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Robert Reich has advice for Democrats should they take the House in this
Lawless in Guantanamo, by Robert Reich: The most important thing about
today's Supreme Court's decision about Guantanamo prisoners is the Court's view
that the Geneva Conventions apply to them. The Bushies have been ignoring the
Geneva Conventions in every possible way... Bush doesn't believe in
international law. His defiance of American law governing spying on Americans
suggests he doesn't believe in U.S. law either. The question now is whether his
administration will obey the Supreme Court. The White House continues to argue
that the President, in his role as Commander-in-Chief, stands above and apart
from the other branches of government.
I've been spending time helping candidates in close House races. I think it
likely the Democrats will win back the House in November. If they do, House Dems
will be sorely tempted to hold extensive hearings on the lawlessness of the Bush
White House. They might even extend their investigative gaze to the Florida
election of 2000 and the Ohio election of 2004; in both cases, there's mounting
and convincing evidence of political tampering.
But I think it would be a grave mistake for House Dems to spend the next two
years on such hearings. ... Democratic party hearings will not convince anyone
... who's not already convinced. They'll simply allow the White House to claim
that all the fuss is nothing but partisan politics. I'd prefer House Dems spend
two years putting forth a positive agenda for getting the nation back on track
economically and in foreign policy. ...
Posted by Mark Thoma on Friday, June 30, 2006 at 12:12 PM in Economics, Politics |
This is a very good choice:
Bush Picks Mishkin, Bernanke Ally, for Fed Governor, Bloomberg: Frederic S.
Mishkin, a Columbia University scholar and an advocate of inflation targeting,
was picked by President George W. Bush to serve as a Federal Reserve governor.
... Mishkin, a former head of research at the New York Fed, wrote a book on
inflation targeting with Bernanke when the current Fed chairman was at Princeton
The board will have one more vacancy after the unrelated departure ... of
Mark Olson, who last week was appointed head of the Public Company Accounting
Oversight Board... Bush has yet to announce a nominee for the slot Olson is
Mishkin, whose appointment is subject to Senate approval, would have a term
running through January 2014, and he would be eligible for re-appointment to a
full 14-year term.
The nomination also provides Bernanke with a policy expert who has authored
150 papers on monetary economics. ...
His nomination is greeted with the following news on PCE inflation from the
May 2006: The trimmed-mean PCE inflation rate for May was an
annualized 3.2 percent. According to the BEA, the overall PCE inflation rate for
May was 4.5 percent, annualized, while the inflation rate for PCE excluding food
and energy was 2.6 percent.
The tables below present data on the trimmed-mean PCE
inflation rate and, for comparison, the overall PCE inflation and the inflation
rate for PCE excluding food and energy. The tables give annualized one-month,
six-month and 12-month inflation rates.
|One-month PCE inflation, annual rate
|PCE excluding food & energy
|Trimmed mean PCE
|Six-month PCE inflation, annual rate
|PCE excluding food & energy
|Trimmed mean PCE
|12-month PCE inflation
|PCE excluding food & energy
|Trimmed mean PCE
|Note: These data are subject to revision
Posted by Mark Thoma on Friday, June 30, 2006 at 11:22 AM in Economics, Monetary Policy |
This article from The Economist says to forget all the doom and gloom you
hear about manufacturing, it's doing fine:
Lean and unseen, The Economist: ...General Motors (GM) ... announced this
week that 35,000 employees—nearly a third of its hourly paid workforce—have
accepted the company's incentives to retire early... They are part of an
overhaul that GM says will lower its annual fixed costs by $5 billion... Delphi,
a bankrupt car-parts maker that used to be part of GM, announced that 12,600 of
its workers have also agreed to accept early retirement.
These huge cuts in ... the heart of American manufacturing have fed a popular
belief that anyone who makes things in the United States is struggling against
an onslaught of foreign competition. Whether American firms are building plants
overseas ... to exploit cheap labour, or closing down factories because they
cannot compete any more, the widespread assumption is that the country's entire
industrial base is being “hollowed out”...
But someone forgot to tell American manufacturers the bad news. Most of them
have enjoyed roaring success of late. Net profits have risen by nearly 9% a year
since the recession in 2001 and productivity has been growing even more rapidly
than is usual during economic expansions. ...
Capital equipment and durable goods-makers such as Caterpillar, General
Electric, an industrial conglomerate, and Boeing, an aerospace giant, have
always been the strongest bits of America's manufacturing base. Their position
is the most secure ... because there is so much knowledge embedded in what they
make. Even when a company such as Boeing stumbles over its efficiency, as it did
a few years ago, its intellectual property gives it room to recover. These days,
however, American manufacturers of all sorts—not just the big durable-goods
makers—are quickly improving their efficiency. ...
Manufacturers were already outpacing their rivals in rich countries during
1995 to 2000, when their productivity was growing by 4.0% a year. After 2000,
the country's metal-bashers somehow managed to raise their productivity growth
by another notch, to 5.1% a year, according to the Bureau of Labour Statistics.
No serious economist thinks that America can maintain such a torrid rate of
productivity growth...; indeed, the pace has already eased in the past year or
Until recently, it was hard to judge whether America's manufacturers might
eventually lose a step once the effects of the 1990s information-technology boom
tailed off. Research by Dale Jorgenson of Harvard University and Kevin Stiroh of
the New York Federal Reserve Bank showed that IT drove much of America's
productivity burst between 1995 and 2000. In a new paper, Messrs Jorgenson and
Stiroh, along with Mun Ho of Resources for the Future, a think-tank, have
compared the late 1990s with the productivity growth of the past five years. Not
only has productivity growth accelerated further—by another 0.7% a year, to
3.2%—but the forces behind it also appear to have become more broadly based.
The economists looked at the entire private sector, not just manufacturing,
and suggested that there could be several explanations... Because American firms
are finding myriad ways to raise productivity, and are not merely riding one
wave of innovation from the IT boom, the economists think that productivity
growth will settle at a rate above what America achieved in the two decades
before 1995. Over the next decade, they expect private businesses as a whole to
boost productivity by 2.6% a year. That would be good news. Manufacturers, which
are boosting productivity even more rapidly than the rest of the economy, should
do even better. ...
But all is not rosy. This is also from The Economist:
The rich, the poor and the growing gap between them: But after 2000
something changed. The pace of productivity growth has been rising again, but
... [a]fter you adjust for inflation, the wages of the typical American worker
... have risen less than 1% since 2000. In the previous five years, they rose
over 6%. If you take into account the value of employee benefits, such as health
care, the contrast is a little less stark. But, whatever the measure, it seems
clear that only the most skilled workers have seen their pay packets swell much
in the current economic expansion. The fruits of productivity gains have been
skewed towards the highest earners, and towards companies, whose profits have
reached record levels as a share of GDP.
Even in a country that tolerates inequality, ... most
Americans are unhappy about the economy. According to the latest Gallup
survey, fewer than four out of ten think it is in “excellent” or “good”
shape, compared with almost seven out of ten when George Bush took
Posted by Mark Thoma on Friday, June 30, 2006 at 03:29 AM in Economics, Income Distribution, International Trade, Technology |
This Paul Krugman column on how to spot a political hack is from April, 2000:
How to Be a Hack, by
paul Krugman, Commentary, NY Times: ...[A]s a number of readers have
informed me, everyone knows that I am a hired tool of global capitalism. This
charge upset me greatly. In fact, I asked my masters for a raise, to 35 pieces
of silver, to compensate for my hurt feelings.
But maybe this is a good occasion to talk about political bias in economic
analysis. It is a real issue. But the corruption is more subtle -- and also more
evenly spread across the political spectrum -- than my hate mailers seem to
First of all, academic research in economics is by and large carried out
without strong political bias. I'm not saying that what you read in the journals
is always right (don't get me started), or that the researchers themselves are
noble characters: successful economists, like successful academics in any field,
are usually ambitious men and women with large egos. But the structure of
rewards in a field in which top departments are constantly jostling for prestige
favors cleverness and originality, not political correctness of any stripe.
While hired guns do not flourish at Harvard or the University of Chicago,
however, in Washington they roam in packs.
Portrait of a hired gun: He or she is usually a mediocre economist -- someone
whose work, if it didn't have an ideological edge, might have been published but
wouldn't have had many readers. He has, however, found a receptive audience for
work that does have an ideological edge. In particular, he has learned that
pretty good jobs in think tanks, or on the staffs of magazines with a distinct
political agenda, are available for people who know enough economics to produce
plausible-sounding arguments on behalf of the party line. Ask him whether he is
a political hack and he will deny it; he probably does not admit it to himself.
But somehow everything he says or writes serves the interests of his backers.
Most of these hired guns work on behalf of right-wing causes: it's a funny
thing, but organizations that promote the interests of rich people seem to be
better financed than those that don't. Still, the left has enough resources to
front a quorum of its own hacks. And anyway, love of money is only the root of
some evil. Love of the limelight, love of the feeling of being part of a
Movement, even love of the idea of oneself as a bold rebel against the Evil
Empire can be equally corrupting of one's intellectual integrity.
How can you tell the hacks from the serious analysts? One answer is to do a
little homework. Hack jobs often involve surprisingly raw, transparent
misrepresentations of fact: in these days of search engines and online databases
you don't need a staff of research assistants to catch 'em with their hands in
the cookie jar. But there is another telltale clue: if a person, or especially
an organization, always sings the same tune, watch out.
Real experts, you see, tend to have views that are not entirely one-sided.
For example, Columbia's Jagdish Bhagwati, a staunch free-trader, is also very
critical of unrestricted flows of short-term capital. Right or not, this mixed
stance reflects an honest mind at work. You might think that hacks would at
least try to simulate an open mind... But it almost never happens.
Of course, honest men can disagree, and they can also make mistakes. But it's
still a good idea to tune out supposed experts whose minds are made up in
advance. Or at least that's what they told me to say.
Posted by Mark Thoma on Friday, June 30, 2006 at 12:15 AM in Economics, Politics |
This discussion is about taboo research topics in biology, but such taboos
exist in economics as well. Thus, these comments could just as easily be directed
at our profession. Even with the protection of tenure, there are some topics that few, if any
economists will dare address. As noted in the essay, just ask Larry Summers:
The Subject is Taboo, by
Olivia Judson, Commentary, NY Times: ...I was 7 or 8, and ... had just spent
the day walking around a golf course with a great friend of my mother’s ..., a
man called Tim, and his opponent, a woman called Nora... Nora ... trounced him.
Worse, she didn’t do it from ... the “ladies’ tees.” ... She did it from the
hardest of all, the “tiger tees.”
I was chatting happily about this, ... not knowing that Nora’s tigerish
defeat ... was, in Tim’s mind, an exasperating humiliation. I soon found out.
As I relived Nora’s victory yet again, Tim leaned over to me and said, “Olivia.
The subject is taboo. Do you know what that means?” And he explained.
Looking back, it seems somehow fitting that I learned this word in the
context of male versus female performance. For certain subjects in science are
taboo — and research into genetic differences in ability or behavior between
different groups of people is one of the biggest of all.
The reasons for this are obvious. Some of the most ghastly atrocities of the
20th century were carried out under the banner of the “master race” and nasty
pseudoscientific notions about genetic superiority. Sexual and racial
discrimination still persist. ... Many geneticists I know are scared — really
scared, and with reason — of having their careers ruined if they ask any other
questions. Look no further than Lawrence Summers, former president of Harvard
University, who was pilloried ... for wondering if mathematical ability in
men and women might have some genetic underpinning. A sign has been hung on the
door that says “Area Closed to Research.”...
Research into the genetics behind certain sorts of group
differences — skin color, the ability to digest milk, the underpinnings of
autism and the like — is now starting to be published. But other subjects remain
ferociously contentious. Let me tell you a tale of three papers.
Last September, the journal Science published two papers that claimed natural
selection had acted recently and strongly on two human genes involved in brain
development. Let’s look at what this claim means. ...
The two [genes] featured in the Science papers are among those thought to affect
brain growth. ... What do we know about these genes...? Not much. ... both
appear to be involved in cell division, for example — but no one knows ...
exactly. We also know ... these genes come in several
subtly different forms. Whether these subtle differences matter is unknown. ...
Now, what does it mean to say that natural selection has acted on these
genes? As I’ve been discussing ... Sometimes, natural selection promotes rapid
change: a mutant form of a gene appears and spreads quickly — within a few
hundred generations, say. Evidence of a rapid spread — within the last several
thousand years — of a new version of each of the two genes is what the Science
The papers caused a stir. For the papers also claimed that the new versions
of the genes ... were more rare in sub-Saharan Africa than elsewhere. All this
means is that, in populations outside Africa, the new forms of the genes may
have conferred some sort of advantage — perhaps related to head size, perhaps
not... But it didn’t take long for the whisperings
to start that the new forms of the genes must be involved in intelligence.
The whispering has no basis: there is no evidence whatsoever that the
variants have anything to do with intelligence. ... But brains, genes and race
form an explosive mixture. So much so that ... the lead scientist on the papers,
Bruce Lahn, will now be retiring from working on brain genes.
Meanwhile, another paper has appeared ... in ... the online journal Public
Library of Science Biology. This paper failed to confirm the earlier result.
However, the authors found that versions of other genes, also thought to be
involved in brain function or structure, have been under recent natural
selection ... and this time, the population is not outside
Africa, but in it. ... Again, we have no idea what this means. But strangely,
these results have received almost no attention: there has been no whispering
I offer this story as ... an illustration of some of the
grave difficulties in this field of research. ... As you can imagine, it is virtually impossible to work in an area as
poisonously political as this one. On one side, you have neo-fascist groups
twisting the most innocuous data out of shape; on the other, well-intentioned
anti-racists who don’t even want the questions asked. Worse still, as ... the
“intelligent design” movement shows, it is not always easy to make sure that
science is discussed rationally. Result: most geneticists are totally unnerved —
and who can blame them?
Perhaps, if open debate is impossible, declaring the area taboo is the best
way to proceed. I don’t pretend to have a solution. But here are some thoughts.
If we declare brain genetics out of bounds, it will make it harder to
understand how our brains are built ... and treat the diseases that affect
people’s brains, especially in old age. ...[T]he study of human genetics has
already illuminated a lot that is interesting and important about our
evolutionary past, and how we have come to be. Handled well, this is a
tremendously exciting area for research. Do we want to limit it? ...
[G]enetic information is pouring in. Questions about the genetics of
human differences are not going to go away. ... Scientists have an essential
role to play in mediating understanding. Do we really want to scare good
scientists from this field? Then the only people left researching it could be
those whose agendas genuinely are sinister.
Now that is a frightening thought.
Posted by Mark Thoma on Friday, June 30, 2006 at 12:09 AM in Economics, Politics, Science |
Has capitalism planted the seeds of inevitable democracy in China?:
Capitalist Revolution Turn Democratic, by Minxin Pei, Project Syndicate: Communist China has experienced a monumental capitalist revolution in the
last two decades, with an economy that is now six times bigger than it was 20
years ago. ... But if these stunning economic statistics make you think that so
much capitalist development must also have brought more democracy to China,
Most Westerners believe in a theory of liberal evolution, according to which
sustained economic growth, by increasing wealth and the size of the middle
class, gradually makes a country more democratic. While the long-run record of
this theory is irrefutable, China’s authoritarian ruling elite ... has been
smart enough to take adaptive measures aimed at countering the liberalizing
effects of economic development.
Thus, for all its awe-inspiring economic achievement, ... democracy in China
has stalled... Since the Tiananmen Square massacre of June 1989 ... not a single
major democratic reform initiative has been implemented.
Instead of democratic transition, China has witnessed a consolidation of
authoritarian rule... Since 1989, the Chinese Communist Party (CCP) has been
pursuing a two-pronged strategy: selective repression that targets organized
political opposition and co-optation of new social elites (the intelligentsia,
professionals, and private entrepreneurs).
This strategy emphasizes the maintenance of an extensive law enforcement
apparatus designed to eliminate any incipient organized opposition. Huge
investments have strengthened the People’s Armed Police (PAP), a large anti-riot
paramilitary force whose specialty is the quick suppression of anti-government
To deal with new emerging political threats, such as the information
revolution, the Chinese government has spent mightily on manpower and
technology. A special 30,000-strong police unit ... screens Internet traffic,
advanced technology is deployed to block access to overseas Web sites considered
“hostile or harmful,” and Internet service and content providers ... must comply
with onerous restrictions designed to suppress political dissent and track down
Having learned ... that a bureaucratic ruling party must co-opt new social
elites to deprive potential opposition groups of leaders, the ... urban
intelligentsia and professionals have been pampered with material perks and
political recognition, while new private entrepreneurs have been allowed to join
This strategy of pre-emptive political decapitation has produced enormous
dividends for the Party. In the 1980’s, its principal adversaries were the urban
intelligentsia... Today, the mainstream of the Chinese intelligentsia is an
integral part of the ruling elite. Many have joined the Party ..., and a large
percentage enjoy various professional and financial privileges.
Predictably, the intelligentsia, usually the most liberal social group, is no
longer a lethal threat to party rule. Worse, without support from this strategic
group, other social groups, such as workers and peasants, have become
politically marginalized and rudderless.
Although the Party’s ... approach has worked since 1989, it is doubtful that
it will retain its efficacy for another 17 years. To the extent that China’s
authoritarian regime is by nature exclusionary (it can only incorporate a
limited number of elites), the co-optation strategy will soon run up against its
limits, and the Party will no longer have the resources to buy off the
intelligentsia or keep private entrepreneurs happy.
At the same time, selective repression can contain social frustrations ...
only temporarily. As long as much of Chinese society views the current political
system as unjust, unresponsive, and corrupt, there will always be a large
reservoir of ill will toward the ruling elites.
When things go wrong – as is likely, given mounting social strains caused by
rising inequality, environmental degradation, and deteriorating public services
– China’s alienated masses could become politically radicalized. ...
So it may be premature for the Party to celebrate the success of its adaptive
strategy. China’s rulers may have stalled democratic trends for now, but the
current strategy has, perhaps, merely delayed the inevitable.
Posted by Mark Thoma on Friday, June 30, 2006 at 12:06 AM in Environment, Politics |
As expected, the Federal Open Market Committee voted today to raise the
target federal funds rate to 5.25%. Of more interest are changes in the wording
of the Press Release that signal the course of future policy. The key
differences from the last statement are:
1. The Fed indicates that new data have validated their previous conjecture that
economic growth would moderate. The wording has changed from saying growth is
"likely to moderate" to "Recent indicators suggest that economic growth is
2. The statement upgrades the change in core inflation from modest to elevated.
The statement "only a modest effect on core inflation" becomes "Readings on core
inflation have been elevated in recent months."
More interesting is the change
in the statement regarding underlying inflation pressure from input costs. Whereas before input costs and capacity constraints had the potential to "Add to inflation
pressures," now they are seen as having the potential to "sustain inflation pressures." So they don't anticipate further increases in the pressure for prices to rise.
3. They indicate that inflation risks remain, but note that the moderation in
aggregate demand should help. But the message is that the risk of inflation has not ended.
4. The San Francisco Fed joins the Kansas City Fed in not asking for an
increase in the discount rate, a signal they may not favor a rate increase,
though the vote itself was unanimous (with Olson not voting due to his recent
The statements about aggregate demand slowing and input costs sustaining rather
than adding to inflation pressures indicate the Fed sees a fall in the inflation
risk, but the statement also makes it clear the Committee is prepared to raise
rates again if the forecasts from incoming data indicate inflation pressures are
||May 10 Statement
|The Federal Open Market Committee decided today to raise its
target for the federal funds rate by 25 basis points to 5-1/4 percent.
||[No substantive difference]
|Recent indicators suggest that economic growth is moderating
from its quite strong pace earlier this year, partly reflecting a gradual
cooling of the housing market and the lagged effects of increases in interest
rates and energy prices.
||Economic growth has been quite strong so far this year. The Committee sees
growth as likely to moderate to a more sustainable pace, partly reflecting a
gradual cooling of the housing market and the lagged effects of increases in
interest rates and energy prices.
|Readings on core inflation have been elevated in recent
months. Ongoing productivity gains have held down the rise in unit labor costs,
and inflation expectations remain contained. However, the high levels of
resource utilization and of the prices of energy and other commodities have the
potential to sustain inflation pressures.
||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 the moderation in the growth of aggregate demand
should help to limit inflation pressures over time, the Committee judges
that some inflation risks remain. The extent and timing of any additional
firming that may be needed to address these risks will depend on the evolution
of the outlook for both inflation and economic growth, as implied by incoming
information. In any event, the Committee will respond to changes in economic
prospects as needed to support the attainment of its objectives.
||The Committee judges that some further policy firming may yet
be needed to address inflation risks but emphasizes that the extent and
timing of any such firming will depend importantly on the evolution of the
economic outlook as implied by incoming information. In any event, the Committee
will respond to changes in economic prospects as needed to support the
attainment of its objectives.
|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; Sandra Pianalto; Kevin M. Warsh;
and Janet L. Yellen.
||[Only difference is that Olson did not vote]
|In a related action, the Board of Governors unanimously approved
a 25-basis-point increase in the discount rate to 6-1/4 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, and Dallas.
||In a related action, the Board of Governors unanimously approved
a 25-basis-point increase in the discount rate to 6 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.
Posted by Mark Thoma on Thursday, June 29, 2006 at 12:09 PM in Economics, Monetary Policy |
Robert Reich, pointing to leaks in the housing bubble, gives the Fed some advice:
Market Meltdown: Say goodbye to the housing bubble, by Robert B. Reich, American
Prospect: ...America’s housing bubble has not exactly burst. It’s just
sprung a leak the size of your average mortgage banker. What’s clear is the boom
is over. All across America, backlogs of unsold homes are long. Price increases
are slowing. In some markets, home prices are actually dropping...
It’s better that bubbles leak than burst. Gradual declines are always easier
to manage than explosions. But the housing boom has been so large and important
to the American economy over the past five years that even this slow leak will
cause severe headaches.
One will be experienced by millions of households that had turned their
growing home values into piggy banks to finance their continued consumption.
That easy route to cash is just about gone. The inevitable result will be less
consumption, which will mean fewer jobs.
A more immediate problem will arise for all the people making, financing, and
selling houses. Here we’re talking about a vast army of carpenters, plasterers,
roofers, plumbers, electricians, mortgage bankers, home inspectors, real estate
agents, architects, structural engineers and many more. According to Moddy’s
Economy.com, housing-related employment has accounted for almost a quarter of
the five million jobs that have appeared since 2003.
These jobs pay well even though most of them don’t require a college degree.
That’s because they don’t have to compete in global commerce. Workers in Beijing
or Calcutta can’t easily build houses in Phoenix or San Diego. ... But now with
the housing boom over, many of these good jobs are over, too.
In other words, without the housing bubble, the American economy will lose a
lot of its fizz. I don’t like bubbles, but from a jobs standpoint this recovery
has needed all the fizz it can get. Median wages have gone nowhere. The ranks of
the long-term unemployed have been unusually high. The percent of the labor
force with jobs is lower than in 2000. Housing has been one of the few bright
spots in the economy.
All of which brings us to Ben Bernanke and his gang at the Federal Reserve
Board Open Market Committee. They’re determined to raise interest rates because
they think the economy is too fizzy and still prone to inflation. I hope they
listen carefully: The hissing sound they hear is air escaping the housing
bubble. There’s less fizz in the economy than they think. Raise interest rates,
and the Fed raises the likelihood the economy will deflate.
We'll know more soon when the Fed announces its rate hike decision from today's meeting.
Posted by Mark Thoma on Thursday, June 29, 2006 at 09:48 AM in Economics, Housing |
If firms have pricing power, if markets can be segmented so that there is no
arbitrage between them, and if the elasticity of demand differs across the
segmented markets, then a profit maximizing firm should charge a higher price
where demand is more inelastic.
But if the barriers between markets break down, prices will begin to
equalize. This article describes pricing in the market for orthopedics and
explains how access to information about prices charged across hospitals is
reducing the ability of orthopedic device suppliers to charge different prices
to different customers for the identical product.
Does this type of pricing reduce economic welfare? First, we need to
determine which type of price discrimination is operating.
Economists generally follow the taxonomy of Pigou, who used the term price
discrimination to describe what we have been referring to as differential
pricing. Pigou described three different forms of price differentiation:
- First-degree price discrimination means that the producer sells
different units of output for different prices and these prices may differ from
person to person. This is sometimes known as the case of perfect price
- Second-degree price discrimination means that the producer sells
different units of output for different prices, but every individual who buys
the same amount of the good pays the same price. Thus prices depend on the
amount of the good purchased, but not on who does the purchasing. A common
example of this sort of pricing is volume discounts.
- Third-degree price discrimination occurs when the producer sells
output to different people for different prices, but every unit of output sold
to a given person sells for the same price. This is the most common form of
price discrimination, and examples include senior citizens' discounts, student
discounts, and so on.
The article says "hospitals that buy in the greatest volume do not typically
receive the best prices" so we can rule out second degree. First degree is an
idealized concept and has strict information requirements (e.g. you must know
how much each hospital is willing to pay) and, as noted, third degree is more
common. Interestingly, as explained after the article, it is not necessarily the
case that third degree price discrimination reduces welfare. But first, here's
Power at Risk for Orthopedics Makers, by Reed Abelson, NY Times: It is a
market that does not appear to play by the usual rules of supply and demand.
Depending on which hospital is buying an artificial knee or hip, the price
charged by the manufacturer might vary by thousands of dollars. And hospitals
that buy in the greatest volume do not typically receive the best prices.
For years, makers of artificial hips and other orthopedic devices have
benefited from their pricing power. But the odd ways of that market may not last
much longer, according to [analyst] Bruce M. Nudell... In a research report..., Mr. Nudell described the current pricing variation in artificial knees and
hips as "unsustainable."
Mr. Nudell says that growing awareness among hospitals of the pricing
disparities is a major threat to the orthopedic device industry. Already,
pricing power is diminishing for the companies, which had been able to raise
prices for artificial knees and hips an average of 8 percent annually in recent
years. The increases are slowing, and he says he expects prices in coming years
to be flat, or even decline. ...
Much of the market's unusual pricing dynamic is a result of the fact that the
surgeon choosing the device typically does not have to pay for it — the hospital
is responsible for the bill. ...
Mr. Nudell is predicting that the financial pressure on hospitals and the
publicity over pricing will end the era in which device makers have felt free to
raise prices every year because the hospitals had no idea what their peers were
The market's unusual dynamics appear to have caught the attention of federal
officials, too. Within the last week, four companies — Biomet, Zimmer Holdings,
Stryker and the DePuy unit of Johnson & Johnson — said that they had received
subpoenas from the Justice Department's antitrust division related to the
manufacture and sale of orthopedic devices. The companies all say they are
As the cost of implants devours an ever-higher share of hospitals'
reimbursements, and as the pricing disparities receive greater publicity,
hospital executives are growing increasingly concerned. Many of the purchasing
managers surveyed mistakenly thought that they were getting better prices than
their peers when, in fact, they were paying more.
"Transparency on these products is an inevitable reality and an inevitable
requirement in order for the health care system to be increasingly competitive
and efficient," said John A. Bardis...
I'm not sure why insurance companies wouldn't have information on prices across hospitals, but assuming the article is correct on the existence of information barriers, how does price discrimination affect economic welfare? Varian says:
Third-degree price discrimination increases welfare when it encourages a
sufficiently large increase in output. If output doesn't increase, total welfare
will fall. As in the case of second-degree price discrimination, third-degree
price discrimination is a good thing for niche markets that would not otherwise
be served under a uniform pricing policy.
The general impression that follows from this discussion is if price
differentiation allows more consumers to be served it will generally increase
welfare. Volume discounts, for example, can be expected to generally enhance
welfare. Market segmentation that allows markets to be served that would
otherwise be neglected is also a case where overall welfare can be expected to
On the other hand, price differentiation that merely shuffles prices paid by
pre-existing customer groups and that does not result in an increase in the
number of customers served, or the amount that they consume, will tend to reduce
overall welfare. The key issue is whether the output of goods and services is
increased or decreased by differential pricing.
And the key here is to recognize that the decision is in the hands of
doctors, not patients, and doctors are not price sensitive according to this
article and according to other evidence. Because of this, price discrimination
would not be expected to bring about a large change in quantity in hospitals
where prices are lower than they would be under uniform prices. Hence, the fall in barriers that allow price
discrimination ought to enhance the economic welfare of those who need to use
Posted by Mark Thoma on Thursday, June 29, 2006 at 01:24 AM in Economics, Health Care, Market Failure, Policy |
The resolution introduced into the House of Representatives for debate along with other condemnations of the press for reporting on bank spying brings this
to mind. From the Wikipedia entry for
With a quasi-War with France underway (that is, an undeclared naval war), the
Federalists under John Adams started a navy, built up the army, levied new
taxes, readied for war and enacted the Alien and Sedition Acts in 1798.
for the act is:
With many Federalists advocating war against a major power, France,
Federalists in Congress, in 1798, passed the laws which they asserted would
protect national security in the United States and which sought to silence
internal opposition. ... Jeffersonians, however, recognized that the laws were
to be used as a tool of the ruling Federalist party to extend and retain their
power, silencing any opposition. ... Under the Alien and Alien Enemies Acts, the
president could deport any "dangerous" or "enemy" alien — a law that is still in
effect in 2006.
Here's a shortened version of the act itself from an April entry in the
Republican Study Committee
THE SEDITION ACT OF JULY 14, 1798 ...
SEC. 2. And be it further enacted, That if any person shall write, print,
utter or publish, or shall cause or procure to be written, printed, uttered or
publishing, or shall knowingly and willingly assist or aid in writing, printing,
uttering or publishing any false, scandalous and malicious writing or writings
against the government of the United States, or either house of the Congress of
the United States, or the President of the United States, with intent to defame
the said government, or either house of the said Congress, or the said
President, or to bring them, or either of them, into contempt or disrepute; or
to excite against them, or either or any of them, the hatred of the good people
of the United States, or ... for opposing or resisting ... any act of the
President of the United States, ... or to resist, oppose, or defeat any such law
or act, or to aid, encourage or abet any hostile designs of any foreign nation
against the United States, their people or government, then such person, being
thereof convicted before any court of the United States having jurisdiction
thereof, shall be punished by a fine not exceeding two thousand dollars, and by
imprisonment not exceeding two years. ...
SEC. 4. And be it further enacted, That this act shall continue and be in
force until the third day of March, one thousand eight hundred and one, and no
JONATHAN DAYTON, Speaker of the House of Representatives. THEODORE SEDGWICK,
President of the Senate, pro tempore.
APPROVED, July 14, 1798: JOHN ADAMS, President of the United States.
and meaning of the Acts:
Under the Sedition Act, anyone "opposing ... any act of the President of the
United States" could be imprisoned for up to two years. It was also illegal to
"write, print, utter, or publish" anything critical of the president or
Congress. It was notable that the Act did not prohibit criticism of the
Vice-President. Jefferson held the office of Vice-President at the time the Act
was passed so the law left him open to attack. ...
Jeffersonians denounced the Sedition Act as a violation of the First
Amendment of the United States Bill of Rights, which protected the right of free
speech. ... Subsequent mentions of the Sedition Act in particular in Supreme
Court opinions have assumed that it would be unconstitutional today. For example
..., the Court declared, "Although the Sedition Act was never tested in this
Court, the attack upon its validity has carried the day in the court of
history." 376 U.S. 254, 276 (1964).
From the Wkipedia
entry for Jefferson:
Jefferson interpreted the Alien and Sedition Acts as an attack on his party
more than on dangerous enemy aliens. He and Madison rallied support by
anonymously writing the Kentucky and Virginia Resolutions that declared that the
Constitution only established an agreement between the central government and
the states and that the federal government had no right to exercise powers not
specifically delegated to it. Should the federal government assume such powers,
its acts under them could be voided by a state. The Resolutions' importance lies
in being the first statements of the states' rights theory that led to the later
concepts of nullification and interposition.
And, back to the Wikipedia
entry on the
Alien and Sedition Acts:
At the time, the redress for unconstitutional legislation was unclear and the
Supreme Court openly hostile to the anti-federalists. The Alien and Sedition
Acts were not appealed to the Supreme Court for review...
In order to address the constitutionality of the measures, Thomas Jefferson
and James Madison sought to unseat the Federalists, appealing to the people to
remedy the constitutional violation, and drafted the Kentucky and Virginia
Resolutions, calling on the states to nullify the federal legislation. The
Kentucky and Virginia Resolutions reflect the Compact Theory, which states that
... States ... agree to cede some of their authority in order to join the union,
but that the states do not, ultimately, surrender their sovereign rights.
Therefore, states can determine if the federal government has violated its
agreements, including the Constitution, and nullify such violations or even
withdraw from the Union. ...
Although the Federalists hoped the Act would muffle the opposition, many
Democratic-Republicans still "wrote, printed, uttered and published" their
criticisms of the Federalists. Indeed, they strongly criticised the act itself,
and used it as an election issue. The act expired when the term of President
Adams ended in 1801.
Ultimately the Acts backfired against the Federalists; while the Federalists
prepared lists of aliens for deportation, and many aliens fled the country
during the debate over the Alien and Sedition Acts, Adams never signed a
Twenty-five people, primarily prominent newspaper editors but also
Congressman Matthew Lyon, were arrested, but it appears only eleven were tried
(one died while awaiting trial) and ten were convicted of sedition, often in
trials before openly partisan Federalist judges. Federalists at all levels,
however, were turned out of power, and over the ensuing years Congress
repeatedly apologized for or voted recompense to victims of the Alien and
It all sounds very familiar. Déjà
Vu, Again and Again.
Posted by Mark Thoma on Thursday, June 29, 2006 at 01:14 AM in Iraq and Afghanistan, Politics, Terrorism |
Having used Hal Varian's little blue book as one of my micro texts in graduate
school, I have no doubt about his skills as a microeconomist. My complaint
about this article examining policies to encourage low-income Americans to save more is
that those skills are not used to identify the market failure the policies
To say, as in the opening line, that "Economists are in almost universal
agreement that Americans save too little," and to follow with suggestions that the government intervene in the marketplace implies these markets do not produce the right
incentives to save, that the market outcome is one of too little saving. The
article does mention different savings rates as an explanation for differences
in asset accumulation over time, but that is a behavioral statement, not a
specific market failure. If we don't know what the problem is, how will we know
what solution is best? My preference is to start by identifying the problem,
then proceeding to find a solution. But whatever the problem is, the argument
Varian makes is that these programs appear to work:
the Incentives That Will Prompt Americans to Save More, by Hal Varian, Economic
Scene, NY Times: Economists are in almost universal agreement that Americans
save too little, and several policies have been proposed with the goal of
encouraging them to save more.
The Bush administration favors increasing contribution limits on tax-deferred
savings accounts like I.R.A.'s. Critics argue that there would be little impact
on total savings ... since wealthy households would simply
transfer assets from taxable accounts to tax-sheltered accounts.
Leaving aside the behavior of high-income households, responsible members of
both parties recognize that providing better incentives to low-income people is
the most challenging problem. How can we get this group to save more?
It is possible for low- and middle-income groups to increase savings. After a
detailed examination of the financial circumstances of people close to
retirement, two economists, Stephen F. Venti ... and David A. Wise ..., concluded that the primary reason for differences in retirement assets
was differences in propensities to save. ...
One promising proposal has been to set ... 401(k) plans so that employees are
automatically enrolled in an appropriate plan unless they explicitly choose
otherwise. ...[T]his simple policy increases participation rates dramatically.
Another suggestion is to provide matching grants to low-income individuals.
...("Saving Incentives for Low- and Middle-Income Families: Evidence From a
Field Experiment With H&R Block"; ...
...) In this experiment, ... low- and middle-income families ... were offered a
20 percent match on their contributions to an I.R.A., a 50 percent match or no
match at all...
Only 3 percent of the individuals who had no match — the control group —
contributed to an I.R.A. But 8 percent of those with a 20 percent match rate
contributed, and 14 percent of those with a 50 percent match contributed. The
amount contributed was four times as much as the control group for the 20
percent match rate and seven times as much for the 50 percent match rate. ...
And most people stuck with their plans: four
months after the initial contribution, over 90 percent of the individuals still
kept the money in their I.R.A.'s.
These effects are far larger than those of the Saver's Credit, an existing
program that provides a tax credit based on the amount of tax-deferred savings.
The problem is that a tax credit is useful only if you pay taxes, and many
low-income individuals have little or no tax liability after other deductions
and credits are applied. Furthermore, the Saver's Credit is complicated and hard to understand. A
matching contribution to a savings program is much easier to comprehend. ...
As the authors put it, "Taken together, our results suggest that the
combination of a clear and understandable match for saving, easily accessible
savings vehicles, the opportunity to use part of an income tax refund to save,
and professional assistance could generate a significant increase in
contributions to retirement accounts, including among middle- and low-income
Matching grants also have a long and venerable history as an American
institution. They were invented by none other than Benjamin Franklin in
conjunction with his fund-raising efforts for the Pennsylvania Hospital, the
first public hospital in America, established in 1751.
Franklin persuaded the legislature to participate by indicating that it would
receive "the credit of being charitable without the expense" and explained to
the donors that "every man's contribution would be doubled." No doubt the sage
of Philadelphia would heartily approve of his innovation being used to encourage
the virtue of thrift.
Posted by Mark Thoma on Thursday, June 29, 2006 at 12:42 AM in Economics, Market Failure, Policy, Saving |
On a whim, I went to This Day in History at the History Channel web site. This is what
Keynes Predicts Economic Chaos, June 28, 1919: ...By the fall of 1918, it was apparent to the leaders of Germany that defeat was
inevitable in World War I. After four years of terrible attrition, Germany no
longer had the men or resources to resist the Allies, who had been given a
tremendous boost by the infusion of American manpower and supplies. In order to
avert an Allied invasion of Germany, the German government contacted U.S.
President Woodrow Wilson in October 1918 and asked him to arrange a general
armistice. Earlier that year, Wilson had proclaimed his "Fourteen Points," which
proposed terms for a "just and stable peace" ... The Germans asked that the
armistice be established along these terms... On November 11, 1918, the
armistice was signed and went into effect, and fighting in World War I came to
In January 1919, John Maynard Keynes traveled to the Paris Peace Conference
as the chief representative of the British Treasury. The brilliant 35-year-old
economist had previously won acclaim for his work with the Indian currency and
his management of British finances during the war. In Paris, he sat on an
economic council and advised British Prime Minister David Lloyd George, but the
important peacemaking decisions were out of his hands, and President Wilson,
Prime Minister Lloyd George, and French Prime Minister Georges Clemenceau
wielded the real authority. Germany had no role in the negotiations deciding its
It soon became apparent that the treaty would bear only a faint resemblance
to the Fourteen Points that had been proposed by Wilson and embraced by the
Germans. Wilson, a great idealist, had few negotiating skills, and he soon
buckled under the pressure of Clemenceau, who hoped to punish Germany as
severely as it had punished France in the Treaty of Frankfurt that ended the
Franco-Prussian War in 1871. ...
The treaty that began to emerge was a thinly veiled Carthaginian Peace, an
agreement that accomplished Clemenceau's hope to crush France's old rival.
According to its terms, Germany was to relinquish 10 percent of its territory.
It was to be disarmed, and its overseas empire taken over by the Allies. Most
detrimental to Germany's immediate future, however, was the confiscation of its
foreign financial holdings and its merchant carrier fleet. The German economy,
already devastated by the war, was thus further crippled, and the stiff war
reparations demanded ensured that it would not soon return to its feet. ...
Keynes, horrified by the terms of the emerging treaty, presented a plan to
the Allied leaders in which the German government be given a substantial loan,
thus allowing it to buy food and materials while beginning reparations payments
immediately. ... President Wilson
turned it down because he feared it would not receive congressional approval. In
a private letter to a friend, Keynes called the idealistic American president
"the greatest fraud on earth." On June 5, 1919, Keynes wrote a note to Lloyd
George informing the prime minister that he was resigning his post in protest of
the impending "devastation of Europe."
The Germans initially refused to sign the Treaty of Versailles, and it took
an ultimatum from the Allies to bring the German delegation to Paris on June 28.
.... Clemenceau chose the location for the signing of the treaty: the Hall of
Mirrors in Versailles Palace, site of the signing of the Treaty of Frankfurt
that ended the Franco-Prussian War. At the ceremony, General Jan Christiaan
Smuts, soon to be president of South Africa, was the only Allied leader to
protest formally the Treaty of Versailles, saying it would do grave injury to
the industrial revival of Europe.
At Smuts' urging, Keynes began work on The Economic Consequences of the
Peace. It was published in December 1919 and was widely read. In the book,
Keynes made a grim prophecy that would have particular relevance to the next
generation of Europeans: "If we aim at the impoverishment of Central Europe,
vengeance, I dare say, will not limp. Nothing can then delay for very long the
forces of Reaction and the despairing convulsions of Revolution, before which
the horrors of the later German war will fade into nothing, and which will
destroy, whoever is victor, the civilisation and the progress of our
Germany soon fell hopelessly behind in its reparations payments, and in 1923
France and Belgium occupied the industrial Ruhr region as a means of forcing
payment. In protest, workers and employers closed down the factories in the
region. Catastrophic inflation ensued, and Germany's fragile economy began
quickly to collapse. By the time the crash came in November 1923, a lifetime of
savings could not buy a loaf of bread. That month, the Nazi Party led by Adolf
Hitler launched an abortive coup against Germany's government. The Nazis were
crushed and Hitler was imprisoned, but many resentful Germans sympathized with
the Nazis and their hatred of the Treaty of Versailles.
A decade later, Hitler would exploit this continuing bitterness among Germans
to seize control of the German state. In the 1930s, the Treaty of Versailles was
significantly revised and altered in Germany's favor, but this belated amendment
could not stop the rise of German militarism and the subsequent outbreak of
World War II....
Posted by Mark Thoma on Wednesday, June 28, 2006 at 07:27 PM in Economics, History of Thought, Miscellaneous |
Yesterday, I defended a liberal arts education. Today, Columbia Business School Dean and former Chair of the Council of Economic Advisers for the Bush administration Glenn Hubbard defends
business schools and MBAs:
Do not undervalue the impact of business education, by Glenn Hubbard,
Commentary, Financial Times: I expected many surprises as the new dean of a
business school, but not an immediate challenge to defend the idea of business
education. Until my appointment, I had seen no reason for such challenges...
A tough take on business schools came in a 2005 Harvard Business Review
article by Warren Bennis and James O’Toole saying that “MBA programmes face
intense criticism for failing to impart useful skills, failing to prepare
leaders, failing to instill norms of ethical behaviour – and even failing to
lead graduates to good corporate jobs”. In business circles, this is shocking –
something like L’Osservatore Romano asking: do we still need a pope?
Such criticisms should be taken seriously. Pure theory pulls the academy
apart from the worlds of commerce, industry and finance. And if the MBA does not
at least cultivate leadership, what good is it? ... We are so enmeshed in a
world shaped by business principles that only the big picture can remind us of
For example, why did social conditions not change for the human race for
thousands of years until England’s industrial revolution in 1750? Why did that
revolution begin with the Spinning Jenny in the mid-18th century and not in the
mid-first century AD when Hero of Alexandria developed a steam engine? Columbia
Business School’s Bruce Greenwald says that human progress “appears to have
arisen largely from the application of sustained management attention to
everyday enterprise”. In a word, business. ...
Countries today prosper or fail to the extent that they embrace basic
business principles. The task of the business school is, then, enormous – to
apply knowledge to transform financial markets, to convince other societies of
the benefits of transparency and to remind our own opinion leaders of the value
of basic business principles. We have largely succeeded in the US, which is
seeing sustained increases in growth of about 3.5 per cent a year with little
inflation... This one percentage point addition to growth is happening ...
because of improvements in productivity.
Why, then, is the US adding productivity growth when so many other big
economies see negative growth in productivity? Those who say the answer is
technology have spent too little time in Tokyo, Seoul and Berlin. The fact is,
technology is better in many other countries. So US companies did not become
more productive by simply buying faster computers. They became more productive
by having managers and entrepreneurs who knew how to integrate these investments
with new business models to raise productivity. These abilities to think
strategically are teachable; and the central classroom for teaching leaders ...
is the business school.
Many measure success by the salaries of business graduates after school. This
is irrelevant. The real value of a business education is its impact years later,
training future leaders how to unlock one set of problems after another.
Business schools have pulled this off by integrating disciplines within the
university and integrating academics with business leaders.
But the critics have a point. The present challenge for the top business
school is to inspire researchers to be in even closer contact with business
leaders, to answer real-world needs. By generating cutting-edge ideas that
bridge theory and practice, a great business school’s research offers an
education for a lifetime career, not just a toolkit for a first job. ...
Posted by Mark Thoma on Wednesday, June 28, 2006 at 01:17 PM in Economics, Technology, Universities |
Today, the senate
delayed the vote on the estate tax because "Senate Republicans are
determined to pass the legislation this year, [but] they want to ensure they
have the 60 votes needed to withstand a challenge by Democrats."
Most senators in favor of eliminating or reducing the estate tax also favor
the Gregg bill changing the budget rules.
The CBPP describes the Gregg bill
as aiming a "budget knife at domestic programs while shielding tax cuts from
This analysis shows the likely outcome if those in favor of the bills prevail. If both bills are put into place at once, the estate tax cuts will
trigger automatic across the board reductions in the entitlement programs:
Combined Effect of Bills Moving
In The Senate Would be to Finance Near-Repeal of the Estate Tax with Cuts in
Medicare, Veterans Benefits, School Lunches, and Other Programs, by by Robert
Greenstein and Richard Kogan: At the urging of Senate Republican leader Bill
Frist, the House of Representatives ... approved a measure designed by
House Ways and Means Committee chairman Bill Thomas to repeal most but not all
of the estate tax. The measure contains no “offsets”; its large cost would be
financed through higher deficits. The Senate takes up the bill this week.
One day before Rep. Thomas unveiled his proposal, the Senate Budget Committee
approved a far-reaching bill to make major changes in federal budget rules. Crafted by committee chairman Judd Gregg and co-sponsored by Senator Frist and
24 other Senate Republicans, the bill includes a provision that would establish
binding deficit targets... In any year in which the deficit targets would
otherwise be missed, automatic across-the-board cuts would be triggered in every
entitlement program except Social Security.
Policymakers who have pushed for repeal of most or all of the estate tax (and
for other tax cuts) often act as though tax cuts are a “free lunch,” ...[H]owever, this is not so. Sooner or later, someone has to pick up the
The Gregg bill places a spotlight on how these tax cuts would be paid for. Taken together, the Thomas estate-tax bill and the Gregg budget-enforcement bill
would result in multi-million dollar tax cuts for the estates of the wealthiest
Americans who die, with these lavish tax cuts being financed by large reductions
in health care, retirement, and other benefits on which millions of ordinary
Congressional Budget Office projections show that if the President’s tax cuts
are extended ... and relief from the
Alternative Minimum Tax is continued, the projected budget deficit in 2012 and
every year thereafter will be close to or more than $200 billion above the
level needed to hit the Gregg bill’s deficit targets... Under ... the Gregg bill, every dollar that a tax-cut bill loses
in revenue must eventually be made up by cutting a dollar out of entitlement or
other mandatory programs (unless discretionary programs are cut more deeply,
other tax cuts are terminated or scaled back, or other revenue-raising measures
are adopted). ...:
Table 1: Cuts in Various Entitlement Programs
by Thomas Estate-Tax Plan
(in billions of dollars)
|Federal Civilian Retirement
| EITC/Child Tax Credit
|SSI for elderly and disabled poor
|Veterans disability compensation and pensions
|School lunch/child nutrition
|Total entitlement cuts
...Enactment of the Thomas bill would trigger $283 billion in entitlement cuts
over the 2007-2016 period, with $262 billion of these cuts coming in the second
five years (2012-2016). ..
Table 1 displays the cuts that would have to be made in various entitlement
programs to offset the increases in deficits the Thomas bill would cause. The
Table is based on the official cost estimate that the Joint Committee on
Taxation has issued of the Thomas bill...
A point could be made that few, if any, Members of
Congress favor allowing the estate tax to return in 2011 to its parameters under
the pre-2001 tax law. Many Senators ...
support making permanent the estate-tax rules that will be in effect in 2009,
when the first $3.5 million of an estate — $7 million per couple — will be
exempt and the top rate will be 45 percent. Were that approach to be adopted,
the entitlement cuts that would be triggered under the Gregg bill would be about
half the size of the cuts shown in Table 1...
Posted by Mark Thoma on Wednesday, June 28, 2006 at 01:47 AM in Budget Deficit, Economics, Politics, Taxes |
Here's the story: Daimler Hopes Americans Are Finally Ready for the Minicar:
The article says it will fit on a regulation pool table and that "Fortwo is the only car in the world less than 3 meters (roughly 10 feet) long."
This and a Hummer side by side at a stop light would make an interesting contrast.
Posted by Mark Thoma on Wednesday, June 28, 2006 at 12:58 AM in Economics, Oil |
Here's a bit more on public universities and the effects of falling state
support. As support has fallen, there has been an increased reliance on tuition, private sector funding of research, and donations as a means of funding, all
of which subject state universities to market pressures that did not exist in
How will universities respond? Of particular interest is whether the
change will affect the ability of universities to provide access to low-income
students. Do universities face competition and does that impact their ability to
provide access? This is the enrollment manager at Oregon State
University, which is about 40 or so miles north of us here at the University of Oregon, in
an interview with The Atlantic magazine:
The Best Class Money Can Buy, by Mathew Quirk, The Atlantic: I asked Bob
Bontrager what he thought about eating other people's lunches.
"I personally prefer kicking their ass," he replied. "It's a zero-sum game.
There's a finite number of prospective students out there. Are you going to get
them, or is your competitor going to get them? You face the pressure and say,
'That feels burdensome to me; I don't want to deal with that.' Or you say,
'That's a pretty interesting challenge; I'm going to go out there and try to eat
their lunch. I'm going to try to kick their ass.' That defines people who are
more or less successful and those who stay in the position."
Bontrager, who works at Oregon State University, is the school's head of
enrollment management—a relatively new but increasingly essential post in higher
education. Three quarters of four-year colleges and universities employ an
enrollment manager to oversee admissions and financial aid. The position is
standard at private schools, and is spreading quickly across public
Over the past twenty years, often under cover of the euphemisms with which
the industry abounds, enrollment management has transformed admissions and
financial aid, and in some cases the entire mission of a college or a
university. At its most advanced it has a hand in every interaction between a
student and a school, from the crafting of a school's image all the way through
to the student's successful graduation. Any aspect of university life that bears
on a school's place in the collegiate pecking order is fair game: academic
advising, student services, even the curriculum itself. Borrowing the most
sophisticated techniques of business strategy, enrollment managers have
installed market-driven competition at the heart of the university.
With their ever-expanding reach, enrollment managers are inevitably dogged by
controversy. But it's the way they have changed financial aid—from a tool to
help low-income students into a strategic weapon to entice wealthy and
high-scoring students—that has placed them in the crosshairs of those who
champion equal access to higher education. Adopting data-mining and pricing
techniques from the airline and marketing industries, they have developed a
practice called financial-aid leveraging that allows a school to buy, within
certain limits, whatever class it wants. Often under orders from a president and
trustees, enrollment managers direct financial aid to students who will increase
a school's revenues and rankings. They have a host of ugly tactics to deter
low-income students and to extract as much money as possible from each entering
All this, understandably, has given the enrollment-management industry a
black eye. "It's a brilliantly analytical process of screwing the poor kids,"
says Gordon Winston, an economist at Williams, and an article last year in The
Chronicle of Higher Education included a warning that "enrollment managers are
ruining American higher education." But some in the industry use its techniques
responsibly—to guarantee enough revenue to support the academic mission, or even
to expand low-income access to higher education. Indeed, the sophisticated
methods of enrollment management may be the only way for schools to hang on to
their principles while surviving in a cutthroat marketplace. [... continue
I'm told Bontrager was asked to use different language when descibing his competitive spirit to the media. We have an enrollment manager, and she relies on the results of an
econometric model that has been developed over many years by colleagues to help
uncover the responsiveness of enrollment to changes in enrollment policy and the
implementation of programs designed to affect recruitment and retention. It's
been a helpful tool.
The effect on access for low-income students is a big concern, though I know
both the Admissions/Enrollment Manger and Financial Aid Directors here and they
certainly fall into those trying to preserve the core mission of equal access
and are among the most devoted advocates of these principles.
But the tension is there -- our funding and ability to provide quality
education depends critically on these revenue sources -- and we have also
instituted scholarship programs designed to attract quality students
irrespective of need. These programs are based, in part, upon knowledge about
elasticities gleaned from the econometric estimation of enrollment decision
models and other statistical work and they do pay attention to the revenue that
My view from the inside, for what it's worth, is that people are worried
about these issues and doing their best to preserve access, but the pressure is
there and the argument that always carries the day is that we must survive to
serve any low-income students at all even if that means serving fewer low-income students than we
might desire to fulfill our commitment to equal opportunity. Over time, in a competitive marketplace, that leads to incentives
and outcomes that bear watching as a matter of public policy.
If you are interested in these issues, the article does a good job or
presenting the tensions universities feel to maximize revenue at the expense of
other values such as equal access, though it may be a bit strident on the access issue.
Posted by Mark Thoma on Wednesday, June 28, 2006 at 12:02 AM in Economics, Market Failure, Policy, Politics, Universities, University of Oregon |
Calculated Risk emails remarks from the president on Social Security reform:
President Discusses Line-Item Veto, White House News Release: "Now, I'm
going to talk about discretionary spending in a minute, but I just want you to
understand that a significant problem we face is in our mandatory programs. And
I know you know that. Those would be programs called Medicare and Social
Security and Medicaid.
As you might recall, I addressed that issue last year, focusing on Social
Security reform. I'm not through talking about the issue. I spent some time
today in the Oval Office with the United States senators, and they're not
through talking about the issue either. It's important for this country --
(applause) -- I know it's hard politically to address these issues. Sometimes it
just seems easier for people to say, we'll deal with it later on. Now is the
time for the Congress and the President to work together to reform Medicare and
reform Social Security so we can leave behind a solvent balance sheet for our
next generation of Americans. (Applause.)
If we can't get it done this year, I'm going to try next year. And if we
can't get it done next year, I'm going to try the year after that, because it is
the right thing to do. It's just so easy to say, let somebody else deal with it.
Now is the time to solve the problems of Medicare and Social Security, and I
want your help."
Talking Points Memo also
Bush's comments and begins "tracking some positions here on Social Security, now that the president has
announced he's going to take another stab at phasing out Social Security next
year." PGL at Angry Bear adds:
Treasury Secretary nominee Henry Paulson said Tuesday that
letting tax rates rise would be a mistake ...
So how would he reduce the deficit?
Secretary nominee Henry Paulson said ...America faces a "formidable challenge"
funding government health and retirement plans and must tackle it soon.
An aging population that will increasingly strain the resources of
Social Security and Medicare means the problems cannot be simply set
aside, he said. "I really do believe that we need to begin very
seriously the process of addressing them because the earlier we step up
to these issues, the less costly will be the ultimate solution,"
There does seem to be a bit of a renewed push, so we shall see if it goes anywhere, but for now I think this is posturing for the elections in the fall. While the administration would like to
privatize Social Security, no doubt about that, I think this is meant to energize the base and and appear faithful to core conservative ideas rather than a serious attempt
to revive reform. But it's worth watching.
Update: Comments so far are skeptical about the "charge up the base for the fall elections" explanation, though I'll note that, unlike last election, there is no mystery about what the Republican's would like to do so those who want to charge up the opposition can use the issue in any case. But if that's not it, and as I noted I'm not even sure a push is coming, what is the reason for the sudden attention to this issue?
Posted by Mark Thoma on Tuesday, June 27, 2006 at 08:45 PM in Economics, Politics, Social Security |
Calculated Risk, who knows these data as well as anyone, says housing is entering a danger
Existing Home Sales, by Calculated Risk:
The National Association of Realtors (NAR)
reports: Existing-Home Sales Ease In May
Sales of existing homes experienced a minor decline in May with home prices
rising near normal rates, according to the National Association of Realtors®....
Total housing inventory levels rose 5.5 percent at the end of May to 3.60
million existing homes available for sale, which represents a 6.5-month supply
at the current sales pace. ...
Click on graphs for larger image
Existing Home Sales are a trailing indicator. The sales are reported at close
of escrow, so May sales reflects agreements reached in March and April.
Usually 6 to 8 months of inventory starts causing pricing problem - and over 8
months a significant problem. Current inventory levels are now in the danger
Update: David Altig at macroblog has more.
Posted by Mark Thoma on Tuesday, June 27, 2006 at 01:36 PM in Economics, Housing |
this piece in Project Syndicate about the future of European universities
reminded me of discussions about the decline of classic liberal arts
education in the U.S. Let's start with this essay by Warren Goldstein, chair of the History Department at the University of Hartford, appearing in the Yale Alumni Magazine.
This echoes my own experience. When I was Department Head, I began bringing
back former students who had found success in the business world to talk to our
undergraduate majors about how best to prepare for the working ("real") world.
Time and again I heard the view expressed in this article, that businesses want
people who can think, write, analyze, develop persuasive arguments, they want
the type of skills a liberal arts education is intended to promote. With that
foundation, they would tell me, they can teach the people the skills needed to
do the job effectively. Some were adamant in their refusal to hire business
school graduates, preferring instead to hire people with the broad set of skills
acquired with a broader education. Economics generally received praise, not so
much for specific theoretical tools we teach, but rather for the way it taught
students to think about the world and approach problems:
What would Plato do? A (semi-)careerist defense of the liberal arts, by Warren
Goldstein, Yale Alumni Magazine:
Nahh, don't tell me -- I bet I can guess your major: art history, right?
-- Tom or Ray Magliozzi
If you're an NPR listener, you've probably heard some version of this line on
Car Talk. Usually the hapless college student on the phone is female, and Tom
and Ray (aka Click and Clack...) are showing their avuncular concern for her
employment prospects. ...[L]iberal arts-bashing is one of their favorite sports.
As far as I can tell, from my turret in the besieged educational outpost of the
liberal arts, nearly all parents of college-age students agree with them. ...
Continue reading "The Decline of Liberal Arts Education" »
Posted by Mark Thoma on Tuesday, June 27, 2006 at 11:55 AM in Economics, Universities, University of Oregon |
Wal-Mart once again. This match pits Wal-Mart supporter Jason Furman against former Wal-Mart employee and detractor, Barbara Ehrenreich:
Is Wal-Mart Good for the American Working Class?
I wish it was better, by Barbara Ehrenreich and Jason Furman:
From: Jason Furman
To: Barbara Ehrenreich
Subject: The Low Prices Are Good News
Posted Monday, June 26, 2006, at
3:18 PM ET
...I myself have never worked at
Wal-Mart, and I can only remember shopping there once. In fact, I instinctively
recoil at the big-box shopping centers spreading their uniformity across the
American landscape. But I try hard not to let my personal and somewhat elitist
shopping inclinations get in the way of an appraisal of Wal-Mart's positive role
in America's economy and society. (For my full appraisal, see
Are you as surprised as I am by how quickly Wal-Mart's critics move past the
issue of low prices? You will hear comments like, "Yes, Wal-Mart may have
somewhat low prices, but let's talk about its impact on workers, the
environment, trade with China, etc." But given just how important these low
prices are to the hundreds of millions of Americans that shop there, I hope I
can beg your indulgence to linger on them for a few moments.
Continue reading "The Wal-Mart Question" »
Posted by Mark Thoma on Tuesday, June 27, 2006 at 02:34 AM in Economics, Miscellaneous |
John Berry explains the Fed's struggle to find an effective communication strategy:
Fed Officials Confront a Failure to Comprehend, by John M. Berry, Bloomberg:
Five months into the term of Chairman Ben S. Bernanke term he and his colleagues
haven't figured out how to get financial markets to understand what they are
trying to do with monetary policy in today's volatile economic setting.
It's now a foregone conclusion that the Federal Open Market Committee will
raise its target for the overnight lending rate by a quarter-percentage point,
to 5.25 percent, on Thursday.
The issue is how to draft a statement that explains the committee's thinking
that leaves it free to respond to new economic data without giving some stubborn
traders the impression that the Fed is soft on inflation. ...
Some officials, convinced that economic growth is slowing and that inflation
will settle down again soon, would really rather not raise the target this week
for the 17th time in a row. Even those officials feel they have no choice
because investors, shaken by recent inflation reports, fully expect them to do
The major concern among officials at this point is the small rise in
inflation expectations shown by a variety of measures the Fed follows. Officials
want to keep expectations capped....
Nevertheless, unless inflation momentum is much stronger than most Fed
officials think it is, at some point soon, they are going to want to leave the
lending rate target unchanged. What some traders can't seem to comprehend is
that if the FOMC were to do that, it wouldn't mean that the committee might not
raise the target at a subsequent meeting. A pause wouldn't mean the Fed was
Obviously, no one knows exactly what the policy path will be for the rest of
the year, including Bernanke and his colleagues. What the officials fervently
hope is that they can find the right words to persuade the markets to leave them
free to analyze incoming economic data and make their policy decisions
The minutes matter and they'll set a baseline for expectations regarding future policy, but communication between meetings, particularly around key data releases, has been more problematic than the minutes.
Posted by Mark Thoma on Tuesday, June 27, 2006 at 02:16 AM in Economics, Monetary Policy |
I received an email saying if I wanted to keep younger readers, I should post
Jon Stewart videos. But I would never pander like that:
Jon Stewart 'Hurts the Country,' Science Finds, by Andrew Ferguson, Bloomberg:
...[A] pair of political scientists from East Carolina University released the
results last week of their 18- month study of the influence that Jon Stewart,
the TV comedian, has on U.S. democracy. The report's conclusions about the
effect of Stewart and his Comedy Central ''Daily Show'': not good. ...
Baumgartner and Morris cite data from the Pew Research Center that show
almost half of Americans between the ages of 18 and 24 watch the ''Daily Show''
at least occasionally. This is also the age group that is most averse to
consuming ''hard news'' from newspapers, magazines or TV. Only one in four of
Stewart's regular viewers report following hard news closely, while, in 2004,
more than half said they got some information about the campaign from Stewart.
... Now Baumgartner and Morris come to confirm what should be obvious... This
isn't good news at all.
''Jon Stewart,'' they write, ''may have a unique effect on young viewers.''
With a barrage of jokes that require almost no contextual knowledge to
understand, he flatters his viewers' sense of superiority even as he makes them
more cynical -- and cynical not just about individual politicians but about the
processes and possibilities of self-government.
Newspaper readers, who are much better informed, also show a slight increase
in cynicism, the researchers found, but they ''do not display cynicism toward
the system in the same manner as watchers of the 'Daily Show.'''
Meanwhile, despite their lack of knowledge, ''Daily Show'' viewers ''reported
increased confidence in their ability to understand the complicated world of
politics.'' Stewart is raising their self-esteem at the same time he makes them
Now, this is a familiar phenomenon in the contemporary U.S. -- rising
ignorance accompanied by rising self-regard. We can't blame Stewart for it all
by himself... But the study does raise the question: Who's hurting the country
Just because the truth hurts is no reason to stop telling it. Here's a recent
example of Stewart in action:
TDS: The Miami Seven:
Jon Stewart takes a look at the case known to many as "The Miami Seven." He
examines the careful and decisive evidence told to us by Alberto Gonzales:
Gonzales: These individuals wish to wage a quote: "full ground war against
the United States."
Stewart: Seven guys? I’m not a general. I am not anyway affiliated with the
military academy, but I believe if you were going to wage a full ground war
against the United States, you need to field at least as many people as say a
Please Alberto, don’t take any questions-you were doing just fine up until
then. That was followed up by some careful analysis of the men involved in the
A: One of the individuals was familiar with the Sears Tower- had worked in
Chicago and had been there-so was familiar with the tower, but in terms of the
plans it was more aspirational rather than operational.
Stewart: No weapons, no actual contact with al-Qaeda, but one of them had
been to Chicago…
Cynical in the sense of "skeptical of the motives of others?" Let's hope so.
Posted by Mark Thoma on Tuesday, June 27, 2006 at 01:09 AM in Politics, Terrorism, Video |
Your goal: Reduce human suffering. Your budget: Fifty billion dollars. Where
do you start?:
Who Should Be
Helped First?, by Bjørn Lomborg, Project Syndicate: The list of urgent
challenges facing humanity is depressingly long. AIDS, hunger, armed conflict,
and global warming compete for attention alongside government failure, malaria,
and the latest natural disaster. While our compassion is great, our resources
are limited. So who should be helped first?
To some, making such priorities seems obscene. But the United Nations and
national governments spend billions of dollars each year trying to help those in
need without explicitly considering whether they are achieving the most that
The western media focuses on a tsunami in Asia; donations flow freely. An
earthquake that devastates Pakistan garners fewer headlines, so the developed
world gives a lot less. There is a better way. We could prioritize our spending
to achieve the greatest benefit for our money.
This month, I will ask UN ambassadors how they would spend $50 billion to
reduce suffering. They will repeat the same exercise that some of the world’s
best economists tackled in a 2004 project called the “Copenhagen Consensus”...
But the question shouldn’t be left to politicians or Nobel laureates alone. We
must all engage in the debate. ..
Here’s one fact to consider: the entire death toll from the Southeast Asian
tsunami is matched each month by the number of worldwide casualties of HIV/AIDS.
A comprehensive prevention program providing free or cheap condoms and
information about safe sex to the regions worst affected by HIV/AIDS would cost
$27 billion and save more than 28 million lives. This, say the economists who
took part ..., makes it the single best investment that the world could possibly
make. The social benefits would outweigh the costs by 40 to one.
Other options that the economists favored spending some of their $50 billion
include providing micro-nutrients to the world’s hungry, establishing free
trade, and battling malaria with mosquito nets and medication. At the other end
of the scale, responses to climate change like the Kyoto Protocol would cost
more than they would achieve, so the economists crossed them off the list of
things to do right now.
Regardless of whether we agree with the economists, everybody must admit that
we cannot do everything at once. ... Often, politicians avoid prioritization.
Why? The glib answer is because it is hard. ...
The UN conference won’t be easy. But it shows that there is a will to put
prioritization squarely at the center of attention. It will produce a “to do”
list that will demonstrate how to achieve the most that we can for humanity...
The principles of economics provide a sound basis on which to make rational
choices. Now, the discussion needs to shift from the academic sphere to
political life. It’s time for all of us to consider and compare our own priority
Posted by Mark Thoma on Monday, June 26, 2006 at 07:35 PM in Economics, Miscellaneous |
This National Review Online commentary urges Republican leaders to reconsider
their opposition to tax increases as part of the solution to growing
entitlements. The idea is to trade concessions on taxes for the creation of
personal Social Security accounts with the hope that, once the door has been opened slightly, salesmanship can open it further and allow conservatives to reach their
goal of privatizing Social Security. Beware of compromise in sheep's clothing:
Entitlement-Reform Realities A little conservative compromise will go a long way
as we attempt to revamp today’s safety-net system, by Jagadeesh Gokhale, NRO:
Some conservatives are apoplectic about the prospect of abandoning the
“no-tax-hike” pledge as part of entitlement reforms. ... Unfortunately, the
political and economic arithmetic of entitlement shortfalls does not permit them
much hope; remaining wedded to high principles and shunning compromise will only
worsen their choices. They should learn from past experience and adopt a more
strategic approach. ...
As the aphorism goes, “possession is nine-tenths of the law.” Liberals’
programs have been in operation for decades and are now supported by a large
bloc of voters, making it especially difficult for conservatives to challenge or
modify them. It’s quite telling that liberals are viewed as having no new ideas.
But that could be because most of their ideas are already in operation.
Liberals are in a peculiar bind. Entitlement shortfalls are growing larger
and threatening to undo their legacy. ... That presents an opportunity for
conservatives to revamp today’s safety-net system by introducing their own
market-oriented framework, with personal Social Security accounts as the crown
jewel. Unfortunately, worsening entitlement shortfalls also make adopting
personal accounts more difficult each year. The closer baby boomers come to
retirement age, the less likely they are to acquiesce to smaller entitlement
benefits than they are currently promised in exchange for adopting personal
accounts — as last year’s debate showed. ...
Now the cake of higher future taxes is in the oven, with the temperature
rising rapidly. Could conservatives remove the cake and replace future tax hikes
with personal accounts? As last year’s stalled Social Security debate showed,
that’s unlikely. But conservatism’s high priests continue to answer this
question with a “yes.” Perhaps they have a closely guarded strategy for
guaranteeing overwhelming electoral success.
Could conservatives do better by agreeing to accept some of the taxes in
exchange for removing the cake earlier and replacing a part of future tax
increases with personal accounts? The answer of the high priests is “no,” which
is puzzling given that their choices would only worsen over time.
What are the strategic tradeoffs? Three items seem relevant: First, resolving
the entitlement shortfall by paring scheduled benefit growth is becoming less
feasible as time passes. The large baby-boomer voting bloc would increasingly
view those benefits as inviolable and would likely possess the political muscle
to enforce those claims. Thus, intransigence on compromise will make higher
taxes more, not less, likely. ...
Second, the fact that personal Social Security accounts do not yet exist and
thus cannot compete with the existing system to demonstrate their superiority is
a huge disadvantage. Their absence allows liberal opponents to compare personal
accounts with placing one’s retirement on a Las Vegas roulette table.
Third, if personal accounts were introduced and proved successful, they would
incorporate property rights much more compelling than existing claims on Social
Security benefits. Those rights on income-earning assets would also be
bequeathable.... Such rights would not only be irreversible, they would carry
strong momentum for expansion as more groups clamored for access to personal
So any arguments that the advantages of introducing personal accounts are not
worthy of a few early concessions on taxes appear far from credible.
First, there is nothing that necessitates linking tax changes to personal accounts - no such linkage was made when taxes were cut. This is nothing more than a strategy for attaining personal accounts,
it is not a solution to the entitlement problem. Medicare is the problem, not
Social Security. Here's Robert Reich on this point who, while
turning 60, is compelled by his 60th birthday to think hard about Social
On Turning 60 (Postscript), by Robert Reich: Commentator Rodger doesn't
believe we can grow our way out of the pending Social Security crisis, but I
think he's (almost) wrong. Look, I was a trustee of the Social Security trust
fund. I saw up close how the actuaries made their projections for when the fund
will run out of gas. They plugged in (and continue to plug in) very low
estimates of average annual economic growth over the next seven decades. But if
the U.S. economy grows anywhere close to its average growth over the LAST seven
decades -- which is over 3 percent a year -- the trust fund will do just fine.
How can we grow that fast when we won't have enough new entries into the labor
force to support the vast baby-boom generation? Two ways: First, productivity
gains will be substantial, as new technologies work their way through the
economy (consider the astounding productivity gains what's over the last five
years). Second, America will continue to have lots of legal and illegal
immigration, despite whatever Washington does in the meantime. So don't worry
too much about Social Security. Fix your worried gaze at Medicare instead.
There's the real problem.
And I'm tired of the "we're the party of ideas" claim. The recent Republican
Line Item Veto
This is the party of new ideas? Where?
Update: MaxSpeak has more to say about the NRO commentary.
Update: Brad DeLong has even more. And in response, I like pomegranates, always have, and as an add-on to the main course or as a snack they're great (though watch out for the stains). But, like Brad, I wouldn't feature them as the main course.
Posted by Mark Thoma on Monday, June 26, 2006 at 10:44 AM in Economics, Policy, Politics, Social Security, Taxes |
What is the explanation for the recent large stock market losses in the U.S. and
around the world generally? Was it U.S. monetary policy as many claim, or
What News Is
Moving the Markets?, by Robert J. Shiller, Commentary, Project Syndicate:
Stock markets in much of the world have shown sharp cumulative declines since
around May 10, with most of the drop occurring in the two-week period to around
May 23, but with prices continuing to fall on average since then. Does trouble
in the world’s stock markets mean trouble for the world economy? ...
Continue reading "Ahmadinejad is a Destabilizing Influence; Bernanke is Not" »
Posted by Mark Thoma on Monday, June 26, 2006 at 09:24 AM in Economics, Oil |
To give you some idea how economists might investigate alternative monetary
policies, I estimated a simple econometric model and then simulated three
different possible monetary policies to see how inflation and output growth would react.
More specifically, I estimate a two lag vector autoregressive (VAR) model with the variables output
growth, inflation, and the federal funds rate. Rates of change are measured as
year over year. You can think of these models as very general reduced form
equations where all of the endogenous variables are functions of exogenous or
predetermined variables. For example, the output growth equation is:
yt = b0 + b1yt-1 + b2yt-2
+ b3inft-1 + b4inft-2 + b5fft-1
+ b6fft-2 + et
The other two equations would be the same except the left-hand side variable
would be either inft or fft instead of output growth, yt, and the coefficients would differ. Because every variable in the
system depends upon lags of every other variable, these models are fairly
general (contemporaneous values on the right-hand side can be
substituted for to get the lagged specification).
I estimated this model using data from 1960Q1 through 2006Q1, then simulated
three monetary policies over the next two years:
Dove: Increase to 5.0 in 2006Q2 (as was done), and stay at 5.0 thereafter.
Intermediate: Increase to 5.0 in 2006Q2, then to 5.5 in 2006Q3, then hold at
Hawk: Increase to 5.0 in 2006Q2, then to 5.5 in 2006Q3, then to 6.0 in
2006Q4, then hold at 6.0.
Graphically, here are the three policies since 2000Q1. The graph
shows actual policy through 2006Q1, and the simulated policies through
2008:1. Note that these policies continue to increase the federal funds
rate at the smae measured pace as in recent quarters (the changes are
in increments of .5 rather than .25 in both the historical data and in
the simulations because there are approximately two meetings per
Click on figure to enlarge
Here are the outcomes of the simulations. In these two graphs, actual values
are shown through 2006Q1 along with the forecasts for the three different policy
Click on figures to enlarge
Focusing first on output in the top graph, initially the path of
output growth is very similar for the three policies, so much so that
only the red line is visible on the graph. However, after peaking at
around 4.1% in either 2006Q3 or Q4 depending on the policy, output
growth then falls until the end of the forecast period at 2008Q1. The
differences in output growth at 2008Q1 are 3.41% for the hawkish
policy, 3.58% for the intermediate, and 3.76% for the dovish policy.
So, there is approximately a one third of a percentage point difference
in output growth between the hawkish and dovish scenarios.
The second graph brings up a problem with this class of models. In
these simple VAR models, changes in policy have very little effect on
inflation and, to the extent that policy does have an effect, it is
perverse. Inflation is higher, though not by much, when policy is
tighter and this is one reason the results should be interpreted with
caution. For example, after two years, inflation is forecast to be
3.47% under the hawkish policy, 3.44% under the intermediate policy,
and 3.41% for the dovish policy, values that are perverse but unlikely
to be statistically distinct. The solution to the "price puzzle" is to
add more variables, commodity price indexes are one way to reverse the
sign, but explaining the movement in inflation through time (and hence
inflation expectations) remains problematic generally and some recent
work has moved toward solutions based upon imposing structural
restrictions, or explanations that use theoretical results involving
indeterminacy (multiple equilibria).
Finally, I should add that the results do not change much if a measure of the
output gap (the deviation of output from a quadratic trend) is used instead of output
growth, or if PCE less food and energy is used instead of PCE. Not perfect, but enough for now...
Posted by Mark Thoma on Monday, June 26, 2006 at 01:22 AM in Economics, Inflation, Macroeconomics, Methodology, Monetary Policy, Unemployment |
Paul Krugman is on vacation, so here's a column from October, 2003. The column explains how the 2001 and 2003 tax cuts contain provisions designed to make it politically difficult to call for a rollback of the tax cuts to their original levels:
The Sweet Spot, by Paul
Krugman, Commentary, NY Times, October 17, 2003: "What we have here is a
form of looting." So says George Akerlof, a Nobel laureate in economics, of the
Bush administration's budget policies — and he's right. With startling speed,
we've blown right through the usual concerns about budget deficits — about their
effects on interest rates and economic growth — and into a range where the very
solvency of the federal government is at stake. Almost every expert not on the
administration's payroll now sees budget deficits equal to about a quarter of
government spending for the next decade, and getting worse after that.
Yet the administration insists that there's no problem, that economic growth
will solve everything painlessly. And that puts those who want to stop the
looting — which should include anyone who wants this country to avoid a
Latin-American-style fiscal crisis, somewhere down the road — in a difficult
position. Faced with a what-me-worry president, how do you avoid sounding like a
dour party pooper?
One answer is to explain that the administration's tax cuts are, in a
fundamental sense, phony, because the government is simply borrowing to make up
for the loss of revenue. In 2004, the typical family will pay about $700 less in
taxes than it would have without the Bush tax cuts — but meanwhile, the
government will run up about $1,500 in debt on that family's behalf.
George W. Bush is like a man who tells you that he's bought you a fancy new
TV set for Christmas, but neglects to tell you that he charged it to your credit
card, and that while he was at it he also used the card to buy some stuff for
himself. Eventually, the bill will come due — and it will be your problem, not
Still, those who want to restore fiscal sanity probably need to frame their
proposals in a way that neutralizes some of the administration's demagoguery. In
particular, they probably shouldn't propose a rollback of all of the Bush tax
Here's why: while the central thrust of both the 2001 and the 2003 tax cuts
was to cut taxes on the wealthy, the bills also included provisions that
provided fairly large tax cuts to some — but only some — middle-income families.
Chief among these were child tax credits and a "cutout" that reduced the tax
rate on some income to 10 percent from 15 percent.
These middle-class tax cuts were designed to create a "sweet spot" that would
allow the administration to point to "typical" families that received big tax
cuts. If a middle-income family had two or more children 17 or younger, and an
income just high enough to take full advantage of the provisions, it did get a
significant tax cut. And such families played a big role in selling the overall
So if a Democratic candidate proposes a total rollback of the Bush tax cuts,
he'll be offering an easy target: administration spokespeople will be able to
provide reporters with carefully chosen examples of middle-income families who
would lose $1,500 or $2,000 a year from tax-cut repeal. By leaving the child tax
credits and the cutout in place while proposing to repeal the rest, contenders
will recapture most of the revenue lost because of the tax cuts, while making
the job of the administration propagandists that much harder.
Purists will raise two objections. The first is that an incomplete rollback
of the Bush tax cuts won't be enough to restore long-run solvency. In fact, even
a full rollback wouldn't be enough. According to my rough calculations, keeping
the child credits and the cutout while rolling back the rest would close only
about half the fiscal gap. But it would be a lot better than current policy.
The other objection is that the tricks used to sell the Bush tax cuts have
made an already messy tax system, full of special breaks for particular classes
of taxpayers, even messier. Shouldn't we favor a reform that cleans it up?
In principle, the answer is yes. But an ambitious reform plan would be
demagogued and portrayed as a tax increase for the middle class. My guess is
that we should propose a selective rollback as the first step, with broader
reform to follow.
Will someone be able to find the political sweet spot, the combination of
fiscal responsibility and electoral smarts that brings the looting to an end?
The future of the nation depends on the answer.
Sweet spots seem to have a lot in common with
doughnut holes. But on the broader question, two and a half years after the column was written, is it smart politics to call for "selective rollback as the first step, with broader
reform to follow" as the elections approach in the fall? I haven't heard anyone hit the political sweet spot yet.
Posted by Mark Thoma on Sunday, June 25, 2006 at 09:09 PM in Economics, Politics, Taxes |
A Wall Street Journal Online Econoblog on the costs and benefits of immigration:
Immigration's Costs -- And Benefits, Econonblog, WSJ: ...The Wall Street Journal Online asked economists Gordon Hanson of the
University of California, San Diego, and Philip Martin, of the University of
California, Davis, to discuss the underlying causes of immigration (both legal
and illegal), its historical roots and the nature of the current political
uproar over the issue.
Gordon Hanson writes: For all the heat that the debate about immigration has
generated, the net economic impact of immigration on the U.S. economy appears to
be remarkably small. First, some thoughts on legal immigration, before we
address illegal immigrants.
Continue reading "Econoblog: The Costs and Benefits of Immigration" »
Posted by Mark Thoma on Sunday, June 25, 2006 at 09:04 PM in Economics, Immigration, Policy, Politics, Unemployment |
Following up on the previous post, here are Greg Mankiw's views on the
existence of, the source of, and solutions to growing income inequality in the U.S.:
Inequality, by Greg Mankiw: A student asks a broad question:
I was wondering if you could offer your views on income inequality.
Let me offer a few observations as broad as the question:
1. There is little doubt that U.S. income inequality has been increasing for
the past three decades. (The trend in
world inequality is very different.) Most economists who study the topic
attribute the trend primarily to changes in technology that reward skilled
workers relative to unskilled workers. Education and other skills are more
valuable now than they were in the past.
2. Reasonable people can disagree about how much the government should
redistribute income. Part of the disagreement is economic: for example, how
large are the elasticities that determine tax distortions? Part of the
disagreement is philosophical: for example, is taking money from high-wage
individuals to give it to low-wage individuals a way to ameliorate the
injustices inherent in a market economy or a form of government-sanctioned
theft? Economists can help with the economic part of the disagreement, but we
have no comparative advantage to help with the philosophical part.
3. However much redistribution we choose, the best way to accomplish it is by
a progressive system of taxes and transfers. Economists sometimes call this a
negative income tax, because low-income individuals pay a "negative" tax.
The current progressive income tax together with the Earned Income Tax Credit is
close to being an example (although the
EITC has a variety of conditions that a pure negative income tax would not
have). Wikipedia reports the following... "...the EITC is one of the largest anti-poverty tools in the United
States, and enjoys broad bipartisan support."
4. Ideally, I would use consumption, rather than income, as the tax base for
purposes of raising revenue and redistribution. The benefit of consumption taxes
over income taxes is that they do not distort the intertemporal allocation of
consumption. A variety of economists have proposed ways to implement a
progressive consumption tax. For example, the Hall and Rabushka
flat tax is progressive in average tax rates; the Bradford
X-tax is similar but even more progressive.
5. Having achieved the desired degree of redistribution with a system of
taxes and transfers, policymakers should focus on economic efficiency when
setting most other policies. That is, policy regarding international trade, rent
control, minimum wages, health care, housing and so on should, in my view, aim
to make the economic pie as large as possible. Although these other policies
affect the size of different slices, they are inefficient and poorly targeted
instruments for purposes of redistribution. To the extent that we choose to
redistribute income, we should use the best tools we have for that purpose (see
points 3 and 4).
Greg and I aren't that far apart on the economic issues, e.g. when I talk
about market failures that is the same as his point about efficiency. I've also
noted previously that consumption taxes are generally more efficient than income
taxes, but the politics that come with them are more difficult since consumption
taxes generally require ex-post income redistribution policies to make them
On the economics, I suspect where we would differ is on how pervasive
market failures are and how effective government can be when it intervenes to
overcome them. For example, I would claim that market failures make the private
provision of health and social insurance less efficient than government
regulated provision, but I suspect he would not, at least not to the same degree.
On the philosophical issue, he doesn' say how much income
redistribution he favors, but as I said my view, broadly stated, is
that it ought to be sufficient to overcome injustices and equalize
opportunity, but there are those on the left who would go further than this in terms of equalizing outcomes.
Finally, I should note that Krugman would disagree strongly with the claim in
point 1 that the main cause of growing inequality is an increase in the skill-based
wage premium. See
Graduates versus Oligarchs. This is important because the solution to income inequality depends upon whether it is a reward to education, or a consequence of government policy. Quoting Krugman:
The notion that it's all about returns to education suggests that nobody is
to blame for rising inequality, that it's just a case of supply and demand at
work. And it also suggests that the way to mitigate inequality is to improve our
educational system — and better education is a value to which just about every
politician in America pays at least lip service.
The idea that we have a rising oligarchy is much more disturbing. It suggests
that the growth of inequality may have as much to do with power relations as it
does with market forces. Unfortunately, that's the real story.
I suspect the need to intervene to overcome injustices associated with government policy and changing power relations is another area where Greg and I would disagree.
Posted by Mark Thoma on Sunday, June 25, 2006 at 10:11 AM in Economics, Income Distribution, Policy, Politics |
Can you summarize Democratic ideology succinctly, Republican-like even?:
Democrats, don't put it in writing It's the party of case-by-case, not sweeping
dogmas, by Jonathan Chait , Commentary, LA Times: After the 2004 presidential election, some of us liberals came away with the
conclusion that it's awfully hard to defeat an incumbent president during
wartime. And some of us came away with the conclusion that John Kerry is a
really awful politician.
Other liberals, though, decided that what this country needs are some good
policy journals. It is because of liberals like these that so many Americans
think we're all a bunch of weenies. One of those weenies is my friend Kenneth
Baer, who, along with Andrei Cherney, has founded a center-left journal called
Democracy. The premise of Democracy is that conservatives have taken power in
large part because of their intellectual journals — and that liberals can
reclaim that power by fighting back likewise.
"Conservative policy journals," writes Baer, "helped take a marginal movement
in American life that was thumped at the polls (Goldwater in 1964) and, over
four decades, turn it into a dominant force." ... Democracy's editors believe
that the central purpose of this journal-led restoration is to Think Big. No
policy papers, please. ... Their role is to formulate sweeping principles.
Alas, this is inherently a losing game for liberals. Here is the problem:
Conservatism and liberalism are not really mirror images of each other.
Conservatives venerate the free market and see smaller government as an end in
itself. Liberals do not venerate government in the same way, and we do not see
larger government as an end in and of itself. For us, everything works on a
case-by-case basis. Should government provide everybody's education? Yes. Should
government manufacture everybody's blue jeans? No. And so on. ...
Everybody knows what [Republicans] stand for. They're for lower taxes, strong
defense and less spending — even if they habitually fail at the spending part
and have royally screwed up the defense portion of late.
But nobody knows what Democrats stand for because you cannot, and should not,
formulate sweeping dogmas when you're operating on a case-by-case basis.
Consider the Clinton administration. What did it stand for on, say, economic
policy? Well, progressive taxation, reducing the deficit (but not at the expense
of Medicare, Medicaid, education and the environment), expanding health
coverage, investing in technology, and … you see? We're long past the point
where it can be described by a single overarching theory...
Some liberals see this problem and conclude that Democrats got too
wishy-washy under President Clinton. If we'd just held firm to strong liberal,
pro-government principles, they say, the public would know where we're coming
Well, that's probably true. But it wouldn't win any elections. Why not?
Because, as social psychologists Lloyd A. Free and Hadley Cantril concluded in
1964, Americans are ideological conservatives and operational liberals.
Everybody's for less spending and regulation in the abstract. When you try to
translate that into specifics — say, lower Medicare benefits or looser standards
on pollution — voters run screaming in the other direction.
Any debate that takes place at the level of ideological generality, then,
inherently favors the right. Liberals can try to come up with slogans of their
own. ... But that brings you back to the problem of nobody understanding what
you believe in. ...
The editors of Democracy scorn this pragmatic interpretation. "Progressives
too often have come to eschew bold ambition," they write, "preferring to take
shelter in the safe harbor of 'realism' and 'competence.' "
Realism and competence may not make for a stirring theme, but when you've had
eight years of the alternative, they look pretty good.
"For us, everything works on a case-by-case basis." That makes it sound ad
hoc, random, without any underlying principles. For me it's not, or I hope it isn't. I try to use two main principles to decide if
the government should intervene, but make no claim this is a mainstream
Democratic position. First, will the private market provide adequate quantities
of the good, or are there significant market failures? Since no market is
perfect, are the market failures substantial enough so that government, even
with it's own inherent inefficiencies, still does a better job of providing the
goods? If so, the government should intervene by providing the appropriate
incentives to the marketplace (which can be as simple as full disclosure
requirements on sales, or as complex as pricing rules for telecommunications), or
providing the good itself when market incentives are insufficient. Second, does the policy overcome social or economic problems
and equalize opportunity? Of course people shouldn't starve or go without housing,
healthcare, schooling, legal defense, etc., but I'm not much for equalizing outcomes. However, I do believe in
equalizing opportunity and that can involve redistributive policies as it does in the provision of universal education. In any case, it's not hard to boil things down to
Making markets work for all of America,
Equalizing opportunity, and
Protecting our future.
Something along those lines would work for me. What would you add/subtract, or do you agree that "[Y]ou cannot ... formulate sweeping dogmas... We're long past the point
where it can be described by a single overarching theory"?
Posted by Mark Thoma on Saturday, June 24, 2006 at 10:12 PM in Economics, Income Distribution, Market Failure, Policy, Politics, Regulation |
I've had a lot of problems with the things Ben Stein has written in the past
(understatement alert), and I cut the parts I didn't like from this commentary,
but I suppose I should give credit when it's due:
Note to the New Treasury Secretary: It's Time to Raise Taxes, by Ben Stein,
Commentary, NY Times:
Henry M. Paulson Jr.
The Goldman Sachs Group
New York, N.Y.
Dear Mr. Paulson:
You almost certainly don't remember little me, but I met you many years
ago... To become chairman of an empire like Goldman Sachs is a spectacular
achievement by any measure. But now you have your work cut out for you as
Treasury secretary. You are facing what is, in many ways, the most dangerous
economic future since the Depression. Danger is coming on many fronts, only
dimly seen by the powers that be in Washington, and your insights ... will be
urgently necessary. ...
Right now, inflation is moving out of the Federal Reserve's comfort zone. The
Fed chairman, Ben S. Bernanke, is doing the right thing by raising rates and
trying to slow the overheated economy, but in a way that does not bring us a
recession. To give us a soft landing without recession or stagflation — rising
inflation and slow growth, as we had in a good part of the 1970's — is not an
easy or assured task. ...
May I respectfully suggest that in this environment, ending the estate tax is
not a major sensible priority? May I suggest that having the lowest taxes in 65
years on high-income taxpayers is not really as prudent as it might be if we
were not running stupendous deficits, with far worse in the future?
I know you are a Republican, and so am I. Now and then, scornful fellow
Republicans ask me what kind of Republican I am, since I'm for higher taxes on
the rich. I tell them that I am an Eisenhower Republican, the kind who wants to
leave a healthier America to posterity. That includes an economy not headed for
the status of a banana republic's economy.
Now, I know that ... Ronald Wilson Reagan, when asked if he were not worried
that his tax cuts would burden posterity with a heavy weight, supposedly asked,
"What has posterity ever done for me?" Those of us with teenage children
certainly know what he meant. But the problem is no longer quite as funny.
The fiscal house is in severe disorder. ... Mr. Bernanke knows what's right and
wrong. You will have allies. But someone needs to take a stand, and that person
might as well be you. The time is always right to do
right... This one will make running Goldman Sachs
Posted by Mark Thoma on Saturday, June 24, 2006 at 08:52 PM in Budget Deficit, Economics, Politics, Taxes |
From the NY Times Economic View, the economic and human costs of income
inequality followed by Gene Sperling on the opportunity cost of tax cuts and spending on the war:
Income Inequality, and Its Cost by Anna Bernasek, Economic View, NY Times:
Inequality has always been part of the American economy, but the gap between the
rich and the poor has recently been widening at an alarming rate. ... The social
and political repercussions of this disparity have been widely debated, but what
about the effects on the economy?
Oddly, despite its position in the political debate, the question has
received little attention from economists. Mostly, they have focused on
measuring income inequality and establishing its causes. Some research has been
done, however, and the results, including insights from related disciplines like
psychology and political science, are disturbing.
Continue reading "The Costs of Inequality and the Opportunity Cost of Policy Choices" »
Posted by Mark Thoma on Saturday, June 24, 2006 at 03:53 PM in Economics, Income Distribution |
Years ago, my dissertation adviser used to tell me that people don't have marginal
products, jobs have marginal products. There is certainly individual variation
in performance on jobs, more so in some than others, but for the majority of
jobs it is true that it is the job itself, not the person doing it, that
determines its productivity. A person can be the
best 7-11 clerk ever, but the job puts a limit on the productivity that can be
achieved and hence the wage that can be earned.
Suppose we take all jobs and break them down into a finite set of k skills or
tasks, S1, S2, ..., Sk. Then an hours worth of labor at a particular job can be
viewed, on average, as some combination of these skills or tasks, L = a1S1 + a2S2 + ... akSk.
When I think of changes in the labor market, it is sometimes helpful to think
about how this skill set is evolving through time -- some coefficients (the aj
terms) get larger, some get smaller, and so on. Some may be zero until certain
points in time when they are invented by new technology, and some may be zero
after particular points in time.
Notice also that from a labor supply point of view these individual tasks or
skills are what determines how unpleasant a job is. Each individual will have
preferences (disutility) over these skills and hence have a different
willingness to work at a job depending upon their aversion to the tasks
involved. A change in productivity, for example, could shift the tasks toward a
more undesirable set causing workers to demand higher wages not only because
they are more productive, but also because the characteristics of the job have
changed. Of course, this could go the other way as well if the job shifts to
tasks that are more desirable. In extreme cases you might be willing to pay to
do the job (suppose the job were to stand on the sideline and make sure an end
zone cone stays in place at the super bowl).
Interestingly, under such a formulation, it is not necessarily the case that
an increase in productivity increases wages. Suppose there is an increase in
productivity that also causes a marked shift towards tasks that workers find
more tolerable. In labor market terms, the labor demand curve and the labor
supply curves would both shift outward leaving an uncertain effect on wages. [On
a technical level it also calls into question identification schemes that use
productivity to map out the labor supply curve.] But I don’t think this explains
flat wages in recent years, i.e. that productivity changes have made jobs so much
better for laborers that there was no reason to raise compensation even though productivity increased, but there
may be cases where the changes in job characteristics are important to consider.
So why do I bring this up? No particular reason, just some thoughts on a lazy
Saturday -- labor economists will probably tell me they know all about this through work on compensating differentials, etc. anyway. But I am curious how technological change and advances in information technology have altered the typical job in recent decades. Is a typical hour of work more
tolerable, less tolerable, or just as miserable day-in and day-out as it ever
was? Any ideas?
Posted by Mark Thoma on Saturday, June 24, 2006 at 02:23 PM in Economics, Technology |
This is Ed Leamer writing at Cato Unbound as part of the series on the future
of the American worker in the global economy:
It’s Like Hurricanes,
by Edward E. Leamer, Conversation, Cato Unbound: Rather than in the abstract, try tackling the following problem.
I grew up in the small town of Vestal near Binghamton, New York. The major
industry of the area in 1900 was cigars, which left when tobacco fashion shifted
to cigarettes and cigarette production was mechanized. No matter, by 1950 the
Endicott Johnson shoe company had replaced cigars. But shoes, which had left
artisan shops in Boston to come to upstate New York, continued their footloose
behavior and left the US altogether in the 1960s. Not to worry. By 1980 IBM was
the major employer of the area. ... IBM produced ... mainframe computers
built by high school graduates at high wages.
Now IBM is gone and there is not much of anything in the way of jobs except
hospitals and Wal-Mart. Young people are fleeing for better lives elsewhere. It
isn’t just Binghamton. On Tuesday, June 13, Sam Roberts wrote about this in the
New York Times in an article titled “Flight
of Young Adults Is Causing Alarm Upstate” ...
We have a real problem here, don’t we? What is causing this radical change in
the physical geography of wealth formation? What should Binghamton do? Is there
any way to save upstate New York? What say ye, o wise men of Cato Unbound?
First, Mr. Thomas Friedman: What did you mean by the item quoted in Richard’s
original essay: “you no longer have to emigrate in order to innovate”? Should we
plaster the Binghamton area with posters that say that, and keep all the bright
kids in the area?
Frank: Is this the failure of education? Did my high school in Vestal take
the wrong path after I graduated? Do State officials need to swoop down on these
schools to prepare kids to do the problem-solving tasks of the 21st Century? Or
is it the institutions? Do we need some new laws that make membership in a labor
Richard: How does the word “creative” help find a solution? This region
contributed more than its share to the innovations of the 20th Century—Corning
glass, Xerox, Ansco, and thousands of small manufacturing firms. IBM was one of
the most innovative companies that has ever existed. ... IBM was the opposite of diversity, with
straight white men wearing starched white shirts and creased dark trousers. Do
you think now the region could be helped by some remedial general training in
tolerance as a way of attracting creative people?
Robin: What do you say about this? You have a sharp critical scalpel, but
what solutions do you propose for a real problem? It sounds like your advice is:
Don’t worry. Be happy.
Last, to Ed: For all the wisdom your words try to convey, you don’t have a
clue, do you? It’s like hurricanes. You can study and understand, but there
isn’t much you can do about it, except offer some disaster relief after the
storm has hit.
Posted by Mark Thoma on Saturday, June 24, 2006 at 12:09 AM in Economics, International Trade, Unemployment |
Several recent posts have said there's no need for the Fed to be so concerned
with inflation. The Dallas Fed says yes there is, and here's why:
Parsing Recent Inflation Data, by Jim Dolmas,
Dallas Fed: Measured core consumer price inflation has picked up noticeably over the past
few months. The following table compares inflation over the 12 months of 2005
with annualized year-to-date inflation in several core consumer price
|CPI ex. food & energy
|PCE ex. food & energy
|Trimmed mean PCE
|Market-based PCE ex. food & energy
|Note: 2006 is YTD annualized
What’s going on here? Some analysts have suggested that the primary culprit
behind the recent surge in core rates is a sharp increase in the price index for
owner-occupied housing. For the PCE, at least, this is not the case. While
the price index for owner-occupied housing has contributed somewhat to the
recent surge, the pattern of increase in the core PCE remains even if
owner-occupied housing is excluded from the index.
The following four charts show 1-, 3-, 6- and 12-month inflation rates for
the PCE ex. food and energy and for the PCE ex. food, energy and owner-occupied
Note in particular that the 3- and 6-month rates—which Chairman Bernanke
described on June 5 as “having reached a level that, if sustained, would be at
or above the upper end of the range that many economists, including myself,
would consider consistent with price stability and the promotion of maximum
long-run growth”—are lower when OOH is excluded from the index, but still above
2 percent. For the 12-month rate, excluding OOH makes only a negligible impact
over the past few months.
If OOH is not the culprit, which component is? Unfortunately in this case,
there seems to be no single perpetrator. Looking at the distribution of
component price changes over the past several months, it appears that the
distribution’s center of gravity, so to speak, has shifted rightward. The
fraction of components (weighted by expenditure) increasing at annualized rates
of 0–3 percent has been squeezed, and the fraction of components increasing at
annualized rates of better than 3 percent has grown.
Chart 5 plots the evolution of the distribution of price increases over the
Compared with December 2005, the fraction of components experiencing
annualized price increases above 3 percent has grown from about 33 percent to 57
percent, and the fraction with increases running at better than 2 percent has
risen from 47percent to 68 percent. Rather than identifying a single component
to blame for the recent pickup in core inflation, Chart 5 suggests an
explanation more akin to the resolution of Agatha Christie’s Murder on the
Orient Express: They all did it.
Posted by Mark Thoma on Saturday, June 24, 2006 at 12:07 AM in Economics, Inflation, Monetary Policy |
For those with a taste for variety, here's a bit of sociology from Crooked
Social Isolation in America, by Kieran Healy: Here’s an
important new paper... The paper compares the social network module of the
2004 General Social Survey (GSS) to the 1985 GSS, the last to include network
questions. The key question of interest is this:
From time to time, most people discuss important matters with other people.
Looking back over the last six months—who are the people with whom you discussed
matters important to you? Just tell me their first names or initials.
...The new findings are striking: since 1985, the number of people saying
there is no-one with whom they discuss important matters nearly tripled. As
McPherson et al say,
The modal respondent now reports having no confidant; the modal respondent in
1985 had three confidants. Both kin and non-kin confidants were lost in the past
two decades, but the greater decrease of non-kin ties leads to more confidant
networks centered on spouses and parents, with fewer contacts through voluntary
associations and neighborhoods. … Educational heterogeneity of social ties has
decreased, racial heterogeneity has increased.
The predicted probability of social isolation is much higher the fewer years
of education one has. Also, “Young (ages 18—39), white, educated (high school
degree or more) men seem to have lost more discussion partners than other
The observed differences are pretty big, as these things go. Are they real?
It may be that the 2004 respondents differed from the 1985 respondents in their
interpretation the words “discuss” and “important.” (People might interpret
“discuss” as face-to-face discussion, when they may also be pouring out their
hearts on a blog somewhere, for instance.) Because of these issues, the authors
spend a lot of time investigating the validity of the measure. More
interestingly, it may be that we really are observing a shift in patterns of
network affiliation. Feel free to speculate in the comments... [T]he paper
...discusses several of the most plausible interpretations of the shift...
Update: The Washington Post has a story on this research: Social Isolation Growing in U.S.
Posted by Mark Thoma on Friday, June 23, 2006 at 07:48 PM in Miscellaneous |
Does corruption create economic incentives that improve efficiency? Sometimes it can. For example, bribing your professor to grade exams and homeworks quickly rather than waiting two or three weeks might improve efficiency, but bribing them to give you a higher grade you don't deserve would not. In this article examining corruption in the equivalent of the DMV in India, the negative effect - bribing for a higher score on the driving test - outweighs the positive effect of reducing processing time:
Driving in New Delhi:
Don't complain about standing in line at the DMV., by Joel Waldfogel, Slate:
At least in principle, some kinds of government corruption are not so bad
because they promote efficiency in how regulations are administered. ... But a
new study of
driver's license examinations in New Delhi, India, confirms what most
international policy wonks have long said: The benefits of corruption are not
worth the costs.
The Department of Motor Vehicles, here and in many foreign countries, is a
place of long lines, sour bureaucrats (think Patty and Selma Bouvier, Marge
Simpson's chain-smoking spinster sisters), and bleak interior decorating. ...
Since access to government clerks is normally allocated on a first-come,
first-served basis, people pay with their time rather than their money. This is
inefficient: Suppose you're in a big hurry and would be willing to pay a lot to
avoid waiting, while I don't mind waiting. Then you could go ahead of me, making
you a lot better off and me only a little worse off, which
reduces our collective frustration. One way to achieve this efficiency would be
to charge a higher price for expedited service. Yet, an expedited government
service option typically does not exist. So, in some countries, the offer of a
bribe in exchange for quicker processing is a common form of corruption—reducing
the social cost of waiting in line.
But DMVs exist for a purpose... They're supposed to reduce unsafe driving.
... Do the clerks in fact do so? To study the process of getting a driver's
license in New Delhi, the authors ... recruited 822 Indians who wanted a driver's license,
randomly assigning them to three groups. ...
One of the groups in the Indian study was offered a cash bonus for getting a
license within 30 days. These subjects had an incentive do whatever was
necessary (offer bribes) to get a license quickly. ... A second group was given driving
lessons. If the licensing process accurately screens out unprepared ... drivers, then these applicants should be more
likely to succeed in getting a license. Both of these applicant groups were
compared to a third control group who received neither lessons nor a speedy
completion bonus. ... Eventually, they gave
their subjects a follow-up written exam to gauge their driving skills.
So, what happened? More than a third (37 percent) of the control group got a
license, compared to 45 percent of the subjects who took driving lessons and 65
percent of the people who got paid for getting a license quickly. Subjects in
the cash bonus group were most likely to hire "agents" to help them navigate the
bureaucracy, spending an average of 1,280 rupees to get a license, compared with
560 rupees for those without an agent. And applicants using agents got their
licenses 15 percent faster, making an average of a quarter fewer trips to the
Indian DMV... They spent
about three hours of their own time, as opposed to five hours for those who did
not hire an agent.
The agents saved applicants time by, for example, standing in line for them.
But the extra cost of using an agent dwarfs the benefit of saving two hours for
a typical Indian, who makes 40 rupees per hour, raising the suspicion that the
agent's fee purchased something other than time. And indeed, 88 percent of the
applicants who hired an agent did not have to take the driver's exam before
getting a license, while almost all of the other applicants did.
Perhaps the aspiring drivers who hired agents were better-qualified...? Dream on. The drivers who used an agent had much lower scores on
the follow-up drivers exam given by the researchers.
This study confirms the view of the World Bank, which "has identified
corruption as among the greatest obstacles to economic and social development."
Payoffs at the Indian DMV may save some qualified drivers some time. But it has
the bad direct effect of allowing unsafe drivers on the road. ... The lesson applies
beyond the DMV. If bribing a procurement officer works better than building a
solid airplane or bridge, why bother with safety checks? Dealing with
by-the-book Pattys and Selmas is pretty unpleasant. But a world without them is
Is Corruption in Iraq Economically Beneficial? for more on the economics of
corruption. Also see When is Corruption Good from the Private Sector Development blog which includes links to topics such as how to measure the costs of corruption. For even more, see Becker and Posner:
Economics of Corruption-Posner,
Posner's response, and
Becker's response. This quote from The New Yorker article highlighted in the first link is worth repeating:
[E]ven if corruption can be a useful means of bypassing
inefficiencies in the short term, in the long term it tends to create
inefficiencies of its own. Bribing, it turns out, doesn’t always speed things up
... a vast study of twenty-four hundred companies in fifty-eight countries ... found that
the more a company had to bribe, the more time it spent tied up in negotiations
with bureaucrats. Graft also encourages government officials to keep complicated
procedures in place... So corruption isn’t just a product of bad institutions
and policies; it also helps cause them. Almost every study done in the past ten
years has found that, on the whole, corrupt countries grow more slowly and have
a much harder time attracting foreign investment.
Update: Truck and Barter has more.
Posted by Mark Thoma on Friday, June 23, 2006 at 04:32 PM in Economics, Market Failure |
This probably isn't the mainstream position on pandas:
Do not panda to misty-eyed sentiment, by Alan Beattie, Commentary, Financial
Times: ...Every week, the worldwide panda industry strikes another blow for
soft-headed sentiment over rational cost-benefit analysis. This week’s feel good
tale was new research suggesting there were 3,000 giant pandas left in the wild,
twice earlier estimates. So what? If pandas can stand on their own four feet,
good. If they cannot, tough. We should stop subsidising them. Pandas are
endangered because they are hopelessly incompetent.
Take their diet. As we all know ..., pandas eat almost exclusively bamboo
shoots. What panda apologists ignore is that ... bamboo has so few nutrients
that the piebald buffoons have to spend 16 hours a day stuffing themselves with
it. It is like trying to subsist on sugar-coated cardboard.
To shovel twigs into their mouths they use what Big Panda tries to pass off
as an opposable thumb but is basically a deformed bone. And ridiculously, given
their diet, giant pandas have a short digestive tract suitable for carnivores,
not vegetarians, so most of the bamboo they eat goes through undigested.
They are also famously bad at sex. Even in the wild pandas do not mate
much... Little wonder no respectable family of animals wants them. ... Yet
thanks to soft-headed anthropomorphism – their big eyes and round faces remind
us of babies, apparently – they are fêted everywhere, notably as the logo of the
charity WWF. ...
Pandas are badly designed, undersexed, overpaid and overprotected. They went
up an evolutionary cul-de-sac and it is too late to reverse. By cosseting them
we are simply rewarding failure. Pandas are doomed. Let them go.
The author is the FT’s world trade editor. He sports a proper opposable
thumb, eats most things and has a digestive system perfectly suited to his
Whatever makes you happy, in a utilitarian kind of way.
This is a bit outside my area, but I thought I'd try to add something. This is an assessment of the Noah's Ark model of species preservation from a textbook I just received in the mail, Environmental Economics by David A. Anderson.
Noah's Ark model asks how to best preserve biodiversity and other benefits from protecting endangered species under the constraint of a limited budget. It takes account of four specific factors in the decision of whether a species should be preserved (invited on the Ark), the species
distinctiveness, the direct benefits from preservation (e.g. recreational and
emotional), the likelihood the species will survive, and the economic cost of
preservation efforts. The problem is, as usual, to match the marginal benefits (measured
as direct benefits plus diversity benefits times the probability of survival) and
the marginal costs:
Are We Loading the Right Species Onto the Ark? Andrew Metrick and Martin Weitzman (1998) collected data on four criteria of
the Noah's Ark Model -- direct benefits, distinctiveness, survivability, and
cost -- and examined whether actual rankings correspond with the logic of the
model. For measures of society's rankings of species, they looked to the
nomination process for protection under the Endangered Species Act. This
included counts of positive comments made about the species, the decision
whether or not to include species on the protected lists, and the amounts of
public expenditures on the recovery of the species.
Direct benefits were measured in terms of species' size and taxonomic class.
As a measure of distinctiveness, they determined whether a species was the sole
representative of its genus and whether it was a subspecies. For survivability
they used a 1 to 5 ranking of endangerment created by the Nature Conservancy.
For cost they used a variable indicating whether or not recovery of the species
conflicts with public or private development plans.
The findings indicate that we place a high priority on the large, cuddly
"charismatic megafauna" like bears and cats. More surprisingly, they suggest
that society spends more money on less endangered species than on more
endangered species, and expenditures do not increase significantly for more
unique species. Further, society is more likely to spend money on an animal
whose preservation conflicts with development plans than on those that could be
saved at a lower cost. In other words, according to this study, our current
strategies for environmental protection do not coincide with what most
economists would recommend in terms of maximizing social welfare.
Posted by Mark Thoma on Friday, June 23, 2006 at 01:28 PM in Economics, Environment, Policy |
Robert Reich says policymakers tend to overreact to the potential for a rerun of the
worst economic event in their lifetimes. Because of this tendency, the
current Fed is overly sensitive to inflation and to a repeat of the 1970s. In fact, he
says, the Fed should be worried about deflation, not inflation:
The Real “Flation” Threat, by Robert Reich, American Prospect: Each generation responds to its own traumatic memory. Ben Bernanke and his
Federal Reserve remember the double-digit inflation of the 1970s and are
determined to mount a preemptive strike. That’s why they’re poised on raising
interest rates yet again Bernanke and company have no direct memory of the
trauma that haunted the previous generation, the depression of the 1930s.
Each generation, in its determination to avoid the nightmare it does
remember, runs the danger of over-reacting, and thereby bringing on the opposite
trauma. A generation ago, economic policy makers paid too little attention to
inflationary forces then building in the American economy. Eventually, Paul
Volcker had to break the back of inflation by raising interest rates sky high.
That put the economy into a severe recession. Now Bernanke and company are
paying too little attention to deflationary forces building in America and the
Bernanke fears that today’s economy resembles the one that began to overheat
the 1970s. But he’s wrong. ... Bernanke and company worry the U.S. labor market
is heating up. They’re wrong here, too. ...
If anything, there’s too much capacity relative to
demand. This is a recipe for deflation. Prices can begin to drop because buyers
hold off, expecting further price decreases. It happened in Japan in the 1990s.
It’s already starting to happen in certain housing markets in the United
The Fed and other central bankers around the world are raising interest rates
because they’re fighting the last war. But they already won that war. Inflation
is no longer our biggest threat. They ought to be worried about the war before
the last one, and the specter of deflation. They’re in danger of losing that war
even before they know they're in it.
I think I'll put Reich in the "sees the potential for a hard-landing" group.
Update: It occurred to me after I posted this that I should have mentioned Ben Bernanke's Views Affected by Depression.
Posted by Mark Thoma on Friday, June 23, 2006 at 12:52 AM in Economics, Inflation, Monetary Policy |
Paul Krugman is on vacation this week so, for those who visit regularly for
the condensed versions of his columns, here's something from the past to fill
the void. With the large amount of discussion concerning raising the minimum wage recently, this book review Krugman did for the September 1998 edition of Washington Monthly about the
minimum wage and a closely related topic, the living wage, might be of interest. It might also surprise you:
The Living Wage, by
Paul Krugman, 1998: Review of Living Wage: What It Is and Why We Need It,
by Robert Pollin and Stephanie Luce
Economics textbooks enthuse about the virtues of a price system. In a market
economy, nobody needs to order people to economize on a scarce commodity or make
extra efforts to produce it: Scarcity leads to a high price, and sheer
self-interest does the rest. Conversely, nobody needs special persuasion to take
advantage of an underemployed resource: Abundance will make it cheap, and again
self-interest will take it from there.
And yet there is a problem with markets: They are absolutely and relentlessly
amoral. Labor, in a market system, is just another commodity; the wage a man or
woman can command has nothing to do with how much he or she needs to make to
support a family or to feel part of the broader society. Some conservatives have
managed to convince themselves that this poses no moral dilemma, that whatever
is, is just. And one supposes that there are still unrepentant socialists who
believe that one can do away with market determination of incomes altogether.
But after a century marked by both the Great Depression--which basically ended
unalloyed faith in markets--and the fall of communism, most people support some
version of the welfare state: a system that is based on markets, but in which
the government tries to prevent too unequal a distribution of income.
But how is that to be accomplished? The standard economist's solution, which
is also the main way the U.S. welfare state operates, involves "after-market"
intervention: Let the markets rip, but then use progressive taxes and
redistributive transfers to make the end result fairer. However, many liberals
have always felt that this solution is unsatisfactory. Instead, they want to
increase "market" wages, notably through support of collective bargaining, and
through the imposition of minimum wage standards.
The "living wage" movement, which has attracted considerable support in
several major U.S. cities, is a variant on this tradition. As described in
Robert Pollin and Stephanie Luce's new book Living Wage, it essentially involves
putting a floor on wages not through a conventional minimum wage law, but by
requiring minimum wage standards of firms that do business with a local
government. Aside from novel enforcement issues (I know this lawyer who will
explain to you about creating dummy companies for the contract work, leaving the
rest of the business unregulated), this is basically a distinction without a
difference: The living wage movement is simply a move to raise minimum wages
through local action.
So what are the effects of increasing minimum wages? Any Econ 101 student can
tell you the answer: The higher wage reduces the quantity of labor demanded, and
hence leads to unemployment. This theoretical prediction has, however, been hard
to confirm with actual data. Indeed, much-cited studies by two well-regarded
labor economists, David Card and Alan Krueger, find that where there have been
more or less controlled experiments, for example when New Jersey raised minimum
wages but Pennsylvania did not, the effects of the increase on employment have
been negligible or even positive. Exactly what to make of this result is a
source of great dispute. Card and Krueger offered some complex theoretical
rationales, but most of their colleagues are unconvinced; the centrist view is
probably that minimum wages "do," in fact, reduce employment, but that the
effects are small and swamped by other forces.
What is remarkable, however, is how this rather iffy result has been seized
upon by some liberals as a rationale for making large minimum wage increases a
core component of the liberal agenda--for arguing that living wages "can play an
important role in reversing the 25-year decline in wages experienced by most
working people in America" (as this book's back cover has it). Clearly these
advocates very much want to believe that the price of labor--unlike that of
gasoline, or Manhattan apartments--can be set based on considerations of
justice, not supply and demand, without unpleasant side effects. This will to
believe is obvious in this book: The authors not only take the Card-Krueger
results as gospel, but advance a number of other arguments that just do not hold
up under examination.
For example, the authors argue at length that because only a fraction of the
work force in the firms affected by living wage proposals will be affected,
total costs will be increased by only 1 or 2 percent--and that as a result, not
only will there be no significant reduction in employment, but the extra cost
will be absorbed out of profits rather than passed on in higher prices. This
latter claim is wishful thinking of the first order: Since when do we think that
cost increases are not passed on to customers if they are small enough? And the
idea that employment "of the affected workers" will not suffer because the
affected wages are only a small part of costs is a non sequitur at best. Imagine
that a new local law required supermarkets to sell milk at, say, 25 cents a
gallon. The loss in revenue would be only a small fraction of each supermarket's
total sales--but do you really think that milk would be just as available as
They also argue that because there are cases in which companies paying
above-market wages reap offsetting gains in the form of lower turnover and
greater worker loyalty, raising minimum wages will lead to similar gains. The
obvious economist's reply is, if paying higher wages is such a good idea, why
aren't companies doing it voluntarily? But in any case there is a fundamental
flaw in the argument: Surely the benefits of low turnover and high morale in
your work force come not from paying a high wage, but from paying a high wage
"compared with other companies" -- and that is precisely what mandating an
increase in the minimum wage for all companies cannot accomplish. What makes
this an odd oversight is that the book contains a lengthy and rather well-done
critique of attempts by local governments to create jobs through investment
incentives, arguing that they mainly end up in a zero-sum poaching war; how
could the authors have failed to notice the parallel?
But while there is much that is silly in their book, Pollin and Luce are
diligent and honest--and as a result the book carries lessons and implications
they may not have intended. The most interesting section is their estimates of
the impact of living-wage proposals on the budgets of hypothetical
families--estimates that perhaps give us the clue to what all this is really
Consider, for example, the effects of "Plan Y" (never mind) on the
hypothetical head of a household, currently making $5.43 an hour. According to
their estimates, as long as he or she remained fully employed, the living-wage
law would raise earned income from $10,860 to $14,500--and also mandate $2,500
in health coverage. (This is, incidentally, a 57 percent increase in the cost to
employers; you have to have a lot of faith in Card-Krueger not to worry that
some jobs might be lost.) According to their numbers, that family would
currently pay less than $900 in taxes while receiving some $9,700 in benefits
such as food stamps, Earned Income Tax Credit, and health care. Their
calculations also show that most of the gains from the living wage proposal
would be offset by reductions in these other redistributive programs. Indeed,
only about one-fifth of the mandated increase in wages and benefits actually
gets manifested in disposable income; the rest is taken away as benefits
Now to me, at least, the obvious question is, why take this route? Why
increase the cost of labor to employers so sharply, which--Card/Krueger
notwithstanding--must pose a significant risk of pricing some workers out of the
market, in order to give those workers so little extra income? Why not give them
the money directly, say, via an increase in the tax credit?
One answer is political: What a shift from income supports to living wage
legislation does is to move the costs of income redistribution off-budget. And
this may be a smart move if you believe that America should do more for its
working poor, but that if it comes down to spending money on-budget it won't.
Indeed, this is a popular view among economists who favor national minimum-wage
increases: They will admit to their colleagues that such increases are not the
best way to help the poor, but argue that it is the only politically feasible
But I suspect there is another, deeper issue here--namely, that even without
political constraints, advocates of a living wage would not be satisfied with
any plan that relies on after-market redistribution. They don't want people to
"have" a decent income, they want them to "earn" it, not be dependent on
demeaning handouts. Indeed, Pollin and Luce proudly display their estimates of
the increase in the share of disposable income that is earned, not granted.
In short, what the living wage is really about is not living standards, or
even economics, but morality. Its advocates are basically opposed to the idea
that wages are a market price--determined by supply and demand, the same as the
price of apples or coal. And it is for that reason, rather than the practical
details, that the broader political movement of which the demand for a living
wage is the leading edge is ultimately doomed to failure: For the amorality of
the market economy is part of its essence, and cannot be legislated away.
Posted by Mark Thoma on Friday, June 23, 2006 at 12:15 AM in Economics, Market Failure, Policy, Politics, Regulation, Unemployment |
Martin Wolf takes on the powerful anti-tobacco lobby:
The absurdities of a ban on smoking, by Martin Wolf, Commentary, Financial
Smokers are the new lepers. One already sees them huddled in doorways. Soon the
health bill now before the UK parliament will ban smoking in all workplaces in
England, including pubs, restaurants and private clubs. But the government
revealed ... that the ban might eventually apply to doorways and entrances of
offices and public buildings, as well as to bus shelters and sports stadiums.
Smokers are to be driven out into the wilderness...
As a life-long non-smoker, I wonder what is driving these assaults. Is it an
attempt to improve public health, as campaigners suggest? Or do smokers serve a
need every society seems to have - for a group of pariahs that all
right-thinking people can condemn? I strongly suspect the latter. ...
The discovery of passive smoking has, for this reason, given the
anti-tobacco lobby its success. It has overwhelmed the protests of libertarians.
Riding a tide of moral indignation, the government has enacted a draconian law
banning smoking even in private clubs. Now it plans to extend that ban outdoors.
So how many lives might this extension "save" (or, more precisely, prolong)?
Indeed, how many lives might the ban itself save?
According to a survey published in 2003 by the Parliamentary Office of
Science and Technology, ... passive smoking increases the risk of death from
lung cancer by 25 per cent. This sounds dramatic. But these studies probably
contain biased or inaccurate samples: some smokers may, for example, be
classified as non-smokers. Moreover, the risk for non-smokers of death from lung
cancer is itself only 10 per 100,000. So the increase generated by passive
smoking comes to just 2.5 per 100,000.
If every non-smoker were exposed to sufficient quantities of second-hand
smoke this would amount to a maximum of 1,000 deaths a year in England, ... less than 0.2 per cent of all deaths in the country. In practice,
however, the ...deaths from lung cancer
caused by passive smoking ... must be very much smaller than this. Many people
already live in an overwhelmingly tobacco-free environment. ...
the government's ban does not even go near to eliminating passive smoking. As
for the proposed extension to open spaces, it can add nothing. The notion that
people would be exposed to dangerous quantities of passive smoke in open bus
shelters or the doorways of buildings seems ludicrous. It also seems next to
impossible to police fairly: where do doorways stop and who decides?
These difficulties do not, as it happens, apply to the places where the most
damaging forms of passive smoking occur, in homes. That is where vulnerable
children are likely to be most exposed... If the UK government were engaged in a serious health endeavour, as opposed
to gesture politics, it would outlaw smoking in the home. This would be
perfectly feasible... Children could be encouraged to "shop" their parents.
Random visits could be arranged. ...
There is a precedent, although not a happy one: Montgomery County, in
Maryland, US, did ban smoking in the home a few years ago, but then retracted
the ban under global ridicule. Yet why the ridicule should have won out is far
from obvious. All those people who think that the risks from passive smoking
justify comprehensive legislation on public places must see the still stronger
case for protecting children at home. Indeed, I wonder why the UK government
does not ban the noxious weed altogether... That would be in
accord with policy on a range of prohibited drugs.
Note: I am opposed to any such policy. I am merely pointing out the
absurdities of current plans. Harm to others is a necessary justification for
government interference. But it is not sufficient. Intervention should also be
both effective and carry costs proportionate to the likely gains...
One of the usual counterargument is to note that for some groups, food servers in restaurants, bartenders, my officemate in graduate school, and so on, the risks
might be a lot higher than average and people shouldn't have to sacrifice their
health for the opportunity to take these jobs. Since the private marketplace will not internalize these costs properly, a legislative solution is needed.
Also, it does seem that those who suffer the most harm with the least ability to avoid it, the children of smokers, are the least protected. And while I agree there is no way to effectively legislate a solution, there is still a role for government in providing education about the harmful effects of secondary smoke through public service announcements. Compared to when I was young, education has made great inroads already.
Posted by Mark Thoma on Thursday, June 22, 2006 at 08:07 PM in Economics, Policy, Politics, Regulation |
Ronald McKinnon of Stanford University explains why "China bashing" is a bad
idea through a comparison of the pressure being applied on China today to revalue the yuan with a period 30 years ago when similar
pressure was applied to Japan to revalue the yen with less than desirable results. Some highlights:
with “China Bashing”, by Ronald McKinnon, Commentary, Project Syndicate:
Pressure on China today to push up the value of the yuan against the dollar is
eerily similar to the pressure on Japan 30 years ago to make the yen appreciate.
Back then, “Japan bashing” came to mean the threat of US trade sanctions unless
Japan softened competitive pressure on American industries. By 1995, the
Japanese economy had become so depressed by the overvalued yen ( endaka fukyo )
that the Americans relented and announced a new “strong dollar” policy. Now
“China bashing” has taken over, and the result could be just as bad, if not
The financial press and many influential economists argue that a major
depreciation of the dollar is needed to correct America’s external deficit. But
the US current-account deficit – about 6% of GDP in 2004 and 2005 – mainly
reflects a new round of deficit spending by the US federal government and
surprisingly low personal savings by American households (perhaps because of the
bubble in US residential real estate).
Moreover, the cure can be worse than the disease. Sustained appreciation of a
creditor country’s currency against the world’s dominant money is a recipe for a
slowdown in economic growth, followed by eventual deflation, as Japan found in
the 1990’s – with no obvious decline in its large relative trade surplus. In a
rapidly growing developing country whose financial system is still immature,
introducing exchange-rate flexibility..., as the IMF advocates, is an even more
If a discrete exchange-rate appreciation is to be sustained, it must reflect
expected monetary policies: tight money and deflation in the appreciated
country, and easy money with inflation in the depreciated country. But domestic
money growth in China’s immature bank-based capital market is high and
unpredictable, while many interest rates remain officially pegged. Thus, the
People’s Bank of China (PBC) cannot rely on observed domestic money growth or
interest rates to indicate whether monetary policy is too tight or too loose.
If China is to avoid falling into a Japanese-style liquidity trap, the best
solution is to fix its exchange rate in a completely credible way so that there
is no fear of currency appreciation. Then financial liberalization could proceed
with market interest rates remaining at normal levels. But China’s abandonment
of the yuan’s “traditional parity” in July 2005 rules out a new, credibly fixed
exchange-rate strategy for some time.
Failing this, China must postpone full liberalization of its financial
markets. This means retaining, and possibly strengthening, capital controls on
inflows of highly liquid “hot” money from dollars into yuan, and continuing to
peg certain interest rates, such as basic deposit and loan rates, to help
preserve the profitability of banks.
Such measures are, of course, an unfortunate detour. True, China’s economy is
now growing robustly and is not likely to face actual deflation anytime soon,
but if China does fall into a zero-interest rate trap, the PBC, like the BOJ,
would be unable to offset deflationary pressure in the event of a large
exchange-rate appreciation. With short-term interest rates locked at zero,
pressure for further appreciation would leave the PBC helpless to re-expand the
China’s monetary and foreign exchange policies are now in a state of limbo.
Instead of stable guidelines with a well-defined monetary (exchange rate) anchor
and a firm mandate to complete financial liberalization, China’s macroeconomic
and financial decision making will be ad hoc and anybody’s guess – as was true,
and still is, for Japan.
With so many different analyses of global
imbalances, with so many different policy recommendations about how to resolve them
and who is at fault, and with dire warnings about every policy choice from some
credible analyst, this must be pretty confusing to people with little training
in the area. Quite honestly, it's pretty confusing even if you have had training
and the main message seems to be that the future holds a great deal of
uncertainty even for those who have studied these problems extensively.
So, since I have nothing in particular to add to the confusion on this issue that someone hasn't already said, I'll go, with appropriate apologies, to a corny, worn out analagy type ending. Should you buy an umbrella to ward off the coming economic storm? Changes in the economic weather,
like changes in the weather more generally, are hard to predict until signs of change are
evident. So far the clouds that are visible aren't gathering into a storm, but I wonder, is your economist uncle's arthritic knee, the one he swears predicts big
storms, aching yet?
Posted by Mark Thoma on Thursday, June 22, 2006 at 03:42 PM in Economics, International Finance, Policy, Politics |
While surfing for material related to another post, I came across this piece
by Paul Krugman written in 2003 on the end of serfdom. It's interesting to think
about the analysis in terms of the global labor market developing today, China, India, the decline of unions, the loss health and retirement benefits as the social contract changes, sweatshops, etc., but the
main reason for passing it along is for its general historical interest and its
analysis of the economics underlying the end of the feudal era:
Serf's Up!, by Paul
Krugman: James Surowiecki writes fine columns, and
one is no exception. But he's got the story of the effects of the Black
Death on serfdom backwards. He - and anyone else curious about history - should
read Evsey Domar's
classic 1970 paper "The causes of slavery or serfdom: a hypothesis." (Sorry,
doesn't seem to be available online. Update: Domar's paper is available here. Thanks smk - Brad DeLong too for posting it.)
Here's what Surowiecki says: "The Black Death helped undermine feudalism. The
population decline was so severe that the individual’s labor grew more valuable,
which enabled serfs to abandon their lords and become tenant farmers or urban
workers." That sounds plausible, but it's not the way it happened. According to
Domar, serfdom actually withered away before the Black Death, as European
population grew close to its Malthusian limit. The puzzle is why serfdom wasn't
reinstituted after the Black Death.
Domar was motivated by his knowledge of Russian history. Serfdom in Russia,
he knew, wasn't an institution that dated back to the Dark Ages. Instead, it was
mainly a 16th-century creation, contemporaneous with the beginning of the great
Russian expansion into the steppes. Why?
He came up with a simple yet powerful insight: there's no point in enslaving
or enserfing a man unless the wage you would have to pay him if he was free is
substantially above the cost of feeding, housing, and clothing him.
Imagine a pre-industrial society where population is pressing on limited land
supplies, and the marginal product of labor - and hence the real wage rate under
competitive conditions - is barely at subsistence. In that case, why bother
establishing property rights in human beings? It costs no more to hire a free
worker than to feed an indentured laborer. Indeed, by 1300 - with Europe very
much a Malthusian society - serfdom had withered away from lack of interest.
But now suppose that for some reason land becomes abundant, and labor scarce.
Then competition among landowners will tend to push up wages of free workers,
and the ruling class will try, if it can, to pin peasants down and prevent them
from bargaining for a higher standard of living. In Russia, it was all about
gunpowder: suddenly steppe nomads were no longer so formidable, and the rich
lands of the Ukraine were open for settlement. Serfdom was an effort to keep
peasants from taking advantage of this situation. (And if I've got it right,
those who were venturesome enough to run away and set up outside the system
Meanwhile, the New World opened in the west. Sure enough, the colonizing
powers tried various forms of indentured servitude - making serfs of the Indians
in Spanish territories, bringing over indentured servants in Virginia. But
eventually they hit on a better solution, from their point of view: importing
slaves from Africa.
Here's the puzzle. In Europe circa 1100, with population scarce, serfdom was
useful to the ruling class. By 1300 it wasn't, and had been allowed to drift
away. But after 1348 it should have been worthwhile again. Yet it wasn't
effectively reimposed. There were attempts to restrain wages and limit labor
mobility, as well as attempts to tax the peasants (Wat Tyler's rebellion fits
into all this.) But all-out feudalism didn't return. Why?
And an even bigger question: why hasn't indentured servitude made a comeback
in the modern era? Yes, I know, human rights and all that - but if it was
profitable to have indentured servants in the modern world, I'm sure that
Richard Scaife's think tanks would have no trouble finding justifications, and
assorted Christian groups would explain why it's God's will.
Anyway, have to get back to real work. But try to find a copy of Domar's
paper and read it.
Posted by Mark Thoma on Thursday, June 22, 2006 at 12:52 PM in Economics, History of Thought |
Should we deny citizenship to people who find it very difficult to become
fluent in English because they weren't exposed to English before a critical
Economic Scene Legislate Learning English? If Only It Were So Easy, by Austan
Goolsbee, Economic Scene, NY Times: President Bush's plan to give
longstanding illegal immigrants a path to citizenship would require them to
learn English as a sign that they accept American culture. The conservative base
of the Republican Party considers any policy that would open that path as little
more than amnesty, and they consider the English requirement trivial...
[E]vidence from economics suggests that ... this path would not be nearly as
easy as either side might think. Immigrants already have a strong incentive to
learn English: better English means a better job and a higher income. Not
speaking English largely means being trapped in a low-paying job... Yet millions
still do not know English. Why not?
As Hoyt Bleakley, an economist at the University of Chicago Graduate School
of Business, puts it: "For someone not to speak English after being in the
country for many years and in the face of the clear job market reward for
learning English, is likely a sign that learning the language is very tough for
them. I'm not so sure that having Congress tell them it's required will actually
The difficulties adults have with learning English are at the center of the
research that Professor Bleakley has done with a fellow economist, Aimee Chin,
of the University of Houston, in their forthcoming ...
"Language Skills and Earnings: Evidence from Childhood Immigrants."
The study's approach begins with ... the ... idea ... that a child can learn
a new language as fluently as a native speaker as long as the child starts
before a critical age (usually thought to be around 11 or 12). Past the critical
period, it is difficult to become fluent in a new language and virtually
impossible to speak without an accent.
It is a theory that can help explain why Henry A. Kissinger, who immigrated
to the United States at about age 14, speaks English with a German accent while
his younger brother, Walter, does not. ... Professor Bleakley and Professor Chin
show rather stark evidence for this theory in the data on immigrants' job
prospects. ...[T]hey document that poor English skills meant less schooling and
substantially lower wages for immigrants and that these disadvantages often
extended to their children, even if those children were born in the United
Professor Bleakley and Professor Chin
extend this initial
study ... by asking how immigrant parents' language skills affect their
children in "What Holds Back the Second Generation? The Intergenerational
Transmission of Language Human Capital Among Immigrants." As a starting point,
the study notes that half the students now classified as having low English
proficiency were, in fact, born in the United States. They are overwhelmingly
the children of non-English-speaking immigrants. So, it is natural to ask what
impact parents have.
In turns out that children whose immigrant parents came to the United States
when young do just about the same in school regardless of [where] the parents
came from... But the situation is different for children whose parents were
older when they arrived. The children from non-English-speaking households do
much worse than English-speaking ones...
When Professor Bleakley and Professor Chin compare the overall distribution
of test scores of English- and non-English-speaking families, they find that the
... top half of students from non-English-speaking households do just about as
well as the top half from English-speaking households. It seems that a child
with talent can succeed no matter what the parents' skills are... But parents
whose English is poor have a big negative impact on the below-average children.
Based on his research, Professor Bleakley sees some serious problems with the
more extreme immigration proposals like the old Proposition 187 in California,
which sought to deny a public education to the children of illegal immigrants.
"For many children of immigrants," Professor Bleakley said, "the school system
is one of the only exposures to English they will get." Kicking them out of
school when they are young means they will most likely never be fluent in
The current dispute over immigration reform has been characterized as a
battle between two messages: "Welcome to America" and "Please Go Home."
Whichever message prevails in the political battle this summer, unless directed
mainly at 10-year-olds, had best come with a translation.
Posted by Mark Thoma on Thursday, June 22, 2006 at 03:24 AM in Economics, Policy, Politics |
Larry Summers says the economists who worried about growing global imbalances
and predicted tough times ahead that have since rescinded their predictions in
favor of milder scenarios may have thrown in the towel too early:
Summers Sees Account Deficit as Global Threat, by John M. Berry, Commentary,
Bloomberg: Former Treasury Secretary Lawrence H. Summers said last week that
the $800 billion U.S. current account deficit represents a risk to the global
economy and that if its decline isn't carefully managed, it could lead to a
world recession. ... In contrast, several of the other conference speakers,
including ... Richard N. Cooper and ... Peter Garber..., portrayed the deficits
as relatively benign.
And a large majority of the roughly 75 economists and academics present
indicated by a show of hands that they expect the current account deficit
eventually to shrink smoothly to a sustainable level. ... [T]here was also broad
agreement that the big short-fall in transactions with the rest of the world may
continue unabated for years to come.
Summers was skeptical... In recent years, numerous economists have predicted
the foreign investors and central banks whose purchases of U.S. stocks and
bonds, direct investments in companies and bank loans have financed the current
account deficits would become reluctant to continue doing so. That could have
forced up interest rates and caused the deficits to decline.
That hasn't occurred, of course, and now some of those economists are
wondering if it ever will. Summers labeled that thinking the ''throw in the
towel theory.'' ''Since the conventional view hasn't been right, that's evidence
that view is wrong,'' or so that argument goes, Summers said. To the contrary,
there's ''more risk now'' than previously that a crisis could erupt...
On June 15, the Boston Federal Reserve Bank's president, Cathy E. Minehan,
asked how many of the participants expected a smooth correction of the deficits
at some point. So many hands went up that she didn't ask who disagreed. ...
Either way, smooth or rough, American households are going to feel a lot of
pain when the adjustment does occur. ... For the current account deficit to
shrink, U.S. savings have to rise and consumption will have to fall. Summers
derided as an ''enduring fallacy'' the notion that a country can decide to save
more, have its current account deficit improve and maintain good economic growth
while nothing else happens.
''If the current account deficit falls, something else has to change,''
Summers said. Exports have to rise, or imports will have to fall, and if U.S.
savings were increasing, ''there would be a decline in global aggregate demand''
unless growth increased elsewhere in the world, he said. ...
Several papers presented at the conference provided convincing evidence that
the U.S. current account deficit isn't just the product of over-consumption by
Americans. Economic circumstances and government policies in many other parts of
the world have played a major role as well.
The extraordinarily high savings rate in China and a number of other
countries has provided a huge amount of capital to be invested elsewhere. By
keeping its currency peg at a relatively low value to the U.S. dollar, the
People's Bank of China, its central bank, has accumulated an enormous amount of
dollars, much of which it has used to purchase U.S. Treasury securities.
Several other East Asian countries also maintain currency pegs that have
required them to accumulate dollars. And with oil priced in dollars, so have
many of the oil exporting nations. ...
Were the U.S. current account deficit to begin to shrink, the surpluses in
other countries ... would have to shrink as well. As Summers put it, ''What
happens in the rest of the world is probably more important in the resolution of
this than what happens in the U.S.''
No one at the conference had a clue as to what might happen to cause the
deficit to begin to shrink, which is another reason to wonder whether it may be
a financial crisis. In the meantime, the deficit is still headed higher.
I'll add that this could be reducing economic activity to some extent already due to uncertainty about future economic conditions. Whether a hard landing actually occurs or not, the chance that it will has to be taken seriously by consumers, financial markets, and policy makers as they formulate plans for the future.
Wile E. Coyote moment coming?
Posted by Mark Thoma on Thursday, June 22, 2006 at 02:15 AM in Economics, International Finance, International Trade |
Gene Sperling tries to convince president Bush that increasing the minimum wage would help worker's and improve his political standing:
Bush Should Call Kennedy on the Minimum Wage, by Gene Sperling, Commentary,
Bloomberg: Memo to President Bush:
I know you don't often take advice from former Clinton administration
economic officials... Nonetheless, Mr. President, you would help both working
Americans and your own political interests if you picked up the phone and told
Senator Edward Kennedy that he should take another shot at trying to raise the
minimum wage to $7.25 an hour.
Yes, his amendment to do that failed yesterday... Nonetheless, I believe that
with your support he could get the seven votes that would provide him with the
60 needed to pass Senate procedural hurdles.
Before anyone on your team starts raising red flags, let me make clear that I
get your concerns. ... a minimum wage is a form of price control... And yes,
when raised too high, it can come at the expense of jobs for minority youths. So
why should a conservative Republican president seek a Bush-Kennedy bill? Let me
give you three reasons.
Dignity for American Workers: First, on the issue of price controls, we have
to acknowledge that ignoring the lopsided bargaining power that can exist in
labor markets and the workplace risks offending core American values. We don't
allow an employer to condition a job on sex from a single mother of three, even
if she would take the deal to keep food on her table.
While offering a low wage may not be as despicable as sexual harassment, most
Americans would agree that economic dignity should also limit how little that
employer can pay that same woman -- even if she was desperate enough to accept
$3 an hour...
A Raise for 15 Million Americans: Second, raising the minimum wage isn't only
about helping teenagers in their summer jobs. Of Americans who now make the
federal minimum wage of $5.15 an hour, 35 percent are sole breadwinners and the
typical minimum-wage worker brings in half of total family income.
And while 7.3 million would directly get a raise, the Economic Policy
Institute estimates that an additional 8 million would likely get an indirect
bump up -- meaning a raise for 15 million Americans. ...
A Reasonable Bill: Finally, as to the fear that higher minimum wage would
crimp labor markets... The claims by opponents that minimum wage increases cost
jobs look weaker and weaker over time. No one has yet rebutted convincingly
David Card and Alan Krueger's study that compared fast-food jobs on the border
of New Jersey and Pennsylvania, and found no decrease in lower-wage jobs after
New Jersey raised its state minimum wage.
Rather, the Economic Policy Institute, Fiscal Policy Institute, and Center
for American Progress have all found that states that raised minimum wages above
the federal level have had just as good, if not better, employment and small
business performance than states that haven't.
Heading Off Democrats: The truth is Mr. President, I'd be surprised if your
political advisers wouldn't support this advice. After all, there is real hope
in Democratic circles that ... minimum-wage referendums in November will
increase turnout among Democrats and progressive independents. ...
Update: Greg Mankiw complains that Gene Sperling only looks at "a single controversial study that finds no adverse side effects," then presents only one side himself in rebuttal. Brad DeLong adds evidence that counters Mankiw's.
Posted by Mark Thoma on Thursday, June 22, 2006 at 01:11 AM in Economics, Policy, Politics |
More evidence of increasing polarization in the U.S.:
U.S. Losing Its Middle-Class Neighborhoods, by Blaine Harden, Washington Post:
Middle-class neighborhoods, long regarded as incubators for the American dream,
are losing ground in cities across the country, shrinking at more than twice the
rate of the middle class itself.
In their place, poor and rich neighborhoods are both on the rise, as cities
and suburbs have become increasingly segregated by income, according to a
Brookings Institution study... It found that as a share of all urban and
suburban neighborhoods, middle-income neighborhoods in the nation's 100 largest
metro areas have declined from 58 percent in 1970 to 41 percent in 2000. ... It
far outpaced the decline of seven percentage points ... in the proportion of
middle-income families living in and around cities. ...
"No city in America has gotten more integrated by income in the last 30
years," said Alan Berube, an urban demographer at Brookings who worked on the
report. "It means that if you are not living in one of the well-off areas, you
are not going to have access to the same amenities -- good schools and safe
environment -- that you could find 30 years ago," he said. ...
The Brookings study says that much more research is needed to better
understand why middle-income neighborhoods are vanishing faster than
middle-income families. But it speculates that a sorting-out process is underway
in the nation's suburbs and inner cities...
The Brookings study says that increased residential segregation by income can
remove a fundamental rung from the nation's ladder for social mobility:
moderate-income neighborhoods with decent schools, nearby jobs, low crime and
reliable services. ...
Posted by Mark Thoma on Thursday, June 22, 2006 at 12:03 AM in Economics, Housing, Income Distribution |
Here's some fun for those boring summer days yet to come. If you follow this link, you will find the rules to the game
'Capture the Flag' from the 1947 Scoutmaster’s Handbook. Here’s a shortened version:
Capture the Flag - This is one of the most popular outdoor games for scouts.
Traditional Rules: From the 1947
Scoutmaster's Handbook, pp 447-8:
- Space – Large;
- Type – Strenuous;
- Teams - Half Troop;
- Formation - Informal ;
- Equipment - Two Signal Flags
Each team has its own territory in which its Scouts are free to move as they
please … The object … is to enter the enemy's territory, capture the flag, and
carry it across the line into home territory without being caught. … If the flag
is successfully captured, it must be carried across the line into home
Here's a version adults can play:
Capture the U.S. Flag - This is one of the most popular political games.
Political Rules - From the 2000
Republican Handbook by Carl Rove:
- Space – United States;
- Type – Political and Patriotic;
- Teams – Republican and Democrat;
- Formation – By Party;
- Equipment - Two United States Flags
Each party has its own blue and red territory in which its members are free
to display the U.S. flag as they please … The object … is to enter the other
party’s territory, capture the U.S. flag, and carry it across the line into home
territory without being Swift Boated. … If the flag is successfully captured, it
must be displayed prominently on cars, houses, clothing, etc. in the home
The Republicans have captured the Democrat’s U.S. flag and, for now, the flag
is theirs alone. But the game is far from over. It’s time for the Democrats, who
are no less patriotic, to go on the offensive and recapture the flag.
Posted by Mark Thoma on Wednesday, June 21, 2006 at 08:39 PM in Miscellaneous, Politics |
Was there ever any question? Apparently there was:
Are Economists Smarter?,
Laurence J. Kotlikoff, Economist's Voice:
final straw that forced my friend Larry Summers to resign as President of
Harvard may have been his alleged suggestion that "economists are smarter than
sociologists." I must say that I too was taken aback. I had always thought
economists were better looking than sociologists, but smarter?
I tried this proposition out on my brother, who’s a
veterinarian at Cornell. "Mike," I asked, "Are we economists smarter than
sociologists?" "Sorry," he said. "You’re better looking and more personable, but
not smarter than sociologists or, for that matter, vets."
"Actually, this is good news," I said. "For years I’d been
told that economists are people who are good with numbers, but don’t have the
personality to be actuaries, let alone sociologists."
"Now that I’ve got you on the phone," Mike said, "do you
really think that Larry Summers thinks that economists are smarter?" "Not
really," I said. "I’ve know Larry since grad school. He loves to provoke,
debate, shake things up, but I can’t believe he thinks we’re smarter. Better
looking, yes, but not smarter. And after what he’s gone through at Harvard, I
don’t think he’s feeling very smart."
"Mike," I said, "you’re a scientist as well as a vet. What’s
smarter mean, anyway? Have you scientists located the smart gene yet?"
"We have," Mike said. "And there’s an easy test for it.
Anyone who thinks he’s smarter doesn’t have it. And, if you don’t mind, pretty
boy, I’ve got work to do."
"Gee," I thought, as I hung up the phone. "I wish I had that
smart gene. My brother must have it. He’s writing papers I can’t begin to read,
and he isn’t asking the smarter question. If only we’d been identical, not
Funny thing is that at one time, I was sure I was smarter
than my brother. I was in grad school at Harvard and my brother was a stable
boy, mucking out stalls at Penn’s large animal hospital. We’d both gone to Penn,
but I majored in a hard subject, economics, and Mike took it easy studying
English. He wouldn’t and couldn’t be caught dead in a math or science course. When we
graduated, Mike headed to one dead end job after another, finally ending up at
age 26 literally knee deep in horse manure.
"Larry, I’m going to be a vet," he told me one day. "No way,"
I said. "You’re knocking your head against the stall. You’re not smart enough to
be a vet. You did so-so in math and science in high school, and you haven’t
looked at those subjects in a decade. You’ll have to go to night school for
years to even apply."
"Larry, I’m going to be a vet."
And sure enough, five years later, after night school, being
rejected at Penn’s vet school and finally being accepted there, Mike graduated
number one in his class! I remember when they gave him the award for being the
top student. I couldn’t believe it. I still can’t believe it. I, after all, had
all the smarts. I did better in math and science and scored higher in the SATs.
Mike had no aptitude for these subjects. Who would know this better than his
twin brother? But there he was getting this award.
This shook my faith in smarts. But then I thought, "Gee, a
lot of what vets do is very hands on, practical. Maybe this is why he succeeded.
Maybe I’m still the smartest." I checked with my sister Barbara, who had gone
from being a paralegal to running a major U.S. corporation. "Don’t worry," she
assured me, "you’re the smartest."
But then Mike messed me up again. Not content with being a
vet, he proceeded to get a PhD in physiology. Then he joined Penn’s vet school
faculty and turned into a hard core scientist with a huge lab, NIH grants, you
name it. He’s now doing genetic research with no time to talk to his "smarter"
half. Penn’s Vet school recently asked if he would consider being its dean.
I’m very proud of Mike. I tell his story to every kid I know
who’s been told he can’t make it, has lousy test scores, "has low aptitude," and
didn’t go to Harvard. I also tell them that "measures" of smarts—IQ, SATs, GPAs,
the ranking of your college—have a laughably small ability to predict success as
measured by labor earnings let alone making brilliant discoveries or just
enjoying life. Finally, I tell them that human potential is neither quantifiable
nor bounded and that anyone who’s really smart knows this for a fact.
Posted by Mark Thoma on Wednesday, June 21, 2006 at 05:32 PM in Economics, Miscellaneous |
It's interesting to think of this article about why evolution progresses at different rates both over time and across regions in terms of how competition among firms for
survival drives innovation in a competitive marketplace. The term 'niche' as
used below would be, for example, an industry where firms are earning greater
than normal profits, or a profitable market opportunity that has not yet been
No Vacancy, No Evolution,
Evolution 101, by Olivia Judson, Commentary, NY Times: Yesterday, I claimed that a major reason large evolutionary changes often
don’t happen is that competition from the creatures around you stops you from
changing. In other words, in environments that are already rich in different
species, natural selection often prevents large changes. My piece of evidence
for this was a claim that, when you take other organisms away — when you reduce
competition for food, or space — evolution explodes. Today, I want to examine
the truth of these claims more closely.
I want to start with a question: Why aren’t there more insects in the sea?
Insects, after all, make up the bulk of all known animal species — most animals
are insects — yet hardly any insects live in the sea.
It’s not because of the water. Many insects live in freshwater for at least
part of their lives. Think of mayfly nymphs, or caddis fly larvae... Or think of
water striders, skating along the top of a pond... Could it be the salt? No.
Brine fly larvae live in the Utah’s Great Salt Lake. Some mosquito larvae do
fine in salt, too — they can even live in the hypersalty Dead Sea. ...
I put it to you that the reason so few insects get beyond rock pools or dip
their toes beneath the low tide mark is that the niches they would occupy in the
ocean proper are taken already. Crabs, lobsters, shrimp, barnacles, water fleas
(which are ... little crustaceans) and company have got all niches covered. My
prediction — which I hope we won’t be testing — is that if all the crustaceans
were wiped out of the oceans, insects would move straight in.
My prediction rests on the fact that it is typically difficult to evolve to
occupy a niche that is already full. An invader must be better at exploiting the
niche than the current occupant, who has already evolved to make effective use
of it. By contrast, when a niche is empty — when seeds are falling to the ground
and no one is eating them, say — it doesn’t matter if, at first, an animal is a
bit inept at finding and opening the seeds.
Consistent with this idea is the observation that when new niches open up —
perhaps because new islands or lakes or cave systems have formed, or because an
asteroid has hit the earth and eradicated millions of species — the first
organisms to become established in the new environments evolve quickly and
reliably into all sorts of new species. This phenomenon is known as adaptive
Newly erupted islands are famous for this. Over and over again, archipelagos
see explosive bursts of evolutionary change and the rapid appearance of species
found nowhere else. New Zealand is full (and was fuller) of an amazing array of
unique flightless birds... Hawaii has an abundance of unique fruit flies,
spiders, silverswords ... and birds. Madagascar has all manner of lemurs... And
everyone knows about the Galápagos.
Rapid bursts of evolution can also happen in new lakes... Indeed, right now,
the great lakes of tropical Africa are the backdrop for the fastest known
radiation of vertebrates, the cichlid fishes. Lake Victoria, for example,
appears to have dried up and then refilled around 14,600 years ago. Since then,
perhaps 500 different species of cichlid have evolved... Lake Victoria has
cichlids that eat algae, cichlids that eat other cichlids, cichlids that eat
fish eggs — cichlids, in short, that have evolved to eat everything that can be
eaten. Some fish live in shallow water; others prefer the deeps...
Ideas about adaptive radiation can also be tested in experiments. ...[M]any
bacteria can whiz through hundreds of generations in a month. This makes it
relatively easy to use bacteria to look at radiations. Here’s what you do. You
create two sets of environments, one simple, and one complex. The complex
environment might have several different places to live, or a variety of sources
of carbon. The simple environment has just one habitat or foodstuff. Then, since
bacteria reproduce asexually, you take genetically identical individuals, and
release them into the two different environments. Sure enough, mutations happen,
and the bacteria rapidly evolve to exploit the different niches. After a month,
you will find that bacteria from the complicated environment have become
genetically diverse. Those from the simple environment, in contrast, remain
In short, empty niches are a license for evolutionary change. Once the new
niches are full, natural selection acts to stop further change, and the rate of
evolutionary change slows. Fossils, islands and test tubes — they all show the
same dynamics. ...
This impliess that it is not competition per se that produces rapid innovation, but
competition coupled with emergent profitable 'niches.'
Posted by Mark Thoma on Wednesday, June 21, 2006 at 03:51 PM in Economics, Science, Technology |