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Tuesday, February 28, 2006

Martin Wolf: Time to Reevaluate the European Social Model

Has the time come?:

Decay and 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. ... ChartIf 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.
Chart

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 protectionism.

Sixth, high taxes and the burden of regulations encourage the outflow of resources. ...

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 itself depends.

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 on Tuesday, February 28, 2006 at 02:11 PM in Economics, Social Security | Permalink  TrackBack (1)  Comments (41)


    Krugman's Money Talks: When Education Doesn't Pay

    Paul Krugman responds to comments on his column Graduates Versus Oligarchs:

    When Education 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 on Tuesday, February 28, 2006 at 12:42 PM in Economics, Income Distribution, Universities | Permalink  TrackBack (0)  Comments (15)


      Existing Home Sales and Consumer Confidence Fall

      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 future."

      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 on Tuesday, February 28, 2006 at 09:51 AM in Economics | Permalink  Comments (4)


        The Rent-to-Ownership Society

        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 Republicans.

        "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 on Tuesday, February 28, 2006 at 02:37 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (11)


          The Fed's Communication Strategy

          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:

          Fed 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 on Tuesday, February 28, 2006 at 12:09 AM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (3)


            Chinese Economist Says Dollar Reserve Growth Should be Reduced

            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 Daily)

              Posted by on Tuesday, February 28, 2006 at 12:07 AM in China, Economics, International Finance | Permalink  TrackBack (0)  Comments (2)


              More Baskets for the Eggs

              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 on Tuesday, February 28, 2006 at 12:06 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (5)


                Monday, February 27, 2006

                Economic Reform and Single Party Rule in China

                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 property rights...

                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 business...

                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 interference.

                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 on Monday, February 27, 2006 at 12:47 PM in China, Economics | Permalink  TrackBack (3)  Comments (6)


                  Posted at Environmental Economics

                  For my records, these are things I've posted at Environmental Economics recently:

                    Posted by on Monday, February 27, 2006 at 09:00 AM in Economics, Environment | Permalink  TrackBack (0)  Comments (1)


                    New Home Sales

                    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 on Monday, February 27, 2006 at 08:49 AM in Economics, Housing | Permalink  TrackBack (0)  Comments (0)


                      Paul Krugman: Graduates Versus Oligarchs

                      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 on Monday, February 27, 2006 at 12:09 AM in Economics, Income Distribution, Universities | Permalink  TrackBack (0)  Comments (47)


                        Turning Coal into Gold through Tax Breaks

                        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:

                        A 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 imperiled. ...

                        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 credit...

                        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 2004."

                        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 on Monday, February 27, 2006 at 12:04 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (1)  Comments (3)


                          Sunday, February 26, 2006

                          The New Silk Road

                          This isn't the first time China has accumulated a large stock of foreign currency reserves through a trade surplus:

                          China, a 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 Chinese silk.

                          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 imported opium.

                          What goods and services will we get China "addicted" to? What will our "opium" be?

                            Posted by on Sunday, February 26, 2006 at 10:17 AM in China, Economics, International Trade | Permalink  TrackBack (2)  Comments (6)


                            Falling Wages

                            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 viable."

                            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 evaporating. ...

                            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 on Sunday, February 26, 2006 at 12:42 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (25)


                              Saturday, February 25, 2006

                              Rogoff: The Indian Tortoise and the Chinese Hare

                              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:

                              The Indian 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 do.

                              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 five-fold. ... 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 on Saturday, February 25, 2006 at 01:46 PM in China, Economics, India | Permalink  TrackBack (0)  Comments (3)


                                Who Gets the Cookies?

                                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 on Saturday, February 25, 2006 at 01:47 AM in Economics, Income Distribution, Policy, Unemployment | Permalink  TrackBack (0)  Comments (34)


                                  Second Thoughts

                                  Tom Allison says deregulation of airlines has not turned out the way he expected:

                                  Now 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 on Saturday, February 25, 2006 at 01:33 AM in Economics, Market Failure, Regulation | Permalink  TrackBack (0)  Comments (2)


                                    Greenspan: Nation Ripe for a Third Party Candidate

                                    Alan Greenspan, political pundit:

                                    Freed of 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 losing.

                                      Posted by on Saturday, February 25, 2006 at 01:14 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (14)


                                      Friday, February 24, 2006

                                      Friedman's Plucks and Capacity Utilization

                                      Not too long ago, I talked about 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 on Friday, February 24, 2006 at 09:18 PM in Economics, Macroeconomics | Permalink  TrackBack (0)  Comments (5)


                                        Bernanke: The Benefits of Price Stability

                                        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]:

                                        The Federal Reserve Board eagle logo links to home page


                                        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 on Friday, February 24, 2006 at 07:55 PM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (2)


                                          European Productivity Growth

                                          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 on Friday, February 24, 2006 at 07:03 PM in Academic Papers, Economics, Technology | Permalink  TrackBack (0)  Comments (1)


                                            Capacity Utilization

                                            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 on Friday, February 24, 2006 at 09:09 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (18)


                                              Averting America’s Bankruptcy

                                              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 solutions.

                                              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 on Friday, February 24, 2006 at 01:53 AM in Budget Deficit, Economics, Social Security, Taxes | Permalink  TrackBack (0)  Comments (44)


                                                Leave it to Bernanke

                                                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 will address 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 arrangements.

                                                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 on Friday, February 24, 2006 at 01:12 AM in Economics, Monetary Policy, Social Security | Permalink  TrackBack (0)  Comments (8)


                                                  Paul Krugman: Osama, Saddam and the Ports

                                                  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 ports.

                                                  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 not."

                                                  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 difference?

                                                  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 on Friday, February 24, 2006 at 12:23 AM in Economics, Iraq and Afghanistan, Politics | Permalink  TrackBack (0)  Comments (3)


                                                    The New Socialist Countryside

                                                    Beijing attempts to quiet unrest in rural areas through income redistribution policies:

                                                    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 on Friday, February 24, 2006 at 12:22 AM in China, Economics, Income Distribution | Permalink  TrackBack (0)  Comments (2)


                                                      Fed Speeches: Santomero, Fisher, and Ferguson

                                                      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 Trade Deficits and the Health of the U.S. Economy. Finally, Roger Ferguson gave a speech on Globalization, Insurers, and Regulators and expresses worry that puzzlingly low long-term rates might suddenly increase.

                                                        Posted by on Friday, February 24, 2006 at 12:12 AM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (0)


                                                        Thursday, February 23, 2006

                                                        Owning Less of the Ownership Society: Fed Verifies Fall In Household Income and Wealth Accumulation in Recent Years

                                                        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 on Thursday, February 23, 2006 at 09:14 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (25)


                                                          Too Much Time on Your Hands

                                                          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":

                                                          Economic 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 at home."...

                                                          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 Professor Hurst.

                                                          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 on Thursday, February 23, 2006 at 12:59 AM in Economics | Permalink  TrackBack (0)  Comments (14)


                                                            Perpetual Economic Motion from the Tax Cut Machine?

                                                            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 have been.

                                                            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 Feb. 15.

                                                            "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 mind.

                                                              Posted by on Thursday, February 23, 2006 at 12:38 AM in Budget Deficit, Economics, Taxes | Permalink  TrackBack (0)  Comments (15)


                                                              Wednesday, February 22, 2006

                                                              Into Africa

                                                              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 blessing.”  ...

                                                              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 on Wednesday, February 22, 2006 at 07:28 PM in China, Economics, International Trade, Politics | Permalink  TrackBack (0)  Comments (4)


                                                                Is Monetary Policy Already Restrictive?

                                                                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 territory.

                                                                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 on Wednesday, February 22, 2006 at 04:18 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (4)


                                                                  Ferguson Resigns from Board of Governors

                                                                  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 on Wednesday, February 22, 2006 at 11:55 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (10)


                                                                    Consumer Prices Increase, Real Wages Fall

                                                                    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 on Wednesday, February 22, 2006 at 07:22 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (5)


                                                                      China's Monetary Report: Revaluation Will Be Gradual

                                                                      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 Washington's move:

                                                                      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 stable” renminbi.

                                                                      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...

                                                                      The 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 on Wednesday, February 22, 2006 at 01:35 AM in China, Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (19)


                                                                        Foreclosure Rates Rise for Minority Homeowners

                                                                        Not a good sign:

                                                                        For 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 on Wednesday, February 22, 2006 at 01:18 AM in Economics, Housing | Permalink  TrackBack (0)  Comments (8)


                                                                          The McWages of Nations

                                                                          Orley Ashenfelter looks at the going rate for flipping burgers around the world:

                                                                          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 burgers?

                                                                          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 on Wednesday, February 22, 2006 at 12:18 AM in Economics, International Trade | Permalink  TrackBack (0)  Comments (3)


                                                                            Tuesday, February 21, 2006

                                                                            Martin Wolf on Modernizing the IMF

                                                                            Martin Wolf discusses how the IMF can avoid falling into obscurity and irrelevance:

                                                                            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 Monday.

                                                                            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 international co-operation. 

                                                                            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 on Tuesday, February 21, 2006 at 05:34 PM in Economics, International Finance | Permalink  TrackBack (0)  Comments (2)


                                                                              You're in Good Hands with Homeland Security?

                                                                              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 International Airport?

                                                                              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 on Tuesday, February 21, 2006 at 04:46 PM in Politics, Terrorism | Permalink  TrackBack (0)  Comments (4)


                                                                                Krugman's Money Talks: No Menschen in Washington

                                                                                Paul Krugman responds to comments on his latest column, "The Mensch Gap":

                                                                                Krugman's Money 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 on Tuesday, February 21, 2006 at 04:12 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (1)


                                                                                  FOMC Meeting Minutes Leave Room for More Rate Hikes

                                                                                  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:

                                                                                  Minutes of 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. ...

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                                                                                    Posted by on Tuesday, February 21, 2006 at 03:51 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1)


                                                                                    Debating Dark Matter: Buiter Responds to Hausmann

                                                                                    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 on Tuesday, February 21, 2006 at 10:33 AM in Economics, International Finance, International Trade | Permalink  TrackBack (0)  Comments (12)


                                                                                      The Government's Role in Wealth Creation and Redistribution

                                                                                      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: "Rebuild America."

                                                                                      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 clean water."

                                                                                      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 Americans. ...

                                                                                      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:

                                                                                      Social Justice, 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 on Tuesday, February 21, 2006 at 01:23 AM in Economics, Income Distribution, Politics | Permalink  TrackBack (0)  Comments (21)


                                                                                        Finding the Evidence That's Already In

                                                                                        The Washington Post joins those with suspicions over the motives behind the creation of the Division of Dynamic Analysis:

                                                                                        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 in.

                                                                                          Posted by on Tuesday, February 21, 2006 at 12:41 AM in Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (7)


                                                                                          Monday, February 20, 2006

                                                                                          Hidden Costs of SUVs, Education Outcomes, Discrimmination, and Disaster Dollars

                                                                                          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 on Monday, February 20, 2006 at 07:37 PM in Economics, Miscellaneous | Permalink  TrackBack (0)  Comments (2)


                                                                                            Robert Hall: "Inflation Targets Can and Should be Met Quite Strictly"

                                                                                            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 output stability:

                                                                                            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 care.

                                                                                              Posted by on Monday, February 20, 2006 at 04:55 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (5)


                                                                                              Assuaging the Barbarians at the Gate: Our "Roman Dilemma"

                                                                                              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 on Monday, February 20, 2006 at 02:27 PM in Economics, International Trade | Permalink  TrackBack (0)  Comments (9)


                                                                                                Real-Time Model Uncertainty is Real

                                                                                                Brian Ironside and Robert Tetlow find a surprisngly large degree of model uncertainty in the principal macro model used by the Federal Reserve Board:

                                                                                                Real-Time 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 on Monday, February 20, 2006 at 11:52 AM in Academic Papers, Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (4)


                                                                                                  Paid Punditry

                                                                                                  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 prevail.

                                                                                                  Continue reading "Paid Punditry" »

                                                                                                    Posted by on Monday, February 20, 2006 at 07:40 AM in Economics, Politics, Press | Permalink  TrackBack (0)  Comments (2)


                                                                                                    Paul Krugman: The Mensch Gap

                                                                                                    Everybody makes mistakes. But not everyone can admit them:

                                                                                                    The 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 actions. ...

                                                                                                    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 — for Iran.

                                                                                                    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 Times.

                                                                                                    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 on Monday, February 20, 2006 at 12:15 AM in Economics, Politics | Permalink  TrackBack (1)  Comments (14)