Economist's View

Bartlett: Same Old Administration

Prudent Bear Visitors: This is an incorrect link. Click here for the Shiller article.

Bruce Bartlett is not impressed with President Bush's choice of Josh Bolten to replace Andrew Card as White House Chief of Staff:

Bush Plays the Same Old Hand, by Bruce Bartlett, Commentary, New York Times: Washington is still atwitter over the resignation of Andrew Card as White House chief of staff and the appointment of his replacement, Josh Bolten... Much of the buzz comes from the belief that President Bush may be listening to the Washington establishment, which has been urging him to reinvigorate his administration and lift his lowly poll ratings. ...

The problem is that only one part of Mr. Bush’s team ever gets shaken up. Whenever things are not working, the economic advisors seem to take most of the blame, while even dramatic failures by other staff members cause no repercussions. No one was fired for the prewar intelligence failures in Iraq ... George Tenet, the former Director of Central Intelligence, was given a medal. Michael Chertoff is still Secretary of Homeland Security even though his agency was responsible for many of the screw-ups related to Hurricane Katrina.

In contrast, in 2002, Treasury Secretary Paul O’Neill was publicly fired — along with Larry Lindsey, Director of the National Economic Council — in a fashion that suggested there was more to it than a mere desire to change staff. Why Bush could not have told the two men privately that he wanted to make a change and allow them to leave with their dignity intact has never been explained. Instead, Vice President Dick Cheney phoned Mr. O’Neill to tell him he was out — this after Mr. O’Neill had personally asked Bush if he wanted him to leave and was told no. ...

The firings sent a message to everyone in the administration that they were expendable... They would not even be permitted the face-saving gesture of quitting for “personal reasons” ... The effect was to dampen what little initiative and independence might have existed ... Mr. O’Neill’s replacement, John Snow, got the message ... His only job seems to be greeting every new economic statistic as if the nation had won the lottery. The economic news has been fairly good. But ... Mr. Bush apparently still believes he has not gotten enough credit, and that this is the primary reason for his low poll ratings.

I have no doubt that Mr. Bolten will do his job with ruthless efficiency, for he is the truest of Mr. Bush’s true believers. I know this because ... Josh Bolten and I often worked together during the George H.W. Bush administration... We weren’t pals, but we were always on friendly terms. Then, a couple of years into the current administration, I saw him at a reception. I had just started writing some mildly critical things about some of Mr. Bush’s policies, like the Medicare drug program... Up until that time, I had been almost entirely positive in my writings about the administration.

So I was taken aback when I went up to Mr. Bolten to say hello and he pointedly turned his back on me and walked away. I guess he thought he was punishing me for my criticism. All this did was confirm my growing belief that Mr. Bush would ultimately be a disaster ...

The funny thing is that I was treated far better by Bill Clinton’s people ... even though I almost never had a good word to say about their positions. To their credit, they really believed in what they were doing and were almost evangelical in their desire to explain why it was right... I have no doubt that if I had come across Gene Sperling ... at such a reception, he would have come straight at me with a laundry list of facts and arguments for why I was wrong... I would have been invited to the White House mess to carry on the conversation, and I would have left with an armful of studies and statistics explaining the virtues of whatever Clinton program I was attacking.

By contrast, the Bush administration never provides its supporters with any ammunition to defend its positions, beyond the endless repetition of the day’s talking points. ... So I see no reason to believe that anything substantive will change in this White House, no matter how many staff changes are made. ...

Baker: Government Should Preemptively Burst the Housing Bubble

Dean Baker is worried, very worried, about a fall in housing prices. So much so, he is calling for a preemptive strike to prevent even larger problems down the road, something I'll comment on at the end. His opening paragraph sets the stage in this piece from Economists' Voice:

The Menace of an Unchecked Housing Bubble, by Dean Baker, Economists' Voice: An unprecedented run-up in the stock market propelled the U.S. economy in the late nineties and now an unprecedented run-up in house prices is propelling the current recovery. Like the stock bubble, the housing bubble will burst. Eventually, it must. When it does, the economy will be thrown into a severe recession, and tens of millions of homeowners, who never imagined that house prices could fall, will likely face serious hardships.

The incredible increase in house prices The basic facts on the housing market are straightforward: Quality-adjusted house prices ordinarily follow the overall rate of inflation. However, in the last eight years house prices have risen by almost 50 percent in real terms... The run-up has not been even. In large parts of the country (most of the South and Midwest) there has been little real appreciation in house prices. In contrast, the run-ups in the bubble areas (the West Coast, the East Coast north of DC, and Florida) have been close to 80 percent in real terms.

The housing bubble spurs the economy directly by increasing home construction, renovation, and sales and indirectly by supporting consumption. The run-up in house prices has created more than $5 trillion in real estate wealth compared to a scenario where prices follow their normal trend growth path. The wealth effect from house prices is conventionally estimated at 5 cents on the dollar, which means that annual consumption is approximately $250 billion (2 percent of GDP) higher than it would be in the absence of the housing bubble.

Marriage Market Decisions of Black, Hispanic, and White Women

Having raised the issue of differences in marriage rates for whites and blacks in Marriage is for White People in a post based upon a Washington Post column, I thought I'd follow up with the abstract and part of the introduction to recent academic research on this issue for those who want to probe a bit deeper into these issues:

A Defense of Outsourcing

This article from Economists' Voice argues that concerns over the loss of jobs in the service sector due to outsourcing are overstated, and that with the appropriate change in policy the costs to workers displaced by globalization can be minimized:

U.S. Offshoring: Small Steps to Make It Win-Win, by Diana Farrell: Companies from the United States lead the world in offshoring white-collar jobs to low-wage countries. Today they employ more than 900,000 service workers overseas. But widespread concern about the effects on the U.S. job market has prompted policymakers to call for curbs on offshoring... Trying to protect jobs this way is a mistake. For one thing, fears of job losses ... are greatly exaggerated. ... In addition, curbs on offshoring would deprive the United States of its many benefits and impose new costs instead. ...

Policymakers should let offshoring continue. But that doesn’t mean they should ignore its consequences. None of the benefits of offshoring currently flow directly to those who suffer most directly, namely US workers whose jobs move overseas. Companies can and should ... use some of their gains from offshoring to help their displaced employees... Wage loss insurance ... would cost only a fraction of the savings that offshoring will bring. Governments too, must work ... to increase retraining, provide life-long learning programs, and ensure portable health and pension benefits...

Job loss will be limited According to our research, the maximum number of U.S. service jobs that could in theory be performed offshore is 11 percent of total service employment. ... In reality, we project that less than 2 percent of all U.S. service jobs actually will be done offshore by 2008. We expect that U.S. companies will create some 200,000 to 300,000 offshore jobs per year over the next 30 years.

Why will so few service jobs go overseas?

Paul Krugman: The Road to Dubai

Paul Krugman continues with the subject of his last column, immigration, and then explains an additional concern with proposals to increase immigration, the effect of creating a large class of workers without political representation, something contrary to our basic democratic principles:

The Road to Dubai, by Paul Krugman, Commentary, NY Times: For now, at least, the immigration issue is mainly hurting the Republican Party, which is divided between those who want to expel immigrants and those who want to exploit them. The only thing the two factions seem to have in common is mean-spiritedness.

But immigration remains a difficult issue for liberals. Let me say a bit more about the ... uncomfortable economics of immigration, then turn to what really worries me: the political implications of a large nonvoting work force. About the economics: the crucial divide isn't between legal and illegal immigration; it's between high-skilled and low-skilled immigrants. High-skilled immigrants ... are, by any criterion I can think of, good for America.

But the effects of low-skilled immigration are mixed at best. ... All of these effects, except for the gains for the immigrants themselves, are fairly small. Some of my friends say that's the point I should stress: immigration is a wonderful thing for the immigrants, and claims that immigrants are undermining ... workers and taxpayers are hugely overblown — end of story. But it's important to be intellectually honest, even when it hurts. Moreover, what really worries me  ...[is] the effects of having a disenfranchised labor force.

Imagine ... a future in which America becomes like Kuwait or Dubai, a country where a large fraction of the work force consists of illegal immigrants or foreigners on temporary visas — and neither group has the right to vote. Surely this would be a betrayal of our democratic ideals, of government of the people, by the people. Moreover, a political system in which many workers don't count is likely to ... have a weak social safety net and to spend too little on services like health care and education.

This isn't idle speculation. Countries with high immigration tend ... to have less generous welfare states... U.S. cities with ethnically diverse populations — often the result of immigration — tend to have worse public services...

Of course, America isn't Dubai. But we're moving in that direction. As of 2002, ... 14 percent of U.S. workers, and 20 percent of low-wage workers, were immigrants. Only a third ... were naturalized citizens. So we already have a large disenfranchised work force, and it's growing rapidly. The goal of immigration reform should be to reverse that trend.

So what do I think of the Senate ... proposal ... derived from a plan sponsored by John McCain and Ted Kennedy? I'm all in favor of ... offering those already here a possible route to permanent residency and citizenship. ... we aren't going to deport more than 10 million people ... But I'm puzzled by the plan to create a permanent guest-worker program, one that would admit 400,000 more workers a year (and you know that business interests would immediately start lobbying for an increase...). Isn't institutionalizing a disenfranchised work force a big step away from democracy?

For a hard-line economic conservative like Mr. McCain, the advantages to employers of a cheap work force may be more important than the violation of democratic principles. But why would someone like Mr. Kennedy go along? Is the point to help potential immigrants, or is it to buy support from business interests?

Either way, it's a dangerous route to go down. America's political system is already a lot less democratic in practice than it is on paper, and creating a permanent nonvoting working class would make things worse. The road to Dubai may be paved with good intentions.

Previous (3/27) column: Paul Krugman: North of the Border
Next (4/3) column: Paul Krugman: John and Jerry

Selling Public Infrastructure to Fund Government

Daniel Gross has a nice column in Slate on "the foolish plan" to sell public infrastructure:

Lost Highway - The foolish plan to sell American toll roads to foreign companies, by Daniel Gross, Slate: If a governor told you there were a way to spread pork, raise funds for infrastructure investment, promote jobs, avoid raising taxes, and put a dent in the trade deficit—all in one fell swoop—you might think he had a bridge to sell you. And you'd be right. Only in this case, it's a toll road. And instead of a sale, how about a long-term lease?

Shiller: Long-Term Perspectives on the Current Boom in Home Prices

Robert Shiller and Dean Baker have articles in the latest Economists' Voice about the housing boom and its sustainability in the near and longer terms. Here's Shiller with a long-term perspective gained from looking at over 100 years of housing data in a variety of countries. I cut quite a bit, but it's still fairly long as it has lots of interesting things to say:

Long-Term Perspectives on the Current Boom in Home Prices, by Robert J. Shiller, Economists' Voice: Homeowners want to know: Is the current boom in home prices temporary? Is a crash possible? And if prices do fall, will they come back up fairly soon, or will they stay down for many years? Some have written reassuringly, downplaying concerns about possible price falls... Angell and Williams, for example, concluded that “In over 80 percent of the metro-area price booms we examined between 1978 and 1998 the boom ended in a period of stagnation… the expectation would be that metro-area home price busts will continue to be relatively rare.” But they reach their conclusion based only on a twenty-year period of United States data.

Indeed, all these studies confined themselves to no more than a few decades’ recent data. Such data simply cannot provide useful insights to homeowners planning to occupy homes for thirty or forty years, and wondering whether a general uptrend in home prices will inevitably carry them over any possible price declines.To answer the important questions, we first need to find out if there have been other booms similar to this one, and what happened after such booms ended. Until now long-term price indexes have not been generally available to allow us to do this. I have constructed one...  The news is not good for homeowners. According to our data, homeowners face substantial risk of much lower prices that could stay low for a long time after. Luckily, though, derivatives products, notably a futures market, are being developed that they will soon be able to use to insure against this risk.

The data show no long-term uptrend in real home price
Figure 1 shows three long-term series of real home prices. All attempt to control for changing size and quality of homes; all are corrected for inflation in consumer prices.

True Time Management

Scientists have this productivity thing all figured out. Just slow down your internal clock to allow more information to be absorbed in the same amount of real time, get your work done in this hyper-state, then turn the clock back to normal and go home:

The Future of Time, by Alan Burdick, Discover: In the future, perhaps all too soon, time will slow down. Certainly that is not what most of us experience now. Time seems to be speeding up: Our computers run faster, ... our cell phones make communication immediate and ubiquitous. Yet all these ingenious "labor-saving" devices have only made us labor more. ... An entire time-management industry rushes to save us: best-selling books, software packages, and other "productivity solutions" designed to improve the conversion of our time units into dollar units .... But they've got the equation all wrong. Productivity is the amount of work done in a given amount of time: P = W/t.

Traditionally, time management has consisted of increasing productivity (P) by increasing the work (W)—squeezing more out in the same lump of time. By this math, time (t) never decreases. That's not time management, that's work management.

There is a better way: What if we could increase productivity by leaving W alone and making t smaller? What if we could slow down time, make each moment seem to last longer so more work could be extracted from it? ... Neurobiologists are slowly coming to realize that "real time" is just a convention foisted upon us by our brains. In any given millisecond, all kinds of information—sight, sound, touch—pours into our brains at different speeds and is reprocessed as hearing, speech, and action. Our perception of time can be manipulated in ways that researchers have already begun to exploit.

To understand how fundamentally your brain bends time ... Tap your finger on the table once. Because light outraces sound, the audio tap should register a few milliseconds after the sight of it; yet your brain synchronizes the two to make them seem simultaneous. A similar process occurs when you see someone speak to you from several feet away—thankfully so, or our days would unravel like a badly dubbed movie. Your mind is messing with the time, editing out the parts that distract you. Woody Allen once said, "Time is nature's way of keeping everything from happening at once." He was right.

"The brain lives just a little bit in the past," says David Eagleman, a neurobiologist at the University of Texas at Houston. "The brain collects a lot of information, waits, then it stitches a story together. 'Now' actually happened a little while ago." ... "Time is one of the many, many illusions that the brain bestows upon us," says Dean Buonomano, a neuroscientist at UCLA. How it does that is not yet clear, he says. Researchers long believed the brain was ruled by a single clock that kept all its disparate activities in sync... But scientists are learning that there is no central clock. Instead, the brain contains lots of little clocks all running at independent rates yet linked by a network.

At this point the future begins to take shape. If scientists gained a better understanding of how neural timing works, we could employ that timing to better use. In the productivity equation, we could effectively make t smaller by making the same amount of time last longer.

Weird as it seems, it can be done. Not long ago, Eagleman became intrigued by the stories one hears of people who experience time slowing—during a car crash, say. (Eagleman himself entered slo-mo briefly as a child, when he fell off a roof.) He wondered: What's really going on? Does the experience gain added vividness only afterward, as it's being recalled? Or does a person's perception of time truly slow down enough to absorb extra information?

Eagleman designed a test. He built a small LED screen that flashed a series of numbers too quickly to comprehend. He attached the screen to his subjects' wrists, clipped a bungee cord to their legs, and had them jump backward, one by one, off a 150-foot tower—a fairly terrifying experience for the uninitiated. To his surprise, his jumpers (all two of them; the experiment is ongoing and the results preliminary) were able to read the flashing numbers on the way down—evidence that a brain under duress can warp time. "It's like the brain has a reserve capacity," he says. "But like everything, it works as slowly as it can get away with." ...

"[When] your perception of time is more acute, ... that doesn't necessarily mean you're getting more done. You can make decisions faster. But are they the best decisions?" The choices one faces in an adrenaline rush are fairly binary: Run from the bear, or freeze. In contrast, the choices one makes in an office often require discriminating thought: Paper clip or staple? Jelly doughnut or chocolate glazed? "You're sacrificing the optimal decision for speed," Buonomano says. "If you think about it, most things are a trade-off between time and quality. You can write your article faster, but will it be better?"

For anyone keen to bring on the future of customized time sooner, Meck suggests an alternative. In November ... the Dalai Lama ... encouraged researchers to study the brains of meditating monks. Different states of meditation are thought to alter time perception... Well, OK, maybe. A future office worker is willing to consider that he might create more time for himself, maybe even get more done, through a regimen of mental calisthenics. However, a future office manager can't help but notice that a monk in deep meditation looks distinctly . . . unproductive.

Okun's Law Then and Now

I was curious to see if the relationship between unemployment and output has changed in recent years, so I took a very quick look at the issue through the lens of Okun's law (and used a simple textbook version of Okun's law as well). Recall that Okun's law is the negative relationship between unemployment and GDP. One way to look at this is to graph the growth of real GDP against changes in the unemployment rate. The data are quarterly, the sample period is 1948:Q2-2005:Q4,  and the changes are expressed in annual rates:

The equation for the fitted line is (GDP Growth) = 3.40 - 1.78ΔUN, not too far from the equation in, say, Mankiw's textbook where (GDP Growth) = 3 - 2ΔUN is used as a rough approximation (e.g. see page 35 in his 5th edition as well as the graph that is very similar to the one above).

The next step is to break the sample into two pieces. I chose 1982 as the break point. You will either like that or you won't, but it's what I chose for a first cut. The individual sub-sample graphs are similar to the total sample:

Here are the fitted lines for the two sub-samples:

And finally, here are the two estimated equations for the sub-samples:

(GDP Growth) = 3.73 - 1.87ΔUN for 1958:Q2-2005:Q4

(GDP Growth) = 2.99 - 1.49ΔUN for 1983:Q1-2005:Q4

The last set of results is close to (GDP Growth) = 3 - 1.5ΔUN if you like round numbers.

So what does this mean? Here are two observations:

• For the full sample, unemployment will be stable (ΔUN=0) when GDP growth is 3.4%. For the sub-samples, the figures are 3.73% for sample through 1982, and 2.99% for the sample after 1982. Thus, rate of output growth producing stable employment has fallen according to these estimates.

• For every percentage point unemployment increases in the early sample (i.e. an additional 1% increase over the last period), GDP growth falls by 1.87%. But in the later sample it falls less, by 1.49%.

I need to think through this more, but the decreased sensitivity of GDP growth to unemployment changes seems to be consistent with technological change allowing firms to replace people with machines more flexibly than in the earlier time period, with technological change allowing work to be digitized and performed elsewhere so that domestic unemployment can rise without output falling, and through the outsourcing of intermediate stages of production.

The Economic Costs and Benefits of Invading Iraq

In his last Economic Scene column for the New York Times, Alan Krueger examines a difficult but important issue, the costs and benefits of invading Iraq. Krueger uses estimates on both sides of the issue, those that find net benefits and those that do not, to illustrate the high degree of uncertainly present in all of these estimates:

The Cost of Invading Iraq: Imponderables Meet Uncertainties, by Alan B. Krueger, Economic Scene, NY Times: The question of whether it was worth invading Iraq is being asked with increasing frequency and fervency. ... Fundamentally, deciding whether war is worth it involves weighing the benefits and costs, both tangible and intangible. The many estimates of the cost of the Iraq war that are available are uninformative absent a comparison with the likely benefits, or a comparison with the costs and benefits of the best alternative to invasion. Unfortunately, cost-benefit comparisons of such weighty issues are more art than science. One problem is that the ... outcomes that would have occurred had another policy been pursued ... cannot be known for sure. In addition, it is often unclear how to value the outcomes of the policy that is pursued.

One of the earliest cost-benefit comparisons was done by Steven J. Davis, Kevin M. Murphy and Robert H. Topel of the University of Chicago on the eve of the invasion in 2003. They explicitly considered a continued policy of containment ... as an alternative to invasion and regime change. Assuming that containment and invasion would protect the United States equally well, the question of whether invasion is worth it turns on which policy is less costly, after discounting all likely future costs.

Allowing for a 3 percent chance that the Iraqi regime would evolve into a benign government in any future year and a 2 percent real interest rate, the economists reckoned that the cost of pursuing a containment strategy was $258 billion to $380 billion. "This dwarfs any reasonable estimate of U.S. war costs," they wrote at the time. Their anticipated price tag for the war, which they considered conservative, was $125 billion. Professors Davis, Murphy and Topel have revised their figures in a new National Bureau of Economic Research working paper... Their estimated war costs have increased to a range of $410 billion to $630 billion, reflecting reality there.

William D. Nordhaus, an economist at Yale ... said the updated work is "economics at its best and worst — quantifying the almost-unquantifiable." In the fog of war accounting, one thing is clear: all costs and benefits can be contested as wildly inaccurate — in either direction. Consider what the cost of containment would have been had the United States not gone to war. The University of Chicago study now says it is in "the range of $350 billion to $700 billion."

This range is arguably grossly inflated because it counts virtually all of the American military forces in the Middle East as dedicated to containing Iraq. While containing Iraq was a central focus, these troops also served many other purposes. They conducted rescue operations in Somalia; performed humanitarian missions in Nigeria, Ethiopia, Eritrea and Jordan; responded to terrorist bombings in Nairobi and Tanzania; and were responsible for military activities in the five Central Asian republics of the former Soviet Union.

Additionally, Iran was considered a greater potential long-term threat than Iraq... It is hard to believe that the United States would not have a substantial military presence in the region even if Iraq was not regarded as a threat. Ideally, only incremental costs would be counted in deciding whether something was worth it...

Another study of Iraq war costs, by Linda J. Bilmes of Harvard and Joseph E. Stiglitz of Columbia, comes up with an eye-catching estimate of $2.2 trillion, assuming the United States is no longer in Iraq in 2015. This is arguably too high for several reasons. First, it counts future interest payments on the debt created by military spending as well as the direct expenditures. (This is analogous to counting both the sale price of a house and the cost of future mortgage payments as the cost of buying the house.)

Second, it counts elevated military recruitment costs that incorporate a premium for higher risk of death or injury ... as well as the predicted direct cost of the deaths and injuries; this is double counting if the risk premium is adequate. Finally, it ascribes a big increase in the price of oil to the war, and, as a result, a loss to the American economy of almost half a trillion dollars.

A menu of cost estimates is thus available, depending on the counterfactual situation that one chooses. "The question of whether the war was worth it hinges not on ... economic costs," said Douglas Holtz-Eakin, ... "but on what do we gain in the way of genuine security and international standing." The costs, he said, were manageable.

The benefits, however, are much harder to quantify than the costs. To Zbigniew Brzezinski, President Jimmy Carter's national security adviser, "the benefits have been, in fact, very few, beyond the obvious one: the removal of Saddam Hussein." Offsetting that, he said the war "undermined our international legitimacy," "destroyed our credibility" and "tarnished our morality with Abu Ghraib and Guantánamo."

The Chicago economists argue that anticipated improvements in Iraq's living standard, once the country stabilizes, tip the balance in favor of invasion over containment, which in their view had costs that were "in the same ballpark." They also argue that the number of Iraqi fatalities since the invasion is probably no greater than would have been the case under Mr. Hussein.

But even if one accepts all of their estimates, their results implicitly raise another question: Why intervene in Iraq and not a country like Sudan, where genocide and oppression are at least as much an affront as they were in Iraq, and where the cost of intervention and prospects for improving lives may offer a better benefit-to-cost ratio than is likely in Iraq?

Credible estimation of counterfactual outcomes of alternative policies for cost-benefit comparisons has been a hallmark of modern economics. When it comes to judging whether war is worth it, however, cost-benefit analysis is little more than educated guessing by other means. But at least it provides a framework for where to put the guesses.

Increased U.S. Productivity from the Outsourcing of Services

Just when you thought it was safe to go back into the workplace and exploit your "skill premium" in the service sector, we learn:

Service Offshoring Raises U.S. Productivity, by Mathew Davis, NBER Reporter: ...In "Service Offshoring and Productivity: Evidence from the United States" (NBER Working Paper No. 11926), co-authors Mary Amiti and Shang-Jin Wei note that service outsourcing is doing more than fueling an economic boom in ... India. It is also playing a major role in ... the surging productivity of American manufacturing firms. They find that American firms are getting bigger boosts in productivity from outsourcing services to overseas providers than from the more familiar practice of turning to foreign concerns for manufacturing materials, such as parts and packaging.

Amiti and Shang-Jin find that from 1992 to 2000, "service offshoring" accounted for around 11 percent of the productivity growth in U.S. manufacturing industries compared to the 3 to 6 percent gain attributable to imported material inputs." Their analysis is the first comprehensive study to find a link between service offshoring and productivity. ... [T]hey observe "Although the level of service offshoring is still low compared to material offshoring, this business practice is expected to grow as new technologies make it possible to access cheaper foreign labor and different skills." ...

Amiti and Shang-Jin note that additional research is needed to understand more precisely how buying services from foreign providers boosts domestic productivity. They also are interested in how the rise in service offshoring might affect U.S. incomes. Economists have long linked the rise of material outsourcing to the fact that for the last twenty years, wages for skilled workers have been increasing faster than wages for unskilled workers, a gap often referred to as the "skill premium." The authors observe that "service offshoring is likely to be more skill intensive than material offshoring" so, "it will be interesting to see what effects, if any, service offshoring has on the wage skill premium.

Valuing Women in India

What happens when the value of a woman in society is determined such that "she can raise her value by becoming the mother of sons"? In Indian Punjab, "There are districts in the state where only one girl child has been born in the past six months":

Meanwhile: India's women battle the 'bad luck' label, by Manreet Sodhi Someshwar, International Herald Tribune: Growing up in my hometown in Indian Punjab, I often heard people remarking to my father, "You are very fortunate." It seemed a reasonable statement: In the hothouse of the Indian middle class, ... were we five siblings, each intent on surpassing the excellent scholarship of the others.

How much better could it get for my parents? ... It was only later, when I moved out of Punjab to study engineering, that I began to comprehend, little by little, the nature of my father's "fortune." In a land where people do away with newborn girls, my father had four daughters. "Kuree maar" (daughter- killer) is a common pejorative in Punjab, yet my father was not only raising four girls, but also educating them and sending them to professional colleges. To add to the strangeness of it all, the girls began to graduate and earn handsome salaries. ...

When their child reaches marriagable age, parents who have sired a son (often with considerable help from a sex-determination test) can command a Honda car, a house, a flat- screen television, cash, even foreign trips - all in the name of the dowry that the hapless parents of the bride are obliged to provide. In a patriarchal society like Punjab, women are defined by matrimony. Before marriage, a Indian woman is a cipher. Marriage simply confers the decimal point. Thereafter, she can raise her value by becoming the mother of sons. It is in her hands, and she understands the situation all too well.

The tools are readily available: tin- roofed clinics ... provide prenatal diagnostic testing and subsequent "medical termination of pregnancy," also known as abortion; traveling laboratories that conduct on- the-spot ultrasound tests; midwives who scour the countryside for pregnant women in need of "help." For some, it is never too late to smother a newborn girl under a sack of grain, strangle her, or bury her alive.

Punjab, India's granary and its most prosperous state, has added another claim to its record: it's the state with the worst child sex ratio: 776 girls for every 1,000 boys. There are districts in the state where only one girl child has been born in the past six months.

This is giving rise to a whole new breed of women, known as Draupadis. In the great Indian epic, the Mahabharata, Draupadi was married to five Pandava brothers, and played a central role in the story. But she is no heroine, no role model; the regard Indians hold for her is apparent in the fact that seldom is a girl named after her. ...[I]n the upside- down world that India's women inhabit, ... fraternal polyandry is flourishing, institutionalizing violence against women: one woman is forced to marry her husband's brothers, and is expected to produce sons for each of them.

My father managed to astound his community with his counterintuitive act: In a culture that regards the birth of a girl as bad luck, he decided that his daughters would be in charge of their destinies. He empowered us. ...

Laws exist in India to safeguard women's rights: polyandry, seeking dowry and sex selection all are prohibited. These laws, however, need to be publicized and enforced so that women know a legal recourse exists for them and that when facing a bully, the first step might just be to stand up for their rights.

In one recent instance, a new bride was daily nagged by her mother-in-law for more dowry. One day she wrenched open a can of kerosene, splashed it on herself and declared she was proceeding to the nearest police station to complain that her in-laws' were threatening to set her on fire. The burning of brides after dowry disputes has forced the police to sit up. The mother-in-law, chastened, stopped her nagging. ...

The Continuing Search for Links between Saddam and Al Qaeda...

Vice President Cheney suggests it's only a matter of time before strong links between Saddam Hussein and Al Qaeda are discovered now that the search is being conducted by researchers outside of the administration:

The Case for Iraq, by John McKinnon, WSJ's Washington Wire: Seeking to buoy public support for the Iraq war, the Bush administration hopes tens of thousands of boxes of captured Iraqi documents now being made public will buttress their case for invading. On Fox News Talk’s Tony Snow Show today, Vice President Cheney predicted that over the next few months, as researchers comb through the records, “we’ll see a pretty complete picture that Saddam Hussein did, in fact, deal with some pretty nefarious characters out there there. And he was legitimately labeled by our State Department as a state sponsor of terror.” That likely includes dealings with Osama bin Laden, Cheney suggested, while adding that he wasn’t making a “hard and fast prediction.” 

In the past, the administration has been embarrassed over suggestions that Iraq aided the 9/11 attackers. Cheney conceded yesterday that an early report that lead hijacker Atta met with Iraqi intelligence officials in Prague “has been pretty well knocked down.” But he said that “that’s a separate proposition from the question of whether or not there was some kind of a relationship between the Iraqi government, Iraqi intelligence services and the al Qaeda organization.” Conservatives also hope to find evidence that Iraq was actively pursuing development of various weapons of mass destruction.

Disposable American Workers

Brad DeLong reviews Louis Uchitelle's new book "The Disposable American":

Americans Idle, Review by Brad DeLong, NY Times: Louis Uchitelle has long been one of The New York Times's best economics reporters. ... Now he has written his first book, "The Disposable American," about large-scale layoffs and the harm he sees them doing to the country. Uchitelle believes Americans have acquiesced in permanent mass layoffs because of three myths: (1) that they are a necessary step to make companies better, stronger, more efficient and more productive; (2) that it is the laid-off workers' own fault if they fail to find near-equivalent new jobs in the modern economy; and (3) that layoffs are primarily an economic affair that ought to be decided upon by managers looking at their corporation's dollars-and-cents bottom line.

To Uchitelle's attack on these three myths I want to say yes, yes and yes. There are numerous costs associated with layoffs that are not measured by their effects on the corporation's bottom line: it's not only workers who get a great deal of the cash flow from a highly efficient productive operation; so do national, state and local governments, as well as businesses in the region that live off the purchases of the workers who are about to be laid off.

Moreover, older workers have a particularly hard time starting over, turning the skills and experience that made them a good fit at their old jobs into something valuable to a new employer. ... White-collar middle managers in their early 50's have next to no chance of finding remotely equivalent jobs. Layoffs destroy what is ... a valuable meshing of worker skills and experience... A huge amount of human capital disappears when businesses close down.

And Uchitelle is right when he says mass layoffs do not make the companies that undertake them better. Mass layoffs make them different. Consider one of his major examples: the Stanley Works, which found itself under increasing pressure from countries like Japan, Taiwan, Korea and China. "Customers for Stanley's hand tools were defecting in alarming numbers. The lure was Asian tools . . .  indistinguishable in quality from Stanley's offerings, and at 60 percent of the price." ...

So Stanley's directors found a new chief executive, John Trani, to change the Stanley Works from a tool-making manufacturing company into a service-providing money-making machine. ... As Uchitelle explains: "Selling hand tools was not a favored market. ... Automatic entrance doors . . . were a different matter. . . . What set the doors apart was the need to service the various electronic components." ... Stanley now had a chance to survive as it gradually shifted into a high-margin service-sector market niche where foreigners could not compete, but where its corporate tool-making assets still gave it an edge. Meanwhile, Stanley's longtime workers were left high and dry. ... Stanley's workers are increasingly electronics maintenance and repair technicians, not blue-collar assembly-line tool makers.

For Uchitelle, this transformation of Stanley — this use of corporate assets to find new market niches where the old workers do not fit — is a bad thing. In his eyes, Stanley's bosses were morally obligated, and in a better world would be legally obligated, to invest the company's resources in directions that promised a chance of preserving the jobs of longtime workers — even if such investments were, in the judgment of Wall Street, unlikely to succeed, and so would depress the stock price.

Uchitelle's diagnosis that mass layoffs are a serious national problem is convincing. But for this card-carrying economist, his desired prescription is not. I see no examples ... of economies that have taken steps in the direction he desires without severe side-effects. In Western Europe, unions bargained fiercely for job security, and governments enacted "no firing without cause" laws... Yet this did not lead to a happy labor market. Instead, high overall unemployment, extra-high long-term unemployment and extra-extra-high youth unemployment appear to be the consequences ... Companies that know they cannot lay off groups of workers if demand goes sour are very likely to be companies that hesitate to hire workers when demand is strong.

Indeed, Uchitelle does not want to forbid all mass layoffs. "Some," he writes, "are inevitable as American companies adjust to the growing competition from abroad." His real wish is for managers to treat their workers as partners and fellow human beings, rather than as potentially obsolete and disposable parts in the corporate money-making machine. But when demand and industrial structure are shifting rapidly, there is a great deal of money to be made by treating workers as disposable parts rather than as partners.

Uchitelle wants the government to help. But the government's powers and competence are limited: it can do much more at cleaning up the mess afterward — in the form of unemployment compensation, education support and job search assistance — than it can at getting managers, directors and shareholders to "play nice" when the financial stakes are high.

Beauty and the Sleeping Sickness Beast

The fate of people in poor countries afflicted with serious diseases depends not only on the cost of treatment, but also upon whether the disease also afflicts people in wealthier countries, or, in the case of sleeping sickness, whether the cure is also an effective beauty treatment:

The Scandal of 'Poor People's Diseases', by Tina Rosenberg, Commentary, NY Times: It's hard to imagine how a Rwandan woman with AIDS might be considered lucky, but in a way, she is. Effective drugs exist to treat her disease, and their price has dropped by more than 98 percent in the last six years. ... [T]he world takes AIDS seriously: rich countries provide money, drug companies have lowered their prices and accepted generic competition, and poor countries like Rwanda are scrambling to provide free treatment to all who need it. None of this is true for people who suffer from malaria, tuberculosis, or a host of other diseases ... like kala azar, sleeping sickness and Chagas disease... Most of these diseases are easily preventable and completely curable. Saving the lives of their sufferers is much cheaper and easier than treating AIDS. Yet millions of people die of them. Why the difference?

As fatal illnesses go, AIDS is the best one for a poor person to catch because rich people get it, too. The other diseases might as well hang out a sign: "Poor People Only." They offer researchers no profitable market. They have little political constituency. ... People with AIDS all over the world are fortunate to have fellow sufferers in America and Europe. They are even more fortunate that many are middle-class gay men. These men have lots of education, leisure time and income ... They are predominantly urban, well-connected and ultra-sophisticated. Their buying power provided pharmaceutical companies with a lucrative market for AIDS drugs. And they lobby. ...  Today, contracting a serious disease that affects only poor people is the worst luck of all.

I. How a Beauty Regime Salvaged a Cure for Sleeping Sickness ...After malaria, sleeping sickness is the most deadly parasitic disease. It is endemic in 36 African countries and is always fatal if it is not treated. The cure used in most places is melarsoprol – an arsenic-based drug so toxic that it collapses each vein into which it is injected and kills between two and eight percent of those who take it. There is another cure, eflornithine, so effective that it is called the "resurrection drug" – it makes people in comas get up and walk.

Eflornithine is an old anticancer drug that turned out to be not very effective against cancer. In the mid-1990's, the company that made the drug stopped making it. The fact that it was extraordinarily effective at treating sleeping sickness didn't matter, because victims of that disease had little money to pay for it. ... [B]y 2000, the existing stocks of eflornithine were dwindling and no other manufacturer was interested. It looked as though the miracle cure would disappear. Then lightening struck. Eflornithine reappeared in a six-page ad in Cosmopolitan magazine as the active ingredient in the Bristol- Myers Squibb product ... that impedes the growth of women's facial hair. Doctors Without Borders ... seized the opportunity to launch a publicity campaign. Christiane Amanpour went to southern Sudan to report on eflornithine for "60 Minutes."

The [company] which still controlled the rights to the drug, eventually agreed to donate a five-year supply, plus money for research, surveillance and training of health care workers, in a package totaling $25 million. The donation runs out this year, but there is a good chance it will be renewed. A Bristol-Myers Squibb spokesman inadvertently summed up the plight of sleeping sickness in 2001: "Before Vaniqa came on the scene, there was no reason to make eflornithine at all. Now there's a reason." The market agrees with him. Saving American complexions is a reason. Saving African lives, apparently, is not. ...

III. Why One Million Africans a Year Die of Malaria Malaria used to be common as far north as Canada and Britain. ... Shakespeare refers to it, as "ague," in eight of his plays. But today, ... Malaria is all but invisible despite the fact that it is one of the world's top killers... It is the leading cause of death for children under five in Africa. ...

International organizations and aid agencies talk a lot about malaria. But they have not backed their talk with money. The solutions they push have been things poor people can buy for themselves, because most donors are unwilling to finance more effective measures. All over Africa, a main cure for malaria is chloroquine. The great advantage of chloroquine is that it costs only a few pennies, so even poor African families can buy it. It just has one small problem – in most places it doesn't work. The parasite has become resistant to it. There is a new, effective cure, called artemisinin-based combination therapy. Countries should be switching to it rapidly, but they are not, because it's much more expensive – around $1.40 for an adult cure, 40 cents for a child. ... more than most malaria-stricken families can afford. That means rich-country donors would have to pay. Until recently, they haven't. ...

The hot prevention tool today is an insecticide-treated net to hang over a bed. These bed nets are very effective, if people can get them. But people can't... Even at the subsidized price of three dollars, the cost is high enough so that people living on a dollar a day do not buy them. One survey asked rural Africans what they would buy if they had the money. A bed net was sixth on the list. The first three items were a radio, a bicycle and, heartbreakingly, a plastic bucket. ...

The truth is that many malaria victims would be better off if America still had the disease. If malaria still existed in America, we would be attacking it with DDT . In fact, we did exactly that. ... This was extremely irresponsible and did terrible environmental harm. But now we know that DDT can beat malaria without environmental damage, if it is ... sprayed in tiny amounts inside houses. DDT, however, is banned in the United States and Europe. That means that Washington has not, until the last few months, financed its use anywhere else and it has blocked the World Health Organization from issuing recommendations to use DDT. American officials maintained it was hypocritical to push an insecticide overseas that is banned at home.

Americans are beginning to realize, however, that it is more hypocritical to deny Africa the ability to use responsibly the tools we used irresponsibly to beat malaria. Last year, President Bush announced a new program to ... provide an additional $1.2 billion over the next five years. ... It will give away bed nets, buy malaria drugs that work and finance indoor spraying. Eight countries in Africa are due to start spraying this year, and three will use DDT as their primary insecticide. ...

The Sky Isn't Falling Yet, But Stay Indoors

Martin Wolf says far too much blame is placed on the U.S. for global imbalances. The source of the problem, and hence the source of the solution, is the exchange rate policies of countries such as China. He believes changes need to be made soon or there will be a painful adjustment process to relieve the pressures arising from accumulating global imbalances:

We should still worry about imbalances, by By Martin Wolf, Financial Times: ...Why should we remain concerned about global imbalances? The answer is that they are undesirable, cannot continue indefinitely and the longer they last, the bigger and more painful the adjustment will be. Worse still, as recent US congressional threats to China ... demonstrate, much damage can be done along the way to the world economy and international relations.

Yet if we are to understand the dangers, we need first to recognise what is happening. ... If only, critics argue, the US government had a smaller fiscal deficit and US households were less profligate, the current account deficits would disappear. These people are right: if the US had an economic depression, the trade deficit would certainly dwindle. Yet this cure would be vastly more painful than the disease. ... As Lawrence Summers ... noted ... “There is one striking fact about the global economy that belies a predominantly American explanation for the pattern of global capital flows: real interest rates globally are low, not high.” ...

A superpower’s place may always be in the wrong. But, ... the driving force behind the global imbalances is Asia’s structural savings surplus, with China playing an increasingly significant role. .... If one accepts ... that the US domestic spending and current account deficits are a ... response to the excess of desired savings over investment in the rest of the world, why should we worry? ...

First, the imbalances are the results of bad policies in the capital exporting countries. The global accumulation of ... foreign currency reserves ... was the result of decisions to intervene in currency markets... China’s reserves alone are now $600 for every man, woman and child – and rising. Cannot a government ... concerned about persistent mass poverty do something more intelligent with this money than lend it to the US, at very low interest rates, only to have the latter both complain and ultimately, in all likelihood, depreciate its currency and so partially default on its liabilities?

Second, the scale of US foreign borrowing has ... allowed George W. Bush ... to offer guns and butter. But the adverse impact on sectors producing tradable goods and services has also exacerbated protectionist sentiments. When the economy next slows down, the expression of these sentiments could become both deafening and dangerous.

Third, strange things are happening to the US economy. ... Since the bursting of the equity bubble, the corporate sector has moved into surplus. The government and, above all the household sector, are in huge deficit. ... As a result, household indebtedness and debt service are both soaring (graph 1, graph 2).

Finally, the counterpart of the huge capital inflow is not increased investment, but increased consumption and falling national savings. ... Investment is also tilted towards real estate and the non-traded sector, which will not pay the foreign debts. ...

Yes, there are economists who argue that the huge US current account deficits are a mirage or, if not that, indefinitely sustainable... Over the past 15 years, US imports at constant prices grew at a trend rate of 8.3 per cent a year, while exports grew at 5.1 per cent. Today, as a result, imports are 60 per cent bigger than exports. It would take a substantial turnround in these relative rates of growth for the current account deficit merely to stabilise as a share of GDP, let alone fall. ...

What is undesirable ought to change. What is unsustainable will change. What is dangerous must change. Yet, if the world is to avoid a serious recession, adjustment must start in the surplus countries. The fate of the world economy does not lie predominantly in US hands. It is comforting for many – both American and non-American – to disbelieve this. It is true, all the same.

The Best Tax Ever

I'm going to follow Brad DeLong who notes:

Brad DeLong: Bruce the Apostate: Fewer conservative--well, not "conservative," fewer Bush-loyal--websites are printing Bruce Bartlett's columns. So it is only fair that more reality-based websites do so.

So here's Bruce Bartlett on the need to raise taxes and, given the need, the optimal tax strategy to employ:

The Best Kind of Tax, by Bruce Bartlett, Commentary, NY Times: In my previous post, I tried to show that the magnitude of growth in government spending already in the pipeline is so great that it cannot be contained just by cutting. ... So we are left with the need for a new revenue source. When confronted by the need to pay for health and other spending programs, every other major country has turned to the value-added tax, or V.A.T. This is the best strategy tax economists have ever devised for raising revenue without investing a lot in enforcement and economic incentives.

The V.A.T. is a kind of sales tax embedded in the price of goods. A farmer who grows wheat, for example, pays, say, 10 percent on the sale. The miller buys the wheat ..., makes flour, and when that is sold, he also pays 10 percent, but gets a credit for the taxes the farmer paid. The baker who makes bread from the flour also pays 10 percent when he sells to the food store, but gets credit for the taxes paid by the farmer and the miller. Since taxes must be paid in order to claim credits for the taxes embedded in the bread at earlier stages of production, the tax is largely self-enforcing. And because the tax is applied only to consumption, its impact on incentives is minimal. ...

According to the International Monetary Fund, the tax base for the V.A.T. is about 37 percent of G.D.P. in industrialized countries. With our G.D.P. close to $13 trillion, that means about $5 trillion would be available for taxation. A 10-percent V.A.T. would raise $500 billion in new annual revenue ... The average V.A.T. rate is 18 percent, according to the Organization for Economic Cooperation and Development, ranging from a low of 5 percent in Japan to a high of 25 percent in Sweden, Denmark and Hungary.

We should bite the bullet and put in a V.A.T. For now, the revenue could be used to fix glaring problems in the tax code, such as the Alternative Minimum Tax. In the longer run, it could be raised gradually to pay for Medicare and other programs. The burden is on those who oppose a V.A.T. to spell out how spending could ... be cut or taxes raised by the order of magnitude I have outlined.

Poor Measurement of Poverty Raises Concerns

The Center on Budget and Policy Priorities has concerns about the limited set of poverty measures the Bureau of Census is considering as replacements for existing measures of poverty. Here are sections of the introduction and conclusion from the report issued today:

Poor Measurement: New Census Report On Measuring Poverty Raises Concerns, by Jared Bernstein and Arloc Sherman, CBPP: On February 14, the Bureau of the Census released its latest report on alternative measures of poverty. ... The Census Bureau has consistently produced important and insightful work in this area, carrying on the mission set forth by a 1995 National Academy of Sciences (NAS) report, Measuring Poverty: A New Approach. The NAS report has been widely viewed in the research community as the leading blueprint for future improvements in measuring poverty.

The latest Census release, however, departs in some respects from this tradition. Unlike past reports in recent years, this release is limited to a set of new measures that are flawed. ... This is of particular concern because the alternative measures ... all incorporate features that both the NAS panel and past Census reports warned were faulty and that reduce the poverty rate substantially. ...

The cumulative effect of the changes in poverty measurement that are presented in the new report is to lower the poverty rate ... by 4.4 percentage points, or more than one-third, to 8.3 percent, from 12.7 percent ... By contrast, the more balanced and complete approach ... represented by the NAS-guided estimates included in last yearâ??s Census analysis resulted in a range of estimates that were between 0.1 percentage points and 2.0 percentage points higher than the official measure...

The Census Bureau says its new report is meant to provide â??a more complete measure of economic well-being,â? but ... by not following some of the key recommendations made by the National Academy of Sciences regarding improved poverty measurement ... and by not including or discussing the NAS-guided measures of poverty, the new report presents an overly positive view of the extent of poverty in America. ...

There's much more on this issue in the report. One thing we should avoid to the extent that we possibly can is the politicization of our economic statistics. I have always trusted that the people producing the statistics do their utmost to produce an unbiased picture of the economy, an independent view free of political bias. Anything, real or perceived, that undermines the faith we have in those statistics would be a huge step backward for those interested in learning how the economy operates and how policy interacts with the economy's operation, or for anyone wishing to view the economy through an unbiased statistical lens.

Is Talking on Airplanes Noise Pollution?

The social rules for appropriate cell phone use in confined spaces such are still developing. Jagdish Bhagwati, professor of economics and law at Columbia University, has a clear opinion of what the rules should be on airplanes:

Fight the mobile phone invasion at 30,000ft, by Jagdish Bhagwati, Financial Times: Our right to peace and quiet is guaranteed by fining taxi drivers from India who honk as they drive: a habit acquired through years of dodging cycles, cows, cars and the carefree in the crowded streets of Calcutta and Karachi. Flights are not allowed to land in Washington DC beyond late evening... Yet, noise pollution, practised with abandon in your face and in your ears, is tolerated in enclosed spaces in buses, trains, restaurants and cinemas and is spreading like bird flu...

The final straw in the US ... is the impending decision to allow the use of mobile phones on flights. In this way, loud passengers will be free to jabber away in a closed cabin, saying “hi” to Joey, Joel and Josie at home just for the heck of it, or conducting their business, which is no concern of yours, by public declamation. What can be done if the US Federal Aviation Administration allows this madness to happen...? [W]e are not out of remedies.

Consider what you can do in the aircraft cabin itself. Before the Good Samaritans came down on smoking, I had a friend who was so annoyed by the smoke getting into his eyes in restaurants... that he carried a little Sanyo fan that would blow the smoke back into their startled faces. While the stewardesses would not let you turn on a CD player at loud volume to drown out the mobile phone users, how about screaming into your own phone (without, of course, actually dialing and paying) ... This is worth a try. But frankly, how long and how often can such ridicule and retaliatory noise-making be sustained, without unleashing a competition in steadily higher octaves, one which the vulgar freaks you are trying to drown out are likely to win? A more effective remedy has to be a collective, legal response. How about encouraging environmental and human rights groups to file lawsuits against the agencies that grant the permission for the use of mobile phones in flight, and against the airlines when they act on such permission? ...

But what of the rights of the mobile phone users? These are more frivolous than those of the fellow passengers on whom they impose. Besides, the airlines can readily accommodate their desire to talk ... Mobile phone users should be provided, at an extra cost charged to their tickets, with a phone booth at which they can queue for their turn. That would protect their rights without invading ours.

The smoking ban on all flights came along when the science behind the problem of secondary harm from smoking became well-established. But this harm ... can also be mental. The stress of ... an enclosed space with continuous noise is sufficient to produce high blood pressure, fatigue and other ailments... It is still not completely clear whether continual emission of radiation from the use of mobile phones on flights could cause secondary brain damage to fellow passengers. If providence were just, it would surely affect the brains of the users. But who believed at first that cigarettes could hurt the smoker’s own family?

So, perhaps the compelling answer may be to threaten the mobile phone companies themselves with ultimate liability, reminding them of the cigarette manufacturers who eventually faced huge financial damages. Eventual retribution could be the most powerful deterrent to the rising spectre of cellular noise.

It would be hard to work, sleep, etc. with the person next to me jabbering on the phone, but what is different about them talking on a cell phone as opposed to talking to the person in the seat next to them or to someone across the aisle? I don't see the distinction. [dual post]

The FOMC Raises the Target Rate to 4.75%

As expected, the FOMC decided to raise the target federal funds rate from 4.5% to 4.75%. Here is the statement along with the previous statement  (released 3/31/06 1/31/06) in italics for comparison:

For immediate release

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-3/4 percent.

[No substantive difference from previous press release on 1/31/06].

The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace. As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

Although recent economic data have been uneven, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.

The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

[Identical to previous press release].

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen.

[Ferguson is not participating, so the vote was unanimous. No substantive difference from previous press release].

In a related action, the Board of Governors approved a 25-basis-point increase in the discount rate to 5-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco.

In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 5-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco.

It is worth noting that Kansas City did not request an increase in the discount rate, just as Minneapolis did not request an increase at the last meeting. This may indicate dissent on the rate increase, but until the minutes are released, we won't know for sure.

The main difference in the two statements comes in the second paragraph. The uneveness discussed in the previous statement is attributed to special, temporary factors. The committee notes that growth has rebounded strongly, but appears likely to moderate to a sustainable pace indicating that the end of rate increases may be near. However, the bottom line is identical to the last press release, "possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures," indicating that although future moves are clearly data dependent, the committee remains wary of inflationary pressures. [See also Bloomberg, NY Times, Washington Post, Wall Street Journal, Financial Times, CNN/Money, WSJ's 'Economists React', Big Picture, William Polley]

Just Close Friends

Karl Rove expresses his love for Joshua Bolten, President Bush's choice to replace Andrew Card as chief of staff:

Rove on Bolten, by Peter Lattman, WSJ Law Blog: ...Karl Rove’s assessment of President Bush’s new chief of staff:

“He’s soft-spoken but very clear thinking,” said Karl Rove, Bush’s chief political adviser. “I love him in an entirely appropriate way. ...”

Since he felt the need to make this distinction, people must make this mistake often. I'm glad he cleared up that he's not one of those "inappropriate" people. Calculated Risk fills us in on the source of Rove's love:

Joshua Bolten: "Budget Deficit Falling Fast", by CalculatedRisk: Joshua Bolten, the Master of the Budget Disaster on July 14, 2005:

"The U.S. budget deficit is falling, and it is falling fast."

Meanwhile back in the real world, the US General Fund deficit will set a new record this year of close to $600 Billion. More Bolten:

"...the budget deficit is forecast to continue to fall, to $162 billion in 2009, or 1.1 percent of GDP - less than half the size of the average deficit over the last 40 years."

This statement isn't just wrong, its dishonest. Until about 20 years ago, the Unified budget deficit and the General Fund deficit were about the same size. When Reagan (following the advice of the Greenspan Commission) upped the SS payroll tax, SS started running huge surpluses. These surpluses are not included in the General Fund. But Bolten is using the Unified Budget - and masking the General Fund deficits with SS surpluses. Over a period of 40 years Bolten should be comparing to the General Fund deficit as a percentage of GDP, not the Unified Budget deficit. That is dishonest.

Besides, Bolten was also wrong. The way things are going, the US might have a $1 Trillion General Fund budget deficit in 2009 (probably more like $800 Billion).

Boltie, you're doing a heck of a job!

Update: Brad DeLong has more. He discusses Vox Baby's comments on Bolten.

Adam Smith on Relative Poverty

Many fans of Adam Smith make the following argument concerning poverty statistics:

Treasury Secretary John Snow ... says ... How the average family is doing in absolute terms is more important than how it is doing relative to others...

Here's a Wall Street Journal commentary by Douglas Besharova from a few days ago that is cited by Donald Luskin in his claim that "The official poverty statistics just can't be right -- showing that the same percentage of Americans lives in poverty as did in 1968":

Each year the Census Bureau calculates the nation's poverty rate, based on the number of people with incomes below the official poverty line... But many analysts ... have pointed out that ... poor people's physical and material well-being is considerably better now than in the late '60s. How else to explain why so many poor now have color TV (93%) ... Millions of low-income Americans are living better lives than they did before. Period.

Adam Smith had something to say on this topic. This is from an article about Mollie Orshansky's development of poverty statistics (long, but worth it) appearing in The New Yorker:

Relatively Deprived, by John Cassidy, The New Yorker: ...The concept of relative deprivation was first described by Adam Smith in “The Wealth of Nations,” in a passage on the “necessaries” of daily life:

By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but what ever the customs of the country renders it indecent for creditable people, even the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-laborer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into, without extreme bad conduct. Custom, in the same manner, has rendered leather shoes a necessary of life in England.

Let's use the TV example. A TV, is, "strictly speaking, not a necessary of life." Suppose a family cannot afford a color TV (a 20" flat screen is less than $100). Would the presumption be that the family is living in a "degree of poverty which ... nobody can well fall into, without extreme bad conduct"? Would a parent "be ashamed" to have their children's friends find out they cannot afford a color TV when they come over to visit? If the answer is yes, then Smith would say they are impoverished.

Tax Advantages for Foreign Firms in China

Foreign companies locating in China have the advantage of low labor costs. They also pay very low taxes, much lower than domestic Chinese firms, a source of growing political discontent. To solve the problem, taxes on foreign firms located in China must be raised, or taxes on domestic firms must be lowered. The problem is that raising taxes on foreign firms endangers FDI, an important source of growth, and lowering taxes on domestic firms reduces needed tax revenues. Thus, for now, the decision is being postponed:

Beijing's 'separate but unequal' tax dilemma, by Frederick W Stakelbeck Jr, Asian Times: At the ... National People's Congress held in Beijing early this month, NPC spokesman Jiang Enzhu announced that the implementation of the much-anticipated Law on Enterprise Income Tax and the Property Law, designed to unify the income tax rates for domestic entities and foreign-invested enterprises (FIEs), would be postponed. ...

The current Chinese income-tax rate structure has been the subject of intense debate over the past several years. A growing number of Chinese economists, government officials and business leaders have openly criticized the tax policies as being unfair to domestic entities, while at the same time providing competitive advantages to FIEs. ... FIEs pay an average 15% tax rate and Chinese entities pay an average 33%. As a result, FIEs operating in China currently enjoy one of the lowest tax rates in the world.

The generous tax policy has allowed FIEs to reap tremendous annual profits and has facilitated the expansion of their China-based operations. FIEs have flocked to China and taken full advantage of the tax incentives offered by special economic zones (SEZ) and coastal open economic zones (COEZs) to grow their businesses.

In 2001, Beijing pledged to rectify the glaring disparity in the country's income-tax rate structure when it joined the World Trade Organization. The communist government promised to replace the present rate structure with a unified income-tax rate structure that would range from 24-28%. But the proposed changes never materialized, provoking frustration in the Chinese business community and raising fears that preferential income-tax rates would become permanent.

Sources close to the recent NPC summit noted that Beijing's procrastination concerning income-tax reform has been primarily based on fears of catastrophic and permanent foreign direct investment (FDI) losses. Generous FIE tax incentives have fostered foreign investment, which has steadily grown over the past few years... An increasing amount of foreign investment has gone into high-technology sectors such as telecommunications and computers, which are crucial to China's global competitiveness...

Several alternatives have been proposed by various groups to address the country's income-tax-rate dilemma. ... The most likely scenario, and the most controversial, involves Beijing delaying a decision on tax reform indefinitely. Instead, the government would call for additional industry input, cooperative empirical research and independent studies before any broad tax-unification plan commenced...

In 2005, more than 44,000 foreign-funded enterprises were established in mainland China - a tremendous accomplishment by any measure. But few observers would deny that some type of income-tax reform is now needed. ... FIEs [a]re using tax loopholes to evade about $3.75 billion in taxes annually. This, coupled with serious misgivings by the Chinese business community about the fairness of the current dual income-tax system, will eventually force Beijing to take action. ...

If you add up the social services such as health care that the government provides to workers in foreign firms, and also add in government expenditures on roads, police and fire protection, port facilities, legal protection, and so on used by these firms, will 15% minus tax breaks for locating in special economic zones cover the total costs foreign firms impose on China, or is there an implicit subsidy for locating in China built into the tax rates, tax rates that are "one of the lowest tax rates in the world"?

While I can't say for sure, I would guess that an average rate of 15% does not fully cover the costs. At the 24%-28% rate China promised the WTO, tax revenues and costs would be closer to alignment and this would reduce or eliminate the competitive advantage the implicit subsidy provides to foreign firms located in China.

Jeffrey Sachs: Depoliticize Development Aid

Jefferey Sachs argues that development aid and political goals should be separated, aid should not be contingent upon the attainment of political objectives set by donor countries:

Development Aid for Development’s Sake, by Jeffrey D. Sachs, Project Syndicate: Almost daily, the United States and Europe brandish threats to impose economic sanctions or cut off development assistance unless some vulnerable government accepts their political strictures. The most recent threats are towards the new Hamas-led government in Palestine. Other recent examples include threats vis-à-vis Chad, Ethiopia, Haiti, Kenya, Bolivia, Uganda, and long-standing sanctions against Myanmar.

To understand why requires taking a long-term view of geopolitics, particularly the gradual decline of US and European global domination. Technology and economic development are proliferating across ... the developing world, while the spread of literacy and political awareness ... made national self-determination by far the dominant ideology of our age... Nationalism continues to produce powerful political “antibodies” to American and European meddling in other countries’ internal affairs.

The failure to understand this lies behind repeated US foreign policy debacles in the Middle East... The US naively continues to view the Middle East as an object of manipulation, whether for oil or for other purposes. In the Middle East, the Iraq war is widely interpreted as a war for US control of Persian Gulf oil – a rather plausible view... Only incredible hubris and naiveté could bring US (and UK) leaders to believe that Western troops would be greeted as liberators rather than as occupiers.

The politicization of foreign aid reflects the same hubris. Even as the US rhetorically champions democracy in the Middle East, its first response to Hamas’s victory was to demand that the newly elected government return $50 million in US aid. Hamas’s doctrines are indeed unacceptable for long-term peace... But cutting aid is likely to increase turmoil rather than leading to an acceptable long-term compromise between Israel and Palestine. ... An aid cutoff should be a policy of last resort, not a first strike.

Aid cutoffs regularly fail to produce desired political results for at least two reasons. First, neither the US nor European countries have much standing as legitimate arbiters of “good governance.” Rich countries have long meddled, often with their own corruption and incompetence, in the internal affairs of the countries that they now lecture. The US preaches “good governance” in the shadow of an unprovoked war, congressional bribery scandals, and windfalls for politically connected companies like Halliburton.

Second, US and European threats to cut off aid or impose sanctions are in any case far too weak to accomplish much besides undermining already unstable and impoverished countries. Consider the recent threats to cut Ethiopia’s aid, which is on the order of $15 per Ethiopian per year – much of it actually paid to US and European consultants. It is sheer fantasy to believe that the threat of an aid cutoff would enable the US and Europe to influence the course of Ethiopia’s complex internal politics. ...

Indeed, the track record of on-again-off-again aid is miserable. Stop-and-go aid has left Haiti in an unmitigated downward spiral. The decade-long sanctions against Myanmar have not restored Aung San Suu Kyi to power, but have deepened the disease burden and extreme poverty... None of this is to suggest that the US and Europe should abide every move by every corrupt dictator. But realism in international economic affairs requires accepting that ... most reliable path to stable democracy is robust and equitable economic progress over an ample period of time.

The overwhelming standard for supplying official development assistance should therefore be whether official assistance actually promotes economic development. ... Can the aid be monitored and measured? Is it being stolen? Is it supporting real development needs, such as growing more food, fighting disease, or building transport, energy, and communications infrastructure?

If development aid can be directed to real needs, then it should be given to poor and unstable countries, knowing that it will save lives, improve economic performance, and thus also improve the long-term prospects for democracy and good governance.

Krugman's Notes on Immigration

Paul Krugman follows up on his column on immigration:

Notes on Immigration, by Paul Krugman, Money Talks, NY Times: Immigration is an intensely painful topic for a liberal like myself, because it places basic principles in conflict. Should migration from Mexico to the United States be celebrated, because it helps very poor people find a better life? Or should it be condemned, because it drives down the wages of working Americans and threatens to undermine the welfare state? I suspect that my March 27 column will anger people on all sides; I wish the economic research on immigration were more favorable than it is.

In writing this piece I drew mainly on three sources, research papers by economists I know and trust. First is a paper, “Immigration Policy,” by Gordon H. Hanson (pdf) of the University of California at San Diego. Mr. Hanson is one of my former students, and a leading expert on all matters having to do with U.S.-Mexican economic relations, especially issues having to do with income distribution. This paper gives a good overview of the (small) gains from immigration and the fiscal impacts.

Second is a paper by George Borjas and Lawrence Katz of Harvard, “The Evolution of the Mexican-Born Workforce in the United States." (pdf). Mr. Borjas is a leading expert on immigration issues; Mr. Katz is one of America’s leading labor economists.

Third is a paper by Mr. Hanson, Matthew Slaughter of Dartmouth (another former student) and Kenneth Scheve (pdf) of the University of Michigan. This paper alerted me to the way immigration penalizes more generous states.

Like all research results, the conclusions of these papers may have to be revised in the light of future research. But I’m afraid that the three negative conclusions I stressed in the column are fairly robust.

First, the benefits of immigration to the population already here are small. The reason is that immigrant workers are, at least roughly speaking, paid their “marginal product”: an immigrant worker is paid roughly the value of the additional goods and services he or she enables the U.S. economy to produce. That means that there isn’t anything left over to increase the income of the people already here.

You might ask why, in that case, there are any gains from immigration. The answer is that when a country receives a lot of immigrants, the wage paid to immigrants reflects the marginal product of the last immigrant, which is less than that of earlier immigrants. So there is some gain. But as Mr. Hanson explains in his paper, reasonable calculations suggest that we’re talking about very small numbers, perhaps as little as 0.1 percent of GDP.

There is, by the way, a possible out from this argument in the case of high-skill immigrants. You could argue that, say, South Asian engineers who move to Silicon Valley add to the dynamism of the region, generating benefits much larger than their wages. (Economists know that I’m talking about “positive externalities.”) But that’s not an argument you can easily make about Mexican migrants who haven’t completed high school.

My second negative point is that immigration reduces the wages of domestic workers who compete with immigrants. That’s just supply and demand: we’re talking about large increases in the number of low-skill workers relative to other inputs into production, so it’s inevitable that this means a fall in wages. Mr. Borjas and Mr. Katz have to go through a lot of number-crunching to turn that general proposition into specific estimates of the wage impact, but the general point seems impossible to deny.

Finally, the fiscal burden of low-wage immigrants is also pretty clear. Mr. Hanson uses some estimates from the National Research Council to get a specific number, around 0.25 percent of G.D.P. Again, I think that you’d be hard pressed to find any set of assumptions under which Mexican immigrants are a net fiscal plus, but equally hard pressed to make the burden more than a fraction of a percent of G.D.P.

Marriage is for White People

I received an email saying:

There is a lot of economics in this article: 'Marriage Is for White People'. You need to be somewhat brave to post it.

Here it is. As we contemplate immigration policy, it would be helpful to know how much of this problem can be attributed to falling wages and employment opportunities for low-skill labor. The large difference in college attendance between black men and black women is also a factor to consider:

'Marriage Is for White People', by Joy Jones, Commentary, Washington Post: I grew up in a time when two-parent families were still the norm, in both black and white America. Then, as an adult, I saw divorce become more commonplace, then almost a rite of passage. Today it would appear that many -- particularly in the black community -- have dispensed with marriage altogether...

[S]ome 12-year-olds enlightened me ... when I taught a career exploration class. ... I was pleasantly surprised when the boys in the class stated that being a good father was a very important goal to them, more meaningful than making money or having a fancy title. "That's wonderful!" I told my class. "I think I'll invite some couples in to talk about being married and rearing children." "Oh, no," objected one student. "We're not interested in the part about marriage. Only about how to be good fathers." And that's when the other boy chimed in, speaking as if the words left a nasty taste in his mouth: "Marriage is for white people." ...

He's right. At least statistically. ... African Americans ... have the lowest marriage rate of any racial group in the United States. In 2001, according to the U.S. Census, 43.3 percent of black men and 41.9 percent of black women in America had never been married, in contrast to 27.4 percent and 20.7 percent respectively for whites. African American women are the least likely in our society to marry. ... I was stunned to learn that a black child was more likely to grow up living with both parents during slavery days than he or she is today..

Traditional notions of family, especially the extended family network, endure. But ... in an era of brothers on the "down low," the spread of sexually transmitted diseases and the decline of the stable blue-collar jobs that black men used to hold, linking one's fate to a man makes marriage a risky business for a black woman. ...

"Women don't want to marry because they don't want to lose their freedom." Among African Americans, the desire for marriage seems to have a different trajectory for women and men. ... As men mature, and begin to recognize the benefits of having a roost and roots ..., they are more willing to marry and settle down. By this time, however, many of their female peers are satisfied with the lives they have constructed and are less likely to settle for marriage to a man who doesn't bring much to the table. Indeed, he may bring too much to the table: children and their mothers from previous relationships, limited earning power, and the fallout from years of drug use, poor health care, sexual promiscuity. In other words, for the circumspect black woman, marriage may not be a business deal that offers sufficient return on investment.

In the past, marriage was primarily just such a business deal. Among wealthy families, it solidified political alliances or expanded land holdings. For poorer people, it was a means of managing the farm or operating a household. Today, people have become economically self-sufficient as individuals, no longer requiring a spouse for survival. African American women have always had a high rate of labor-force participation. "Why should well-salaried women marry?" asked black feminist and author Alice Dunbar-Nelson as early as 1895. But now instead of access only to low-paying jobs, we can earn a breadwinner's wage, which has changed what we want in a husband. ...

Most single black women over the age of 30 whom I know would not mind getting married, but acknowledge that the kind of man and the quality of marriage they would like to have may not be likely, and they are not desperate enough to simply accept any situation just to have a man. A number of my married friends complain that taking care of their husbands feels like having an additional child to raise. ...

By design or by default, black women cultivate those skills that allow them to maintain themselves (or sometimes even to prosper) without a mate. "If Jesus Christ bought me an engagement ring, I wouldn't take it," a separated thirty-something friend told me. "I'd tell Jesus we could date, but we couldn't marry."

And here's the new twist. African American women aren't the only ones deciding that they can make do alone. Often what happens in black America is a sign of what the rest of America can eventually expect. In his 2003 book, ... Andrew Hacker noted that the structure of white families is evolving in the direction of that of black families of the 1960s. In 1960, 67 percent of black families were headed by a husband and wife, compared to 90.9 percent for whites. By 2000, the figure for white families had dropped to 79.8 percent. Births to unwed white mothers were 22.5 percent in 2001, compared to 2.3 percent in 1960. So my student who thought marriage is for white people may have to rethink that in the future. ...

But human nature being what it is, if marriage is to flourish -- in black or white America -- it will have to offer an individual woman something more than a business alliance, a panacea for what ails the community, or an incubator for rearing children...

Update: See also "The Role of Labor and Marriage Markets, Preference Heterogeneity and the Welfare System in the Life Cycle Decisions of Black, Hispanic and White Women" for recent academic work on this issue.

 

Should High-Skill Labor Immigration Be Limited?

This editorial in the Wall Street Journal arguing for increased immigration of high-skill labor, along with the commentary by Krugman on the need to limit low-skill immigration that follows, illegal immigration in particular, completes an immigration daily double. While discussing the impact of immigration on domestic low-skill workers, Krugman highlights research by Borjas and Katz showing that immigration of low-skill labor lowers wages for workers in those markets. Following up on Krugman's statement that "a review of serious ... research reveals some uncomfortable facts about ... immigration... If people like me are going to respond effectively to anti-immigrant demagogues, we have to acknowledge those facts," a recent paper by Borjas, "Immigration In High-Skill Labor Markets: The Impact of Foreign Students on The Earnings of Doctorates," shows that high-skill immigration has lowered wages as well. Thus, the argument made below that wages are not undercut because "it's illegal to pay these high-skill immigrants less than the prevailing wage" misses how the prevailing wage is affected by immigration:

The Other Immigrants, Review and Outlook, Wall Street Journal: Lost in the heated debate about the future of millions of illegal laborers in the U.S. is that our system for admitting foreign-born professionals is also in tatters. While globalization has increased the competition for international talent, U.S. businesses are frustrated by processing delays, long backlogs and especially the failure of Congress to increase the annual limits on visas for skilled immigrants. The Senate Judiciary Committee is scheduled to resume its mark-up of Arlen Specter's immigration bill today. And the good news is that it contains long-overdue provisions for hiring more of the foreign professionals who help keep our economy competitive.

Under Mr. Specter's proposal, the annual cap on H-1B guest worker visas for immigrants in specialty fields like science and engineering would rise to 115,000 from 65,000. Moreover, the new cap would not be fixed but would fluctuate automatically in response to demand for these visas. ...

Another important reform addresses foreign students who want to work here after graduating from U.S. colleges and universities. It doesn't make a lot of sense in today's global marketplace to educate the best and brightest and then send them away ... to start businesses and develop new technologies for U.S. competitors. But that's exactly what current U.S. policy encourages by limiting the employment prospects of foreign students who would rather stay here.

Mr. Specter would let more foreign students become permanent residents by obtaining an advanced degree in math, engineering, technology or the physical sciences and then finding work in their field. .... The reality today is that the U.S. ... and our economy will suffer if bad policy limits industry's access to intellectual capital.

Anti-immigration groups and protectionists want to dismiss these market forces, arguing that U.S. employers seek foreign nationals only because they'll work for less money. But it's illegal to pay these high-skill immigrants less than the prevailing wage. ...

According to a new study by the National Foundation for American Policy, our broken system for admitting foreign professionals also contributes to outsourcing. Since 1996 the 65,000 annual cap on H-1B visas has been reached in most years, sometimes only weeks into the new year. This leaves employers with the choice of waiting until the next fiscal year to hire workers in the U.S. or hiring people outside the country.

"Many companies concede," says the report, "that the uncertainty created by Congress' inability to provide a reliable mechanism to hire skilled professionals has encouraged placing more human resources outside the United States to avoid being subject to legislative winds." ...

[T]he U.S. labor market has ... long been a magnet for highly skilled and educated foreigners, many of whom attend school in America at some time in their lives. In a world where these brains have more options than ever in Asia and Europe, we drive them away at our economic peril.

Paul Krugman: North of the Border

Paul Krugman says we need to face up to the facts on immigration:

North of the Border, Immigration Facts, by Paul Krugman, Commentary, NY Times: "Give me your tired, your poor, your huddled masses yearning to breathe free," wrote Emma Lazarus, in a poem that still puts a lump in my throat. I'm proud of America's immigrant history, and grateful that the door was open when my grandparents fled Russia.

In other words, I'm instinctively, emotionally pro-immigration. But a review of serious, nonpartisan research reveals some uncomfortable facts about the economics of modern immigration, and immigration from Mexico in particular. If people like me are going to respond effectively to anti-immigrant demagogues, we have to acknowledge those facts.

First, the net benefits to the U.S. economy from immigration, aside from the large gains to the immigrants themselves, are small. Realistic estimates suggest that immigration since 1980 has raised the total income of native-born Americans by no more than a fraction of 1 percent.

Second, while immigration may have raised overall income slightly, many of the worst-off native-born Americans are hurt by immigration — especially immigration from Mexico. Because Mexican immigrants have much less education ... they increase the supply of less-skilled labor, driving down the wages of the worst-paid Americans. The most authoritative recent study ... by George Borjas and Lawrence Katz of Harvard, estimates that U.S. high school dropouts would earn as much as 8 percent more if it weren't for Mexican immigration.

That's why it's intellectually dishonest to say, as President Bush does, that immigrants do "jobs that Americans will not do." The willingness of Americans to do a job depends on how much that job pays — and the reason some jobs pay too little to attract native-born Americans is competition from poorly paid immigrants. Finally, ... our social safety net has more holes in it than it should — and low-skill immigrants threaten to unravel that safety net. ... Unfortunately, low-skill immigrants don't pay enough taxes to cover the cost of the benefits they receive. ...

We shouldn't exaggerate these problems. Mexican immigration, says the Borjas-Katz study, has played only a "modest role" in growing U.S. inequality. And ... the disastrous Medicare drug bill alone does far more to undermine ... our social insurance system than the whole burden of ... illegal immigrants. But modest problems are still real problems, and immigration is becoming a major political issue. What are we going to do about it?

Realistically, we'll need to reduce the inflow of low-skill immigrants. ... But the harsh anti-immigration legislation passed by the House... legislation that would, among other things, make it a criminal act to provide an illegal immigrant with medical care — is simply immoral.

Meanwhile, Mr. Bush's plan for a "guest worker" program is clearly designed by and for corporate interests, who'd love to have a low-wage work force that couldn't vote. Not only is it deeply un-American; it does nothing to reduce the adverse effect of immigration on wages. And because guest workers would face the prospect of deportation after a few years, they would have no incentive to become integrated into our society.

What about a guest-worker program that includes a clearer route to citizenship? I'd still be careful. ... it could all too easily ... create a permanent underclass of disenfranchised workers. We need to do something about immigration, and soon. But I'd rather see Congress fail to agree on anything this year than have it rush into ill-considered legislation that betrays our moral and democratic principles.

Previous (3/24) column: Paul Krugman: Letter to the Secretary
Follow up (3/27): Krugman's Money Talks: Notes on Immigration
Next (3/31) column: Paul Krugman: The Road to Dubai

Falling Real Wages and Widening Inequality

Greg Ip summarizes the data and debate on real wage growth and changes in inequality since 2000:

Wages Fail to Keep Pace With Productivity Increases, Aggravating Income Inequality, by Greg Ip, Wall Street Journal (free): Since the end of 2000, gross domestic product per person in the U.S. has expanded 8.4%, adjusted for inflation, but the average weekly wage has edged down 0.3%. That contrast goes a long way in explaining why many Americans ... don't believe the Bush administration when it trumpets the economy's strength. What is behind the divergence?...

Some factors aren't in dispute. Since the end of the recession of 2001, a lot of the growth in GDP per person ... has gone to profits, not wages. This reflects workers' lack of bargaining power in the face of high unemployment and companies' use of cost-cutting technology. ... Another factor holding down wages is that employer-paid health benefits, pensions and payroll taxes have risen almost 16% since 2000, making employers less generous with wages. Also ..., people at the top -- executives, managers and professionals -- are widening their lead on the rest.

The role of inequality is contentious. Treasury Secretary John Snow... says, "Since the early 1980s on, we've seen a rise in inequality but we've also seen ... a continuous rise in living standards." How the average family is doing in absolute terms is more important than how it is doing relative to others ... Still, the gap between the wages of the highest- and lowest-paid workers has continued to widen. Based on Labor Department data, ... the weekly wage of the worker at the 10th percentile ... fell 2.7% from 2000 to 2005, adjusted for inflation. The wage of the worker at the 90th percentile rose 5.3%.

Many economists predict that with the U.S. unemployment rate below 5% now, workers will regain their leverage. Indeed, wages have picked up recently. Still, wage inequality may continue to rise. Lawrence Katz, an economist at Harvard University ... says the wage gap has been growing for the past 25 years, particularly between the top and the middle. He believes the biggest factor is technology, which has complemented the skills of the well-educated while rendering redundant routine skills of many in the middle.

"The factors that seem to be driving it are continuing: the broad span of the computer revolution," he says. "For people in the middle the big question is: Will our education system give them ... skills that are very valuable?..." Mr. Snow, a Ph.D. economist, says income equality ultimately reflects "equality of educational opportunities," and if the U.S. can "reduce the variability of educational opportunities," it will also reduce the income gap.

History suggests that with unemployment low and growth steady, the typical family will see its income rise noticeably. As that happens, Americans' spirits will rise, as well.

Dobbsism

Is Lou Dobbs bad for America?:

Dobbsism, unintelligently designed for our times, By Benn Steil, Commentary, Financial Times: 

Even if the result is more profits for multinational corporations, do we truly believe that exporting those jobs will lead to a better life in this country, for our workers?...Or should we rely on public policy, regulation, tariffs, and quotas to protect our standard of living? Or should we share the blind faith of many in corporate America and Washington, in the power of a free market to resolve these questions? - Lou Dobbs, Exporting America, 2004

Faith is required in all views regarding the beginning of life, whether scientific, so-called, or whether religious...The fact is that evolution, Darwinism, is not a fully explained or completely rigorous and defined science that has testable results within it. - Lou Dobbs, CNN, May 12, 2005

As an economist, I feel a communal and curmudgeonly kinship with evolutionary biologists. We are ... in a seemingly endless ... struggle to persuade others that impersonal and unseen forces shape our world in predictable ways which, though far from obvious, are eminently demonstrable. The resistance we are up against I will call Dobbsism. Dobbsism is ... exemplified by crusading American television anchor Lou Dobbs... It is the consciousness behind belief in intelligent design, according to which biological life must have been designed by a creator, given its complexity. It is likewise behind the belief that a complex social construct like a “national economy” must be deliberately designed by enlightened policymakers, lest joblessness, poverty and mass bankruptcy result from the neglect.

To be clear, no biologist would claim that conscious design cannot improve on unguided evolution. Thousands of years of deliberate human genetic modification of animals and plants attest otherwise. Likewise, no economist would claim that economic outcomes cannot be improved by policy interventions. ... However, it is exceptionally well established that enormous and highly adaptive biological complexity can emerge, and has emerged, over periods of time that are well beyond what humans can intuitively grasp, through processes that are entirely unguided by a deliberate, thinking force. Evolution is indeed “just a theory”. Gravity is as well. But evolution is a theory strongly supported by the fossil record, comparative anatomy, the distribution of species, embryology and molecular biology.

Likewise, the foundation of the doctrine of free trade, that there is an inherent gain in production specialisation along the lines of comparative competence, is far from obvious but logically impeccable and empirically sound. Of this theory of comparative advantage, Nobel Prize winner Paul Samuelson wrote: “That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.”

Why should we care? Well, Dobbsism ... can be dangerous. Take President George W. Bush’s imposition of tariffs on imported steel in 2002, on which Mr Dobbs commented enthusiastically that: “It appeared that the president had decided he had a far more important constituency to serve than the members of the World Trade Organisation, the European Union, and the so-called free traders: namely, working men and women in this country”. Powerful stuff. But is it true that Mr Bush faced down foreigners and free traders to the benefit of American workers?

It is a simple task to count the number of American steel workers at two different points in time, even if it is less straightforward to determine the portion of any decline that resulted from foreign competition (as opposed to, for example, new technology). Unfortunately for economists however, they must apply considerably more data and higher maths in order to estimate the effect of steel tariffs on American workers, the vast majority of whom do not work in the steel industry. Studies have found that the tariffs produced tens of thousands of job losses in steel-using industries.  Yet since statistical estimation techniques are not nearly as comforting as counting steel workers, Dobbsism would dismiss such an exercise as “just theory”...

But this leaves the hard question unanswered. Even if "no economist would claim that economic outcomes cannot be improved by policy interventions," there is considerable disagreement about how much policy intervention is optimal. How much "genetic alteration" should we do in an attempt to make the economy yield higher welfare returns?

Geopolitics and Geoeconomics

This article argues that many proponents of free trade and globalization do not pay enough attention to the conflict between economics and geopolitics that globalization brings about and that, though globalization in some form is inevitable, it will be guided and limited by political realities:

Globalization 2.0, by David Rieff, NY Times Magazine: Globalization is both unavoidable and of great benefit to the world as a whole. At least that has been the conventional wisdom..., except at the far fringes of the radical, antiglobalization left and the xenophobic, protectionist right. But is it true? Is the march toward economic interdependence, open markets and the weakening of national identity really as unstoppable as all that?

Two recent controversies — the sale of port facilities to a company owned by the government of Dubai and the negotiation of a controversial nuclear cooperation deal with India — underscore the tensions and contradictions between America's commitment to economic globalization and its political priorities in a post-9/11 world.

In part, these controversies pitted desirable outcomes — political stability and national security on the one hand; economic dynamism on the other — against one another. In the ports case, the principles of globalization demanded that the Dubai company be allowed to take over the management of the six ports in question. But advocates of globalization never really took into account ... that even as nations become interdependent..., political difficulties may continue to separate them.

Globalization is a coherent theory for times of comparative peace and economic expansion like the 1990's. It is less persuasive in times of conflict and fear like those we live in today. Although ... Karl Rove has insisted that Democrats live in a pre-9/11 world and Republicans do not, the Bush administration's defense of the ports deal seems like a classic case of pre-9/11 thinking. The administration argued that the deal had to go forward if Americans were to remain true to their commitment to open markets... But add the threat of terrorism and the specter of weapons of mass destruction to the equation, and suddenly the words "free movement" seem more like a threat than a harbinger of a more prosperous economic future.

Bush's deal with India also illustrates the new and unexpected conundrums of globalization. The administration pledged to help India develop nuclear power plants despite that country's refusal to sign the Nuclear Nonproliferation Treaty and its maintenance of an atomic-weapons arsenal. An implicit argument was this: Because India is so important a strategic partner and, prospectively at least, a major economic power, Washington is no longer in a position to insist, even rhetorically, that New Delhi abide by the established rules of the nuclear game.

U.S. officials made little effort to deny that they were making an exception in India's case — an exception they were at pains to point out they would never make for Iran. Rather, as Bush made clear ... the cementing and deepening of the U.S.-Indian alliance were simply too important to allow a mere international legal regime to get in the way. ... Better to accept an India that uses more civilian nuclear power (and offers U.S. companies the chance to benefit from the sector's expansion) than to vainly chastise an India that is not going to abandon its nuclear arsenal anyway, whatever the effect on nonproliferation globally.

In retrospect, globalization's most fervent partisans and critics were both naïve to imagine that geopolitics would play second fiddle to geoeconomics... The Achilles heel of that "inevitabilist" vision of globalization, so dominant in the 1990's, was its rigid ... economic determinism. Today's globalization — inseparable from political concerns, no longer able to overrule nationalist sentiments or national security objections, increasingly marked by the phenomenon of Asian companies buying European and North American assets — is most likely to be far more controversial and far less orderly.

In all likelihood, Asians will complain about Western hypocrisy. After all, when globalization meant Western companies buying one another and acquiring assets in Asia, the U.S. and the countries of the European Union were unstinting advocates of globalization. Now it may seem that Western nations were never committed to ... globalization in the true sense of the word — but simply to opening new markets for their own corporations and exporting political and legal norms coined in Washington or Brussels. But could it have been otherwise? As both the Indian nuclear agreement and the furor over the Dubai ports deal demonstrate, imagining that nations could not politicize international trade and economic issues or legal norms is as vain a hope as expecting them to act against their own self-interest in any other sphere of public life. Doubtless, some form of globalization is unavoidable. It will just not be the globalization we had been led to expect.

Why is the Trade Gap So Persistent?

This article asks why the trade gap appears stickier, i.e. is not moving back towards zero, as quickly as it did in the past. Several reasons are cited, the most prominent being the increased proportion of total trade with countries that peg their exchange rate and interfere with the automatic adjustment mechanism:

A Stickier Trade Gap By Daniel Altman, Economic View, NY Times: ...Last year was the eighth in a row with a record-setting deficit in the nation's current account, which includes the trade balance and other income from abroad. Yet once upon a time, that big deficit turned around, and it took a mere five years. Could that, too, happen again this time? ... From 1987 to 1991, the annual current account deficit fell from a peak of almost $161 billion — equivalent to about 3 percent of the domestic economy — to less than $3 billion. This time, however, the challenge is bigger: the deficit of $805 billion for 2005 was about 6 percent of the domestic economy. And there are other factors that could make a turnaround much more difficult.

First, consider what took place in the late 1980's and early 1990's. The dollar was falling rapidly against foreign currencies, partly as a result of coordination by the governments of the world's five biggest economies. As the dollar fell, American investments became less attractive to foreign investors; the same returns would be worth less when converted into their home currencies. The returns themselves were falling, too. ...

Clearly, the United States was becoming a relatively less attractive place to invest. The value of the dollar and investment returns held hands as they jumped off a cliff. At the same time, the current account deficit narrowed. Americans couldn't afford as many foreign goods, and foreigners could afford more American goods.

Now things are heading in the same direction — sort of. While long-term interest rates remain stubbornly low ... in the United States, they are finally starting to rise in Japan and Germany. Those changes may be starting to make a difference in foreign investors' preferences, said Maury N. Harris, chief United States economist at UBS Securities. "When you look at the monthly Treasury international capital flows data, your capital inflows aren't as strong as they were, let's say, six months ago," he said. Mr. Harris said he also expected to see the dollar's value decline this year, by about 9 percent relative to the euro.

But even if exchange rates change with the euro and Japanese yen, it probably won't solve the problem the way it did from 1987 to 1991. The big difference is the "changing shares of who we import from, and very few changes in who we export to," said Catherine L. Mann, a senior fellow at the Institute for International Economics... "It's important, because who we import from increasingly is from countries that have exchange rates that have not moved very much."

Back in 1987, the nation's current account deficit with Japan and Europe, which had fairly flexible currencies, was 62 percent of the total deficit. Last year, it was just 32 percent. In 1987, the current account deficit with the rest of Asia, Africa and Latin America was about 50 percent of the total. In 2005, the share of the deficit for those regions, where many countries link their currencies to the dollar, was an enormous 71 percent. (The numbers in each year don't add up to 100 percent because of surpluses with other countries and international organizations.) These changes matter, because countries like China protect their currency links by keeping plenty of dollar-denominated securities in reserve in their central banks. ...

"The U.S. capital markets are where people want to invest their money right now," [Columbia] Professor [Robert] Hodrick said, "and the performance of our economy has been really extraordinary, so there's no reason to think that that's a bad idea." ... For the current account deficit to turn around in a hurry in this climate ... the United States economy would have to become genuinely weak while that of the rest of the world was strong. Some forecasters do see growth slowing here in the next year or two, while Germany and Japan pick up, and ... the current account deficit could start to shrink by the end of next year. But ... without really big differences in economic growth, a return to balance in the current account could take a decade — not just five years, as before. Given the alternative, that might not be so bad.

Echoing a point Brad Setser also makes, since the investment in the U.S. is largely from foreign central banks, the focus on business conditions and asset returns as an explanation for the trade balance misses a point Larry Summers was trying to make in his speech. Summers believes "an international facility in which countries could invest their excess reserves without taking domestic political responsibility for the process of investment decision and ultimate result" is needed to allow foreign central banks to diversify their reserve holdings.

Putin Accused of Plagiarizing His Dissertation

Vladimar Putin is accused of copying a large part of his dissertation from a management text:

Researchers peg Putin as a plagiarist over thesis, by David R. Sands, Washington Times: Vladimir Putin -- KGB spy, politician, Russian Federation president, 2006 host of the Group of Eight international summit -- can add a new line to his resume: plagiarist. Large chunks of Mr. Putin's mid-1990s economics dissertation on planning in the natural resources sector were lifted straight out of a management text published by two University of Pittsburgh academics nearly 20 years earlier ... "Somebody was cutting corners," said Mr. Gaddy, "whether it was Mr. Putin or whoever cut-and-pasted the work for him."  ... Mr. Putin's effort should be seen in a Russian, post-Soviet context, some scholars said. E. Wayne Merry ... at the American Foreign Policy Council, said dubious academic credential building was common in Eastern Europe and especially the old East Germany... "It was really quite common for an up-and-coming apparatchik to get a ghostwritten work done to obtain a degree," he said. "It's probably an open question whether Putin even read his dissertation until shortly before he had to defend it."...

The Velocity of Money and Recessions

Here's a brief follow-up to the post on velocity. The graphs show the percentage change (year over year rather than month to month as before) in M1, M2, and M3 income velocity, and add NBER dated recessions:

What Jobs Should Laid-Off Workers Be Retrained To Do?

This article is an attempt to address an often repeated, but hard to answer question, what jobs to target when designing education and retraining programs for displaced workers. However, the article is more successful at identifying the problems than it is at finding a recipe for solving the displaced worker problem:

Retraining Laid-Off Workers, but for What?, by Louis Uchitelle, NY Times: Layoffs have disrupted the lives of millions of Americans over the last 25 years. The cure that these displaced workers are offered — retraining and more education — is heralded as a sure path to new and better-paying careers. But often that policy prescription does not work, as this book excerpt explains. It is adapted from "The Disposable American: Layoffs and Their Consequences" by Louis Uchitelle, an economics writer for The New York Times...

JO GOODRUM, a thin, energetic woman older than her audience of aircraft mechanics ... got their attention with a single, unexpected sentence... Her husband, she said, had been laid off six times since the late 1980's. And yet here she was, standing before them, in one piece, cheerful, apparently O.K., giving survival instructions to the mechanics, who would be laid off themselves in 10 days.

They were, in nearly every case, family men in their 30's and 40's who had worked for United Airlines since the mid-1990's. ... Confrontation had brought on the layoffs. Influenced by militants in their union local, Hoosier Air Transport Lodge 2294 of the International Association of Machinists, the 2,000 mechanics at the center had engaged in a work slowdown for many months, and then a refusal to work overtime. But rather than give ground, United responded by outsourcing, sending planes to nonunion contractors elsewhere in the country. That scared the mechanics. They quieted down and, in effect, authorized the leaders of Lodge 2294 to make peace. ... In this state of mind, the union was helping to usher the 60 laid-off mechanics quietly away. It had rented the conference room on this cold January evening in 2003 to introduce the men to what amounted to a boot camp for recycling laid-off workers back into new, usually lower-paying lines of work.

The Relationship Between Manufacturing Production and GDP

After posting this graph showing the relationship between industrial production (IP) and GDP, I was made aware of research on this topic by Charles Steindel appearing in the New York Fed's August 2004 issue of Current Issues in Economics and Finance. In examining the graph I posted, it is difficult to see any change in the relationship between IP and GDP over time. This paper shows that a change in the trend relationship between the two series since 2001 is detectable when the series are put into a comparable basis (basically, manufacturing IP vs. the goods component of GDP) and offers reasons for the break in the relationship:

The Relationship between Manufacturing Production and Goods, by Charles Steindel, NY Fed: The sharp divergence in the 2001 recession between two key economic indicators—manufacturing production and goods output—could suggest that one indicator is flawed, casting doubt on the reliability of its overall series. This analysis finds no evidence of error. Rather, the strength of spending on consumer—relative to capital—goods and the growth of merchandising services in the sale of consumer goods more likely explain the recent deviation.

A curious phenomenon of the 2001 recession was the sharp divergence between two arguably similar economic indicators: the manufacturing component of industrial production and the goods output component of GDP.1 Adding to the peculiarity is the fact that the indicators’movements were much more alike in the previous recession, 1990-91.

Beginning in mid-2000, manufacturing, or "factory," production experienced significant declines. ... In the year and a half that followed, production grew very little. ... The GDP data tell a different story. The 2001 downturn witnessed virtually no drop in overall GDP, and there has been substantial growth since then. ... GDP encompasses more than just manufacturing activity, so it may not necessarily move in step with manufacturing production.2 Within the GDP data, however, is a series—goods output—that measures U.S. production of goods. The ... series, which accounts for about 40 percent of GDP, measures the same type of activity as manufacturing production does. Yet this series, like overall GDP, has behaved quite differently than the factory output numbers in recent years...

The recent divergence of these two sets of data raises a pertinent question... Namely, are manufacturing production and goods output measuring the same type of activity? If they are, their separate paths could suggest that one indicator has been in error and thus cast doubt on the reliability of the overall industrial production or GDP number.

Selling the Tree Farm

Suppose the government were to sell off all of its assets, the national parks, the White House, dams, tanks, government buildings, desks, chairs, the miles of ocean front land between Los Angeles and San Diego used as a military base, every bit of government property sold to the highest bidder. If the government completely liquidated, would it have enough to pay off the national debt? While it's an interesting exercise to think through, and the (highly speculative) estimates I've seen place the total value of government assets somewhat close to the value of the debt, I didn't expect the government would actually try to pay the debt this way:

Selling the Forests, Editorial, NY Times:  It's rarely a good idea to sell off assets to pay normal operating expenses. It's an even worse idea when the assets are chunks of national forest. But that's exactly what the Bush administration wants to do. Washington has long sent money to isolated local communities surrounded by national forests. The communities cannot tax federal property, so the money helps pay for schools. The grants were calculated as a percentage of timber sales. When the annual harvest declined, partly as a result of court rulings in favor of various endangered species, the money was taken from general revenues. President Bush's 2007 budget proposes to raise the money by auctioning off about 300,000 acres of federal forest in 41 states, at an anticipated price of $800 million. The administration recently sent a bill to Congress that would give the Forest Service the authority to conduct the sales. ... In addition to the forest sale, the administration also proposes to sell a half-million acres managed by the Interior Department, not for any purposes related to stewardship of the public lands, but simply to reduce a national deficit already bloated by tax cuts...

Summers: Foreign Central Banks Should Diversify Away from U.S. Debt

Larry Summers tells foreign central banks to diversify their reserves away from U.S. debt:

Summers Urges Diversification For Emerging-Markets' Assets, by Davud Wessel, WSJ: Lawrence Summers ... said emerging-market governments should consider diversifying their reserves away from "maximally liquid, maximally safe" short-term securities, such as U.S. Treasury debt. ... Mr. Summers said China, Taiwan, Russia, Thailand, India and other countries with significant reserves should consider "more aggressive investment -- either in support of imports that have a high social return or in a much richer menu of international assets." If India's reserves were invested in assets that performed as well as U.S. university endowments, he said, its government would have additional income equal to between 1% and 1.5% of gross domestic product each year.

Because central banks are likely to be criticized if their investments do poorly and because of "opportunities for mischief in picking assets" and "exercising control," Mr. Summers suggested the International Monetary Fund or World Bank consider creating "an international facility in which countries could invest their excess reserves without taking domestic political responsibility for the process of investment decision and ultimate result."...

I'd rather not have a shift away from U.S. Treasury debt and the upward pressure on interest rates that's likely to bring about. Still, it would be wise for us to prepare for that eventuality, something we are not doing now. Full text of Summer's remarks.

The Income Velocity of Money

The latest issue of The Economist argues that central banks should pay more attention to monetary aggregates in the conduct of monetary policy. Nevertheless, the Fed discontinued reporting M3 on March 23. In light of this, and for those who might be interested, here's a few graphs showing velocity and velocity growth measures based upon M1, M2, and M3, where V ≡ PY/M and PY is nominal GDP:

Amartya Sen: Democracy Isn't 'Western'

Amartya Sen, a Nobel laureate in economics discusses the deception of using cultural differences between countries as an explanation of economic and political differences, in particular as an explanation for the emergence of democracy in some countries, but not in others:

Democracy Isn't 'Western', by Amartya Sem, Commentary, WSJ:  "The fault, dear Brutus, is not in our stars, but in ourselves, that we are underlings." Culture too, like our stars, is often blamed for our failures. Attempts to build a better world capsize, it is alleged, in the high sea of cultural resistance. The determinism of culture is increasingly used in contemporary global discussions to generate pessimism about the feasibility of a democratic state, or of a flourishing economy, or of a tolerant society, wherever these conditions do not already obtain.

Indeed, cultural stereotyping can have great effectiveness in fixing our way of thinking. When there is an accidental correlation between cultural prejudice and social observation (no matter how casual), a theory is born, and it may refuse to die even after the chance correlation has vanished without trace. For example, labored jokes against the Irish, which have had such currency in England, had the superficial appearance of fitting well with the depressing predicament of the Irish economy when it was doing quite badly. But when the Irish economy started growing astonishingly rapidly, for many years faster than any other European economy, the cultural stereotyping and its allegedly profound economic and social relevance were not junked as sheer rubbish. Theories have lives of their own, quite defiantly of the phenomenal world that can be actually observed.

Many have observed that in the '60s South Korea and Ghana had similar income per head, whereas within 30 years the former grew to be 15 times richer than the latter. This comparative history is immensely important to study and causally analyze, but the temptation to put much of the blame on Ghanaian or African culture (as is done by as astute an observer as Samuel Huntington) calls for some resistance. Mr. Huntington closes his contrast with a spectacular formula: "South Koreans valued thrift, investment, hard work, education, organization and discipline. Ghanaians had different values. In short, cultures count." Ghanaians, and perhaps many other Africans, seem doomed to stagnate, according to this analysis.

In fact, that cultural story is extremely deceptive. There were many important differences, other than any differences in cultural predispositions, between Ghana and Korea in the 1960s. First, the class structures in the two countries were quite different, with a very much bigger -- and proactive -- role of business classes in Korea. Second, the politics were very different, too, with the government in South Korea eager to play a prime-moving role in initiating societal reform and economic development in a way that was not true in Ghana. Third, the close relationship between the Korean economy and Japan, on the one hand, and the U.S., on the other, made a big difference, at least in the early stages of Korean economic expansion.

Fourth -- and perhaps most important -- by the 1960s South Korea had acquired a much higher literacy rate and a much more expanded school system than Ghana had. Korean massive progress in school education had been largely brought about in the post-World War II period, mainly through resolute public policy, and it could not be seen just as a reflection of cultural difference. This is not to suggest that cultural factors are irrelevant to the process of development, but they do not work in isolation from social, political and economic influences. Nor are they immutable.

The temptation of founding economic pessimism on cultural resistance is matched by the evident enchantment, even more common today, of basing political pessimism, particularly about democracy, on alleged cultural impossibilities. While it is easy enough to understand the widespread -- and increasing -- doubts about armed intervention allegedly aimed at jump-starting democracy in Iraq through largely foreign and military planning, it would be quite a leap from there to become skeptical of the general possibility of the emergence of democracy in any country that is currently nondemocratic. It is worth remembering that democracy has developed well enough in many countries in Asia, Africa and Latin America, and in the case of some, such as South Africa, even foreign assistance to local democratic movements (for example through economic boycott) has positively helped.

When it is asked whether Western countries can "impose" democracy on the non-Western world, even the language reflects a confusion centering on the idea of "imposition," since it implies a proprietary belief that democracy "belongs" to the West, taking it to be a quintessentially "Western" idea which has originated and flourished exclusively in the West. This is a thoroughly misleading way of understanding the history and the contemporary prospects of democracy.

Stiglitz: Bush's Bad Faith Energy Policy

Joseph Stiglitz, a Nobel laureate in economics and a Professor of Economics at Columbia University, is not happy with Bush's energy policy. In this Project Syndicate piece, he wonders if it is "just another example of incompetence and muddle" or if the policy is the result of  "bad faith and sheer ineptitude":

Bush’s Bad-Faith Energy Policy, by Joseph E. Stiglitz, Project Syndicate: One of the more surreal sessions at this year’s World Economic Forum in Davos had oil industry experts explaining how the melting of the polar ice cap ... represents ... an opportunity: vast amounts of oil may now be accessible. Similarly, ... the fact that the United States has not signed the Law of the Sea, the international convention determining who has access to offshore oil and other maritime mineral rights, presents ...[an] upside: the oil industry ...  need not beg Congress for the right to despoil Alaska.

President George W. Bush has an uncanny ability not to see the big message. For years, it has become increasingly clear that much is amiss with his energy policy. Scripted by the oil industry, even members of his own party referred to an earlier energy bill as one that “left no lobbyist behind.” While praising the virtues of the free market, Bush has been only too willing to give huge handouts to the energy industry...

There is a market failure when it comes to energy... The fact that Americans do not pay the full price for the pollution – especially enormous contributions to greenhouse gases – that results from their profligate energy use means that energy is under-priced, in turn sustaining excessive consumption. The government needs to encourage conservation, and intervening in the price system – namely, through taxes on energy – is an efficient way to do it. But, rather than encouraging conservation, Bush has pursued a policy of “drain America first,” leaving America more dependent on external oil in the future. ...

Now, ... Bush appears to have finally woken up to the reality of America’s increasing dependence; with soaring oil prices, it was hard for him not to note the consequences. But, again, his administration’s faltering moves will almost surely make matters worse in the immediate future. Bush still refuses to do anything about conservation, and he has put very little money behind his continuing prayer than technology will save us.

What, then, to make of Bush’s recent declaration of a commitment to make America 75% free of dependence on Middle East oil within 25 years. For investors, the message is clear: do not invest more in developing reserves in the Middle East, which is by far the lowest-cost source of oil in the world.

But, without new investment in developing Middle East reserves, unbridled growth of energy consumption in the US, China, and elsewhere implies that demand will outpace supply. If that were not enough, Bush’s threat of sanctions against Iran poses the risks of interruptions of supplies from one of the world’s largest producers. With world oil production close to full capacity and prices already more than double their pre-Iraq War level, this portends still higher prices, and still higher profits for the oil industry – the only clear winner in Bush’s Middle East policy.

To be sure, one shouldn’t begrudge Bush for having at last recognized that there is a problem. But, as always, a closer look at what he is proposing suggests another sleight of hand by his administration. Aside from refusing to recognize the importance of global warming, encourage conservation, or devote enough funds to research to make a real difference, Bush’s grandiose promise of a reduction of dependence on Middle East oil means less than it appears. With only 20% of US oil coming from the Middle East, his goal could be achieved by a modest shift of sourcing elsewhere.

But surely, one would think, the Bush administration must realize that oil trades on a global market. Even if America were 100% independent of Middle East oil, a reduction in supply of Middle East oil could have devastating effects on the world price – and on the American economy.

As is too often the case with the Bush administration, there is no flattering explanation of official policy. Is Bush playing politics by pandering to anti-Arab and anti-Iranian sentiment in America? Or is this just another example of incompetence and muddle? From what we have seen over the past five years, the correct answer probably contains more than a little bad faith and sheer ineptitude. [dual posted]

DeLong: Lack of Penalties for Unsound Fiscal Policy Threatens the Euro

Brad DeLong warns that the lack of institutional and market mechanisms to penalize unsound fiscal policy among European Union members is a threat to the euro:

Europe’s Free Riders, by J. Bradford DeLong, Project Syndicate: In the United States, individual states that follow unsound fiscal policies face a penalty. Their bonds sell at a discount... The higher debt service they must pay serves – to some degree – as a form of discipline against the temptation to spend now and pay later.

Of course, the discipline of the market is not perfect: the bond market does not “see” implicit future liabilities (like promised pension payments) to any great degree. Nevertheless, this enforced fiscal discipline, combined with individual states’ own internal budgetary procedures, has prevented a large scale state-level fiscal crisis from occurring in the US since the Great Depression.

Let us now turn to Europe. Before the advent of the euro, there were many fiscal crises in individual nation-states in southern Europe, which produced waves of high inflation. But, with the single currency in place, the road to solving a fiscal crisis through inflation has been closed, as the European Central Bank (ECB) now stands watch over monetary policy.

Nevertheless, even with nation-states no longer able to rely on inflation to solve their unbalanced finances, the single currency allows them to use the debt capacity properly belonging to other members of the European Union to extend their spending sprees and postpone political accountability... To head off this possibility, the EU created the Stability and Growth Pact: government deficits had to be less than 3% of GDP.

Last week, the government of Germany – once the most fiscally prudent and disciplined EU country – broke the pact’s rules for fiscal discipline for the fifth consecutive year... Finance Minister Peer Steinbrueck signaled that he expected the European Commission to apply some sanctions to Germany: the credibility of the pact would, he said, be at stake if no action were taken. Thus, Germany would not block sanctions ... as it did two and a half years ago.

But Steinbrueck also made it clear that he expects any sanctions in response to Germany’s predicted 3.4%-of-GDP fiscal deficit to be largely symbolic, not penalties that would cost its government or economy anything of significance. The Stability and Growth Pact is not – or is not yet – working anywhere near the way it was intended to work.

What about market discipline? Is the German government’s willingness to issue more debt and run bigger deficits limited because the market recognizes and penalizes nation states that allow their fiscal positions to weaken?

In a word, no. The interest rates on the euro-denominated sovereign debt of the twelve euro-zone governments are all very similar. So the market does not seem to care that countries have different potentials to generate exports to fund the financial flows needed for debt repayments, or different current and projected debt-to-GDP ratios. ...

In the long run, this is dangerous. Both market discipline and sound fiscal management are needed to create a reasonable chance of long-run price stability. Omit either a market penalty now for behavior that may become reckless or the institutional levers that give a voice to future generations, and you run grave risks – perhaps not today or tomorrow, but someday...

As time passes, the coming of the single currency and the way that the euro has been implemented is generating more and more unease. .... The necessary transfers are not being made to make the common currency bearable to regions that ... are already in recession when the ECB tightens policy. The institutional foundations of stable long-run fiscal policy are being eroded. And ... the ECB is giving the market less scope to reward the thrifty and penalize the profligate than it should.

There is no movement of the soil yet, and there will not be for some time. But the ground under the euro may well begin to shift if things don’t change.

Hunting for a Domestic Agenda

Some notes from the Wall Street Journal's Washington Wire:

Pay Takes Center Stage, by John Harwood, Washington Wire:

MINIMUM WAGE EMERGES as election-year flashpoint. Treasury Secretary Snow’s remarks on income inequality fuel debate. “We’ll engage with” advocates of an increase, he says, while cautioning against pricing some workers out of labor market. The wage remains $5.15 an hour, a level set in 1997; relative to average wages, it’s at its lowest point since 1949. Commerce Secretary Gutierrez also signals openness to an increase if Congress pursues the issue “thoughtfully…and not emotionally.” With Bush and Republicans politically weakened, Democratic Sen. Kennedy plans push for floor vote this spring on an increase to $7.25. Strategist Carville advises Democrats to block pay raise for Congress until average worker’s wages rise.

TEAM BUSH SCRAMBLES to revive domestic agenda. President’s acknowledgment of political capital spent on war reflects slipping prospects on other fronts. Senate Finance Chairman Grassley predicts uphill fight for even scaled-down version of expanded health savings accounts. A senior Bush adviser sees delay — pushing House-Senate conference until after midterm elections — as best chance for winning immigrant guest-worker program. Both chambers have sidetracked Bush’s proposed Medicare savings; extension of dividend and capital-gains tax cuts remains in doubt. Moderate Republicans, complains Heritage Foundation’s Michael Franc, are “completely untethered” from party leaders. ...

MINOR MEMOS: …“Cheney Invites Helen Thomas on Hunting Trip” following her contentious press conference exchange with Bush, humorist Andy Borowitz reports.

Paul Krugman: Letter to the Secretary

Paul Krugman sends a Dear John letter:

Letter to the Secretary, Dear John Snow, by Paul Krugman, NY Times:  Dear John Snow, secretary of the Treasury:

I'm glad that you've started talking about income inequality, which in recent years has reached levels not seen since before World War II. But if you want to be credible on the subject, you need to make some changes in your approach.

First, you shouldn't claim, as you seemed to ..., that there's anything meaningful about the decline in some measures of inequality between 2000 and 2003. Every economist realizes that ... "much of the decline in inequality during that period reflected the popping of the stock market bubble," which led to a large but temporary fall in the incomes of the richest Americans.

We don't have detailed data ... yet, but the available indicators suggest that after 2003, incomes at the top ... came roaring back. ... I find it helpful to illustrate ... with a hypothetical example: say 10 middle-class guys are sitting in a bar. Then the richest guy leaves, and Bill Gates walks in. Because the richest guy in the bar is now much richer than before, the average income in the bar soars. But the income of the nine men who aren't Bill Gates hasn't increased, and no amount of repeating "But average income is up!" will convince them that they're better off.

Now think about what happened in 2004 ... a small fraction of the population got much, much richer. ... In effect, Bill Gates walked into the bar. Average income rose, but only because of rising incomes at the top.

Speaking of executive compensation, Mr. Snow, it hurts your credibility when you say, as you did ..., that soaring pay for top executives reflects their productivity and that we should "trust the marketplace." Executive pay isn't set in the marketplace; it's set by boards ... And executives' pay often bears little relationship to their performance. You yourself ... are often cited as an example. When you were appointed to your present job, ... the performance of the company you had run, CSX, was "middling at best." Nonetheless, you were "by far the highest-paid chief in the industry." ... So my advice on the question of executive pay is: don't go there.

Finally, you should stop denying that the Bush tax cuts favor the wealthy. ... [U]sing the right measure — the effect of the tax cuts on after-tax income — the bias toward the haves and have-mores is unmistakable. ... once the Bush tax cuts are fully phased in, they will raise the after-tax income of middle-income families by 2.3 percent. But they will raise the after-tax income of people ... with incomes of more than $1 million, by 7.3 percent.

And those calculations don't take into account the indirect effects of tax cuts. If the tax cuts are made permanent, they'll eventually have to be offset by large spending cuts. ... that means cuts where the money is: in Social Security and Medicare benefits. Since middle-income Americans will feel the brunt of these cuts, yet received a relatively small tax break, they'll end up worse off. But the wealthy will be left considerably wealthier.

Of course, my suggestions about how to improve your credibility would force you to stop repeating administration talking points. But you're the secretary of the Treasury. Your job is to make economic policy, not to spout propaganda. Oh, wait.

Previous (3/20) column: Paul Krugman: Bogus Bush Bashing
Next (3/27) column: Paul Krugman: North of the Border

Meltdown

At current levels of greenhouse gases, a lot of coastal property may be "liquidated" as seas rise by as much as twenty feet:

Climate Model Predicts Greater Melting, Submerged Cities, Scientific American: Over the past 30 years, temperatures in the Arctic have been creeping up, rising half a degree Celsius with attendant increases in glacial melting and decreases in sea ice. Experts predict that at current levels of greenhouse gases ... the earth may warm by as much as five degrees Celsius, matching conditions roughly 130,000 years ago. Now a refined climate model is predicting, among other things, sea level rises of as much as 20 feet, according to research results published today in the journal Science...

Such a sea level rise would permanently inundate low-lying lands like New Orleans, southern Florida, Bangladesh and the Netherlands. Already sea level rise has increased to an inch per decade... And evidence that the Arctic is exponentially warming continues to accumulate. ... "We need to start serious measures to reduce greenhouse gases within the next decade," ... "If we don't do something soon, we're committed to [13 to 20 feet] of sea level rise in the future."

Bernanke Shrugs Off a Potential Decline in the Dollar

Ben Bernanke is relatively unconcerned about the potential economic consequences of a falling dollar:

Bernanke Says Dollar Risk From Less Capital Not 'Worrisome', Bloomberg: Federal Reserve Chairman Ben S. Bernanke said a possible decline in the dollar because of less foreign investment wouldn't have a "worrisome" effect on the U.S. economy. Bernanke said it isn't clear that faster economic growth in emerging markets would cause investors to shift capital to those countries and away from the U.S. Should that happen, "it might be associated with a decline in the value of the dollar and a narrowing of the U.S. trade deficit," Bernanke wrote in a March 21 letter to Representative Harold Ford Jr... Neither of those events, though, "would be likely to threaten U.S. growth or boost inflation and interest rates to a worrisome extent."... Bernanke told another lawmaker this week, Democratic Representative Brad Sherman of California, that the trade deficit needn't cause a "precipitous decline" in the dollar's value, though the "possibility of a future disruptive correction of the U.S. trade deficit cannot be ruled out."

There's more in the letter to Representative Sherman concerning Bernanke's opposition to allowing non-financial companies to perform banking functions, something Wal-Mart has applied to do:

Bernanke: Economy can handle dollar drop, CNN/Money/Reuters: ...In the letter, Bernanke also restated the Fed's position that Congress should review an exemption that allows commercial firms to acquire industrials banks, warning that decisions on the issue could have "important ramifications" for the U.S. economy. ... Wal-Mart Stores ... has applied to open an industrial bank in Utah, an application under review by the Federal Deposit Insurance Corp. ... In a news release, Sherman said the statement "clearly urges Congress to prevent regulators from mixing banking and commerce."

Creative Construction

The stereotype is that American students aren't very well-trained technically and thus do poorly when tested in areas such as math and science, but their intuitive skills are fairly well developed. Foreign students are just the opposite according to this view, excellent technically, but less able to express the intuitive reasoning behind the mathematics or the science and less able to use intuitive skills to combine ideas creatively. The difference is generally attributed to a difference in emphasis in education with foreign students far more devoted to rote learning than their American counterparts. While this gives Americans a disadvantage in engineering, computer programming, and so on, they are much more likely to come up with innovative new ideas. Or so the story goes. Is this is really true? India and China believe it and are wondering how to change their educational systems to encourage more creativity:

Worried About India's and China's Booms? So Are They, by Thomas L. Friedman, Commentary, NY Times: The more I ... travel, the more I find that the most heated debates in many countries are around education. ... every country thinks it's behind. ... America agonizes that its ... public schools badly need improvement in math and science. I was just in Mumbai attending the annual meeting of India's high-tech association, ... where many speakers worried aloud that Indian education wasn't nurturing enough "innovators."

Both India and China, which have mastered rote learning and have everyone else terrified about their growing armies of engineers, are wondering if too much math and science — unleavened by art, literature, music and humanities — aren't making Indira and Zhou dull kids and not good innovators. Very few global products have been spawned by India or China.

"We have ... everyone going into engineering and M.B.A.'s," said Jerry Rao, chief executive of ... one of the top Indian outsourcing companies. "If we don't have enough people with the humanities, we will lose the [next generation of] V. S. Naipauls and Amartya Sens," he added, referring to the Indian author and the Indian economist, both Nobel laureates. ...

Innovation is often a synthesis of art and science, and the best innovators often combine the two. The Apple co-founder Steve Jobs ... recalled how he dropped out of college but stuck around campus and took a calligraphy course, where he learned about the artistry of great typography. "None of this had even a hope of any practical application in my life," he recalled. "But 10 years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography." ...

Capital will now flow faster than ever to tap the most productive talent wherever it is located ... Hence the concern I found in India that it must move quickly from business process outsourcing ... into knowledge process outsourcing  ... coming up with more original designs and products.

"We need to encourage more incubation of ideas ... to make innovation a national initiative," said Azim Premji, the chairman of ... one of India's premier technology companies. "Are we as Indians creative? Going by our rich cultural heritage, we have no doubt some of the greatest art and literature. We need to bring the same spirit into our economic and business arena."

But to make that leap, Indian entrepreneurs say, will require a big change in the rigid, never-challenge-the-teacher Indian education system. "If we do not allow our students to ask why, but just keep on telling them how, then we are only going to get the transactional type of outsourcing..." said Nirmala Sankaran C.E.O. of ... an Indian-based education company. "We have a creative problem in this country."...

The Post's "Sekrit Plan" is Working!

There's more trouble for the Washington Post's new right-wing blogger. The Washington Post's "sekrit plan" to discredit the right is working!:

Conservative blogger recently hired by Washington Post appears to be serial plagiarist, Raw Story: Various liberal bloggers around the web are exposing what appears to be a pattern of plagiarism by the new conservative blogger hired by the Washington Post, Ben Domenech... The prominent blogger Atrios has compiled a listing of at least four instances of apparent plagiarism. Several examples were also found by DailyKos. In one instance, Domenech appears to have lifted a paragraph from Salon.com. Read the full list of links to the quotes listed below at Atrios.blogspot.com.

Domenech: At its best, "The Bachelor" skews the absurdity of any human relationships ‹ even the successful ones. As terrified as Jimmie is of losing his freedom, Anne is equally worried about becoming like her parents ‹ who, it turns out, are an older couple nauseatingly and demonstratively still in love with each other.

Salon: At its best, it skews the absurdity of any human relationships -- even the successful ones. As terrified as Jimmie is of losing his freedom, Anne is equally worried about becoming like her parents -- who, it turns out, are an older couple nauseatingly, demonstratively, still in love with each other.

In a second instance, he appears to have lifted part of an article from reviewer Steve Rhodes.

Domenech: The most important co-stars in the Bond movies are the spy's toys. These films usually have the audience applauding for the stunts and this episode of the superspy saga is no different. There's plenty of action and vehicles to enjoy, like the helicopter with a super-sized chainsaw attached, which cuts through cars and buildings, and a sleek, one-man boat with jet afterburners that looks like something custom-made for Batman.

Rhodes: The most important costars in the Bond movies are the spy's toys. These films usually have the audience applauding for the stunts, and this episode of the superspy saga is no different. The best of the bunch in THE WORLD IS NOT ENOUGH is a sleek, one-man, black boat complete with jet afterburners, which looks like something custom-made for Batman. The vehicle even has the ability to dive underwater briefly while the driver holds his breath. It can turn into a car as well, all the better to engage in a typical Bond demolition derby.

In a third instance, he copies Salon.

Domenech: One night, Frank meets Mary Burke (Patricia Arquette), whose father has suffered a heart attack. Mary, a former junkie, hasn't spoken to her father in three years, but she becomes deeply troubled when she realizes he's so close to death. Frank is even more concerned for her than he is for her father. He begins to fall deeply in love with her, checks up on her at her apartment, invites her to have a piece of pizza at the hospital with him. He's as gentle as a lamb with her, but he's an exhausted one, all bruised and battered.

Salon: In the line of duty one night, Frank meets Mary Burke (Patricia Arquette), whose father has suffered a heart attack. Mary is a former junkie who seems to have just barely pulled her life together. She hasn't spoken to her father in three years, but she becomes troubled when she realizes he's so close to death. Frank is just as concerned for her as he is for her father. He begins to fall deeply in love with her, checking up on her at her apartment, inviting her to have a piece of pizza at the hospital with him. He's as gentle with her a spring lamb, but he's an exhausted one, all bruised and buffeted.

Domenech: Rhames gives the most delightful and energized performance in the movie. His scenes, particularly his sassy flirtation with a honey-voiced dispatcher (Queen Latifah) let some much-needed light leak into the picture. Arquette is charming but neurotic as the dazed, soft-spoken Mary. She seems to walk around in a haze of confusion half the time, but when she smiles, the air around her seems to clear miraculously. Her scenes with Cage (her husband in real life) have an emotional quality that sets them apart from the rest of the film, but they are sometimes overlong.

Salon: Rhames gives the single most delightful and energized performance in the movie. His scenes, particularly his sassy flirtation with a honey-voiced dispatcher (no wonder: it's Queen Latifah) let some much-needed light leak into the picture. Arquette, as usual, is charming, here as the dazed, soft-spoken Mary. She seems to walk around in a haze of confusion half the time, but when she smiles, the air around her seems to clear miraculously. Her scenes with Cage (her husband in real life) have a strange, arrhythmic underwater quality to them that's vaguely maddening but fascinating at the same time.

More instances are available at DailyKos.com.

The Foreign Direct Investment Behavior of Multinational Corporations

A colleague,  Bruce Blonigen, writing in the NBER Reporter on the determinants of foreign direct investment by multinational corporations:

Foreign Direct Investment Behavior of Multinational Corporations, by Bruce A. Blonigen, NBER Reporter: There is increasing recognition that understanding the forces of economic globalization requires looking first at foreign direct investment (FDI) by multinational corporations (MNCs): that is, when a firm based in one country locates or acquires production facilities in other countries. While real world GDP grew at a 2.5 percent annual rate and real world exports grew by 5.6 percent annually from 1986 through 1999, United Nations data show that real world FDI inflows grew by 17.7 percent over this same period! Additionally, MNCs mediate most world trade flows. For example, Bernard, Jensen, and Schott find that 90 percent of U.S. exports and imports flow through a U.S. MNC, with roughly 50 percent of U.S. trade flows occurring between affiliates of the same MNC, or what is termed intra-firm trade ⁽¹⁾  

Despite the obvious importance of FDI and MNCs in the world economy, research on the factors that determine FDI patterns and the impact of MNCs on parent and host countries is in its early stages. The most important general questions are: what factors determine where FDI occurs, and what impacts do those MNC operations have on the parent and host economies? As I discuss in a recent survey of the empirical literature addressing the first question -- the determinants of FDI decisions -- the answers are not straightforward.⁽²⁾ In particular, the literature has shown that we cannot simply conclude that factors such as exchange rates or tax policies have an unambiguous general impact on FDI patterns. Instead, meaningful insights come from developing hypotheses about, say, when a factor should matter for FDI, or even just a particular form of FDI, and then finding creative ways to test these hypotheses in the data.

Was There a Conspiracy to Alter the CPI and Reduce Entitlement Spending?

Did the government change the calculation of the CPI from an arithmetic mean to a geometric mean for valid economic and statistical reasons, or was it a conspiracy designed to save money on entitlement spending?:

macroblog: Is The CPI A Government Conspiracy?: It seems that a lot of people think so, and several readers have pointed me in the direction of Mr. John Williams, whose website appears to be devoted to the proposition that there liars, damned liars, statistics, and the lying damned liars who construct them. Williams' section on the conspiracy that is the consumer price index has several of the usual complaints -- the use of quality adjustments, the invoking of "core" inflation, and so on -- but what he seems most exercised about is the shift in methodology from "arithmetic mean" to "geometric mean" calculations that the Bureau of Labor Statistics implemented in 1999:

In the early 1990s, press reports began surfacing as to how the CPI really was significantly overstating inflation. If only the CPI inflation rate could be reduced, it was argued, then entitlements, such as social security, would not increase as much each year, and that would help to bring the budget deficit under control. Behind this movement were financial luminaries Michael Boskin, then chief economist to the first Bush administration, and Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System...

Shortly after Clinton took control of the White House ... attitudes changed. ... Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting. ... Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by a total of 30%.

The material on Williams' website is a bit dated (appearing first in 2004), but his take on the price statistics appears to have a lot of fans, being cited as recently as yesterday in readers' comments to an article by David Wessel. So what is this arithmetic-mean/geometric-mean thing all about? The Bureau of Labor Statistics explains;

In contrast to the fixed quantity weights of the current CPI formula, the geometric mean estimator ... implies that consumers can alter the quantities of goods and services they buy, albeit within the narrow range of a CPI category, when the relative prices of those goods and services change. It is, in part, this property of the geometric mean estimator that led to the Boskin Commission recommendation of its use in the CPI.

In other words, the crime of a geometric weighting scheme is to assume that people change their behavior when prices change. If you are looking for a cover-up, you won't find it at the BLS... What this means is that the methodology employed by the BLS conspires to do nothing more than implement the common sense proposition that consumers substitute high-priced goods for similar lower-priced goods:

Substitution can take several forms corresponding to the types of item- and outlet-specific prices used to construct the basic indexes:

• Substitution among brands of products, for example, between brands of ice cream;
• Substitution among product sizes, for example, between pint and quart packages of ice cream;
• Substitution among outlets, for example, between a brand of ice cream sold at two different stores;
• Substitution across time, for example, between purchasing ice cream during the first or second week of the month;
• Substitution among types of items within the category, for example, between ice cream and frozen yogurt;
• Substitution among specific items in different index categories, for example, between ice cream and cupcakes.

Notably:

...overall substitution across categories, such as between ice cream products in general and apples in general, is not addressed by the geometric mean formula. ...

Product categories without close substitutes are, in fact, treated in the old-fashioned way that Williams and his fans seem to prefer.

The new formula, the geometric mean estimator, will be used in index categories that comprise approximately 61 percent of total consumer spending represented by the CPI-U. The remaining index categories ... will continue to be calculated as they are currently.

No doubt about it, measurement is hard, and there are a lot of judgment calls that have to be made. But when it comes to assessing the motivation for those calls, I'm with David Wessel...:

I know that is a popular view. I've personally found the technicians at agencies like the Bureau of Labor Statistics to be straight shooters who do their best to cope with the complex methodological issues inherent in measuring our large and dynamic economy.

And, for my money, they do it well.

Mine too.