure to say shut Jim up."
But Dr. Einaudi added, "That doesn't mean I like this kind of pressure being
The fresh efforts to quiet him, Dr. Hansen said, began in a series of calls
after a lecture he gave ... and the release of data ... showing that 2005 was
probably the warmest year in at least a century, officials at the headquarters
of the space agency repeatedly phoned public affairs officers, who relayed the
warning to Dr. Hansen that there would be "dire consequences" if such statements
continued, those officers and Dr. Hansen said in interviews.
Among the restrictions, according to Dr. Hansen and an internal draft
memorandum he provided to The Times, was that his supervisors could stand in for
him in any news media interviews. In one call, George Deutsch, a recently
appointed public affairs officer at NASA headquarters, rejected a request from a
producer at National Public Radio to interview Dr. Hansen, said Leslie McCarthy,
a public affairs officer responsible for the Goddard Institute.
Citing handwritten notes taken during the conversation, Ms. McCarthy said Mr.
Deutsch called N.P.R. "the most liberal" media outlet in the country. She said
that in that call and others Mr. Deutsch said his job was "to make the president
look good" and that as a White House appointee that might be Mr. Deutsch's
But she added: "I'm a career civil servant and Jim Hansen is a scientist.
That's not our job. That's not our mission. The inference was that Hansen was
disloyal." ... Mr. Acosta, Mr. Deutsch's supervisor, said that when Mr. Deutsch
was asked about the conversations he flatly denied saying anything of the sort.
... Ms. McCarthy, when told of the response, said: "Why am I going to go out of
my way to make this up and back up Jim Hansen? I don't have a dog is this race.
And what does Hansen have to gain?" ...
"He's not trying to create a war over this," said Larry D. Travis, an
astronomer who is Dr. Hansen's deputy at Goddard, "but really feels very
strongly that this is an obligation we have as federal scientists, to inform the
public, and this kind of attempted muzzling of the science community is really
rather dangerous. If we just accept it, then we're contributing to the problem."
"He really is one of the most productive and creative scientists in the
world," Dr. Cicerone said. "I've heard Hansen speak many times and I've read
many of his papers, starting in the late 70's. Every single time, in writing or
when I've heard him speak, he's always clear that he's speaking for himself, not
for NASA or the administration, whichever administration it's been." ...
Many people who work with Dr. Hansen said that politics was not a factor in
his dispute with the Bush administration. "The thing that has always struck me
about him is I don't think he's political at all," said Mark R. Hess, director
of public affairs for the Goddard Space Flight Center in Greenbelt, Md... "He really is not
about concerning himself with whose administration is in charge, whether it's
Republicans, Democrats or whatever," Mr. Hess said. "He's a pretty down-the-road
conservative independent-minded person. "What he cares deeply about is being a
scientist, his research, and I think he feels a true obligation to be able to
talk about that in whatever fora are offered to him."
The administration is set to reveal a new science education initiative soon to encourage more people to enter science related fields. Showing more respect for science and the dedicated scientists behind it would be a good way to begin.
Posted by Mark Thoma on Saturday, January 28, 2006 at 12:51 PM in Economics, Environment, Science |
Gerald Prante at the The Tax Policy Blog looks at the difference between GDP
and net domestic product growth rates (in levels, NDP=GDP-CFC, where CFC is the consumption of fixed capital, i.e. a measure of depreciation, see the BEA for more). He also notes that
much of the spending on hurricane Katrina is reflected in defense spending which
rose in the 3rd quarter but fell in the 4th leading to corresponding swings in
the GDP figures:
Gerald Prante, The Tax Policy Blog, Hurricanes,
Government Spending, and GDP: The Bureau of Economic Analysis today released GDP numbers for the 4th
quarter and it showed GDP rising at only 1.1 percent, down significantly from
the 4.1 percent growth witnessed in the 3rd quarter of 2005. ... There are two main factors associated with the high volatility of recent GDP
growth: (1) Hurricane Katrina and (2) defense spending.
Remember that GDP is Gross Domestic Product, meaning that if our
economy is just replacing capital destroyed by Katrina, gross production will
increase. But also during Katrina, federal defense spending—part of the
government portion of GDP—rose dramatically. Defense spending includes much of
the costs to government from hurricane relief ...
Specifically, defense spending rose 10 percent in the 3rd quarter, only to fall
13.1 percent in the 4th quarter. That means the 3rd quarter GDP number was
“artificially” high thanks to these added costs of rebuilding and spending, and
the percent change in the 4th quarter was “artificially” low as spending
and rebuilding subsided.
If, on the other hand, we examine Net Domestic Product (NDP)—which accounts
for huge capital stock losses from natural disasters—one can see a much
different picture of the recent economy. NDP fell dramatically in the 3rd
quarter—an 8.4 percent annualized decline—but rose dramatically in the 4th
quarter by 12 percent. Contrast that with GDP, which increased at a rapid pace
of 4.1 percent in the 3rd quarter, yet only rose by 1.1 percent in the 4th
Take a look at the chart below of the quarterly growth rates in GDP and NDP
since 2003 and the timing of when the two indicators diverge. The first large
divergence comes in the 3rd quarter of 2004 ... when we saw the
destruction caused by Hurricanes Ivan and Charley. During the 3rd quarter of
2004, defense spending rose by 13.8 percent, spiked by the hurricane relief
expenses, and then only increased by 0.8 percent in the 4th quarter.
The second large divergence between the two indicators appeared in the 3rd
quarter of 2005 with Hurricanes Katrina and Rita. Notice too from the chart that
this phenomenon does not occur in 2003 as its hurricane season was very light
relative to other years. Hurricane Isabel was the only big storm of the 2003
season and only struck land as a Category 2 storm.
Click on figure to enlarge
Here's the same two series for a slightly longer time period, since 1990:
The magnitude of the changes in NDP growth recently look unusually large, but a longer view of the two series shows
that changes of this magnitude are not unprecedented:
However, though subsequent data revisions may change this, the difference between the two series is unusually large:
I'm not sure what to make of the inceasing volatility in the difference between the two growth rates.
Posted by Mark Thoma on Saturday, January 28, 2006 at 01:05 AM in Economics |
Or is it really Wal-Mart's evil super-store twin up to its old profit
Wal-Mart fishes for eco-friendly profile, by Jonathan Birchall and Fiona Harvey,
Financial Times: Wal-Mart has committed itself to taking most of the fish it
sells in North America from environmentally sound sources, in its latest
initiative to improve its much criticised record on environmental and social
issues. The world’s largest retailer has pledged that all of its US fresh and
frozen fish, excluding farmed fish, will eventually come from fisheries
certified as being “sustainable” by the Marine Stewardship Council... Wal-Mart,
which operates 900 fish counters, joins a small group of US retailers, including
Whole Foods Market and Wild Oats, which source salmon, pollock, lobster and hoki
fish from MSC-certified fisheries. ...
Wal-Mart has also established “sustainability networks” that bring its
suppliers and its buyers together with concerned non-profit groups, covering
products including agricultural products, seafood, and gold and jewellery.
Rupert Howes, head of the Marine Stewardship Council, said: “It is hugely
significant that Wal-Mart is doing this, and setting a real example to the rest
of the industry.”
However, only a small number of fisheries have been certified as sustainable.
This means it will take between three and five years for Wal-Mart to achieve its
goal. The company has also been showing new interest in improving conditions in
garment and footwear factories – another area highlighted by Mr Scott.
But it is still struggling to persuade many of its critics that it is serious
about its conversion to the cause of corporate social responsibility. ...
However, David Schilling, of the Interfaith Center on Corporate Responsibiity,
which has co-ordinated numerous shareholder resolutions critical of Wal-Mart,
said critics would watch for genuine changes that went beyond its current
propaganda war. ...
Wal-Mart faces considerable challenges if it is to adapt its operations to
the range of standards now embraced by some of its rivals. Unlike Nike or Gap,
both of which have been active in developing supply chain monitoring, it sells a
vast range of merchandise ranging from bananas to diamonds; its supply chain
uses 60,000 factories worldwide for its own brand products alone, compared to
around 700 at Nike.
Posted by Mark Thoma on Saturday, January 28, 2006 at 12:16 AM in Economics, Environment |
Paul Krugman responds to comments on his recent column Health Care Confidential:
The V.H.A.: Not Wealthy, but Sometimes Wise, Paul Krugman, Money Talks: C.J. Stimson, Nashville, Tenn.: ...[We] often
find ourselves debating the V.A. and its tremendous advances. The quality and
cost figures reported over the last decade do seem to paint a very optimistic
picture. But ... I often wonder whether it's actually
replicable. The patient base for the V.A. makes it very unique and lends
itself to improved outcomes and increased efficiency. The V.A. is a closed
system where variables in the delivery of care, the most important of which is
the patient, can be well controlled. If this degree of control could be
exercised over a broader population, perhaps U.S. Health Care, Inc., would be
feasible. I am afraid, however, that the American psyche is not ready to cede
such control. ...
Paul Krugman: As you say, the V.A. is a closed population, which is
what makes it work. Big plans like Kaiser share some of the same advantages,
and have partially matched the V.A.'s achievement. But to replicate the
achievement nationwide, we'd need a nationwide health system - which is sort
of a "well, duh" conclusion.
I am highly skeptical of claims that the obstacle to such a system lies in
something deep about the American psyche. After all, people tell us that even
the more limited goal of single-payer health care is deeply unacceptable to
Americans, yet every American over 65 benefits from Medicare, which is
single-payer pure and simple, and it's highly popular. So I think the problem
is politics, not national character. ...
Jennifer C. Jaff, Farmington, Conn.: Your view of the Veterans
Administration as a model of successful single-payer healthcare ignores the
daily reality of patients -- especially those with chronic illness. Veterans
Administration doctors routinely cut off all medication -- no tapering even
where normal protocol is to taper, ... without reason, disregarding
long-standing diagnoses ... of other Veterans Administration
doctors. If you talk to patients with chronic conditions, you will find that
the Veteran's Administration vastly under-treats, withholding medication and
treatment that are used routinely in the private sector... In theory, you may be
right. In practice, unless those engaging in this important debate about
health care financing focus on the real experience of patients with chronic
diseases -- those patients whose health care is the most expensive, and who
have the most contact with the health care system -- these sorts of
misimpressions of how things really work will lead to disastrous outcomes. ...
Health care policy that is made only for the healthy will jeopardize the
care and financial stability of millions of Americans with chronic diseases.
I, for one, am terrified when even the well-intentioned like you get this
wrong. I see bankruptcy court in my future, and the future of fully half of
Americans who suffer from at least one chronic disease, unless our needs and
the cost of our care is addressed in any plan to reform the health care system
Donna Whaley, Tennessee Colony, Tex.: I feel compelled to comment that
this Op-Ed is obviously written by someone who is not dependent on the V.A. for
health care. Someone who is not waiting for MONTHS for follow-up to a heart
attack and a subsequent failed stress test, wondering if you will last until
they can work you in. Or who discovered that her recent kidney stone procedure
was done with outdated equipment and no anesthesia unnecessarily causing
excruciating pain that could have been avoided. The V.A., I believe, does the
best they can with what they have, but it is far from good enough. ... What I
ask is that you please address the problems, too -- your article makes it sound
Paul Krugman: The V.A. does have some waiting time issues; as you
say, they're due to lack of funds. The fact remains, however, that despite its
shoestring budget the V.A. by all accounts does a better job in many
dimensions than private health care.
Still, you've touched on my biggest worry about the V.A., which is that it
will be starved for funds by politicians who prefer to use the money for, say,
tax cuts. That's what happened to Britain's National Health Service, which is
better than Americans think, but was nickel-and-dimed by successive British
governments down to the point where it currently spends only about 40 percent
as much per capita as the U.S. system.
Robert Feinberg, Chicago: Enjoyed your article on the V.A. My own
experience as a retired naval officer differs. While I have had some positive
experiences with V.A. care, on the whole, I have found the system still
reflective of the old stereotypes. ... The fact is, among the retired officer community, most of us will do
almost anything not to use the V.A. system .... But I am glad that it exists
to provide care for those less fortunate ... By the way, did you know that the
V.A. treats service-connected conditions only and that an entire generation of
vets have no carte blanche access to the system? ...
Tom Lewis, Colebrook, Conn.: You missed one important point about
the VHA. It emphatically does not serve all veterans. It means-tests them and
serves generally the oldest, sickest and poorest. This makes its mission far
harder because it does not cherry-pick the way the privatized, insured health
care system does. With that in mind, it is an even more interesting model for
a national health care system. On the other hand, all of its statistics are
self-reported. I'm told that some V.H.A. institutions cook their statistics.
There is no federal health care oversight agency for any of the federal health
care agencies: D.O.D., prisons, V.H.A., etc. Bear in mind also, that the V.H.A.
is very bureaucratic. Patients get bumped around a lot in the course of care.
And access and quality of care vary considerably. The south and southwest are
underbedded. The northeast and rust belt are wrongly bedded. Many vets do not
have access to V.H.A. medical centers or clinics. Inpatient mental health
care, for example, can be very uneven. (The writer is the former director of
the New York State Division of Veterans Affairs.)
Ben Hadad, Houston: Please don't wax too poetic on V.A. health care
unless you like most appointments three to four hours late and six months or
more to make an appointment. Once they get you in they are great. Prescription
drugs flow seamlessly by mail, certainly at an affordable cost. ...
Paul Krugman: The comments on the V.A. have been greatly informative
... Let me say something about how to interpret what you're reading.
First, experiences with the V.A. are by no means uniformly positive. That's
what you'd expect. We're talking about a real-world system run by fallible
human beings. So negative stories don't condemn the system, just as positive
stories don't validate it. For that you need careful, systematic quality
assessments - and these give the V.A. system very high marks.
Second, waiting times are a bit of an issue. This reflects the tightness of
the V.A.'s budget. And there is, to be honest, some reason to think that this
is always a risk with government-run health care: politicians see an
opportunity to squeeze a bit, to make funds available for their pet projects,
then to squeeze a bit more, and after a decade or two quality has really
suffered. That's what happened to the British system, although that system
remains much better than Americans have been told.
But - and this is my last point - consider the alternative. Out here in the
non-veteran world, corporations are reacting to rising health care costs by
dropping insurance; states are reacting by throwing people off Medicaid; and
people without health insurance are leaving chronic problems untreated, then
ending up in emergency rooms - or dead. Meanwhile, the V.A. is containing
costs while providing excellent if not always perfect care.
Posted by Mark Thoma on Friday, January 27, 2006 at 07:31 PM in Economics, Health Care |
This Fed Letter from the FRBSF is based upon
speech last week. She reviews the Greenspan years, looks ahead the the
Fed under Bernanke, and talks about how Bernanke and Greenspan differ on
explicit inflation targets:
2006: A Year of Transition at the Federal Reserve, Economic Letter, FRBSF:
At the end of this month, Alan Greenspan will bring to a close his 18 years of
distinguished service as Chairman of the Board of Governors of the Federal
Reserve System. ... With such a significant transition for the Fed just days
away, this seemed like a natural time to spend a few moments looking back at the
Greenspan Fed and offering some of my own views on what may lie ahead under a "Bernanke
Alan Greenspan has won many plaudits for skillfully
managing monetary policy—and deservedly so. During the Greenspan years,
the U.S. economy has been extraordinarily stable, with just two mild
and short recessions (Figure 1), and with low and stable inflation for
over a decade ... Clearly, in the short time I have today, I
cannot do justice to all the accomplishments.... So I'll focus on two
aspects of policy that I believe have been especially important... a
systematic, and therefore understandable and predictable approach to
policy, and a growing emphasis on communication and transparency.
I will focus first on what I mean by a systematic approach to policy. While
the Fed does not follow a policy rule, it has been consistent in its approach to
achieving its dual mandate—keeping inflation low and stable and promoting
maximum sustainable employment. ...
systematic, consistent approach has enhanced the ability of financial markets to
anticipate the Fed's response to economic developments and to respond themselves
in advance of the Fed. Such market responses strengthen and speed the
transmission of policy to the economy and conceivably enhance economic
stability. Moreover, such an approach helps build the public's confidence in the
Fed's commitment to low and stable inflation; this, in turn, may well make it
easier for the Fed to respond to fluctuations in labor and product markets,
because there is less risk that an easing of policy will unleash a wave of
inflation fears. As successful as this systematic approach ... has by no means
been a straitjacket for policy during the Greenspan years. Rather, policy also
has been flexible when unusual circumstances called for it. ...
Now let me turn to the second aspect of policy, namely, the increased
emphasis on communication and transparency. One of the first steps in this
direction occurred in 1994, when the FOMC first started issuing press releases
after its meetings that explicitly announced changes in the federal funds rate
target. Over the decade or so since then, the press release has come to include
a statement about the balance of risks to the attainment of its dual mandate,
and at least some indication of where policy may go in the future. This enhanced
transparency works in tandem with the systematic approach ... because
it ... helps the markets anticipate the Fed's response to economic
Of course, there have certainly been other developments in policy during the
18 years of Greenspan's chairmanship that have contributed to its success in
achieving its dual mandate. But I believe these two—a systematic approach to
policy and more communication and transparency—are particularly noteworthy. ...
Looking ahead to the "Bernanke years"
These achievements provide a great foundation for the new Chairman, Ben
Bernanke. Having observed him when he was a member of the Board of Governors
from 2002 to 2005, and being familiar with his remarkable body of research on
macroeconomic policy, I feel pretty confident that he places an equally high
value on a systematic approach as well as on transparency and communication.
... And any of you who have read the
speeches he gave while he was a Governor will know that he is a consummate
communicator and teacher.
One area where he has differed with Chairman Greenspan is on how to define
"price stability." Of course, both see price stability as a prime objective of
policy. But for Chairman Greenspan, the definition has been behavioral—that is,
he would say that we have achieved price stability when inflation is low enough
that it does not materially affect people's economic decisions. In contrast, ... Bernanke
... said that he would like to see the establishment of a numerical objective
for price stability... Since his nomination, he has said that he would not institute
such an approach without a consensus among FOMC members.
For my part, I'm sympathetic to the idea of a quantitative objective for
price stability, as I agree that it enhances both Fed transparency and
accountability. ... I see an
inflation rate between 1% and 2%, as measured by the core personal consumption
expenditures price index, as an appropriate price stability objective for the
Fed. However, I also think it is critically important that a numerical inflation
objective not weaken our commitment to a dual mandate that includes full
employment. ... I believe that a numerical long-run
objective for inflation will enhance our ability to maintain that success even
in the face of the significant challenges that may come up. ...
Posted by Mark Thoma on Friday, January 27, 2006 at 06:08 PM in Economics, Monetary Policy |
With today's disappointing advance GDP report which will be revised as new
data arrive, I thought it might be worthwhile to look at typical revisions in
recent years to see if there is any particular pattern.
Continue reading "Revisions to Real and Nominal GDP" »
Posted by Mark Thoma on Friday, January 27, 2006 at 03:45 PM in Economics |
News from Greg Ip and John McKinnon at the Wall Street Journal on Bush's choice to fill the two open seats
on the Federal Reserve Board of Governors:
Bush Is Moving To Fill Two Slots At Federal Reserve, by Greg Ip and John D.
McKinnon, WSJ: With leadership at the Federal Reserve about to change, the
White House is moving to fill two vacancies on the central bank's seven-member
board of governors. President Bush plans to soon nominate Kevin M. Warsh, a
White House adviser on domestic finance and capital markets, to fill one of
the two vacancies, two people familiar with the matter said. Mr. Bush aims to fill the other seat with an academic economist, and the
likeliest candidate is Randall S. Kroszner, who teaches at the University of
Chicago's Graduate School of Business, one of these people said...
The nominations would tilt the board's composition toward
financial-industry expertise rather than macroeconomics. Mr. Warsh, a lawyer
by training, was an investment banker at Morgan Stanley before joining the
White House National Economic Council. He has been the White House's point
person on financial-industry issues. Mr. Kroszner, who served on the Council
of Economic Advisers during Mr. Bush's first term, specializes in banking,
banking regulation, international-financial crises and monetary economics...
DeLong on Randall Kroszner [photo/web page, color photo]:
I know I'm proud to have played a (alas, very small) part in the education
of Randy Kroszner and Robin Hanson, both far to my right.
Both Clarida and Kroszner would be excellent appointments. Appointing
non-specialists with financial market backgrounds would be a mistake in my
view, increasing the risk of ... regulatory capture by Wall Street...
That doesn't sound like a strong endorsement of Warsh [photo, photo with Bush]. I know little about him.
BusinessWeek Online has a bit more, but not much:
Warsh is the NEC's point man for contact with the financial-services
industry. He has recently sought to raise his public profile by speaking to
more industry groups and was mentioned as a candidate for chairman of the
Securities & Exchange Commission before Bush tapped Rep. Christopher Cox (R-Calif.)
for the job.
Update: Bloomberg reports that Al
Hubbard, director of the White House's National Economic Council, says:
"They're going to fit very, very well'' at the Fed, said Al
Hubbard ... in an interview. Warsh, who works for Hubbard, "has terrific
business experience, having worked on Wall Street.'' Kroszner is "one of the great economists in our country,''...
The same report notes that a former Fed vice Chairman is not sold on Warsh:
Preston Martin, who was Fed vice chairman from 1982 to 1986.
called Kroszner "a brilliant choice because he has served in many
categories around and in the Federal Reserve system.'' "If I were on the Senate committee, I'd vote yes for Kroszner
and no for Warsh,'' said Martin. "I have great reservations about
Warsh because he just doesn't have the background.''
Brad DeLong has questions too.
Posted by Mark Thoma on Friday, January 27, 2006 at 01:45 AM in Economics, Monetary Policy, Politics |
The Economist swallows hard, and then talks sensibly about health care reform:
America's headache, The Economist: Everyone , it seems, has a health
problem. ... But nowhere has a bigger health problem than America. ... Pushed
by polls that show health care is one of his main domestic problems ...,
George Bush is expected to unveil a reform plan in next week's
America's health system is unlike any other. The United States spends 16%
of its GDP on health, around twice the rich-country average, equivalent to
$6,280 for every American each year. Yet it is the only rich country that does
not guarantee universal health coverage. ...[M]ost Americans receive health
insurance through their employer, with the government picking up the bill for
the poor (through Medicaid) and the elderly (Medicare).
This curious hybrid certainly has its strengths. Americans have more choice
than anybody else, and their health-care system is much more innovative.
Europeans' bills could be much higher if American medicine were not doing much
of their R&D for them. But there are also huge weaknesses. The one most often
cited ... is the army of uninsured. ... In many cases that is out of choice
and, if they fall seriously ill, hospitals have to treat them. But it is still
deeply unequal. And there are also appalling inefficiencies: by some measures,
30% of American health spending is wasted.
Then there is the question of state support. Many Americans decry the
“socialised medicine” of Canada and Europe. In fact, ... around 60% of America's health-care bill
ends up being met by the government (thanks in part to huge tax subsidies that
prop up the employer-based system). Proportionately, the American state
already spends as much on health as the OECD average, and that share is set to
grow... America is, in effect, heading towards a version of socialised
medicine by default.
Is there a better way? ...[T]here is no such thing as a perfect health-care
system: every country treads an uneasy compromise between trying to harness
market forces and using government cash to ensure some degree of equity.
Health care is also ... where market forces have ... the most limited success:
it is plagued by distorted incentives and information failures. To begin with,
most health-care decisions are made by patients and doctors, but paid for by
someone else. There is also the problem of selection: private-sector insurers
may be tempted to weed out the chronically ill and the old, who account for
most of the cost of health care.
In the longer term, America, like this adamantly pro-market newspaper, may
have no choice other than to accept a more overtly European-style system. In
such a scheme, the government would pay for a mandated insurance system, but
leave the provision of care to a mix of public and private providers. Rather
than copying Europe's distorting payroll taxes, the basic insurance package
would be paid for directly by government...
Such a system would not be perfect but it could mitigate the worst
inequities in America's health-care system, while retaining its strengths. In
practice, however, it will not happen soon. American politicians are still
scarred by the failure of Hillary Clinton's huge health-care plan ....
Incremental change ... looks the only way forward...
[T]here is a flaw at the heart of his proposal. Mr Bush goes straight to
one of the biggest distortions in American health care—the generous tax
subsidies doled out to firms providing insurance. These help to promote a
culture where costs do not matter. ...[T]he president wants to even things out
by doling out yet more tax subsidies to others—for instance, letting
individuals set more of their out-of-pocket medical expenses against taxes.
Such hand-outs may have political appeal, but they will worsen the budget
deficit and, most probably, drive up the pace of medical spending. America's
health-care system could be improved in small steps. But those steps need to
be in the right direction.
See The Economist's companion article "Desperate Measures" [free link] for more detail
on these and other issues. It ends with:
Mr Bush's health-care philosophy has a certain
political appeal. It suggests incremental change rather than a comprehensive
solution. It reinforces existing industry trends. And it promises to be pain-free.
Unfortunately, it will not work. The Bush agenda may speed the reform of
American health care, but only by hastening the day the current system falls apart.
Posted by Mark Thoma on Friday, January 27, 2006 at 01:19 AM in Economics, Health Care |
Paul Krugman continues the health care theme from recent columns and in the
post below this one with ideas on how to reform the health care system. He
says there are lessons to be learned from a government run program that is not
too far away:
Health Care Confidential, by Paul Krugman, On Health Care Commentary, NY Times:
American health care is desperately in need of reform. But what form should
change take? Are there any useful examples we can turn to for guidance? Well, I
know about a health care system that has been highly successful in containing
costs, yet provides excellent care. And the story of this system's success
provides a helpful corrective to anti-government ideology. For the government
doesn't just pay the bills ... it runs the hospitals and clinics.
No, I'm not talking about some faraway country. The system in question is our
very own Veterans Health Administration, whose success story is one of the
best-kept secrets in the American policy debate. In the 1980's and early 1990's,
says ... The American Journal of Managed Care, the V.H.A. "had a tarnished
reputation of bureaucracy, inefficiency and mediocre care." But reforms
beginning in the mid-1990's transformed the system, and ... "have allowed it to
emerge as an increasingly recognized leader in health care." Last year customer
satisfaction with the veterans' health system ... exceeded that for private
health care for the sixth year in a row. This high level of quality (which is
also verified by objective measures ...) was achieved without big budget
increases. ... How does the V.H.A. do it?
The secret of its success is the fact that it's a universal, integrated
system. Because it covers all veterans, the system doesn't need to employ
legions of administrative staff to check patients' coverage and demand payment
from their insurance companies. Because it's integrated, ... it has been able to
take the lead in electronic record-keeping and other innovations that reduce
costs, ensure effective treatment and help prevent medical errors.
Moreover, the V.H.A., as Phillip Longman put it in The Washington Monthly,
"has nearly a lifetime relationship with its patients." As a result, it
"actually has an incentive to invest in prevention and more effective disease
management. ..." Oh, and one more thing: the veterans health system bargains
hard with medical suppliers, and pays far less for drugs than most private
I don't want to idealize the veterans' system. In fact, there's reason to be
concerned about its future: will it be given the resources it needs to cope with
the ... wounded and traumatized veterans from Iraq? But the ... V.H.A. is
clearly the most encouraging health policy story of the past decade. So why
haven't you heard about it?
The answer, I believe, is that pundits and policy makers ... can't handle the
cognitive dissonance. (One prominent commentator started yelling at me when I
tried to describe the system's successes in a private conversation.) For the
lesson of the V.H.A.'s success story ... runs completely counter to the
pro-privatization, anti-government conventional wisdom that dominates today's
The dissonance ... is one reason the Medicare drug legislation looks as if
someone went down a checklist of things the veterans' system does right, and in
each case did the opposite. For example, the V.H.A. avoids dealing with
insurance companies; the drug bill shoehorns insurance companies into the
program... The V.H.A. bargains effectively on drug prices; the drug bill forbids
Medicare from doing the same.
Still, ideology can't hold out against reality forever. Cries of "socialized
medicine" didn't, in the end, succeed in blocking the creation of Medicare. And
farsighted thinkers are already suggesting that the Veterans Health
Administration, not President Bush's unrealistic vision of a system in which
people go "comparative shopping" for medical care the way they do when buying
tile, represents the true future of American health care.
Previous (1/22) column:
Paul Krugman: Iraq's Power Vacuum
Next (1/29) column: Paul Krugman: A False Balance
Posted by Mark Thoma on Friday, January 27, 2006 at 12:33 AM in Economics, Health Care |
I am told by a cardiac nurse that she gets taken out to lunch once a week or so by
medical and pharmaceutical device reps. She orders stents and a few other things
so they treat her well. This spring, she is going to an all expenses paid
conference in Las Vegas. There are a few classes you can attend if you want, she says they always make sure to have at least one, but
attendance is not required and she doubts she will bother. There are plenty of
places to cut costs for health care that don't involve cutting benefits to
In Article, Doctors Back Ban on Gifts From Drug Makers By Gardiner Harris, NY
Times: The gifts, drugs and classes that makers of pharmaceuticals and
medical devices routinely give doctors undermine medical care, hurt patients and
should be banned, a group of influential doctors say in ... The Journal of the
American Medical Association. ... Broadly adopted, the recommendations would ...
shut off the focus of drug makers' biggest expenditures. But Dr. David
Blumenthal, an author of the article, said it was "not very likely" that many in
medicine would listen to the group. ...
Federal law forbids companies from paying doctors to prescribe drugs or
devices, but gifts and consulting arrangements are almost entirely unregulated.
Voluntary professional guidelines suggest that doctors refuse gifts of greater
than "modest" value. Sanctions against doctors who accept gifts of great value
are extremely rare. The drug industry spends tens of billions of dollars a year
to woo doctors, far more than it spends on research or consumer advertising.
Some doctors receive a significant part of their income from consulting
arrangements with drug and device makers. Others take regular vacations and
golfing trips that are paid for by companies. ...
Surveys show that most doctors do not believe that these gifts influence
their medical decisions, although most believe that they do affect their
colleagues' medical judgment. But even small gifts can lead to profound changes
in doctors' prescribing behavior, with "negative results on clinical care," the
article states. As a result, all gifts should be banned...
Ken Johnson, a spokesman for the Pharmaceutical Research and Manufacturers of
America, said the drug industry had a voluntary code of marketing conduct. "Only
practices that do not compromise independent judgments of health providers -
such as modest working meals, gifts of minimal value that support the medical
practice, and distribution of free samples - are permitted," ... Dr. Duane M.
Cady, board chairman of the American Medical Association, said in a statement
that "drug and medical device makers can play a role in educating physicians
about new products." He said the organization was "in the process of examining
and updating its policy on gifts to physicians from industry." ...
Kaiser Permanente, the California-based managed-care group, is one of the few
medical organizations in the United States that have enacted nearly all of the
recommendations suggested by the journal article. Kaiser physicians prescribe
heavily marketed medicines far less frequently than doctors nationally. ...
The article also argues that "no strings attached" consulting arrangements
should be banned... Doctors should refuse free drug samples, the article states,
because they are "a powerful inducement for physicians and patients to rely on
medications that are expensive but not more effective." Such a refusal would
also eliminate one of the principal reasons for which drug salespeople are
routinely allowed to enter doctors' offices... While the article does not
suggest that salespeople be refused entry into offices, it states that such
visits have few useful functions. ...
Dr. Troy A. Brennan, former chairman of the American Board of Internal
Medicine and the other principal author of the article, said he was looking
forward to reading responses to it. "I don't think there are a lot of good
answers as to why it's O.K. to accept these gifts and contracts," Dr. Brennan
Advertising and product differentiation can play a role in
providing information, but this goes far beyond any socially useful function.
Posted by Mark Thoma on Thursday, January 26, 2006 at 05:56 PM in Economics, Health Care, Market Failure |
Another interesting looking paper I haven't had a chance to read:
The Quiet Revolution that
Transformed Women's Employment, Education, and Family, by Claudia Goldin, NBER
WP 11953, January 2006: Abstract The modern economic role of women
emerged in four phases. The first three were evolutionary; the last was
revolutionary. Phase I occurred from the late nineteenth century to the 1920s;
Phase II was from 1930 to 1950; Phase III extended from 1950 to the late 1970s;
and Phase IV, the "quiet revolution," began in the late 1970s and is still
ongoing. ... The evolutionary phases are apparent in time-series data on labor
force participation. The revolutionary phase is discernible using time-series
evidence on women's more predictable attachment to the workplace, greater
identity with career, and better ability to make joint decisions with their
spouses. Each of these series has a sharp break or inflection point signifying
social and economic change. ... The paper concludes by assessing whether the
revolution has stalled or is being reversed... [Open AEA web link, Author web site link - both have sharper figures than the copies below]
Here are a few graphs from the paper:
Posted by Mark Thoma on Thursday, January 26, 2006 at 03:58 PM in Academic Papers, Economics |
Guess what? If you lower the cost of missing class, less students show up.
This article notes that when more material is posted for classes,
attendance is lower. I've noticed the same thing. There is a very clear
association between how much I post and class attendance and because of this, I
have stopped posting as much review material. I thought it gave students a false
sense of security. They would skip class thinking they could make up what was
lost with web-based material later, then find out when the test time arrives
that the posted material is not an effective substitute for coming to class, or
that they have waited too long to get started making up missed material. That's
when I start getting frantic email. It appears to me that it is the students on
the margin who most easily fall victim to this temptation.
On the other side, though, are the students who make effective use of the
posted material. They show up to class as always, and use what I post as a
complement, not a substitute, to lectures. I am reluctant to allow class policy
to be dictated by the students who are more interested in obtaining a piece of
paper than learning, so I am rethinking my policy about posting material. I
don't think my classes should be less effective for the best students just
because other students cannot resist the temptation to sleep in on a cold and
rainy morning knowing that lecture materials will be posted to make the sleep
less costly. This isn't high school where it's the state's job to make sure
every student is educated. In college, students must begin learning to take
responsibility for their own education and I should not let some students to be held
back in an attempt to force those at the other end of the spectrum to come to
class, read, ask questions, and learn the material. Still, it's hard not to structure incentives so as to get the most out of every student rather than just the subset who are most interested in learning the course material:
Skip class? You've got online pal, Detroit Free News/LA Times, by Stuart
Silverstein: Skipping classes, particularly big lectures where an
absence can go undetected, is a tradition among college undergraduates who party
late or swap notes with friends. These days, professors are witnessing a spurt
in absenteeism as an unintended consequence of adopting technologies originally
envisioned as learning aids.
One of Azevedo's Classes
Last semester, Americ Azevedo's class on "Introduction to Computers" at the
University of California, Berkeley, featured some of the hottest options in
educational technology. By visiting the course's Web sites, the 200 students
could download audio recordings or watch digital videos of the lectures, as well
as read the instructor's lecture notes and participate in online discussions.
But there was one problem: So many of the undergraduates relied on the
technology that, at times, only 20 or so actually showed up for class. "It was
demoralizing," Azevedo said. "Getting students out of their media bubble to be
here is getting progressively harder."
Even as many academics embrace electronic innovations, others are pushing
back. To deter no-shows, professors are reverting to low-tech tactics such as
giving more surprise quizzes or slashing online offerings.
"Too much online instruction is a bad thing," said Terre Allen, a
communication studies scholar at California State University, Long Beach.
Last term, Allen posted extensive lecture notes online for her undergraduate
course, "Language and Behavior." One goal was to relieve students of the burden
of scribbling notes, freeing them to focus on the lectures' substance. Yet the
result, Allen said, was that only about one-third of her 154 students showed up
for most of the lectures. In the past, when Allen put less material online, 60
percent to 70 percent of students typically would attend. ...
Kelly A. Rocca, an assistant professor of communication at St. John's
University in New York and one of the few scholars who has recently studied
American college absenteeism, said she suspects that skipping class has reached
an all-time high because of off-campus jobs and reliance on technology. To
combat ditching in her own classes, Rocca refuses to post notes online. With
undergraduates, she said, "the more reasons you give them not to come to class,
the less likely they are to come." ...
Other research supports the common-sense belief that skipping class hurts a
student's grades. Lee Ohanian, a UCLA economics professor, said he notices that
frequent skippers often "are the ones who are doing just enough to get by. The
ones who are getting the A's are in the front row at every lecture." Ohanian
said "too much technology really leads to a passive learning environment" and
spurs absenteeism. He has cut back on posting lecture materials online and now
provides extensive notes only for the most complicated topics.
Despite concerns about absenteeism, schools increasingly are experimenting
with ways to let students watch or listen to lectures on their computers or
digital music players, ... Likewise, online, or "distance," education programs
-- premised on students' not needing to be in class -- are growing.
Advocates of the new technologies say they give schools an effective,
low-cost way to deliver instruction while freeing students to review material at
their own pace. The online options also let students participate in discussions
electronically and allow instructors the flexibility to make quick changes.
Update: Brief follow up at iLecture.
Posted by Mark Thoma on Thursday, January 26, 2006 at 09:56 AM in Economics, Universities |
"Even when it ... hurts you on average to take the gamble, the smart people
... actually like it more":
Take the Bird in the Hand, or a 75% Chance at the Two in the Bush?, By Virginia
Postrel, Economic Scene, NY Times: Would you rather have $1,000 for sure or
a 90 percent chance of $5,000? A guaranteed $1,000 or a 75 percent chance of
$4,000? In economic theory, questions like these have no right or wrong answers.
Even if a gamble is mathematically more valuable ... someone may still prefer a
sure thing. People have different tastes for risk, just as they have different
tastes for ice cream... The same is true for waiting: Would you rather have ...
$3,400 this month or $3,800 next month? Different people will answer
differently. Economists generally accept those differences without further
explanation... Shane Frederick, a management science professor at the Sloan
School of Management at the Massachusetts Institute of Technology, ...
discovered striking systematic patterns in how people answer questions about
risk and patience, including those above. This short problem-solving test, he
found, predicts a lot:
1) A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball.
How much does the ball cost?
2) If it takes five machines five minutes to make five widgets, how long
would it take 100 machines to make 100 widgets?
3) In a lake, there is a patch of lily pads. Every day, the patch doubles in
size. If it takes 48 days for the patch to cover the entire lake, how long would
it take for the patch to cover half the lake?
The test measures not just the ability to solve math problems but the
willingness to reflect on and check your answers. (Scores have a 0.44
correlation with math SAT scores, where 1.00 would be exact.) The questions all
have intuitive answers — wrong ones. Professor Frederick gave his "cognitive
reflection test" to ... students... Participants also answered a survey about
how they would choose between various financial payoffs, as well as
time-oriented questions like how much they would pay to get a book delivered
Getting the math problems right predicts nothing about most tastes, including
whether someone prefers apples or oranges, Coke or Pepsi, rap music or ballet.
But high scorers — those who get all the questions right — do prefer taking
risks. "Even when it actually hurts you on average to take the gamble, the smart
people, the high-scoring people, actually like it more," ... They are also more
patient, particularly when the difference, and the implied interest rate, is
large. Choosing $3,400 this month over $3,800 next month implies an annual
discount rate of 280 percent. Yet only 35 percent of low scorers ... said they
would wait, while 60 percent of high scorers preferred the later, bigger payoff.
The connection between cognition and risk preferences challenges some of the
"prospect theory" developed [by] Daniel Kahneman and Amos Tversky. They observed
that people would accept larger risks to avoid losses than to achieve gains,
even when the two choices were mathematically equivalent. The same person might
take a sure $100 instead of a 50 percent chance of $300, yet prefer a 50 percent
chance of losing $300 rather than a sure $100 loss. This result, which has
implications for investment and insurance, is one of the major findings of
behavioral economics. Although prospect theory "is spectacularly true" for the
low-scoring group, Professor Frederick writes, high scorers treat potential
gains and potential losses about the same. ...
The correct answers, by the way, are 5 cents, 5 minutes, and 47 days.
Posted by Mark Thoma on Thursday, January 26, 2006 at 01:18 AM in Economics |
There are limits to Greenspan's free-market tendencies after all:
Greenspan Opposes Bank Loophole,
by Bernard Wysocki Jr., WSJ: Federal Reserve Chairman Alan Greenspan is opposing a
regulatory loophole that allows corporations to own banks,
into the middle of an effort by Wal-Mart Stores Inc. to establish a bank. Mr. Greenspan's salvo, outlined in a 12-page letter to Congress
..., is the latest in a controversy over the separation of commerce and banking.
Wal-Mart officials say the Utah bank would be a back-office
processing center, handling debit-card, credit-card and electronic
check-transfer payments ... A third party currently
processes the transactions ... and bringing the work in-house would save
Wal-Mart money. Company officials repeatedly have said they don't plan to
establish bank branches. Under current law, these state-chartered banks, many
incorporated in Utah, may open branches in more than 20 states...
In his letter, sent Jan. 20 in response to questions from Rep.
Jim Leach, ... Mr. Greenspan doesn't single out Wal-Mart's application for criticism
but mentions it along with the names of other big companies that have
established industrial-loan corporations -- or industrial banks, as these
state-chartered financial institutions are sometimes called. ...
"The ILC exemption is now the primary means by which commercial
firms may control an FDIC-insured bank engaged in broad lending and
deposit-taking activities and thereby breach the general separation of banking
and commerce," Mr. Greenspan's letter said. He warned that the growing use of
the loophole is "undermining the prudential framework that Congress has
carefully crafted and developed" to oversee financial institutions. ...
uncharacteristically blunt language, Mr. Greenspan urged Congress to close the
loophole, which he said "provides the corporate owners of exempt ILCs a
significant competitive advantage over other types of banking institutions, and
creates an unlevel competitive playing field among banking organizations."
In an interview, Mr. Leach, the former chairman of the House
banking committee, said he considered Mr. Greenspan's letter significant. "It's ... a stark warning to the Congress" about
the need to separate commerce and banking, Mr. Leach said. "This is not
primarily a Wal-Mart issue. It is a 'nature of the American economy' issue."...
In coming out against the ILC loophole, and by implication
against Wal-Mart's bid for a bank, Mr. Greenspan has parted company with some
free-market advocates who believe that a Wal-Mart bank, if it did turn into a
retail-banking powerhouse, would encourage competition in the financial-services
field, and would ultimately lower costs to consumers....
A spokesman for the Fed said it couldn't comment on whether
incoming Fed Chairman Ben Bernanke would endorse every word of Mr. Greenspan's
comments. However, the spokesman said other Fed officials have made similar
comments, as official Fed positions, during the time Mr. Bernanke was a Fed
[The Full Letter:
Read Greenspan's letter to Congress.]
Posted by Mark Thoma on Thursday, January 26, 2006 at 12:36 AM in Economics, Financial System, Monetary Policy, Regulation |
I haven't had a chance to read this yet, but I hope to:
The Evolution of Top Incomes: A
Historical and International Perspective, by Thomas Piketty and Emmanuel Saez,
NBER WP 11955, January 2006: Abstract This paper summarizes the
main findings of the recent studies that have constructed top income and wealth
shares series over the century for a number of countries using tax statistics.
Most countries experience a dramatic drop in top income shares in the first part
of the century due to a precipitous drop in large wealth holdings during the
wars and depression shocks. Top income shares do not recover in the immediate
post war decades. However, over the last 30 years, top income shares have
increased substantially in English speaking countries but not at all in
continental Europe countries or Japan. This increase is due to an unprecedented
surge in top wage incomes starting in the 1970s and accelerating in the 1990s.
As a result, top wage earners have replaced capital income earners at the top of
the income distribution in English speaking countries. We discuss the proposed
explanations and the main questions that remain open. [Open link]
Here are some figures from the paper:
Posted by Mark Thoma on Wednesday, January 25, 2006 at 04:34 PM in Academic Papers, Economics, Income Distribution |
The administration has no comment regarding the use of Mickey Mouse science:
Mouse frustrates endangered species policy, by John Heilprin, AP: An
acrobatic mouse is threatening Bush administration efforts to give Western
developers an upper hand over endangered species. The Preble's meadow jumping
mouse is in fact a distinct creature, according to a U.S. Geological Survey
study presented ... to senior Interior Department officials.
That finding contradicts research touted by Interior Secretary Gale Norton
last February when she proposed removing the mouse from the government's
endangered species list. Critics say it also undercuts the administration's
claim that it uses the best science available in promoting fewer protections for
The previous study, which was done by a biologist since hired by Norton's
department, concluded there was no genetic difference between the Preble's
meadow jumping mouse and the much more common Bear Lodge meadow jumping mouse.
Listed by the government as a threatened species since 1998, the Preble's meadow
mouse stands in the way of any project that could damage its habitat, a broad
swath of Colorado and Wyoming ...
The 3-inch mouse uses its 6-inch tail, and strong hind legs to launch itself
a foot and a half into the air, where it can abruptly switch directions in
mid-flight. It prefers to roam by night, scurrying and jumping along streams
through undisturbed grasslands. There it dines on insects, spiders, fungus,
moss, willow, sunflower, grasses and seeds, hibernating each winter from
mid-October to early May.
A year ago, developers welcomed the findings of biologist Rob Roy Ramey ...
and the Interior Department's conclusion, based on his findings, that the
Preble's meadow mouse no longer needed federal protections. Ramey was later
contracted as a science adviser to the Interior Department in its attempt to
reclassify several species whose endangered status is blocking developers.
The new study was conducted by Tim King, a USGS conservation geneticist based
in West Virginia, and peer-reviewed by academic experts outside government. One
of the reviewers, Eric Hallerman, a professor of fisheries and wildlife science
at Virginia Tech, said King's study debunks Ramey's work. "It contradicts it
fairly strongly," Hallerman said. ... Hallerman said Ramey's work reflects the
Bush administration's intrusion of politics in its scientific research. "It
seemed to me from the get-go, he wanted to find that this was not a
taxonomically valid subspecies," Hallerman said.
After others raised similar doubts, Interior officials agreed to revisit
Ramey's work by commissioning King's study. They had no immediate comment
Wednesday. ... King said it probably would be a few more months before officials
decide whether his study justifies continued federal protections for the
high-flying mouse. "I would think that would be one of the options," he said.
Though I would not want the present poltical environment to tackle such a task, I could be convinced that the Endangered Species Act needs reexamination. But there is no role for shoddy or comissioned science in such a process, and no role for anything that blurs the distinction between true science in search of the truth and work designed to reach or support a predetermined conclusion.
Posted by Mark Thoma on Wednesday, January 25, 2006 at 03:07 PM in Economics, Environment, Politics, Regulation, Science |
Should the allocation of transportation services - driving on roads - be
allocated by the price system? If we continue on the road to privatization, will we be satisfied that it is equitable for the haves to be able to drive on roads closed by resource constraints to the have nots?:
Indiana Sells Road for Billions; Prepare for Deluge, by Joe Mysak, Bloomberg:
On Monday, Governor Mitch Daniels said a Spanish-Australian consortium had bid
$3.85 billion to run the Indiana Toll Road, a 157-mile highway across northern
Indiana that runs from the Illinois to Ohio, for 75 years. The legislature still
has to approve the proposal...
A Merrill Lynch & Co. report published last July on the subject of U.S. toll
road privatization asked whether sales like the Skyway were one-offs, "or do
they represent the beginning of a sweeping trend that will spread to other
tolled bridges, tunnels, expressways and long-distance toll roads?'' Let's bet
on the sweeping trend. The money is just too big to resist...
Merrill Lynch estimates that at least 18 states from California to
Massachusetts have state-, county-, or city-owned toll roads that might lend
themselves to privatization. ... What you need is an established road, and the
flexibility to increase tolls. ... We are going to see more of these
transactions, and the numbers are going to get bigger and bigger. It was
estimated last year that New Jersey might get $30 billion for the state's
Turnpike and Parkway... That would cure a lot of Governor Jon Corzine's
headaches. Merrill Lynch estimated that the New York State Thruway Authority
might be worth something like $20 billion. ... So now the cry will go up: Sell
the roads! ...
The sticky matter for Governor Daniels is selling the state's lawmakers, and
everyone else in Indiana, for that matter, on the idea. But we've come a long
way from the days where people felt bad about selling assets like landmark
buildings and other property to foreign investors. ... The money is just too
Selling Yellowstone Park to private developers would raise a lot of money
too, but that doesn't mean we should do it. There are arguments both ways here, and some of my concern is redued by recent research showing that toll lanes are used predominantly by people pressed for time, people late for daycare pickups, that sort of thing, not just higher income individuals. Still, equity considerations are a concern.
Posted by Mark Thoma on Wednesday, January 25, 2006 at 07:40 AM in Economics, Market Failure, Regulation |
Econ professor illustrates
benefits of Wal-Mart, PressZoom: Economics Professor Jerry Hausman placed
the cooling hand of numbers on ... notions about Wal-Mart's
economic impact in an IAP session titled, "The Consumer Benefits From Increased
Competition in Shopping Outlets: Measuring the Effect of Wal-Mart," ...
Hausman's ... hourlong talk ... focused on the direct and indirect effects for
consumers when one of Wal-Mart's ... super centers comes to town. ... Hausman
focused on ... grocery prices and shopping data for 10,000 families who buy food in
Wal-Mart super centers.
The direct effect for consumers is easy to spot, he said: Wal-Mart brings in
lower food prices. Cereal, for example, costs 17 percent less at Wal-Mart than
at a traditional supermarket. The indirect effect of Wal-Mart occurs "even if
you never enter a Wal-Mart," Hausman said, since supermarkets tend to drop their
prices in competitive response to Wal-Mart's. In addition, Wal-Mart does not
raise its prices after it has driven out the competition, he said. "The indirect
price effect is 5 percent even if you never go into a Wal-Mart,"...
Hausman presented graphs to show that Wal-Mart's impact on consumers varies
by income category: For families with incomes less than $10,000 annually, a
super center makes a 30 percent difference in what they can buy. "The marginal
utility on the poor is greater," he noted. The rate of overall improvement in
consumer welfare [from] a Wal-Mart super center's direct and indirect effects on
the cost of food in a community averages 3.75 percent, Hausman said.
"Getting a 3.75 percent improvement in consumer welfare is greater than any
tax reform or other policies. And while Wal-Mart pays its employees less --
which does affect local wages -- you still can't beat that 3.75 percent. If
economists could improve consumer welfare by that much, we'd all be heroes,"
Hausman said the U.S. Bureau of Labor Statistics ( BLS ) is taking a
puzzlingly inaccurate measure of Wal-Mart's economic role, especially for
lower-income families: According to the BLS, consumers are no better off when a
Wal-Mart enters their community. But that's not what the numbers show. According
to Hausman's research, excluding Wal-Marts from local markets creates a "large
loss" to consumer welfare, he said.
Hausman is co-author, with Ephraim Leibtag, of "Consumer Benefits From
Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart" ...
and "CPI Bias From Supercenters: Does the BLS Know that Wal-Mart Exists?" ....
from Hausman's presentation are available on his web site.
The last part refers to bias in the way the CPI is
calculated by the BLS. See the second paper below on how the BLS does not
account for the fall in the price of the reference basket of goods when
consumers purchase goods at lower price from Wal-Mart after a store enters a
market. Here are the papers:
Consumer Benefits from Increased
Competition in Shopping Outlets: Measuring the Effect of Wal-Mart, Jerry Hausman
and Ephraim Leibtag, NBER WP 11809, December 2005: Abstract Consumers
often benefit from increased competition in differentiated product settings. In
this paper we consider consumer benefits from increased competition in a
differentiated product setting: the spread of non-traditional retail outlets. In
this paper we estimate consumer benefits from supercenter entry and expansion
into markets for food. We estimate a discrete choice model for household
shopping choice of supercenters and traditional outlets for food. We have panel
data for households so we can follow their shopping patterns over time and allow
for a fixed effect in their shopping behavior. We find the benefits to be
substantial, both in terms of food expenditure and in terms of overall consumer
expenditure. Low income households benefit the most. [AEA
web link] [Link
on Hausman's page]
CPI Bias from Supercenters: Does
the BLS Know that Wal-Mart Exists?, Jerry Hausman and Ephraim Leibtag, NBER WP
10712, August 2004: Abstract Hausman (2003) discusses four sources of
bias in the present calculation of the CPI. ... We discuss economic and
econometric approaches to measuring the first order bias effects from outlet
substitution bias. ... the current BLS procedure does not treat correctly outlet
substitution bias and acts as if Wal-Mart does not exist. Yet, Wal-Mart offers
identical food items at an average price about 15%-25% lower than traditional
supermarkets. The BLS links out' Wal-Mart's lower prices. ... We find a
significant difference between our approach and the BLS approach. Our estimates
are that the BLS CPI-U food at home inflation is too high by about 0.32 to 0.42
percentage points, which leads to an upward bias in the estimated inflation rate
of about 15% per year. [Link
on Hausman's page - June 2005 revision]
For a different perspective, see Paul Krugman: Wal-Mart's Excuse.
Posted by Mark Thoma on Wednesday, January 25, 2006 at 01:59 AM in Academic Papers, Economics |
argues that a primary factor in explaining the U.S. productivity advantage
in recent years is more effective use of information technology. Chris Giles of
the Financial Times follows up with a discussion of this and other influences on
the difference between the U.S. and European productivity rates. He says
resistance to change and tougher management practices has forestalled the
adoption of productivity enhancing technology:
How US productivity pulled away, by Chris Giles, Financial Times: You
could call it the productivity myth. It goes like this. European economies
trail behind the US because their citizens would rather people-gaze from a
pavement cafe than labour loyally in the corporate salt mines. Americans, on
the other hand, are a bunch of stakhanovites so preoccupied with boosting
their nation’s gross domestic product they take just a week’s vacation a year.
The conveniently simple notion that Europeans are poorer because they
prefer leisure to work can no longer be supported by the data, however. ...
One fact is indisputable. Over the past decade the US has stolen a march on
its competitors so marked that it can no longer be dismissed as a statistical
blip. ... The trend had been obvious for some time before that. ... The US has
not always held so unassailable a lead. In the 1950s and 1960s, European per
capita incomes steadily rose towards US levels, spurred on by the rapid
recovery from the devastation of the second world war and the successful
integration of European economies. ...
But the good times in Europe and Japan are long gone. In the past decade,
the gap between US living standards and those in other leading countries
widened again. ... the relative position of Europe’s economy has declined
For much of that period, economists have grasped at sociological and
cultural straws as they sought to explain the continued disparity in living
standards. They have argued it had much to do with Europeans’ determination
not to work themselves into the ground like their unfortunate US counterparts.
Part of this is true. Europeans do work fewer hours than US employees... Most
of this difference is indeed a conscious choice. The decline in European
weekly working hours has been a consistent feature since 1950. In the US, in
contrast, hours worked stopped falling in the early 1980s and since then,
while US citizens have become richer, they have not chosen to “buy” additional
Europeans accept that lower incomes are the price of spending more time at
home. If they worked US hours, ... European GDP per capita would increase from
73 per cent of US levels to 86 per cent. ... A second drag on European living
standards is the share of its population that is working. Unemployment dogs
Germany, France and Italy ... because European economies are worse at getting
the young into employment and keeping older people at work. For the 30 to 50
age group, there is almost no difference between the participation rates of
the US and Europe...
The Conference Board, the global business organisation, has found that the
differences between the two can be found in just three industries: retail,
wholesale and finance. Take retail, where research ... indicated that the US’s
advantage is almost entirely due to the building of new shops and the closure
of existing stores that had become uncompetitive. The Wal-Mart effect, in
other words, transformed the US economy as much as it transformed the US
By contrast, in Europe planning laws and a reluctance to allow old
establishments to fail have prevented productivity growth from taking off.
Prof Robert Gordon of Northwestern University thinks the outcome reflects the
power of existing producers in Europe at the expense of poorer consumers.
This, he believes, is a high price for Europeans to pay for the preservation
of small and unproductive shops. The idea that European economies are bad at
exploiting new technology is supported by detailed research ... Management
differences and the use of technology explains Europe’s poor performance... US
companies use technology better and their hire-and-fire culture keeps workers
on their toes.
If Europe wants to improve its productivity levels, it seems, it must
accept tougher management, the emergence of new and much more productive
shopping centres and the death of many companies. The same lessons apply to
Japan. For the US, the lesson of the past decade is that it should avoid
complacency ... If Europe were to rediscover its competitive spirit and close
the gap, it could disappear as quickly as it came...
Posted by Mark Thoma on Wednesday, January 25, 2006 at 12:33 AM in Economics, Technology |
This is a post from my daughter, Amy, at Flash Report on the recent story about students spying on their professors at UCLA:
in on the UCLA Story, Flash Report, by Amy Thoma
Posted by Mark Thoma on Tuesday, January 24, 2006 at 11:40 AM in Politics, Universities |
This is a graph of quarter to quarter growth rates for real GDP in the U.S. since 1947:
Does anything catch your eye? In the mid-1980s (some narrow it down to first
quarter of 1984), the variance of GDP growth declines substantially, by 50%. The source of the decline is not completely clear. This NBER paper uses cross-country evidence to help to settle whether it was from better technology, better policy, a run of good luck where no big shocks hit the economy, financial innovation, or some other explanation:
Assessing the Sources of Changes
in the Volatility of Real Growth, Stephen G. Cecchetti, Alfonso Flores-Lagunes,
and Stefan Krause, NBER WP 11946, January 2006: Abstract In much of
the world, growth is more stable than it once was. Looking at a sample of twenty
five countries, we find that in sixteen, real GDP growth is less volatile today
than it was twenty years ago. And these declines are large, averaging more than
fifty per cent. What accounts for the fact that real growth has been more stable
in recent years? We survey the evidence and competing explanations and find
support for the view that improved inventory management policies, coupled with
financial innovation, adopting an inflation targeting scheme and increased
central bank independence have all been associated with more stable real growth.
Furthermore, we find weak evidence suggesting that increased commercial openness
has coincided with increased output volatility. [Open
link to paper]
Posted by Mark Thoma on Tuesday, January 24, 2006 at 10:19 AM in Academic Papers, Economics, Macroeconomics |
Former Treasury Secretary Robert E. Rubin says it's time for politicians to
stop playing games and deal with our mounting economic challenges. He urges both
sides to set aside differences and hammer out effective bi-partisan solutions.
I will just note that one party is in power, the other isn't, and the party in
power has shown few signs of a willingness to seek political solutions that will allow these problems to be addressed through negotiatied, compromise solutions:
'We Must Change Policy Direction', by Robert E. Rubin, Commentary, WSJ Online:
...[T]he leaders of Asia's emerging market economies... are making tough
decisions ... The result is large numbers of well-educated workers in low-wage
and increasingly market-based environments (especially in China and India)...
This has created a competitive challenge of historic proportions which
encompasses manufacturing and virtually all services electronically
communicable. We can meet this challenge and enjoy a bright future. Our economy
has great strengths ... However ... to avoid the real possibility of great
economic difficulty, we must re-establish our own seriousness of purpose about
economic policy, and we must change policy direction on many fronts.
Some would argue that our reasonably healthy GDP growth ... indicates that we
can stick with the economic policy status quo. I believe this would be a serious
mistake. Median real wages ... have been roughly stagnant for the past five
years -- and many Americans have had falling real incomes. Private sector job
growth has been the lowest of any recovery since the '30s. ...
Re-establishing seriousness of purpose regarding economic policy ... will
require ... making choices that are very difficult politically, compromising
among divergent views ..., and putting aside ideology in favor of facts and
analysis. There is ... widespread agreement that our future economic well-being
is threatened by large ... fiscal deficits, huge increases in entitlement costs
..., personal savings rates of approximately zero, public school system
inadequacies, and high health care costs. But our political system is failing to
mediate differing views on how to address these issues, and failing to make the
difficult decisions required. ...
To move forward, serious policy advocates from all perspectives should start
by agreeing on two basic bedrock principles: that there is no free lunch; and
that a strong future requires incurring costs now for benefits later. We should
then put everything on the table. Our strategy should have four components:
(1) We should re-establish sound fiscal conditions for the intermediate term
... and put in place a real plan to get entitlements on a sound footing ... (2)
We need a strong public investment program -- paid for, not funded by increased
public borrowing -- to promote productivity growth, to help those dislocated by
technology and trade, and to equip all citizens to share in our economic
well-being and growth. (3) We must pursue an international economic policy that
continues global integration, ... (4) We should work toward a regulatory regime
that meets our needs and sensibly weigh risks and rewards.
Our strategy should reaffirm market-based economics as the most effective
organizing principle for economic activity, while recognizing the critical role
of government in providing the many requisites for economic success that
markets, by their very nature, will not provide.
Broad participation in economic well-being and growth is critical ... to
realize our economic potential. ... Broad-based participation is also the best
antidote to protectionism, and to pressures for undue restrictions on our
economic flexibility and immigration. For these same reasons, measures to
increase security for the growing number of people dislocated in our rapidly
changing economy may well be wise economically. This can be done without
creating the rigidities and excessive social benefits that have led to
chronically slow growth and high unemployment in Continental Europe. ... Our
economy is not working for too many of our people, and that is a problem for all
The proponents of supply-side theory who assert that tax cuts will wholly --
or even significantly -- pay for themselves (through increased growth and
federal tax revenues), appear to be no more accurate now than they were in the
'90s. ... Virtually all mainstream economists take the view that sustained
long-term deficits will crowd out private investment, increase interest rates,
reduce productivity and reduce growth. ... The adverse impact on interest and
currency rates has not yet occurred, partly because business has had relatively
low levels of demand for capital -- but most importantly because of vast capital
inflows from abroad ... This is not indefinitely sustainable; at some point,
which could be near in time or still some years out, continued imbalances,
increasing fiscal debt levels and ever-greater overweighting of dollar holdings
abroad are highly likely to lead to loss of confidence, and trouble.
The fiscal and entitlement holes are now so deep that measures adequate to
address them would be exceedingly difficult politically... And, even more
importantly, the proposals themselves would likely be so sharply attacked as to
become politically toxic. Thus, I believe that the most realistic way forward is
for the president to bring together the leaders of both parties and both houses
to make these decisions with joint political responsibility. Everything should
be on the table... Finding the balance that best promotes economic growth in
this context could well call for revenue increases as well as spending
discipline... None of this is easy, but our economy could well be at a critical
juncture... To realize our bright future and to minimize the risk of serious
difficulty, we urgently need our own sense of mission to meet the challenges
facing our economy.
Posted by Mark Thoma on Tuesday, January 24, 2006 at 12:17 AM in Budget Deficit, Economics, Policy, Politics |
Yasheng Huang from the MIT Sloan School of Management says China could learn
a thing or two from India about economic development. He believes India will
outperform China in the next few decades unless "China embarks on bold
China could learn from India’s slow and quiet rise, by Yasheng Huang, Financial
Times: In an article published in 2003 called “Can India overtake China?”
Tarun Khanna of Harvard Business School and I argued that India’s domestic
corporate sector – strengthened by the country’s rule of law, its democratic
processes and relatively healthy financial system – was a source of substantial
competitive advantage over China. At that time, the notion that India might be
more competitive than China was greeted with wide derision.
Two years later, India appears to have permanently broken out of its
leisurely “Hindu rate of growth” ... and its performance is beginning to
approach the east Asian level. ... More impressively, India is achieving this
result with just half of China’s level of domestic investment in new factories
and equipment, and only 10 per cent of China’s foreign direct investment. ...
Why, then, is India gaining strength? Economists and analysts have habitually
derided India’s inability to attract FDI. This single-minded obsession with FDI
is as strange as it is harmful. Academic studies have not produced convincing
evidence that FDI is the best path to economic development compared with
responsible economic policies, investment in education and sound legal and
An economic litmus test is not whether a country can attract a lot of FDI but
whether it has a business environment that nurtures entrepreneurship, supports
healthy competition and is relatively free of heavy handed political
intervention. In this regard, India has done a better job than China. From India
emerged a group of world-class companies... This did not happen by accident.
Although it has many flaws, India’s financial system did not discriminate
against small private companies the way the Chinese financial system did.
Infosys benefited from this system. ... It is unimaginable that a Chinese bank
would lend to a Chinese equivalent of an Infosys. With few exceptions, the
world-class manufacturing facilities for which China is famous are products of
FDI, not of indigenous Chinese companies. ...
Pessimism about India has often been proved wrong. Take, for example, the
view that India lacks Chinese-level infrastructure and therefore cannot compete
with China. This is another “China myth” – that the country grew thanks largely
to its heavy investment in infrastructure. ... China built its infrastructure
after – rather than before – many years of economic growth and accumulation of
financial resources. The “China miracle” happened not because it had glittering
skyscrapers and modern highways but because bold economic liberalisation and
institutional reforms – especially agricultural reforms in the early 1980s –
created competition and nurtured private entrepreneurship.
For both China and India, there is a hidden downside in the obsession with
building world-class infrastructure. As developing countries, if they invest
more in infrastructure, they invest less in other things. Typically, basic
education, especially in rural areas, falls victim to massive investment
projects... China made a costly mistake in the 1990s: it created many
world-class facilities, but badly under-invested in education. Chinese
researchers reveal that a staggering percentage of rural children could not
finish secondary education. India, meanwhile, has quietly but persistently
improved its educational provisions, especially in the rural areas. For
sustainable economic development, the quality and quantity of human capital
will matter far more than those of physical capital. ...
Unless China embarks on bold institutional reforms, India may very well
outperform it in the next 20 years. But, hopefully, the biggest beneficiary of
the rise of India will be China itself. It will be forced to examine the
imperfections of its own economic model ... China was light years ahead of India
in economic liberalisation in the 1980s. Today it lags behind in critical
aspects, such as reform that would permit more foreign investment and domestic
private entry in the financial sector. The time to act is now.
Update - New Economist adds:
MIT's Yasheng Huang writes ...
China could learn from India's slow and quiet rise ...
Huang's claims are, I think, exaggerated - India's
poor infrastructure is a problem, and its education system has
major shortcomings. Nonetheless, it is refreshing to read a piece these days
that doesn't extoll the virtues of China, and which demonstrates that "pessimism
about India has often been proved wrong"
Posted by Mark Thoma on Monday, January 23, 2006 at 06:03 PM in China, Economics, India |
NY Fed president Tim Geithner gave a speech today on the implications of global imbalances for the conduct of monetary policy.
the speech. Brad Setser comments
here. I'll update this post later today.
Update: Here's a follow up from the Financial Times. President Geithner believes the
trajectory for the current account deficit is unsustainable, and it's not
necessarily self-correcting in a smooth, non-disruptive fashion, but we just don't know for sure how rocky the road might be. In his view,
the longer the trade gap builds, the larger the risks. Because of this, policies
such as reductions in the federal budget deficit are needed to mitigate the risk:
US current account deficit ‘unsustainable’ – NY Fed chief, by Christopher Swann,
Financial Times: Timothy Geithner, president of the New York Federal
Reserve, on Monday dismissed the view that the US current account deficit was
sustainable, suggesting the risk of a sudden fall in the dollar would grow the
longer the trade gap widened. ... Mr Geithner said the problem could not
necessarily be expected to solve itself. “Time does not necessarily help. The
longer these gaps continue to build, the greater the ultimate adjustment
required, and the greater the risks that accompany that process,” he said.
“The plausible outcomes range from the gradual and benign to the more
precipitous and damaging,” he said. “The size and duration of these [global]
imbalances, perhaps the most visible of which is the US current account deficit,
present challenges – and risks – for the world economy.” His warning came as
Raghuram Rajan, chief economist at the International Monetary Fund, repeated his
concern over the risk of a run on the dollar. “You cannot discount a run on the
dollar. But you cannot fully quantify that risk at the moment,” he said ...
Mr Geithner ... does not see a role for monetary policy in responding to the
current account by raising interest rates to slow domestic demand growth and so
the demand for imports. Rather, he believes the risks on the external side make
it more important for the Fed to keep inflation under control, to avoid adding
to the problems and to preserve the Fed’s flexibility in a crisis.
Many economists have argued that the risks to the dollar from the bloated
current account deficit are mitigated by support for the currency from Asian
central banks... However, Mr Geithner said this should provide little comfort
over the long term. “A prolonged continuation of the exchange rate arrangements
that have given rise to the large increase in foreign official investments in US
financial assets is unlikely to be consistent with the domestic requirements of
those economies and for this reason many are already in the process of change,”
“Even if we could be confident that the world would be comfortable financing
the US on these terms for some time, that fact alone does not mean that it is
prudent for the US to continue borrowing on this scale.” Mr Geithner repeated
his call for US politicians to reduce the budget deficit. The fact that the US
is using much of the money borrowed from abroad to finance public spending, he
said, increased the dangers. If it was being invested in the productive capacity
of the US tradeable goods industries, this would at least help the US to pay
back its foreign obligations.
Posted by Mark Thoma on Monday, January 23, 2006 at 07:29 AM in Economics, Fed Speeches, Monetary Policy |
It's hard to argue with the goal of reducing corruption, but this hardly seems like the best way to go about it. It's so
surprising to hear that Paul Wolfowitz is creating controversy as president of the World Bank:
Wolfowitz triggers graft storm at World Bank, by Andrew Balls and Edward
Alden, Financial Times: Paul Wolfowitz, president of the World Bank,
has triggered a bitter conflict with the bank’s senior career staff by
empowering a group of close political advisers to pursue aggressively what he
sees as widespread corruption surrounding bank projects. The dispute has come
to a head with the appointment ... of Suzanne Rich Folsom, a counsellor
to Mr Wolfowitz with close ties to the Republican party, as the new director
of the Department of Institutional Integrity, the internal bank watchdog that
investigates suspected fraud and staff misconduct.
Her appointment has raised objections that a person close to Mr Wolfowitz,
and with a political background, has been put into a senior position at a unit
that was seen as independent of the president’s office since it was set up in
2001. Robert Hindle, previously the senior manager of the unit and a long-time
World Bank employee, resigned ... largely as a result of ... concern
at the targeting of employees who had worked on projects that developed
corruption problems... A number of senior bank staff and executive directors
representing member countries ... complain of a lack of consultation by Mr
Wolfowitz’s advisers, and an atmosphere of suspicion. Roberto Dañino, the
bank’s general counsel and a former prime minister of Peru, this month also
announced his resignation because, friends said, he was unhappy at the way the
bank was being run by Mr Wolfowitz... Mr Wolfowitz’s appointment last year was greeted with apprehension by some
long-time staff. Many Republicans believe the bank is plagued by corruption.
Ms Rich Folsom was hired ... with the task of improving the bank’s relations
with Congressional Republicans.
Brad DeLong has
Posted by Mark Thoma on Monday, January 23, 2006 at 01:08 AM in Economics, Politics |
Infrastructure is essential in allowing an economy to reach its potential, a
fact Paul Krugman illustrates with Iraq. He explains how the failure to develop
Iraq's infrastructure through effective reconstruction efforts has undermined
the chance of a successful outcome:
Iraq's Power Vacuum, by Paul Krugman, Commentary, NY Times: In the State of
the Union address, President Bush will assert ... that he has a strategy for
victory in Iraq. I don't believe him. ... To explain myself, let me tell you
some stories about electricity.
Power shortages are a crucial issue for ordinary Iraqis, and for the
credibility of their government. As Muhsin Shlash, Iraq's electricity minister,
said ..., "When you lose electricity the country is destroyed, nothing works,
all industry is down and terrorist activity is increased." ... In today's Iraq,
blackouts are the rule rather than the exception. ... Baghdad and "much of the
central regions" - in other words, the areas where the insurgency is most active
and dangerous - currently get only between two and six hours of power a day.
Lack of electricity ... prevents businesses from operating, destroys jobs and
generates a sense of demoralization and rage that feeds the insurgency. So why
is power scarcer than ever...? Sabotage by insurgents is one factor. But as ...
The Los Angeles Times ... showed, the blackouts are also the result of some
incredible missteps by U.S. officials. Most notably, ... U.S. officials ...
decided to base their electricity plan on natural gas: ...American companies
were hired to install gas-fired generators in power plants across Iraq. But ...
"pipelines needed to transport the gas" - ... to the new generators - "weren't
built because Iraq's Oil Ministry, with U.S. encouragement, concentrated instead
on boosting oil production." Whoops.
Meanwhile, ... U.S. officials chose not to raise the prices of electricity
and fuel, which had been kept artificially cheap under Saddam, for fear of
creating unrest. But as a first step toward their dream of turning Iraq into a
free-market utopia, they removed tariffs and other restrictions on ... imported
consumer goods. The result was that wealthy and middle-class Iraqis rushed to
buy imported refrigerators, heaters and other power-hungry products, and the
demand for electricity surged ... This caused even more blackouts.
In short, U.S. officials thoroughly botched their handling of Iraq's
electricity sector. They did much the same in the oil sector. But the Bush
administration is determined to achieve victory in Iraq, so it must have a plan
to rectify its errors, right? Um, no. ... all indications are that the Bush
administration ... doesn't plan to ask for any more money for Iraqi
Another Los Angeles Times report ... contains some jaw-dropping quotes from
U.S. officials, who now seem to be lecturing the Iraqis on self-reliance. "The
world is a competitive place," declared the economics counselor at the U.S.
embassy. "No pain, no gain," said another official. "We were never intending to
rebuild Iraq," said a third. We came, we saw, we conquered, we messed up your
infrastructure, we're outta here.
Mr. Shlash certainly sounds as if he's given up expecting more American help.
... Yet he also emphasized the obvious: partly because of the similar failure of
reconstruction in the oil sector, Iraq's government doesn't have the funds to do
much power plant construction. In fact, it will be hard pressed to maintain the
capacity it has, and protect that capacity from insurgent attacks.
And if reconstruction stalls, as seems inevitable, it's hard to see how
anything else in Iraq can go right. ...[T]he Bush administration... doesn't have
a plan; it's entirely focused on short-term political gain. Mr. Bush is just
getting by from sound bite to sound bite, while Iraq and America sink ever
deeper into the quagmire.
Previous (1/19) column: Paul Krugman: The K Street Prescription
Next (1/26) column: Paul Krugman: Health Care Confidential
Update: From the Washington Post:
Professionals Fleeing Iraq As Violence, Threats Persist: Exodus of Educated Elite Puts Rebuilding at Risk: ... Iraq's top professionals -- doctors, lawyers, professors -- and
businessmen have been targeted by shadowy political groups for
kidnapping and ransom, as well as murder, some of them say. So many
have fled the country that Iraq is in danger of losing the core of
skilled people it needs most ... "It's creating a brain drain," said Amer
Hassan Fayed, assistant dean of political science at Baghdad
University. "We could end up with a society without knowledge. How can
such a society make progress?" Professionals and businessmen with
the means to escape are going to Jordan, Syria, Egypt or, if they have
visas, to Western countries...
Posted by Mark Thoma on Monday, January 23, 2006 at 12:31 AM in Economics, Iraq and Afghanistan, Politics |
Tim Duy with his latest Fed Watch:
I had previously believed that the Fed would not purposefully
invert the yield curve (in this case, the spread between the 10 year and the Fed
Funds rates). I had thought that whatever economic environment would drive
tighter Fed policy would drive long rates higher. But it looks like inversion
day is coming, barring some near term changes in the bond market. Moreover, the
Fed looks to be sending a very specific signal: Even if we do pause at the March
meeting, our bias remains tilted toward inflation. A solid economy and rising
energy prices means it is too early to call off the dogs. In my opinion,
policymakers do not want investors to get the idea that a pause in rates signals
an imminent rate cut. Instead, they are signaling that without a more dramatic
change in the economic environment, the odds remain tilted toward more
tightening in the post-Greenspan era.
As this post kept getting longer and longer, a quick outline
of my take on the Fed’s position is in order:
- Overall, economic activity is quite healthy.
- Consumer spending cooled at the end of last year,
but Fed officials don’t seem particularly worried.
- Housing is cooling as well, but not uniformly, and
not in such a way as to suggest a crash is coming.
- The expectation continues to be that firms will step
up capex spending.
- Resource utilization continues to be a concern.
- A cessation in rates hikes should not be interpreted
as the first step toward cutting rates.
Beige Book was, in my opinion, somewhat hard to get a handle on.
Mixed messages were common, leaving open the possibility of cherry picking
little bits and pieces to support whatever story you want to tell. With that in mind, I concluded that the anecdotal message
was that despite some cooling in housing and consumer spending, economic
activity continued its solid expansion. And while prices pressures remain
contained, there are enough signals of potential inflationary pressures to keep
policymakers on their toes.
I was somewhat surprised by the benign impressions of consumer spending given
wide expectations that Q4 GDP will look soft due to a weak household spending
component. Moreover, the slowdown in the housing market appears to be evolving
as planned, with pockets of cooling somewhat offset by pockets of heating up –
including an acceleration in Oregon (Oregon is relatively inexpensive compared
to other West Coast states). This pattern will support the underlying contention at the Fed that the housing “bubble” is
not likely to pop with the same consequences as the burst of the technology
bubble. The auto industries woes are still evident – no surprise here. But
outside of that, not much of concern to policymakers and reflective of the
quiescence we see in FedSpeak.
Consistent with the December employment and industrial
production reports, manufacturing activity looked solid:
Increases in manufacturing activity were widely reported across the country.
Only the St. Louis District characterized industrial activity as mixed.
Elsewhere, robust expansion was reported in the San Francisco, Dallas, Kansas
City, Minnesota, Chicago, New York, and Boston Districts. More moderate
expansion was indicated in the Cleveland, Richmond, Philadelphia, and Atlanta
So it looks like, via both anecdotal and data evidence, that
resource utilization from the physical capital side of the equation is on the
rise – this is evidently important to at least one governor, as we will see a
bit later. What about the labor side of the equation? Here it is worth repeating
the relevant section from the Beige Book overview:
Most Districts reported signs of continued, if generally moderate,
increases in employment. Cleveland, Minneapolis, and Richmond all cited
moderate employment gains, with Richmond noting that its rate represented a
slowdown. New York, Atlanta, Kansas City, and Dallas reported evidence of
stronger employment growth. However, Boston noted that output growth had
generally not translated into higher employment, while St. Louis reported a
widely mixed pattern of layoffs and hiring. Hiring at financial and legal
services firms is boosting the New York District's employment growth,
although New York also reported some hiring in manufacturing. Atlanta
reported strong demand for both skilled and unskilled labor, in part boosted
by storm-recovery efforts.
Atlanta reported several locations with tight labor market conditions, while
Boston, New York, Philadelphia, Chicago, Kansas City, Dallas, and San Francisco
all reported specific occupations in which jobs have been difficult to fill.
Several of these Districts cited trucking jobs. Skilled construction workers are
relatively sought after in Dallas and San Francisco, and skilled manufacturing
jobs were mentioned by Boston, Chicago, and Dallas. Atlanta listed a variety of
specialties in "extreme shortage." New York and San Francisco noted that
finance-industry labor markets were relatively tight. Despite reports of labor
market tightness, Boston, Philadelphia, Minneapolis, Kansas City, and San
Francisco all noted that wage increases have been generally moderate. However,
New York, Chicago, and Dallas all reported some acceleration in compensation.
Mixed messages here – St. Louis and Atlanta appear to be on
opposite ends of the spectrum – but the story seems to point to a strengthening
labor market with accelerating wage gains in some locals. Will this acceleration
spread? In the current environment, I would say this is a good bet. Note that
jobless claims, a leading indicator, have fallen to a six year low. Will the Fed
be unhappy, from an inflation perspective? Maybe. As always, the answer to this
question depends on pass through. The Fed will be most concerned if they sense
that pricing power is emerging that will allow firms to raise prices to offset
higher wages. If not, then rising wages would reflect productivity gains.
Nothing bad about that – it would simply indicate that the short run data is
catching up to the long run theory.
On, then, to the inflation story. Note that the report on
trucking and shipping has the feel of emerging transportation bottlenecks:
Continue reading "Fed Watch: Ready to Invert" »
Posted by Mark Thoma on Sunday, January 22, 2006 at 05:08 PM in Economics, Fed Watch, Monetary Policy |
Following up on the topic of economic and political ties between Africa and China in the post below this one, the World Bank and Chad are having troubles over oil revenues from a World
Bank sponsored project intended to ease poverty, and there are indications this
may result in Chad abandoning the World Bank agreement and forging deals with
Why a World Bank oil project has run into the sand, by David White, Financial
Times: It was touted as the formula all future projects of its kind would
follow. The conditions put in place for an oil development and pipeline project
in central Africa were hailed by the World Bank as a pioneering breakthrough, a
way of tracking where the money went and making sure it helped the people who
needed it most. Yet two and a half years since oil for export started pumping
... the triumph rings hollow.
The deal, which obliged Chad to account for most of its direct revenues from
the $4.2bn (£2.4bn, €3.5bn) project, was meant to overcome the sorry history of
mineral exploitation in developing countries – the “resource curse” that,
instead of bringing development, gets in the way of it, favouring corruption,
self-serving elites, waste, poverty and unrest.
But the World Bank took a gamble setting its test case in a fragile country
held back by war, with no record of good governance and little experience of
budget management. Always questionable, the experiment is now at an impasse, a
victim of mutual misunderstanding and the desperation of a shaky regime needing
to shore up its rotting power base.
The breakdown is a significant early test for Paul Wolfowitz, who took over
as World Bank president last June... Chad had defied the bank by changing its
law on managing petroleum revenues, to gain more freedom in spending its money.
...[T]he outcome will have important implications. It could demonstrate how any
country can bypass international attempts to impose standards on it. It could
also leave one of the world’s poorest countries ... even worse off than before.
The government seems not to have reckoned with the full consequences. For the
moment it has no access to further funds either from its main creditor or from
its oil. A cornerstone international institution is sticking to its principles
but at a potential cost, both to the people the scheme was supposed to benefit
and to its reputation.
“It’s a paradox, when the World Bank is an organisation that presents itself
as the high priest of the fight against poverty, and its first reflex is to
close down projects of social benefit,” says Mahamat Ali Hassan, Chad’s economy
minister. Chadian officials’ charge of “blackmail” has a resonance in other
developing countries. ...
The differences between Chad’s new legislation and the 1999 original would
seem to leave room for negotiation but both sides have dug in. ... In an
exercise in brinkmanship, Idriss Déby, Chad’s president, had the law approved by
parliament in late December. A week later ... he had a two-hour telephone
conversation with Mr Wolfowitz. Next morning, the World Bank chief called in
board members. The bank’s loans to Chad, destined mostly for non-oil projects,
Chad’s government received the notification only five days later. Mr Déby,
who still had the possibility of sending the law back to parliament, immediately
signed it. The bridges were now burnt. Each side appears to have underestimated
the other’s determination.
The freezing of funds has created bewilderment in Chad’s government, which by
its spokesman’s admission “has its back to the wall”. ... “If it’s crunch time,
Chad could turn its back on the international community,” warns Chris Melville
of Global Insight... Officials hint at alternative oil deals with China, already
the dominant client for oil from neighbouring Sudan. Chad may seek bridging
finance from other African oil producers – possibly Gabon or Equatorial Guinea –
or elsewhere. That could sustain the regime for a year until taxes from the oil
venture begin flowing in. Chad may be able to cancel its World Bank debt on the
oil project and go its own way. ...
Chad was supposed to establish a model of good practice. But, as a western
observer in the country puts it: “The risk is that it will become an example for
the worst pupils.” ...
Posted by Mark Thoma on Sunday, January 22, 2006 at 12:39 PM in China, Economics |
As the economic ties between China and Africa grow stronger, there are
questions about the nature of the evolving relationship:
A match made in Beijing, by Lyal Whi, Mail & Guardian Online, South Africa:
Africa needs China. ...China’s insatiable appetite for natural resources is
creating unprecedented demand for commodities, pushing prices to new highs and
fuelling economic growth across the continent. But China’s relations with Africa
have stirred a polarised debate from Cape to Cairo. China is either the next big
thing, usually in the view of business and some governments. Or it is the red
peril, the new coloniser...
In terms of political ideology and approaches to socio-economic development,
China is closely aligned to countries of the south. This has ... shaped China’s
relations with countries in Africa and elsewhere and created a somewhat
idealistic impression of the distant partner or big brother in the East ... Many
Africans still believe that relations with China are of an altruistic nature.
They tend to forget the hardnosed commercial reality that now determines
international relations -- and relations with China in particular.
They are seemingly unaware of the fact that China’s relations with Africa are
merely part of a broader strategy of engagement with the developing world,
focused on the search for natural resources. Reliable access to resources is
essential for ongoing growth and development and is at the core of China’s
national interests. In this respect, China and Africa are ideal partners. Africa
is a treasure trove of metals and minerals and has huge agricultural potential.
But China’s relations with Africa have faced criticism. Firstly, trade
imbalances are increasingly in China’s favour and large-scale dumping of cheap
manufactured products are undercutting local industries. ... The South African
clothing and textile sector has lost more than 100 000 jobs since 1995 due
largely to the influx of cheaper products from China. Trade with China has, if
anything, worsened unemployment and poverty in South Africa, which are two of
the most pressing problems facing the country today.
Secondly, the slow trickle of long-term fixed investments from China
indicates a lack of commitment in Africa. ... Finally, the nature of Chinese
activities on the continent ... are often accused of undermining the principles
of good governance and human rights, is a source of controversy both on the
continent and abroad. The use of Chinese labour on many of the African based
contracts is also a point of contention. ... China’s so-called “respect for
sovereignty” carries little resonance among human rights groups ...
China needs Africa. Apart from Latin America, Africa is probably the richest
diversified source of metals, minerals, fuel and agricultural produce in the
world. ... China is also seeking greater international recognition and leverage
in multilateral organisations. Africa is able to provide such support and assist
China in improving its “soft power” of influence and acceptance worldwide.
China-Africa relations are first and foremost commercial in nature. But
China’s pursuit of business interests in Africa should not disregard the
principles associated with political good governance. ... Finally, Africa can
learn from China’s process of economic development and liberalisation, which has
turned it into an investment magnet and one of the most competitive markets in
the world. An improved investment climate in Africa will guarantee a reliable
supply of resources and unlock vast potential in the labour market.
Posted by Mark Thoma on Sunday, January 22, 2006 at 01:56 AM in China, Economics |
Last year, the administration promoted Social Security privatization. This
year, the push is for Health Savings Accounts. Here's president Bush in his
radio address today:
President's Radio Address: ...For the sake of America's small businesses,
workers, and families, we must also make health care more affordable and
accessible. A new product known as Health Savings Accounts helps control costs
by allowing businesses or workers to buy low-cost insurance policies for
catastrophic events and then save, tax-free, for routine medical expenses. This
year, I will ask Congress to take steps to make these accounts more available,
more affordable, and more portable...
I thought it would be useful to review the debate over these accounts. Here's
Martin Feldstein's arguments in support of Health Savings Accounts:
Taxes, by Martin Feldstein, WSJ, 1/19/04: ...Health Savings Accounts ... may well be
the most important piece of legislation of 2003. These new tax and medical
insurance rules have the potential to transform health-care finances, bringing
costs under control and making health care reflect what patients and their
doctors really want. It is remarkable that this legislation has received so
little public attention.
Today's high cost of health care reflects the way that the tax law has
subsidized the use of insurance to pay for health care. ... Because
out-of-pocket payments at the time of care are only a small fraction of the
total cost of producing that care, individuals naturally want "the best care"
that medical science can provide. And the demand for that high-tech care drives
medical innovation toward new and more expensive modes of treatment.
The demand for the typical health-insurance policy reflects the tax provision
that allows employees to exclude payments for health insurance from their
taxable income. ...[T]he resulting tax saving is a very large subsidy for the
purchase of the kind of comprehensive, low-deductible insurance policy that
drives up health-care costs ... essentially a $120 billion subsidy for
purchasing the wrong kind of insurance. ...
The new HSA law (a part of the recent Medicare reform bill) eliminates the
preferential subsidy... Anyone under the age of 65 can establish a Health
Savings Account if they have a "qualified" health-insurance plan. A "qualified"
plan is an insurance policy that has a minimum deductible of $2,000 for a family
and a $10,000 limit on the family's annual out-of-pocket expenses. The
deductible is designed to make individuals more cost-conscious in their
consumption of health care, and the annual limit on out-of-pocket expenses is
there to prevent financial hardship... An individual can withdraw funds from his
HSA without paying tax if the money is used for any kind of health bills...
High-deductible policies give individuals and their doctors an incentive to
avoid wasteful health spending. When spending comes from the individuals' own
Health Savings Accounts, individuals and their doctors have a strong reason to
balance the costs of medical procedures against the potential favorable impact
on health. ...
Here's Paul Krugman with a different view:
Medical Class Warfare,
by Paul Krugman, NY Times, 7/16/04: The ... main component of the Bush plan involves
"health savings accounts." ...[H]ealth savings accounts don't seem to have much
to do with the needs of the families likely to find themselves without health
insurance. For one thing, such families need more protection than a plan with a
$2,000 deductible provides. Furthermore, the tax advantages of health savings
accounts would be small for those families most at risk of losing health
insurance, who are overwhelmingly in low tax brackets.
But for people whose income puts them in high tax brackets, these accounts
are a very good deal; making the premiums deductible turns them into a great
deal. In other words, health savings accounts will offer the already affluent,
who don't have problems getting health insurance, yet another tax shelter.
Meanwhile, health savings accounts, in the view of many experts, will actually
increase the number of uninsured.
This perverse effect shouldn't be too surprising: unless they are carefully
designed, medical policies often have side consequences that worsen the problems
they supposedly address. ... In the case of health savings accounts, the key
side consequence is a reduced incentive for companies to insure their workers.
When companies provide group health insurance, healthier employees implicitly
subsidize their sicker colleagues. They're willing to do this largely because
the employer's contributions to health insurance are a tax-free form of
compensation, but only if the same plan is offered to all employees.
Tax-free health savings accounts and premiums would provide healthier and
wealthier employees an incentive to opt out, accepting higher paychecks instead,
and would lead to higher insurance premiums for those who remain in traditional
plans. This would cause some companies to stop providing health insurance, or
raise employee contributions to a level some workers can't afford. ...
And, from another column:
Health, by Paul Krugman, NY Times, 8/27/04: ...Clearly, health care reform is an
urgent social and economic issue. But who has the right answer? ... George
Bush's economists think ... health costs are too high because people have too
much insurance and purchase too much medical care. What we need, then, are
policies, like tax-advantaged health savings accounts tied to plans with high
deductibles, that induce people to pay more of their medical expenses out of
pocket. (Cynics would say that this is just a rationale for yet another tax
shelter for the wealthy, but the economists who wrote the report are probably
[Others] believe that health costs are too high because private insurance
companies have excessive overhead, mainly because they are trying to avoid
covering high-risk patients. What we need, according to this view, is for the
government to assume more of the risk, for example by picking up catastrophic
health costs, thereby reducing the incentive for socially wasteful spending, and
making employment-based insurance easier to get. A smart economist can come up
with theoretical justifications for either argument. The evidence suggests,
however, that the [second] position is much closer to the truth. ...
Does this mean that the American way is wrong, and that we should switch to a
Canadian-style single-payer system? Well, yes. ... My health-economist friends
say that it's unrealistic to call for a single-payer system here: the interest
groups are too powerful, and the antigovernment propaganda of the right has
become too well established in public opinion. All that we can hope for right
now is a modest step in the right direction... I bow to their political wisdom.
I'm with Krugman on this one.
Posted by Mark Thoma on Sunday, January 22, 2006 at 01:38 AM in Economics, Health Care |
Daniel Altman talks about the decline in manufacturing and other changes in the U.S.
economy driven by technological change and globalization:
Exporting Expertise, If Not Much Else By Daniel Altman, Economic View, NY Times:
Want to understand what's really happening in the American economy? ...[T]he sea
of numbers that pour out of ... statistical agencies... describe some disturbing
changes. You can look at the economy in two ways: by production, or by people.
The two aren't always the same... This is clear when you look carefully at the
biggest long-term trend in the economy: the decline of manufacturing.
Both of manufacturing's two big categories, durable goods (like cars and
cable TV boxes) and nondurable goods (like pastrami and pantyhose), have
plunged, but the exact trends have differed. From 1965 to 2005, the percentage
of payroll employees devoted to durable goods dropped to 8 percent, from 19
percent; over the same period, the share of the economy they represent shrank by
just four percentage points. In other words, workers in these industries became
a lot more productive as their numbers dwindled.
The picture was different for nondurable goods. In that category, the
employees' share of the nation's labor force also declined steeply, by nine
percentage points, to just 5 percent of the total. But nondurables' share of the
economy dropped by even more, by 10 percentage points. ... Most of the losses in
nondurable production had already occurred by the early 1990's. That's not too
surprising, when you think about it: the nation's agriculture had become about
as efficient as it could be, and clothing imports from developing countries like
China, Bangladesh and Mauritius were in full swing.
The story for durable goods is more troubling. Half of the decline in
production has been a legacy of the last recession: sales went down, and they
have stayed down. The situation is a first, and it has been reflected in the
labor market, too. ...[A]fter the 2001 recession, [employment] sank below nine
million and hasn't picked up. ... The explanation may lie ... in the world's
emerging economies. They saturated the American market with nondurables in the
1980's and early 90's, using the profits to move onto higher-value, durable
The change in the trend for durable goods was not the only worrisome legacy
of the last recession. In the information sector, which had been among the most
steadily growing areas of the labor market, growth has completely stalled ...
The relatively small industries of broadcasting and Internet publishing have
started upward ... But in print publishing, telecommunications and Internet
services, the trend has been absolutely flat, despite the economy's return to
Of course, there have been winners, too. The share of the economy devoted to
medical care services has grown by eight percentage points in the past four
decades, with commensurate changes in employment. But this isn't necessarily
great news for the economy. ...
The leisure and recreational industries have also expanded, with the share of
employment up by four percentage points. Here, too, exporting is difficult:
after all, gambling, artistic performances and restaurant dinners usually take
place on site. More promising, management and professional services like law and
finance resumed their strong growth after taking a hit in the recession. These
areas are the ripest for exporting. Need some business advice? No problem. Want
some derivatives structured? Great. ...
We are becoming a nation of advisers, fixers, entertainers and high-tech
engineers, with a lucrative sideline in treating our own illnesses. ... The
change is being forced on us by global competition and our own aptitudes. The
first step in dealing with it is to realize what's happening. The second, most
likely, is to prepare for more of the same.
Posted by Mark Thoma on Saturday, January 21, 2006 at 04:43 PM in Economics, International Trade, Technology, Unemployment |
It's too bad that the
whale they were trying to rescue from the Thames did not survive the ordeal. It reminded me of
this story of "A whale that ... will always
have the last laugh":
Bob Welch: Tale of flying blubber keeps bubbling up, by Bob Welch Columnist, The
Register-Guard, November 10, 2005: Saturday marks the 35th anniversary of the funniest thing that ever happened
in Oregon: the exploding whale. Like you needed reminding, right? ... [E]ach
year at this time, [we] pay tribute to the ... Oregon Department of
Transportation ... for bringing us the laugh heard 'round the world.
Who can we thank for helping keep the spirit alive? An otherwise unassuming
Eugene man, Steve Hackstadt, mastermind of the ever-popular "TheExplodingWhale.com"
Web site. It receives about 10,000 hits a day ... "There are still people who
don't believe," says Hackstadt, a 35-year-old software engineer who works for
NASDAQ. "Some think it's an urban legend." No, it's too perfect for legend.
In 1970, an 8-ton sperm whale washed ashore dead - this is an important fact,
this "dead" part - just south of Florence. After considering ways to get rid of
the stinking, rotting remains, the Highway Division gathered its finest minds to
noodle a solution.
Being guys, they naturally figured a half-ton of dynamite would do the job.
Most of the ex-whale, they figured, would blow out to sea as mist and any small
pieces would be cleaned up by the gulls. ... As KATU's Paul Linnman says while
narrating film footage: "The humor of the situation gave way to a run for
survival as huge chunks of whale blubber fell everywhere." A woman can be heard
saying, "Here come pieces of ... ." The hood of a car is crunched like a pop
Nobody was hurt. "However," reported Linnman, "everyone on the scene was
covered with small particles of dead whale." Oregon rain - with a ... twist.
For most people, the story faded. But .... In 1990, columnist Dave Barry saw
the video and called the explosion "the most wonderful event in the history of
the universe." Then, in the mid-'90s, along came Hackstadt, a graduate student
in the University of Oregon's computer information science department. He saw
the video and slapped it on his personal Web page. "It's a classic," he says.
... Eight tons of whale blubber, splattered up to a quarter-mile from the
ex-whale, attest to that.
If engineers thought the idea of burying the whale to be impractical, the
story itself refuses to be buried. It has a cult following, ... "I've received
death threats. Some people don't understand that the whale was dead when this
happened. A lot of people are confused. It's like: 'You killed Keiko.' "
No, no, no. This story isn't about death. It's about a whale that refuses to
die. A whale that lives on. A whale that, thanks to man's stupidity, will always
have the last laugh.
Posted by Mark Thoma on Saturday, January 21, 2006 at 04:23 PM in Oregon |
According to this geriatric medicine specialist, it's not for thee:
It's a benefit, but for whom?, by Daniel J. Stone, Commentary, Los Angeles Times: As a geriatric medicine specialist, I am confronted daily by the chaos and
confusion of Medicare's Part D drug benefit. The program should reflect
President Bush's ideals of "compassionate conservatism." Compassion would mean
user-friendliness and easy access to affordable drugs. And a conservative plan
would maximize "bang for the buck." Instead, the priorities of the insurance and
pharmaceutical companies have trumped these objectives.
Economics 101 tells us that the largest purchasers have bargaining power to
get the best prices... Similar national bargaining entities in Canada and Europe
allow foreign consumers to pay a third to one-half of U.S. drug prices. A single
Medicare bargaining entity, however, threatened to place unprecedented price
pressures on drug companies and might have reduced or eliminated the role of
So Congress sacrificed Medicare's bargaining power in favor of a system in
which multiple private insurers offer competing plans. This decision will
ultimately transfer billions of dollars from seniors and the government to
insurers and drug companies. Some claim the industry needs these resources to
finance tomorrow's drug breakthroughs. Although the need for research dollars is
real, it seems unfair for Medicare seniors to shoulder costs that also subsidize
Canadian and European consumers.
One of my patients, Betty L., is already feeling the pinch. A low-income
senior on Medi-Cal, Betty was automatically enrolled in a Medicare Part D
program on Jan. 1. ...[H]er new Healthnet plan requires small co-payments. ...
[and] it omits coverage for ...[drugs] Medi-Cal covered. To get those medicines,
and cover her new co-pays, Betty will be charged ... extra ... We all have a
right to question a prescription drug program that will cost $700 billion over
10 years and yet increases drug payments for some of the poorest.
George A. and Mary S., two other patients in my practice, have "Medi-Gap"
drug coverage policies, and they are less financially vulnerable... In order to
find the right Part D coverage, they must sort though ... about 80 different
plans ... George A., an 85-year-old bachelor with multiple medical problems,
knows that Medicare Part D might save him money... he just hasn't had the
motivation to make an informed choice. Given his advanced age and relative
financial security, George would rather pay more and worry less about the
prospect of change.
Mary S., a relatively healthy 80-year-old, has Internet access, and she's
sophisticated about medication issues. I've explained that it would be
relatively easy to use Medicare's interactive website to input her medications
and find plans that would cover her current prescriptions. "When you get old,"
she countered, "nothing is that easy." As Mary's comments suggest, Part D's
congressional architects seemed to think that seniors would be utterly at ease
when it comes to using the Internet and reading the fine print in insurance
plans. Unfortunately, that description doesn't fit most Americans in any age
range, much less seniors.
The Department of Health and Human Services is proclaiming that 21 million
seniors have enrolled in the program. Conveniently, this statistic ignores the
fact that the vast majority ..., like Betty L., were ... automatically enrolled
them in Part D. About 22 million more seniors still need to make a choice, and
many of them, like George A. and Mary S., remain too uninformed, confused or
wary to make up their minds.
How did American seniors and AARP, their powerful watchdog, permit Congress
to approve a complex and confusing drug benefit program that squanders its
bargaining power? The answer is that it was better than nothing. That abysmal
standard appeared sufficient... But seniors have a right to expect those in
power to adhere to principles rather than corporate interests when their health
and financial welfare are at stake. Saddling seniors with a flawed program that
prioritizes special interests rather than seniors' interests can be considered
neither compassionate nor conservative.
Posted by Mark Thoma on Saturday, January 21, 2006 at 12:43 PM in Economics, Health Care, Policy |
This is from Table 132 of
this report from the
CDC web site. It's a graph of the percentage of people with workplace provided
private health coverage from 1984-2003. There's quite a bit of detail in the
table including breakdowns of coverage by age, sex, race, and income level. For
example, here's coverage by age:
The numerical overall changes by age are:
Under 18 years
Thus, the largest decline is for those under 45.
Here are the numerical endpoint data by sex along with the overall changes. Given
the standard errors in the table (not shown here), there is little difference between males and females:
There are, however, big differences by income level, and the changes are
larger for those under 18. As the following table shows, the decline in
workplace provided health care coverage has been largest among those earning between 100%
and 200% of the poverty level, a change of over 20%, while the change for those
outside this range is less than 10%:
Age and Percent of Poverty Level
Below 100 %
200 % or more
Under 18 years
Below 100 %
200 % or more
These data show that middle income families have been affected most by the
decline in employer provided private health care coverage.
Update: A colleague writes to tell me:
The explanation for the decline in coverage (at least through the late 90s) is also quite interesting. David Cutler has a paper (NBER WP #9036), arguing that the reason for the decline was not a decrease in employers offering HI, but a decrease in employees choosing to purchase insurance from their employers, primarily due to rising premiums.
Posted by Mark Thoma on Saturday, January 21, 2006 at 01:02 AM in Economics, Health Care |