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Saturday, September 30, 2006

You Can't Say That Here

Should the government ban some people from the U.S. because they promote ideas that are too dangerous for us to hear? I think we're losing sight of what freedom means:

Why I'm Banned in the USA, by Tariq Ramadan, Washington Post, London: For more than two years now, the U.S. government has barred me from entering the United States to pursue an academic career. The reasons have changed over time, and have evolved from defamatory to absurd...

I am increasingly convinced that the Bush administration has barred me [because of] my political views. In recent years, I have publicly criticized U.S. policy in the Middle East, the war in Iraq, the use of torture, secret CIA prisons and other government actions that undermine fundamental civil liberties. And for many years, ... I have called upon Muslims to better understand the principles of their own faith, and have sought to show that one can be Muslim and Western at the same time.

My experience reveals how U.S. authorities seek to suppress dissenting voices and -- by excluding people such as me from their country -- manipulate political debate in America. Unfortunately, the U.S. government's paranoia has evolved far beyond a fear of particular individuals and taken on a much more insidious form: the fear of ideas.

Continue reading "You Can't Say That Here" »

    Posted by on Saturday, September 30, 2006 at 05:23 PM in Economics, Policy, Politics, Terrorism | Permalink  TrackBack (0)  Comments (7)


    The Neo-Liberal Road to NAFTA

    Brad DeLong reconsiders the neo-liberal foundations of his support for the North American Free Trade Agreement:

    Neo-liberalism has a patchy Mexican record, by J. Bradford DeLong, Project Syndicate: Six years ago, I was ready to conclude that the North American Free Trade Agreement (NAFTA) was a major success. The key argument in favor of NAFTA had been that it was the most promising road the US could take to raise the chances for Mexico to become democratic and prosperous, and that the US had both a strong selfish interest and a strong neighborly duty to try to help Mexico develop.

    Since NAFTA, Mexican real GDP has grown at 3.6 percent per year, and exports have boomed, going from 10 percent of GDP in 1990 and 17 percent of GDP in 1999 to 28 percent of GDP today. Next year, Mexico's real exports will be five times what they were in 1990.

    It is here -- in the rapid development of export industries and the dramatic rise in export volumes -- that NAFTA made the difference. ... Increasing trade between the US and Mexico moves both countries toward a greater degree of specialization and a finer division of labor in important industries like autos, where labor-intensive portions are increasingly accomplished in Mexico, and textiles, where high-tech spinning and weaving is increasingly done in the US, while Mexico carries out lower-tech cutting and sewing.

    Such efficiency gains from increasing the extent of the market and promoting specialization should have produced rapid growth in Mexican productivity. Likewise, greater efficiency should have been reinforced by a boom in capital formation...

    The key word here is "should." ...[T]he 3.6 percent rate of growth of GDP, coupled with a 2.5 percent per year rate of population and increase, means that Mexicans' mean income is barely 15 percent above that of the pre-NAFTA days, and that the gap between their mean income and that of the US has widened. Because of rising inequality, the overwhelming majority of Mexicans live no better off than they did 15 years ago (indeed, the only part of Mexican development that has been a great success has been the rise in incomes and living standards that comes from increased migration to the US, and increased remittances sent back to Mexico).

    Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization and the international division of labor. We see the enormous increase in Mexican exports to the US over the past decade.

    We see great strengths in the Mexican economy -- a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.

    Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next 12 years.

    To be sure, economic deficiencies still abound in Mexico. According to the OECD, these include a very low average number of years of schooling, with young workers having almost no more formal education than their older counterparts; little on-the-job training; heavy bureaucratic burdens on firms; corrupt judges and police; high crime rates; and a large, low-productivity informal sector that narrows the tax base and raises tax rates on the rest of the economy. But these deficiencies should not be enough to neutralize Mexico's powerful geographic advantages and the potent benefits of neo-liberal policies, should they?

    Apparently they are. The demographic burden of a rapidly growing labor force appears to be greatly increased when that labor force is not very literate, especially when inadequate infrastructure, crime, and official corruption also take their toll.

    We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime and official corruption. We thus implicitly suggest that Mexicans would be far worse off today without NAFTA and its effects weighing in on the positive side of the scale.

    That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico's slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one.

      Posted by on Saturday, September 30, 2006 at 09:25 AM in Economics, International Trade | Permalink  TrackBack (1)  Comments (83)


      The Lex Gabinia

      Can we avoid making the same mistakes, or is it too late already?:

      Pirates of the Mediterranean, by Robert Harris, Commentary, NY Times: In the autumn of 68 B.C. the world’s only military superpower was dealt a profound psychological blow by a daring terrorist attack on its very heart. Rome’s port at Ostia was set on fire, the consular war fleet destroyed, and two prominent senators, together with their bodyguards and staff, kidnapped. ... [I]n the panicky aftermath of the attack, the Roman people made decisions that set them on the path to the destruction of their Constitution, their democracy and their liberty. One cannot help wondering if history is repeating itself.

      Consider the parallels. The perpetrators of this spectacular assault were not in the pay of any foreign power: no nation would have dared to attack Rome so provocatively. They were, rather, the disaffected of the earth: “The ruined men of all nations,” in the words of the great 19th-century German historian Theodor Mommsen, “a piratical state with a peculiar esprit de corps.”

      Like Al Qaeda, these pirates were loosely organized, but able to spread a disproportionate amount of fear among citizens who had believed themselves immune from attack. To quote Mommsen again: “The Latin husbandman, the traveler on the Appian highway, the genteel bathing visitor at the terrestrial paradise of Baiae were no longer secure of their property or their life for a single moment.”

      What was to be done? Over the preceding centuries, the Constitution of ancient Rome had developed an intricate series of checks and balances intended to prevent the concentration of power in the hands of a single individual. The consulship, elected annually, was jointly held by two men. Military commands were of limited duration and subject to regular renewal. Ordinary citizens were accustomed to a remarkable degree of liberty: the cry of “Civis Romanus sum” — “I am a Roman citizen” — was a guarantee of safety throughout the world.

      But such was the panic that ensued after Ostia that the people were willing to compromise these rights. The greatest soldier in Rome, the 38-year-old Gnaeus Pompeius Magnus (better known to posterity as Pompey the Great) arranged for a lieutenant of his, the tribune Aulus Gabinius, to rise in the Roman Forum and propose an astonishing new law.

      “Pompey was to be given not only the supreme naval command but what amounted in fact to an absolute authority and uncontrolled power over everyone,” the Greek historian Plutarch wrote. “There were not many places in the Roman world that were not included within these limits.”

      Pompey eventually received almost the entire contents of the Roman Treasury — 144 million sesterces — to pay for his “war on terror,” which included building a fleet of 500 ships and raising an army of 120,000 infantry and 5,000 cavalry. Such an accumulation of power was unprecedented, and there was literally a riot in the Senate when the bill was debated.

      Nevertheless, at a tumultuous mass meeting in the center of Rome, Pompey’s opponents were cowed into submission, the Lex Gabinia passed (illegally), and he was given his power. In the end, once he put to sea, it took less than three months to sweep the pirates from the entire Mediterranean. Even allowing for Pompey’s genius as a military strategist, the suspicion arises that if the pirates could be defeated so swiftly, they could hardly have been such a grievous threat in the first place.

      But it was too late to raise such questions. By the oldest trick in the political book — the whipping up of a panic, in which any dissenting voice could be dismissed as “soft” or even “traitorous” — powers had been ceded by the people that would never be returned. Pompey stayed in the Middle East for six years, establishing puppet regimes throughout the region, and turning himself into the richest man in the empire.

      Those of us who are not Americans can only look on in wonder at the similar ease with which the ancient rights and liberties of the individual are being surrendered in the United States in the wake of 9/11. The vote by the Senate on Thursday to suspend the right of habeas corpus for terrorism detainees, denying them their right to challenge their detention in court; the careful wording about torture...; the admissibility of evidence obtained in the United States without a search warrant; the licensing of the president to declare a legal resident of the United States an enemy combatant — all this represents an historic shift in the balance of power between the citizen and the executive.

      An intelligent, skeptical American would no doubt scoff at the thought that what has happened since 9/11 could presage the destruction of a centuries-old constitution; but then, I suppose, an intelligent, skeptical Roman in 68 B.C. might well have done the same.

      In truth, however, the Lex Gabinia was the beginning of the end of the Roman republic. It set a precedent. Less than a decade later, Julius Caesar — the only man, according to Plutarch, who spoke out in favor of Pompey’s special command during the Senate debate — was awarded similar, extended military sovereignty in Gaul. Previously, the state, through the Senate, largely had direction of its armed forces; now the armed forces began to assume direction of the state.

      It also brought a flood of money into an electoral system that had been designed for a simpler, non-imperial era. Caesar, like Pompey, with all the resources of Gaul at his disposal, became immensely wealthy, and used his treasure to fund his own political faction. Henceforth, the result of elections was determined largely by which candidate had the most money to bribe the electorate. In 49 B.C., the system collapsed completely, Caesar crossed the Rubicon — and the rest, as they say, is ancient history.

      It may be that the Roman republic was doomed in any case. But the disproportionate reaction to the raid on Ostia unquestionably hastened the process, weakening the restraints on military adventurism and corrupting the political process. It was to be more than 1,800 years before anything remotely comparable to Rome’s democracy — imperfect though it was — rose again.

      The Lex Gabinia was a classic illustration of the law of unintended consequences: it fatally subverted the institution it was supposed to protect. Let us hope that vote in the United States Senate does not have the same result.

        Posted by on Saturday, September 30, 2006 at 12:10 AM in Economics, Iraq and Afghanistan, Policy, Politics | Permalink  TrackBack (1)  Comments (83)


        Personal Consumption Expenditures

        With today's release of personal consumption expenditure data showing that real personal consumption expenditures fell .1% from last month, I thought I'd take a (very) quick look at these data. This is a graph of the percentage change in personal consumption expenditures from one year ago from the St. Louis Fed. The red line representing the latest value of the growth in PCE has been added to the diagram to make it easier to compare the current growth rate in PCE to the growth rate in earlier time periods:

        Pce93006
        Click to enlarge the diagram

          Posted by on Saturday, September 30, 2006 at 12:06 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0)


          Friday, September 29, 2006

          Friday Cats Control Your Mind Blogging

          I'll admit I haven't quite figured out what 'Friday cat blogging' is all about, but I'll try to play anyway. Via a link in the Flash section of the Discover Magazine web site, are cats contributing to mass personality changes?:

          A University of California at Santa Barbara study finds countries with high rates of Toxoplasmosis are more neurotic and suggest the cat-borne parasite could be causing mass personality changes.

          Here's the article from the Mind and Brain section of Seed Magazine:

          Continue reading "Friday Cats Control Your Mind Blogging" »

            Posted by on Friday, September 29, 2006 at 01:20 PM in Economics, Miscellaneous, Science | Permalink  TrackBack (0)  Comments (8)


            The Myth of the Coming Labor Shortage

            Richard Freeman says not to expect the future labor shortages that many are forecasting:

            Is A Great Labor Shortage Coming? Replacement Demand in the Global Economy, by Richard B. Freeman, NBER WP 12541, Sept 2006:

            The sky is falling down, the sky is falling down ...
            I must go and tell the king ...
            A great labor shortage is coming.

            In the early 2000s, the business press and media began reporting that the US labor market was on the verge of a major transformation. The retirement of baby boomers and slow projected growth of the labor force were going to create a great labor shortage. Policy-makers should forget about the sluggish real wage growth of the past three decades, the deterioration in pensions and employer provided health care, the “jobless” recovery from the 2001 recession, and fears of job loss from off shoring or low wage imports and focus on helping business find workers in the coming shortage. ...

            In this paper, I assess the shortage claims and the labor supply and demand projections on which they are based. I conclude that there is no more reason to believe that the US faces a great future labor shortage than that Chicken Little got it right about the sky falling down. The retirement of baby boomers and slow growth of the US work force, on which the shortage claims are based, will most likely have modest and hard to detect impacts on the job market. I argue that increased supplies of skilled labor in low wage countries will impact US workers more than slower increases in domestic labor supply.

            ...

            If the analysis of this paper is correct and the economic sky will not fall down in the face of a slower growth in the US work force, why have so many persons concerned with the well being of the US economy warning about the great coming labor shortage?

            I suspect that ... fears of a coming shortage fit with the concerns of various groups. Future shortage or not, business will benefit from policies that increase labor supply to drive down labor costs. Advocates of education and training see the shortage analysis as a way to gain national support for increased spending on training that will benefit workers. Politicians can use the shortage analysis to avoid dealing with policies like minimum wages, mandated health care spending, labor law reform, or enforcement of labor laws, and the like, by endorsing “win-win” education and training policies while sidestepping the fact that someone must pay for these investments. ...

            I [also] believe the [reason] shortage analysis appeals to some is that it offers a more optimistic framework for analyzing the economic future than the view that the biggest problem facing US workers is competition from low wage labor overseas is. If the doubling of the global work force has weakened the position of workers in the US, the country has to deal with issues regarding the rules of the global economy, ways to increase savings and the supply of capital, ways to retain good jobs and sectors and to distribute the gains from globalization to labor as well as capital while deterring protectionism.

            That the coming labor shortage is more myth than reality does not invalidate some of the policies that shortage analysts endorse to help the economy progress. More and better schooling and job training and greater provision of occupational information may be critical to the nation’s preserving comparative advantage in high tech sectors under the global competition vision of the future. There is arguably greater need for those policies if global competition places downward pressure on US workers than if a domestic labor shortage puts them in the catbird seat in the economy and places business under pressure to recruit more workers.

            Finally, if my analysis is wrong and the US develops a great labor shortage in the future, I do not see how the country can go wrong allowing market forces to raise the price of labor. There is nothing in economics that predicts “slower growth in the standard of living, change in the balance of payments, inequality, persistent structural unemployment,” or any other economic disasters from the normal functioning of competitive markets in the face of a shift in the supply-demand balance. If there is going to be a great labor shortage that raises wages and benefits for American workers, maybe we ought to cheer the workings of the Invisible Hand rather than seeing this as a disaster that policy should seek to avoid.

            The last paragraph is worth emphasizing. David Wessel of the WSJ and Andrew Samwick have a previous discussion of these results.

              Posted by on Friday, September 29, 2006 at 12:19 PM in Economics, International Trade, Unemployment | Permalink  TrackBack (1)  Comments (33)


              Health Care Costs and Health Care Coverage

              This Economic Letter from the San Francisco Fed looks at how health care cost increases affect health care coverage. The main result is that the share of of firms offering coverage has remained relatively constant but the plans offered have become more expensive and have tighter eligibility requirements. Thus, most of the decline in employee sponsored coverage is due to workers voluntarily opting out, presumably due to rising costs, and to tightened eligibility requirements:

              Health Insurance Costs and Declining Coverage by Tom Buchmueller and Rob Valletta, Economic Letter, FRBSF: As discussed in a recent FRBSF Economic Letter (Jones 2005), the share of health-care spending in GDP has been rising rapidly in the United States and other advanced industrial countries since at least 1960. For example, data from the U.S. Centers for Medicare and Medicaid Services (CMS) indicate double-digit annual increases in premiums for private health plans during the years 2001-2003, which significantly increased the overall share of business and household expenditures devoted to medical services. As Jones (2005) and others have argued, the rapid increase in the price of medical care likely is demand-driven to a large degree, reflecting the high value that consumers in wealthy countries assign to medical technologies that improve the quality of life and extend its duration.

              Continue reading "Health Care Costs and Health Care Coverage" »

                Posted by on Friday, September 29, 2006 at 10:45 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (3)


                Bush on Energy Policy

                The Wall Street Journal interviews George Bush on energy issues:

                Interview With President Bush, Wall Street Journal:

                THE WHITE HOUSE
                Office of the Press Secretary
                (Birmingham, Alabama)

                Internal Transcript
                September 28, 2006

                INTERVIEW OF THE PRESIDENT BY THE WALL STREET JOURNAL

                Q: I think I would like to just start on the topic that you were on just now -- energy. Obviously, it's a huge priority for you and I wonder if you can just talk about where it goes from here.

                THE PRESIDENT: I think energy diversification is a priority for the nation. And by energy diversification, I mean that a policy that promotes technological change so that we become less dependent on crude oil from overseas.

                The best way to become less dependent on crude oil from overseas is to change the driving habits of the country. My vision is that, ultimately, we'll be using hydrogen-powered automobiles; in the meantime, we'll be diversifying our fuel mix from gasoline to more ethanol. Conservation will be achieved by new technologies, such as batteries that enable a car to go for the first 40 miles on electricity and your car doesn't have to look like a golf cart.

                It's interesting, this diversification has required federal involvement -- federal involvement through tax credits for ethanol, as well as research dollars. But those research dollars are being complemented by research dollars in the private sector. And one reason why the research dollars in the private sector are coming is because the price of crude oil, the rise in the price of crude oil has made it clear that there is profitability for private dollars when they invest...

                Q: Do you envision more policy down the road?

                THE PRESIDENT: I envision more money being spent to accelerate that which is possible. You heard a full discussion today about the possibility of switch grass and two types -- using switch grass as a raw material and two types of manufacturing processes.

                The market for ethanol will evolve differently than the market for gasoline, because transportation is part of the bottleneck of finished product, and therefore in order to get ethanol penetration throughout the country, there are going to have to be locally-built plants so as to reduce transportation costs. And, therefore, there's going to be the need for locally-grown raw materials for those plants. And some places just aren't that good for growing corn or sugar, therefore, we're going to have to develop alternatives to be able to use to make ethanol. ...

                Q: And do you envision the money being spent in that area, in particular?

                THE PRESIDENT: Well, we're spending, since I've been President, about $29 billion on dealing with alternative forms of energy, which it affects the warming issue. In other words, as you diversify away and/or improve the capacity to burn certain fuels, you're developing environmentally friendly technologies.

                And so our effort is multifaceted. You know, for example, you heard me mention the need to deal with nuclear waste. And I believe we ought to reprocess, as well as have fast burner reactors that can deal with that fuel, which reduces the amount of waste substantially, which then makes it easier to store, which then makes it easier to convince people that nuclear power is the way to go. Nuclear power is renewable. Nuclear power is going to be necessary for the production of hydrogen, which is the new kind of -- which will be the new source of powering automobiles, plus it's clean. It deals with the warming issue.

                Q: So that's another area, is it fair to say, where you envision some new policy?

                Continue reading "Bush on Energy Policy" »

                  Posted by on Friday, September 29, 2006 at 05:19 AM in Economics, Oil, Policy, Politics | Permalink  TrackBack (0)  Comments (8)


                  Competition in Cable Television Markets

                  Eliminating cable monopolies:

                  Cable Guys, by James K. Glassman, WSJ [AEI link]: In an era of partisan nastiness and gridlock, the California legislature did something on Aug. 31 that was shockingly harmonious, reasonable and beneficial to consumers. Both parties voted overwhelmingly to allow competition into a sector -- cable television -- where prices have been elevated and service depressed by the most pernicious monopoly in America.

                  When Gov. Arnold Schwarzenegger signs the bill, as expected, companies that want a statewide video franchise can go straight to the Public Utility Commission and get approval to operate within 44 days. In the past, in California, as in other states, cable companies had to make separate deals with America's 33,760 municipal units -- a process that can take years. The local licensing agencies "would often drag their feet and demand unrelated favors such as building parking lots and planting trees," writes Sonia Arrison of the Pacific Research Institute.

                  The effect was to create cable monopolies that often infuriated captive customers. According to a 2004 study by the Government Accountability Office, "cable subscribers in about 2% of all markets have the opportunity to choose between two or more wire-based operators." ...

                  Seven states, comprising about one-third of the U.S. population, have now passed video franchise laws, which will not only lower monthly subscriber costs but also create new technology jobs ... as Verizon and AT&T, along with cable overbuilders like RCN, jump in with both feet. ... Broadband service will improve; state and local governments will still get their franchise fees. All that will end is a monopoly that drives consumers nuts. ...

                  How much will consumers save? A 2004 study by the GAO looked at six markets with cable competition and found that rates were 15% to 41% below similar markets with no competition. ...

                  Yes, Americans can choose satellite TV, but, for reasons of convenience and service, many find it an inadequate substitute. There's a reason that cable families far outnumber satellite families. ... But if satellite TV improves and becomes a more attractive alternative, what's wrong with having enhanced cable competition, too? The more the merrier...

                  Is there a downside to deregulating these markets? One potential downside is the loss of "build-out requirements," the granting of a regulated monopoly in return for servicing segments of the market that might not otherwise receive service. With competition and deregulation, some segments of the market may go unserved raising questions of equity.

                  I don't know a lot about the regulation and structure of these markets, so this may already be in place, but requiring cable franchise operators to share existing cable lines similar to the co-location requirements for telecommunications carriers (e.g. UNE-P) would be one way to promote competition by easing entry and exit barriers. This would give consumers a choice of cable companies through the existing cable lines rather than relying on intra-modal competitors such as satellite and telecommunications carriers who would need to develop separate and potentially costly data pipelines to bring video services to consumers.

                  Update: Along the same lines, from June 2005:

                  Cable Firms Don't Have to Share Networks, Court Rules, by Yuki Noguchi, Washington Post: The Supreme Court upheld cable companies' right to restrict rival Internet service providers from their networks, prompting telephone companies yesterday to argue that they should be relieved of a similar regulatory obligation. Phone companies are required to share their lines with Internet providers, an outgrowth of an era when such rules were deemed necessary to foster competition. But the phone companies argue that the rules put them at a disadvantage compared with the ... cable industry. ...

                    Posted by on Friday, September 29, 2006 at 02:49 AM in Economics, Market Failure, Regulation | Permalink  TrackBack (0)  Comments (5)


                    Free GIF

                    Someone asked me today why I use the GIF format for the pictures I post rather than the JPG format. I said, "I don't know." That's probably why I noticed this:

                    GIF is NOW finally free - for real, with a final Unisys joke, by Tony Mobily, Free Software Magazine: I am sure a lot of you remember the great "GIF fiasco": more than a decade ago, Unisys decided to make money out of the most used image file format on the Internet: the GIF format. To be more precise, Unisys announced that they would go after developers of programs able to load and save GIF files...

                    To make the short story shorter, the PNG file was invented as a reaction to Unisys' move; although it was never wildly successful, PNG did manage to make Unisys's threat very much irrelevant. Unisys took their time, but eventually realised that if they had seriously sued people over the GIF patent, the days of the GIF format would be over.

                    In the pre-SCO era, people were outraged and wondered if Unisys's CEO had gone insane (to me, he just looked like he had a very, very low IQ and a very big problem managing his company's finance and marketing). In our post-SCO era, we are just glad it didn't sue IBM in the hope that the Goliath company would get annoyed enough to buy out the moody David.

                    Anyway, things went well: PNG was created, Unisys' share price today looks pitiful (karma, anybody?), and people still happily use GIF files everywhere.

                    Dr. Jekyll Not many people noticed that in just a few days the GIF format will definitely be free - forever. The GNU web site has a page on the GIF format. At the bottom of the page, you can see:

                    1. ...The U.S. IBM patent expired 11 August 2006, The Software Freedom Law Center says that after 1 October 2006, there will be no significant patent claims interfering with employment of the GIF format.

                    The first of October 2006 is just about around the corner. So... well, it looks like the nightmare is definitely, without any doubt, over. I personally don't think that IBM (the holder of the last GIF patent) would ever sue anybody for using GIF, especially after investing several billion dollars on GNU/Linux and showing their declared friendliness towards free software (which would be directly affected by a law suit). But you never know with patents.

                    Mr. Hyde However, if you really think it's over, and that you will never ever have to worry about GIF ever again... well, let me tell you, you are wrong. The nightmare is far from over. The nightmare is just about to start. I shivered when I saw this page. To me, it was absolutely devastating! It says:

                    Unisys Corporation holds and has patents pending on a number of improvements on the inventions claimed in the above-expired patents. Information on these improvement patents and terms under which they may be licensed can be obtained by contacting the following: [...]

                    Oh my... Unisys has been improving the GIF format, without telling anybody what the improvements are! I honestly don't think the world can survive without those improvements. I am pretty sure Cheryl Tartler, the person dealing with sending out those improvements is swamped with requests and cannot send them out fast enough! In fact, I am pretty confident that's all she does all day long: sending Unisys's improvements to people once they've signed an NDA and paid their licensing fees. I am pretty sure this will help be an immense help to the downward trend of Unisys' shares. Millions, billions will come!

                    Err... OK, just in case somebody at Unisys is listening: "Hello! I am only joking!". It may look obvious, but you never know...

                      Posted by on Friday, September 29, 2006 at 12:15 AM in Economics, Technology | Permalink  TrackBack (0)  Comments (8)


                      Thursday, September 28, 2006

                      Is Productivity Growth Slowing?

                      Today, second quarter GDP growth was revised downward from 2.9% to 2.6%. Dean Baker explains how this might impact measures of productivity:

                      Is Productivity Growth Slowing?, by Dean Baker: The news reports on the release of revised data for 2nd quarter GDP missed the fact that output in the nonfarm business sector was revised down by 0.4 percentage points. This means that (ignoring rounding) productivity growth for the quarter should also be lowered by 0.4 pp to a 1.2 percent annual rate. At this point, the consensus estimate for 3rd quarter GDP growth is about 2.5 percent, which translates into a 1.5 percent rate of productivity growth, assuming hours grow at a modest 1 percent annual rate.

                      Productivity growth has clearly slowed from its extraordinary 3.6 percent annual rate over the years 2002-04. If the third quarter growth comes in at close to 1.5 percent, then the year over year rate (3rd quarter 2005 to 3rd quarter 2006) would be under 2.0 percent. That would be news.

                      Update: How much does R&D contribute to productivity and economic growth?:

                      Economists Put a Number on R&D, by Greg Ip and Mark Whitehouse, WSJ: That research and development makes an important contribution to U.S. economic growth has long been obvious. But in an important advance, the nation's economic scorekeepers declared they can now measure that contribution and found that it is increasing. ...

                      In the current system of measuring gross domestic product, R&D is treated like a so-called intermediate expense. For example, salaries paid to research scientists are lumped in with wages paid to assembly-line workers. Under the new approach ..., R&D spending is treated like capital investment, such as the cost of a machine tool or an office building. By that measure, R&D would have accounted for nearly 7% of growth from 1995 to 2002, up from a little more than 4% from 1959 to 1994. (The rest comes from an expanding work force, increased capital and other, unexplained factors.) That exceeds by a wide margin the 2% contribution of investment in buildings and factories during the 1959-2002 period.

                      Treating R&D as an investment would make the economy 3% larger and the national savings rate about two percentage points higher. ...

                      Since the 1950s, economists have explained economic output as the result of measurable inputs. Any increase in output that can't be explained by capital and labor is called "multifactor productivity" or "the Solow residual," after Robert Solow, the Nobel-prize winning economist considered the father of modern growth theory.

                      Between 1959 and 2002, this factor accounted for about 20% of U.S. growth. Between 1995 and 2002, when productivity growth accelerated sharply, that grew to about 33%. Accounting for R&D would explain about one fifth, by some measures, of the productivity mystery. It suggests companies have been investing more than the official data had previously shown -- a good omen for future economic growth. "The slump in investment is not as drastic as people thought before they saw these figures," says Dale Jorgenson, professor of economics at Harvard University.

                      Mr. Jorgenson noted a lot of the multifactor productivity growth remains unexplained. "The great mystery of growth...is not eliminated."

                      Paul Romer, an economics professor at Stanford Business School, said the better the measurements of R&D become, the more economists and policy makers will realize other factors may be more important. "If you look at why we had rapid productivity growth in big-box retailing, there were lots of intangibles and ideas that...don't get recorded as R&D."

                      BEA director Steve Landefeld said for now, GDP will continue to be measured in the typical way, but the agency plans to start including R&D regularly in 2012. ...

                        Posted by on Thursday, September 28, 2006 at 05:00 PM in Economics | Permalink  TrackBack (0)  Comments (12)


                        "How Scandanavia's Neoliberal Parties Came to Love the Welfare State"

                        This article from The American Prospect says that recent electoral victories by the center-right in Scandinavia may not indicate the sharp turn to the right and the clear rejection of the welfare state that many have claimed. It is not clear whether "the welfare state swallowed the center-right, or the center-right swallowed the welfare state":

                        Centered Right How Scandanavia's neoliberal parties came to love the welfare state, by Ulrik Jørstad Gade, American Prospect: Something odd is happening in Scandinavian politics. Or rather, something normal has stopped happening. Everybody knows that for the better part of a century, social democrats have been building ... welfare states in Scandinavia. The news is that economic liberals ("liberals" in the classical, continental sense of the term) have basically ceased to attack them. In fact, Scandinavia’s center-right parties now actively embrace the welfare state. And suddenly -- and not coincidentally -- voters like them.

                        For generations, political power in Scandinavia has rested overwhelmingly with the labor-oriented social democrats, interrupted only by brief periods of center-right government. But last week, Danish Prime Minister Anders Fogh Rasmussen, who took office in 2001, achieved the status of longest-sitting prime minister ever from Venstre, the traditionally economically liberal party of Denmark. ... And as of yet, according to polls, Rasmussen has nothing to fear from the center-left opposition.

                        Meanwhile in Sweden, whose political history is even more solidly social democratic than Denmark’s, 41-year-old Fredrik Reinfeldt just led the conservative party Moderaterna to its best election result since 1928, securing a narrow victory for a center-right coalition. Sweden’s economy is doing great after 12 years of social democratic leadership, but there has been growing dissatisfaction with the quality of some welfare services, such as the public health system, senior, and child care. That is, the situation is much like in Denmark in 2001. (One notable exception is that Rasmussen rode a wave of xenophobia and populist nationalism ... Immigration issues have been remarkably absent from Sweden’s national political debate in this race.)

                        So what is happening? How does the center-right conquer the center? ... [A]n essential part of the answer is that these parties stopped railing against the welfare state. Instead, they befriended the beast, and the electorate that loves it. Parties making up center-right coalitions in Denmark and Sweden now offer to do almost exactly what the social democrats do, only better. They promise better welfare and more individual choice, all at lower costs -- simply by managing the welfare state more efficiently. The result ... has been to crowd out the democratic socialists from the welfare-loving center of middle-class voters.

                        To achieve this, right-wing liberals have had to work hard to distance themselves from the neoliberal, small-government ideas they used to preach -- ideas that evidently estranged a majority of voters. The transformation has been remarkable. Less than a decade ago, both Rasmussen and Reinfeldt fiercely criticized the welfare state in polemic books. ... But today, both leaders are battling the left over the quality of welfare services for the middle class. ...

                        An obvious question is how deeply felt this political and philosophical change really is. In a recent interview with Danish newspaper Weekendavisen, Rasmussen said that the welfare model is a necessary condition for the goal of liberalism, defined as a maximization of individual freedom and self-reliance. Obviously, the term “self-reliance” can be found in any old school textbook of economic liberalism, but the introduction of the welfare state into a discourse of individual freedom does stand out as a departure from Rasmussen’s ideological past.

                        In fact, he appears to embrace a concept of freedom long championed by some on the left ...: one that is as concerned with freedom to as freedom from. From this perspective, government is not a categorical infringement on individual rights; on the contrary, government can and should expand individual freedoms by providing opportunities for citizens. Thus the accessibility of a quality education is a freedom issue, as is the availability of affordable health care, day care, paid maternity and paternity leave, etc. While Rasmussen is probably still to the right of most Danes on several specific welfare issues, he does seem to have revised his basic take-no-hostages, small-government outlook.

                        But clearly, Venstre’s seeming transformation is also at least partly tactical. ... Taught by bitter experience, Rasmussen’s Venstre has finally abandoned its kamikaze attacks on the welfare state. ...

                        Thus it’s a bit hard to tell whether the welfare state swallowed the center-right, or the center-right swallowed the welfare state. In the new era, allegiances and appeals have gotten jumbled. In 2000, the year before his first term as prime minister, Rasmussen boasted that analyses showed Venstre to be a greater workers’ party than the Social Democrats, the traditional labor party. And for the recent Swedish elections, one slogan of Reinfeldt’s Moderaterna was that “Sweden needs a new workers’ party.” Perhaps it just got itself one. Or perhaps, with center-right parties slowly reforming it from the inside, the Scandinavian welfare state has a beast in its belly.

                          Posted by on Thursday, September 28, 2006 at 11:34 AM in Economics, Policy, Politics, Social Security | Permalink  TrackBack (1)  Comments (17)


                          The Poverty of Anti-Trade Sentiments

                          "This is a sweatshop?" asks Bloomberg's Andy Mukherjee as he examines how trade affects poverty in developing nations:

                          Apple IPod Lifts Generation of China's Workers, by Andy Mukherjee, Bloomberg: Is America's gadget fixation lifting Asians out of poverty or pushing them deeper into it? That has been a question ever since press reports suggested that Apple Computer Inc.'s iPod music players are being assembled in sweatshop conditions in China.

                          Workers were being forced to toil for as little as $50 a month under Dickensian conditions, one commentator said. Poor Asians, mostly women, were caught in this vicious cycle because Americans are addicted to gizmos, another rued.

                          Amid the hysteria, Apple began its own audit of the factory... The findings, unveiled last month, are interesting. Air-conditioned hostels, Apple's auditors discovered, are available to workers free of charge; the dorms have TV rooms, free laundry, snooker tables and public telephones; the campus comes with soccer fields, a swimming pool, supermarkets, Internet cafes, banks, 13 restaurants and a hospital.

                          There's no child labor; no one is paid less than the locally mandated minimum wage; male and female employees are housed in separate dormitories; safety isn't a concern. Everyone has medical coverage.

                          The biggest complaint of workers: a lack of overtime opportunities during non-peak periods. This is a sweatshop? The assembly-line jobs in export industries may seem dreary, exacting and unrewarding to an analyst in Europe or the U.S., but they are far better than what's available in the domestic sectors of a developing Asian economy. ...

                          The interdependence of the Asian producer and the American consumer is a mutually beneficial one in a world where labor can't move freely to close the wage arbitrage. Making electronic goods for the U.S. ... has proven to be the shortest route to riches in Asia in the past 50 years. ...

                          None of this is to contend that Hon Hai workers in Shenzhen are living in a capitalist utopia. Work weeks are often longer than the stipulated 60 hours.

                          Accommodation is of considerably poorer quality for those workers who are forced to live outside the campus. After Apple published its audit report, Hon Hai said it would hire more workers and build more dormitories. Hon Hai and Apple would surely keep their promises. The Taiwanese company has a market value of $31 billion, almost half that of Apple. That's a lot of corporate reputation at stake.

                          The biggest winners will be the Chinese workers and their families. Millions of Asians have fed the American craving for consumer goods and crawled out of poverty within one generation, as the Hon Hai workers in China surely will.

                            Posted by on Thursday, September 28, 2006 at 01:52 AM in Economics, International Trade | Permalink  TrackBack (0)  Comments (62)


                            My Dog's Better Than Your Dog

                            When, if ever, is enough enough? Robert Frank says our insatiable demand for quality improvement means that we will never have everything we want:

                            The More We Make, the Better We Want By Robert H. Frank, Economic Scene, New York Times: Productivity growth has raised living standards in the United States more than 40-fold since 1790. In his 1930 essay, “Economic Possibilities for Our Grandchildren,” John Maynard Keynes speculated about how the continuation of such spectacular productivity growth might transform our lives. Like many other distinguished thinkers, both before him and after, he predicted that people would have great difficulty filling their days once it became unnecessary to spend more than a token amount of time working. ...

                            How could Keynes ... have made such an absurd prediction? It would be one thing if he had merely overlooked the possibility of boundless human desire. Yet he explicitly considered this possibility, only to dismiss it. Thus, he wrote that human needs fall into two classes: basic, or absolute, needs, which are independent of what others have, and relative needs, which we feel “only if their satisfaction lifts us above, makes us feel superior to, our fellows.”

                            Keynes granted that although needs rooted in a desire for superiority might indeed be insatiable, this was not true of absolute needs. And seeing absolute needs as more important by far, he concluded, “A point may soon be reached, much sooner perhaps than we are all aware of, when these needs are satisfied in the sense that we prefer to devote our further energies to noneconomic purposes.”

                            Keynes was ... mistaken, however, in seeing this desire [to flaunt one’s superiority] as the only source of insatiable demands. Decisions to spend are also driven by perceptions of quality, the desire for which knows no bounds. But quality is an inherently relative concept. The same car that would have been deemed as having brisk acceleration and sure handling by drivers in Keynes’s day, for example, would be much less charitably evaluated by today’s drivers — even those with no desire to outdo their neighbors. ... In purely mathematical terms, such a model would be essentially identical to one based on a desire not to own quality for its own sake, but rather to outdo others.

                            Yet the subjective impressions conveyed by these two descriptions could hardly be more different. To demand quality for its own sake is to be a discerning buyer. But to flaunt one’s superiority is to be a boor, a social moron. Such people exist, but that most of us manage to avoid them most of the time suggests that they are rare.

                            Perceptions of quality influence the demand for virtually every good, including even basic goods like food. When a couple goes out for an anniversary dinner, for example, the thought of feeling superior to others probably never enters their minds. Their goal is just to share a memorable meal. But a memorable meal is a quintessentially relative concept. It is one that stands out from other meals. ...

                            There are no obvious limits to the escalation of quality standards. ... Until recently, for example, the Porsche 911 Turbo was considered perhaps the best all-around sports car on the market. Priced at over $120,000, it handles impeccably and has blistering acceleration.

                            But in 2004, Porsche raised the bar by introducing its Carrera GT, which handles slightly better than the Turbo and beats its 0-to-60 time by two-tenths of a second. People who really care about cars find these small improvements genuinely exciting. To get them, however, they must pay almost four times the price of the Turbo.

                            By placing the desire to outdo others at the heart of his description of insatiable demands, Keynes relegated such demands to the periphery. But the desire for higher quality has no natural limits. Keynes and others were wrong to have imagined that a two-hour work week might someday enable us to buy everything we want. That hasn’t happened and never will.

                              Posted by on Thursday, September 28, 2006 at 12:12 AM in Economics | Permalink  TrackBack (0)  Comments (15)


                              Wednesday, September 27, 2006

                              Worker's Cooperatives

                              Andrew Leonard at Salon notes the demise of Burley bikes:

                              Cheap labor vs. a worker's cooperative, by Andrew Leonard: Eleven years ago, ... I bought myself a mountain bike and a Burley Trailer to tow my 1-year-old daughter around Berkeley, Calif. The Burley wasn't cheap, but its striking blue and yellow colors were, and still are, a familiar sight around the Bay Area. And it's held up well -- my ex-wife still uses it to transport groceries and other vital necessities around town.

                              I did not know until today, however, that for 25 years Burley had been a worker-owned cooperative in Eugene, Ore. I say, "had been," because I also learned today, via a link from Treehugger, that in June, after three years of mounting losses, Burley converted itself to a private corporation. Then, on Sept. 11, a local businessman bought the company. Already, some 40 employees have been laid off and more will probably follow.

                              It's easy, especially living in Berkeley, where memories of the infighting and squabbling that doomed the legendary Berkeley Co-op 20 years ago still linger, to hear the words "failed worker-owned coop" and start pointing fingers at some inherent flaw in collective management. New owner Michael Coughlin alluded to exactly that, in the most mild of ways, when he told the Eugene Register-Guard that "I think it is a great business. I just think that they really had troubles adapting to competitive issues and keeping their product costs under control. I think managing a business in a very competitive arena is not well suited for a cooperative structure."

                              What exactly would that competitive arena be?

                              Continue reading "Worker's Cooperatives" »

                                Posted by on Wednesday, September 27, 2006 at 06:54 PM in Economics, International Trade | Permalink  TrackBack (0)  Comments (7)


                                How Much Will One More Year Cost Me, Doc?

                                The quoted price is $5,000 per year. I was going to take ten more for now, with an option on ten more later. But Andrew Leonard from Salon says maybe I should shop around a bit more - I might get a better deal elsewhere:

                                Hey, long life ain't cheap, by Andrew Leonard: ...David Leonhardt's ongoing series ... takes Tuesday's news that health care costs have spiked upwards another 7.7 percent in 2006 (noted here yesterday) and spins it as a positive, because, hey, modern medicine means we all get to live longer. So quit it with the cheapskate carping, already.

                                "Would you prefer spending an extra $5,000 on health care every year -- or losing ten years off your lifespan?" he writes.

                                This is a disingenuously bogus way to phrase the question. Dean Baker, as usual, cuts to the quick:

                                "As I've noted before, every other wealthy country enjoys longer life expectancies than the United States and they pay on average less than half as much per person."

                                Felix Salmon at Economononitor chimes in, noting that "Leonhardt is justifying a doubling of healthcare costs since 1999 by looking at an increase of 10 years in the average lifespan since 1950" and wondering "Does Leonhardt stop to wonder why these things are so expensive? Does he puzzle over the fact that Americans pay much more for such things than the citizens of any other country? Does he propose that Medicare be allowed to negotiate drug prices, or -- to take an eminently sensible suggestion from Dean Baker-- that foreign doctors be allowed much more easily into the U.S.?"

                                To be fair, near the end of his column, Leonhard concedes that "The current situation is indeed unsustainable, a point the conventional wisdom has right. The cost of health insurance can't keep doubling every seven years, and wasteful spending... does need to be reined in."

                                Exactly. Which is what most everybody else who saw the figures on health care costs yesterday concluded. Shouldn't the point of a contrarian column be to prove the conventional wisdom wrong? Otherwise, what is the point?

                                  Posted by on Wednesday, September 27, 2006 at 03:15 PM in Economics, Health Care | Permalink  TrackBack (0)  Comments (21)


                                  Inequality and Success in War

                                  Chris Dillow says he's just the messenger:

                                  Equality and war, by Chris Dillow: Economic inequality in the US is jeopardizing the country's chances of defeating the Iraqi insurgency. That's the claim of this new paper. Authors James Galbraith, Corwin Priest and George Purcell show that economic equality is highly correlated with victory in war:

                                  From 1962 through 1999, the more egalitarian countries prevailed in 31 of 42 pair-wise comparisons. From 1816 to 1962, restricting our attention to bi-national wars, the more egalitarian country prevailed in 64 of 80 cases. From 1715 to 1815, the proportion was 24 of 26. Taking all together, we find the presumptively more egalitarian country prevailed in 119 of 148 cases.

                                  For example, egalitarian Israel has consistently beaten its less equal neighbours, Communist Vietnam beat the US, the egalitarian North beat the Confederacy. They reckon the pattern extends into ancient times:

                                  Like the armies of Alexander, the Golden Horde of Tamurlane, Genghis Khan and Attila owed their vast military success in part to a comparatively flat hierarchy; nomadic tribes everywhere are more broadly egalitarian than the domains they ravage.

                                  They cite three reasons why equality causes military victory:

                                  Egalitarian countries have stronger social solidarity, and therefore better morale. Second, inegalitarian countries often structure their armed forces to handle internal regime security, at the expense of efficiency at meeting external threats. Third, deeply unequal countries face a problem of loyalty in the lower ranks.

                                  This, they say, has implications for the war in Iraq:

                                  The American military is under obvious stress from this fact [of increased inequality], for the simple reason (among others) that as a career it cannot compete for the services of the prosperous...But the Iraqi insurgency of 2006 represents an egalitarian mini-state.

                                  Kick this one around, yourselves - I'm just the messenger.

                                  Adding a fourth reason, inegalitarian countries with concentrated power may also have poorer leadership and little ability to prevent misguided decisions by those in power. This could help to explain lack of success in wars, though I have no data to back this up.

                                  In this recent post, James Galbraith reviews James MacDonald’s new book A Free Nation Deep in Debt which claims that democracies have an advantage in war:

                                  It’s a simple but compelling argument. States exist to make war; those who win survive. Public credit is a powerful weapon; states that can borrow win wars. And so even narrow democracies, rooted in parliaments going back to the Middle Ages, have an evolutionary advantage over absolute monarchies, for the king’s credit is always poor.

                                  So, starting wars with egalitarian democracies is, apparently, a bad idea. Interesting arguments, but I can't say I'm fully convinced.

                                  Update: Felix at economonitor reminds me that James MacDonald’s book, which I describe as new, is nearly four years old (if you haven't been to Felix's "new" blog, it's worth checking out). He goes on to say:

                                  I thought I'd pop up and give it a plug myself. It's ... timeless, and fantastic, and utterly compelling.

                                    Posted by on Wednesday, September 27, 2006 at 10:12 AM in Economics, Income Distribution, Iraq and Afghanistan, Politics | Permalink  TrackBack (0)  Comments (15)


                                    Are Workers Dissatisfied or Not?

                                    A question being asked recently is why polls report such dissatisfaction with the economy even though the aggregate numbers paint a fairly healthy picture. Or so I thought. Bruce Bartlett says the question being asked recently is why workers aren't more outraged over their poor economic conditions. He concludes it's because there's nothing to be outraged about:

                                    Wages of stagnation?, by Bruce Bartlett, Commentary, Washington Times: Lately, there has been a big debate going on among Democrats about why workers aren't outraged by their economic condition, and therefore more hostile to Republican economic policies and more sympathetic to Democratic policies.

                                    On the surface, it would appear that workers should be in open revolt. According to the Bureau of Labor Statistics, the average worker is no better off today than ... seven years ago in real terms. ... Census Bureau data confirm this trend. ... Looking at the broadest measure of economic well-being, median household income, we also see flatness. ... Median household income peaked in 1999 ... and fell every year thereafter until 2005's small uptick.

                                    There is no simple explanation for worker passivity in the face of income stagnation. One argument is that labor union membership has fallen sharply ... and consequently workers have no organizational mechanism through which to bargain for higher wages or protest wage stagnation politically. ...

                                    Another possibility is that workers have been so beaten down ... in recent years that they are just grateful to have jobs at all, even if their pay stinks. And because of declining health coverage by employers, those lucky enough to have health insurance may feel compelled to hold on to such jobs. ... Indeed, the rising cost of health benefits is a key reason for the flatness of wages. From the point of view of employers, their total labor costs have risen sharply. But all of the increase has gone into benefits, leaving nothing left over to raise wages. Workers may not like this fact, but accept its reality. ...

                                    Still another explanation.... Many baby boomers have just seen the last of their children finish college and leave home. Suddenly, they have had a huge increase in their discretionary income... They may not be any better off in terms of their family income, but they feel a lot better off financially.

                                    Finally, despite wage and income stagnation at the macro level, people continue to move up out of the working class... According to the Census Bureau, the percentage of all households with an income below $25,000 per year (in 2005 dollars) fell to 27.1 percent last year from 27.6 percent in 2004. In 1995, 28.9 percent fell into this income class. In 1985, the percentage was 30.5 percent and in 1975 it was 33.1 percent.

                                    At the same time, the percentage of households that are considered well-to-do -- those with an income above $75,000 (in 2005 dollars) -- rose to 28.3 percent last year from 27.9 percent in 2004. In 1995, only 24.4 percent of households had that much income, up from 20.2 percent in 1985 and 14 percent in 1975.

                                    In short, despite all the talk about the rich getting richer at the expense of the poor, the fact is that the percentage of households with low incomes has fallen and the percentage of those with high incomes has risen. This is perhaps the main reason why Democrats have had trouble getting traction on the income issue -- there are fewer people in the income class to which they historically have directed their message. The more people there are in the $75,000-plus income category, the more people there are who are receptive to the Republican message of low taxes.

                                    Another possibility is that the polls are right, workers are dissatisfied because the gains for the top income groups have been much larger than the gains for those at the bottom. On this point, here's Robert Samuelson:

                                    Trickle-Up Economics, Our Growing Inequality Problems, by Robert J. Samuelson, Commentary, Washington Post: ...Although Americans are not hugely envious of the rich -- especially if their wealth seems honestly earned -- we also think that prosperity should be broad-based. Trickle-up economics, with most gains flowing to the top, seems un-American. But is that what we now have? Good question. ...

                                    Let me try to make sense of it. Superficially, the news was not encouraging. The median household income ..., though up slightly from 2004, was still below its record ... in 1999... The poverty rate was essentially unchanged ...[and] well above its recent low of 11.3 percent in 2000... But the annual numbers are less important in addressing the trickle-up question than long-term trends. Here are three that I think matter.

                                    · Living standards aren't stagnating. Over any realistic period -- say a decade -- they've risen for almost everyone. ...

                                    · The rich are getting an ever-bigger piece of the economic pie...

                                    · The inflow of poor Hispanic immigrants ... has increased poverty. From 1995 to 2005, the rise in the number of Hispanics in poverty ... more than accounted for the entire increase in the U.S. poverty population. Poverty among blacks, though still high, declined. Among non-Hispanic whites, it held roughly steady. ...

                                    The bottom line: Productivity gains (improvements in efficiency) are going disproportionately to those at the top. We do not really understand why. Globalization, weaker unions, increasingly skilled jobs, the frozen minimum wage and the "winner-take-all society" ... have all been cited as reasons. Costly employer-provided health insurance is also squeezing take-home pay in the middle.

                                    My sense is that intensified competition has simply made employers stingier. ...

                                    What might government do? The Bush administration's enthusiasm for tax cuts for the rich could be tempered; to reduce the budget deficit, their taxes could be raised without dulling economic incentives. ... Equally, liberals and others who support lax immigration policies across our southern border should understand that these policies deepen U.S. inequality. ...

                                    [N]o one should be happy with today's growing economic inequality. It threatens America's social compact, which depends on a shared sense of well-being.

                                    Given the support for liberal immigration rules among many conservatives and the lack of agreement on this issue by Democrats, Samuelson's attempt at "he said-she said" journalism when he says, "Equally, liberals ... who support lax immigration policies ... should understand that these policies deepen U.S. inequality" is forced. I also don't think the evidence supports the assertion that immigration policy is an important  source of changes in inequality.

                                    Update: Robert Reich with anecdotal evidence on these and other issues:

                                    Political Notes from the Heartland, by Robert Reich: I’ve spent much of the past two weeks in the Heartland – Dallas, Houston, and then north into Oklahoma, and Minnesota – giving talks, and talking with lots of people. It was a free-floating focus group whose scientific value is probably questionable – after all, the audiences picked me and I picked the people I wanted to talk with – but I heard several themes over and over again, enough so that they seemed worth noting.

                                    1. First, everything you’ve heard about the deep dissatisfaction with Congress and the Bush administration is true. Iraq and the economy are on everyone’s minds, and just about everyone I met was determined to “throw the rascals out.” I don’t recall this level of hostility since Richard Nixon occupied the White House – and, surprisingly, I heard a lot of it from people who described themselves as Republicans.

                                    2. Not a single Democrat expressed enthusiasm for Hillary Clinton’s presidential candidacy. Most were afraid she’d lose. Many were upset with her drift to the right. Lots said they just “don’t like her.” Almost all wanted Gore to run instead. Among the Democratic left, I also heard a lot of talk about Russ Feingold. John McCain’s name came up over and over, among Democrats and Republicans. Most Democrats admired him, a surprising number said they’d vote for him over Hillary. Most were unaware of how conservative McCain is, and how hawkish.

                                    3. The “culture wars” seem to have died down. Almost everyone said the divisive issues of abortion and gay marriage had become less salient in their states and communities. The religious right is still very much alive and I had a number of conversations with people who described themselves as “right-wing Christians,” but their attention has switched to issues like immigration. Immigration is a big deal in the Heartland, but Republicans are all over the place on it, and so are Democrats.

                                    4. I’ve never heard so much discussion about widening inequality. It’s a theme I’ve been talking about for years now, without much response. But for some reason, now – perhaps we’ve reached a sort of tipping point on the subject, where the public is starting to take notice and become concerned – it’s now a big deal. There’s lots of worry about the nation “coming apart,” about “anyone falling into poverty,” and about “rich people running the country.” Again, I heard this from self-described Republicans as well as Democrats.

                                    5. The other salient issue is health care. Everyone’s upset about it. The middle class is suffering sticker shock, as employers continue to shift health care costs on to employees. No one has heard any politician give a clear and simple account of what’s wrong and what should be done. Almost everyone I talked with predicted this would be the major domestic policy issue in 2008.

                                    More to come.

                                      Posted by on Wednesday, September 27, 2006 at 12:24 AM in Economics, Income Distribution, Unemployment | Permalink  TrackBack (0)  Comments (87)


                                      Science and Religion

                                      To me, this isn't that controversial, but apparently this editorial is generating a large response at Scientific American:

                                      Science and Religion, Editorial, Scientific American, October, 2006: It is practically a rite of passage that scientists who reach a certain level of eminence feel compelled to publicly announce and explain their religious beliefs. The new books by Owen Gingerich and Francis Collins, reviewed this month on page 94, follow in the footsteps of Arthur Eddington and Max Planck. Yes, these authors say, they believe in God, and no, they see no contradiction between their faith and their research— indeed, they see each as confirming the other.

                                      Why this enduring fascination? Doubtless it is partly a reaction to the tensions that always seem to arise between science and religion: the recurring war over the teaching of evolution and creationism, the statements by physicists that they are plumbing the instant of “creation” or searching for a “God particle,” the reassurances of some evangelicals that a Second Coming will make global warming irrelevant. In writing books about their own faith, religious scientists may be hoping to point the way to reconciliations for the rest of society.

                                      Yet the tension may be greatly exaggerated. Americans are famously religious, but according to studies by the National Science Foundation, they say that they hold science in higher regard than do the people of any other industrial country. Surveys indicate that scientists are only half as likely as the general public to describe themselves as religious, but 40 percent still do. As Albert Einstein wrote, it takes fortitude to be a scientist—to persevere despite the frustrations and the long lonely hours—and religious inspiration can sometimes provide that strength.

                                      Unquestionably, the findings of science conflict with certain religious tenets. Cosmology, geology and evolutionary biology flatly contradict the literal truths of creation myths from around the world. Yet the overthrow of religion is not a part of the scientific agenda. Scientific research deals in what is measurable and definable; it cannot begin to study what might lie beyond the physical realm or to offer a comprehensive moral philosophy. Some scientists (and some nonscientists) are led to atheism in part by contemplation of the success of science in accounting for observable phenomena.

                                      Some find support for their spiritual beliefs in the majesty of the reality revealed by science. Others are unmoved from agnosticism. Which philosophy an individual embraces is a personal choice, not a dictate of science. Science is fundamentally agnostic, yet it does not force agnosticism even on its practitioners.

                                      No matter how earnest their testimonies, when researchers write about their faith in God, they are not expressing a strictly scientific perspective. Rather they are struggling, as people always have, to reconcile their knowledge of a dispassionate universe with a heartfelt conviction in a more meaningful design.

                                      As for healing a social rift, most of the debates that are commonly depicted as religion versus science are really not questions of science at all; they are disagreements among various systems of beliefs and morals. The policy fight over embryonic stem cells, for example, centers on when and how one segment of a pluralistic society should curtail the behaviors of those who hold different values. Our attention should focus not on the illusory fault line between science and religion but on a political system that too often fails to engage with the real issues.

                                        Posted by on Wednesday, September 27, 2006 at 12:21 AM in Religion, Science | Permalink  TrackBack (0)  Comments (24)


                                        A Difficult Rebalancing Act

                                        Martin Wolf looks at the possibility of a U.S. led worldwide economic slowdown and what might be done to avoid it:

                                        A slowing US could brake the world, by Martin Wolf, Commentary, Financial Times: The world economy is enjoying a glorious run. In 2003, 2004 and 2005, it had its best years since the early 1970s. Yet that is no encouraging parallel. The torrid expansion of the early 1970s led to a period of inflationary turmoil. We must ask whether the extraordinary growth of recent years also hides dangers – different, perhaps, but still significant. The answer, alas, is yes.

                                        To doubt the resilience of the world economy must now look perverse. Since 2000, it has overcome so many obstacles: post-bubble traumas in Japan; the bursting of a global stock market bubble in 2000; the terrorist attacks of September 11 2001; a US recession; years of stagnation in the eurozone; wars in Afghanistan and Iraq; real oil prices at levels close to those of the late 1970s; and the failure to complete the Doha round of multilateral trade negotiations. Yet, in spite of all this, world economic growth was 4.1 per cent in 2003, 5.3 per cent in 2004 and 4.9 per cent in 2005, measured at purchasing power parity exchange rates. ...

                                        How has it been possible for the world economy to leap over so many hurdles?

                                        Continue reading "A Difficult Rebalancing Act" »

                                          Posted by on Wednesday, September 27, 2006 at 12:15 AM in Economics, Housing, International Finance | Permalink  TrackBack (0)  Comments (1)


                                          Tuesday, September 26, 2006

                                          Globalization and the Yield Curve

                                          From the Dallas Fed, an Economic Letter on how globalization affects the yield curve and the consequences for monetary policy. The paper explains how globalization has made long-term interest rates harder for central banks to control reducing their ability to influence the real economy:

                                          Globalization’s Effect on Interest Rates and the Yield Curve, by Tao Wu, Economic Letter, Vol. 1, No. 9. September 2006, Dallas Fed: From June 2004 to July 2006, the Federal Open Market Committee raised the target federal funds rate in 17 consecutive meetings, taking it from 1 percent to 5.25 percent. The puzzling feature of this round of monetary tightening is that long-term interest rates didn’t increase as much as they did in previous tightening cycles. In fact, long-term rates declined most of 2004 and 2005, despite the steady increases in short-term rates. In 2005, former Federal Reserve Chairman Alan Greenspan characterized this divergence in the path of short- and long-term rates as a “conundrum.”

                                          Continue reading "Globalization and the Yield Curve" »

                                            Posted by on Tuesday, September 26, 2006 at 10:14 AM in Economics, International Finance, Monetary Policy | Permalink  TrackBack (1)  Comments (18)


                                            All Too Quiet on the Energy Front

                                            Jeff Sachs isn't very happy with the Bush administration's approach to avoiding an energy crisis in the future. He thinks we are fighting the wrong war:

                                            Fighting the wrong war, by Jeffrey Sachs, Guardian: Unlimited: It always comes back to oil. The continuing misguided interventions in the Middle East by the United States and the United Kingdom have their roots deep in the Arabian sand. Ever since Winston Churchill led the conversion of Britain's navy from coal to oil at the start of the last century, the Western powers have meddled incessantly in the affairs of Middle Eastern countries to keep the oil flowing, toppling governments and taking sides in wars...

                                            Just when one is lulled into thinking that something other than oil is at the root of current US and UK action in Iraq, reality pulls us back. Indeed, President Bush recently invited journalists to imagine the world 50 years from now. He did not have in mind the future of science and technology, or a global population of nine billion, or the challenges of climate change and biodiversity. Instead, he wanted to know whether Islamic radicals would control the world's oil.

                                            Whatever we are worrying about in 50 years, this will surely be near the bottom of the list. Even if it were closer to the top, overthrowing Saddam Hussein to ensure oil supplies in 50 years ranks as the least plausible of strategies. Yet we know from a range of evidence that this is what was on Bush's mind when his government shifted its focus from the search for Osama bin Laden to fighting a war in Iraq.

                                            The overthrow of Saddam was the longstanding pet idea of the neoconservative Project for a New American Century, which was already arguing in the 1990's that Saddam was likely to achieve a stranglehold over "a significant proportion of the world's oil supplies." Vice President Dick Cheney reiterated these fears in the run-up to the Iraq war, claiming that Saddam Hussein was building a massive arsenal of weapons of mass destruction to "take control of a great portion of the world's energy supplies".

                                            Cheney's facts were obviously wrong, but so was his logic. Dictators like Saddam make their living by selling their oil, not by holding it in the ground. Perhaps, though, Saddam was too eager to sell oil concessions to French, Russian, and Italian companies rather than British and US companies.

                                            In any event, the war in Iraq will not protect the world's energy supplies in 50 years. If anything, the war will threaten those supplies by stoking the very radicalism it claims to be fighting. Genuine energy security will come not by invading and occupying the Middle East, or by attempting to impose pliant governments in the region, but by recognizing certain deeper truths about global energy.

                                            First, energy strategy must satisfy three objectives: low cost, diverse supply, and drastically reduced carbon dioxide emissions. This will require massive investments in new technologies and resources, not a "fight to the finish" over Middle East oil. Important energy technologies will include conversion of coal to liquids (such as gasoline), use of tar sands and oil shale, and growth in non-fossil-fuel energy sources. Indeed, there is excellent potential for low-cost solar power, zero-emitting coal-based technologies, and safe and reliable nuclear power. ...

                                            It is ironic that an administration fixated on the risks of Middle East oil has chosen to spend hundreds of billions - potentially trillions - of dollars to pursue unsuccessful military approaches to problems that can and should be solved at vastly lower cost, through R&D, regulation, and market incentives. The biggest energy crisis of all, it seems, involves the misdirected energy of a US foreign policy built on war rather than scientific discovery and technological progress.

                                            Whether Iraq is all about oil or not, there has been an underinvestment in research into alternatives sources of energy, and an unwillingness to consider policies to reduce carbon emissions. Iraq being about something other than oil won't change that, and I doubt it would change the administration's energy policy. We could do more than we are doing now even being in Iraq, and as Sachs notes, even more yet if we weren't.

                                              Posted by on Tuesday, September 26, 2006 at 01:30 AM in Economics, Environment, Iraq and Afghanistan, Policy, Politics, Terrorism | Permalink  TrackBack (0)  Comments (29)


                                              Econoblog: Citywide Minimum-Wage Rules

                                              A Wall Street Journal Econoblog (free) on living wage laws:

                                              Econoblog: Citywide Minimum-Wage Rules: Living Wages or Killing Jobs?: ...Chicago Mayor Richard M. Daley used the first veto of his 17-year tenure to reject an ordinance aimed at forcing big retailers to pay wages of $10 an hour and health benefits equivalent to $3 an hour by 2010. ... Some cities such as Santa Fe, San Francisco and Washington, D.C., have such "living wage" laws, which opponents argue keep some retailers out of town and boost unemployment among low-wage workers. Supporters counter that such measures can help ensure adequate wages for workers. The Online Journal asked economists Richard Epstein ... of the University of Chicago ... and Michael Reich ... at the University of California at Berkeley to discuss their different views on local minimum wage rules.

                                                Posted by on Tuesday, September 26, 2006 at 12:32 AM in Economics, Policy, Unemployment | Permalink  TrackBack (0)  Comments (0)


                                                The Method of Economics

                                                Following "Ricardo's Difficult Idea" and "'Deconstructing' Hostility to Economic Ideas," here's one last Krugman piece on economic models:

                                                Why I'm an Economist, by Paul Krugman, August 1999: Writing an introductory textbook has some perhaps unexpected side effects. By forcing you to go back to basics - to explain to an audience of young people why economic theory is useful and important - it also makes you think about why you yourself went down that path. And so the other day I found myself in a reverie about the choices I myself made, all those years ago. (Was I also trying to avoid working on the task at hand? Of course). As an undergraduate, I wasn't especially interested in economics per se: I was interested in History, in understanding the fate of empires and the destiny of kings. But I settled for something far narrower. Why?

                                                I asked myself this slightly rueful question while revising my exposition of the Ricardian model of land rent. Every economist knows it: peasants cultivate the best land first, then the next best, and so on. Competition among the landowners ensures that each peasant gets no less than what he could grow on the best uncultivated land; competition among the peasants [ensures] that he gets no more. It's a beautiful example of economic reasoning in action.

                                                But as I was rewriting the chapter section, I had a sudden fantasy vision of a bright but cynical undergraduate declaring that this was nonsense, that the landowners would conspire to keep the peasants down. And that undergraduate would, historically, often - but not always - have been right. Indeed, my old teacher Evsey Domar wrote a classic paper arguing that serfdom and slavery often were the response of ruling classes to labor shortage. Thus Russia imposed strict restrictions on the mobility of peasants from the late 16th century onward, precisely because the availability of rich new farmland on the expanding frontier would otherwise have increased their bargaining power against landlords. (The frontier expansion itself was probably the result of the growing effectiveness of firearms, which turned the military balance against the steppe nomads; so gunpowder, which contributed to the rise of the bourgeoisie in the West, created serfdom in the East). And, of course, slavery - which, along with serfdom, had died out in the West during the labor-abundant high Middle Ages - was reintroduced in the land-abundant conditions of the New World.

                                                On the other hand, of course, it has not always worked that way. England's peasants were not reenserfed after the Black Death drove up their wages; attempts to build a system of indentured white servitude in America failed; slavery was abolished; and in the modern world wages do more or less reflect marginal productivity.

                                                Now suppose I were to ask the question, why does a labor shortage sometimes lead to a rise in wages, sometimes to political action by the ruling class to keep the lower orders in their place? And I won't be satisfied with a narrative about what happened in some specific case: I want a widely applicable model, like Ricardo's model of land rent. That is, I want a framework that is more than an after-the-fact rationalization of what we already know happened.

                                                But of course there is no such model. Worse yet, not only don't I know of any such model, I don't even know how one might begin to create one. My perplexity is not, I believe, a reflection of my ignorance of political science, or sociology. Economists may make lots of bad predictions, but they do have a method - a systematic way of thinking about the world that is more true than not, that gives them genuine if imperfect expertise. (That is also, of course, why lay commentators and other social scientists tend to hate them). Other social sciences haven't yet found anything remotely equivalent. Oh, there are bits and pieces, and some of them are very exciting; try taking a look at Robert Axelrod's stuff. But basically when it comes to most of the questions that I am really interested in, one man's view is as good as another.

                                                When I was young and naive, I used to imagine that my career as an economist could eventually branch out into one as a general social scientist. And I still love to read and think about the broader questions - a book like Jared Diamond's Guns, Germs, and Steel can keep me happy as a clam for weeks. But the clarity and power of economic analysis can spoil you: once you have a taste of what it means to have a really insightful model, you tend to be inhibited about looser speculations.

                                                The truth is that other social sciences are still waiting for their Adam Smiths. Someday they will find them; as Colin McEvedy wrote in his introduction to the Penguin Atlas of Ancient History, "History being a branch of the biological sciences, its ultimate expression must be mathematical." But for the meantime I guess that I am stuck with my day job.

                                                If you want more, try "The Accidental Theorist," which begins:

                                                The Accidental Theorist, by Paul Krugman: Imagine an economy that produces only two things: hot dogs and buns. Consumers in this economy insist that every hot dog come with a bun, and vice versa. And labor is the only input to production.

                                                OK, timeout. Before we go any further, I need to ask what you think of an essay that begins this way. Does it sound silly to you? Were you about to turn the virtual page, figuring that this couldn't be about anything important?

                                                One of the points of this column is to illustrate a paradox: You can't do serious economics unless you are willing to be playful. Economic theory is not a collection of dictums laid down by pompous authority figures. Mainly, it is a menagerie of thought experiments--parables, if you like--that are intended to capture the logic of economic processes in a simplified way. In the end, of course, ideas must be tested against the facts. But even to know what facts are relevant, you must play with those ideas in hypothetical settings. And I use the word "play" advisedly: Innovative thinkers, in economics and other disciplines, often have a pronounced whimsical streak.

                                                It so happens that I am about to use my hot-dog-and-bun example to talk about technology, jobs, and the future of capitalism. Readers who feel that big subjects can only be properly addressed in big books--which present big ideas, using big words--will find my intellectual style offensive. Such people imagine that when they write or quote such books, they are being profound. But more often than not, they're being profoundly foolish. And the best way to avoid such foolishness is to play around with a thought experiment or two...

                                                  Posted by on Tuesday, September 26, 2006 at 12:15 AM in Economics, Methodology | Permalink  TrackBack (0)  Comments (10)


                                                  Monday, September 25, 2006

                                                  Fed Watch: Widening Disconnect

                                                  Tim Duy explains the growing disconnect between market expectations and Fed communications:

                                                  Widening Disconnect, by Tim Duy: The countdown to the next FOMC meeting is underway, and the gap between market expectations and the Fedspeak appears to be widening. Quite honestly, I find such periods very, very uncomfortable, mostly because I feel Fed watching amounts to explaining a position taken by the Federal Reserve that the markets believe is increasingly untenable.

                                                  For example, note Monday’s speech by Dallas Federal Reserve President Richard Fisher:

                                                  As I sit at the FOMC table, I continue to fret more about inflation than I do about growth. While I am well aware of the risks to economic growth, the history of inverted yield curves, and the ever present possibility of exogenous shocks in a politically hazardous world, the “balance of risk,” in my book, is still tilted to the inflation side of the equation.

                                                  I have said in the past that perhaps the best strategy is to bet against Fisher, and market participants appear to be taking that advice to heart, as the yield curve shifted down yet again despite these hawkish words. Of course, Fisher does make the required reference to the housing slowdown, but focuses on the upside potential for the economy while reciting anecdotal evidence of tightening labor markets:

                                                  One of the most experienced CEOs I regularly visit summarizes it this way: “We were all expecting things to be worse, but they haven’t gotten worse. We were all expecting things to get tougher, but they haven’t gotten tougher.”

                                                  Except in one area: procurement of labor. I am hearing more and more reports about the difficulty of finding labor to work our oil fields or run our chemical plants. Bankers complain of a paucity of bank clerks and tellers. Truckers are experiencing a shortage of drivers. In Houston, we are hearing complaints about the difficulty of finding cashiers for retail establishments. A major hotelier told me last week that there is a shortage of housekeeping staff. And for those who source abroad, finding ever cheaper inputs has become noticeably more difficult as growth in sourcing countries eats up available capacity. Having achieved a considerable amount of operating leverage from outsourcing and aggressively pushing the envelope of cyberspace, companies are now voicing the kinds of complaints about labor shortages most often heard in a full employment economy.

                                                  Of course, a trained macroeconomist would at least note that employment is a lagging indicator. Oddly, he doesn’t seem to understand this, since he then continues on to list a litany of surveys indicating slower growth ahead, which he then discounts to conclude that growth is simply slowing back to potential. In reality, it is all very frustrating, especially considering that Fisher appears to view the Fed watching community with certain derision:

                                                  After participating in those discussions, it is always instructive to sit back and read the various interpretations that pour forth from well-meaning analysts about what action the committee took or did not take and what was said or left unsaid in the press release that follows the meeting. I liken this process to the ancient ritual of divining the future by slicing open animals to study their entrails. The analytical community dissects our statements and presumed intentions with the greatest of care. It is definitely less gory than the rituals of ancient civilizations. But it is only slightly more accurate as a predictor of the future.

                                                  I really shouldn’t take the bait, but I have to point out that we might not have to read the “entrails” if the Fed actually developed a consistent communication strategy. All right, perhaps that is simply too much to expect. Instead, how about simply a single inflation target? In Fisher’s speech, he draws attention to the CPI, the Cleveland Fed’s median CPI, and the Dallas Fed’s trimmed mean CPI. Which one, exactly, should we pay most attention too? But wait, isn’t the Fed’s preferred inflation measure the core-PCE, which Fisher fails to mention? And if core-PCE is not the relevant variable for policy, why is that the one singled out in the Fed’s Semiannual Report to Congress?

                                                  But I digress. While Fisher is rattling on about the Fed’s inflation bias, the market is busy driving the 10 year Treasury below 4.6%, while, as astutely noted by Calculated Risk, busy little traders are beginning to price in a rate cut for December. This, I believe represents a significant disconnect with the thinking at the Fed; in the Fed’s view, the data represent a welcome slowdown, not cause for a rate hike. Moreover, Richmond Fed President Jeffrey Lacker was still pushing for a rate hike last week. Simply put, I can’t see where monetary policy makers are looking toward a rate cut. If forced to choose between hike and cut, I still suspect they would actually choose to hike.

                                                  How then could the markets be getting so far in front of the Fed? While it is dangerous to assume too much about the motivation for market behavior, note that the expectations for a rate cut began rising after the last FOMC statement, where the Fed reiterated its inflation bias. Market participants appeared to ignore this, however, and instead shifted attention to the Fed’s focus on the contractionary impact of the housing slowdown. Last week, I criticized the Fed for not expanding on that point, commenting:

                                                  If housing is your focus, cut rates now! They didn’t cut rates, so there must be more. So where is the rest of their analysis? What are the factors that offset the housing slowdown? Inquiring minds want to know.

                                                  So, regardless of whether or not the Fed intended to intensify the focus on housing, that is what happened. And if you focus on housing, it is tough to see anything in the future other than a rate cut, especially with the first national price decline in years threatening to help derail the steady flow of home equity withdrawal that has helped propped up the economy.

                                                  Bottom Line: The Fed is looking at more than housing; especially important is this week’s advance durable goods and personal income reports, the latter containing the important PCE inflation reading. This broader look at the data is what the Fed uses to justify its inflation bias. But the Fed has also intensified the market’s preoccupation with housing – and since there is no good news in housing, the disconnect between Fedspeak and the markets is not likely to resolve itself anytime soon.

                                                  Update: In light of Tim's comments, note these two back-to-back entries on Bloomberg Breaking News:

                                                    Posted by on Monday, September 25, 2006 at 04:05 PM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (1)  Comments (25)


                                                    "Wagner’s Music is Better Than it Sounds"

                                                    The title expresses Dallas Fed President Richard Fisher's assessment of the U.S. economy -- it's better than it sounds -- except for inflation, which he believes may be a problem. His bottom line?:

                                                    While I am well aware of the risks to economic growth, the history of inverted yield curves, and the ever present possibility of exogenous shocks in a politically hazardous world, the “balance of risk,” in my book, is still tilted to the inflation side of the equation. ... While the inflation risk ... is very much on my mind, it is my considered judgment that the recent tempering of U.S. economic growth to a more sustainable rate, combined with the lagged effects of our 17 prior quarter-point rate increases, should act to lower the inflation rate over time. However, if this proves not to be the case, appropriate action will have to be taken.

                                                    Fisher's speech is below, but first here's the national outlook from the Dallas Fed:

                                                    Continue reading ""Wagner’s Music is Better Than it Sounds"" »

                                                      Posted by on Monday, September 25, 2006 at 01:46 PM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (4)


                                                      "Ricardo's Difficult Idea"

                                                      The usefulness of mathematical modeling, a subject brought up by Krugman in this commentary, seems to have struck a bit of a chord. So let me follow up with one or two more commentaries from Krugman on this topic. Let's start with this defense of both economic models and Ricardo's theory of comparative advantage (this is fairly long -- Section 4, "The Two Cultures," deals directly with mathematical modeling):

                                                      Ricardo's Difficult Idea, by Paul Krugman: The title of this paper is a play on that of an admirable recent book by the philosopher Daniel Dennett, Darwin's Dangerous Idea: Evolution and the Meanings of Life (1995). Dennett's book is an examination of the reasons why so many intellectuals remain hostile to the idea of evolution through natural selection -- an idea that seems simple and compelling to those who understand it, but about which intelligent people somehow manage to get confused time and time again.

                                                      The idea of comparative advantage -- with its implication that trade between two nations normally raises the real incomes of both -- is, like evolution via natural selection, a concept that seems simple and compelling to those who understand it. Yet anyone who becomes involved in discussions of international trade beyond the narrow circle of academic economists quickly realizes that it must be, in some sense, a very difficult concept indeed. I am not talking here about the problem of communicating the case for free trade to crudely anti-intellectual opponents, people who simply dislike the idea of ideas. The persistence of that sort of opposition, like the persistence of creationism, is a different sort of question, and requires a different sort of discussion. What I am concerned with here are the views of intellectuals, people who do value ideas, but somehow find this particular idea impossible to grasp.

                                                      My objective in this essay is to try to explain why intellectuals who are interested in economic issues so consistently balk at the concept of comparative advantage. Why do journalists who have a reputation as deep thinkers about world affairs begin squirming in their seats if you try to explain how trade can lead to mutually beneficial specialization? Why is it virtually impossible to get a discussion of comparative advantage, not only onto newspaper op-ed pages, but even into magazines that cheerfully publish long discussions of the work of Jacques Derrida? Why do policy wonks who will happily watch hundreds of hours of talking heads droning on about the global economy refuse to sit still for the ten minutes or so it takes to explain Ricardo?

                                                      In this essay, I will try to offer answers to these questions. The first thing I need to do is to make clear how few people really do understand Ricardo's difficult idea -- since the response of many intellectuals, challenged on this point, is to insist that of course they understand the concept, but they regard it as oversimplified or invalid in the modern world. Once this point has been established, I will try to defend the following hypothesis:

                                                      Continue reading ""Ricardo's Difficult Idea"" »

                                                        Posted by on Monday, September 25, 2006 at 11:22 AM in Economics, International Trade, Methodology, Policy, Politics | Permalink  TrackBack (0)  Comments (15)


                                                        Protectionist Threats

                                                        The protectionist threats are getting louder. Unless China changes its practices immediately, Senators Schumer and Graham are calling for a vote on their bill to impose a temporary tariff of 27.5% on all imports:

                                                        Play by the Rules, by Charles E. Schumer and Lindsey O Graham, Commentary, WSJ: If there's one issue on which we all should agree, it is that increasing global trade is good for American workers and businesses. No serious economist believes that we would be better off if we closed our borders. But for trade to be good for our people, every major economic power needs to abide by the rules of free trade.

                                                        One of the fundamental tenets of free trade is that currencies should float -- or at the very least, move along with market forces. The reason for this is that a free-floating currency allows large trade imbalances to self-correct... Unfortunately, the Chinese government intervenes in the market to keep its currency, the yuan, artificially low, which allows China to artificially inflate its exports and reduce its imports. Their continued manipulation is a form of protectionism, and it throws the whole global trading system out of balance...

                                                        China bends or breaks the rules far too often. Years of currency manipulation, intellectual property theft, and barriers to entry have cost American jobs and contributed heavily to our trade deficit with China... China's actions ... make it harder for Americans to support free trade...

                                                        Three years ago, we grew frustrated with the pace of China's reforms, and we introduced a bill that would impose a temporary tariff of 27.5% on all Chinese imports unless China agreed to play by the rules. Our bill was carefully crafted to not impose tariffs immediately, giving the parties time to negotiate an alternative. In addition, the president would retain the right to delay the tariff for up to two years. Neither of us wants the tariff to become law; our goal all along has been to send a shot across China's bow and prod them to play fair...

                                                        Senior administration officials concede that our bill has helped strengthen their hand in negotiations. So we have succeeded in getting China's attention. In fact, we believe the only reason there has been any progress on this issue at all is because of the existence of our bill...

                                                        In April 2005, we finally brought our bill to the Senate floor. The Chinese responded that July by allowing the yuan to appreciate by 2.1%, and promising to allow market forces to play a greater role in determining its value. Since the small revaluation, however, the currency has appreciated very little in 14 months... So the rhetoric out of China is not being matched by real results.

                                                        We have agreed four times since last April to delay taking a final vote on our bill. Before the most recent delay, in March of this year, we traveled to China to meet with several of its top government officials... We returned from our trip with the strong impression that China would move more quickly in the ensuing months. However, ... there was no real movement.

                                                        We appreciate that China's banking system is not yet ready for a fully floating currency, but we also agree with most mainstream trade economists that gradual currency appreciation is possible without disrupting their "harmonious society." We have been patient and reasonable, but the time for patience has run out. The workers and manufacturers in our states rightfully demand a level playing field...

                                                        Unfortunately, the Chinese appear to be content with the status quo... They have no reason to change unless we send a very strong message that the status quo is not acceptable.

                                                        We look forward to meeting with Treasury Secretary Hank Paulson, who just recently returned from China. We hope he brings back good news. If not, the clock will have run out and it will be time for an up-or-down vote. With Congress's recess imminent, we know our bill will not become law, but it will be our last opportunity before a new Congress convenes to send such a message. We believe more strongly than ever that pressuring the Chinese to allow their currency to float is in the economic interests of both nations.

                                                        My guess is that China will say the right things, then do what it was going to do anyway. Hopefully, whatever happens, protectionism can be avoided -- that's a downward spiral for all. But if the yuan is devalued revalued significantly, a previous post (slightly edited) summarizes what might happen. We shouldn't expect any miracles in the short-run:

                                                        1. Consumers are worse off due to the rise in the price of consumer goods. If revaluation is bilateral and production moves from China to other countries, this effect may not be as large in the long-run. If the dollar devalues against other currencies generally, the effect on prices paid by U.S. consumers will be larger.
                                                        2. Borrowers (households, business, and government) are worse off due to rising interest rates which increases the cost of loans and the cost of financing government debt. Part of this is a transfer from borrower to lender, but there is a net drain as well due to debt held by foreigners.
                                                        3. U.S. manufacturers are better off, but this requires the dollar to devalue against other currencies generally, not just against a particular currency such as the yuan.
                                                        4. If U.S. manufacturers do better, then employment will increase as well making labor better off, but this takes time to occur.
                                                        5. If employment and manufacturing do increase, there are transitional costs to consider. Rising interest rates will cause less activity in sectors such as housing and more activity in other sectors such as (hopefully) computer chips. Thus, during the transition unemployment could increase. Nevertheless, to the extent that such domestic and international rebalancing is healthy for the economy in the long-run, there is a long-run benefit that more than offsets the short-run cost.

                                                        Update: I didn't cover this aspect, but Greg Mankiw and KNZN (the latter more completely) evaluate the statement "One of the fundamental tenets of free trade is that currencies should float."

                                                        Update: William Polley has the latest, "But it does keep their name in the papers...":

                                                        Senators Schumer and Graham may be standing down... for now...

                                                          Posted by on Monday, September 25, 2006 at 12:33 AM in Economics, International Trade, Policy, Politics, Unemployment | Permalink  TrackBack (1)  Comments (55)


                                                          'Deconstructing' Hostility to Economic Ideas

                                                          Paul Krugman, in a commentary written ten years ago, discusses the division between the humanist/literary and mathematical/scientific visions of the world, a division that "is a hidden but powerful force confusing and garbling the public discussion of many issues" in economics:

                                                          The implausible pundits, Paul Krugman, May 1996: Late in the summer of 1992 I received the page proofs of an article I had written for a liberal intellectual American magazine. I phoned in a few corrections; only one of them was really important. Editors always change your title - and the new title was snappier than my own pedestrian proposal. But the editor had added a subtitle that horrified me. It was, I thought, utterly inappropriate for a plainly written article that was distinctly populist in its implications. I pleaded with him to drop the subtitle, but when the article came out there it was: 'The rich, the right, and the facts: deconstructing the income distribution controversy'.

                                                          'Deconstructing'? Why would an editor (who, incidentally, regarded himself as a champion of ordinary working Americans) insist on using a buzzword that means nothing to most people and alienates most of the rest? Was he not gratuitously playing into the hands of his (and my) political opponents? I was baffled. But I now think I understand his motives - and I believe that this seemingly trivial incident offers an insight into a hidden conflict that lies behind many of the confusions that bedevil the public discussion of economics. Every economist who ventures beyond the confines of the academic world gets used to facing a certain amount of hostility. Some of that hostility comes from people who hold strong political views and do not want them challenged; some of it comes from people who want more from economists than they can deliver - easy answers to hard problems, accurate predictions of the inherently unpredictable. What I have gradually come to realise, however, is that there is an extra reason why certain people, namely literary intellectuals, are hostile to economists. Their hostility is not so much political as cultural.

                                                          My point is a familiar one: that our society remains divided between C. P. Snow's two cultures; or perhaps to put it differently, there is a continuing struggle between two ideas of what it means to be an intellectual. One culture is humanist and literary; the other mathematical and scientific. The editor of my article, I now believe, was perhaps unconsciously using the language of critical theory as a way of declaring his allegiance in that struggle; he was saying: 'I may write about quantitative stuff like GDP and real wages, but my sensibility is literary.'

                                                          In this particular case, the harm done by the culture war was minor: the audience for my article was probably reduced only marginally. But I have become convinced that the divide between two kinds of intellectuals - those who feel comfortable with a more or less mathematical approach to the world and those who do not - is a hidden but powerful force confusing and garbling the public discussion of many issues.

                                                          In a way, economics can be regarded as one of the humanities. Like history or sociology, it is concerned with human beings and what they do. And it is therefore a subject in which many humanist intellectuals are interested. But, as a discipline, economics is firmly on the mathematical side of the great divide. It is, indeed, a field in which ideas are mainly expressed in the form of mathematical models. This means that humanist intellectuals, even when they are deeply interested in economic affairs, generally find what mainstream economists have to say repellent if not incomprehensible. And because such intellectuals are uncomfortable with the way economists think, they systematically favour economic thinkers and ideas that most economists, with good reason, regard as unworthy of serious attention.

                                                          The result is that the wider public debate about economics, a debate that is largely filtered through publications edited by people who are or would like to be literary intellectuals, is deeply distorted: facts and concepts that research has established beyond a reasonable doubt are rejected or ignored, while views that are flatly wrong but that appeal to a literary imagination remain stubbornly in circulation. And these misguided views directly shape debates over real economic policy.

                                                          Continue reading "'Deconstructing' Hostility to Economic Ideas" »

                                                            Posted by on Monday, September 25, 2006 at 12:09 AM in Economics, Press | Permalink  TrackBack (0)  Comments (21)


                                                            Sunday, September 24, 2006

                                                            The Counterterrorism - Industrial Complex

                                                            Harper's on the growing counterterrorism-industrial complex:

                                                            Meet the Counterterrorism-Industrial Complex, by Ken Silverstein, Harper's: Last week I wrote about the steady flow of CIA employees to Blackwater USA, the private security contractor with major operations in Iraq. Yesterday's Los Angeles Times took a broader look at the revolving door between intelligence agencies and the private sector, and found that “...U.S. spy agencies have turned to unprecedented numbers of outside contractors to perform jobs once the domain of government-employed analysts and secret agents.”

                                                            For private contractors to hire intelligence officials is not a new phenomenon. Take a look at the board of directors of any major defense or homeland security contractor and you're likely to come across some familiar names. ... But the pace of the movement to private firms has recently reached alarming proportions. “At the CIA,” said the Los Angeles Times story, “poaching became such a problem that former Director Porter J. Goss had to warn several firms to stop recruiting employees in the agency cafeteria . . . .

                                                            One former senior CIA official told me that the implications of the “enhanced revolving door” are being felt in a broad variety of ways. “There are many people inside who aspire to work for a private contractor because—overnight—they can at least double their earnings,” he said. “It undermines morale and doesn't build a competent system. But the bigger story is that this is symptomatic of a new ‘counterterrorism-industrial complex’ that's popping up and that is starting to look a lot like Eisenhower's military-industrial complex. It's a multibillion dollar industry and it's beginning to drive policy.”

                                                            Eisenhower's Farewell Address on January 17, 1961 mentions the military-industrial complex for the first time publicly and warns about its growing political influence. According to Wikipedia:

                                                            In the penultimate draft of the address, Eisenhower initially used the term military-industrial-congressional complex, indicating the essential role that U.S. Congress plays in propagating the military industry. But, it is said, that the president chose to strike the word congressional in order to avoid offending members of the legislative branch of the federal government.

                                                            Here's the part of the Farewell Address where the term is used:

                                                            In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together. ... [W]e should, we must ... be alert to the ... danger that public policy could itself become ... captive...

                                                            It is the task of statesmanship to mold, to balance, and to integrate these and other forces, new and old, within the principles of our democratic system – ever aiming toward the supreme goals of our free society.

                                                            Another factor in maintaining balance involves the element of time. As we peer into society's future, we -- you and I, and our government -- must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.

                                                            During the long lane of the history yet to be written, America knows that this world of ours, ever growing smaller, must avoid becoming a community of dreadful fear and hate, and be, instead, a proud confederation of mutual trust and respect. Such a confederation must be one of equals. The weakest must come to the conference table with the same confidence as do we, protected as we are by our moral, economic, and military strength. That table, though scarred by many past frustrations, cannot be abandoned for the certain agony of the battlefield...

                                                              Posted by on Sunday, September 24, 2006 at 10:59 AM in Economics, Terrorism | Permalink  TrackBack (0)  Comments (10)


                                                              Saturday, September 23, 2006

                                                              Informal Payment Mechanisms and Terrorism

                                                              This article from the Asian Times describes informal payment mechanisms in developing countries, markets that authorities are attempting to shut-down to prevent the flow of money to terrorists. However, in the process many small businesses who rely on these markets are finding it much more difficult to conduct financial transactions:

                                                              Moving money without really moving it, by Indrajit Basu, ATimes: Emerging from his damp cubbyhole office in one of the labyrinthine lanes in Burrabazaar, Kolkata, the busiest trading hub in the eastern part of India, Champalal Bubna mopped his brow. ...[O]rdinarily he would have hated walking up the long road ahead - too narrow for a car to enter - carrying the heavy grocery bag he had with him.

                                                              But that day, he didn't mind, for the bag ... was full of hard cash, and he had to hurry to deliver the consignment to his associate's office about 3 kilometers of winding lanes ahead. The money had to move through informal channels that day for a payment in US dollars to a marble exporter in Cairo. Soon thereafter, he had to rush to meet a new client who also wanted to move money informally to an iron-scrap supplier in Georgia.

                                                              "It's getting hectic these days," said Bubna ... an erstwhile hawaladaar ... "Moving money by hawala is getting very difficult...," he said, "but thank God it is, because that's why demand is booming and my knowledge of the tricks of this trade and the contacts are coming in handy."

                                                              Indeed. The Indian government may have intensified its "war on terrorism" and its financial channels including hawala or hundi and angaria, but that has only resulted in a burgeoning demand for "informal value transfer systems", because in the pursuit to regulate money-laundering in the wake of renewed terrorist attacks, the government is also clamping down on regular or formal money-transfer systems, which is making life difficult for the numerous small-business people in the country.

                                                              Continue reading "Informal Payment Mechanisms and Terrorism" »

                                                                Posted by on Saturday, September 23, 2006 at 07:11 PM in Economics, Financial System, Terrorism | Permalink  TrackBack (0)  Comments (4)


                                                                How Should the Risks of Natural Disasters Be Distributed?

                                                                The increase in home insurance costs in areas where risks of natural disasters are high is affecting housing affordability for low-income groups. Should low-risk areas cross-subsidize high-risk areas to help with this problem?:

                                                                Soaring Insurance Costs Make Housing Less Affordable, by Ana Cruz-Taura, Atlanta Fed: Across the country low interest rates have masked the effect of rising taxes and insurance costs on monthly housing payments. But as the real estate market cools down, interest rates continue to rise, and catastrophic losses reveal the exposure of vulnerable geographies, attention is shifting to the volatility of insurance underwriting and pricing.

                                                                Affordable insurance is critical Many remedies have been proposed to address insurance concerns. The disproportionate impact of Hurricane Katrina on the poor and the uninsured has prompted community groups in hurricane and flood zones to increase outreach and education regarding the availability and benefit of both hazard and flood insurance. ...

                                                                Access to affordable insurance will ultimately determine the success of community-based outreach to protect homeowner assets. Those already insured will have to keep up with the mounting expense of insurance and rising deductibles... For the uninsured, establishing coverage can be difficult without prior insurance history. Personal credit scores are now used across the industry to approve and price insurance, and this practice may adversely affect low-income homeowners.

                                                                Continue reading "How Should the Risks of Natural Disasters Be Distributed?" »

                                                                  Posted by on Saturday, September 23, 2006 at 02:40 PM in Economics, Politics, Regulation | Permalink  TrackBack (0)  Comments (20)


                                                                  Inequality "Jumps Sharply"

                                                                  New data show that inequality continues to increase:

                                                                  Richest Americans' Income Share Jumps Sharply, by Greg Ip, Wall Street Journal: The richest Americans sharply increased their share of total income in 2004, though it remained below the high-water mark of 2000, new data from their tax returns show.

                                                                  Internal Revenue Service data, posted on the agency's web site Friday, also show that the average tax rate for Americans as a whole remained near its lowest in 20 years and has fallen most sharply for the best-off.

                                                                  The share of all income earned by the top 1% of taxpayers rose to 19% in 2004 from 16.8% in 2003, the IRS said. That remains below the 20.8% high hit in 2000, when it was elevated by capital gains related to the stock boom. ... After tax, the share of income of the best-off 1% jumped to 16.5% from 14.4% but remains below the 2000 peak of 17.8%.

                                                                  The data show that the average tax rate for all taxpayers was 12.1%, up slightly from 11.9% in 2003 but down from 15.3% in 2000, due in part to the Bush tax cuts. Rates fell most for those at the top. The tax rate of the richest 1% fell to 23.5% from 24.3% in 2003 and 27.5% in 2000. For the bottom 50%, the 2004 tax rate was 3%, unchanged from 2003 and down from 4.6% in 2000.

                                                                  Although dated, the IRS figures are among the best ways to compare the gains of the rich, middle class and poor because they include things that some other reports don't, including capital-gains income and taxes paid. Because capital gains are volatile and mainly reflect swings in the stock market, some experts prefer the Census Bureau data. That showed the richest families' share of total income in 2004 equaled its previous high and rose to a new high in 2005. ...

                                                                  The people at the top must be getting smarter and more skilled every year, and a record-setting higher income share is their reward. Tax cuts and other policies had nothing to do with it.

                                                                  Update: Greg Mankiw also comments on Greg Ip's report in a post called "Ip is caught framing":

                                                                  In today's Wall Street Journal, Greg Ip describes recent changes in tax rates:

                                                                  The data show that the average tax rate for all taxpayers was 12.1% [in 2004], up slightly from 11.9% in 2003 but down from 15.3% in 2000, due in part to the Bush tax cuts. Rates fell most for those at the top. The tax rate of the richest 1% fell to 23.5% from 24.3% in 2003 and 27.5% in 2000. For the bottom 50%, the 2004 tax rate was 3%, unchanged from 2003 and down from 4.6% in 2000.

                                                                  The sentence that I have bolded puts a particular spin on the numbers. Here is an alternative way to describe the changes:

                                                                  From 2000 to 2004, the average tax rate for all taxpayers fell from 15.3% to 12.1%, representing 21% tax cut. The tax rate of the richest 1% fell from 27.5% to 23.5%, a 15% tax cut. For the bottom 50%, the tax rate fell from 4.6% to 3%, a 35% tax cut. As a result of these changes, the top 1% paid a larger share of the tax burden in 2004 than it did four years earlier, and the bottom 50 percent paid a smaller share.

                                                                  Isn't it amazing how the same set of numbers can be framed in different ways? ... By choosing the particular framing that he did, Ip let his politics seep into his reporting.

                                                                  I disagree. The statement "Rates fell most for those at the top" is positive, not normative. That is, it's a statement of fact, not an opinion. Greg Mankiw wants more facts to be presented, but I don't think his suggestion improves the framing.

                                                                  Mankiw wants Greg Ip to say "the top 1% paid a larger share of the tax burden" but that's a more value-laden presentation due to the word "burden." Is it a "burden" for the wealthy to pay taxes out of their higher incomes? Maybe. It depends on how the question is framed. Why not just say a "higher share of taxes?"

                                                                  I'm sorry the facts Greg Ip presented don't agree with Mankiw's politics, but I don't see that as a reason to attack the messenger. Mankiw could have added facts of his own without accusing the reporter of letting "his politics seep into his reporting."

                                                                    Posted by on Saturday, September 23, 2006 at 05:40 AM in Economics, Income Distribution, Taxes | Permalink  TrackBack (0)  Comments (23)


                                                                    Leftovers

                                                                    These are drafts of posts I collected this week, but didn't get to or didn't post for one reason or another. I thought I'd post them "as is" instead of deleting them. There are quite a few:

                                                                    Continue reading "Leftovers" »

                                                                      Posted by on Saturday, September 23, 2006 at 02:45 AM in Economics, Miscellaneous | Permalink  Comments (12)


                                                                      "The Many Faces of Adam Smith"

                                                                      This column by Alan Krueger from 2001 is a reminder that Adam Smith was not a "narrow, unyielding defender of unfettered free enterprise":

                                                                      The many faces of Adam Smith: Rediscovering 'The Wealth of Nations.', by Alan B. Krueger, Economic Scene, NY Times, August 2001: ...In her book ..., [Emma Rothschild, director of the Center for History and Economics at King's College, Cambridge] argues that [Adam] Smith has been reinvented as a narrow, unyielding defender of unfettered free enterprise. Yes, he emphasized the motivating force of self-interest and gains from free trade, but he also viewed freedom in a broader sense than economic freedom and championed the disadvantaged.

                                                                      The real Adam Smith was a complex thinker, capable of holding and exploring ideas even when they were in conflict. To understand Smith, Ms. Rothschild says his contributions must be viewed in light of 18th-century institutions.

                                                                      Smith worried about the encroachment of government on economic activity, but his concerns were directed at least as much toward parish councils, church wardens, big corporations, guilds and religious institutions as to the national government; these institutions were part and parcel of 18th-century government.

                                                                      Ms. Rothschild stresses that Smith was sometimes tolerant of government intervention, "especially when the object is to reduce poverty." Smith passionately argued, "When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favour of the masters." He saw a tacit conspiracy on the part of employers "always and everywhere" to keep wages as low as possible.

                                                                      Smith was a Rawlsian before the philosopher John Rawls, proclaiming: "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed and lodged."

                                                                      At the turn of the 19th century, Adam Smith's arguments were invoked by Samuel Whitbread in favor of a minimum wage and by William Pitt against it. "There is something of Smith," Ms. Rothschild wryly observed, "on both sides of the parliamentary debate."

                                                                      Or consider taxes. Dick Armey does not miss an opportunity to enlist Adam Smith in support of his flat tax. Smith did favor low taxes and argued that subjects "ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities." But he also argued, "It is not very unreasonable that the rich should contribute to the public expence, not only in proportion to their revenue, but something more than in that proportion."

                                                                      Would Mr. Armey support a tax on luxury carriages? Smith did.

                                                                      Smith also supported universal government-financed education because he believed the division of labor destined people to perform monotonous, mind-numbing tasks that eroded their intelligence, not because education led to economic gain. His economic policy had social and moral objectives, not just the maximization of national income. To Smith, enlightenment was for the masses. ...

                                                                      [T]here can be little doubt that Smith's faith in the invisible hand has been exaggerated by modern commentators. Smith used the metaphor only once in "The Wealth of Nations," applied it narrowly and presented the idea with more than his usual number of caveats.

                                                                      He persistently worried that if merchants and manufacturers pursued their self-interest by seeking government regulation and privilege, the invisible hand would not work its magic...

                                                                      The beauty of Adam Smith -- why he is still worth reading and debating after 225 years -- is that he saw economics as deeply intertwined with human nature, with people's feelings, emotions and thoughts. He eloquently reported what he observed firsthand or learned from history without prejudice or fear. I suspect that that is also why he found it so hard to hew to a consistent line: some observations led to generalities that were incongruent with other generalities drawn from other observations. The elegant properties of laissez-faire rest on assumptions -- including the absence of market power -- that Smith's observations led him to doubt sometimes.

                                                                      Smith's internal conflicts also demonstrate that deviations from some principles, like proportional taxation and laissez-faire, are sometimes required to satisfy others, like support for the disadvantaged and universal education...

                                                                        Posted by on Saturday, September 23, 2006 at 12:43 AM in Economics, History of Thought | Permalink  TrackBack (0)  Comments (3)


                                                                        Friday, September 22, 2006

                                                                        Oil Prices and the U.S. Trade Deficit

                                                                        This Economic Letter from the San Francisco Fed looks at the relationship between oil prices and the trade deficit:

                                                                        Oil Prices and the U.S. Trade Deficit, by Michele Cavallo, Economic Letter, FRBSF: With the price of oil ... having nearly quadrupled over the last four years, it is little surprise that U.S. import prices have soared. One concern about these higher import prices relates to their implications for the U.S. trade balance... This Economic Letter explores the relation between the surge in oil prices and the trade deficit...

                                                                        Continue reading "Oil Prices and the U.S. Trade Deficit" »

                                                                          Posted by on Friday, September 22, 2006 at 02:34 PM in Economics, International Trade, Oil | Permalink  TrackBack (0)  Comments (16)


                                                                          Will Bush Raise Your Taxes?

                                                                          I'm confused by this new strategy coming from the Republicans for the fall elections because it implies Bush is too weak to stand up to Democrats if they take control of congress:

                                                                          Republican Tax Deception, by James Crabtree: And so it begins. We've known for a while that the Republicans have planned to trot out a tax increase message, as a Siamese twin to "cut and run." There have been reports that the GOP would run the national campaign on security, but in local races would try to capitalize on voter concern about the economy by running hard on tax. This makes sense, particularly if you listen to reports like this on NPR this morning, showing discontent over the economy in rural areas (and noting that Dems were doing surprisingly well amongst rural voters.) And, so, no surprise yesterday when President Bush began to roll out the tax message, during a sweep through Florida yesterday...

                                                                          Here's what Bush said:

                                                                          Bush Leads New Offensive Featuring Economy and Linking Democrats to High Taxes, by Jim Rutenberg, NY Times: President Bush began a blistering new political offensive on Thursday, asserting that if Democrats won control of Congress from Republicans it would mean higher taxes, less money in the pockets of working families and damage to the economy.

                                                                          The speech by Mr. Bush here, in which he belittled Democrats as “the party of high taxes,” signaled what Republicans described as a new phase of the White House’s fall campaign, as Republicans begin to combine their emphasis on national security with a tough new emphasis on the issue that unites them more than any other, taxes.

                                                                          Mr. Bush’s offensive was backed up by a flood of television advertisements on behalf of Republican candidates.

                                                                          “If they get control of the House of Representatives, they’ll raise your taxes, it will hurt our economy, and that’s why we’re not going to let them get control of the House of Representatives,” the president said...

                                                                          “The Democrats have made their position clear,” Mr. Bush said. “I want you to remember the last time they had control of the United States Congress back in 1993, they passed a massive tax increase.” ...

                                                                          It will take two to do the tax Tango. If Democrats win back the house, they can't pass any legislation unless Bush signs it - they won't be able to overturn a veto. Is Bush saying that if tax increase legislation comes to him, he won't veto it?  He must be, because if he vows "Read my lips, no new taxes," then there's no reason to believe taxes will go up. But he's not saying that.

                                                                          Update: From comments:

                                                                          ...[Y]ou are overthinking this.  If we can be sure Bush believes in one thing, it is that cutting taxes always helps the econony, and raising taxes hurts it.  ...  Bush truly believes it.  So, no, of course he won't allow a Democraticly controlled Congress to raise taxes.  And, yes, of course he would veto such a bill.

                                                                          So what did he mean? He has just simplified (dumbed down, if you will) his main point so that voters will get it: Democrats will not allow my tax cuts to become permanent.  True, not the same thing as "raising" taxes, but after 5 plus years of lower taxes, having the marginal rates "return" to their pre-cut rates would be the same thing ... as voters (who vote on the issue of lower tax rates) see it.

                                                                            Posted by on Friday, September 22, 2006 at 09:32 AM in Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (27)


                                                                            Updating Social Insurance

                                                                            This is a plan to update social insurance to reflect changes that have occurred since the inception of social insurance programs in the 1930s:

                                                                            Families Valued Creating a twenty-first-century social insurance system for today's "juggler families.", Karen Kornbluh, Democracy Journal: ...[O]ver the past generation the American family has changed dramatically, but the policies designed to mitigate the risks it faces have remained frozen in time, many of them operating on rules developed in the midst of the Great Depression. As a result, the most vulnerable families in the new economy all too often wind up with limited protection in times of need. ...

                                                                            The FMLA, though overlooked by many opinion-makers, was a breakthrough in updating the American social contract for today’s families. It amended the Fair Labor Standards Act of 1938 to allow workers to take time off to care for a new child or a sick relative without losing their jobs. ... But the ability to take time away from one’s job ... is not comprehensive. To give families the security they need to raise healthy, productive members of society, we need also to address the financial risks parents incur just for being good parents–when they take time out of the workplace, require a flexible schedule to raise children, or get hit with high health care or child care expenses.

                                                                            For this, progressives should turn to one of the most important innovations of the last century: social insurance. In the 1930s, progressives established a suite of social insurance schemes to help families share the risks of the industrial economy: the risks associated with the inability of the breadwinner to earn the family income because of old age, death, a temporary layoff, or disability. These social insurance programs continue to provide families essential support. But today we need to create new elements in the social insurance system–as well as reform the protections now in place–to confront the new risks families face...

                                                                            Continue reading "Updating Social Insurance" »

                                                                              Posted by on Friday, September 22, 2006 at 12:15 AM in Economics, Health Care, Policy, Politics, Social Security | Permalink  TrackBack (0)  Comments (3)


                                                                              Paul Krugman: Insurance Horror Stories

                                                                              In the past, insurance companies put a lot of effort and resources into identifying people likely to get sick, and then avoided extending them coverage. However, as Paul Krugman describes, insurance companies are increasingly diverting even more resources away from health care in order to find reasons to cancel coverage for those who already have insurance, generally just when they need it the most:

                                                                              Insurance Horror Stories, by Paul Krugman, Sick System Commentary, NY Times: “When Steve and Leslie Shaeffer’s daughter, Selah, was diagnosed at age 4 with a potentially fatal tumor in her jaw, they figured their health insurance would cover the bulk of her treatment costs.” But “shortly after Selah’s medical bills hit $20,000, Blue Cross stopped covering them and eventually canceled her coverage retroactively.”

                                                                              So begins a recent report in The Los Angeles Times ... which offers a series of similar horror stories and suggests that these stories represent a growing trend: more and more health insurers are finding ways to yank your insurance when you get sick.

                                                                              This trend helps explain something that has been puzzling me: why is the health insurance industry growing rapidly, even as it covers fewer Americans?

                                                                              Between 2000 and 2005, the number of Americans with private health insurance coverage fell by 1 percent. But over the same period, employment at health insurance companies rose a remarkable 32 percent. What are all those extra employees doing?

                                                                              Now we know at least part of the answer: they’re working harder than ever at identifying people who really need medical care, and ensuring that they don’t get it. ... Welcome to the ugly world of American health care economics. ...

                                                                              Because everyone faces some risk of incurring huge medical costs, only the superrich can afford to be without health insurance. Yet private insurers try to refuse coverage to those most likely to need it, and deny payment whenever they can get away with it.

                                                                              The point isn’t that they’re evil or greedy (although you do wonder how the people who cut off the Schaeffers can look themselves in the mirror). The fact is that cruelty and injustice are the inevitable result of the current rules of the game. Blue Shield of California is a nonprofit insurance provider, yet as a spokesman put it, if his organization doesn’t follow the for-profit practice of selectively covering only the healthiest people, “we will end up with all the high-risk people.”

                                                                              Now, before you panic about the state of your own coverage, ... the horror stories in The Los Angeles Times article all involve individual insurance; if your coverage comes via your employer, you’re reasonably secure against sudden cancellation.

                                                                              But employment-based insurance is in rapid decline, as ... more and more companies adopt Wal-Mart-style minimal-benefit policies. That’s why many people are turning to individual insurance — only to find out, in some cases, that they didn’t get what they thought they paid for.

                                                                              And here’s the thing: it’s all unnecessary.

                                                                              Every other wealthy nation manages to provide almost all its citizens with guaranteed health insurance, while spending less on health care than we do. And there’s no mystery why: we’re paying the price for pointless, destructive reliance on private insurers. Medicare, which is a universal health insurance program for older Americans, spends less than 2 cents of every dollar on administrative costs, leaving 98 cents to pay for medical care. By contrast, private insurance companies spend only around 80 cents of each dollar in premiums on medical care; much of the remaining 20 cents is spent denying insurance to those who need it.

                                                                              If we had a universal system — Medicare for everyone — there would be no more horror stories like those reported by The Los Angeles Times. And we’d almost certainly spend less on health care than we do now.

                                                                              _________________________
                                                                              Previous (9/18) column: Paul Krugman: King of Pain
                                                                              Next (10/2) column: Paul Krugman: Things Fall Apart

                                                                                Posted by on Friday, September 22, 2006 at 12:15 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (85)


                                                                                Thursday, September 21, 2006

                                                                                From Comments: Inequality and Economic Rents

                                                                                kharris with a comment about recent changes in inequality in response to "The Great Attack Squad Distortion":

                                                                                Comment on "The Great Attack Squad Distortion," by kharris: ... Somewhere out there, on a not-very-obscure website (I know because I'm too lazy to hunt through the obscure ones) is a wonder piece on economic rents. (Not land rents - don't even start!) I can't remember where I saw it, and I'd like to recommend it to everybody.

                                                                                The starting point is that shifts in technology which allow extensive replication of good performance has meant that the top of many fields have enjoyed a big rise in compensation. That's not new. The ending point was that this is essentially an instance of economic rent collection. Prior to the existence of nationwide broadcast of athletic events, athletes were paid a lot less. A whole army of people have been involved in making broadcast possible and profitable, but some of the big winners had nothing to do with developments in broadcasting. They just play basketball, same as the generation before them. Madonna is richer than Ella ever was because of developments in the music industry and technology, not because she is a better singer than Ella. Bill Gates has made tons of money, in part because of things that universities and the Pentagon and IBM did while Bill was still in diapers. These people are collecting economic rents.

                                                                                Once we see these things as partly rents, rather than what NRO would argue they are (exclusively smarts and hard work), the argument changes. Taxing rents doesn't change economic outcomes, the argument goes. Only when taxes get to the point of cutting into normal economic returns do we see distortions. Huge disparities in income and wealth can't be justified on the grounds of rents.

                                                                                Nor can they be justified by being lucky. There is, of course, a big element of luck in being the beneficiary of economic rents. Bill Gates could have been born in the era of the telegraph. Then where would he be? More to the point, those guys IBM went to see first could have been in the office, and IBM would never have bothered to meet with Gates. If Debbie Harry had gotten the attention of a better agent or producer or whatever, rather than Madonna, think how much better pop music could have been, and how much less rich Madonna would be now?

                                                                                The problem is - and this is a killer - the word "rents" was always the wrong one, since it sounds so much like what you hand to your landlord. The argument is tough enough to sell, because it is a degree more complicated than simple supply-and-demand. Add in a term that is going to confuse the issue and it gets worse. Let's try to sell this story, but do it without using the word "rents."

                                                                                  Posted by on Thursday, September 21, 2006 at 02:46 PM in Economics, Income Distribution, Market Failure, Policy, Politics | Permalink  TrackBack (1)  Comments (40)


                                                                                  Economics and Democracy

                                                                                  James Galbraith reviews two books on the link between economics and democracy:

                                                                                  How to explain the link between economics and democracy–and how not to, Democracy Journal: Reviewed by James Galbraith: Economic Origins of Dictatorship and Democracy By Daron Acemoglu and James A. Robinson, and A Free Nation Deep in Debt: The Financial Roots of Democracy By James MacDonald:

                                                                                  From where does democracy come? Is rule "by the people, for the people"  ... as the great American civic faith would have us believe? Is it the most effective way to solve social problems–as John Dewey and the pragmatists argued? Or is it merely the worst system except for all the others, as Winston Churchill dismissively quipped?

                                                                                  Continue reading "Economics and Democracy" »

                                                                                    Posted by on Thursday, September 21, 2006 at 12:07 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (15)


                                                                                    The Great Attack Squad Distortion

                                                                                    Paul Krugman must be scoring points - the NRO attack squad is out in full force once again trying to overcome the points he's making. Thomas Nugent, in a commentary called "The Great Inequality Distortion" attacks Krugman for suggesting that inequality has increased in recent years. He also questions the integrity of Thomas Piketty and Emmanuel Saez as he tries to chastise Krugman for "Quoting so-called experts on long-term trends in inequality (Is there a potential bias in these studies?)". On the latter point, the bias, there is no reason to question the intellectual honesty behind the research. If he has evidence, put it on the table, otherwise don't throw around frivolous accusations. In addition, their expertise is not in question.

                                                                                    As for the whole attack in the article on Krugman's presentation of inequality statistics, it's simply without basis. For example, he whines:

                                                                                    [W]hat is the basis for his growing inequality assumption? Is he referring to levels of income? Wealth? After-tax income?

                                                                                    Well, if he'd check Krugman's Money Talks page for a section called "On Tracking Inequality" he might be enlightened. It's all there, including links to the original data. A simple email to Krugman would have straightened it out as well, but of course, that would undermine the attack squad effort.

                                                                                    He also tries to criticize Krugman for using 2000 as a base year for making comparisons. Two points on this. First, if you pick another base year the story doesn't change - there has been a rise in inequality in recent years. Second, as explained here, the question Krugman is addressing is about discontent with economic conditions and the distribution of gains during the so-called "Bush boom" and how the distribution is related to education. Thus, 2000 is a natural starting point. More directly, as Brad DeLong notes, the column is in part a response David Brooks who also appears to use the years 2000 and 2005 as the years for comparison ("appears to use" because sources for all of his numbers are not evident). So the questions about the use of 2000 as a base year don't withstand closer examination.

                                                                                    He also questions the use of the median rather than the mean to measure changes in income over time which not a productive avenue to follow as the median is generally accepted as the better measure. But in any case, his overall point is to deny that there is widening inequality, something that is widely acknowledged to have occurred. He actually claims inequality has narrowed:

                                                                                    During the first four years of the George W. Bush presidency, the income share of the top 1 percent fell slightly to 19 percent from 20.8 percent.

                                                                                    Note that, after criticizing Krugman, who actually does give sources for his numbers, there is no way to tell how he arrived at these percentages.

                                                                                    This next argument is particularly odd. After denying that inequality has increased, he says that the rich are now paying more taxes than before, but that's a good thing:

                                                                                    In 2004, Americans in the top 5 percent of income-tax payers paid 57.1 percent of taxes, up from 56.5 percent in 2000.

                                                                                    If you think this one through, wealthier taxpayers are paying more taxes that help … well, you guessed it … the poor.

                                                                                    Yes, they should be jumping up and down in joy that maybe, just maybe, a few pennies will trickle down their way. They've been promised that they will, but so far? Not so good.

                                                                                    Finally, he says, what if Krugman is right, what if in fact there has been widening inequality?:

                                                                                    So what? Maybe they earned it. Maybe they made good investment decisions. Maybe they work 60 to 70 hours a week. And maybe, because of their efforts, they are the ones paying all those additional taxes.

                                                                                    Yeah, they're just better than the common folk, the ones working that many hours and more just to get by.

                                                                                    Update: An email adds:

                                                                                    I'd add that it's true that the top 1 percent share was slightly lower in 2004 than in 2000. Piketty-Saez confirm it. But a look at their charts, at the end of the downloadable spreadsheet, tells the story: that fall in the top 1's share is a little wiggle at the very end of the chart, quickly reversed. That is, the top 1 lost some ground when the bubble burst, but regained most of it between 2002 and 2004. And the odds are that we have already surpassed the previous peak.

                                                                                      Posted by on Thursday, September 21, 2006 at 12:21 AM in Economics, Income Distribution, Politics | Permalink  TrackBack (1)  Comments (30)


                                                                                      Hal Varian on Inequality: The Right Place at the Right Time

                                                                                      Hal Varian examines of the driving forces behind changes in inequality in the late 1990s:

                                                                                      Many Theories on Income Inequality, but One Answer Lies in Just a Few Places, by Hal Varian, Economic Scene: It is widely recognized that income inequality increased in the 1990’s, but nobody knows quite why. Despite the lack of hard evidence, there are plenty of theories.

                                                                                      One says the culprit was declining unionization. Another ties it to immigration and outsourcing. A third theory is that the demand for high-level cognitive skills has increased, while other explanations range from changes in executive compensation to the lack of policy initiatives directed toward the working poor.

                                                                                      All these factors may have contributed..., but there is little solid evidence about their relative importance. Two University of Texas researchers, James K. Galbraith and Travis Hale, added an interesting twist to this debate in a paper, “Income Distribution and the Information Technology Bubble.”

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                                                                                        Posted by on Thursday, September 21, 2006 at 12:15 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (17)


                                                                                        Wednesday, September 20, 2006

                                                                                        Borjas, Grogger, and Hanson: Immigration and African-American Employment Opportunities

                                                                                        New research on immigration. This is the first study to look for a link between immigration and incarceration rates in the black population:

                                                                                        Immigration and African-American Employment Opportunities: The Response of Wages, Employment, and Incarceration to Labor Supply Shocks, by George J. Borjas, Jeffrey Grogger, and Gordon H. Hanson, NBER WP 12518: Abstract The employment rate of black men, and particularly of low-skill black men, fell precipitously from 1960 to 2000. At the same time, the incarceration rate of black men rose markedly. This paper examines the relation between immigration and these trends in black employment and incarceration. Using data drawn from the 1960-2000 U.S. Censuses, we find a strong correlation between immigration, black wages, black employment rates, and black incarceration rates. As immigrants disproportionately increased the supply of workers in a particular skill group, the wage of black workers in that group fell, the employment rate declined, and the incarceration rate rose. Our analysis suggests that a 10-percent immigrant-induced increase in the supply of a particular skill group reduced the black wage by 3.6 percent, lowered the employment rate of black men by 2.4 percentage points, and increased the incarceration rate of blacks by almost a full percentage point. [open link]

                                                                                        I think it's important to add this from the end of the introduction:

                                                                                        These findings can obviously generate a great deal of controversy in the immigration debate and can be easily misinterpreted. As a result, we are extremely cautious in both the presentation and interpretation of the evidence. Although we have attempted to control for other factors that may account for the large shifts in black employment and incarceration rates over the four-decade period that we examine, it should be obvious that no study can control for all possible factors. It is equally important to emphasize that although the evidence suggests that immigration played a role in generating these trends, most of the decline in employment or increase in incarceration in the black population remains unexplained. Put differently, immigration seems to have an effect and this effect seems to be numerically important, but we would have witnessed much of the decline in black employment and the concurrent increase in black incarceration rates even if there had been no immigration in the past few decades.

                                                                                          Posted by on Wednesday, September 20, 2006 at 07:28 PM in Economics, Immigration, Unemployment | Permalink  TrackBack (0)  Comments (6)


                                                                                          GAO: Health Savings Accounts Primarily Benefit High-Income Individuals

                                                                                          The Center for Budget and Policy Priorities notes a GAO study confirming that Health Savings Accounts primarily benefit healthy, high-income individuals. There is also evidence these accounts are being used as tax-shelters, and there are other problems as well. Overall, this is a fairly negative assessment of these accounts:

                                                                                          GAO Study Confirms Health Savings Accounts Primarily benefit high-income individuals, CBPP: Summary A groundbreaking new study by the Government Accountability Office (GAO) demonstrates that Health Savings Accounts (HSAs) — tax-favored savings accounts attached to high-deductible health insurance plans established under the 2003 Medicare drug law —  are heavily skewed toward affluent individuals.  The GAO findings also provide strong indications that HSAs are being used extensively as tax shelters.  Finally, the GAO data suggest that HSAs can be beneficial to healthy individuals with relatively few health care costs, but not to people who have medical conditions and incur higher costs.

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                                                                                            Posted by on Wednesday, September 20, 2006 at 04:54 PM in Economics, Health Care, Policy | Permalink  TrackBack (0)  Comments (4)


                                                                                            Fed Watch: Unsatisfying

                                                                                            Tim Duy is unhappy with today's statement from the FOMC concerning their decision to leave the target interest rate unchanged:

                                                                                            Unsatisfying, by Tim Duy: Like almost everyone, I was expecting policy to remain essentially unchanged at the conclusion of today’s FOMC meeting. Still, I was left unsatisfied by the accompanying statement, posted by Mark Thoma. At best, its brevity makes it look straightforward. At worst, it looks like something cobbled together because FOMC members were unable to reach a uniform opinion on the state of the economy.

                                                                                            First, note the single sentence paragraph describing the state of the economy. In August, the FOMC concluded that “growth has moderated.” That was a definitive conclusion about the state of activity. Now the “moderation appears to be continuing. [emphasis added]” Not so definitive, and suggests that not everyone on the FOMC believes that the second quarter slowdown will intensify or even continue – despite the growing housing slowdown, which they acknowledge by dropping the “gradual” modifier. Moreover, they only mention the housing slowdown in explaining why the economy “appears” to be moderating. If that was the only factor they are looking at, wouldn’t you expect a more definitive forecast? As Jim Hamilton reminds us, you can’t exactly miss the relationship between housing and recessions. If housing is your focus, cut rates now! They didn’t cut rates, so there must be more. So where is the rest of their analysis? What are the factors that offset the housing slowdown? Inquiring minds want to know.

                                                                                            OK, so they don’t completely know which way the economy is headed; not entirely unexpected, given that the US economy is almost certainly at an inflection point (although I like to see a bit more confidence from my central bankers, or at least another explanatory sentence). But I would expect the Fed to have a better handle on the inflation situation. Unfortunately, the third paragraph doesn’t leave me very confident on that front either. In the first sentence, energy prices have the “potential to sustain inflation pressures.” In the second sentence, inflation pressures are likely to moderate due to the “reduced impetus from energy prices.” What? WHAT!?! Are energy prices contributing to inflation or not? Shouldn’t the FOMC have an opinion on the impact of energy prices on inflation?

                                                                                            I think the FOMC is trying to say that high energy prices are worrisome, but with oil prices down, or at least stabilizing, the amount of pass through should be easing. That is the generous interpretation, and they could have said it a bit more directly. But it could be that some members do not believe that stabilizing energy prices will have a moderating impact on inflation – Richmond Fed President Jeffrey Lacker is holding firm to his conviction that rates need to be even higher. Presumably, he doesn’t agree with the FOMC statement. I doubt he is alone. In any event, this mixed message stuff is not exactly credibility enhancing.

                                                                                            Interestingly, the early comments from economists at the Wall Street Journal website do not mention the mixed message on energy. I understand that it is in vogue to cut the Fed slack over their communication “strategy,” but I would prefer that someone was willing to hold the Board’s feet over the fire.

                                                                                            Bottom line: The Fed remains on hold, on average more worried about inflation and less worried about growth than market participants. I believe the statement is muddled and reflects a lack of consensus; more to the point, this statement is simply a minor league effort. The more I read it, the more irritated I get.

                                                                                            Am I just irritable and over-reacting? Maybe I should just be happy that rates were held steady.

                                                                                            Update: William Polley and New Economist have more on the information value of the FOMC statement.

                                                                                              Posted by on Wednesday, September 20, 2006 at 02:17 PM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (1)  Comments (11)


                                                                                              The Fed Leaves Target Rate Unchanged at 5.25%

                                                                                              The Federal Open Market Committee voted today to keep the target federal funds rate at 5.25%. The key differences from the last Press Release are:

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                                                                                                Posted by on Wednesday, September 20, 2006 at 11:44 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (9)


                                                                                                If At First You Don't Succeed, Run Another Regression

                                                                                                In political science, and I suspect in economics as well, there is a surprising lack of t-statistics just below the 5% significance level, and a similarly surprising amount just above indicating “scholars “tweak” regression specifications and samples to move barely insignificant results above conventional thresholds”.

                                                                                                Something fishy in political science p-values..., Statistical Modeling, Causal Inference, and Social Science, by Andrew: A comment pointed out this note by Kevin Drum on this cool paper by Alan Gerber and Neil Malhotra on p-values in published political science papers. They find that there are surprisingly many papers with results that are just barely statistically significant (t=1.96 to 2.06) and surprisingly few that are just barely not significant (t=1.85 to 1.95). Perhaps people are fudging their results or selecting analyses to get significance. Gerber and Malhotra's analysis is excellent--clean and thorough.

                                                                                                Here's the abstract from the paper:

                                                                                                Abstract ...This paper examines the two most prominent political science journals (the APSR and the AJPS) and two major literatures in the discipline (the effect of negative advertisements and economic voting) to see if there is evidence of publication bias. We examine the effect of the .05 significance level on the pattern of published findings using what we term a “caliper” test and can reject the hypothesis of no publication bias at the 1 in 100,000,000 level. Our findings therefore strongly suggest that the results reported in the leading political science journals and in two important literatures are misleading and inaccurate due to publication bias. We also discuss some of the reasons for publication bias and propose reforms to reduce its impact on research.

                                                                                                Kevin Drum includes a graph showing this effect explicitly:

                                                                                                Lies, Damn Lies, and....: Via Kieran Healy, ...It is, at first glance, just what it says it is: a study of publication bias, the tendency of academic journals to publish studies that find positive results but not to publish studies that fail to find results. ...

                                                                                                The chart on the right shows G&M's basic result. In statistics jargon, a significant result is anything with a "z-score" higher than 1.96, and if journals accepted articles based solely on the quality of the work, with no regard to z-scores, you'd expect the z-score of studies to resemble a bell curve. But that's not what Gerber and Malhotra found. Above a z-score of 1.96, the results fit the bell curve pretty well, but below a z-score of 1.96 there are far fewer studies than you'd expect. Apparently, studies that fail to show significant results have a hard time getting published.

                                                                                                So far, this is unsurprising. Publication bias is a well-known and widely studied effect, and it would be surprising if G&M hadn't found evidence of it. But take a closer look at the graph. In particular, take a look at the two bars directly adjacent to the magic number of 1.96. That's kind of funny, isn't it? They should be roughly the same height, but they aren't even close. There are a lot of studies that just barely show significant results, and there are hardly any that fall just barely short of significance. There's a pretty obvious conclusion here, and it has nothing to do with publication bias: data is being massaged on wide scale. A lot of researchers who almost find significant results are fiddling with the data to get themselves just over the line into significance.

                                                                                                And looky here. In properly sober language, that's exactly what G&M say:

                                                                                                It is sometimes suggested that insignificant findings end up in “file drawers,” but we observe many results with z-statistics between zero and the critical value. There is, however, no way to know how many studies are “missing.” If scholars “tweak” regression specifications and samples to move barely insignificant results above conventional thresholds, then there may be many z-statistics below the critical value, but an inordinate number barely above the critical value and not very many barely below it. We see that pattern in the data.

                                                                                                We see that pattern in the data. Message to political science professors: you are being watched. And if you report results just barely above the significance level, we want to see your work....

                                                                                                I'd be interested in seeing a similar chart for economics.

                                                                                                  Posted by on Wednesday, September 20, 2006 at 10:41 AM in Economics, Methodology | Permalink  TrackBack (2)  Comments (17)


                                                                                                  An Interview with Martin Feldstein

                                                                                                  This interview with Marty Feldstein covers its share of controversial topics. The interview is fairly long, so if you want to pick and choose the section headers are: The Art of Monetary Policy, Time Consistency in Fiscal Policy, Social Security Reform, European Social Insurance, European Union, The Return of Saving, The Economics of Health and Health Care, Executive Compensation, Supply-Side Economics, Tax Reform Panel, and The NBER:

                                                                                                  Interview with Martin S. Feldstein, by Douglas Clement, Interview on July 10, The Region, September 2006: As a Harvard professor for nearly 40 years, Martin Feldstein has taught economics to thousands of young students, many of whom later became quite influential in their own right—as Treasury secretaries, presidential advisers, corporate leaders, even Fed governors.

                                                                                                  As a policy adviser, he chaired the Council of Economic Advisers during the Reagan years, and landed on the cover of Time magazine in 1984 for his controversial opposition to a growing budget deficit. He has a lower profile in Washington these days but remains extremely influential, helping the current administration develop its tax cut initiatives, for instance.

                                                                                                  And as president of the National Bureau of Economic Research, the nation's preeminent economics think tank, Feldstein has shaped the course of economic scholarship for almost three decades: identifying key issues, encouraging empirical research, creating opportunities for cooperation and disseminating working papers of leading economists long before they appear in academic journals.

                                                                                                  But years from now it is likely that Feldstein will be best remembered as a prescient public citizen, a scholar who identified some of the most serious economic predicaments of our time, developed pragmatic solutions to those problems and then pressed policymakers—persistently—to implement them.

                                                                                                  Social Security. Health insurance. Distortionary taxes. Unemployment insurance. The current account deficit. These are the issues that Feldstein has pushed to the forefront of popular and policy agendas decade after decade. Through a prolific stream of professional articles, newspaper columns and scholarly books, as well as frequent speeches and media interviews, he maintains a stark spotlight on crises that others try to ignore.

                                                                                                  Educated at Harvard and then Oxford, Feldstein returned to Harvard as an assistant professor in 1967 and two years later became one of the youngest economists granted tenure by the university. In 1977, he won the John Bates Clark award as the best American economist under 40.

                                                                                                  Numerous achievements and awards have followed, but Feldstein seems most gratified by close collaboration with colleagues. In the following interview, held during a break from the NBER's 2006 Summer Institute, a three-week gathering in Cambridge of about 1,400 economists, Feldstein notes that earlier in the day Paul Samuelson compared the Institute to Niels Bohr drawing atomic physicists to Copenhagen in the 1920s. “I thought that was a nice sentiment,” Feldstein comments quietly. His smile suggests that he could hardly conceive of higher praise.

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                                                                                                    Posted by on Wednesday, September 20, 2006 at 03:33 AM in Budget Deficit, Economics, Health Care, Monetary Policy, Saving, Social Security, Taxes | Permalink  TrackBack (0)  Comments (12)


                                                                                                    Health Care and Job Growth

                                                                                                    In this post, Robert Reich makes the point that most of the recent job growth has come from two areas, the health care sector and from employment related to the military. Michael Mandel of BusinessWeek Online said recently in a cover story for the magazine that growth in health care is "propping up the economy." Kevin Drum challenged this assertion as "statistical trickery" to which Michael Mandel responded here. Kevin Drum summarizes the debate and responds with:

                                                                                                    The Healthcare Boom Revisited, by Kevin Drum, Political Animal: ....Michael Mandel, who wrote the Business Week cover story... [T]he takeaway from his story was that the American economy is being kept afloat by jobs in the healthcare industry. If you take those jobs away, private sector job growth elsewhere in the economy has been zero for the past five years. I objected that this was "statistical trickery" that could be done during any economic cycle, since if you remove the highest-growth industry you can make any economy look bad. Mandel emails to say that's not right:

                                                                                                    This is a very unusual period where employment gains are so highly concentrated. Let's look at the previous business cycle, for example. Employment peaked in June 1990. Five years later, private sector employment had grown by 6.5 million.

                                                                                                    The single biggest contributor to that growth was health services...but it only accounted for 25% of the private employment gains from 1990 to 1995.

                                                                                                    ....To put it a different way, private employment grew at a 1.4% annual rate from June 1990 to June 1995. Take out health services, and the annual growth rate of the rest of the private sector fell a bit, to 1.1%. Not that big a difference

                                                                                                    Point taken. In the previous cycle, measured five years from the employment peak, the biggest industry (which was healthcare back then too) had contributed a lot of jobs, but not all the jobs. The non-healthcare economy really does look unusually anemic this time around.

                                                                                                    On the other hand, it's also worth looking at a chart Mandel posted elsewhere on his blog. As you can see, it shows very healthy non-healthcare job growth for the past three years. There's no question that ... (measuring from the employment peak for both the 1990 cycle and the 2001 cycle) overall job growth has been exceptionally weak this time around; and there's equally no question that healthcare has been the principal standout. On the other hand, since 2003 non-healthcare industries have accounted for about 80% of all new private sector jobs. I'm not sure this really makes the case that healthcare is the main industry keeping our economy afloat.

                                                                                                    I'm not sure I understand the original objection. If you are trying to explain job growth and taking one industry out has a substantial effect on the job growth figures, that's the point isn't it?

                                                                                                    It isn't about making the economy look good or bad, it's an attempt to explain the source of the change in employment in recent years. Over this time period there is little or no growth in private non-health employment, the level of employment at the end of the sample is very near the level at the beginning. Thus, according to the evidence presented, all of the job creation is from the health care sector. Stated another way, if the health care sector had experienced negative growth, overall growth would be negative and in that sense health care is "propping up the economy" as Michael Mandel claims.

                                                                                                    However, to acknowledge a slight variation on Kevin Drum's point, you could also take out the biggest negative growth industry and, if it has a large impact on the growth figures, talk about how booming the economy would be had that industry not been in decline. I think it's better to identify the largest sources of change - positive or negative - as a starting point in explaining variations in job growth. This is essentially he same type of argument made about core versus overall inflation, core can be a better measure of the underlying trend if there are a few outliers skewing the picture.

                                                                                                      Posted by on Wednesday, September 20, 2006 at 12:45 AM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (85)