« January 2006 |
| March 2006 »
the welfare state, by Martin Wolf, Commentary, Financial Times: The time has come for Europeans to ask themselves the unthinkable: can their
vaunted social model endure? ... Symptoms are not hard to find: this is a continent of high and
persistent unemployment, declining productivity growth, rapid ageing
and growing fiscal strains; it is also one whose once-proud role in
knowledge-creation is in decline. But in one respect, western Europe remains pre-eminent: its states
are the tax-and-spend champions of the world (see chart). ...
European social democracy looks increasingly unworkable in the long run. ...
If one is to assess this possibility one must look not at where the
model works least well but where it works best. The maternal state is
most fully developed in the Nordic countries and particularly in
Sweden. In a forceful new polemic, Johnny Munkhammar of Timbro, a
free-market Swedish think- tank, convinces me that trouble abounds
even in Sweden’s social democratic paradise. Indeed, its long-run
performance shows this (see chart).
What, then, are the failings of the big state? The answers include:
fiscal unsustainability; mediocrity of provision; slackening work
effort; slowing productivity growth; resistance to economic
adjustment; flight of valuable economic resources; difficulties in
absorbing immigrants; and even the undermining of the family. A social
system that protects people from the consequences of their own
decisions is rife with moral hazard: in the long run, it changes not
just behaviour but even values in a less productive direction.
Consider each of these points in turn.
First, the services the state provides – particularly education and health –
are ones on which people wish to spend more money as they become richer. ... For these reasons, the ratio of public spending in gross domestic
product must rise progressively if state-funded services are to meet
the demands of the population. But such increases are politically
impossible and, in practice, largely ceased two decades ago.
Second, financial stringency, combined with the difficulties in running
public sector monopolies, generates rising dissatisfaction with the quality of
what is provided. Waiting lists are endemic in Swedish health, for example.
State-run schools provide a deteriorating quality of education..., while state-run
universities are rapidly-growing but under-funded behemoths.
Third, output per hour in the European Union was 91 per cent of US
levels in 2005 (at purchasing power parity), ... while GDP
per head was 73 per cent. Lower work effort is the cause: fewer hours
worked and lower employment. Taxes, regulations and benefits at least
partly explain this.
Fourth, since 2005, productivity in the EU has been losing ground
to the US after a long-period of catching up. ...
Fifth, the job security provided in many countries lowers
willingness to hire. This makes it more important for workers to hang
on to existing employment. That, in turn, makes rapid economic change,
including imports, more threatening. This is why countries with
rigorous job protection are increasingly inclined towards
Sixth, high taxes and the burden of regulations encourage the outflow of
Seventh, high minimum wages, whether set by law, trade unions or
welfare benefits, combined with heavy taxes on work, generate high
levels of unemployment of relatively unskilled people. In Europe today
many of these people are immigrants. ... The results are seen in criminality, rioting
and social disorder.
Finally, for many mothers the welfare state is a substitute for a
committed father. For fathers it is an excuse for abandoning their
responsibilities. For both, it is a reason not to produce the children
who might help look after them in old age. The result is lower overall
investment – quantitatively and, in some respects, even qualitatively
– in the posterity on which the sustainability of the welfare state
The welfare state brings significant benefits. But it can also go
too far. In much of western Europe, it now has. If present trends do
not reverse, growing economic, social and even political difficulties
threaten. No taboo can remain inviolate, including the most sacred one
of all: that of the all-providing state.
As the welfare state pedulum begins swinging back in the other direction, and it does seem to have reached its apex, let's hope its momentum doesn't carry it too far.
Posted by Mark Thoma on Tuesday, February 28, 2006 at 02:11 PM in Economics, Social Security |
Paul Krugman responds to comments on his column Graduates Versus Oligarchs:
Doesn't Pay, by Paul Krugman, Money Talks, NY Times: ... Paul Krugman: Several people have asked whether the surge in incomes
at the very top might be to a large extent a statistical illusion, due to lower
marginal tax rates. The idea is that great fortunes went "underground" when top
tax rates were high, and resurfaced when rates fell under Reagan and Bush.
It's a good question, and has been studied by economists. Let me give you a
quick explanation of why I think it's a fairly minor factor. The kind of income
we'd expect to see surging if wealth was hidden would be from capital —
dividends, interest, etc. But the big gains have, in fact, come in high-level
compensation — C.E.O. paychecks and such. In fact, the growth numbers in my
article referred to wage and salary income.
Now, we can be reasonably sure that in 1970 the C.E.O. of General Motors
wasn't receiving huge hidden compensation equal to several times his reported
income. (C.E.O. compensation has gone from about 40 times average wages to about
400 times.) So the increase in incomes at the top is mainly a real phenomenon,
not a story about tax avoidance.
One other point: a few people have asked whether there are graduates and
graduates — whether serious tech degrees have paid off more than liberal arts or
whatever. The answer is, not dramatically. Having an engineering degree has no
more been a ticket to big income gains than being at the 90th percentile.
Posted by Mark Thoma on Tuesday, February 28, 2006 at 12:42 PM in Economics, Income Distribution, Universities |
From the WSJ, worries that recent data are pointing to a slowing economy, particularly in housing.
Also, fourth quarter GDP growth was revised upward from 1.1% to 1.6%:
Weak Fourth-Quarter Growth Was Less Bleak Than Thought GDP for 4th Quarter Is
Revised Higher, But Home Sales, Confidence Deteriorate, WSJ: The U.S.
economy expanded at a slightly stronger pace at the end of last year than
earlier estimated, and while growth is expected to rebound sharply to start
2006, fresh readings on home sales and consumer confidence hinted at bumps on
the road ahead.
The... broadest measure of all goods and services produced in the economy,
rose at a 1.6% annual rate in the fourth quarter, better than the earlier
reported 1.1% growth. ...
The housing market ... is beginning to show signs of slowing down. The latest
evidence arrived Tuesday in a report from the National Association of Realtors
showing sales of existing homes fell 2.8% in January .... Sales of condominiums
and co-ops were particularly weak, falling 10.6%. ... The data echoed a report
Monday showing new-home sales dropped 5% last month, as slower sales and rising
inventories pushed the number of unsold homes up 2.5% in January to the highest
level in nearly a decade.
Also Tuesday, the Conference Board, a private research group, said its index
of consumer confidence for February fell to a reading of 101.7 compared with the
revised 106.8 seen in January. ... Ian Shepherdson, chief U.S. economist at High
Frequency Economics, wrote ... that while confidence readings appear to run in
sympathy with the twists and turns in gasoline prices, "it is also possible that
the softening housing market is beginning to affect people's views of the
Though consumers' confidence has sputtered, they have continued to spend. ...
retail chain-store sales index increased by 1.5% in the week ended Feb. 25 on a
seasonally adjusted, comparable-store basis, according to data released Tuesday.
The index increased 3.6% in annual terms. ...
Though at a three month low, consumer confidence hasn't been very informative recently and some feel a slowdown in housing is needed to rebalance the economy. Even at a slower pace, the growth in housing remains high by historical standards. I don't see these reports by themselves as cause for alarm, but rather as part of an emerging and somewhat confusing picture of the strength of the economy.
Posted by Mark Thoma on Tuesday, February 28, 2006 at 09:51 AM in Economics |
The administration is proposing that elderly patients purchase rather than
rent oxygen equipment and hospital-style beds used at home:
'Ownership' for Elderly's Oxygen Equipment, by David Rogers, WSJ: President
Bush's "ownership society" is coming to one corner of Medicare: Live long
enough, and a patient could have his or her own oxygen equipment and
hospital-style bed at home. Congress paved the way this month with a budget bill
mandating a "rent-to-own" rule requiring that Medicare home-care beneficiaries
take title to their rented beds after 13 months. Now, Mr. Bush wants to apply
the same standard to oxygen equipment in hopes of saving billions of dollars and
empowering the elderly to bargain for cheaper respiratory-therapy services.
The administration contends that the rental payments now are a waste of
scarce government funds... Instead of renting, Medicare would in effect buy the
equipment for a beneficiary, who then could bargain for services -- oxygen
supplies and maintenance -- separately on the basis of service and price.
Patients will now "own the means of delivery," says House Ways and Means
Committee Chairman Bill Thomas...
The change has angered Republican-friendly medical-equipment and home-care
suppliers that rent equipment to Medicare but never surrender title. Malachi
Mixon, a Bush supporter ... calls the proposed changes "absolutely crazy" and
says they ignore the services provided by suppliers, financed through the
rentals. "They think you drop it off like a stork," he says. ...
Critics contend the administration is captive to a free-market ideology that
ignores the frailty of the elderly, many of whom are in ill health ...
"Republican delusions that health care can work like any other market apparently
know no bounds," says Robert Berenson, a senior fellow at the Urban Institute
and a top Medicare administrator under President Clinton. "They now even extend
their notions of an ownership society to people in their last months of life."
Mr. Mixon says one unintended consequence is the economic pressure to build
cheaper, less durable products given the 13-month cap imposed on bed rentals.
And Lawrence Higby, chief executive of Apria Healthcare Group Inc., says owning
oxygen equipment is likely to be a burden rather than a boon for the elderly,
many of whom are too weak to negotiate the savings on supply envisioned by
"The cornerstone of the misunderstanding is that all we are doing is
providing equipment," he says. "Medicare's attitude is you only pay the police
and fire departments when they come to the house. We maintain a 24-hour hotline.
We have drivers named in wills."...
Since they'll own the equipment, they'll be able to pass it along to their
children too. After Medicare paid for it in full, it will end up sitting in a
garage, attic, basement, etc. Wouldn't it be more efficient to pool the risk of being
outlived by your equipment? Rental arrangement are one, but not the only way
to do that. In addition, I'm imagining someone in a hospital-style bed at home
linked to their respirator while haggling over the price of the next bottle of
oxygen. Couldn't Medicare use its collective purchasing power to negotiate even
better prices on their behalf and save them the trouble?
Posted by Mark Thoma on Tuesday, February 28, 2006 at 02:37 AM in Economics, Health Care |
St. Louis Federal Reserve president William Poole doesn't think the typical
consumer of Fed speak has enough training in economics and monetary policy to
understand unfiltered policy deliberations properly, so the statements need to be cleaned
of potentially misleading technical language. I'm not sure I agree on this
point. Here's a brief part of a much longer speech on Fed communication:
Communications, by William Poole, St. louis fed President, Feb. 24, 2006:
...Fed communications issues are often discussed under the general term
“transparency.” What, literally, does transparency mean? ... Transparency must
mean disclosing as much as possible without damaging the integrity of policy
deliberations. That integrity is essential both to be sure that all issues are
fully debated and to ensure that information ... remains confidential. But there
is [an] aspect to transparency that is incompletely understood. ... Much of the
FOMC deliberation consists of fairly technical discussions. Without an advanced
degree in economics, or extensive policy experience, much of this material is
simply incomprehensible. Thus, although policy experts can understand undigested
material, the message that they would convey to the general public would likely
not be timely and might not closely match, in emphasis and tone, the consensus
message the FOMC would want to convey. ...Instead, the Fed needs a conscious
communications strategy rather than a strategy of simply “opening up.” The
purpose of a conscious strategy is not to hide anything but rather to have a
clear transmission of information. ... FOMC transcripts ... require a
substantial background in economics and the history of monetary policy to
interpret correctly. ...
What about members of the FOMC who do not have this background (see "Kevin Who?")? Should we be worried they might misinterpret technical material presented at meetings?
Posted by Mark Thoma on Tuesday, February 28, 2006 at 12:09 AM in Economics, Fed Speeches, Monetary Policy |
Though it might help to answer questions about low long-term interest rates, I'm not anxious to find out will happen if China slows its accumulation
of dollar based foreign exchange reserves:
Economist urges cut in dollar reserves, China View: The country should
reduce the U.S. dollar share of its foreign exchange reserves because of the
risks posed by the instability of the U.S. currency, influential economics
professor Xiao Zhuoji said in an interview published yesterday. ...Xiao also
proposed a number of ways to slow the explosive growth in the country’s
reserves, which rose 34 percent last year to US$818.9 billion. “U.S. dollars
account for most of our reserves, and the instability of the dollar increases
foreign exchange risk. So we should take measures to cool down this
extraordinary reserve growth,” ... He proposed adjusting the structure of
China’s reserves to reduce currency risk ... Xiao is a Beijing University
professor and a member of the standing committee of the Chinese People’s
Political Consultative Conference, a body that advises the National People’s
Congress. ... China could slow reserve growth by strictly controlling capital
inflows and speeding up exchange rate reform, he said. For example, companies
could be allowed to hold more foreign exchange, instead of being required to
sell it to the central bank, and individuals could be permitted to invest in
foreign currencies. Xiao also said China could also cut its trade surplus, which
tripled last year to US$102 billion, by reducing resource-intensive exports and
importing more high-tech products. (Reuters/China
Posted by Mark Thoma on Tuesday, February 28, 2006 at 12:07 AM in China, Economics, International Finance |
The government securities market is dependent upon just two banks and that
worries the Fed:
Fed in call for ‘stand-by’ Treasuries bank, by Jennifer Hughes, Financial Times:
The US Federal Reserve has asked Wall Street dealers to develop a “stand-by”
bank that would step in if one of the two leading Treasuries clearing banks
encountered problems. The Fed and the US Treasury depend on the Treasuries
securities market to implement monetary policy and fund the US government. But
the market, in which $545bn is traded daily, depends on two banks, JPMorgan
Chase and Bank of New York, to clear its trades. This situation concerns
regulators. Don Layton, who retired recently as vice-chairman of JPMorgan Chase
and will lead the project, said: “If one of these two had troubles of any kind,
literally half the government securities market would not be able to
function...” ... The stand-by
facility, provisionally called “NewBank”, is designed to come into play only if
there is a loss of market confidence in one of the clearers, and dealers became
wary of clearing trades through it. ...
Posted by Mark Thoma on Tuesday, February 28, 2006 at 12:06 AM in Economics, Financial System |
Will the market eventually undermine communist party power in China?:
A fierce battle hobbles China’s march to the market, by Richard McGregor,
Financial Times: Liu Guoguang, a once influential but long retired Marxist
economist, recently burst back onto the scene with an incendiary warning for the
Chinese government. If it did not rein in market reforms and deal with the
growing, gaping rich-poor divide, China would “change its colour”: code for the
“red” Communist party losing power. ... Almost overnight, symposiums were staged
around the country to study his “economic thought”, including one at Ya’nan, the
Communist party’s old revolutionary base.
“The government has already lost control of many sectors and, of the state
enterprises that are left, we seem to be willing to sell them, to foreigners or
anybody,” says Liu Rixin, a longtime senior planning official. Nostalgia aside,
the words of the retired economist resonated so widely because he explicitly
linked the survival of single-party rule to the maintenance of a dominant role
for the state in the economy. The nexus between the two is rarely so openly
acknowledged but it is the central underlying issue in a ... very nasty battle
over economic policy under way in China. It will have a bearing on all manner of
reforms, such as privatisation and foreign investment in the finance sector.
Some measures have already been delayed – such as a law to clarify private
On one level, the attack by the elderly economist seemed to symbolise a
backlash against Mr Hu’s government. But such straightforward interpretations no
longer apply in a China ... How, after all, could Mr Hu be criticised for the
rich-poor gap when he, along with Mr Wen, has made tackling it a centrepiece of
his economic policy? ...
China is now less equal than the US and Russia, according to the World Bank,
and income inequalities are still widening. And while incomes have mostly risen
across the board, the social wage ... which provided free health, education,
housing and an old-age pension – has been drastically cut, all but disappearing
in the countryside.
China spends less than one-fifth of the developed-country average on health
and education.... In rural areas, where China’s poorest communities live, nearly
90 per cent of health costs are borne by individuals. ... education researchers
are discovering that drop-out rates among rural children from junior secondary
schools average 30-40 per cent. “This is the most under-reported story in China
– the country’s massive failure to educate its rural youth in the 1990s,” says
Yasheng Huang of MIT Sloan School of Management. ...
To old Marxists such as Mr Liu, Mr Hu and Mr Wen have not done enough to
uphold government – and, by implication, party – control of the economy.
Alongside them, as part of a loose ragtag coalition that marches under the
“anti-reform” banner, celebrity economists such as Lang Xianping, who fronts a
popular television show in Shanghai, have criticised privatisation as a
slow-motion Russian-style theft of state assets.
Many mainstream economists counter that the Hu-Wen administration is shaping
up as a disaster precisely because it refuses to tackle the state’s still
dominant role. For these economists, pushing the rich-poor gap to centre stage
is simply a device by the leadership to increase the role of the state in
Li Qingyuan, a veteran official and executive in the finance sector, takes a
more sanguine view of where the current debate will lead. It is nothing like the
“scary discussions” of the early 1990s, she says, when there was a genuine
leftist resurgence in the wake of the 1989 Tiananmen Square crackdown. “This
kind of argument comes up from time to time but I don’t think it will last long
and obstruct the pace of reform,” she adds. “The general trend is irreversible.”
But that is precisely what worries the Marxists the most. For the
octogenarian Mr Liu, until recently written off as a dinosaur in the debate, it
is the most powerful argument in years he has been able to muster for reining in
the market economy. Such reforms mean a larger private sector and a smaller
state – and, ultimately, greater pressure for a more pluralistic politics and
institutions able to adjudicate economic disputes free of arbitrary political
But while Mr Liu and the party have allies among an entrepreneurial elite
dependent on government favours to build their businesses, it is an alliance
that is increasingly resented and under attack. “If westerners think the current
growth model can be maintained,” says the Shanghai-based economist, “they are
making a big mistake.”...
Posted by Mark Thoma on Monday, February 27, 2006 at 12:47 PM in China, Economics |
For my records, these are things I've posted at Environmental Economics recently:
Posted by Mark Thoma on Monday, February 27, 2006 at 09:00 AM in Economics, Environment |
Calculated Risk has the details on today's housing report "U.S. New Home Sales Fell 5 Percent in January." His bottom line:
This report is still reasonably strong, except for the record inventory and
months of inventory.
Update: Greg Ip, writing in the WSJ's Washington Wire, points out that due to a change in the sample, housing price data will be biased downward:
Tricky Housing Trends: New-home sale prices are always tricky to analyze
because they are heavily influenced by the mix of homes sold: more luxury home
sales will tend to bias up the figure, more homes sold in the south or Midwest,
where prices are lower, will bias it down. But in the last year an additional issue has muddied the trend. In January
2005, for the first time since 1985, the Census Bureau updated the sample of
local permit offices it checks to track new-home construction and prices. A lot
changed between 1985 and 2005. Older, pricier areas became heavily built up and
activity declined. In newer, outlying areas, where prices were generally lower,
construction picked up. The 2005 sample thus has a larger share of those newer,
cheaper areas. Comparing 2005 figures to those in 2004 will give the impression
of a slowing in price gains, but that's somewhat artificial.
See Sample Change Damps New-Home Price Gains
Posted by Mark Thoma on Monday, February 27, 2006 at 08:49 AM in Economics, Housing |
Paul Krugman on the 80-20 fallacy:
Graduates Versus Oligarchs, Rising Oligarchy, by Paul Krugman, Commentary, NY Times: Ben
Bernanke's maiden Congressional testimony as chairman of the Federal Reserve
was, everyone agrees, superb. ... But Mr. Bernanke did stumble at one point.
Responding to a question ... about income inequality, he declared that "the most
important factor" in rising inequality "is the rising skill premium, the
increased return to education."
That's a fundamental misreading of what's happening.... What we're seeing
isn't the rise of a fairly broad class of knowledge workers. Instead, we're
seeing the rise of a narrow oligarchy: income and wealth are becoming
increasingly concentrated in the hands of a small, privileged elite. I think of
Mr. Bernanke's position ... as the 80-20 fallacy. It's the notion that the
winners in our increasingly unequal society are a fairly large group ... the 20
percent or so of American workers who have the skills to take advantage of new
technology and globalization...
The truth is quite different. Highly educated workers have done better than
those with less education, but ... real earnings of college graduates actually
fell more than 5 percent between 2000 and 2004. Over the longer stretch from
1975 to 2004 the average earnings of college graduates rose, but by less than 1
percent per year.
So who are the winners from rising inequality? ... A new research paper by
Ian Dew-Becker and Robert Gordon ... gives the details. Between 1972 and 2001
the wage and salary income of Americans at the 90th percentile of the income
distribution rose only ... about 1 percent per year. So being in the top 10
percent of the income distribution, like being a college graduate, wasn't a
ticket to big income gains.
But income at the 99th percentile rose 87 percent; income at the 99.9th
percentile rose 181 percent; and income at the 99.99th percentile rose 497
percent. No, that's not a misprint. Just to give you a sense of who we're
talking about: ... the 99th percentile will correspond to an income of $402,306,
and the 99.9th percentile to an income of $1,672,726. The ... 99.99th percentile
[is] probably well over $6 million a year. ...
The notion that it's all about returns to education suggests that nobody is
to blame for rising inequality, that it's just a case of supply and demand at
work. And it also suggests that the way to mitigate inequality is to improve our
educational system — and better education is a value to which just about every
politician in America pays at least lip service.
The idea that we have a rising oligarchy is much more disturbing. It suggests
that the growth of inequality may have as much to do with power relations as it
does with market forces. Unfortunately, that's the real story.
Should we be worried about the increasingly oligarchic nature of American
society? Yes ... Both history and modern experience tell us that highly unequal
societies also tend to be highly corrupt. There's an arrow of causation that
runs from diverging income trends to Jack Abramoff ...
And I'm with Alan Greenspan, who ... has repeatedly warned that growing
inequality poses a threat to "democratic society." It may take some time before
we muster the political will to counter that threat. But the first step toward
doing something about inequality is to abandon the 80-20 fallacy. It's time to
face up to the fact that rising inequality is driven by the giant income gains
of a tiny elite, not the modest gains of college graduates. [Link
to Dew-Becker and Gordon paper, includes comments from Ian Dew-Becker on the paper]
Previous (2/24) column: Paul Krugman: Osama, Saddam and the Ports
Next (3/3) column: Paul Krugman: George the Unready
Posted by Mark Thoma on Monday, February 27, 2006 at 12:09 AM in Economics, Income Distribution, Universities |
There's gold in them thar halls of congress. Gold that starts out as coal and
ends up, after being sprayed with diesel or some other substance, as a
synthetic fuel tax break. Unfortunately for those exploiting this provision of
the tax code, recent increases in oil prices threaten to trigger an end to the
tax break bonanza. However, GOP senator Rick Santorum slipped a provision into
the hurricane relief bill to ensure the tax breaks would continue and the
provision is now in the reconciliation process:
Magic Way to Make Billions, by Donald L. Bartlett and James B. Steele, Time:
The wording is so bland and buried so deep within a 324-page budget document
that almost no one would notice that a multibillion-dollar scam is going on. Not
the members of Congress voting for it and certainly not the taxpayers who will
get fleeced by it. And that is exactly the idea. ... Buried in the huge
budget-reconciliation bill ... are a few paragraphs that accomplish an extraordinary
feat. They roll back the price of a barrel of crude oil to what it sold for two
years ago. They create this pretend price for the benefit of a small group of
the politically well connected. ...[who] will walk away with billions of dollars in tax
subsidies, not from oil but from the marketing of a dubious concoction of
synthetic fuel produced from coal ...
To understand why Washington wants to backdate the price of oil for its
friends, it's necessary to return to the oil shocks of the 1970s, when long
lines formed at gas stations and people dialed down the thermostats ... so they could afford to pay their utility bills. In 1980, Congress
enacted tax incentives ... to spur the development of a
synthetic-fuel industry. The goal was to build huge plants using new
technologies that would transform raw coal, which the U.S. has in abundance,
into synthetic natural gas ... and--here comes the ever popular bromide--reduce
U.S. dependence on foreign oil. ...
When oil prices fell, ... the synfuel credit remained on the books, dormant,
until a group of enterprising entrepreneurs came across it in the 1990s and saw
a way to transform coal into gold. The coal can look and burn like regular coal.
The IRS rule for transforming coal into synfuel--and getting the tax
credit--requires only that the substance be chemically altered in some way. The
alchemy that satisfies the IRS is a simple process: some plants spray newly
mined coal with diesel fuel, pine-tar resin, limestone, acid or other
substances--a practice that industry critics call "spray and pray." Other
operators mix coal-mining waste with chemicals, coat it with latex and blend it
with untreated coal to form briquettes. ... Those synfuel operations were a far
cry from the state-of-the-art plants that Congress had envisioned ...
For owners and operators, the whole point isn't creating a profitable new
energy resource ...; it's about collecting the tax subsidy. Progress
Energy Inc. ... reported ... that in 2002-04 its synfuel-production
losses added up to $400 million. No problem: the company claimed $852 million in
tax credits, magically transforming a money-losing operation into a money-making
business with $452 million in profits--courtesy of the American taxpayer. ....
And Progress Energy is not alone. ...
This was not what Congress had in mind in 1980 when it enacted the subsidy.
The idea was to stimulate ... a new industry that would make synthetic
fuel competitive with the price of conventional oil and gas. To achieve that
end, lawmakers pegged the value of the credit to the price of crude oil. If oil
prices ... rise above a certain level, the synfuel ... subsidy would be phased out. As long as
oil prices were below $50 per bbl., synfuel producers could claim the full value
of the credit. But in the past year, as prices have risen to as much as $66 per
bbl., anxiety has spread through the synfuel ranks that their boondoggle is
With so much at stake, the synfuelers have pumped money into a campaign to
preserve their tax break. At the center of the synfuel lobby in Washington is a
consortium called the Council for Energy Independence. It's a name worthy of the
most successful Washington lobbies... Since 2002, the Council for Energy
Independence has spent $2 million lobbying Congress to preserve the tax
Last November the lobby scored a remarkable coup. Buried deep in a bill
called the Tax Relief Act of 2005, passed by the Senate on Nov. 18, was Section
559... Section 559 ... says the synfuel credit will be based not on current oil prices--the yardstick used in
the past--but on "the amount which was in effect for sales in calendar year
In 2004 oil prices were safely below the line to allow synfuel producers to
claim the maximum credit. The stealth amendment ... was inserted in the Tax Relief Act, which provides aid for Hurricane
Katrina victims ... With so many higher profile issues at stake, the clause on synfuels sailed right through with no discussion. Many lawmakers, if not most,
don't even know it's there.
When asked about the provision's origins, Senate Finance Committee aides at
first said they did not know ... Asked again by TIME to identify the author, the
Senate Finance aide later wrote in an e-mail, "the provision originated as an
amendment from Sen. [Rick] Santorum [a Pennsylvania Republican]. ... Chairman
Grassley accepted the Santorum amendment ..." ...
The bill is now part of Congress's budget-reconciliation process. But there
is no synfuel amendment in the House bill, meaning that it cannot become law
unless the House conferees agree to the Senate provision. ... the odds are that
synfuel may slip through again. ... The synfuel lobby contends that the
exemption from the run-up in oil prices is necessary to create stability in the
industry. ... And the synfuel lobby expects to carry the day too, largely
because Congress has bigger issues to deal with. Kirk Benson, the chairman and
CEO of Headwaters, told analysts that "in the world of Washington, D.C., what we
want to do isn't material ... It's an afterthought." ...
We should continue to cut social, education, and health programs, maybe
delay infrastructure spending too, in order to protect tax cuts that distort
the allocation of resources towards scam synthetic fuel programs that make
the people lobbyists represent rich.
Posted by Mark Thoma on Monday, February 27, 2006 at 12:04 AM in Budget Deficit, Economics, Politics, Taxes |
This isn't the first time China has accumulated a large stock of foreign
currency reserves through a trade surplus:
vortex for the world's gold, by Keith Bradsher, The New York Times/IHT:
China has such a huge stash of other countries' money that it could, in theory,
give bonuses equaling half a year's wages to all 770 million of its famously
low-paid workers. China will soon release statistics showing that it has passed
Japan as the biggest holder of foreign currency the world has ever seen. Its
reserves already exceed $800 billion and are on track to reach $1 trillion by
the end of the year, up from just under $4 billion in 1989. But China has held a
similar position before.
The current pile, much of it invested in U.S. Treasury securities or
mortgages on American homes, is a result of China's selling more goods than it
buys and of foreign money pouring in for the building of factories, apartment
towers, office buildings and shopping malls. China is not alone; oil exporters
are also piling up cash and trying to figure out what to do with it, leading to
disputes like the current one over a Dubai company's designation to run cargo
terminals at American ports.
History offers parallels to the yawning U.S. trade deficit and the resulting
accumulation of dollars in China. China sells to American companies almost six
times as much as it buys from them, but this is not the first time China has
been an export powerhouse. Ancient Rome, for example, found that it had little
except glass that China wanted to buy. Nearly 2,000 years ago, Pliny complained
about the eastward flow of Roman gold along the Silk Road in exchange for
Long-distance trade collapsed during the early years of the Dark Ages. But
through the next several periods of rapid growth in international commerce -
from A.D. 600 to 750, from 1000 to 1300 and from 1500 to 1800 - China again
tended to run very large trade surpluses. By 1700, Europe was paying with silver
for as much as four-fifths of its imports from China because China was
interested in little that Europe manufactured.
A longstanding mystery for economic historians lies in how so much silver and
gold flowed to China for centuries for the purchase of Chinese goods yet caused
little inflation in China. Many of China's manufactured goods remained much
cheaper than those from other countries until the early 1800s, despite the
rapidly growing supply of silver in the Chinese economy. One theory is that
Chinese output was expanding as fast as the supply of precious metal. Another is
that the Chinese were saving the silver and gold, not spending it.
The same phenomenon has appeared today, as dollars inundating China have
resulted in practically no increase in prices for most goods and services -
although real estate prices have jumped in most cities. China has an even easier
time preventing domestic prices from rising these days because modern banking
techniques allow its central bank to buy up the dollars and take them out of
everyday circulation. The central bank has accumulated the country's immense
foreign currency reserves in the process.
The British Empire in the 19th century worked out a way to maintain a large
long-term trade surplus with China. So far, however, nobody has suggested that
the United States also try getting millions of Chinese people addicted to
What goods and services will we get China "addicted" to? What will our "opium" be?
Posted by Mark Thoma on Sunday, February 26, 2006 at 10:17 AM in China, Economics, International Trade |
It's not getting any easier for middle class workers:
Two Tiers, Slipping Into One, by Louis Uchitelle, NY Times: Rick Doty is a
30-year veteran of Caterpillar, the big tractor and earth-moving equipment
manufacturer. He is paid $23.51 an hour as a machinist, and he receives
additional benefits worth almost as much. That sets him far above newly hired
workers consigned to a much lower wage scale. To these fellow workers, Mr. Doty,
who is also a local union leader, struggles to justify an inequality that he
helped to negotiate. ... arguing that $12 to $13 an hour is good pay here. "And
I assure them that five years down the road, when the present contract expires,
we in the union are going to improve their lot in life."
That does not seem likely. After more than a decade of failed strikes and job
actions ... the U.A.W. reluctantly accepted a two-tier contract that provides
for significantly lower wages and benefits for newly hired employees. ... The
trade-off is the promise of a manufacturing revival at long last in the old Rust
Belt, as new hires come aboard at much lower labor costs. "What we've done is
reposition ourselves to actually grow employment in our Midwestern plants," said
Jim Owens, Caterpillar's chief executive. "We finally have a labor cost that is
Caterpillar is adding a significant chapter to the labor cost-cutting that is
widespread in America... Until recently, cutbacks in the wages and benefits of
hourly workers were limited mostly to money-losing companies... They have said
that their survival was at stake. Now, however, even healthy and highly
profitable companies like Caterpillar are engaging in the practice, and as they
do so, the longstanding presumption that factory workers at successful companies
can achieve a secure, relatively prosperous middle-class life ... is
As Caterpillar's managers see it, they have no choice. ... The new contract
reflects the company's success in imposing a "market competitive" pay scale;
that is, wages and benefits that attract enough qualified workers by being
slightly better than the packages offered by others in each community or region
where Caterpillar has operations. ...
In the new lower tier, ... easily replaceable workers will no longer earn
more than $12.50 an hour, or $26,000 a year. They must work their way up toward
middle-class jobs, Mr. Owens argues ... "I want people to have a higher income,"
Mr. Owens said. "But you do that by starting out maybe driving a forklift or
working in a warehouse and then you get new skills. ..." Beyond that, he says,
talented workers are encouraged to take courses to qualify for promotion to
salaried jobs ... outside the union. ...
The trade-off for lower wages, Caterpillar's top executives counter, is more
jobs for the region. ... But the company itself, he says, cannot succeed without
the concessionary U.A.W. contract... Caterpillar, meanwhile, is prospering. ...
Net income was up 40 percent last year, to $2.85 billion; it has nearly tripled
since 2003. Tens of millions of dollars have gone into research to develop a
great variety of Caterpillar products that sell against those of Komatsu and
Volvo, the two biggest foreign competitors...
Fixed monthly pensions go now only to veteran workers, like Mr. Doty, and job
security is effectively canceled for new hires, who must work 12 years without
interruption to become immune to layoffs. Mr. Glynn notes that the arrangement
gives Caterpillar leeway to shed the new workers when demand turns down for the
company's products. ...
Posted by Mark Thoma on Sunday, February 26, 2006 at 12:42 AM in Economics, Income Distribution |
India everywhere? Not without roads, bridges, and better health and education
programs. Here's Kenneth Rogoff of Harvard University, formerly the chief
economist at the IMF:
Tortoise and the Chinese Hare, by Kenneth Rogoff, Project Syndicate: “India
everywhere” was the theme at this year’s World Economic Forum. ... The India media blitz was a huge success. In Davos,
speaker after speaker touted the idea that even if China is ahead now, over the
longer run, the race between Asia’s two giants is a toss-up. ... But what is the
reality in the race between economies with more than a billion people each?
On the surface, China has opened up quite a lead on India. Twenty-five years
ago, at the start of the contemporary wave of globalization, national output in
India and China was about the same. Now, by any measure, China is more than
twice as rich. ... [T]he real difference – whether we like to admit it or not
– is that China’s communist government has succeeded in globalizing a much
larger share of its population than India’s democratic government has managed to
Not that China is exactly egalitarian. It is only along the coast, home to
roughly one in three Chinese citizens, that most people can be said to have
really joined the twenty-first century. Much of rural China is still
miserable... But caste-bound India’s record of exclusion is worse. Perhaps only
one in five persons are integrated into the global economy. ... Whereas China
probably has about 450 million people in its globalized economy, India has at
most 200-250 million. It is this difference, more than anything else, that sets
the two economies apart.
What can India do to close the gap? Its biggest shortcoming is its lack of
roads, bridges, ports, and other infrastructure, where the contrast with China
is just stunning. If your products can’t get to the global economy, you cannot
conquer it. Over the past five years, China has multiplied its highway system
It is not just a matter of money – India’s central bank is rolling in cash,
which it has mainly invested in low-yield foreign treasury bills.
The real problem is that China’s authoritarian system faces little opposition
when it decides to bulldoze a shantytown that stands in the way of a new
airport. India’s government, by contrast, has neither the power nor the
inclination to trample over poor people to make rich people richer.
Unfortunately, without infrastructure, the ... majority of India’s citizens will
remain frozen out of globalization.
So, is the idea that India’s economy could overtake China’s hopeless
romanticism? Not necessarily, if only because the areas where India excels,
notably services, have far higher potential margins than manufacturing. Here,
the Chinese, hampered by a vastly inferior legal system, will not be able to
compete easily. Western companies are far more inclined to trust Indian firms with sensitive
financial information or patents than they are in the case of China. Foreign
companies know that if they outsource any high-tech process to China, they might
as well publish their blueprints on the Internet.
India also has a much better developed financial system than China, an
advantage that will be increasingly important ... Command and control financing
... works well when it comes to building bridges; it is a lot less effective
when it comes to choosing what companies deserve to survive. ... If India is to
ever catch up with China, it must globalize more of its citizens, through better
provision of health, education and infrastructure. Only then will we truly start
seeing “India everywhere.”
Posted by Mark Thoma on Saturday, February 25, 2006 at 01:46 PM in China, Economics, India |
The Economist asks how workers can maintain or increase their share of income when the forces of globalization are working against them:
Decoupled, by Ronald Gant, The Economist: "Nothing contributes so much to
the prosperity and happiness of a country as high profits,” said David Ricardo,
a British economist, in the early 19th century. Today, however, corporate
profits are booming in economies, such as Germany's, which have been stagnating.
And virtually everywhere, even as profits surge, workers' real incomes have been
flat or even falling. In other words, the old relationship between corporate and
national prosperity has broken down.
This observation has two sides to it. First, ... companies are no longer tied
to the economic conditions and policies of the countries in which they are
listed. Firms in Europe are delivering handsome profits that are more in line
with the performance of the robust global economy than with that of their
sclerotic homelands. ... Europe's and Japan's stockmarkets have outpaced those
in America, despite the latter's faster GDP growth.
Second and more worrying, the success of companies no longer guarantees the
prosperity of domestic economies or, more particularly, of domestic workers.
Fatter profits are supposed to encourage firms to invest more, to offer higher
wages and to hire more workers. Yet even though profits' share of national
income in the G7 economies is close to an all-time high, corporate investment
has been unusually weak in recent years. Companies have been reluctant to
increase hiring or wages by as much as in previous recoveries. In America, a
bigger slice of the increase in national income has gone to profits than in any
recovery since 1945.
The main reason why the health of companies and economies have become
detached is that big firms have become more international. ... With the profits
of these firms so dependent on their global operations, it is not surprising
that corporate prosperity has failed to spur “home” economies. ... If a large
part of the spurt in profits comes from foreign operations, it is less likely to
be used to finance investment or extra job creation at home. ...
Globalisation has also shifted the balance of power in the labour market in
favour of companies. It gives firms access to cheap labour abroad; and the
threat that they will shift more production offshore also helps to keep a lid on
wages at home. This is one reason why, despite record profits, real wages in
Germany have fallen over the past two years. ...
Workers can still gain from rising profits if they own shares, either
directly or through pension funds. ... In America, capital gains on shares have
played a big role in supporting household spending over the past decade. But ...
workers in continental Europe are losing out... This is partly because of the
smaller role played by institutional investors, such as pension funds, in Europe
compared with, say, America.
If profits (and hence executive pay) continue on their merry way, while
ordinary employees' real wages stand still and their health benefits and
pensions are eroded, workers might well expect their governments to do something
to close the gap. ... higher taxes on profits, restrictions on overseas
investment, import barriers, or making it harder to lay off workers. The trouble
is, in a globalised economy ... Firms would simply move operations' head offices
to friendlier countries.
A more promising way of allowing workers to share in companies' prosperity is
to encourage firms to introduce profit-sharing schemes for employees. But
perhaps the most useful thing that governments can do is to ensure that
consumers ... benefit from lower prices as a result of the shifting of
production to low-cost countries. The prices of consumer goods have fallen by
much more in America in recent years than in the euro area, where retailers are
shielded from competition... Greater competition in Europe would allow workers
to share in the gains of globalisation through lower prices. ...
The main reason given for stagnating wages is that earnings have
higher expected returns when invested in foreign rather than domestic
markets or when used to increase domestic wages, and a secondary reason
is a shift in market power in labor markets toward firms. If so, firms
won't voluntarily increase the share of profits going to domestic
workers at the expense of more profitable opportunities elsewhere. Are tax breaks or some other form of government intervention needed to "encourage firms to introduce
profit-sharing schemes for employees" or to encourage firms to put other policies in place to increase, or at least maintain, labor's share of income? I'm not there yet, but if politicians insist on implementing tax breaks, why not think along these lines?
Posted by Mark Thoma on Saturday, February 25, 2006 at 01:47 AM in Economics, Income Distribution, Policy, Unemployment |
Tom Allison says deregulation of airlines has not turned out the way he expected:
You Tell Us, IHT: ...Tom Allison, a
former counsel to the committee of the U.S. Senate that wrote the law that
deregulated the airline industry in 1980, ... say[s] that maybe free markets have
their drawbacks. Specifically, Allison [said] lower fares
as routes were opened up to competition also led to service deterioration and
severe human costs. "I had no idea these things would happen," Allison said. ...
Posted by Mark Thoma on Saturday, February 25, 2006 at 01:33 AM in Economics, Market Failure, Regulation |
Alan Greenspan, political pundit:
the constraints of public office, Alan Greenspan has expanded from commenting on
the economy to commenting on politics, by Greg Ip, WSJ Washington Wire (dynamic
link): Speaking to a Wall Street gathering ..., the former Federal
Reserve chairman decried the "polarization" of American politics and said the
ground was ripe for a third party presidential candidate... A member of the
audience asked Mr. Greenspan if he would endorse a candidate for president. Mr.
Greenspan said he would not, "for now." But he went on to describe the two
American parties now as controlled by their extreme wings, even though the
voting public is far more centrist... He
described the leadership of the parties as "bimodal," meaning clustered at the
extreme ideological ends, whereas the voting public was "monomodal," meaning
clustered near the middle. Such situations, he said, create an opening for a
third-party candidate who appeals to the center. That, he said, could prompt the
candidates of the other two parties to move back to the center, for fear of
Posted by Mark Thoma on Saturday, February 25, 2006 at 01:14 AM in Economics, Politics |
Not too long ago, I
Friedman's plucking model, an alternative to
the natural rate of output view of the world. The typical view of business
cycles is one where the economy varies around a trend value (the trend can vary
over time also). In Friedman's model, output moves along a ceiling value, the
full employment value, and is occasionally plucked downward through a negative
demand shock. To get some idea of what this might look like, I regressed the log
of real GDP on a constant, trend, and trend squared, then added .05 to the
predicted value to shift the estimated trend line upward to make it a ceiling. This gives:
I should say that this is not the best way to estimate the ceiling, but it is
quick and easy relative to frontier estimation techniques. What made me think of this was the post earlier on
capacity utilization. If a
gap is calculated as gap = ceiling - rgdp, and then graphed on a two-scale graph
along with capacity utilization, here is the result (this is actually the
negative of the gap to
make the correlation easier to spot visually):
The last time I looked at this was ten years ago or
so. As you can see from the diagram, at that time capacity utilization measures
and the gap from Friedman's plucking model appeared to be very highly correlated.
Given they are conceptually similar, i.e. both are deviations from a maximum
value, and that both measures move with real GDP, this is expected. However,
since around 1994 the correlation appears to have weakened somewhat, and then seems to
have reestablished itself around 2000. The question is why. Here are graphs with the sample split arbitrarily from 1967 to 1985 and from 1986-2005 showing this:
The reason for the poor association in the mid and later 1990s may be the estimation technique for the trend or changes in productivity growth during this time period. Globalization and the transition to a more service based economy are also possibilities.
Posted by Mark Thoma on Friday, February 24, 2006 at 09:18 PM in Economics, Macroeconomics |
Ben Bernanke's delivered his first speech outside of Washington since becoming Federal Reserve Chair. This was given at at a
symposium for the 75th anniversary of Princeton's Woodrow Wilson
School of Public and International Affairs and marks his return to Princeton. [See Bloomberg for coverage of remarks made after the speech in response to questions]:
Remarks by Chairman Ben S. Bernanke, February 24, 2006
The Benefits of Price Stability
It is a great pleasure for me to return to Princeton today, to see so
many friends and former colleagues, and to help celebrate the seventy-fifth
anniversary of the founding of the Woodrow Wilson School of Public and
International Affairs. I taught at Princeton for seventeen years--more often
than not in Bowl 1, in the deep, dark basement of Robertson Hall--and my
wife Anna and I raised our two children here. Like all good New Jerseyans,
we will always think of our home address in terms of a Turnpike exit--in our
case, Exit 9.
Continue reading "Bernanke: The Benefits of Price Stability" »
Posted by Mark Thoma on Friday, February 24, 2006 at 07:55 PM in Economics, Fed Speeches, Monetary Policy |
This is a summary of a paper by Gordon and Dew-Becker "Why
Did Europe's Productivity Catch-up Sputter Out? A Tale of Tigers and Tortoises,"
one of the papers from a FRBSF
conference on the causes and consequences of productivity growth:
Productivity Growth: Causes and Consequences—Conference Summary, by Daniel
Wilson, FRBSF: ...Gordon and Dew-Becker sought to determine the cause of the
rather stark divergence in productivity growth in the European Union (EU)
relative to the strong performance in U.S. since 1995. ... Previous research had
shown that information technology (IT) played a big role in the U.S.
acceleration in the second half of the 1990s, so one might think the slowing in
EU productivity might be due to developments affecting the IT sector in Europe.
On the contrary, Gordon and Dew-Becker show that the slowdown in Europe was
quite broad-based and not due just to weakness in IT-related industries. A
common explanation for the EU slowdown is that institutional and legal barriers
limit flexibility, and it is frequently illustrated by a story about zoning laws
in Europe that prevent big-box stores, like Wal-Mart and Target, from expanding
and establishing the ultra-efficient distribution systems they have in the U.S....
Gordon and Dew-Becker offered a different story: Somewhat ironically, the labor
market reforms enacted in the mid-1990s in many EU countries actually had a
negative effect on productivity growth—at least temporarily. ... by relaxing
rigid work rules and high wage floors, EU employers could hire more low-wage,
low-productivity workers and substitute away from high-skill workers and
capital. ... By opening the door to these low-productivity workers ... average
productivity is pulled down, at least until the economy adjusts to the new
composition of the workforce.
Posted by Mark Thoma on Friday, February 24, 2006 at 07:03 PM in Academic Papers, Economics, Technology |
I keep hearing that capacity utilization rates are entering the inflation danger
zone, e.g. here in the discussion of today's advance durable goods report. The maximum usage was 89.4% in the first month in 1967 which is also the
first observation in the sample. The mean, shown in the figure, is 81.4%. The
last measurement was 80.9%. The graph is constructed using Fed data:
Current usage is below the overall mean. Why is a value below the historical mean nearing the inflation danger zone? I must be missing something. Has structural change altered the definition of full capacity? Even by recent standards, e.g. since 1990, capacity looks low. Is it a problem in particular key industries rather than a general problem, is that the inflation worry?
Posted by Mark Thoma on Friday, February 24, 2006 at 09:09 AM in Economics, Monetary Policy |
Laurence Kotlikoff proposes a New New Deal in Economist's Voice:
Averting America’s Bankruptcy with a New New Deal, by Laurence J. Kotlikoff, Economist's Voice: The United
States is essentially bankrupt and requires critical and immediate fiscal
surgery thanks to decades of fiscal profligacy and the impending retirement of
the baby boom generation. According to the latest projections ..., the difference
between the federal government’s present value of projected expenditures and the
present value of projected receipts is $63.3 trillion. This fiscal gap is 8.2
percent of the present value of GDP, meaning that we need to devote that share
of GDP every year for eternity to cover the shortfall.
Since federal personal and corporate income taxes represent
9.8 percent of GDP, one way to close the gap would be to immediately and
permanently raise those taxes by roughly 84 percent (8.2 divided by 9.8).
Advocating this hike is a political non starter. Enacting it could well be
economically ruinous. Yet, doing nothing, and leaving this bill for our children
and grandchildren to pay is neither feasible nor moral.
What should we do? ... Neither the Republican or Democratic politicians are offering
sensible solutions; and indeed present policies are making matters worse. Given
this, it is time for academic economists, who care more for policy substance
than for partisan advantage, to suggest sensible, efficient, and equitable
So let me suggest solutions to our three most troubled fiscal
institutions – our tax system, our Social Security system, and our government
healthcare system. Each solution is radical, but simple. The three reforms, in
conjunction with cutbacks in federal discretionary spending, would leave us with
... fiscal institutions
that can reliably pay for what the government spends. ... Let’s start with the tax system.
Continue reading "Averting America’s Bankruptcy " »
Posted by Mark Thoma on Friday, February 24, 2006 at 01:53 AM in Budget Deficit, Economics, Social Security, Taxes |
Ben Bernanke discusses economic security in today's world in a speech from July 2005 reprinted in part in the latest issue of Economist's Voice:
Skills, Ownership, and Economic Security, by S. Bernanke, Ph.D., Economist's Voice: I
the issue of economic security—what it means in the context of today’s world and
what we as a nation can do to help our citizens achieve it.
The idea of what it means to be economically secure in
America has changed over time. In our parents’ generation, people aspired to be
like the family in the television show "Leave it to Beaver." Mom stayed home
with the kids, and Dad worked at the same company from the day he completed his
education until the day he got his gold watch. Within the company, workers moved
predictably up the corporate ladder, earning higher incomes as their seniority
increased. The company provided health care, training, and a defined-benefit
pension, which, together with Social Security, provided the basis for a secure
retirement. Government programs and the tax code were designed to promote these
It’s an idyllic picture, although it’s not entirely obvious
that it was ever really an accurate description of life in America. Because of
lack of education, racial discrimination, and other reasons, large portions of
the population could not hope to enjoy this type of security in the decades
after World War II. And the American economy has always been much more dynamic
than this placid depiction suggests. Over time we have gone from being an
agricultural economy to a manufacturing economy to an economy based largely on a
diverse array of services. Technology and new products and services have
radically changed the types of jobs that people hold. New occupations and
professions have constantly emerged, with the U.S. labor market creating
millions of new jobs each year to replace millions of others that have come to
an end. In the new economy, Ward Cleaver might have left his company to start
his own business, while June might have gone back to graduate school when Wally
and the Beaver got older.
Continue reading "Leave it to Bernanke" »
Posted by Mark Thoma on Friday, February 24, 2006 at 01:12 AM in Economics, Monetary Policy, Social Security |
Paul Krugman explains how the the administration is a victim of its own
tangled web of deception:
Osama, Saddam and the Ports, by Paul Krugman, Commentary, NY Times: The
storm of protest over the planned takeover of some U.S. port operations by Dubai
Ports World doesn't make sense viewed in isolation. The Bush administration
clearly made no serious effort to ensure that the deal didn't endanger national
security. But that's nothing new — the administration has spent the past four
and a half years refusing to do anything serious about protecting the nation's
So why did this latest case of sloppiness and indifference finally catch the
public's attention? Because this time the administration has become a victim of
its own campaign of fearmongering and insinuation. Let's go back to the
beginning. At 2:40 p.m. on Sept. 11, 2001, Donald Rumsfeld gave military
commanders their marching orders. "Judge whether good enough hit S. H. [Saddam
Hussein] @ same time — not only UBL [Osama bin Laden]," read an aide's
handwritten notes about his instructions. ... "Hard to get a good case," the
notes acknowledge. Nonetheless, they say: "Sweep it all up. Things related and
So it literally began on Day 1. When terrorists attacked the United States,
the Bush administration immediately looked for ways it could exploit the
atrocity to pursue ... a war with Iraq. But to exploit the atrocity, President
Bush had to do two things. First, he had to create a climate of fear: Al Qaeda,
a real but limited threat, metamorphosed into a vast, imaginary axis of evil
threatening America. Second, he had to blur the distinctions between nasty
people who actually attacked us and nasty people who didn't. The administration
successfully linked Iraq and 9/11 in public perceptions through a campaign of
constant insinuation and occasional outright lies. In the process, ... all Arabs
were lumped together in the camp of evildoers. Osama, Saddam — what's the
Now comes the ports deal. ... after all those declarations that we're engaged
in a global war on terrorism, after all the terror alerts ... the administration
can't suddenly change its theme song to "Don't Worry, Be Happy." ... This isn't
just a Middle Eastern company; it's ... part of the authoritarian United Arab
Emirates, one of only three countries that recognized the Taliban as the
legitimate ruler of Afghanistan. ... [A]fter years of systematically suggesting
that Arabs who didn't attack us are the same as Arabs who did, the
administration can't suddenly turn around and say, "But these are good Arabs."
Finally, the ports affair plays ... into the public's awareness ... that Mr.
Bush ... and his family have close personal and financial ties to Middle Eastern
rulers. ... Mr. Bush shouldn't really be losing his credibility as a terrorism
fighter over the ports deal, which ... may turn out to be O.K. Instead, Mr. Bush
should have lost his credibility long ago over his diversion of U.S. resources
away from the pursuit of Al Qaeda and into an unnecessary war in Iraq, his
bungling of that war, and his adoption of a wrongful imprisonment and torture
policy that has blackened America's reputation.
But there is, nonetheless, a kind of rough justice in Mr. Bush's current
predicament. After 9/11, the American people granted him a degree of trust
rarely, if ever, bestowed on our leaders. He abused that trust, and now he is
facing a storm of skepticism about his actions — a storm that sweeps up
everything, things related and not.
Previous (2/20) column: Paul Krugman: The Mensch Gap
Next (2/27) column: Paul Krugman: Graduates Versus Oligarchs
Posted by Mark Thoma on Friday, February 24, 2006 at 12:23 AM in Economics, Iraq and Afghanistan, Politics |
Beijing attempts to quiet unrest in rural areas through income redistribution
China launches ‘New Deal’ for farmers, by Richard McGregor, Financial Times:
Beijing has launched an ambitious “New Deal” for China’s farmers, aimed at
lifting stagnant rural incomes through a combination of crop subsidies, tax
cuts and infrastructure spending in inland areas far from the thriving coast.
The plan, called the “New Socialist Countryside”, is the centrepiece of the
commitment by president Hu Jintao and premier Wen Jiabao to reduce gaping
income inequalities split largely along an urban-rural divide.
The government also hopes to use the plan to rein in the widespread and
often illegal confiscation of rural land for development... China has a
thriving private property market in cities but does not permit rural residents
to buy and sell farming plots, even though many see it as an essential step to
aggregating rural land to make it more productive.
Mr Chen said this issue, a highly-sensitive and much-debated one in
policymaking circles, was “still in the process of being considered.” One
major obstacle to reform of rural land is the government’s fear that many
farmers would immediately sell their plots and become part of a huge landless
peasant class. ...
Not everyone believes that would be bad:
China’s drive to close wealth gap leaves questions, by Richard McGregor,
Financial Times: ...China’s aim is to keep as much land in production [as
possible] to ensure basic food sufficiency. Liu Fuyuan, the head of the
think-tank attached to the planning ministry in Beijing, thinks this is
misguided, unless it is also combined with incentives to get more rural
workers off the land. “We should make farmers move into the cities,” he says.
“That is the only way to get economies of scale in the countryside.”
Posted by Mark Thoma on Friday, February 24, 2006 at 12:22 AM in China, Economics, Income Distribution |
There were several Federal Reserve speeches today. Philadelphia Fed president
Santomero in his last speech before stepping down as president discusses
The U.S. Economy: How Fast Can We Grow?. After the speech
he indicated that
the target rate is near the neutral range and that the Fed must begin to take
seriously lags in the effects of policy at its next meeting:
"Actions take time to work through the system ... We have to be cautious.
As we go about raising rates, it will take some time to be fully felt in the
system," Santomero said ... "That is part of the logic that has to go into the next decision" on
interest rates, he said.
Dallas Fed president Fisher also spoke today on
Deficits and the Health of the U.S. Economy. Finally, Roger Ferguson gave a
Globalization, Insurers, and Regulators and expresses worry that puzzlingly
low long-term rates might suddenly increase.
Posted by Mark Thoma on Friday, February 24, 2006 at 12:12 AM in Economics, Fed Speeches, Monetary Policy |
I'm sure there will be lots written on this report from the Fed on changes in
consumer finances since 2001, so here's some highlights to get things started
from a WSJ report along with figures from the Fed study. The report shows that between 2001 and 2004, real household income is down, household wealth growth slowed
sharply and fell for some groups, and household debt burdens are up. Not exactly the
economic miracle from
tax cuts and other administration policy we have been hearing about:
Fed Study Finds Drop In Household Incomes, WSJ: Average U.S. household
incomes fell in the 2001-04 period after adjusting for inflation, and growth in
household wealth slowed sharply from the previous three years, according to
Federal Reserve data released Thursday. The Fed's most recent Survey of Consumer
Finances shows real average household income shrank in the latest three-year
period covered after
Average household net worth still rose 6.3% on an inflation-adjusted basis,
"however, the measured gains in wealth in the 2001-04 period pale in comparison
with the much larger increase of the preceding three years," according to a
summary of the Fed survey results. In the 1998-2001 period, net worth surged 28.7%, and in the three years
before that it grew 25.6%, the survey data show.
Household debt as a percentage of assets increased to 15.0% in 2004 from
12.1% three years earlier, with residential real estate's share of total debt
holding steady at about three-fourths. "Even with interest rates lower in 2004
than in 2001, the (survey) data show a moderate increase in measures of debt
burden," the Fed said.
The Fed also shows some signs of increased wealth inequality. The data show
median wealth dropped for families with the bottom 40% of incomes, and rose for
higher-income families. But on an average basis, net worth either held steady or
increased for all income groups.
With interest rates generally lower and stock markets trending down in the
latest three-year period, the overall share of financial assets in household
portfolios declined. Families that held stocks directly or through managed funds
fell to about 49% in 2004 from 52% three years earlier.
An increase in nonfinancial assets, primarily real estate, helped to balance
the decline. Nonfinancial assets grew to 64.3% of total assets in 2004 from
58.0% three years earlier. Homeownership was up 1.4 percentage points to 69.1%
in the latest three-year period, while home values rose dramatically in many
areas, the survey shows.
See also Tom Bozzo at Marginal Utility, Washington Post, NY Times.
Posted by Mark Thoma on Thursday, February 23, 2006 at 09:14 AM in Economics, Income Distribution |
Did you know you have considerably more leisure time than people had a few
decades ago? Plenty of time to spend "Sitting outside ... basking in the sun ... drinking iced lattes":
Scene The Work You Do When You're Not at Work, by Virginia Postrel, Economic
Scene, NY Times: What would you be doing if you were not at work? Scrubbing
the bathroom or watching the Olympics? Fixing the car or playing golf? Darning
socks or doing crossword puzzles? The easiest way to measure leisure is to take
survey data on how many hours a week people spend at work and subtract. Since
1965, the number of hours the average American works for pay has not changed
much. By this simple measure, then, leisure has also stayed the same.
But are we really working as much as ever? "All time away from work is not
equal," Erik Hurst, an economist at the Graduate School of Business at the
University of Chicago, said... Some time off is actually just more work. To put
it in economic terms, we spend some time off the job in consumption (watching
TV, hanging out with our friends, reading for pleasure) and some in production
(cooking dinner, cleaning the house, doing household repairs). Some activities,
like sleeping and eating, fall somewhere in between, while others, including
child care and gardening, combine pleasure and production.
The difference is not just that we enjoy some activities and dislike others.
It is that we could, in theory, pay someone else to do the production for us. A
cook or a restaurant can make dinner, but nobody else can play golf or watch TV
for you. That distinction can make a big difference in predicting how ... people
will respond to higher wages or lower taxes. Do they have to give up recreation
to earn more money? Or are they trading one kind of work for another?
If they spend their off-hours cooking, Professor Hurst suggested, "when they
get richer, they can buy a microwave or order takeout." That seems to be what
has happened over the last few decades. Americans are not, in fact, working as
much as they used to. They are just getting paid for more of the work they do...
Professor Hurst and Mark A. Aguiar, an economist at the Federal Reserve Bank
of Boston [said] "Leisure time ... has increased significantly between 1965 and
2003," they write ...
The increase in leisure is particularly striking for women. During this period,
they entered the paid labor force in large numbers, yet gained just as much
leisure as men. The difference is in where the gains came from.
Ninety-seven percent of men ages 21 to 65 had jobs in 1965, compared with 87
percent in 2003. That drop accounts for about 60 percent of men's increase in
leisure time. By contrast, Professor Hurst said ..., "for the women, the entire
gain in their leisure time is coming from declines in nonmarket work. The time
women spend on cooking and cleaning and laundry and other household maintenance
has been dramatically declining over the last 40 years." ...
More women working outside the home created more demand for such
conveniences, which, in turn, enabled more women to work outside the home. By
contrast, said Professor Hurst, "A woman who was working full time in 1965 was
also working full time at home, almost — 40 hours in the market, 20 or 25 hours
In new research, the economists are looking at how much leisure time people
of the same age have had in different periods. This is one early finding:
Middle-aged people have a lot more free time than they used to. "The
40-year-olds in 1965 worked a lot, lot more than the 40-year-olds in 2003," said
And, of course, one of the biggest increases in leisure time is deliberately
missing from the working paper, since it omits retirees. Longer life spans mean
more retirement years. "It used to be that you worked till 65, and died at 66.
Now you work till 65 and die at 80," said Professor Hurst. "The net increase in
leisure is rather large."
Posted by Mark Thoma on Thursday, February 23, 2006 at 12:59 AM in Economics |
Bloomberg's John M. Berry wonders when the administration will adopt a reality
based view of tax policy and the budget deficit:
Bush, Congress Make a Farce of the Debt Ceiling, by John M. Berry, Bloomberg:
The scary, totally unfunny debt ceiling farce is playing once again in
Washington. With the federal government debt about to hit the $8.18 trillion
legal limit, the Treasury Department last week suspended sales of special
securities bought by state and local governments so that regular auctions of
Treasury bills and notes could continue. More such steps undoubtedly will have
to be taken in coming weeks until Congress screws up the courage to increase the
debt limit. At some point next month, Treasury will run out of such stop-gap
measures and regular securities auctions may have to be postponed. ...
The problem, of course, is that voting to increase the debt ceiling is
approving profligate behavior, even though they have little choice because of
earlier tax and spending decisions. The reality is that taxes and spending are
badly out of whack, and hardly anyone -- certainly neither President George W.
Bush nor Vice President Richard Cheney -- wants to admit it. ... Instead, Bush
continues to push Congress to extend earlier tax cuts that lowered the maximum
personal income tax rate on dividends and long-term capital gains to 15 percent.
Those cuts are set to expire at year-end.
Meanwhile, Cheney ... called for extending not just that pair of rate cuts,
but all of the Bush-era cuts that under current law would expire in 2010...
"...tax relief is set to expire in the next several years. So if we do nothing,
Americans will face a massive tax increase. That would be counterproductive, it
would be irresponsible, it would be bad for the economy. Congress needs to make
the Bush tax cuts permanent,'' he said.
Irresponsible? Bad for the economy? Not nearly as irresponsible as Cheney's
claim in the speech that "despite forecasts to the contrary, the tax cuts have
translated into higher federal revenues.'' ... In fact, total federal receipts
in fiscal year 2005 were higher than in each of the prior two years. On the
other hand, receipts as a share of gross domestic product were only 17.5 percent
last year. Except for fiscal 2003 and 2004, that was the lowest share at any
time since 1992. And since most of the cuts involved personal income taxes, the
more telling comparison is in those receipts as a share of GDP. In fiscal 2005,
individual income tax receipts were equal to just 7.5 percent of GDP. Again,
except for the prior two years, that was the lowest share in 29 years. ...
Nevertheless, the administration is greatly enamored with the notion that tax
cuts can more or less pay for themselves. For instance, the fiscal 2007 Bush
budget would create a new Dynamic Analysis Division within the Treasury
Department, at a cost of more than a half-million dollars, to analyze major tax
proposals along those lines. Analyze? Why waste the money? ...
What if you don't want to increase growth because the economy might be
nearing full employment? That's more than a passing concern at the Federal
Reserve right now ... If tax cuts were a good way to stimulate the economy after
the 2001 recession hit, might raising taxes be a good way to help restrain it
when needed? Certainly the tight fiscal policies and budget surpluses of the
late 1990s helped the Fed keep interest rates lower than they otherwise would
And then there is the fundamental issue of balancing revenues and spending.
At the moment, investors and analysts seem largely unperturbed by large
continuing deficits, presumably because other forces are helping keep interest
rates low. That's not likely to be the case indefinitely, and Federal Reserve
Chairman Ben S. Bernanke gave this warning in his congressional testimony on
"I am concerned about the prospective path of deficits,'' Bernanke said. "I
believe that that does reduce national savings and therefore imperils, to some
extent, the future prosperity of our country and increases the burden that'll be
faced by our children and grandchildren.'' Bush and Cheney should keep it in
Posted by Mark Thoma on Thursday, February 23, 2006 at 12:38 AM in Budget Deficit, Economics, Taxes |
China is making both economic and political gains in Africa:
China winning resources and loyalties of Africa, by David White, with Andrew
England, Tony Hawkins, Dino Mahtani, John Reed and Andrew Yeh, Financial Times:
Some see it as a late blossoming relationship, others as a new kind of
colonialism. Either way, China is resolutely and rapidly extending its presence
and influence across the African continent as its companies move into terrain
where western businesses hesitate to tread. The Chinese advance –
government-backed, led by state-run corporations and propelled by the drive to
secure oil supplies – has in the span of a few years changed the pattern of
Africa’s investment and trade. ... China is establishing a position as Africa’s
top commercial partner behind the US and France, overtaking Britain.
For China, Africa offers an extra dimension: a continent three times its own
size, less populated than itself and stocked with many of the raw materials it
needs. Crude oil from Angola, platinum from Zimbabwe, copper from Zambia,
tropical timber from Congo-Brazzaville, iron ore from South Africa: all are on
China’s shopping list. In return, the Chinese offer advantages to African
governments. They bring first-hand experience of fast development, are attuned
to conditions in poor countries and are unconcerned by scruples over governance
standards or human rights.
In a different way to the ideological competition that took place in Africa
during the cold war, China is emerging strongly as an alternative option for
governments more used to dealing with former European colonial powers and the
US. At one level China is involved in a straightforward resources grab... But it
is also engaged in a mix of influence-building and opportunism. ... Trade
between China and Africa has almost quadrupled since the start of this decade,
jumping 36 per cent last year ... About half of China’s exports are machinery,
electronic and high- technology products. Tens of thousands of Chinese have
moved to Africa... Chinese tourism to Africa has boomed... According to
the Beijing government, more than 600 Chinese-funded companies have been set up
in Africa in the last 10 years. ...
In war-ruined Angola, the Chinese have leapt into one of the world’s most
inhospitable investment environments, offering a $2bn oil-backed credit at a
time when ... [a]n agreement between Angola and the International Monetary Fund has
been held up ... because of IMF concerns about how the government manages its
oil money. ... “The Chinese are offering the loan as an alternative to working
with the IMF,” says Princeton Lyman, director of Africa policy studies at the
Council on Foreign Relations in Washington.
Up to now, the African view of China’s fast-growing involvement has been
overwhelmingly positive. China is widely regarded as a model of modernisation,
more responsive to African needs than western partners, able to build dams,
roads and bridges more quickly and cheaply and providing consumer products
better suited to African pockets. ...
But criticism is growing. Tradespeople ... complain about a Chinese
invasion. ... Companies from China are censured for preferring Chinese labour
or, when they employ locals, providing poor conditions. China’s cheap consumer
goods displace local production. Garment factories have been shutting across
Africa... There is a clamour for protection. When South Africa’s Cosatu labour
federation staged an anniversary celebration in December, participants peeled
off their red union T-shirts in disgust when word went round that they were
Chinese-made. ... Chris Alden, an expert at the London School of Economics, says
of the relationship: “African actors are beginning to see this as a mixed
A senior Nigerian foreign affairs official says: “...China is catching up
with the level of engagement that western governments have . . . Being [is] a
developing country, they understand us better. They are also prepared to put
more on the table. For instance, the western world is never prepared to transfer
technology – but the Chinese do. It is our view that, while China’s technology
may not be as sophisticated as some western governments, it is better to have
Chinese technology than none at all.” ... Zimbabwe, according to president
Robert Mugabe, is “returning to the days when our greatest friends were the
Chinese”. On independence day last year he told supporters: “We look again to
the East, where the sun rises, and no longer to the West, where it sets.” ...
Posted by Mark Thoma on Wednesday, February 22, 2006 at 07:28 PM in China, Economics, International Trade, Politics |
Joachim Fels and Manoj Pradhan of Morgan Stanley warn that, according to their estimates of the
natural rate of interest, current monetary policy is already slightly
restrictive. Thus, any further increases in the target interest rate run the danger
of pushing policy into an overly restrictive position:
Do not overlook natural interest rates, by Joachim Fels and Manoj Pradhan,
Commentary, Financial Times: ...[T]he “natural” rate of interest, devised
more than a century ago by Knut Wicksell, the Swedish economist, has enjoyed a
renaissance in academic and central bank circles in recent years. Put simply,
the natural rate of interest is the interest rate that keeps output at its
potential and inflation stable, once any shocks to the economy have played out.
... His work foreshadowed and influenced the Austrian monetary business cycle
theorists ..., most notably Ludwig von Mises and Friedrich von Hayek.
Following the Wicksellian approach, one can thus judge the stance of, say,
the Federal Reserve’s monetary policy by comparing the actual level of the
(real) Fed funds rate with the natural rate. If the actual interest rate is
above the natural rate, Fed policy would be restrictive... Conversely, if the
Fed keeps interest rates below the natural rate, the economy and inflation would
be expected to accelerate. Yet, like another popular concept in economics, the
output gap, the natural rate cannot be observed, it has to estimated.
Importantly, any estimate of the natural rate will have to take into account
that it is a moving target. It may vary over time in response to, say, changes
in technology or private households’ time preference. ... Using an approach
first introduced by Thomas Laubach and John Williams, two Fed researchers, we
combined a simple model of the US economy and a less simple statistical
filtering technique to produce an estimate of the time-varying natural interest
rate for the US. Here is the result of this exercise: the natural rate declined
from a peak of nearly 4 per cent in the mid-1960s to a trough of slightly above
2 per cent in the first half of the 1990s, reflecting the long-run decline in US
productivity growth over that period. Since then it has hovered between 2 and
2.5 per cent, reaching lows in the early 1990s and again in the early part of
this decade when the equity bubble burst.
Our latest estimate puts the natural rate at 2.25 per cent. ... Whether
monetary policy is expansionary, neutral or restrictive can be judged by the gap
between the actual level of the real Fed funds rate and the natural rate.
Between 2001 and 2005, this gap was strongly negative, indicating a very
expansionary policy stance. ... However, the Greenspan-Fed’s 14 rate hikes have
removed policy accommodation, with the real Fed funds rate rising to – and, more
recently, even beyond – our measure of the natural rate of interest.
Judged by this yardstick, Ben Bernanke, the new Fed chairman, has inherited a
monetary policy stance which is already slightly restrictive. Further increases
in the Fed funds rate beyond the current 4.5 per cent, which he seemed to
endorse in his testimony last week, would push policy further into restrictive
Of course, any such estimates of the natural rate need to be taken with a
large pinch of salt as the underlying model is fairly simple and the standard
errors of such models are fairly large. Moreover, a restrictive monetary policy
stance may be exactly what the doctor ordered for an economy that threatens to
overheat – a risk that Mr Bernanke emphasised in his testimony. However, with
looming downside risks to the US housing market, the Fed may well be forced to
reverse course later this year. This would set the stage for a big rally in
bonds and a re-steepening of the currently inverted yield curve.
I would quibble with the particulars, e.g. the trend filtering technique and
other things, and the qualifications in the last paragraph are needed, but this is a good question to ask and a reasonable way to answer
it. It makes me think again about whether further tightening is warranted, particularly given the lags between the time changes in the target rate are implemented and the subsequent impact on the economy.
Posted by Mark Thoma on Wednesday, February 22, 2006 at 04:18 PM in Economics, Monetary Policy |
This is a surprise:
For immediate release: Roger W. Ferguson, Jr., submitted his resignation Wednesday as Vice Chairman
and as a member of the Board of Governors of the Federal Reserve System,
effective April 28, 2006. ... He will not attend the
March 27-28 meeting of the Federal Open Market Committee. ... Ferguson, 54, was first appointed to the Board by President Clinton to fill
an unexpired term ending January 31, 2000. He was then appointed by President
Bush to a full term that expires on January 31, 2014. ...
Ferguson is the only Democrat on the Board and his departure will
give president Bush the opportunity to appoint all seven Board members.
That is not how it was intended to work. One possible hint about the resignation comes from Bloomberg:
The vice chairman had been publicly at odds with Bernanke on announcing a
numerical inflation target. Bernanke described such a goal at his Nov. 15
confirmation hearing as a "possible step toward greater transparency.''
Ferguson said in October 2004 that an inflation goal may limit the Fed's
flexibility to respond to economic shocks, and two months ago said any progress
toward such a change ``would be very slow.'' Edward Gramlich, who resigned as a
Fed governor last year, has said their disagreement "never got acrimonious.''
But I'm hesitant to jump to any conclusions on the reasons for the
resignation until we know more. Here's the letter:
Posted by Mark Thoma on Wednesday, February 22, 2006 at 11:55 AM in Economics, Monetary Policy |
Further increases in the target federal funds rate are increasingly data dependent, but there's nothing
in this inflation report to indicate the Fed will pause at its next meeting. Inflation is
up 4% over a year ago largely due to higher enrgy prices. This will keep energy cost pass-through concerns heightened. However, core inflation is better behaved increasing 2.1% which is down from a 2.2% year over year increase last month. Also, though it isn't grabbing the
headlines, average weekly earnings of workers adjusted for inflation fell once again:
Consumer Prices Jumped 0.7% As Food, Energy Costs Climbed, WSJ: Consumer
prices surged last month on higher energy and food costs but underlying price
pressures remained largely contained. The ... consumer price index rose by a
seasonally adjusted 0.7% in January after decreasing 0.1% in December. The ...
core index, which excludes food and energy, climbed 0.2%, after a 0.1% rise the
previous month. ...
Consumer prices stood 4% higher than a year ago. Core prices rose a more
modest 2.1% in the 12 months ending January. Some economists say that quirks in
the calculation of the CPI may be causing inflation to be overstated during the
winter and understated in the rest of the year. The quirk appears only in the
total index, not the core index... Though core inflation remains at what is
thought to be the high end of the Fed's comfort zone, Wednesday's data suggest
price pressures haven't yet taken firm hold throughout the economy, which may
ease concerns of some Federal Reserve policy makers. ...
In a separate report, the Labor Department reported that worker wages lost
traction against the increase in prices. The average weekly earnings of U.S.
workers, adjusted for inflation, fell 0.2% in January...
Posted by Mark Thoma on Wednesday, February 22, 2006 at 07:22 AM in Economics, Monetary Policy |
China's central bank issued a 2005 fourth quarter monetary report (the report is here,
but it's not yet available in English). The
report makes clear that China isn't changing its position on managing its
exchange rate, at least not in its public pronouncements. They are working on
building a system that will support more flexibility, but the yuan will float
when market conditions within China dictate it, and not before. Will saying they
are committed to improving the exchange rate system be enough? It's now
China rebuffs US call for faster revaluation, by Richard McGregor, Financial
Times: Beijing has rebuffed renewed US demands for a faster acceleration of
its currency, saying it would maintain its policy of “gradualism” in building a
flexible system suited to the development of its own economy. A statement
published on the website of the central bank, the People’s Bank of China, part
of its quarterly survey of the economy, said Beijing would maintain a “basically
This phrase, often used by the government, is code for Beijing’s priority of
bedding down reforms to its currency system at a pace that will allow traders
and enterprises to adjust to a new regime before allowing a freer float. The
government wants to avoid surprises for enterprises that have little experience
in managing currency risk and build expertise in foreign exchange markets prone
to speculation. “We will perfect the managed floating exchange rate system based
on China’s needs for economic and financial development and stability,” the bank
said in its statement. ...
And, from The Standard in Hong Kong, more on the monetary report:
Yuan to be kept stable in growth slowdown, by Greg Yang, The Standard:
Beijing will keep the exchange rate of the country's currency at a stable level
this year, while economic growth is expected to slow, the People's Bank of China
said. The yuan will be kept at a reasonable and balanced level this year, with
market forces playing a fundamental role in determining the exchange rate, the
central bank said in its 2005 fourth- quarter monetary report Tuesday. ...
"We'll optimize the managed-floating exchange rate system and widen the channels
for capitals to flow out of the country," the bank said...
economy's excessive reliance on export and investment has become a major problem
for China's economic development, the bank said. Fixed-asset investment and exports contributed 48.8 percent and 17.9 percent,
respectively, of GDP growth last year... China ... has set a GDP growth
target of 8 percent for this year, down from last year's 9.9 percent, the bank
said. "The central bank is always conservative on releasing the full-year GDP
target at the beginning of every year," said Standard Chartered economist Tai
Hui in Hong Kong. "The final result shall be higher." ...
"The central bank obviously sees inflation to go up, not down, despite
concerns about deflation risks by some economists and officials," said Citigroup
economist Huang Yiping in Hong Kong. "The expected pickup of inflation would
further strengthen the case for more tightening." China has tightened lending to some overheated sectors such as steel...
Monetary policy within the U.S. has one objective, domestic well-being. The Fed does not consider, except to the extent it feeds back to the U.S., the impact of its monetary policy decisions on other countries. That is not within its mandate. The Chinese central bank is no different. It is not its job to worry about economic conditions within the U.S., its job is to promote domestic stability and the bank intends to do that by stabilizing the exchange rate irrespective of our protestations. I doubt the Fed would follow the wishes of Chinese politicians and policymakers if the situation were reversed.
So what is our solution? We have our purchasing power to play against China's fear of political unrest from economic instability. We can threaten protectionist measures and that is fine so long as the threat works and we do not have to actually put the tariffs or quotas in place. But what if our bluff is called? A trade war is not in either country's long-run interests. A more difficult but better solution is to convince the Chinese that it is in their best economic interest to allow the yuan to float sooner rather than later, an approach that requires effective persuasion rather than effective threats. But patience does have its limits.
Posted by Mark Thoma on Wednesday, February 22, 2006 at 01:35 AM in China, Economics, Monetary Policy |
Not a good sign:
Minorities, Signs of Trouble in Foreclosures By Vikas Bajaj and Ron Nixon, NY
Times: ...[I]in the last several years, neighborhoods with large poor and
minority populations in places like Cleveland, Chicago, Philadelphia and Atlanta
have experienced a sharp rise in foreclosures, in some cases more than a
doubling, according to an analysis of court filings and other housing data by
The New York Times and academic researchers. The black home ownership rate even
dipped slightly last year, according to the Census Bureau.
The increase in foreclosures could be the first of a wave of financial
distress for many minority homeowners ... because they are twice as likely as
whites to have taken out expensive subprime mortgages, most of which will jump
to higher interest rates in the next two years... The Mortgage Bankers
Association of America plays down the severity of foreclosures, noting that most
new minority homeowners are doing well and that the Midwest is facing unique
economic challenges. The trade group estimates that fewer than 1 percent of all
loans were in foreclosure in the three months that ended last September...
But broad national statistics can obscure hard local realities. In Cuyahoga
County, which includes Cleveland, ... court filings by lenders seeking to
foreclose on delinquent borrowers totaled more than 11,000 in 2005, more than
triple the number in 1995. A similar pattern can be seen in Chicago... Loan data
that mortgage lenders must disclose show that minorities are far more likely to
receive subprime loans than whites. ... The disparities persist even when income
is taken into account. ...
Posted by Mark Thoma on Wednesday, February 22, 2006 at 01:18 AM in Economics, Housing |
Orley Ashenfelter looks at the going rate for flipping burgers around the
Ashenfelter devises inventive real-world tests to illuminate labor economics,
by Eric Quiñones, Princeton
Weekly Bulletin: To address the current debate about whether China’s and India’s growing
economies will soon rival that of the United States, Princeton economist Orley
Ashenfelter poses a simple question: What is the going rate for flipping
Ashenfelter is conducting a study of McDonald’s employees’ wages in many
countries to illustrate the relative strength of their economies, and early
results indicate that developing nations still have a long climb. While the
average hourly “McWage” is around $6 in the United States and other western
nations, the same job in China, India and other developing countries pays less
than 50 cents.
“A Big Mac is the same everywhere. The job is the same,” Ashenfelter said.
“What makes a country wealthy is the wage rate that the market can guarantee for
someone who wants to work. To most people in the developed world, a $6 job would
seem to not be much of an accomplishment — in fact, it is a huge accomplishment
that most of the world cannot yet even aspire to.” ...
Posted by Mark Thoma on Wednesday, February 22, 2006 at 12:18 AM in Economics, International Trade |
Martin Wolf discusses how the IMF can avoid falling into obscurity and
World needs independent Fund, by Martin Wolf, Financial
Times: If the International Monetary Fund did not exist, we would not
re-invent it. This is not because it is useless, but because today’s world lacks
the courage and vision to create powerful multilateral institutions. That fact
alone makes those we have inherited more valuable. Even so, they must be kept
up-to-date. Otherwise, they risk suffering a lengthy senescence. This danger now
threatens the Fund.
Three questions need to be addressed. First, how has the world changed since
the 1944 conference at Bretton Woods... where the Fund was created?
Second, what (if anything) is its contemporary role? Third, what changes are
needed if it is to play it? Mervyn King, governor of the Bank of England,
addressed just these questions in a thought-provoking speech in New Delhi, on
If the answer to the second question were “none”, we would need to go no
further. It is not. An institution concerned with international monetary
stability continues to have a role. But the world has changed in fundamental
respects. The system of quasi-fixed exchange rates ... vanished in the 1970s.
Controls on the capital account have disappeared in the high-income countries
and are on the way out ... in many emerging countries. ... Finally, use of IMF resources
has fallen to minimal levels, though this could change again...
What are the
public goods that such an institution might provide? They fall into six
categories: information; analysis; advice to individual governments; advice on
co-ordination of policies; management of defaults; and emergency lending. Being specifically concerned with international monetary stability, Mr King
focuses on provision of the information, analysis and advice needed for
Specifically, he recommends the execution of three
tasks: first, the IMF “should provide and share information about the balance
sheets of all major countries, their composition and size, and the links between
them”; second, it should “encourage countries to abide by their commitments to
each other by promoting greater transparency about national policies”; and,
third, it should provide “a forum for national authorities to discuss risks to
the world economy”. ...
Mr King notes,
however, that the Fund’s only asset is its power of analysis, persuasion and
“ruthless truth-telling”, in the words of John Maynard Keynes. That phrase, he
says, does not “conjure up many memories of any of the many international
meetings I have attended”. If this is to change, the IMF needs an “independent,
respected and clear voice”.
Do Mr King’s three tasks exhaust the Fund’s role? The answer is “no”. First, the Fund continues to have a role as an adviser on fiscal, monetary
and financial stability to countries that lack systemic significance. The view
is often advanced that such advice only works when accompanied with loans. But
this suggests that recipients do not value the advice. Second, the abandonment
of an active role in dealing with insolvency and illiquidity would be a pity.
If the IMF is to deliver, however, it must become credibly independent. ... Let us be brutal: the IMF is on the brink not just of “obscurity”, as Mr
King suggests, but of irrelevance. ... Even if its role as
lender of last resort is falling into abeyance, it can still guide national
decision-making, particularly in strengthening global stability. If it is to do
that, however, it must become a tough-minded and independent organisation,
willing and able to criticise powerful governments both publicly and forcefully.
Such an IMF is the last thing its powerful shareholders now desire. Yet it is
also in their own long-run interests. They have increasingly recognised this
logic in the creation of independent central banking. They should recognise the
same logic in the creation of truly independent global surveillance.
Posted by Mark Thoma on Tuesday, February 21, 2006 at 05:34 PM in Economics, International Finance |
I am not an expert on port security. I have to place my faith in others.
President Bush says, under the threat of his first veto, that we should allow a
state-owned company from Dubai to take control of port terminals in six eastern
cities. The Homeland Security Administration has checked this out thoroughly I
am told, so there's no need to worry. Still, I wonder:
'Security' Without Sense, by Scott Wallace, Sunday Outlook, Washington Post:
It has been almost two months since I resigned from the Department of Homeland
Security's Transportation Security Administration (TSA). I had served as a
security screener at Dulles International Airport for more than three years.
Even now, I can scarcely believe some of the absurdities I experienced as a
screener. ... the TSA's policies regarding what is acceptable to carry onto an
airplane mock security rather than enhance it. ...
Visitors to Dulles see posters at the checkpoints with the word "WARNING" in
large red letters, followed by the information that "passengers are advised that
the secretary of the Department of Homeland Security has determined that Bandara
Ngurah Rai International Airport, Denpasar, Bali, Indonesia, and Port au Prince
International Airport, Haiti, do not maintain and administer effective aviation
security measures." That's good to know, but what about Washington Dulles
At Dulles, an entry point to the "sterile" area, the part of the airport
supposedly restricted to those who have gone through a security check, is known
as the SIDA door (SIDA stands for Security Identification Display Area). Workers
with airport badges can pass through this door with knapsacks, book bags, you
name it, without going through the TSA checkpoints upstairs. But pilots, flight
attendants and TSA employees -- all of whom have passed background checks before
being hired -- are not permitted to access the sterile area through the SIDA
door. They must go through the same TSA checkpoints used by passengers.
The Department of Homeland Security might want to address an issue such as
the SIDA door at Dulles before warning travelers about Bali and Port au Prince.
At the TSA, truth indeed is stranger than fiction.
Posted by Mark Thoma on Tuesday, February 21, 2006 at 04:46 PM in Politics, Terrorism |
Paul Krugman responds to comments on his latest column, "The
Talks: No Menschen in Washington, Commentary, NY Times: ... Ken Shemberg,
Bowling Green, Ohio: As usual, I think you have it right. This
administration couldn't admit a fault if they were caught red-handed on
videotape. But, to be fair, is that really different from other presidents? Your
example of Ike's D-Day letter was written before he became a president. Maybe
Lincoln admitted faults — he liked to poke fun at himself — and maybe Kennedy
admitted fault on the Bay of Pigs. But in reading presidential biographies, it's
hard for me to dredge up a time when a president said, yep, I was wrong — on a
major issue, anyway. Can you think of one? Grover Cleveland did admit to having
an illegitimate daughter. But that was a bit different, wasn't it?
Paul Krugman: Fair enough; full-blown apologies from politicians are
rare. But I think there are two distinguishing features of this administration.
First, they don't even make tacit admissions that they made mistakes. Both
Reagan and Clinton changed course and brought in better people when it became
clear that their policies weren't working; these guys never do. In particular,
it's obvious to everyone that Rumsfeld and Chertoff are incompetent. But they're
loyal, and Bush chose them, so they stay.
The other is that they don't even admit to themselves that they've made
mistakes, and learn nothing from experience. I'll write soon about how looming
problems with Medicare Part D were ignored in the months after Katrina, when any
normal administration would have wondered what other things it was unready for.
Max Wieselthier, New York.: A quite beautiful exposition with one
minor defect. The plural for mensch is menschen.
Paul Krugman: Yes, I know. What do you take me and my parents for,
untermenschen? But it's become an English word for all practical purposes. And
if The History Channel can pronounce Field Marshal Rommel's first name "Irwin",
I can anglicize the plural of mensch. ...
Posted by Mark Thoma on Tuesday, February 21, 2006 at 04:12 PM in Economics, Politics |
The Fed released its minutes from the last FOMC meeting. No surprises. While
rates are nearing their destination, the committee expresses more worry about
the inflation risk than the risk to output growth and is poised to raise rates
again if needed. The bias is toward further rate increases, but all members
agree that the next move is far more data dependent than other recent moves:
the Federal Open Market Committee January 31, 2006: ...The information
reviewed at this meeting suggested that underlying growth in aggregate demand
remained solid, even though the expansion of real GDP was estimated to have
slowed in the fourth quarter. ... Headline consumer inflation had been held down
by falling consumer energy prices; more recently, however, crude oil prices
climbed back up to high levels. Meanwhile, core inflation had moved up a bit
from low levels seen last summer. ...
Continue reading "FOMC Meeting Minutes Leave Room for More Rate Hikes" »
Posted by Mark Thoma on Tuesday, February 21, 2006 at 03:51 PM in Economics, Monetary Policy |
Here's Willem Buiter's response to Ricardo
Hausmann's defense of dark matter:
Martin Wolf's Economist's Forum, by Willem Buiter: Dear Ricardo, dear All,
...I stress two points in my
discussion of past and prospective future developments of the US net foreign
asset position and net foreign investment income... First, it is not wise to
assume that the total risk-adjusted rate of return ... on US foreign assets will
in the future be systematically higher than the rate of return on US foreign
liabilities. Second, evidence on the historical behaviour of these rates of
return since 1980 presented by
Hausmann and Sturzenegger
... is deeply suspect.
Continue reading "Debating Dark Matter: Buiter Responds to Hausmann" »
Posted by Mark Thoma on Tuesday, February 21, 2006 at 10:33 AM in Economics, International Finance, International Trade |
Should Democrats focus less on government as an agent of wealth
redistribution and more on government's role in creating the means for
individuals, particularly the disadvantaged, to create and accumulate wealth?:
Creating Wealth for the Poor, by E. J. Dionne Jr., Commentary, Washington Post:
Ron Sims, the county executive in Washington state's King County, believes
government's job is "to help create wealth more efficiently." That view comes
naturally to a leader of the entrepreneurial Seattle region, which has improved
the nation's experience of everything from technology to coffee. ... Meeting
Sims ... provided a bracing reminder that there is an authentic search going on
outside of conventional politics for the new ideas to animate a new political
era -- precisely what Democrats are supposed to be seeking.
Sims is a ... Democrat... Sims's ... idea [is] that government, far from
being a drain on the nation's wealth, ought to "provide the social
infrastructure and the physical infrastructure to help wealth be created." He
said during lunch here the other day that Democrats should run under the slogan:
Sims notes that after World War II, the federal government helped unleash an
era of exceptional growth through investments in schools, interstate highways
and higher education. Both India and China are "making intelligent moves for
economic growth" and the United States cannot stand by and watch. "You need
people and brains to create an economy," he says. "You need transportation to
move an economy. And you need an environmental policy to create clean air and
Sims's idea reminds Democrats that a commitment to active government is not
simply about redistributing wealth. ... effective government has always been
essential to robust economic growth. Government, in the Sims formulation, should
be a dynamic player in our nation's economic life. ... Democrats ... find
themselves attacked for being too concerned about redistributing money, yet they
are far too timid in committing themselves to lifting up the very poorest
The decline of manufacturing employment means the economy is producing fewer
well-paying jobs for the less-skilled. These disconnected young men tend to go
to the poorest schools, grow up amid concentrated poverty and in families that
often lack fathers, and face persistent employment discrimination. Face it: The
one expensive social program we have for this group is incarceration.
Can't we do better? [For example] ... reform education and training
programs and work with employers and other intermediaries to connect these young
men to the labor market. ... expand programs such as the Job Corps that have
"proven track records," ... do far more to integrate ex-offenders into the world
of work. ... [and] create much stronger work incentives through income
supplements, higher minimum wages and changes in the child support system. ...
Sims's practical focus on government's role in wealth creation ... is good
public policy. My hunch is that it could also be good politics.
I'm reminded of this by Brad DeLong:
by Brad DeLong, TPM Cafe: ... Could it be that in
America today framing one's issues in terms of "social justice" loses more votes
than it wins in important political backgrounds?... That we are much better off
talking about "social insurance" and "safety nets" and "equal opportunity" and
"personal liberty" than "social justice"? Could it be that there are many more
people in America who have a knee-jerk approval of equal opportunity and
personal liberty ... than have a knee-jerk approval of social justice? Whew.
It's over. I'm back to my real self again. It won't happen again--at least not
for another month or so. Yours in struggle and solidarity, Brad DeLong
Posted by Mark Thoma on Tuesday, February 21, 2006 at 01:23 AM in Economics, Income Distribution, Politics |
The Washington Post joins those with suspicions over the motives behind the creation of the Division of Dynamic
Undynamic Analysis, Editorial, Washington Post Online: "The evidence is in,
it's time for everyone to admit that sensible tax cuts increase economic growth,
and add to the federal treasury." That was Vice President Cheney the other
day.... But Mr. Cheney is the one who needs to reexamine his evidence. Yes, tax
policies can help promote economic growth. But no matter how many times the vice
president and his tax-cutting allies proclaim their belief in the tax-cut fairy,
she doesn't exist. Tax cuts do not magically pay for themselves...
Proponents of the magic tax cut have long argued that, if only the
growth-enhancing effects of cuts were accounted for in the budgetary equation,
this cost-free boon would become clear. Trouble is, responsible economists who
have attempted to engage in this kind of "dynamic analysis" haven't come up with
the unalloyed positive conclusion the administration wants...
Now the administration is moving to commission its own evidence, creating a
"Division on Dynamic Analysis" in the Treasury Department. ... This measly
budget item -- $513,000 -- may be just a sop to conservatives; after all, though
Mr. Cheney may not know it, Treasury professionals have been doing dynamic
analysis for some time. But it could be something more pernicious: an office set
up in pursuit of a particular result. After all, Mr. Cheney says the evidence is
Posted by Mark Thoma on Tuesday, February 21, 2006 at 12:41 AM in Economics, Politics, Taxes |
These are from an article
A Wealth of Talent" in the San Diego Tribune on UCSD's move into the US
News & World Report's top 10 (about which department chair Richard Carson says
“I think we sent out an e-mail,” ... “We didn't throw a
party or anything like that.”).
The brief articles are about the research of
Michelle White on the hidden costs of SUVs, Julian Betts on classroom outcomes,
Kate Antonovics on discrimmination, and Richard Carson on disaster dollars:
Continue reading "Hidden Costs of SUVs, Education Outcomes, Discrimmination, and Disaster Dollars" »
Posted by Mark Thoma on Monday, February 20, 2006 at 07:37 PM in Economics, Miscellaneous |
Robert Hall says the Fed can and should meet its inflation targets
strictly. Tolerating inflation outside of a narrow band, even in the short-run, is at odds with maximal
Ben Bernanke: The Measure of the Man, by Robert E. Hall, Commentary, WSJ:
The U.S. Constitution directs the government to regulate the value of money and
to fix standards of weights and measures. In the modern federal government, the
Fed sets the value of the dollar and the National Institute of Standards and
Technology (NIST) sets standards such as the length of the yard. The Fed
chairman is the second-most powerful person in the world and known to every
newspaper reader in the U.S. When I last checked, Google News had 10,100 hits
for Alan Greenspan, just retired, and 13,100 for Ben Bernanke, his successor.
The director of NIST, William A. Jeffrey, enjoys no name recognition. One has to
drill three layers deep in the NIST Web site even to find his name. Google News
had zero hits for him.
How have the two agencies performed their constitutional assignments of
providing stable units? The NIST and its predecessor agency, the National Bureau
of Standards, have kept the length of the yard almost exactly constant. They
have resisted pressure from the fabric industry, for example, to shorten the
yard and improve profits. Yard-length-policy has been perfect. So perfect that
we don't even think about the dangers of shrinkage in its length.
The Fed's job is to keep the purchasing power of the dollar at a stable
level. The overall record of the Fed in this mission is dismal. From 1968 to
1982, the dollar fell in half -- as if the government had let the yard shorten
to 18 inches. During that period, the Fed responded to political pressures for
short-term expansion at the cost of neglect of its key function. Between 1982
and 1990, the dollar continued to shrink. But for the past 15 years, under Mr.
Greenspan, the Fed has accomplished its goal. Its record during that period is
almost as good as the NIST's. After allowing for a stable rate of inflation of
2.5% per year, the Fed has delivered a unit of purchasing power hardly less
stable than the yard.
There can be no doubt that Mr. Bernanke is completely committed to continuing
the policy of a stable dollar. Under his leadership, the Fed is likely to make
this commitment more formal, perhaps even stating a target such as 2.5%
inflation. Mr. Bernanke has been outspoken on the point that the inflation must
be kept at the target -- it is as bad a failure of policy if it drops below as
if it exceeds the target.
One of the important lessons of monetary policy in the U.S. and many other
countries over the past decade is that inflation targets can and should be met
quite strictly. Most economists thought that confining inflation to a narrow
band, such as 1.5% to 3.5%, would be excessively destabilizing when oil or other
volatile commodity prices spiked. Our advice was that the economy should roll
with the punch, tolerating inflation during those episodes and then squeezing it
out later. We thought that a stricter inflation policy would destabilize the
real economy, resulting in high unemployment during oil shocks. But the
worldwide result of the adoption of fairly strict inflation targeting has seen a
pronounced reduction in fluctuations in GDP growth and unemployment. Stabilizing
the value of the dollar (and the pound, the Euro, the New Zealand dollar, and
many other currencies) has delivered a more stable economy in other dimensions.
Update: The WSJ changed the title to A Bore at the Fed and added this paragraph (as I noted earlier, the first version they posted repeated the penultimate paragraph twice):
One of the reasons that President Bush selected Mr. Bernanke was his
sympathy for the administration's fiscal policy, which emphasizes
structural reform with low marginal tax rates over concern with the
deficit. It's unlikely that Mr. Bernanke will follow Mr. Greenspan in
sounding off about non-monetary policy issues. He will stick to his
mandate to keep the dollar stable. Monetary policy will recede from the
front page to the inner pages of the C section under Mr. Bernanke's
leadership. A stable dollar is just as boring (and desirable) as a
stable yard. Mr. Bernanke's name recognition will shrink to William
Jeffrey's level. With the problem of an unstable dollar permanently off
the policy table, we can turn to solving other critical national
problems, such as inducing people to save enough for retirement health
Posted by Mark Thoma on Monday, February 20, 2006 at 04:55 PM in Economics, Monetary Policy |
International trade is often viewed as a means to a stable, prosperous and
integrated international society, but according to Harold James, an historian at Princeton University's Woodrow School, it can also result in the "Roman dilemma”
where the outcome of liberalizing economic ties is one of conflict or even war. Can this dilemma be avoided?:
Modern America’s Roman predicament, by Harold James, Financial Times: Before
September 11 2001, it was widely assumed that globalisation bred peace and
stability. But over the past five years, there has been increased nervousness
about this concept ... In particular, there is widespread mistrust of the
world’s only superpower and increased doubt about the sort of politics that
America tries to impose on the rest of the world.
As the Bush presidency gets bogged down in the quagmire of Iraq, there is
still a widespread assumption that there might be a quick and easy fix. ... Such
optimistic beliefs are mistaken but are characteristic of an ever-recurring
dilemma of an interconnected world. Consider some historical parallels: in 1776,
the year of the US Declaration of Independence, Adam Smith and Edward Gibbon
published the first volumes of two works that both used history to illuminate
Britain’s own problems with the globalisation of that age: The Wealth of Nations
and The Decline and Fall of the Roman Empire.
In these monumental and parallel works, Smith and Gibbon explored what could
be called the “Roman dilemma”. In essence, how peaceful commerce is frequently
seen as a way of building a stable, prosperous and integrated international
society. At the same time, however, the peaceful liberal economic order leads to
domestic clashes and also to international rivalry and even wars. ...
The central problem identified by Gibbon and Smith is that complex societies
need rules to function, whether on a national (state) level or in international
relations. But we do not always comply voluntarily with rules and rules require
some enforcement. In addition, they need to be formulated. The enforcement and
the promulgation of rules are both consequences of power, and power is always
concentrated and unequally distributed. ...
The propensity for subversion and destruction of a rule-based order comes
about because – and whenever – there is a perception that rules are arbitrary,
unjust and reflect the imposition of particular interests in a high-handed
imperial display of power. ... The adage that power tends to corrupt itself
affects the way in which the holders of power behave. Even if the wielder of
power resists the addiction, other people suspect the addiction is there. ...
Both politicians and their critics find this hard to understand as they try
to respond to global challenges, such as the threat of terrorism or the
proliferation of nuclear weapons. They are about to be as baffled by Iran as
they were by Iraq.
If the threat lies in discontent about modernity, and if poverty and
marginalisation are the breeding grounds for violence and terrorism, then growth
and a better distribution of wealth can hold a more effective cure. If, on the
other hand, cultural differences are really so profound, then imperial conflict
and conquest is the only adequate answer. Much contemporary debate, especially
after the 9/11 terrorist attacks, fluctuates between these poles. Should the
industrial world buy off or fight the barbarians at the gate?
Yet both options look like different aspects of the old but unsatisfactory
Roman solution: conquer and provide prosperity. There is only a difference in
emphasis. ... There exists an alternative to the “challenge and response” model
that has as its outcome the clash of civilisations. The other path depends on
dialogue within a shared natural law framework.
Instead of thinking that technical development will automatically produce
prosperity and thus solve, as it were by a kind of magic, the problem of values,
policymakers in the industrialised world need to think and talk explicitly about
values and traditions. What does Islamic tradition have in common with western
traditions that respects human dignity; and how can modern America show that it
respects these values too? ...
To me, this is a big part of our problem:
The propensity for subversion and destruction of a rule-based order comes
about ... whenever ... there is a perception that rules are arbitrary, unjust
and reflect the imposition of particular interests in a high-handed imperial
display of power.
We have not convinced the global community that our actions are in the world rather than
our own narrow interest, and the world has yet to be convinced that the invisible international hand directs our self-interest to their benefit.
Posted by Mark Thoma on Monday, February 20, 2006 at 02:27 PM in Economics, International Trade |
Brian Ironside and Robert Tetlow find a surprisngly large degree of model uncertainty in
the principal macro model used by the Federal Reserve Board:
Model Uncertainty in the United States: The Fed from 1996-2003, by Brian
Ironside and Robert Tetlow, CEPR Discussion Paper No. 5305: Abstract
We study 30 vintages of FRB/US, the principal macro model used by the Federal
Reserve Board staff for forecasting and policy analysis. To do this, we exploit
archives of the model code, coefficients, baseline databases and stochastic
shock sets stored after each FOMC meeting from the model's inception in July
1996 until November 2003. The period of study was one of important changes in
the US economy with a productivity boom, a stock market boom and bust, a
recession, the Asia crisis, the Russian debt default, and an abrupt change in
fiscal policy. We document the surprisingly large and consequential changes in
model properties that occurred during this period and compute optimal
Taylor-type rules for each vintage. We compare these optimal rules against
plausible alternatives. Model uncertainty is shown to be a substantial problem;
the efficacy of purportedly optimal policy rules should not be taken on faith.
We also find that previous findings that simple rules are robust to model
uncertainty may be an overly sanguine conclusion. [open link, outline of Lucrezia Reichlin discussion]
Posted by Mark Thoma on Monday, February 20, 2006 at 11:52 AM in Academic Papers, Economics, Monetary Policy |
The paid pundit story seems to have lost some of its momentum, but it still
kicks up a little dust now and then. Hopefully, it won't fall off the radar screen altogether:
Cleaning house on opinions for hire, by Cathy Young, Commentary, Boston Globe:
The fall of master lobbyist Jack Abramoff has had reverberations ... among
journalists. In the wake of revelations that two right-of-center opinion writers
had accepted payoffs from Abramoff to write articles favorable to his clients,
other pundits have become targets of suspicion. Some in conservative circles
want to clean house; others, to circle the wagons and protect their own. For the
good of conservative and libertarian opinion journalism, the former should
Continue reading "Paid Punditry" »
Posted by Mark Thoma on Monday, February 20, 2006 at 07:40 AM in Economics, Politics, Press |
Everybody makes mistakes. But not everyone can admit them:
Mensch Gap, by Paul Krugman, Commentary, NY Times: "Be a mensch," my parents told me. Literally, a mensch is a person. But by
implication, a mensch is an upstanding person who takes responsibility for his
Dick Cheney isn't a mensch. There have been many attempts to turn the
shooting of Harry Whittington into a political metaphor, but the most
characteristic moment was the final act — the Moscow show-trial moment in which
the victim of Mr. Cheney's recklessness apologized for getting shot. Remember,
Mr. Cheney, more than anyone else, misled us into the Iraq war. Then, when
neither links to Al Qaeda nor W.M.D. materialized, he shifted the blame to the
very intelligence agencies he bullied into inflating the threat.
Donald Rumsfeld isn't a mensch. Before the Iraq war Mr. Rumsfeld muzzled
commanders who warned that we were going in with too few troops, and sidelined
State Department experts who warned that we needed a plan for the invasion's
aftermath. But when the war went wrong, he began talking about "unknown
unknowns" and going to war with "the army you have," ducking responsibility for
the failures of leadership that have turned the war into a stunning victory —
Michael Chertoff, the secretary of homeland security, isn't a mensch.
Remember his excuse ... "I remember on Tuesday morning," ... "picking up
newspapers and I saw headlines, 'New Orleans Dodged the Bullet.' " There were no
such headlines, at least in major newspapers, and we now know that he received —
and ignored — many warnings about the unfolding disaster.
Michael Leavitt, the secretary of health and human services, isn't a mensch.
He insists that the prescription drug plan's catastrophic start doesn't reflect
poorly on his department, that "no logical person" would have expected "a
transition happening that is so large without some problems." In fact,
Medicare's 1966 startup went very smoothly. ...
I could go on. Officials in this administration never take responsibility ...
it's always someone else's fault. Was it always like this? I don't want to
romanticize our political history, but I don't think so. ... Dwight Eisenhower
... wrote a letter before D-Day accepting the blame if the landings failed. His
modern equivalent would probably insist that the landings were a "catastrophic
success," then ... blame ... their failure on the editorial page of The New York
Where have all the mensches gone? The character of the administration
reflects the character of the man at its head. President Bush is definitely not
a mensch; his inability to admit mistakes or take responsibility ... approaches
the pathological. ... And as long as his appointees remain personally loyal, he
defends their performance, no matter how incompetent. After all, to do otherwise
would be to admit that he made a mistake in choosing them. ...
But how did such people attain power in the first place? ... Whatever the
reason ... it has horrifying consequences. You can't learn from mistakes if you
won't admit making any mistakes, an observation that explains a lot about the
policy disasters of recent years ...
Above all, the anti-mensches now ruling America are destroying our moral
standing. A recent National Journal report finds that we're continuing to hold
many prisoners at Guantánamo even though the supposed evidence against them has
been discredited. We're even holding at least eight prisoners who are no longer
designated enemy combatants. Why? Well, releasing people you've imprisoned by
mistake means admitting that you made a mistake. And that's something the people
now running America never do.
Previous (2/13) column: Paul Krugman: Debt and Denial
Next (2/23) column: Paul Krugman: Osama, Saddam and the Ports
Posted by Mark Thoma on Monday, February 20, 2006 at 12:15 AM in Economics, Politics |