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[This is supposed to post automatically.]
This surprised me. The correlation between genetics and longevity may be a lot weaker
than you think, with "only 3 percent of how long you live compared to the
average person ... explained by how long your parents lived":
Live Long? Die Young? Answer Isn’t Just in Genes, by Gina Kolata, NY Times:
Josephine Tesauro never thought she would live so long. At 92, she is straight
backed, firm jawed and vibrantly healthy... Mrs. Tesauro does, however, have a
living sister, an identical twin. But she and her twin are not so identical
anymore. Her sister is incontinent, she has had a hip replacement, and she has a
degenerative disorder that destroyed most of her vision. She also has dementia.
“She just does not comprehend,” Mrs. Tesauro says. Even researchers who study
aging are fascinated by such stories. How could it be that two people with the
same genes, growing up in the same family, living all their lives in the same
place, could age so differently?
The scientific view of what determines a life span or how a person ages has
swung back and forth. First, a couple of decades ago, the emphasis was on
environment, eating right, exercising, getting good medical care. Then the view
switched to genes, the idea that you either inherit the right combination of
genes that will let you eat fatty steaks and smoke cigars and live to be 100 or
you do not. And the notion has stuck, so that these days, many people point to
an ancestor or two who lived a long life and assume they have a genetic gift for
But recent studies find that genes may not be so important in determining how
long someone will live... — except, perhaps, in some exceptionally long-lived
families. That means it is generally impossible to predict how long a person
will live based on how long the person’s relatives lived.
Continue reading "The Weak Link Between Genes and Longevity" »
Posted by Mark Thoma on Thursday, August 31, 2006 at 05:04 PM in Economics, Health Care, Miscellaneous |
Greg Mankiw posts a link to a paper with the introduction "Economist Ann Huff Stevens punctures another media myth." The paper implies that workers shouldn't feel insecure about their economic prospects since the data don't support their perceptions of insecurity. But as I said back in December when I posted the abstract and part of the introduction to the Stevens' paper:
There is other research, e.g. see here, showing that measures of insecurity such as the variance of income have risen in recent years. Thus, even if these results hold up to further scrutiny, they do not prove that worker's perception of increasing economic insecurity is illusory.
If you look at some of the other statistics Ann Huff Stevens has produced, you get a different impression about economic security:
In fact, what happened in the Ryans' case -- an economic implosion triggered by a succession of layoffs for John and a medical crisis for Kim -- has become increasingly common among the nation's working families during the last 25 years. Setbacks such as job losses and prolonged illnesses have always taken their toll, of course. But they haven't always packed the economic punch they now do. Since the 1970s, the odds that a family will see its income chopped in half when hit by this kind of shock have nearly doubled to more than 20%, according to statistics generated by The Times in cooperation with researchers at UC Davis. "Working families stand a good chance of sustaining big blows to their incomes even from fairly commonplace events," said UC Davis economist Marianne E. Page, who with colleague Ann Huff Stevens helped The Times with its analysis. "The odds of suffering a sizable setback have grown considerably in recent years."
And when you ask people on the front lines how they feel rather than looking at data to see how they should feel, you get a different answer as shown in three new opinion polls. Contrary to what is implied above, workers perceptions of insecurity are not a myth:
Three Polls Find Workers Sensing Deep Pessimism, by Steven Greenhouse, NY Times: Three new opinion polls released yesterday found deep pessimism among American workers, with most saying that wages were not keeping pace with inflation and that workers were worse off in many ways than a generation ago.
The Pew Research Center found in a survey of 2,003 adults completed last month that an overwhelming majority said workers had less job security and faced more on-the-job stress than 20 or 30 years ago.
The nonpartisan Pew center, said, “The public thinks that workers were better off a generation ago than they are now on every key dimension of worker life — be it wages, benefits, retirement plans, on-the-job stress, the loyalty they are shown by employers or the need to regularly upgrade work skills.”
In a poll of 803 registered voters commissioned by the A.F.L.-C.I.O., Peter D. Hart Research found that 55 percent said their incomes were not keeping up with inflation, 33 percent said their incomes were keeping even and 9 percent said their incomes were outpacing inflation. ...
A poll of 800 nonsupervisory workers released yesterday by Lake Research Partners found that 51 percent said the next generation would be worse off economically, 27 percent said the next generation would fare about the same and 18 percent said it would be better off.
The poll, for Change to Win, the coalition of unions that left the A.F.L.-C.I.O., found that 63 percent of respondents said the economy was on the wrong track and 28 percent said it was going in the right direction. ...
The Pew survey found that 69 percent said there was more on-the-job stress than a decade ago, 62 percent said there was less job security and 59 percent said Americans had to worker harder to earn decent livings. Thirteen percent said they did not have to work as hard, and 26 percent said they work about the same.
One factor increasing anxiety is the corporate trend to send job overseas. The Pew poll found that 31 percent of respondents said it would be possible for their employer to hire someone outside the country for their job...
To be successful this fall, I think the GOP should keep telling workers their perceptions of insecurity are mythical.
[I'll be on the road all day and won't be able to do any updates until tonight - Mark].
Update: Greg Mankiw emails:
Your post on worker insecurity seems to conflate employment volatility and income volatility, as if they were the same thing. There is no question that there has been a big increase in income inequality over this period. So, even if job changes have the same frequency they had in the past, it seems possible that a job change has a bigger impact on a family's income. In other words, employment stability can remain the same while income volatility rises.
Thanks Greg - I was trying to avoid people drawing the conclusion that constant job duration implies constant economic security, so, that was one of the points I was trying to make. As Greg notes, just because employment duration hasn't changed doesn't mean the the cost of being unemployed remains constant. If the variance of income increases, which the evidence suggests it has, or if job changes or layoffs become more costly for other reasons, then the increase in the cost of being unemployed will cause workers to feel more insecure even if employment duration is constant.
Posted by Mark Thoma on Thursday, August 31, 2006 at 08:06 AM in Economics, Politics, Unemployment |
Nouriel Roubini rebuts the positive spin surrounding the GDP revision of
Revised Q2 GDP
Figures: Much Worse Than the Headline…Beware of the Spin Doctors, by Nouriel
revised Q2 figures are out and the headline figure – 2.9% growth – is better
than the initial advance estimate of 2.5%. Right after the publication of
these revised figures today the spin doctors have been in a frenzy to use this
number to prove that the economy is fine. First in the line among these spin
doctors is “Eighth Inning” Dallas Fed President Richard Fisher – yes the same
Fisher who firmly predicted in June 2005 that we were at the “eighth inning” of
the Fed tightening cycle and then went on voting another nine times for a Fed
Funds raise. An hour after the release of the new Q2 figures he stated in a
"We are slowing down, but this number may help us keep it in perspective,"
Federal Reserve Bank of Dallas President Richard Fisher said today after a
speech in Dallas. "We could not have kept growing at the rate we were growing in
the first quarter." He called the figures today "pretty healthy,"
This is also the same Fisher who – in a previous speech – called me and other
realists who are worried about housing and the economy an
Beware of these spin doctors. Behind the headline figure, the numbers in the
revised Q2 figures are much worse than the initial estimate.
Continue reading "What Inning Are We In?" »
Posted by Mark Thoma on Thursday, August 31, 2006 at 12:15 AM in Economics, Housing, Monetary Policy |
Bruce Bartlett looks for legal loopholes in the government's ability to levy
Tax ruling with portent?,
By Bruce Bartlett, Commentary, Washington Times:
Last week, a federal appeals court in Washington handed down an important
decision relating to the definition of income for tax purposes. What is
important is the decision is the first one in decades saying the Constitution
itself limits what the government may tax. If upheld by the Supreme Court, it
could significantly alter tax policy and possibly open the door to radical
In the case, a woman named Marrita Murphy was awarded a legal settlement that
included compensation for physical injury and emotional distress. The former has
always been tax-exempt, just as insurance settlements are. Obviously, it makes
no sense to tax as income the payment for a loss that only makes one whole
again. One is not made better off, so there is no income. But under current law,
compensation for nonphysical injuries are taxed.
Ms. Murphy argued that just as compensation for physical injuries only makes one
whole after a loss, the same is true of awards for emotional distress. In short,
it is not income within the meaning of the 16th Amendment to the Constitution.
The appeals court agreed and ruled her award for emotional distress is not
income and therefore not taxable.
Tax experts immediately recognized the far-reaching implications for other areas
of the tax law. Tax protesters have long argued that the 16th Amendment did not
grant the federal government power to tax every single receipt it deems to be
income. Yet in practice, that is what the Internal Revenue Service does.
The very concept of income itself has never been defined in the tax law. It is
pretty much whatever the IRS says it is. ...
One area where I would like to see the court go further has to do with whether
interest constitutes income. To economists, some portion of the interest we
receive on our saving is merely compensation for loss of the immediate enjoyment
we would receive if we consumed our income today instead of saving it.
Think of it this way. Would you be satisfied receiving your paycheck a year from
now instead of on payday? Of course not. You would suffer a real loss if you had
to wait a year to get paid for your work. But if you were offered, say, 10
percent more in a year, you might say that was OK. Collectively, our willingness
to put off consumption today for greater consumption in the future is what
determines the pure rate of interest.
But in the view of many great economists, such as John Stuart Mill, the future
interest is merely compensation for the loss of immediate satisfaction.
Therefore, it is not income but more like an insurance settlement that simply
makes us whole.
Now, obviously, market interest rates are more than simply a discount between
present and future, as my example implies. A lot represents a return to risk and
an adjustment for expected inflation. But in principle, some portion of interest
is compensation for loss and therefore not income.
Given the logic of the Murphy decision, it is quite possible the risk-free,
inflation-adjusted rate of interest could also be excluded from taxation on
constitutional grounds. Following through that logic consistently would
revolutionize taxation and eventually lead to a pure consumption tax, which most
economists today favor.
I'm not predicting the Supreme Court will follow this logic. But it does open an
interesting possibility that tax analysts will follow with interest.
Why can't wage income also be viewed as making a person whole for the
sacrifice of working all day, or, in the language of the article, as a reward
for delaying leisure (you can't go to the beach today if you work)? Being made
whole for giving up consumption is not fundamentally different from being made
whole for working, i.e. for giving up leisure.
Historically, arguing that interest income was the reward for a sacrifice
allowed interest to be viewed as justified and provided a
defense against the charge that interest income was unearned or undeserved. That
is, the argument that giving up consumption involves a sacrifice in the same way that labor
does was an attempt to show interest income was just like labor income - both
involved a sacrifice and therefore both required compensation - it was not an attempt to distinguish
interest income from labor income.
My guess is that Bruce Bartlett would say no problem, the more income taxes
that are unconstitutional because they are compensation for sacrifice, the
better. But, like him, I doubt the courts will find, nor do I think they should
find, that interest or wages (or rents and profits where similar arguments can
be made) cannot be taxed because "it is not income but more like an insurance
settlement that simply makes us whole."
Update: PGL at Angry Bear
also discusses Bartlett's article and in a similarly titled post notes, as I did only implicitly (his post came before mine), that
this would shift the tax burden from capital income to labor income. He also notes this is consistent with an ongoing conservative agenda to eliminate taxes on capital income.
Update: Bernard Yomtov, in
[T]here is an additional flaw in Bartlett's "reasoning." Interest is not
"compensation for loss" at all. It is part of a voluntary transaction in which
the recipient exchanges cash now for more cash later. This is exactly like
selling some physical object. If a car dealer makes, say, $1000 profit on the
sale of a car this is not "compensation for the loss of the car," it is income.
Ms. Murphy's transaction was not voluntary. She did not choose to sell her
emotional wellbeing. The compensation she received did not include a profit
If someone steals your car, and you get it back (or its cash equivalent), that is not income. The court ruling extends this principle to loss of emotional well-being.
Posted by Mark Thoma on Thursday, August 31, 2006 at 12:06 AM in Economics, Politics, Taxes |
Here are links to the papers and discussion presented at the Jackson Hole
Symposium (the highlighted names are links to papers):
New Economic Geography: Effects and Policy Implications, A Symposium Sponsored
by The Federal Reserve Bank of Kansas City, August 24-26, 2006:
OPENING REMARKS, Ben S. Bernanke, Chairman, Board of Governors of the
Federal Reserve System
- SHIFTS IN ECONOMIC GEOGRAPHY AND THEIR CAUSES
- CONSEQUENCES FOR PRODUCTION AND PRICES, EMPLOYMENT AND WAGES
- CONSEQUENCES FOR FINANCIAL MARKETS AND GLOBAL SAVING AND INVESTMENT
- Author: Raghuram G. Rajan, Economic Counsellor and Director of Research,
International Monetary Fund, Paper:
Foreign Capital and Economic Growth
- Discussant: Susam M. Collins, Professor, Georgetown University and Senior
Fellow, Brookings Institution
- LUNCHEON ADDRESS
- STRATEGIES FOR GROWTH
T. N. Srinivasan, Professor, Yale University; Jan Svejnar, Professor,
University of Michigan; Paul Collier, Professor, Oxford University
- IMPLICATIONS FOR MONETARY POLICY
- OVERVIEW PANEL
Martin Feldstein, President and Chief Executive Officer, National Bureau of
Economic Research; Arminio Fraga, Chief Executive Officer, Gavea Investimentos;
Rakesh Mohan, Deputy Governor, Reserve Bank of India
Posted by Mark Thoma on Thursday, August 31, 2006 at 12:03 AM in Academic Papers, Economics, Monetary Policy |
Time compares hospitals in the private sector to VA hospitals and finds that
VA hospitals do better than their private sector counterparts according to a
variety of measures of cost and quality:
How VA Hospitals Became The Best, by Douglas Waller, Time: ...Until the
early 1990s, care at VA hospitals was so substandard that Congress considered
shutting down the entire system and giving ex-G.I.s vouchers for treatment at
private facilities. Today it's a very different story. The VA runs the largest
integrated health-care system in the country... And by a number of measures,
this government-managed health-care program ... is beating the marketplace.
Continue reading "VA Hospitals vs. Private Sector Hospitals" »
Posted by Mark Thoma on Wednesday, August 30, 2006 at 11:52 AM in Economics, Health Care |
Alberto Alesina gives explanations for the difference in economic performance
between the U.S. and Europe. He also discusses the success of the EU and the
euro at enhancing economic outcomes in European countries:
Alberto Alesina, NBER Reporter: Per capita income in Continental Western
Europe (in short, Europe) was catching up with the United States from the end of
the Second World War until the mid-1980s; from 1950 to about 1975, we speak of a
European miracle. Then, something changed. The United States re-emerged from the
difficult decades of the 1970s with a renewed political energy that led to
deregulation, increased competition, reduction of marginal tax rates, and
restructuring of corporations, which later facilitated the immediate adoption of
the innovations from the information revolution. Europe, instead, seemed
"stuck:" incapable of gathering sufficient energy to reform itself. This was
especially the case for the largest countries: Germany, France, Italy, and
What Happened? Let's start with the basics.
Continue reading "Economic Performance in the U.S. and Europe" »
Posted by Mark Thoma on Wednesday, August 30, 2006 at 01:32 AM in Economics, Macroeconomics |
This is from "How
It's Playing Out" in the the Washington Post's
Home Sweet Home, by Rachel Dry: Outlook went house hunting this weekend and
the real estate market was not pretty. Michael Grunwald's
article about the increasingly elusive dream of home-ownership and the new
realities of who qualifies for affordable housing caused some online readers to
say its time to ditch that original dream. At
Economistsview, one commenter said: “It's time for America to re-imagine the
dream of home ownership, and start thinking about smaller, better-made houses
close to urban centers…It makes me ill to go to the rural community I grew up in
and see miles of land once used for horse farms crowded now with cheaply-made "McMansions."...
Posted by Mark Thoma on Wednesday, August 30, 2006 at 12:15 AM in Economics, Housing |
Brad DeLong sets the record straight as he reviews claims in a new book on the use of economic statistics. His conclusion? Two thumbs down for Econospinning:
"Mix and Match", by Brad DeLong:
Gene Epstein of Barrons writes, asking:
I wish Brad DeLong would ... open my book [Econospinning] ... to the
12 pages that make up the second chapter... The chapter recounts a garden-variety case of econospinning by New York Times
columnist Paul Krugman. My version of the story is that Krugman not only
confused one set of employment data with another to make a point about the job
outlook in a May 2004 column. A year later, when Krugman was given the chance to
correct the error by then-Public Editor Daniel Okrent, he denied he had made it.
DeLong also weighed in, ostensiby to defend Krugman, but only succeeded in
compounding the confusion.
OK. There is a certain horrifying fascination in watching the right wing's
minions and useful idiots in the press attempt to attack Paul Krugman on matters
of economic substance. The Mickey Kauses, the Andrew Sullivans, the Donald
Luskins, the Danny Okrents--all seem unarmed men in a battle of wits, or perhaps
an air assault by a circular firing squad of flying attack monkeys.
Our story so far:
Continue reading ""Unarmed Men in a Battle of Wits"" »
Posted by Mark Thoma on Tuesday, August 29, 2006 at 09:38 PM in Economics, Press |
Some disappointing news in today's income data from Census. The NY Times sets the table:
Mobility, Editorial, NY Times: If you’re still harboring the notion that the
economy is “good,” prepare to be disabused...
On to the news:
Young College Grads in Free Fall, by Michael Mandel, Economics Unbound:
release from Census was filled with all sorts of interesting numbers. Real
median household income rose for the first time since 1999. But it turns out
that all of the gain came from foreign-born households--immigrants in other
words. The income of native households remained "statistically unchanged." That
will give both the pro-immigrant and anti-immigrant forces plenty to talk about.
More disturbingly, the numbers show that young college grads face a steadily
worsening future of falling wages. The real earnings of workers aged 25-34 with
a BA dropped by 3.3% in 2005. All told, the earnings of young college grads are
down by almost 8% since 2002.
Isn't this a horrible looking graph?
The Center on Budget and Policy Priorities (CBPP) examines income and poverty statistics:
Poverty Remains Higher, and
Median Income for Non-Elderly is Lower, Tthan When Recession Hit Bottom, CBPP:
Summary Overall median household income rose modestly in 2005, while the
poverty rate remained unchanged. For the first time on record, poverty was
higher in the fourth year of an economic recovery, and median income no better,
than when the last recession hit bottom and the recovery began.
In addition, the 1.1 percent increase in median income in 2005, which was
well below the average gain for a recovery year, was driven by a rise in income
among elderly households. Median income for non-elderly households (those headed
by someone under 65) fell again in 2005, declining by ... 0.5 percent. Median
income for non-elderly households was $2,000 (or 3.7 percent) lower in 2005 than
In a related development, the median earnings of both male and female
full-time workers declined in 2005. Median earnings for men working full time
throughout the year fell for the second straight year, dropping ... 1.8 percent,
after adjusting for inflation. The median earnings of full-time year-round
female workers fell for the third straight year, declining by ... 1.3 percent.
Furthermore, the poverty rate, at 12.6 percent, remained well above its 11.7
percent rate in 2001, while median household income was $243 lower than in 2001
(not a statistically significant difference). In addition, both the number and
the percentage of Americans who lack health insurance climbed again and remained
much higher than in 2001. Four million more people were poor, and 5.4 million
more were uninsured, than in 2001. The percentage of children who are uninsured
rose in 2005 for the first time since 1998.
The Poor Become Poorer
The poor also became poorer. The amount by which the average person who is
poor fell below the poverty line ($3,236) in 2005 was the highest on record, as
was the share of the poor who fell below half of the poverty line....
Results Disappointing for this Stage of an Economic Recovery “Four
years into an economic recovery, the country has yet to make progress in
reducing poverty, raising the typical family’s income, or stemming the rise in
the ranks of the uninsured...”
Center executive director Robert Greenstein said. “It is unprecedented in recoveries of the last 40 years,” he noted, “for
poverty to be higher, and the typical working-age household’s income lower, four
years into a recovery...”
Continue reading "Disappointing News on Income, Poverty, Health Insurance, and the Earnings of College Graduates" »
Posted by Mark Thoma on Tuesday, August 29, 2006 at 08:01 PM in Economics, Health Care, Income Distribution, Universities |
The meeting minutes for the last FOMC meeting were released today. It's a
pretty busy day, so I haven't had time to wade through them, but here's a few
reactions from the Wall Street Journal, Financial Times, and Bloomberg. [Upate: William polley too.] First, the Wall Street Journal:
Continue reading "FOMC Meeting Minutes" »
Posted by Mark Thoma on Tuesday, August 29, 2006 at 02:44 PM in Economics, Monetary Policy |
Why GM cannot simply drop brands like Buick and Pontiac even if it is in GM's
best interest to do so:
Dealer'sChoice, by James Surowiecki, The New Yorker: When General Motors was
the biggest and most profitable auto manufacturer in the world, its strategy was
to provide “a car for every purse and purpose.” G.M. offered a panoply of
distinctive brands, each targeted at a particular category of buyer—Buick for
the successful but conservative driver, Cadillac for the wealthier and more
flamboyant, and so on. This was a tremendously successful strategy in the days
when G.M.’s domination was unchallenged. But now, with G.M. losing billions of
dollars a year and struggling to restructure, ...[w]hen analysts talk about how
to turn G.M. around, most start with the need to slim down the company and get
rid of less popular brands. (Buick and Pontiac are perennial nominees.) It’s an
eminently sensible approach, but it’s unlikely to happen anytime soon, because
it would challenge the interests of some of the most powerful players in today’s
auto industry—car dealers.
Car dealers ... seem like the archetypal small businessmen, and it’s hard to
believe that they could sway the decisions of global corporations like G.M. and
Ford. But, collectively, they have enormous leverage. Dealers are not employees
of the car companies—they own local franchises, which, in every state, are
protected by so-called “franchise laws.” These laws do things like restrict
G.M.’s freedom to open a new Cadillac dealership a few miles away from an old
one. More important, they also make it nearly impossible for an auto
manufacturer to simply shut down a dealership. If G.M. decided to get rid of
Pontiac and Buick, it ... would have to get them to agree to close up shop,
which in practice would mean buying them out. When, a few years ago, G.M.
actually did eliminate one of its brands, Oldsmobile, it had to shell out around
a billion dollars to pay dealers off—and it still ended up defending itself in
court against myriad lawsuits. As a result, dropping a brand may very well cost
more than it saves, since it’s the dealers who end up with a hefty chunk of the
You’d think that what’s bad for G.M. would also be bad for the people who
sell its cars. But G.M. makes money (when it does) on new cars and on the
financing of loans. Dealers, by contrast, make most of their money on servicing
old cars and selling used ones. So dealers can thrive even when the automaker
languishes. And at the state level they often have more political influence than
automakers do. In the late nineties, for instance, local dealers were challenged
by companies that wanted to sell cars over the Internet. In response, some
states, including Texas, actually passed laws making it illegal to have a
business selling cars online (unless you already owned a local dealership)...
When Ford itself started experimenting with online sales, dealers’ vigorous
objections (along with legal challenges) caused the manufacturers to quickly
Ford and G.M. always sold their cars through independent dealers... They
could have owned the dealerships themselves... Instead, they preferred to give
dealers franchises, and work with them as partners. And, historically, the
automakers were not good partners. In 1920, for instance, the U.S. economy went
into a deep recession. But Henry Ford kept his factories running at full tilt,
and forced thousands of Ford dealers around the country to buy new cars that
they had little chance of selling. The dealers knew that if they said no they’d
never see a Model T again, so they ate the inventory. A decade later, when the
Great Depression hit, Ford and G.M. used the same strategy to help keep the
production lines going. They turned their dealers into a cushion against hard
In the long term, this was a disastrous tactic, because it inspired
mistrustful dealers to look to the government for help. (The first franchise law
was passed in 1937.) Dealers recognized that much about their businesses was
always going to be out of their control—automakers not only decide what cars get
made but also dictate sales strategies and incentive plans. So they decided to
protect what they could, using laws to insulate themselves from competition and
from the risk of being dropped by the manufacturer. And that’s what has made
life so hard for the automakers today.
The irony in all this is that G.M. and Ford adopted the dealer system because
they thought it would make their lives easier. A dealer who owned his own
business would work harder than a mere employee, the thinking went, and would
not require a lot of outside monitoring. But the benefits that the car companies
reaped from franchising cost them a lot in terms of control and flexibility.
There are now many things that G.M. can’t do (like shut down Buick) that it
could do easily if it owned its own dealers. Car companies might like to change
this—in the late nineties, both G.M. and Ford tried to start buying up
dealerships. But, at this point, the system is self-protecting; dealers
revolted, state regulators started nosing about, and the automakers gave up.
They made a devil’s bargain some eighty years ago, and now they’re stuck with
Posted by Mark Thoma on Tuesday, August 29, 2006 at 11:12 AM in Economics, Regulation |
What happens when the U.S. closes its doors to trade? Does protectionism help
infant industries? Does protectionism impact economic growth? Douglas Irwin
looks to the past to answer these and other questions about international trade:
of U.S. Trade Policy, by Douglas A. Irwin, NBER Reporter: While
international trade and trade policy continue to be as controversial as ever,
the United States has been committed for more than half a century to maintaining
an open market. It was not always that way. For most of U.S. history, the United
States imposed fairly substantial barriers to imports in an effort to protect
domestic producers from foreign competition.
For the past several years, I have been investigating the historical aspects
of U.S. trade policy as part of the NBER's research on international trade and
the development of the American economy. The purpose of this research has been
to study the economic effects of past trade policies on the U.S. economy and
understand the political and economic forces that have shaped those policies.
Early American Trade Policy ...[H]istorical data ... from early
government documents ... reveal that tariffs started out at relatively low
levels, about 15 percent in the 1790s, but rose thereafter to generate
additional revenue and help finance the War of 1812. ...
One of the classic, early statements on U.S. trade policy is
Alexander Hamilton's Report on Manufactures in 1791. This report called
for government support of manufacturing through subsidies and import
tariffs... Although Hamilton's proposals for bounties (subsidies)
failed to receive support, ... Congress adopted virtually every tariff
recommendation put forward in the report by early 1792. These tariffs
were not highly protectionist duties, because Hamilton feared
discouraging imports, the critical tax base on which he planned to fund
the public debt. Indeed, because his policy toward manufacturing was
one of limited encouragement and not protection, Hamilton was not as
much of a protectionist as he is often made out to be. Hamilton's
moderate tariff policies found support among merchants and traders, the
backbone of the Federalist Party. But disappointed domestic
manufacturers shifted their political allegiance to the Republican
Party, led by Thomas Jefferson and James Madison, both of whom were
willing to consider much more draconian trade policies aimed at
Indeed, as president, Jefferson was responsible for one of the most unusual
policy experiments in the history of U.S. trade policy. At his request, Congress
imposed a nearly complete embargo on international commerce from December 1807
to March 1809. The Jeffersonian trade embargo provides a rare opportunity (or
natural experiment) to observe the effects of a nearly complete (albeit
short-lived) elimination of international trade. Economists usually describe the
gains from international trade by comparing welfare at a free-trade equilibrium
with welfare at an autarky equilibrium. In practice, such a comparison is almost
never feasible because the autarky equilibrium is almost never observed, except
in unique cases such as this one. By mid-1808, the United States was about as
close to being fully shut off from international commerce as it has ever been
Monthly price data allow us to observe the dramatic impact of the embargo:
the export-weighted average of the prices of raw cotton, flour, tobacco, and
rice, which accounted for about two-thirds of U.S. exports in the United States,
fell by one third within a month or two of the embargo. The price of imported
commodities rose by about a third as the number of ships entering U.S. ports
fell to a trickle and imports became increasingly scarce. According to my
calculations, the static welfare cost of the embargo was about 5 percent of GDP.
Thus, the embargo inflicted substantial costs on the economy during the short
period that it was in effect.
The embargo, along with the dramatic reduction in trade as a result of the
War of 1812, is commonly believed to have spurred early U.S. industrialization
by promoting the growth of nascent domestic manufacturers.
Continue reading ""Historical Aspects of U.S. Trade Policy"" »
Posted by Mark Thoma on Tuesday, August 29, 2006 at 12:21 AM in Economics, International Trade |
Ronald McKinnon argues that China's revaluation of the yuan over the past
year was needed to maintain price stability in light of the surprisingly high
rate of inflation in the U.S. This leads to a monetary rule for China where any
change in the value of the monetary anchor - i.e. changes in the inflation rate
in the U.S. - is offset with changes in the exchange rate between the dollar and
The Yuan and the Greenback,
by Ronald McKinnon, Commentary, Wall Street Journal: China's central bank anchored the national price level from 1994 to Sept. 21,
2005, by keeping its currency, the yuan, fixed at 8.28 yuan to the U.S. dollar.
The policy was a great success: Over that period, China's consumer price
inflation dropped to around 1% to 2%, from more than 25%, and inflation-adjusted
GDP grew at a healthy 9% to 10% clip per year.
Today, however, the U.S. monetary anchor isn't as stable as it once was. U.S.
inflation is spiraling up, with consumer prices rising to 4.1% and producer
prices to 4.2% on a year-on-year basis through last July. Clearly, China's
foreign monetary anchor is slipping. Worse, the Federal Reserve Bank has been
indecisive about caging the inflation dragon, leaving the interbank federal
funds rate at just 5.25% -- an unduly stimulatory level -- at its August
The initial motive for unhooking China's peg to the dollar was probably to
defuse -- or confuse -- misguided American political pressure to appreciate the
yuan's value versus the greenback. The premise of such arguments, that yuan
appreciation would reduce China's large and growing trade surplus, is widely
held but wrong. The trade imbalance between China and the U.S. results from
China's high savings combined with the opposite tendency in the U.S., neither of
which is predictably affected by changing the yuan-dollar exchange rate.
China's inflation is, however, predictably affected by sustained
exchange-rate changes. Although unhooking the yuan-dollar exchange rate to
reduce China's trade surplus was wrongly motivated, the subsequent small
appreciation has had a positive effect: It's helped to insulate China from
surprisingly high U.S. inflation. ...
China's consumer price inflation registered just 1%
over the year through last July, while the U.S. rate hit 4.1%. This inflation
differential of 3.1 percentage points was consistent with the yuan's
appreciation of 3.3% year over year, as the
chart nearby shows. That the
inflation differential mimicked the appreciation so closely is partly a
statistical coincidence, and probably unlikely to happen again. Nevertheless,
cause and effect are ... important. ...
This reasoning leads to a new monetary rule for China: Pick some target rate
for annual inflation in China's CPI, say 1% ..., then
see how much higher American inflation, say 4.1%, is above China's internal
target rate. The difference, in this case 3.1%, then becomes the planned annual
gradual appreciation of the yuan rate against the dollar. ...
Floating the yuan, which would lead to a large initial appreciation, would be
a major policy mistake. China's trade surplus would continue unabated, with a
continued accumulation of dollar claims by the private sector that would force
successive appreciations of the yuan until the central bank was again forced to
intervene and stabilize the rate at a much appreciated level. By then,
expectations of ongoing appreciation and deflation in China would be firmly in
place. That scenario could mimic what happened to Japan with its ever higher yen
in the 1980s through the mid-1990s -- a deflationary slump, coupled with a zero
interest liquidity trap and its "lost" decade of the '90s.
The bottom line is that China's central bank must carefully watch inflation
and interest rates in the U.S. when formulating its own exchange-rate-based
monetary strategy. Any exchange-rate changes against the dollar should be
tightly controlled and gradual -- as with the appreciation over the past year.
A simple way to think about this is to use the long-run purchasing power
parity (PPP) condition. This condition states that in the long-run the exchange rate
is the ratio of the price level in each country, or E = P/P* where P is the
U.S. price level, P* is China's price level, and E is the $/yuan exchange rate
(a larger E is a depreciation in the dollar and an appreciation in the yuan, and
yes, I know that there are problems with PPP).
Now, if E is fixed the U.S. can export its monetary policy to China. To see
this, suppose that the U.S. inflation rate, i.e. the rate of increase in P, is
4%. Then P* must increase by 4% as well to keep E constant. Thus, the U.S.
monetary policy of a 4% inflation rate must be adopted by China to maintain the
fixed exchange rate and the U.S. has exported its policy to China. If China wants a zero inflation rate, then it must abandon
a fixed exchange rate and let E increase by 4% a year (which is an
appreciation in the yuan of 4% per year) to match the increase in P. In that
case P* = P/E would be constant.
Posted by Mark Thoma on Tuesday, August 29, 2006 at 12:15 AM in China, Economics, International Finance, Monetary Policy |
Robert Reich wonders if he is being too cynical:
Katrina: Another Shameful Anniversary, by Robert Reich: Here's another story
the press seems intent on disregarding, as does everyone else. Even though the
national economy keeps growing, the number of impoverished Americans also keeps
growing. About one out of four New Yorkers, for example, is living in poverty...
Before Katrina hit, about one in four residents of New Orleans was also
living in poverty. Today, New Orleans’ poverty rate is much lower. But that’s
not because it did anything New York or any other city should try to emulate.
New Orleans lowered its poverty rate by having a flood that wiped out the homes
of its poor, and then made it hard for them to ever come back.
More than half of the people who lived in New Orleans before Katrina have
still not returned. The poor have no place to return to. Their former houses are
in rubble. ... Poor neighborhoods ... are still devastated. Inexpensive housing,
even rental housing, is hard to find.
It’s an old story, really. Areas of any town or city where the infrastructure
is most ignored – like the Industrial Canal levee that burst on the morning of
August 29 a year ago – have the lowest property values. So that’s where the poor
live. When there’s a flood or a leak of toxic wastes or any other calamity,
these places are the first to become uninhabitable. Which means, the poor often
have to leave. Then the political and moral question is whether anyone cares
enough to help them return and rebuild.
Sometimes cities actively try to get rid of their poorest citizens. Not long
ago officials in Fall River, Massachusetts, tried to raze a low income housing
project and not replace it with any other affordable housing. Other cities have
been known to give the poor one-way bus tickets out of state.
But more often it’s a matter of simply doing nothing. Last September,
President Bush promised more than sixty billion dollars for the first stages of
getting New Orleans back on its feat. But he made that money contingent of the
city of New Orleans developing a recovery plan. The mayor of New Orleans
appointed a commission to do that, but nothing came of it. The congressman who
represents New Orleans came up with a proposal but the White House rejected it.
The New Orleans City Council tried to do something but it's been deadlocked. The
governor of Louisiana appointed her own commission but it hasn’t come up with a
A year after Katrina and there’s no plan to redevelop its poorest
neighborhoods, no housing for the displaced, barely a trickle of money to help
them. Could it be that there's no plan to bring back the poor to New Orleans
because no one in power wants to bring them back? Or am I being too cynical?
Since the poor who used to live in New Orleans don’t have their own money to
rebuild there, they’ll probably stay where they are now – in Houston or Dallas
or Birmingham or Jackson, Mississippi. At least until those cities figure out
how to reduce their own poverty rates and send the poor somewhere else.
Posted by Mark Thoma on Tuesday, August 29, 2006 at 12:06 AM in Economics, Policy |
When I post things about the economic, political, and social conditions in China, I'm often not sure I know enough to frame the
article properly, i.e. whether it's an accurate description of China, an
exaggerated account from some group for political purposes, a government controlled message, or
what, and it makes it hard to evaluate what is written. I've never been there,
only read and talked to people about it, so I have to trust I've chosen credible sources and rely on what I read and
what people tell me. Because of that uncertainty, sometimes I just post things and hope to
learn from the comments. What's your reaction? How general and accurate is this
rather pessimistic description of life and the potential for progress in rural China?:
Tales from China’s farming frontline, by Richard McGregor, Book Review,
Will the Boat Sink the Water? The Life of China’s Peasants By Chen
Guidi and Wu Chuntao translated by Zhu Hong Public Affairs, Perseus Books, New
China’s national audit office announced a new code of conduct after a macabre
incident last week, when one of its auditors died of “excessive drinking and
eating” at banquets hosted by the local electricity bureau whose books he was
screening. ... At first glance, this tragicomic scandal has little to do with
China’s long-suffering farmers...
Chen and Wu’s book is a graphic exposé of the deprivations of rural
communities, told through three years of research in Anhui, one of China’s
poorest and most populous provinces. A series of hair-raising case studies
features a cast of brutal, bullying officials who enrich themselves by stealing
land and grain, and imposing ever more ridiculous taxes on already impoverished
Every tax must be paid down to the last penny. People who resist are beaten,
arrested and imprisoned, sometimes for months without charge. One psychotic
official, who was made village chief while on probation for embezzlement and
rape, savagely murders a group of peasants who refused to bend to his will.
Villagers take their complaints to the police and to more senior levels of
government... Some even make the expensive, risky journey to Beijing to
petition, in time-honoured fashion, the imperial centre. Their efforts have
little impact, which underlines the central point of the book.
The horrors of the countryside are not new in China; nor are promises from on
high to remedy them. But as with the drunken accountant partying himself to
death on the tab of his audit target, the real failure is the absence of
In Chen and Wu’s story, Beijing comes across as a centre of relatively
enlightened officialdom, struggling not just to impose its will on the rowdy
countryside but even to find out what is happening there in the first place.
China’s leaders have long acknowledged the deprivation of rural communities.
Hu Jintao and Wen Jiabao, the present leadership duo, have made the issue a
priority of their administration, abolishing with a flourish all agricultural
In this respect, Chen and Wu’s tales from the farming frontline are
singularly on-message. But the accountability issue perhaps also explains how
reaction to the book played out in Beijing in late 2003, when it was published
in Chinese to great acclaim and then peremptorily banned.
After all, accountability cuts both ways. If local officials were to be held
to independently enforced standards of governance and elections, the same
strictures should surely apply to the higher-ups in Beijing.
China’s policymakers, however, need much more than just a dose of democracy
to manage the immense challenges of the countryside. How, for example, do you
peacefully and equitably move hundreds of millions of rural residents off the
land and into cities, which is what China will have to do over coming decades?
About two-thirds of China’s 1.3bn people live in rural communities but for
decades they have effectively been treated as second-class citizens, with their
rights to move to urban areas sharply curtailed.
Then there is the issue of land ownership. Unlike in the cities, farmers
cannot buy or sell their properties, only lease them. But officials can
capitalise the value of rural land if they rezone it for commercial use, giving
them a huge financial incentive to drive farmers from their properties.
Chen and Wu focus on another, less talked-about cause of the farmers’ woes –
the multiple levels of government. They show how the decision to create township
governments in the 1980s and give them the power to raise taxes has bred bloated
and viciously self-interested bureaucracies.
Telling the truth about such injustices in all their horror is still not easy
in today’s China. Chen and Wu recount the tale of one upright official who
delivers bad news up the line about the parlous state of the local economy only
to be consistently rebuffed.
Most grassroots officials survive and prosper by painting a rosy picture.
They have a simple, survivalist credo – “No lies, nothing accomplished”. Chen
and Wu express little optimism that the incentives that foster such chicanery
will change in the near future.
Posted by Mark Thoma on Monday, August 28, 2006 at 04:44 PM in China, Economics |
Here's a couple of follow-up items to the
post about Wal-Mart. Both are from Ezra Klein at Tapped. His view is
two-fold. First, it's not Wal-Mart, but what Wal-Mart represents that is the
problem. Second, what Wal-Mart represents is a firm with excessive market power
in input markets and it is using that power to suppress wages and payments to
its suppliers. Because of its size and influence, that spills over to other
sectors of the economy resulting in low wages and benefits generally, and difficult conditions for firms supplying goods to Wal-Mart or for firms trying to compete against it:
Round 2, by Ezra Klein, Tapped: Sebastian Mallaby's obtuse
column about anti-Wal-Mart sentiment among Democrats offers me an
opportunity to expand on some
I made last week. Then, referring to a Jonah Goldberg column on the same
subject, I said that "how to handle Wal-Mart is among the two or three most
important issues facing the country." ...
Continue reading "More Wal-Mart" »
Posted by Mark Thoma on Monday, August 28, 2006 at 01:14 PM in Economics, Market Failure |
Sebastian Mallaby wonders why centrist Democrats have shifted their stance on
Shopping for Support Down the Wrong Aisle, by Sebastian Mallaby, Commentary,
Washington Post: Once upon a time, smart Democrats defended globalization,
open trade and the companies that thrive within this system. ... Then dot-bombs
and Enron punctured corporate America's prestige, and Democrats bolted. Rather
than hammer legitimately on real instances of corporate malfeasance --
accounting scandals, out-of-control executive compensation and the like --
Democrats swallowed the whole anti-corporate playbook.
To see the difference between then and now, just look at the Clintons. In the
late 1980s and early 1990s, Hillary Clinton sat on Wal-Mart's board; and when
Sam Walton died in 1992, Bill Clinton lauded him as "a wonderful family man and
one of the greatest citizens in the history of the state of Arkansas.''
Campaigning in the New Hampshire primary that year, Bill Clinton came proudly to
the rescue of a local company called American Brush Co. by helping it become a
Times change. Last year Hillary Clinton returned a campaign contribution from
Wal-Mart... The nation's most successful retailer, which has seized the
opportunities created by globalization ... is now seen as too toxic to touch.
... Clinton is not alone... Joe Lieberman, who holds fast to his principles on
the Iraq war, recently abandoned his centrist economic credentials by appearing
at an anti-Wal-Mart rally. No matter that Lieberman once served as chairman of
the business-friendly Democratic Leadership Council. ...
After Lieberman ... stepped down as chairman of the DLC, he was succeeded by
Sen. Evan Bayh of Indiana. Well, Bayh recently showed up at an anti-Wal-Mart
rally, too, as has Iowa Gov. Tom Vilsack, who is the current DLC chairman. ...
Harry Reid, the Democrats' Senate leader, appeared at an anti-Wal-Mart event on
Saturday, and Sen. Joe Biden and Gov. Bill Richardson popped up at earlier
How can supposedly centrist Democrats defend this betrayal of their
principles? Some claim that their beliefs are consistent, but that the company
has changed: The Wal-Mart of the early 1990s mainly bought American, whereas
today's irresponsible monster buys cheap stuff from China. But this argument
merely illustrates how far Democrats have come. Since when did the party's
centrists believe that trading with China is evil? It was the Clinton
administration that brought China into the World Trade Organization.
Other Democrats reaffirm their centrist credentials while calling upon
Wal-Mart to pay workers more. ... But the idea that Wal-Mart pays below-market
wages is false. Otherwise nobody would work there. Hillary Clinton and Sen. John
Kerry have attacked Wal-Mart for offering health coverage to too few workers.
But Kerry's former economic adviser, Jason Furman of New York University,
concluded in a paper ... that Wal-Mart's health benefits are about as generous
as those of comparable employers. Moreover, Clinton and Kerry know perfectly
well that market pressures limit the health coverage that companies can provide.
After all, both senators have proposed expansions in government health provision
precisely on the premise that the private sector can't pay for all of it.
The truth is that none of these Democrats can resist dumb economic populism.
...[T]he DLC crowd is pandering shamelessly to the left of the party... For a
party that needs the votes of Wal-Mart's customers, this is a questionable
strategy. But there is more than politics at stake. According to a paper for the
National Bureau of Economic Research by Jerry Hausman and Ephraim Leibtag,
neither of whom received funding from Wal-Mart, big-box stores led by Wal-Mart
reduce families' food bills by one-fourth. Because Wal-Mart's price-cutting also
has a big impact on the non-food stuff it peddles, it saves U.S. consumers
upward of $200 billion a year, making it a larger booster of family welfare than
the federal government's $33 billion food-stamp program.
How can centrist Democrats respond to that? By beating up Wal-Mart and
forcing it to focus on public relations rather than opening new stores,
Democrats are harming the poor Americans they claim to speak for.
I think the answer to the question of why centrist Democrats have shifted
their stance on globalization is straightforward - the gains from globalization
have not been shared equally. The claims made in the 1990s about the benefits of
globalization have not been realized and it's no longer wise politically to
assert that globalization will benefit typical households. With stagnant real
wages and other economic problems such as declining health care coverage,
Wal-Mart is an obvious and glaring symbol to many of the failed promises of
globalization, and lower priced imported goods do not overcome the failed
promises the symbol represents.
I continue to support global economic integration, I am not a Wal-Mart basher, and I think the anti Wal-Mart campaign is
misplaced (though I do have concerns about the extent to which it exploits its market power in input markets). But I also think it is important for Democrats to acknowledge their role in
pushing for globalization in the past, and show they understand that the very unequal
benefits that globalization has brought about requires us to rethink how to
protect the most vulnerable from its effects.
Posted by Mark Thoma on Monday, August 28, 2006 at 03:06 AM in Economics, International Trade, Politics |
Paul Krugman looks at the rebuilding effort in New Orleans, such as it is, one year later:
Broken Promises, by Paul Krugman, A Year Later Commentary, NY Times: Last September President Bush stood in New Orleans, where the lights had just come on for the first time since Katrina struck, and promised "one of the largest reconstruction efforts the world has ever seen." Then he left, and the lights went out again.
What happened next was a replay of what happened after Mr. Bush asked Congress to allocate $18 billion for Iraqi reconstruction. In the months that followed, congressmen who visited Iraq returned with glowing accounts of all the wonderful things we were doing there, like repainting schools and, um, repainting schools.
But when the Coalition Provisional Authority ... closed up shop nine months later, it turned out that only 2 percent of the $18 billion had been spent, and only a handful of the projects ... had even been started. In the end, America failed to deliver even the most basic repair of Iraq's infrastructure...
And so it is along our own Gulf Coast. The Bush ... plans a public relations blitz to persuade America that it's doing a heck of a job aiding Katrina's victims. But ... so far the administration has done almost nothing to make good on last year's promises. ...[E]ven the cleanup remains incomplete: almost a third of the hurricane debris in New Orleans has yet to be removed. And the process of going beyond cleanup to actual reconstruction has barely begun.
For example, although Congress allocated $17 billion ... primarily to provide cash assistance to homeowners, as of last week the department had spent only $100 million. The first Louisiana homeowners finally received checks ... just three days ago... Local governments, which were promised aid in rebuilding facilities such as fire stations and sewer systems, have fared little better...
Apologists for the administration will doubtless claim that blame for the lack of progress rests not with Mr. Bush, but with the inherent inefficiency of government bureaucracies. That's the great thing about being an antigovernment conservative: even when you fail at the task of governing, you can claim vindication for your ideology.
But bureaucracies don't have to be this inefficient. The failure to get moving on reconstruction reflects lack of leadership at the top.
Mr. Bush could have moved quickly... But he didn't. As months dragged by with little sign of White House action, all urgency about developing a plan for reconstruction ebbed away.
Mr. Bush could have appointed someone visible and energetic to oversee the Gulf Coast's recovery, someone who could act as an advocate for families and local governments... But he didn't. How many people can even name the supposed reconstruction "czar"?
Mr. Bush could have tried to fix FEMA, the agency ... he destroyed through cronyism and privatization. But he didn't. FEMA remains a demoralized organization, unable to replenish its ranks: it currently has fewer than 84 percent of its authorized personnel.
Maybe the aid promised to the gulf region will actually arrive some day. But by then it will probably be too late. Many former residents and small-business owners, tired of waiting for help that never comes, will have permanently relocated elsewhere; those businesses that stayed open, or reopened after the storm, will have gone under for lack of customers. In America as in Iraq, reconstruction delayed is reconstruction denied - and Mr. Bush has, once again, broken a promise.
Previous (8/25) column: Paul Krugman: Housing Gets Ugly
Next (9/1) column: Paul Krugman: The Big Disconnect
Posted by Mark Thoma on Monday, August 28, 2006 at 12:15 AM in Economics, Politics |
More from Jackson Hole on attempts to better understand the forces and
consequences of globalization:
Policymakers fear ‘lumpy’ growth may not benefit all,
by Krishna Guha, Financial Times: ...This year no fewer than 20 central bank
governors, ... plus other senior officials ...,
made the pilgrimage to the Fed’s annual
Jackson Hole gathering. ...[T]he ... group discussed the defining force of our time: globalisation.
Like businesspeople and investors, central bankers are struggling to keep
pace with rapid changes in global economic activity. They listened as some of
the world’s leading academic economists presented research offering insights
into how globalisation works. But even those speaking admitted that the process,
its likely outcomes and its demands on policy remain imperfectly understood.
Continue reading "Flying Globalized Geese and Lumpy Golden Eggs" »
Posted by Mark Thoma on Monday, August 28, 2006 at 12:06 AM in Economics, International Trade |
Charles Bean says central banks are mistaken to focus on core inflation
rather than headline inflation in their policy deliberations:
BoE hits at US inflation measure, by Krishna Guha in Jackson Hole, Financial
Times: The US Federal Reserve is wrong to focus on core measures of
inflation that exclude energy prices, Charles Bean, chief economist at the Bank
of England, has suggested.
It should focus instead on headline inflation, which is much higher...
Including energy and food costs, US consumer price inflation is running at an
annual rate of 4.1 per cent, against 2.7 per cent for core inflation.
Continue reading "Should the Fed Focus on Core Inflation or Headline Inflation?" »
Posted by Mark Thoma on Sunday, August 27, 2006 at 04:29 PM in Economics, Monetary Policy |
writing at Angry Bear, takes on
Kudlow's latest at the NRO and his claims about tax cuts and the budget
deficit. It's the usual from the NRO crowd, cut taxes and the world will be
wonderful. Cactus notes
Kudlow ends his post with the words: “I don’t get it.” Well, I agree with him
Separately in an email PGL, who is busy today (update: he found some time), notes the following statement
from Kudlow and encouraged me to comment:
Let's start with the Fed's goofy sacrifice ratio, which basically refers to
how much unemployment has to go up in order to bring inflation down. I call this
economic garbage the "Phillips curve in drag," because over the last 25 years,
unemployment and inflation have actually moved in tandem and they have both
moved down. In other words, as inflation slows, unemployment comes down because
the economy is strong. (If you look at their relationship during the 1970s, you
would see unemployment and inflation both moving higher.) The fact is, strong
growth coexists rather nicely with low inflation. And since inflation is too
much money chasing too few goods, then if you're producing more goods that
absorb the money supply, especially with low tax rates to produce more goods,
then why should we fear growth?"
Okay, I'll bite.
Continue reading "Kudlow Needs Help with the Phillips Curve" »
Posted by Mark Thoma on Sunday, August 27, 2006 at 01:44 PM in Economics, Macroeconomics |
A downside of high housing prices - unaffordable housing for low and middle class families:
The Housing Crisis Goes Suburban, by Michael Grunwald, Washington Post: ...Seventy years after President Franklin D. Roosevelt declared that the
Depression had left one-third of the American people "ill-housed, ill-clothed
and ill-nourished," Americans are well-clothed and increasingly overnourished.
But the scarcity of affordable housing is a deepening national crisis, and not
just for inner-city families on welfare. The problem has climbed the income
ladder and moved to the suburbs, where service workers cram their families into
overcrowded apartments, college graduates have to crash with their parents, and
firefighters, police officers and teachers can't afford to live in the
communities they serve.
Homeownership is near an all-time high, but the gap is growing between the
Owns and the Own-Nots -- as well as the Owns and the Own-80-Miles-From-Works.
One-third of Americans now spend at least 30 percent of their income on housing,
the federal definition of an "unaffordable" burden, and half the working poor
spend at least 50 percent of their income on rent, a "critical" burden. The real
estate boom of the past decade has produced windfalls for Americans who owned
before it began, but affordable housing is now a serious problem for more low-
and moderate-income Americans... Yet nobody in national politics is doing
anything about it -- or even talking about it.
For most of the past 70 years, housing was a bipartisan issue. In recent
decades, its association with urban poverty made it more of a Democratic issue.
But now it is simply a nonissue. The current crunch falls hardest on renters in
Democratic-leaning cities and metropolitan areas, but Democrats have ignored the
issue as resolutely as Republicans. ...
"Even 10 years ago, that would have been unimaginable," says Ron Utt of the
conservative Heritage Foundation. "But now the problems are so much worse, and
nobody cares. . . . I find myself on panels where I'm the token conservative,
and I'm the one asking: Doesn't anyone care about affordable housing?" ...
Overall, the number of households receiving federal aid has flatlined since
the early 1990s, despite an expanding population and a ballooning budget. ...
Today, for every one of the 4.5 million low-income families that receive federal
housing assistance, there are three eligible families without it. ... It sounds
odd, but the victims of today's housing crisis are not people living in "the
projects," but people who aren't even that lucky. ...
The root of the problem is the striking mismatch between the demand for and
the supply of affordable housing -- or, more accurately, affordable housing near
jobs. ... [W]orkers are enduring increasingly long commutes from less expensive
communities, a phenomenon known as "driving to qualify."... This creates all
kinds of lousy outcomes -- children who don't get to see their parents, workers
who can't make ends meet when gas prices soar, exurban sprawl, roads clogged
with long-distance commuters emitting greenhouse gases. ...
Moderate-income families aren't able to buy Lamborghinis or Armani, but they
can buy cars and clothes. So while it's obvious why they can't afford McMansions,
it's not so obvious why they can't afford decent housing. They demand it.
Shouldn't the market supply it?
The answer is yes. But in many communities, local regulations have stifled
multifamily housing and even modest single-family housing. Minimum lot
requirements, minimum parking requirements, density restrictions and other
controls go well beyond the traditional mission of the building code and end up
artificially reducing the development of safe, affordable housing.
The unfashionable but accurate term for these restrictions is "snob zoning."
Suburbanites use them to boost property values by keeping out riffraff -- even
the riffraff who teach their kids, police their streets and extinguish their
fires. Urbanites are susceptible to the same NIMBY impulses, often couched as
opposition to "traffic congestion" or "overdevelopment" or protection of the
neighborhood's "character." It's easy to support affordable housing in someone
Los Angeles is considering a bond issue that would create 1,000 units of
affordable housing -- small comfort to those 620,000 families in overcrowded
apartments. Economist Christopher Thornberg notes that California's private
market added 120,000 urban rental units in 1987; in the first half of 2006, the
total was just 232. The main obstacle, Thornberg concludes, is "the
intransigence of local zoning boards."
In other words, the best thing local officials can do to promote affordable
housing is to get out of the way -- stop requiring one-acre lots and two-car
garages, and stop blocking low-income and high-density projects.
Washington politicians ... have the federal budget at their disposal. But
Congress hasn't supported new construction since the Low-Income Housing Tax
Credit of 1986, which creates nearly 100,000 units of affordable housing a year,
enough to replace half the units that are torn down or converted to market
rents. Bush proposed a home-ownership tax credit during his 2000 and 2004
campaigns, but it turned out to be the rare tax cut he didn't pursue. ... The
only affordability ideas with any traction at the national level are not really
housing ideas; for example, one way to make housing more affordable to workers
would be to raise their incomes -- through higher minimum wages, lower payroll
taxes or an expanded Earned Income Tax Credit. ...
Eventually, politicians may rediscover housing -- not as an urban poverty
issue, but as a middle-class quality-of-life issue, like gas prices or health
care. Homeownership is often described as the American dream, but these days
many workers would settle for a decent rental that won't bankrupt their
Posted by Mark Thoma on Sunday, August 27, 2006 at 04:48 AM in Economics, Housing, Policy, Politics |
The cheerleading for the administration is mostly over. The Washington
Times reviews recent statements on the budget, employment, and wages that
undermine the administration's credibility:
The budget (credibility) gap,
Editorial, Washington Times: Ever since the White House Office of Management and Budget (OMB) issued its
Mid-Session Review last month, the administration has been doing cartwheels
celebrating the fact that the budget deficit for fiscal 2006 ... will be less
than $300 billion. ...
Continue reading "Cheers to Jeers" »
Posted by Mark Thoma on Sunday, August 27, 2006 at 02:34 AM in Budget Deficit, Economics, Politics |
The Wall Street Journal's Washington Wire reports from the annual Fed
symposium at Jackson Hole:
Continue reading "Notes from Jackson Hole" »
Posted by Mark Thoma on Saturday, August 26, 2006 at 05:10 PM in Economics, Monetary Policy |
Dean Baker weighs in on the dispute over the sources of income inequality (original Krugman article, follow up email, DeLong summary, Mankiw response) :
Income Inequality: Missing Mechanisms, by Dean Baker: There has been a
raging blog debate, following in the wake of some recent Paul Krugman columns,
as to whether the rise in income inequality is due to policy or the natural
workings of the economy. While Krugman indicated that he believed the policy
view (promising details later), many of the economists weighing in have said
that they don't see any policy mechanism(s) that could explain the rise in
Perhaps I have different eyes (or maybe I don't have sufficient training in
economics), but I see the mechanisms almost everywhere. There is a nice
example in the news today. A judge ruled that Northwest's flight attendants
can't go on strike to oppose the wage cuts that the airline is unilaterally
imposing following in the wake of its bankruptcy.
In other words, a U.S. judge is telling workers that they will go to jail if
they refuse to work for the wages that Northwest wants to pay them. (I know, I'm
skipping some steps here.) Judges don't have to threaten workers with jail for
refusing to agree to employers' demands. This is a policy decision.
For those who find the labor-management framework difficult to understand,
imagine that Northwest purchased flight attendant services from the Flight
Attendant Services Corporation (FASC), which is a corporation wholly owned by
the workers it employs. Suppose that FASC tells Northwest that it will not
provide services for the lower fee it is now offering. Would any judge threaten
FASC with jail if it didn't agree to offer its services on Northwest's terms?
There are many other examples of rulings that have gone against labor in the
last quarter century. For practical purposes, it is now legal to fire workers
for organizing a union (the penalties are a joke). This is not the whole policy
story; I have much more in my book,
The Conservative Nanny State.
It's short and free (and the summary is even shorter), so you have no excuse not
to read it, unless you want to remain as ignorant as an NPR reporter your whole
Update: If "My sense" is a valid econometric estimator, then Brad DeLong
40% (one fifth plus two tenths) of income inequality is attributable to changes
in policy and power relationships:
I agree with Dean: this is a bad decision. ... This is a judge who is not
doing his job properly. But in a big country this is a (relatively) little
decision. My sense (and it is just a guess) is that declining unionization and
union power might account for perhaps a fifth of the widening in income
inequality; that reductions in the value of the minimum wage might account for a
tenth; and that legal changes that have shifted the balance of power within the
corporation toward CEOs might account for another tenth. I have a hard time
finding other policy changes that have a big impact--and only a portion of
declining unionization and union power is due to changes in government policy
since the 1970s.
Brad says "it is just a guess," so, with "My sense" plus or minus two wetware
standard errors, my sense is that this could account well over half of the
variation in income inequality.
Update: An email talks about the econometric evidence that does exist:
I'd add that estimates based on the union-nonunion wage differential, or on the
time series effects of local changes in union density, aren't reliable ways of
inferring the effects of a change from an economy in which unions are marginal
to one in which they're dominant and back again.
Posted by Mark Thoma on Saturday, August 26, 2006 at 02:16 PM in Economics, Income Distribution, Policy |
This discusses the argument that when it comes to health care reform, "things
have to get worse before they get better" and whether reform should be incremental:
What Would Lenin Do?, by Maggie Mahr, American Prospect:
While some progressives applaud efforts to force employers
like Wal-Mart to take on greater responsibility for health care, others argue
that our employer-based health care system is a failing relic of the past and
that such gambits are actually counterproductive. Rather than trying to shore up
our employer-based system, they say, we should seek to capitalize on that
system's mounting woes to build support for replacing it with national health
insurance. Call it the Leninist road to universal health care -- things have to
get worse before they get better.
Chicago’s recent decision to pass a “living wage”
ordinance that would require big-box retailers to pay $3 an hour in benefits has
revived that debate. Last week, the Prospect's own Ezra Klein
quotes from labor leader Andy Stern to buttress his own
against efforts like Chicago's. ... Klein
we need wholesale reform -- that is, national health insurance. “Progressives
are, or at least should be, engaged in a longer-term project of creating a
better, more just society for everyone, regardless of employment status.”
Labor lawyer and blogger Nathan Newman
Continue reading "Incremental versus Wholesale Health Care Reform" »
Posted by Mark Thoma on Saturday, August 26, 2006 at 12:33 PM in Economics, Health Care, Policy, Politics |
Jeremy Piger reviews research on the reaction of financial markets to
non-quantitative written and oral Fed communications, and, separately, provides estimates of recession probabilities for the U.S.:
Is All That Talk Just Noise?, by Jeremy Piger, Monetary Trends, August 2006, FRB
St. Louis: Announcements by the Federal Reserve regarding its target value
for the federal funds rate garner substantial attention from the media and
participants in financial markets. Indeed, there is evidence that the “news” in
these announcements, or the deviation of the targeted funds rate from market
expectations, affects the price of assets traded in various financial markets,
most notably those for equities and bonds.
In recent years, however, communication from the Federal Reserve has
increasingly included ... many forms of non-quantitative communication: that is,
the written statement released following meetings of the Federal Open Market
Committee; testimony by Federal Reserve officials, particularly the Chairman,
before Congress; and speeches made by Federal Reserve governors and regional
Reserve Bank presidents. I discuss ... whether this large amount of written and
verbal communication is also deemed important by market participants for valuing
financial assets. This would be the case if buyers and sellers believed that
Federal Reserve talk was informative about the direction of future policy... In
addition, market participants may value Federal Reserve talk if they believe it
conveys some new information about the state of the economy.
Continue reading "Talk is Cheap, But is it Informative?" »
Posted by Mark Thoma on Saturday, August 26, 2006 at 02:52 AM in Economics, Monetary Policy |
I agree with this. Our drug policy, marijuana law in particular, is drug law madness:
Czars’ Reefer Madness, by John Tierney, Commentary, NY Times: ...White House drug ... czars have ... called Dutch drug policy “an
unmitigated disaster,” bemoaning Amsterdam’s “stoned zombies” and its streets
cluttered with “junkies.” Anti-pot passion has only increased in the Bush
administration, which has made it a priority to combat marijuana. ... The Bush
administration can’t even abide it being used for medical purposes by the
terminally ill. Why risk having any of it fall into the hands of young people
who could turn into potheads, crack addicts and junkies?
But if America’s drug warriors came here, ... [a]nd if they talked to Peter
Cohen, a Dutch researcher..., they would discover something... Even though
marijuana has been widely available since the 1970’s, enough to corrupt a couple
of generations, the Netherlands has not succumbed to reefer madness.
The Dutch generally use drugs less than Americans do, ... (and ... surveys
might understate Americans’ drug usage, since respondents are less likely to
admit illegal behavior). More Americans than Dutch reported having tried
marijuana, cocaine and heroin. Among teenagers who’d tried marijuana, Americans
were more likely to be regular users.
In a comparison of Amsterdam with another liberal port city, San Francisco,
... people in San Francisco were nearly twice as likely to have tried marijuana.
Cohen isn’t sure exactly what cultural and economic factors account for the
different usage patterns..., but he’s confident he can rule out one explanation.
“Drug policy is irrelevant,” says Cohen, the former director of the Center
for Drug Research at the University of Amsterdam. ... The good news about drugs,
Cohen says, is that the differences between countries aren’t all that important
— levels of addiction are generally low in America as well as in Europe. The bad
news is that the occasional drug fad get hyped into a crisis that leads to bad
“Prohibition does not reduce drug use, but it does have other impacts,” he
says. “It takes up an enormous amount of police time and generates large
possibilities for criminal income.”
In the Netherlands, that income goes instead to coffee-shop owners and to the
government, which exacts heavy taxes. It also imposes strict regulations ..., including who can be served (no minors) and how much
can be sold (five grams to a customer). ...
Raskam [the creator of the award-winning marijuana blend named “Arjan’s Haze,”] sneers at the street products in the United States, which he considers
overpriced and badly blended. But he acknowledges there’s one feature in the
American market he can’t compete with.
“Drugs are just less interesting here,” he said. “One of my best friends here
never smoked cannabis, never wanted to even try my products. Then when she was
32 she went to America on holiday and smoked for the first time. I asked her
why, and she said, ‘It was more fun over there. It was illegal.’ ”
Posted by Mark Thoma on Saturday, August 26, 2006 at 12:15 AM in Economics, Policy, Regulation |
Robert Shiller explains the difference in saving rates between China and the U.S.:
Growth rate gulf result of opposite approach to saving, by Robert Shiller,
Project Syndicate: The saving rate in China is the highest of any major
country. China's gross saving rate ..., which includes both public and private
saving, is around 50 percent.
By contrast, the saving rate in the United States is the lowest of any major
country - roughly 10 percent of GDP. Differences in saving rates must be a major
reason that China's annual economic growth rate is a full six percentage points
higher than in the US. ... Unfortunately, explaining saving rates is not an exact science.
Ingrained habits probably explain more about China's saving rate. When
incomes are growing rapidly, as they are in China, it is easier to save
because people are not yet accustomed to a higher standard of living.
They also tolerate enterprise or government policies that encourage
Continue reading "The Difference in Saving Rates between China and the U.S." »
Posted by Mark Thoma on Friday, August 25, 2006 at 08:10 PM in China, Economics, Saving |
Tim Duy wants help with his homework:
37 Charts – In No Particular Order, by Tim Duy
David Altig discusses the challenge macroeconomists face as they aggregate a
dizzying array of economic data into a coherent story:
To put it straight, I harbor
no illusions about the state of the residential housing market. But I am a
macroeconomist -- and one primarily engaged in thinking about national economic
monetary and fiscal policies at that -- so my tendency is to focus on the
trajectory of the entire economy. In the best of times there are some sectors
of the economy that struggle, and it is not clear that these are the appropriate
objects of policy.
How much emphasis should we place on the housing sector?
Continue reading "37 Charts – In No Particular Order" »
Posted by Mark Thoma on Friday, August 25, 2006 at 02:25 PM in Economics |
Ben Bernanke opens the Fed conference at Jackson Hole with a discussion about
economic integration. The talk has two sections, the history of economic
integration, and the current episode of economic integration. Once conclusion from the
history section is that, while economic integration is beneficial overall, the costs are not shared equally:
A third observation is that social dislocation, and consequently often social
resistance, may result when economies become more open. An important source of
dislocation is that--as the principle of comparative advantage suggests--the
expansion of trade opportunities tends to change the mix of goods that each
country produces and the relative returns to capital and labor. The resulting
shifts in the structure of production impose costs on workers and business
owners in some industries and thus create a constituency that opposes the
process of economic integration. More broadly, increased economic
interdependence may also engender opposition by stimulating social or cultural
change, or by being perceived as benefiting some groups much more than others.
His quote of Martin Luther from 1524 is one illustration of this:
Continue reading "Bernanke: A Short History of Global Economic Integration" »
Posted by Mark Thoma on Friday, August 25, 2006 at 09:33 AM in Economics, Fed Speeches, Monetary Policy |
This argues, rightly I think, that post-war reconstruction must begin with reconciliation and
stabilization as primary goals, it cannot be "development as usual":
of Reconstruction, by Graciana del Castillo, Project Syndicate: ...[A]ccording
to the UN and several independent studies, countries in transition from war to
peace face roughly a 50% chance of sliding back into warfare. ...
When wars end, countries confront a multi-pronged transition. Violence must
give way to security for inhabitants; lawlessness and political exclusion must
give way to the rule of law and participatory government; ethnic, religious, or
class/caste polarization must give way to national reconciliation; and ruined
war economies must be transformed into functioning market economies that enable
ordinary people to support themselves.
These multiple tasks make economic reconstruction fundamentally different
from “development as usual.” To succeed, the transition to peace requires
demobilization, disarmament and reintegration of former combatants, as well as
reconstruction and rehabilitation of services and infrastructure.
Continue reading "Post-War Reconstruction and Reconciliation" »
Posted by Mark Thoma on Friday, August 25, 2006 at 03:06 AM in Economics, Iraq and Afghanistan, Politics |
Paul Krugman, like
Calculated Risk, is thinking about Eeyore:
Housing Gets Ugly, by Paul Krugman, Commentary, NY Times: Bubble, bubble,
Toll’s in trouble. This week, Toll Brothers, the nation’s premier builder of
McMansions, announced that sales were way off, profits were down, and the
company was walking away from already-purchased options on land for future
Toll’s announcement was one of many indications that the long-feared housing
bust has arrived. Home sales are down sharply; home prices ... are now falling
in much of the country. The inventory of unsold existing homes is at a 13-year
high; builders’ confidence is at a 15-year low.
A year ago, Robert Toll, who runs Toll Brothers, was euphoric about the
housing boom... In a New York Times profile ... published last October, he
dismissed worries about a possible bust. “Why can’t real estate just have a boom
like every other industry?” he asked. “Why do we have to have a bubble and then
The current downturn, Mr. Toll now says, is unlike anything he’s seen: sales
are slumping despite the absence of any “macroeconomic nasty condition”... He
suggests that unease about the direction of the country and the war in Iraq is
undermining confidence. All I have to say is: pop!
Now what? Until recently most business economists were predicting a “soft
landing” for housing. Even now, the majority opinion seems to be that we’re
looking at a cooling market, not a bust. But this complacency looks increasingly
like denial, as hard data — which tend ... to lag what’s actually going on ... —
start to confirm anecdotal evidence that it is, indeed, a bust.
Why the sudden crackup? ...[W]ith prices falling in many areas, the
speculative demand for houses has gone into reverse, as people try to get out
with a profit while they still can. There’s now a rapidly growing glut of unsold
houses. This is a recipe for a major bust, not a soft landing.
Moreover, it could be both a deep and a prolonged bust. Since 2000, much of
the nation has experienced a rise in home prices comparable to the boom in
Southern California during the late 1980’s. After that bubble popped, Los
Angeles house prices began a slow, grinding deflation, eventually falling 20
percent (34 percent after adjusting for inflation). Prices didn’t begin a
sustained recovery until 1996, more than six years after the downturn began.
Now imagine the same thing happening across a large part of the United
States. It’s an ugly picture, and not just for people and companies in the
construction business. Many homeowners — especially those who bought their
houses with interest-only loans or with minimal down payments — will find
themselves in financial distress. And the economy as a whole will take a hit.
As far as I know, Nouriel Roubini of Roubini Global Economics is the only
well-known economist flatly predicting a housing-led recession in the coming
year. Most forecasters consider his call alarmist, and many Federal Reserve
officials remain optimistic. Last week, Richard Fisher, the president of the
Federal Reserve Bank of Dallas, dismissed “Eeyores in the analytical community”
who worry about a possible recession.
Call me Eeyore. While I don’t share Mr. Roubini’s certainty, I see his point:
housing has been the main engine of U.S. economic growth over the past three
years, and with that engine now going into reverse, it’s hard to see how we can
avoid a serious slowdown.
Update: In Money Talks, Krugman adds:
Just a wonkish note about how bad the macroeconomics of
all this could be:
If you look at the most leading of the indicators on housing, stuff like new
home sales and applications for permits, they're off more than 20 percent from a
year ago. If that translates into an equivalent fall in residential investment,
we're talking about a fall from 6 percent of the G.D.P. to 4.8 percent. And this
may be only the beginning; I wouldn't be surprised to see housing investment
drop below its pre-bubble norm of 4 percent of G.D.P., at least for a while.
Add to this the likely effect of a housing bust on consumer spending and
you've got a direct hit to G.D.P. of, say, 2.5 percent or more. That's bigger
than the slump in business investment that led to the 2001 recession. And the
main reason the 2001 recession wasn't as deep as some feared was that the Fed
was able to engineer... a housing boom. What will the Fed do this time?
Maybe rising business investment and a declining trade deficit will soften
the blow. But it's remarkably easy, playing with the numbers, to come up with
scenarios in which the unemployment rate rises above 6 percent by the end of
2007. That's not a prediction, but it's well within the range of possibility.
Previous (8/21) column:
Paul Krugman: Tax Farmers, Mercenaries and Viceroys
Next (8/28) column: Paul Krugman: Broken Promises
Posted by Mark Thoma on Friday, August 25, 2006 at 12:15 AM in Economics, Housing |
Tim Duy reviews the latest housing data and the Fed's reaction to it in a Fed Watch:
More Data Watching, by Tim Duy: The
recent spate of housing data
confirms the anecdotal evidence – while there may be some pockets of resistance,
the national housing market is quickly reversing course. Still, as I noted
earlier this week, the Fed’s reaction to date appears to be muted. How long will
they maintain such a complacent posture? In general, I think the answer
is: Longer than you might expect.
The key, of course, is to what extent housing undermines the rest of the
economy. I think there is little debate that the first impact (outside of
residential investment) will be on the consumer, although the
Wall Street Journal
appears to believe we are still kicking this around:
Continue reading "Fed Watch: More Data Watching" »
Posted by Mark Thoma on Thursday, August 24, 2006 at 01:15 PM in Economics, Fed Watch, Monetary Policy |
Interesting graph on political party identification by age:
This was posted in response to an
about differing fertility rates for Republicans and Democrats (e.g. see here). More details from
the Statistical Modeling, Causal Inference, and Social Science blog
here and here (original Pew Center
report). The Statistical Modeling blog says:
Peak Republican age is about 46--that's a 1960 birthday, meaning that your first
chances to vote were the very Republican years of 1978 and 1980, when everybody
hated Jimmy Carter.
Posted by Mark Thoma on Thursday, August 24, 2006 at 01:11 PM in Politics |
Robert Reich says welfare reform is not the success you might have heard
about. There are serious flaws in the current rules for welfare that have been
overlooked or ignored in the rush to praise the reform effort:
Welfare Deform -- A Sad Anniversary, by Robert Reich: I'm baffled by the way
the press has covered the tenth anniversary (this week) of Bill Clinton's
welfare reform -- full of praise for a policy that has led to more poverty in
America among single mothers and their children than before. I keep reading that
welfare reform succeeded because welfare rolls were reduced. Of course they were
reduced. People were kicked off welfare. How could they not be reduced?
To be sure, the economy of the late 90s was so strong that many who were
kicked off found jobs. Remember, between 1995 and 2000, some 14 million new jobs
were added to the U.S. economy. That was because Alan Greenspan allowed the
economy to grow fast, thereby pushing the official rate of unemployment down
below 4 percent. In many cities, employers had to troll for workers -- which
meant a lot of people who otherwise could never find or keep a job landed and
maintained one, and at a wage above the minimum.
But that was then. Now is now.
Continue reading "Shut Your Eyes and Claim Victory" »
Posted by Mark Thoma on Thursday, August 24, 2006 at 09:11 AM in Economics, Policy, Politics |
I had to have my water heater replaced today, so I might be overly
sympathetic to this message. My house is at that age where the roof,
water heater, furnace, etc., that came with it when it was new begin to fail and
it takes fairly big investments to replace them.
This article argues that the US is at a similar position in the life of its
capital, i.e. that the roads, bridges, power plants, dams, ports, airports,
electricity networks, sewage systems, and so on, most of which were built 50-75 years ago, are
all showing signs of wear or inadequate capacity and are in need of replacement,
expansion, or substantial maintenance. The question is how to summon the
political will to address these needs with all the other pressing budget issues:
Things Fall Apart: Fixing America’s Crumbling Infrastructure, by Nicholas
Kulish, Commentary, NY Times: Whether it’s the roads we drive on, the pipes
carrying our water, or the power lines humming with the electricity...,
America’s physical networks are falling apart.
Continue reading "Foundations of Productivity" »
Posted by Mark Thoma on Wednesday, August 23, 2006 at 08:27 PM in Economics, Miscellaneous |
From a colleague in response to a discussion on bimodal income distributions in
East Asia and South Asia (thanks Shankha), this is an interesting animation on world
poverty, income distributions, and health:
Animation on Human Development Trends
If that doesn't work, go to Human Development
Reports, then click on the link "HD
in Animation" on the RHS column (under HDR2005).
There is all sorts of interesting information, and it's very well done.
Posted by Mark Thoma on Wednesday, August 23, 2006 at 03:42 PM in Animation, Economics, Income Distribution |
A Reaction Essay in Cato Unbound on the issue of immigration from Mexico.
This is a reaction to
this essay (posted
here) by Richard Rodriguez:
Seeing Mexican Immigration Clearly, by Douglas S. Massey, Reaction Essay, Cato
Unbound: Richard Rodriguez is an essayist in the humanist tradition and thus
comments on the cultural meaning of Mexican immigration and the symbolic
importance of Mexicans in American society. As a student of culture myself, I
concur with his emphasis on cultural meanings and symbols in the current debate.
Despite my appreciation for the cultural ramifications of Mexican
immigration, I am a social scientist and ultimately believe that accurate
understanding needs to be grounded in empirical reality. In 25 years of research
on a variety of public policy issues, I have never seen so much
misinformation.... Thanks to the media and political entrepreneurs, Mexican
immigrants are routinely portrayed as a tidal wave of human beings fleeing an
impoverished, disorganized nation who are desperate to settle in the United
States, where they will overwhelm our culture, displace our language, mooch our
This profile, however, bears no discernible relationship to the reality that
I know as a social scientist.
Continue reading "The Characteristics of Migrant Workers from Mexico" »
Posted by Mark Thoma on Wednesday, August 23, 2006 at 02:15 PM in Economics, Immigration, Policy, Politics |
The Washington Times says the public favors Social Security reform to lock up the trust fund by an
Social Security reform, by Gary J. Andres, Commentary, Washington Times:
Social Security reform ... crashed last year on the rocks of
hyper-partisanship... [S]everal important lessons emerged from an otherwise dark
cloud of defeat. Doing "something" on the Social Security issue before Congress
adjourns could build congressional credibility in this important area of
Continue reading "Locking Up the Social Security Trust Fund" »
Posted by Mark Thoma on Wednesday, August 23, 2006 at 12:30 PM in Economics, Politics, Social Security |
Tim Duy with his latest Fed Watch:
Finally – Some FedSpeak, by Tim Duy: Presumably, the Fed remains data
dependent. Market participants, however, largely don’t see it that way.
Increasingly, the view is that the Fed is done – as of today, odds for another
rate hike in September stand south of 20%, and, with rates on the 10 year
Treasury drifting to 4.8%, it looks like the mood has firmly swung to an
expectation that the next shift in policy will be a rate cut. I doubt the Fed is
ready to admit victory on the inflation front so quickly, last week’s CPI and
PPI numbers not withstanding. Nor, as we have seen from recent Fedspeak, are
they ready to embrace the recession story. But the slowdown in consumer
spending is likely weighing heavily on their thoughts. Heavily enough that they
will hold rates steady in September, while still signaling their inflation
Recent Fedspeak is best described as minimal. Last week Dallas Fed President
Richard Fisher stepped up to the podium, but revealed little new in Fed
thinking, simply noting the tight spot between accelerating inflation and slower
growth. The only new information one could glean from his speech was when he
described recession-minded analysts as “Eeyores.” Such a dismissive remark can
only suggest that the idea of a rate cut is furthest from his mind. That said,
Fisher’s “eighth inning” remark lingers in everyone’s minds – perhaps the best
strategy is to bet against Fisher, and side with the “Eeyores.” Similarly,
Calculated Risk takes
on Fisher’s optimistic view of the Texas housing market.
More interesting were Chicago Fed President Michael Moskow’s hawkish
sounding remarks on Tuesday. Here there was a clear message: Pause does not
mean done. Simply put, Moskow still sees the risks of high inflation as greater
than slower growth. I can’t say I find this as a surprise, considering that
Moskow sees the evolving slowdown as incredibly mild with growth sliding
comfortably back to potential. Also note that he reiterates his view that
potential growth is consistent with a monthly NFP gain of just 100k, and that he
dismisses signs of weakness in the second quarter GDP report as “due to
transitory and one-off events, such as the timing of shipments in transportation
and communications equipment.” And he sounds very complacent about housing, much
displeasure. Like Fisher, Moskow is not ready to buy into the Eeyore story –
keep this in mind, as I suspect the Fed will be the last people to believe the
economy has turned uncomfortably slow.
On the inflation front, Moskow says something intriguing:
Continue reading "Fed Watch: Finally – Some FedSpeak" »
Posted by Mark Thoma on Wednesday, August 23, 2006 at 01:15 AM in Economics, Fed Watch, Monetary Policy |
Andrew Leonard at Salon reviews research raising questions about the environmental Kuznets
Outsourcing pollution The richer they are, the cleaner they get?, by Andrew
Leonard, Salon: ...In 1990 Taiwan passed a law requiring catalytic
converters on new cars and motorcycles. In the intervening years, concentrations
of ... carbon monoxide, NO2, and assorted airborne particulates, have decreased.
A loud and vigorous environmental movement, growing in step with Taiwan's
thriving economy, has also asserted itself. Accordingly, Taiwan would seem to
proof of a concept known in economics as the "Environmental Kuznets Curve"
The EKC holds that there is a bell-shaped, "inverted U" curve describing the
relationship between a society's economic growth and the problem of
environmental degradation. Simply put, at early stages of growth, environmental
degradation gets worse, but as citizens get richer, things start to get better.
... So if we could just achieve economic growth all over the world, then voilà,
environmental despoilation would diminish.
But alas, life doesn't seem to be so simple. The
New Economist today highlighted another blog
Capital, specializing in environmental economics and written by Robert
Metcalfe, a graduate student at the London School of Economics. In his most
recent post, Metcalfe summarizes
a recent paper that finds evidence for the EKC to be "fragile," if it exists
The new paper states that the validity of the EKC has become the most
investigated topic in environmental economics... At first, scads of studies
found evidence supporting the EKC relationship. But in recent years the idea has
concerted assault. A few points stand out.
First, it makes a big difference what pollutants you study. There is clear
evidence that airborne particulate matter declines steadily with income growth,
and pretty good evidence that pollutants like NO2, carbon monoxide and sulfur
dioxide fit neatly into EKC models. But the correlation is much less clear when
investigating things like deforestation or carbon dioxide emissions. The quick
and dirty rule seems to be that if you can't see it or smell it in your local
urban neighborhood, then, no matter how rich you are, you aren't going to do
much about it.
Second, the early work demonstrating supposed EKC relationships did not take
into account the impact of globalization. The industrialized world may have
succeeded in cleaning up its own act (relatively speaking) simply by exporting
the dirtiest industries abroad. So, in a global context, nothing really
improved: The impact of pollution was simply
outsourced. This holds ... true for Taiwan... If there has been improvement
in Taipei's air quality over the past decade, it just happened to come at
precisely the period during which Taiwan moved most of its nastiest
manufacturing industries across the Taiwan Straits to China. ...
It would be nice to hope that new technologies could help China and other
nations leapfrog the mistakes that their predecessors made, but such solutions
are expensive. The troubling truth may be that ultimately it will be harder
for the poorer nations to follow the same trajectory as the developed world,
because with nowhere left to export their pollution, they'll have to fix it
themselves. And the price won't be cheap.
Posted by Mark Thoma on Wednesday, August 23, 2006 at 12:33 AM in Academic Papers, Economics, Environment |
This paper by Bennett McCallum extends the work of a colleague, George Evans, on the
least-squares learnability of rational expectations solutions. Rational
expectations models require agents to understand how to calculate the solution
to the model, but that is a very complicated mathematical problem so it is unclear how agents accomplish this task. The question
in this work is whether agents can use simple linear learning rules (linear
regressions) to learn about the complicated rational expectations solutions.
The paper shows
that previous results of Evans and Honkapohja (and others) on the types of models that are learnable pertain to a broad class of models,
broader than many might have suspected from the original work. This is important
because, as McCallum argues, "learnability (and thus E-stability) should be
regarded as a necessary condition for the relevance of a RE equilibrium" and
this broadens the class of such models.
Since I don't expect many of you will be interested in wading through the
paper which is necessarily technical, or even the introduction, let me highlight
the part of the discussion on the relevance of RE equilibria.
Remember that, in RE models, agents are assumed to be able to calculate the solution. Suppose we
give agents an ideal learning environment, i.e. they use the correct model, correct
estimator, the structure is invariant, and so on. In such an idealized world, if
agents cannot learn the RE equilibrium, then it is very unlikely they would be
able to learn about it in a more complicated set-up. This helps us determine which models are useful representations of the economy. Models with RE
solutions that cannot be learned in an ideal world are generally uninteresting
and can be set aside:
The position that learnability (and thus E-stability) should be
regarded as a necessary condition for the relevance of a RE equilibrium begins
with the presumption that individual agents must somehow learn the magnitudes of
parameters describing the economy’s law of motion from observations generated by
the economy; they cannot be endowed with such knowledge by magic. Of course any
particular learning scheme might be incorrect in its depiction of actual
But in this regard it is important to note that the LS learning process in
question assumes that (i) agents are collecting an ever-increasing number of
observations on all relevant variables while (ii) the structure is remaining
unchanged. Furthermore, (iii) the agents are estimating the relevant unknown
parameters (iv) with an appropriate estimator (v) in a properly specified model.
Thus if a proposed RE solution is not learnable by the process in question—the
one to which the E&H results pertain—then it would seem highly implausible that
it could prevail in practice...
While I'm discussing colleagues, I also want to welcome the newest member of our Department,
mentioned today by
Hamilton in his discussion of the debate over business cycle dating that
came in response to a question from
Mankiw, among others. I'm pretty happy to have Jeremy as a colleague. Here's
the introduction to McCallum's paper:
Continue reading "Learning About Rational Expectations Solutions" »
Posted by Mark Thoma on Wednesday, August 23, 2006 at 12:15 AM in Academic Papers, Economics, Macroeconomics, University of Oregon |
I haven't posted at Environmental Economics for a while, and this actually
reverses the flow by posting their stuff here. Oh well. This discusses a
disconnect between the public and economists on public policy issues, environmental policy in particular:
Putting Our Values On The Table, by J.S.: The myriad theories that underlie
the ever-expanding field of economics are essentially positive in nature; they
are descriptive and subject to hypothesis testing. ...
However, as soon as we enter the world of public policy, economic models and
their implications are riddled with normative assumptions. Much of the distrust
that many environmentalists have towards economics is based on their belief that
economists often hide their value judgments behind highly complex mathematical
models, instead of being forthright about their normative assumptions. I think
there is some truth to this.
Some examples of areas where normative elements are unavoidable in economic
analysis are the following:
Continue reading "Economists and Their Values" »
Posted by Mark Thoma on Tuesday, August 22, 2006 at 07:03 PM in Economics, Environment, Policy |
According to Ezra Klein, welfare reform wasn't the bi-partisan cooperative effort that Bill Clinton remembers in his
New York Times
commentary. Whatever you think of the outcome, it was a battle every step of the way:
Bill's Misremembered Bipartisanship,
by Ezra Klein, Tapped: Far be it for me to criticize Bill Clinton ..., but his
op-ed today is just nuts. Celebrating welfare reform's better-than-expected
results, he generously concludes that "[r]egarding the politics of welfare
reform, there is a great lesson to be learned, particularly in today's
hyper-partisan environment, where the Republican leadership forces bills through
Congress without even a hint of bipartisanship. Simply put, welfare reform
worked because we all worked together. The 1996 Welfare Act shows us how much we
can achieve when both parties bring their best ideas to the negotiating table
and focus on doing what is best for the country."
vetoed the first two welfare reform bills the Republican Congress sent him
for their unimaginable cruelty -- they were punitive programs, focused on
punishing, not uplifting, poor blacks. The third bill sparked the most
acrimonious and intense negotiations of the Clinton White House, with the
president proving unable to decide his course till the eleventh hour and 59th
minute. That's because the bill was never meant to be signed. Here's how Jason
DeParle, The New York Times lead reporter on welfare reform, recounts the
maneuverings in his
remarkable book American Dream:
Continue reading "Misremembering Welfare's Dismembering" »
Posted by Mark Thoma on Tuesday, August 22, 2006 at 03:24 PM in Economics, Politics, Social Security |
This is an email from Paul Krugman:
I think it's really important to realize that we have only a modest amount of
direct evidence that technological change is driving increased income
inequality. That is, while there have been a few studies showing some connection
between increased use of IT and changes in the wage structure, very little of
the conventional wisdom that technology is the culprit is based on those
So why is technology given the credit? Basically because it's the residual
category - and as Bob Solow said about the role of technology in growth, the
residual is the measure of our ignorance. We estimate the effects of the stuff
whose effects we know how to measure - taxes and globalization, mainly - and
then attribute the rest to technology.
The point is that it's all too possible that we're attributing to technology
rising inequality that may be largely due to hard-to-quantify political and
There are several reasons to think that politics plays a big role. One is the
broad correlation between the political climate and trends in inequality, which
I pointed out in the Times. (By the way, Larry Bartels in Princeton's politics
department shows that there's a strong correlation between party control of the
White House and inequality trends even in the short run; see
http://www.princeton.edu/~bartels/income.pdf. It's kind of a mysterious
result, but worth pursuing.)
Another piece of evidence is the wide difference in inequality trends between
the US and to a lesser extent the UK, on one side, and everyone else.
Yet another piece of evidence, which I think is very suggestive, is the
discontinuous nature of the Great Compression. If you go back to the original Goldin and Margo paper,
http://www.nber.org/papers/W3817, they found that there was a drastic
reduction in wage inequality over the course of just 5 or 6 years in the 40s,
which then stuck for another 30 years. In the paper, they struggle to reconcile
this with a supply-and-demand framework, but it sure looks like a change in
norms which had sustained effects on market outcomes.
So what are the mechanisms? Unions are probably top of the list; I believe
that there's a qualitative difference between wage bargaining in an economy with
11 percent of workers unionized, which is what we had in the early 30s, and one
with 35 percent unionization, which is what emerged from World War II. That's
discontinuous change, partly driven by a change in political regime. And the
process went in reverse under Reagan.
An overall climate of public scrutiny may matter too, especially at the top
of the scale.
And don't forget that some taxes affect the pre-personal-tax distribution of
income. Taxes on corporate profits went from a minor inconvenience before FDR,
to a major source of revenue under Eisenhower, and back again.
The bottom line is that the view that rising inequality reflect forces beyond
the reach of politicians may sound sensible, but it's actually a supposition
based on very little evidence, and there's a lot of evidence on the other side.
Update: Andrew Gelman at the Statistical Modeling, Causal Inference,
and Social Science blog reminds me of his excellent discussion of the
Bartels paper referenced above. The discussion is at
Larry Bartels on income, voting, and the economy
More on Larry Bartels's analysis of Democrats, Republicans, and the economy.
Posted by Mark Thoma on Tuesday, August 22, 2006 at 08:27 AM in Economics, Income Distribution, Technology |
answers a question from PGL at Angry Bear:
What did you think of Dr. Thoma's efficiency wage defense for the
David has a very nice follow-up and he explains how a model with variable
effort might operate. He says, though:
Be, however, forewarned -- the econgeek rating on this one is pretty high.
He presents it in a way that is easy to understand, complete with
graphs to illustrate his points, so that shouldn't be a problem. Interestingly, in such a model:
[V]ariable labor effort seems to undo a good measure
of the (bad) effects that might otherwise follow from imposing a wage that is
"too high". Might this explain why the data do not speak so clearly on the
overall employment effects of the minimum wage? Maybe.
But he remains skeptical.
Posted by Mark Thoma on Tuesday, August 22, 2006 at 12:33 AM in Economics, Policy, Politics, Unemployment |
Joseph Stiglitz says that because airports are virtual monopolies, there is
no competition to force private security companies to operate efficiently or in the public interest:
Airports debacle worsened by greed and neglect, by Joseph Stiglitz, Commentary,
NY Financial Times: Britain’s current airport debacle is the predictable and predicted
outcome of ill-conceived airport privatisation. Some things – steel mills for
example – can be easily privatised; others cannot, as America’s problems in
contracting security arrangements made clear. ...
During the Clinton administration, privatisation of the US air traffic
control system was hotly debated... The US Council of Economic Advisers, of
which I was a member and then chairman, after careful analysis, expressed strong
reservations partly because airports ... are almost inevitably virtual or actual
monopolies. It is just too risky to privatise an entity that will not face
competition. The UK airports crisis, triggered by the recent discovery of a
terrorist plot ..., showed the mismatch between the interests of a private
operator and those of users...
Passenger safety and security are of course paramount. The problem has been
disappointing management by BAA, the UK airport operator, in normal times, and
its disastrous handling of the recent crisis. Flights were cancelled and delayed
largely because BAA lacked sufficient trained staff for security checks. If it
takes three minutes to X-ray a suitcase, then it takes three minutes whether it
is done an hour before a flight is supposed to leave or three hours later. The
only reason for delays would be the decision by airport authorities to keep
passengers waiting rather than spend money on extra personnel to process them
quickly. There is an incompatibility of incentives, and because airports are a
monopoly there is no competition to force it to change.
The magnitude of the debacle can be seen...: if the average passenger makes
just £10 an hour, and wastes one hour queuing, and if some 68m passengers pass
through Heathrow a year, then the value of the lost time is £680m ($1.28bn) –
quite a dent in profits if BAA had to compensate passengers for lost time. And
it would quickly realise that it could greatly shorten queues by hiring more
security personnel and buying more screening devices – at a fraction of that
In an ideal world, a well-designed contract would ... have BAA bear these
costs, so it would face appropriate incentives. But in the rush to privatise,
too little attention has been paid to these finer points. Without appropriate
incentives, a private operator bears the cost of additional personnel and
equipment, but gets none of the benefit. The inexorable drive for profit
maximisation leads to excessive economisation; BAA’s profits rise at the expense
of airline profits and consumer welfare; and society is worse off. The seeming
disdain BAA shows for customers and users is what one might expect from a
Too often, the debate has centred around two polar institutional
arrangements, government ownership versus privatisation. There are alternatives,
such as corporatisation with significant ownership by airlines but continuing
safety oversight by government. The airlines, as owners, would be sensitive not
only to the direct impact on their profits, but the indirect impact as a result
of unhappy customers who chose alternative modes of transportation. And the
airlines, themselves, would be sensitive to safety – all know what an accident
does to air travel.
This blind and simplistic faith in markets was, perhaps, understandable in
the Thatcher years; it is less so now. The current crisis should make
incontrovertible what has been evident to any user of UK’s airports: something
is wrong and must be fixed. ... [U]nless incentives are better aligned,
privatisation will continue to be a disappointment.
Too many privatization advocates do not think through whether profit maximization is compatible with the interests of the public (as it would be under pure competition). I don't have a problem with private sector based solutions to market failure problems, I think that's best, but only if there is careful consideration of the underlying economics and steps are taken to ensure that the types of problems Stiglitz is talking about are avoided, something that isn't always possible to accomplish with solutions based in the private sector.
This is an obvious point, of course we want to ensure that firms internalize all costs and benefits so that they respond correctly to economic incentives and act in the public interest as they seek to maximize profit. But this is overlooked far too often as people forget why the good was provided by the public sector to begin with.
Posted by Mark Thoma on Tuesday, August 22, 2006 at 12:21 AM in Economics, Market Failure, Policy |
Unfortunately, I'm not going to get to these:
Posted by Mark Thoma on Monday, August 21, 2006 at 05:31 PM in Economics, Miscellaneous |