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| November 2006 »
John Berry makes a point worth repeating. He says the administration's claim
that it cut taxes is wrong:
Bush Makes Up for Tax Cuts With More Spending, by John M. Berry, Bloomberg:
...Over substantial Democratic opposition, Bush and a Republican-controlled
Congress have cut taxes significantly over the past six years. The problem is
that -- with plenty of cooperation from Democrats -- they have also greatly
From fiscal 2001 to 2006, federal outlays shot up 42 percent, more than
double the 19 percent increase over the previous five years.
In the short run, you can cut taxes and spend more. In the long run, as Nobel
laureate economist Milton Friedman has potently argued, to spend is to tax.
Continue reading "What Tax Cut?" »
Posted by Mark Thoma on Tuesday, October 31, 2006 at 10:36 AM in Budget Deficit, Economics, Politics, Taxes |
In one of the comments in Martin Wolf's forum about
Larry Summers commentary on the difficulties globalization is causing for
the middle class worldwide, Robert Wade writes:
Robert Wade: Larry Summers says: "The economic logic of free, globalised,
technologically sophisticated capitalism may well be to shift more wealth to the
very richest and some of the very poorest in the world, while squeezing people
in the middle." A new study by Peter Edward presents confirming evidence (...
2006, 'Examining Inequality: Who Really Benefits from Global Growth?', World
Development...). Of the increase in world consumption between 1993 and 2001
between 50 and 60 per cent accrued to those in the top 10 per cent of world PPP
income in 1993, of whom four-fifths lived in the (old) OECD and most of the rest
in Latin America. ...
Most of the rest of the increase accrued to the burgeoning middle class of
China. Hardly any accrued to those living on less than $1-a-day, though 'hardly
any' in percentage terms may have been sufficient to push enough people up
...[so] that the number under $1-a-day fell while the number between $1 and
So when Larry talks of the "global middle class" being squeezed he is talking
about the vast majority of the world's population, and the even bigger majority
of the world outside the OECD and China. This should qualify any easy assertion
that "globalization works"...
Larry also says: "[W]ithout its [the global middle class'] support it is very
doubtful that the existing global economic order can be maintained." ... Elites
are likely to sponsor measures that lower inequality only when their legitimacy
is seriously threatened. We see fluctuations in after-tax inequality over time
in response to the degree of threat to the capitalist order or to the survival
of particular states... But despite the ... constancy (not fall) of world income
inequality (the fast rise of China and India notwithstanding), inequality has
hardly [been] an issue [in] global or even national policy discussion. ...
Finally, Larry says that 'the combination of low wages, diffusible technology
and the ability to access global product and financial markets has fuelled an
economic explosion' in Asia, especially in China. The problem here is that low
wage labour is available all over the place, not just in Asia, and diffusable
technology is, from the supply side, diffusable all over the place. Asian
economies have certainly benefitted from being able to access global product and
financial markets... But they have adopted policy regimes that depart in major
ways from the principles that Larry keenly promoted from the US Treasury, whose
spirit is caught in his remark in this column, 'protectionism [note the 'ism',
as though it is a creed, like communism] is counterproductive'.
The governments of the successful economies (think Japan, Taiwan, South
Korea, Singapore for starters) have in practice adopted a variety of policy
instruments to accelerate the national integration of the economy, as a
complement to Larry's central interest in 'international integration'. In the
first three, these policy instruments included managed trade regimes with
substantial amounts of protection ... in line with a larger development
strategy. Larry refers to 'middle-income countries without natural resources
struggl[ing] to define an area of comparative advantage'. I suggest that the
struggle to define and exploit areas of comparative advantage in the context of
increasing competition in world markets may ... involve a more pro-active
directional thrust from the state (the direction established through
state-business-union collaboration) than Larry would be happy to endorse. ...
I don't think state-business-union collaboration is the answer to this
problem. Do you?
Martin Wolf also comments on the article.
Posted by Mark Thoma on Tuesday, October 31, 2006 at 03:17 AM in Economics, Income Distribution, International Trade, Policy |
Here's a discussion of the option backdating controversy from James
Surowiecki at The New Yorker:
The Dating Game, by James Surowiechi, The New Yorker: ..When news broke,
earlier this year, that some companies had backdated stock-option grants ... in
order to make them more valuable, it seemed like a problem that would come and
go quickly... But the scandal has metastasized... What’s distinctive about this
one is that the benefits companies got from backdating were so small. Never, you
might say, have so many cheated so much to gain so little.
The most common stock options are known as “at the money” options, which let
you buy the company’s stock at the price that it had on the day of the grant.
They’re valuable only if the stock price rises after you get them. The companies
involved in the recent scandal were backdating options to a time when the stock
price was lower, making them immediately lucrative. As it happens, companies are
perfectly free to issue options priced below the current market: those are
called “in the money” options, and they’re worth something right when they’re
issued. .. But there’s a rule that companies have to follow when they issue “in
the money” options: they have to disclose it in their financial statements.
The backdating companies broke this rule: they reported how many options they
were issuing, but conveniently omitted the fact that they had been backdated. In
Washington, people say that it’s not the crime that gets you—it’s the coverup.
In the case of backdating, the only crime was the coverup.
The question is why anyone bothered. ... [C]ompanies didn’t need backdating
to lavish huge sums of money on their executives: they could have issued more
at-the-money options to make up the difference, or they could have just handed
out grants of stock. ... Why did they sneak around? One reason is public
relations. Companies typically justify ... stock options by claiming that
they’re an incentive for performance: the executives get rich only if they do a
good job and the stock goes up. Unless executives can time-travel, though, it’s
hard to make that case for backdated options.
The bigger reason for choosing to backdate is to get around some bothersome
accounting regulations. Until recently, the regulations distinguished, for no
good reason, between in-the-money and at-the-money options. In-the-money
options—but not at-the-money options—had to be recorded as an expense, which
drove down reported earnings. Backdating allowed companies to reward employees
with in-the-money options while getting the favorable accounting treatment of
at-the-money options. ...
Classifying the options properly would have lowered the number in the
“earnings” box, and so C.E.O.s assumed that it would also drag down the
company’s stock price. They played games with their accounting because they
thought investors weren’t smart enough to look at the fundamentals. They were
“managing earnings,” massaging the numbers, something that many (perhaps most)
companies do in some form or other... Executives do it because they believe that
if they don’t the stock market will punish them.
They’re wrong. As the investment strategist Michael Mauboussin puts it, “The
market follows cash flows,” not earnings. As long as revenues and expenditures
are reported honestly, [several studies show that] accounting legerdemain
doesn’t fool the market. ...
Posted by Mark Thoma on Tuesday, October 31, 2006 at 02:43 AM in Economics |
Yesterday, we heard from a
physicist about economics. It was not a generally positive review of our
discipline. Today, Chemistry World brings us scientists who, though it appears
less than enthusiastic in some cases, suddenly find economics useful:
Economist’s review marks turning point, Chemistry World: Scientists have
welcomed an economist’s review into the costs of climate change, which warns of
global recession if greenhouse gas emissions are not stabilised.
A proper economic analysis was long overdue, providing independent support
for the views of scientists accused of hyping up climate change, Chris Reay,
National Environment Research Council (Nerc) research fellow at Edinburgh
University, UK, told Chemistry World. ‘If this is the tipping point, I don’t
mind if it comes from an economist,’ he said.
Thanks. We don't mind your help either. The statement refers to the Stern Review on the potential costs of global warming:
The government-commissioned report, carried out by former World Bank chief
economist Sir Nicholas Stern, warns that the global economy could shrink by up
to 20 per cent unless action is taken now to reduce greenhouse gas emissions;
Stern estimates an R&D investment of one per cent of global GDP is needed.
‘The Stern Review finally closes a chasm that has existed for 15 years
between the precautionary concerns of scientists, and the cost–benefit views of
many economists,’ commented Michael Grubb, professor of climate change and
energy policy at Imperial College London and the University of Cambridge, UK.
And, said Grubb, it was encouraging that although Stern saw the problem as
massive and urgent, it could be solved...
Posted by Mark Thoma on Tuesday, October 31, 2006 at 12:50 AM in Economics, Environment, Science |
James Crabtree from NDN reports on a speech given today by Paul Krugman:
Krugman’s Remarks at New America Foundation Economic Conference:
DISCLAIMER: These notes were taken by NDN’s James Crabtree from Paul Krugman’s
opening address to the New America Foundation’s “Back to the Economy” conference
on Monday October 30th 2006. They are notes only, not a written speech
circulated by Mr. Krugman. Any quotes taken should make clear that this is not a
verbatim or official transcript.
Continue reading "NDN: Krugman's Remarks at the New America Foundation Economic Conference" »
Posted by Mark Thoma on Monday, October 30, 2006 at 02:37 PM in Economics, Housing |
Tim Duy weighs in on the controversy over the auto production figures in the
latest GDP release:
Third Quarter GDP, Part II, by Tim Duy: A bit of a controversy is
simmering with regards to the jump in auto production as reported in 3Q06 GDP
report. According to
An unexpected increase in auto production last quarter was a statistical
fluke that will be reversed, making current U.S. economic growth even weaker,
according to a former Commerce Department economist.
The report, in part, leads David Altig to
Even an optimist would have to admit that the
fourth quarter begins with a few pretty big challenges.
While Nouriel Roubini takes
a more aggressive stance:
This mismeasurement of motor vehicle production in Q3 is highly suspicious
coming about ten days before the US mid-term elections. It is also highly
suspicious as it is not clear how the Bureau of Economic Analysis (BEA) at the
Department of Commerce could have made such a gross mistake when seeing an
alleged 26% increase in auto production that was patently at odds with many
facts. During Q3 all the major US automakers - Ford, GM, Chrysler - announced
production cuts for both Q3 and Q4. So, how could the folks at BEA argue and
estimate that production went up by a whopping 26%?.. We thus expect BEA to
provide a rapid clear and open explanation of this gross mismeasurement.
Admittedly, I was surprised as well – but I quickly thought to myself “oh, so
prices fell.” Didn’t seem like a big deal, so I was caught off guard by the
It is worth it to step in and help the BEA – this is not an issue of “gross
mismeasurement.” This is an issue of some confusion about the NIPA accounts
Truth be told, the BEA is not helping itself. From the
Guide to the NIPAs:
Gross domestic product (GDP) (1–34), the featured measure of U.S. output, is
the market value of the goods and services produced by labor and property
located in the United States.
From this definition, it is reasonable to conclude that GDP measures output.
But, as I explain every time I teach principles of macroeconomics, in practice
the BEA does not measure output. Instead, the BEA measures demand:
GDP is measured as the sum of personal consumption expenditures, gross
private domestic investment (including change in private inventories and before
deduction of charges for CFC), net exports of goods and services (exports less
imports), and government consumption expenditures and gross investment. GDP
excludes intermediate purchases of goods and services by business.
Personal consumption expenditures (PCE) (1–15) measures goods and services
purchased by U.S. residents. PCE consists mainly of purchases of new goods and
of services by individuals from private business.
In the background, the BEA is making use of the “national income equals
national output” identity: If it was purchased, we must have had the income for
it, which implies that we produced the output in the first place. Still, in
practice, I am careful about using GDP as a measure of output, simply because it
is calculated by measuring demand (purchases), not supply.
The 3Q06 “mismeasurement” of auto production is a perfect example – the
supposed automobile “production” component of PCE is a
measure of final sales, not
Sales estimates (PCE and PFI) for new cars and trucks are prepared using unit
sales, allocations by sector, and estimates of average expenditure per vehicle…
In converting from nominal to real, a decline in prices yields a positive
increase in real sales, even if nominal sales stay constant (or even fell). As
a demand side concept, this is not a problem. If the price of automobiles falls
relative to other goods in my basket, I am unambiguously better off as my budget
constraint increased. The real quantity of aggregate goods and services I can
consume is greater. No mismeasurement. One, however, has to be careful of the
supply side interpretations.
In practice, I tend to think of GDP as a demand side indicator, particularly
when examining quarterly data. In any event, I find it disingenuous to accuse
the BEA of manipulating the data for political purposes – the confusion is
readily cleared up once you understand how the data are constructed.
Update (by MT): Brad DeLong responds.
Tim Duy responds to Brad:
Update (by Tim Duy): Sorry for the delay – I had to shift to household
production to compensate for a sick child.
Brad DeLong responds:
Now I am confused. Real GDP is (a) real final
demand, plus (b) the change in business inventories. If cars were sold more
cheaply in Q3 than anybody expected--and thus if the same flow of money spent on
auto purchases resulted in more cars sold--then the extra cars sold must have
come out of inventories, right?
Auto companies didn't ramp up production in Q3, did
Which serves to remind me that swimming with the
big fish means you risk getting bitten now and then. Fair enough – some clarity
can’t hurt, especially since Brad is getting to an important point. Note that I
never claimed US auto production increased. My point is simply that the
reported rise in auto production in the GDP accounts – as measured by final
sales – is not necessarily inconsistent with the reported decline in US auto
production. And it certainly does not imply that the BEA is manipulating the
data for political purposes.
Let’s disregard the price decline, and just switch
to physical units. In the comments, spencer points out that auto and light
truck sales rose from 16.17 to 16.63 million units in Q3. Did in fact those
sales never really happen because the Big 3 cut domestic production?
No – at least two channels can be operating. One,
as Brad (and spencer) points out, is inventory depletion. Which gets to the
point that although something may get counted as final sales in 3Q, that doesn’t
mean it was actually produced in 3Q. It could have been counted as an inventory
accumulation in a previous quarter, and is subtracted in the current quarter. If the BEA underestimated inventory draw for this quarter, they can fix it on a
revision – nothing nefarious need be occurring.
Moreover, just because a car is counted as a final
sale in the US in 3Q does not mean it was PRODUCED in the US at all, in any
quarter. In this case, the value is subtracted from GDP in the imports
category. Note the large negative contribution due to rising imports (although
I can’t say this was due to autos). Aggregate data can sometimes mask sectoral
shifts unless you are looking for the shifts. It is not the BEA’s fault that
Detroit chooses to make cars Americans are less interested in purchasing.
Getting back to the price decline, a decline in prices causes a statistical
increase in real output. No big surprise – this is the way the data is
computed. There may be an issue of whether the seasonal variations in prices
have been accounted for properly. I have mused on this with other data. But I
try to remember that the BEA has very qualified economists who spend hours
studying the minutiae of these data, including the seasonal effects.
Posted by Mark Thoma on Monday, October 30, 2006 at 01:28 PM in Economics |
Paul Krugman on the economic and political consequences of the slumping
Bursting Bubble Blues, by Paul Krugman, Housing Bust, Commentary, NY Times:
Here are the five stages of housing grief:
1. Housing bubble? What housing bubble? “A national severe price distortion
[in housing] seems most unlikely in the United States.” (Alan Greenspan, October
2. “There’s a little froth in this market,” but “we don’t perceive that there
is a national bubble.” (Alan Greenspan, May 2005)
3. Housing is slumping, but “despite what you hear from some of the Eeyores
in the analytical community, a recession is not visible on the horizon.”
(Richard Fisher, president of the Federal Reserve Bank of Dallas, August 2006)
4. Well, that was a lousy quarter, but “I feel good about the U.S. economy, I
really do.” (Henry Paulson, the Treasury secretary, last Friday)
5. Insert expletive here.
We’ve now reached stage 4. Will we move on to stage 5?
Over the last few years, ... the housing boom became a bubble, fueled by a
surge of irresponsible bank lending, which continues even now. ... The question
now is how much pain the bursting bubble will inflict.
Last week’s report on G.D.P. showed the first signs of serious economic
damage. According to the “advance” estimates (which are often subject to major
revisions), growth in the third quarter of 2006 slowed to its worst level since
early 2003. A plunge in spending on residential construction, which fell at an
annual rate of 17 percent, was the main culprit. ...
Some say the worst is already over. Mr. Greenspan, who’s been an optimist all
the way, now argues that the latest data on new-home sales and mortgage
applications suggest that housing has already bottomed out. Business investment
is still growing briskly, and so far consumers haven’t cut their spending. So
maybe this is as bad as it gets.
But I think the pessimists have a stronger case. There’s a lot of evidence
that home prices, although they’ve started to decline, are still way out of
line. Spending on home construction remains abnormally high as a percentage of
G.D.P., because banks are still lending freely in spite of rapidly rising
This means that home sales probably still have a long way to fall. ...
Moreover, much of the good news in the latest economic report is unsustainable
at best, suspect at worst. Almost half of last quarter’s estimated growth was
the result of a reported surge in automobile output, which some observers think
was a statistical illusion... So this is probably just the beginning. ...
In case you’re wondering, I don’t blame the Bush administration for the
latest bad economic numbers. If anyone is to blame for the current situation,
it’s Mr. Greenspan, who pooh-poohed warnings about an emerging bubble and did
nothing to crack down on irresponsible lending.
Still, the bad news will have political consequences. The Bush administration
has been trying to shift attention away from the disaster in Iraq to an
allegedly booming economy. That strategy wasn’t working too well even when the
headline numbers were good, because it never felt like a boom to most Americans.
But now even the headline numbers have turned lousy.
And if that hurts the G.O.P. in next week’s election, well, there’s a certain
poetic justice involved. The administration tried to claim undeserved credit for
the positive effects of the housing boom, so why shouldn’t it receive some blame
for the negative effects of the housing bust?
Previous (10/27) column:
Paul Krugman: The Arithmetic of Failure
Next (11/3) column: Paul Krugman: As Bechtel Goes
Posted by Mark Thoma on Monday, October 30, 2006 at 12:15 AM in Economics, Housing, Monetary Policy, Politics |
This is Philip Ball, "consultant editor of Nature and the author of Critical
Mass," with a criticism of neoclassical theory:
Baroque fantasies of a most peculiar science, by Philip Ball, Commentary,
Financial Times (free): It is easy to mock economic theory. Any fool can see that
the world of neoclassical economics, which dominates the academic field today,
is a gross caricature in which every trader or company acts in the same
self-interested way – rational, cool, omniscient. The theory has not foreseen a
single stock market crash and has evidently failed to make the world any fairer
or more pleasant.
The usual defence is that you have to start somewhere. But mainstream
economists no longer consider their core theory to be a “start”. The tenets are
so firmly embedded that ... it is ... rigid dogma. To challenge these ideas is
to invite blank stares of incomprehension – you might as well be telling a
physicist that gravity does not exist.
That is disturbing because these things matter. Neoclassical idiocies
persuaded many economists that market forces would create a robust post-Soviet
economy in Russia (corrupt gangster economies do not exist in neoclassical
theory). Neoclassical ideas ... may determine ... how we run our schools,
hospitals and welfare system. If mainstream economic theory is fundamentally
flawed, we are no better than doctors diagnosing with astrology.
Neoclassical economics asserts two things. First, in a free market,
competition establishes a price equilibrium that is perfectly efficient: demand
equals supply and no resources are squandered. Second, in equilibrium no one can
be made better off without making someone else worse off.
The conclusions are a snug fit with rightwing convictions. So it is tempting
to infer that the dominance of neoclassical theory has political origins. But
... the truth goes deeper. Economics arose in the 18th century in a climate of
Newtonian mechanistic science, with its belief in forces in balance. And the
foundations of neoclassical theory were laid when scientists were exploring the
notion of thermodynamic equilibrium. Economics borrowed wrong ideas from
physics, and is now reluctant to give them up.
This error does not make neoclassical economic theory simple. Far from it. It
is one of the most mathematically complicated subjects among the “sciences”, as
difficult as quantum physics. That is part of the problem: it is such an
elaborate contrivance that there is too much at stake to abandon it.
It is almost impossible to talk about economics today without endorsing its
myths. Take the business cycle: there is no business cycle in any meaningful
sense. In every other scientific discipline, a cycle is something that repeats
periodically. Yet there is no absolute evidence for periodicity in economic
fluctuations. Prices sometimes rise and sometimes fall. That is not a cycle; it
is noise. Yet talk of cycles has led economists to hallucinate all kinds of
fictitious oscillations in economic markets. Meanwhile, the Nobel-winning
neoclassical theory of the so-called business cycle “explains” it by blaming
events outside the market. This salvages the precious idea of equilibrium, and
thus of market efficiency. Analysts talk of market “corrections”, as though
there is some ideal state that it is trying to attain. But in reality the market
is intrinsically prone to leap and lurch.
One can go through economic theory systematically demolishing all the
cherished principles that students learn... [I]t is abundantly clear that
herding – irrational, copycat buying and selling – provokes market fluctuations.
There are ways of dealing with the variety and irrationality of real agents
in economic theory. But not in mainstream economics journals, because the models
defy neoclassical assumptions.
There is no other “science” in such a peculiar state. A demonstrably false
conceptual core is sustained by inertia alone. This core, “the Citadel”, remains
impregnable while its adherents fashion an increasingly baroque fantasy. As Alan
Kirman, a progressive economist, said: “No amount of attention to the walls will
prevent the Citadel from being empty.”
The author seems to believe he has a better theory of aggregate fluctuations:
[I]t is abundantly clear that herding – irrational, copycat buying and
selling – provokes market fluctuations.
That's fine, but when he says "The theory has not foreseen a single stock
market crash" as his argument against neoclassical theory, he should first
realize macroeconomists don't focus on predicting the stock market, and then he
ought to put his theory to the same test. Can he predict stock market crashes?
If he can predict the stock market's random walk behavior, will he then go on to show he
can provide improved forecasts of the things macroeconomists care about? More
generally, can physicists predict earthquakes, etc.? If I ask, why is
there gravity, will physicists be able to tell me? Should I accept string theory as
evidence of their success and superiority? The existing paradigm in physics
doesn't work and the new one, string theory, doesn't produce testable
implications and may be little more than mathematically sophisticated
philosophic musings - is that where we want to head?
I don't mind the criticism, it's good for us and there are truths in what is
said. But I always resent the arrogance of scientists from other fields thinking
they can mosey on over to economics for a few minutes, diagnose our ills, and
solve all our problems. I'd suggest they solve the problems in their own
discipline first, or show a bit more humility when giving advice to others, especially when, as above, they are clearly unaware of vast swaths of literature such as the published work on corruption. And along those lines, and for the record, we're well aware of and have models for the list of things he mentions
in his "abundantly clear" theory of market fluctuations. If he actually tried to
build these models rather than simply casting aspersions at the existing
paradigm, he'd find it isn't as clear as he thinks.
Update: I'd characterize this as a typical response to this post -
Thoma was off the mark, but interesting discussion!:
Economics vs physics chez Thoma, by Felix Salmon: Mark Thoma's readers are
certainly busy on weekends! A post of his on the general subject of physics vs
economics went up on Sunday, and already it's got 52 comments and counting.
The impetus for the blog entry is a piece by Philip Ball in the FT, wherein a
hard scientist attacks the soft scientists in the economic realm for their
dogmatism and lack of falsifiability.
Thoma initially takes a slightly dubious tack in response, complaining that
physicists can't predict earthquakes (they never claimed that they could) and
that "the existing paradigm in physics doesn't work" (it does). But things
rapidly get more subtle and interesting in the comments: a prime example of the
blog format really enriching the debate.
Let me join in and also trumpet the quality of the comments I get here, and say thanks while I'm at it.
Posted by Mark Thoma on Sunday, October 29, 2006 at 02:57 PM in Economics, Science |
Because of the problems globalization and technological change have created
for middle class workers, Larry Summers believes that the advancement of global
integration will depend upon "what can be done for the great global middle"
through policies enacted by the "best parts of the progressive tradition." He
has in mind progressives who "do not oppose the market system," instead "they
improve on the outcomes it naturally produces":
The global middle cries out for reassurance, by Larry Summers, Commentary,
Financial Times (free): ...Neither the after-effects of September 11 2001
nor a tripling in oil prices has prevented the world’s economy from growing
faster in the past five years than in any five-year period in recorded economic
history. Given this recent performance and the ... optimistic outlook, one might
have expected this to be a moment of particularly great enthusiasm for the
market system and for global integration.
Yet in many corners of the globe there is growing disillusionment. From the
failure to complete the Doha trade round to pervasive Wal-Mart-bashing, from
massive renationalisation in Russia to the success of populists in Latin America
and eastern Europe, we see a [growing] degree of anxiety about the market
Why is there such disillusionment? Some anti-globalisation sentiment can be
seen as ... arising from the Bush administration’s foreign policy misadventures.
But there is a much more troubling source: the growing recognition that the vast
global middle is not sharing the benefits... – and that its share of the pie may
even be shrinking.
Continue reading "Summers: The Global Middle Cries Out for Reassurance" »
Posted by Mark Thoma on Sunday, October 29, 2006 at 11:23 AM in Economics, Income Distribution, International Trade |
After listing some of the items on the Democrat's policy agenda, Jonathan Chait explains why Republicans are attempting to deflect the political conversation
away from the content and merit of the Democrat's proposals during the election campaign using their usual
trick of aggressively defining the Democrat's position as extreme, and then
running against it:
Running against the boogeyman: Party of ideas? Not the GOP, by Jonathan Chait:
...Democrats running for the House of Representatives actually have an agenda.
... If you're like most people, you probably have no idea what that agenda is.
Let me list it:
- Put new rules in place to break the link between lobbyists and legislation.
- Enact all the recommendations made by the 9/11 commission.
- Raise the federal minimum wage to $7.25 an hour.
- Cut the interest rate on federally supported student loans in half.
- Allow the government to negotiate directly with pharmaceutical companies for
lower drug prices for Medicare patients.
- Broaden the types of stem cell research allowed with federal funds.
- Impose pay-as-you-go budget rules, requiring that new entitlement spending
or tax cuts be offset with entitlement spending cuts or tax hikes.
Republicans disagree with all these items. Indeed, the reason these items are
on the Democratic agenda is that Republicans in Congress have blocked them from
coming up for a vote. So where's the Republican rebuttal? ...
My point is, we're not even getting a debate about a caricature of the
Democratic position, let alone the actual one. Instead, we're getting things
like this: GOP Rep. John Hostettler of Indiana is running an ad warning that if
Democrats take power and California Democrat Nancy Pelosi becomes House speaker,
she "will then put in motion her radical plan to advance the homosexual
What is the homosexual agenda? The ad does not say. (Apparently it involves
raising the minimum wage and cutting the interest rate on government-backed
student loans. I can just see it if the Democrats win — all those gay Wal-Mart
employees, cackling with glee as they use their fat $7.25-an-hour salaries to
pay off their suddenly puny college debts.)
Which is my point. Republicans don't want an actual choice election, they
want to run against a mythological Democratic Party so frightening that the
voters overlook all the GOP's failures. ... They raise the specter of a radical
Democratic agenda, but they refuse to say what they don't like about that
agenda. And there's a good reason for that: It's popular.
When will Democrats stop allowing the other side to define them? I'm not sure
why this has been such a problem in recent elections, but it's been frustrating
to watch it happen again and again. Perhaps this will improve next election if,
as looks likely even with the ongoing problem of defining themselves to the
public, Democrats are able to regain some degree of power. Control of the House
gives Democrats the opportunity to propose policies that define and publicize
their policy agenda and, if they propose the right policies, this puts them in a much
better position to present a well-known and well-defined policy agenda to the
public during the campaign.
Posted by Mark Thoma on Sunday, October 29, 2006 at 01:35 AM in Economics, Politics |
John Whitehead at Hypothetical Bias on the relative value of sports and academics in higher education:
Perfect substitutes: At halftime of the ASU-Furman game..., the ASU
Chancellor (i.e., President) stated that holding the NCAA I-AA championship
football trophy felt just as good as having a Nobel Prize winner on the
Posted by Mark Thoma on Saturday, October 28, 2006 at 05:05 PM in Economics, Universities |
According to this report, acting now to avoid the negative consequences of global warming will require 1% of GDP, while waiting until later will cost between 5-20% of GDP:
Economist: Global warming will be costly, by Thomas Wagner, The Associated
Press: A comprehensive report on the global economic cost of climate change,
to be released by the British government Monday, is expected to be the world's
most serious effort to quantify the long-term effect of doing nothing.
The Independent newspaper reported Friday that the long-awaited review would
say global warming could cost the world's economies up to 20 percent of their
gross domestic product if urgent action is not taken to stop floods, storms and
Author Sir Nicholas Stern met privately with Prime Minister Tony Blair and
his Cabinet ministers Thursday to brief them about his findings. Stern, a
government adviser on climate change, is a former chief economist of the World
Quoting unidentified officials at the briefing, The Independent said Stern
warned the world would have to pay 1 percent of its annual gross domestic
product now to avert catastrophe but that doing nothing could later cost five to
20 times that amount.
"Business as usual will derail growth," the paper quoted Stern as saying as
he briefed the government on his 700-page report, covering a period up to the
The report was mandated by Blair's treasury chief, Gordon Brown, who is
expected to replace Blair when he steps down as prime minister next year. Brown
recently said he would use the report to alert governments around the world that
they have been too slow to recognize — let alone fight — the threat of climate
Posted by Mark Thoma on Saturday, October 28, 2006 at 04:49 PM in Economics, Environment, Policy |
From the NBER Digest, research on the "persistently large black-white
differences in standardized test scores":
Scores: Neighborhoods, Not Schools, Matter Most, by David R. Francis, NBER
Digest: The large gap in student achievement, particularly between blacks
and whites, has long troubled Americans. Fifty years after the Brown v. Board of
Education decision, persistently large black-white differences in standardized
test scores remain central to education policy.
In Racial Segregation and the Black-White Test Score Gap (NBER Working Paper
No. 12078 [open
link]), NBER researchers David Card and Jesse Rothstein cast some fresh and
perhaps surprising light on this issue. Using data from SAT records for roughly
one third of test takers in the 1998-2001 high school graduation classes, they
find that the black-white achievement gap is clearly linked to racial
Continue reading "Black-White Test Scores: Neighborhoods Matter" »
Posted by Mark Thoma on Saturday, October 28, 2006 at 04:04 PM in Economics, Policy |
Here's part of an interview with terrorism expert Ron Suskind. This isn't about economics, but I thought you should know that capturing and threatening "grievous injury" to young children is one of our interrogation methods:
President Knows More Than He Lets On", Spiegel Online: One hundred suspected
terrorists from all over the world are still being held in secret American
prisons. In an interview with Spiegel Online, CIA expert Ron Suskind accuses
Washington of "running like a headless chicken" in its war against al-Qaida. He
reserves special criticism for the CIA's torture methods, which he argues are
Continue reading "Suskind: The President Knows More Than He Lets On" »
Posted by Mark Thoma on Saturday, October 28, 2006 at 12:53 PM in Economics, Iraq and Afghanistan, Politics, Terrorism |
The San Francisco Fed looks at the likely consequences of a sudden
reversal in the current account and concludes that should a "sudden
stop" occur, the risks of substantial disruption are low:
What Are the Risks to the United States of a Current Account Reversal?, by Diego
Valderrama, FRBSF Economic Letter: The U.S. current account has been in
deficit since the beginning of the 1980s, except for a brief period in 1991, and
has grown to 6.6% of gross domestic product (GDP) in the second quarter of 2006.
The growing deficit has clearly caught the attention of policymakers and
analysts. As Fed Chairman Bernanke put it in a speech he gave while a Governor
of the Federal Reserve Board, "the current pattern of international capital
flows—should it persist—could prove counterproductive" (Bernanke 2005).
The current account measures the difference between domestic income and
expenditures, and it is the mirror image of the funding needed to finance this
difference. With the deficit in the current account at historic highs, there is
a perceived risk that it could quickly reverse (become less negative) if, for
any reason, the United States should lose access to the financing that covers
the income-expenditures gap. For example, this could happen as a result of a
reduction in the demand for U.S. assets if foreign central governments
diversified their reserves.
Economic theory does not offer a robust prediction as to how a current
account reversal impacts economic growth, asset prices, or the exchange rate.
Indeed, in the simplest models of open economies, countries can run very large
current account deficits without much impact at all, as long as they reduce
those deficits eventually by repaying old loans. However, other models predict
that current account reversals can have a negative impact on economic output,
asset prices, and the exchange rate (Mendoza 2006, Obstfeld and Rogoff 2005).
Still other models predict that adjustments leading to strong exports and
current account surpluses can boost income. Given the lack of a theoretical
consensus, this Letter turns to the recent empirical literature to learn more
about the potential risks to the U.S. economy of a possible current account
reversal and about the factors that are associated with more disruptive
Continue reading "Current Account Adjustments and Economic Growth" »
Posted by Mark Thoma on Saturday, October 28, 2006 at 01:43 AM in Economics, International Finance |
Some science. Brian Greene defends string theory against charges that it is
of little use because it fails to deliver testable implications:
Universe on a String, by Brian Greene, Commentary, NY Times: ...Einstein's belief that he'd
one day complete the unified theory rarely faltered. Even on his deathbed he
scribbled equations in the desperate but fading hope that the theory would
finally materialize. It didn't.
In the decades since, the urgency of finding a unified theory has only
increased. Scientists have realized that without such a theory, critical
questions can't be addressed, such as how the universe began or what lies at the
heart of a black hole. These unresolved issues have inspired much progress, with
the most recent advances coming from an approach called string theory. Lately,
however, string theory has come in for considerable criticism. And so, this is
an auspicious moment to reflect on the state of the art. ...
Continue reading "Vibrating Filaments of Imagination" »
Posted by Mark Thoma on Saturday, October 28, 2006 at 12:24 AM in Science |
Tim Duy with a Fed Watch following today's disappointing report on real GDP
Soft GDP Report Anticipated by The Fed, by Tim Duy: Brad DeLong responds to the headline GDP number with
some hand wringing:
The BEA says:
GDP (Third Quarter 2006 (advance)): 1.6% [per year]
The odds of the Fed's cutting interest rates soon just went up.
More to follow...
I like the title – I can imagine Brad saying “gork” while settling down with
his morning coffee. Unsurprisingly, Nouriel Roubini finds
occasion to gloat:
The first estimate of Q3 GDP growth is a dismal 1.6%, sharply lower than the
5.6% of Q1 and the 2.6% of Q2. In July - when I first predicted a US recession
in 2007 - I forecasted
that Q3 GDP growth would be 1.5% at the time when the market consensus was
Of course, Nouriel can’t help himself but to take the opportunity to double
down on his bet that the US is headed toward a recession:
The first leading indicator of economic activity for October – the Philly,
Richmond and Chicago Fed reports – are all consistent with a further economic
slowdown in Q4 relative to Q3. I thus keep my forecast that Q4 growth will be
between 0% and 1% and that the economy will enter into an outright recession by
Q1 of 2007 or, at the latest, Q2.
But more on Nouriel later. The
of economists was well represented in the Wall Street Journal ($$$). Pick
the economist that best fits with your trading strategy:
[T]he markets are already split between [inflation] rebound or further
softness in the fourth quarter. We expect the latter, triggering a Fed ease [of
interest rates] in March. -- Ian Shepherdson, High Frequency Economics
[T]he Fed got the moderation in growth that it was expecting and
hoping for … However, any expectations of Fed easing at this point would be very
premature, in our judgment, as demand growth was fairly solid outside of housing
and, partly fueled by real income gains from lower energy prices … we continue
to expect the next move from the Fed to be a rate hike, but we see such a move
as being data dependent and not occurring until the January/March timeframe. --
John Ryding, Bear Stearns
The latter is a good place for me to take over. This GDP report was
anticipated by the Fed, and by adding an explicit forecast into Wednesday’s FOMC
statement: “Going forward, the economy seems likely to expand at a moderate
pace.” This was a deliberate effort to get ahead of the data, and stave off
expectations of a rate cut. Did it work? Given the rally in bonds and the
comments of DeLong and Shepherdson, I would say “not really.” Nor am I
surprised. The Fed is
fighting against history here, as Kash reminds us.
The Fed will not lose much sleep over this GDP report. Yes, the headline
number is low. But the devil is in the details, and the Fed will be drawn
toward three in particular. The first is the 3.1% gain in consumption spending
– the wealth effect from a declining housing market has yet to hit consumers in
earnest. The second is the 8.6% gain in fixed investment, and the revival of
equipment and software spending to a 6.4% rate. Outside housing, investment
spending is slowing, not collapsing. The third point is the import surge.
Underlying domestic demand must be pretty strong; we can’t remotely satisfy our
consumptive desires on domestic productive capacities.
The Fed will also be drawn to the deceleration in core inflation; core-PCE
rose at 2.3% annual rate, down from the 2.7% rate in the second quarter. Still,
inflation remains too high, and Fed officials will remain vigilant.
In short, the GDP report is consistent with the Fed’s view on the economy: A
slowdown in the housing sector, with minimal spillover into other parts of the
economy, and moderating inflation numbers. For the Fed, these are “stay the
course” numbers (for some reason, I just can’t get that phrase out of my head).
But the third quarter is now behind us, sunk cost, history. We are already
one month into the fourth quarter, which is where the real action will happen.
First, will the wealth effect bite in consumers? Nouriel (of course), thinks
This weakness in residential and non-residential construction will directly
affect retail activity where employment has already started to fall. Expect in
Q4 and 2007 actual fall in durable consumption (autos, housing related
consumption such as furniture and home appliances and other big ticket items) as
the housing slowdown, the fall in home prices and the negative wealth effects of
falling prices and reset of ARMs take a toll on consumption, especially
housing-related durable one.
I suppose somebody has to be the anti-Nouriel, if only to maintain a “fair
and balanced” blogsphere. Note that Nouriel cleverly covers his back by
limiting his analysis to the volatile durable goods component, limiting his
exposure on his claim that consumer spending is about to collapse. Recall from
Nouriel’s take on the
2Q06 GDP report:
Real private consumption (that is 70% of aggregate demand) was growing only
2.5% in Q2, with durable goods consumption actually falling 0.5% led by lower
purchases of cars and of goods related to housing: as housing slumps consumers
are buying less furniture, home appliances, etc.. Expect even worse consumption
growth in H2, as a further slumping housing sector, higher oil prices and high
interest rates are seriously shaking saving-less, debt-ridden consumers whose
real wages are falling.
So far, consumption growth is accelerating, not deteriorating in H2. Why
aren’t households listening to Nouriel? Don’t they get it? On a basic
psychological level, it is always good to touch base with Keynes:
For a man’s habitual standard of life usually has the first claim on his
income, and he is apt to save the difference which discovers itself between his
actual income and the expense of his habitual habit; or, if he does adjust his
expenditures to changes in his income, he will over short periods do so
This phrase is both underlined AND starred in my copy of The General Theory,
so it must be important. It serves to remind me that consumer behavior changes
slowly, especially on the downside. Once you are accustomed to a certain
standard of living, you tend to resist downsizing. Hence why consumer spending
rarely shifts as quickly as economists think it should.
Will 4Q be the turning point for consumers? Not so far, according to the
early data. The University of Michigan reading on consumer sentiment jumped in
October, telling me that consumers are happy. And only one thing makes
consumers happy – SPENDING. Plus, they still have their jobs; initial
unemployment claims continue to hover around 300k. Nothing to lose sleep about
on that point. Moreover, real incomes are rising: according the GDP report,
real disposable personal income stands 3.9% higher than 3Q05.
Oh, and oil prices fell.
Turning toward investment, I believe this is where you need to push to
generate a recession. Specifically, business investment.
Calculated Risk argues that declining residential investment will be
followed by declining nonres fixed investment. This is the risk factor I am
watching, but so far not seeing. Note that the pace of new orders for
nondefence, nonaircraft capital goods accelerated through the second quarter,
rising 0.6%, 0.8%, and 1.1% for July, August, and September (watch – October
they will drop). Unfilled orders continue to grow as well.
Also, there is a reasonable chance that investment spending is held back by
the delayed launch of Windows Vista. And note this
Norfolk Southern Corp., the fourth-largest U.S. railroad, boosted freight
rates, helping third-quarter profit increase 38 percent. Sales rose 11 percent.
''Overall, we don't see any drastic slowing of the entire economy,'' Norfolk
Southern Chief Executive Officer Charles ``Wick'' Moorman said in an interview.
``We think that pricing power will stay with us for a while.''
I pay attention to what the rail barons say – they generally have a good
sense of economic activity.
Turning toward the jump in imports leads me to this bizarre claim:
The housing sector and the growing trade deficit were the main
culprits … subtract[ing] from growth 1.1% and 1.3%, respectively. Confounding
naysayers, consumers and business investment continued to stave off the
recession that the housing adjustment and the tide of imports could easily
cause. -- Peter Morici, University of Maryland
A “tide in imports” is almost certainly NOT going to cause a recession. Yes,
yes, it contributes negatively to GDP, but only because we are buying more stuff
than we can produce domestically. Rising imports must indicate strong demand.
A positive contribution from imports – import compression – would be more
consistent with weak economic conditions. For example, imports contributed
positively to growth in 2001 and 2002. Has everyone forgotten that little party
called the Asian financial crisis? Serious import compression. I suspect that
crowded port conditions are pushing the Holiday import binge earlier into the
year, and the seasonals have not quite caught up. If so, import growth will not
be so strong in Q4.
All right, I have rattled off enough for one blog. I believe the risk of a
hard landing is not insignificant, but recent data does not point in that
direction. We are not seeing the hallmarks of a hard landing such as collapsing
core durable goods orders, rising jobless claims, or plummeting consumer
confidence. Without those signals, the Fed will stick to the soft landing
story. Consequently, the Fed is not likely to view 3Q06 report as disastrous;
they will view as in line with their expectations. Will those expectations be
correct? Time will tell.
Posted by Mark Thoma on Friday, October 27, 2006 at 02:58 PM in Economics, Fed Watch, Monetary Policy |
Free Exchange from The Economist reviews today's
release of GDP data showing
third quarter real GDP growth falling to 1.6% (advance estimate) and discusses some of
the political implications:
Big, bad news for Mr Bush, by Economist.com: It is hard to contemplate the
new US GDP figures without a mental image forming of Republican campaign
strategists rolling around on the ground, gripping their bellies and moaning "It
hurts! It hurts!" Second quarter GDP growth was a lacklustre 2.6% (annualised)...
This morning ... the news came that America's economy had disappointed again,
growing by just 1.6% in the third quarter... There has been a tepid attempt to
bring up the Dow's record levels, but this has fallen rather flat: the record
isn't a record if you adjust for inflation, and anyway, the Dow isn't a very
good proxy for economic health, or even investor confidence. It has only thirty
companies in it, and these are weighted by cost rather than market
capitalisation, which means that it is easily blown about by outsized movements
in the prices of a few stocks. The S&P 500, which is much more representative,
is still well below its 2000 peak.
In the New York Times on Tuesday, Eduardo Porter wrote
This Time, it's Not the Economy:
President Bush, in hopes of winning credit for his party’s stewardship of the
economy, is spending two days this week campaigning on the theme that the
economy is purring. “No question that a strong economy is going to help our
candidates,” Mr. Bush said in a CNBC interview yesterday, “primarily because
they have got something to run on, they can say our economy’s good because I
voted for tax relief.”
But Republican candidates do not seem to be getting any traction from the
glowing economic statistics with midterm elections just two weeks away.
We'd suggest that this is because the statistics, like GDP, are not actually
glowing; in fact, they're barely emitting enough light to check your watch by.
Even fantastic headline numbers, like 4.6% unemployment, disguise weak wage
growth and sagging labour force participation. Perhaps even more problematically
for the Republicans, what growth there is isn't being felt by the average voter.
Companies are increasing compensation--but they're spending it on benefits like
health insurance, which doesn't feel the same as a wage increase even if you're
one of the unlucky few who gets a $100,000 cancer treatment out of it. And
income growth is concentrated among the wealthy, who are too few to swing an
Ironically, this last may be helping the Republicans, a little, by fuelling
surging tax revenues. These have reduced his administration's projected budget
deficits to roughly 2% of GDP, which is practically parsimonious by historical
standards. That makes Mr Bush's tax cuts, eagerly supported by Republicans, look
a lot more affordable. Though probably we won't hear Mr Bush, or any other
Republicans, thanking rising income inequality in any of their stump speeches.
Update: Free Exchange has an update that tries to paint a rosier picture of the data based upon this (free) article on the GDP figures from The Economist. However, as noted, even if the current figures do provide some hope, and there is doubt about that, there is a "grimmer picture for the long-run."
Posted by Mark Thoma on Friday, October 27, 2006 at 09:31 AM in Economics, Politics |
Some unpleasant military arithmetic:
Arithmetic of Failure, by Paul Krugman, Commentary, NY Times: Iraq is a lost
cause. It’s just a matter of arithmetic: given the violence of the environment,
with ethnic groups and rival militias at each other’s throats, American forces
there are large enough to suffer terrible losses, but far too small to stabilize
the country. ...
Afghanistan, on the other hand, is a war we haven’t yet lost, and it’s just
possible that a new commitment of forces there might turn things around.
The moral is clear — we need to get out of Iraq, not because we want to cut
and run, but because our continuing presence is doing nothing but wasting
American lives. And if we do free up our forces ..., we might still be able to
The classic analysis of the arithmetic of insurgencies is a 1995 article by
James T. Quinlivan, an analyst at the Rand Corporation. “Force Requirements in
Stability Operations” ... looked at the number of troops that peacekeeping
forces have historically needed to maintain order and cope with insurgencies.
Mr. Quinlivan’s comparisons suggested that ... in some cases it was possible
to stabilize countries with between 4 and 10 troops per 1,000 inhabitants. But
examples like the British campaign against communist guerrillas in Malaya and
the fight against the Irish Republican Army in Northern Ireland indicated that
... a difficult environment could require about 20 troops per 1,000 inhabitants.
The implication was clear: “Many countries are simply too big to be plausible
candidates for stabilization by external forces,” Mr. Quinlivan wrote. ...
Iraq is a cauldron of violence, far worse than Malaya or Ulster ever was. And
that means that stabilizing Iraq would require a force of at least 20 troops per
1,000 Iraqis — that is, 500,000 soldiers and marines.
We don’t have that kind of force. The combined strength of the U.S. Army and
Marine Corps is less than 700,000 — and the combination of America’s other
commitments plus the need to rotate units home for retraining means that only a
fraction of those forces can be deployed for stability operations at any given
time. Even maintaining the forces we now have deployed in Iraq ... is slowly
breaking the Army.
Meanwhile, what about Afghanistan? ... If Afghanistan were in as bad shape as
Iraq, stabilizing it would require at least 600,000 troops — an obvious
However, things in Afghanistan aren’t yet as far gone as they are in Iraq,
and it’s possible that a smaller force — one in that range of 4 to 10 per 1,000
... — might be enough to stabilize the situation. But right now, the forces
trying to stabilize Afghanistan are absurdly small: we’re trying to provide
security to 30 million people with a force of only 32,000 Western troops and
77,000 Afghan national forces.
If we stopped trying to do the impossible in Iraq, ... we and the British ...
might still do some good. But we have to do something soon: the commander of
NATO forces in Afghanistan says that most of the population will switch its
allegiance to a resurgent Taliban unless things get better by this time next
It’s hard to believe that the world’s only superpower is on the verge of
losing not just one but two wars. But the arithmetic of stability operations
suggests that unless we give up our futile efforts in Iraq, we’re on track to do
Previous (10/23) column:
Paul Krugman: Don't Make Nice
Next (10/30) column: Paul Krugman: Bursting Bubble Blues
Posted by Mark Thoma on Friday, October 27, 2006 at 12:15 AM in Economics, Iraq and Afghanistan, Politics |
Daniel Gross on a new Republican talking point, "Dow 12,000":
How Now, Grown Dow?, by Daniel Gross,
Slate: The Dow Jones industrial average first closed above 12,000 on Oct.
19, and has remained above that lofty benchmark ever since. ... Dow 12,000
quickly became a Republican talking point. ... Dick Cheney boasted that "we've
got all-time record highs on the Dow Jones Industrials again today." ... White
House flack Tony Fratto noted that "we're seeing record highs in some of the
markets, and that tells us, and we think it tells Americans, that there is a
great deal of confidence in our economic future."
So far, Republican candidates don't seem to be benefiting from the Dow
record, which is less surprising than it seems. For starters, the Dow's success
does not mean that stock-market investors in general are thriving, because the
Dow does not well represent the whole market. The Dow has a long and
distinguished history... But as an overall stock-market proxy and investment
tool, it's an also-ran. The ... index only accounts for less than one-quarter of
the market. And because of its weighting system, the performance of a few stocks
can have a disproportionate impact. ...
The S&P 500, whose constituents represent 80 percent of the overall market,
is a much more accurate gauge of general market performance. ... And when you
look at the S&P 500, it's clear that the stock-market recovery is not as broad
as the Republicans would like you to think. Though it has recovered
substantially from its 2002 low, the index is still off nearly 10 percent from
its 2000 peak. As for the tech-heavy Nasdaq 100, ... it would have to nearly
triple in order to set a record high. So, the claim that "the stock market" is
at an all-time high simply doesn't match most investors' experiences.
What's more, 12,000 doesn't really even represent a record high for the Dow.
In absolute numbers, the Dow is higher than ever. But.... In real terms, the Dow
is still nowhere near the peak it hit several years ago. ...
[S]ome of those who are trumpeting the high nominal value of the stock market
are urging people to focus on the real, inflation-adjusted value of another
asset that has been at record highs recently. Take a gander at George Will's
absurd column last week. ... Will celebrates the record nominal high in stock
prices but urges readers to focus on the real price of oil. By mixing and
matching real and nominal, Will could just as easily have argued that oil is
more expensive than it has ever been, while the Dow is barely at the level it
reached in 1999. If Democrats controlled the levers of power, he'd be making
precisely that argument.
The distinction between the performance of the Dow and that of the other
market indices is a perfect metaphor for the economy under Bush. Assume the
stock market represents America. The Dow components—the tiny minority of the
richest—are putting up record numbers, while the masses are struggling to do as
well as they did in the late 1990s.
Posted by Mark Thoma on Friday, October 27, 2006 at 12:12 AM in Economics, Politics |
What affect, if any, do international capital flows have on long-term
interest rates within the U.S.?:
Flows Alter U.S. Interest Rates, by Les Picker, NBER Digest: There is a
burgeoning literature on the impact of international capital flows on emerging
market economies. ... In contrast, much less is known about the impact of
capital flows on the larger economies of the world. ...[U]ntil recently, many
market participants held the view that capital flows could not possibly affect
interest rates in the United States.
In International Capital Flows and U.S. Interest Rates (NBER Working Paper
12560), authors Francis Warnock and Veronica Warnock ... ascertain the
extent to which foreign flows into U.S. government bond markets can help to
explain movements in long-term Treasury yields.
The authors address this issue at an important time. ... Over the course of
2004, the Federal Reserve began a well advertised tightening that raised short
rates while economic growth strengthened and inflation picked up. Many market
observers predicted an increase in long-term U.S. interest rates that would
result in substantial losses on bond positions. However, long-term interest
rates remained quite low, puzzling market participants, financial economists,
The authors find that foreign flows have an economically large and
statistically significant impact on long-term U.S. interest rates. Their work
also suggests that large foreign purchases of U.S. government bonds have
contributed importantly to the low levels of U.S. interest rates observed over
the past few years. In the hypothetical case of zero foreign accumulation of
U.S. government bonds over the course of an entire year, long rates would be
almost 100 basis points higher. Were foreigners to reverse their flows and sell
U.S. bonds in similar magnitudes, the estimated impact would be doubled. Further
analysis indicates that roughly two-thirds of the impact comes directly from
East Asian sources. In addition, some of the foreign flows owe to the recycling
of petrodollars, suggesting a mitigating factor that might be reducing some of
the bite of higher oil prices. ...
Posted by Mark Thoma on Friday, October 27, 2006 at 12:09 AM in Economics, International Finance |
A new paper from the New York Fed looks at the twin deficits debate. Here's
the introduction explaining the debate, part of the conclusion, and a link to the paper:
Twin Deficits, Twenty Years Later, by Leonardo Bartolini and Amartya Lahiri,
Current Issues in Economics and Finance, October 2006 Volume 12, Number 7:
In recent years, the twin-deficit hypothesis—the argument that fiscal deficits
fuel current account deficits—has returned to the forefront of the policy
debate. The argument first emerged in the 1980s, when a significant
deterioration in the U.S. current account balance accompanied a sharp rise in
the federal budget deficit. Now, with the U.S. current account and fiscal
balances plunging by 3 and 4 percent of GDP, respectively, from 2001 to 2005,
the view that the two deficits might be closely linked has attracted new
interest. Changes in U.S. fiscal policy have also been viewed as playing a key
role in widening the nation’s current account deficit since the turn of the
millennium and thus in determining whether global current accounts will be
rebalanced over the next decade.
According to the twin-deficit hypothesis, when a government increases its
fiscal deficit—for instance, by cutting taxes—domestic residents use some of the
income windfall to boost consumption, causing total national (private and
public) saving to decline. The decline in saving requires the country either to
borrow from abroad or reduce its foreign lending, unless domestic investment
decreases enough to offset the saving shortfall. Thus, a wider fiscal deficit
typically should be accompanied by a wider current account deficit.
Casual observation suggests that the twin-deficit hypothesis accurately
captures the U.S. experience in the 1980s and the first years of the new
century. However, the hypothesis does not explain the U.S. record of the late
1990s, when a substantial current account deficit coexisted with a federal
budget surplus. Nor does it accord with Japan’s experience during the 1990s, or
the experience of many other countries undergoing sharp swings in fiscal policy
over the past two decades. Many empirical studies have also failed to find a
strong relationship between fiscal and current account deficits, perhaps because
they have used data on a very limited number of countries or have focused on
periods that were too short to yield reliable evidence in a variety of
environments and over time.
This edition of Current Issues contributes to the debate on the
twin-deficit hypothesis by analyzing the link between fiscal and current account
deficits across a larger sample of countries and over a longer period than
examined in earlier studies. Reviewing the international record over the past
thirty years, we revisit both key components of the twin-deficit hypothesis: the
relationship between fiscal policy and private saving, and the response of
current account balances to fiscal policy changes. Our findings confirm the
broad wisdom that private saving indeed tends to decline when fiscal policy
loosens. However, this response may have weakened over time. Saving now tends to
fall by about 35 cents in response to each extra dollar of fiscal deficit, down
from the decline of 40 to 50 cents that researchers have reported for earlier
periods. In addition, much of the decrease in national saving is matched by a
drop in the current account, whose deficit rises by 30 cents for each extra
dollar of fiscal deficit.
These results offer some support for the twin-deficit view. They suggest,
however, that the effects of fiscal policy on saving and the current account
balance are too weak for deficit reductions in the United States to play a
central role in correcting the nation’s current account imbalance with the rest
of the world.
Conclusion ...Our estimates suggest that even if the federal fiscal
deficit—currently about 2 percent of GDP—were fully erased, the nation’s current
account deficit would improve by only a fraction of its current 7 percent of
GDP. For example, if the U.S. current account continues to respond to fiscal
changes as it has, on average, in our sample of OECD countries—by 30 cents on
the dollar—a full elimination of the federal fiscal deficit would improve the
U.S. current account by only 0.6 percent of GDP, or less than one-tenth of its
current level. While these calculations are based on historical correlations
that could break down if circumstances change in unexpected ways, they are
nonetheless suggestive of the likely magnitude of the effects at work.
Posted by Mark Thoma on Friday, October 27, 2006 at 12:06 AM in Budget Deficit, Environment, International Finance, International Trade, Policy |
A few hospitals are starting to recognize that offering free preventive care to some uninsured patients is cost effective because it avoids much higher costs later on. Others hospitals are, apparently, pursuing a different strategy to avoid the cost of caring for the uninsured:
Hospitals Try Free Basic Care for Uninsured, by Erik Eckholm, NY Times: Unable to afford health insurance, Dee Dee Dodd had for years been mixing occasional doctor visits with clumsy efforts to self-manage her insulin-dependent diabetes, getting sicker all the while.
In one 18-month period, Ms. Dodd, 38, was rushed almost monthly to the emergency room, spent weeks in the intensive care unit and accumulated more than $191,000 in unpaid bills. That is when nurses ... tagged her as a ... repeat visitor whose ailments — and expenses — might be curbed with more regular care. The hospital began offering her free primary care through its charity program.
With the number of uninsured people in the United States reaching a record 46.6 million last year, ... Seton is one of a small number of hospital systems around the country to have done the math and acted on it. Officials decided that for many patients with chronic diseases, it would be cheaper to provide free preventive care than to absorb the high cost of repeated emergencies. ... Over the last 18 months, Ms. Dodd’s health has improved, and her medical bills have been cut nearly in half.
Reaching out to uninsured patients, especially those with chronic conditions like diabetes, hypertension, congestive heart failure or asthma, is a recent tactic... These institutions are searching for ways to fend off disease and large debts by bringing uninsured visitors into continuing basic care. ...
Still, only a fraction of the uninsured ... are benefiting. “All these local efforts are commendable, but they are like sticking fingers in the dikes,” Ms. Davis of the Commonwealth Fund said, noting that the larger trend was hospitals’ seeking to avoid the uninsured. ...
Universal care is a solution to this problem and it would also save all the money and effort that is wasted "seeking to avoid the uninsured" by handing them off to someone else:
Police allege 5 patients were dumped on skid row by hospital, by Richard Winton and Cara Mia DiMassa, LA Times: The LAPD says it has opened its first criminal investigation into the dumping of homeless people on skid row after documenting five cases in which ambulances dropped off patients there... Police said the patients, who had been discharged from a Los Angeles hospital, told them they did not want to be taken downtown. ...
Though police have documented other cases of hospitals dropping off recently discharged patients in the district, "this is the most blatant effort yet by a hospital to dump their patients on skid row against their will," LAPD Capt. Andrew Smith said. ... Police said they were investigating whether the patients were falsely imprisoned during their transfer and also whether the hospital violated any laws regarding the treatment of patients. ...
[T]he city attorney is looking at whether hospitals that engage in dumping could be penalized for violating the federal Emergency Medical Transfer and Active Labor Act, which requires medical facilities to screen and stabilize all patients and penalizes them for releasing or transferring patients who are medically unstable.
The city attorney also is examining whether hospitals that dump homeless patients can be cited for violating a state law that deals with unfair business practices...
Posted by Mark Thoma on Thursday, October 26, 2006 at 02:00 AM in Economics, Health Care |
Robert Frank says to be careful not to confuse happiness, which is relatively invariant to growth in the economy, and human welfare which increases as the economy grows:
Prospering May Not Make People Happier, but It May Make Them Healthier, by Robert H. Frank, Economic Scene, NY Times: ...The rapidly expanding literature on ... “subjective well-being” appears to suggest ... that when the incomes of everyone in a community grow over time, conventional measures of well-being show little change.
Many critics of economic growth interpret this finding to imply that continued economic growth should no longer be a policy goal in developed countries. They argue that ... it is relative, not absolute, income that matters. As incomes grow, people quickly adapt to their new circumstances, showing no enduring gains in measured happiness. Growth makes the poor happier in low-income countries, critics concede, but not in developed countries...
All true. But these statements do not imply that economic growth no
longer matters in wealthy countries. The reason, in a nutshell, is that
happiness and welfare, though related, are very different things.
Growth enables us to expand medical research and other activities that
clearly enhance human welfare but have little effect on measured
Continue reading "Happiness Is Not the Same As Welfare" »
Posted by Mark Thoma on Thursday, October 26, 2006 at 01:17 AM in Economics, Policy |
A recap of recent debate and commentary on CEO pay:
First, there was Incentives for the Dead (Krugman) on executive stock options followed by the response Mixed Reviews for Krugman Today (Samwick). This was followed in turn by Power, Changing Social Norms, and CEO Pay (Thoma) and CEO Compensation (DeLong).
This led to an email exchange. First Andrew Samwick asks:
I liked your post on power and social norms affecting CEO pay. You are right--norms have changed. I have as of late been thinking more about how consequential norms are in relation to incentives, and in some cases, how cheap to implement.
I couldn't tell from the link to my post whether you were disagreeing with my statement about average pay:
Apart from the (relatively minor) increase in expected compensation that must compensate the added risk exposure imposed by the pay-performance sensitivity, there is no justification presented for higher levels of pay unless the incentives work, the value of the firm rises, and the CEO's compensation rises via that pay-performance sensitivity.
I think this is consistent with what you quoted from the HBR article. Am I missing something?
To which I responded:
Good to hear from you. My interpretation is that the authors are saying that the level of pay was too low both because they weren't adequately compensated for risk and because of the "uninvited but influential guests at the managerial bargaining table." Thus, when these pressures were alleviated, compensation rose by more than a simple risk premium adjustment would imply.
The other factor is that even if you accept that wages were lower by only the risk premium component (and I still need to be convinced), that does not mean that that subsequent increases justified by the risk compensation argument were limited to this amount. Once the barn door was opened by the argument, given the problems with executive compensation committees, etc., compensation rose by more than the risk premium argument would suggest.
Thanks for your e-mail. I don't think we're disagreeing much--see my next post on this with respect to Brad's post. Based on your e-mail, I think we still disagree on the extent to which we believe that the recent history of option grants to senior management can be attributed to anything Jensen & Murphy wrote or would endorse.
And he ends with this response to DeLong: More on Executive Compensation (Samwick).
Posted by Mark Thoma on Thursday, October 26, 2006 at 12:15 AM in Economics, Income Distribution |
Tim Duy reviews today's rate decision:
Staying the Course, by Tim Duy: The FOMC delivered no big surprises at the
conclusion of today’s FOMC meeting; policy is held constant with a bias
toward further tightening. Fears of additional hawkishness proved to be
unfounded. And Richmond Fed President Jeffery Lacker continues to dissent,
uncomfortable with Chairman Ben Bernanke’s willingness to let core inflation
ease slowly back below 2%. Lacker is concerned that the longer inflation is
high, the more likely it becomes that inflation expectations will creep up to
match. Not an unreasonable position, but one that is out of line with the rest
of the FOMC.
Two changes in the statement caught my eye. The first was the return to an
explicit forecast: “Going forward, the economy seems likely to expand at a
moderate pace.” “Moderate” is code for “soft landing.” With resource utilization
at a high level, moderate growth implies only a gradual easing of inflation.
Without more a more rapid deceleration in underlying economic activity, expect
rates to be on hold for a time. The Fed does.
The second change was to eliminate energy as both a cause of inflationary
pressures and a reason to believe inflation would moderate.
I criticized the
last statement on this point. My criticism, however, likely did not sway the
FOMC to drop energy as an inflationary factor. What did sway Bernanke & Co. is
the obvious drop in retail gasoline prices, not to mention lower oil and natural
gas prices. Watch oil – prices drops have disappointed in the past.
I expect the Fed to be on hold in December as well. The next opening for a
policy change is in January. By that time we will have an idea if growth
reaccelerated in Q4. Higher consumer confidence and lower gas price suggest a
solid start to the quarter. Can it last in the face of an ongoing housing
Posted by Mark Thoma on Wednesday, October 25, 2006 at 03:45 PM in Economics, Fed Watch, Monetary Policy |
The Federal Open Market Committee voted today to keep the target federal
funds rate at 5.25%. The key differences between today's Press Release and the Press Release from the previous meeting are:
Continue reading "Fed Leaves Target Rate Unchanged at 5.25%" »
Posted by Mark Thoma on Wednesday, October 25, 2006 at 11:45 AM in Economics, Monetary Policy |
Robert Samuelson on the rise and fall of the managerial class:
The Next Capitalism, by Robert Samuelson, Newsweek [WP]: When he died in 1848,
John Jacob Astor was America's richest man, leaving a fortune of $20 million
that had been earned mainly from real estate and fur trading. Despite his
riches, Astor's business was mainly a one-man show. He employed only a handful
of workers, most of them clerks. This was typical of his time, when the farmer,
the craftsman, the small partnership and the independent merchant ruled the
economy. Only 50 years later, almost everything had changed. Giant industrial
enterprises -- making steel, producing oil, refining sugar and much more -- had
come to dominate.
The rise of big business is one of the seminal events in American history,
and if you want to think about it intelligently, you consult historian Alfred D.
Chandler Jr., its pre-eminent chronicler. ...
Until Chandler, the emergence of big business was all about titans. The
Rockefellers, Carnegies and Fords were either "robber barons'' whose greed and
ruthlessness allowed them to smother competitors and establish monopolistic
empires. Or they were "captains of industry'' whose genius and ambition laid the
industrial foundations for modern prosperity. But ... Chandler ... uncovered a
more subtle story. New technologies (the railroad, telegraph and steam power)
favored the creation of massive businesses that needed -- and, in turn, gave
rise to -- superstructures of professional managers: engineers, accountants and
It began with railroads. In 1830, getting from New York to Chicago took three
weeks. By 1857, the trip was three days (and we think the Internet is a big
deal). From 1850 to 1900, track mileage went from 9,000 to 200,000. But
railroads required a vast administrative apparatus to ensure the maintenance of
"locomotives, rolling stock, and track'' -- not to mention scheduling trains,
billing and construction...
Elsewhere, the story was similar. ... No matter how efficient a plant might
be, it would be hugely wasteful if raw materials did not arrive on time or if
the output couldn't be quickly distributed and sold. Managers were essential; so
were statistical controls. Coordination and organization mattered. Companies
that surmounted these problems succeeded. ... The rise of big business involved
more than tycoons. Its central feature was actually the creation of professional
The trouble now is that the defining characteristics of Chandler's successful
firms have changed. ... We can ... identify many of the forces reshaping
business: new technologies, globalization and modern finance... But the very
multitude of trends and pressures is precisely the problem. No one has yet
synthesized them and given them larger meaning.
Just as John Jacob Astor defined a distinct stage of capitalism, we may now
be at the end of what Chandler perceptively called "managerial capitalism.''
Managers, of course, won't disappear. But the new opportunities and pressures on
them and their companies may have altered the way the system operates. ... Asked
about how the corporation might evolve, [Chandler] confesses ignorance: "All I
know is that the ... Internet is transforming the world.'' To fill that void,
someone must do for capitalism's next stage what Chandler did for the last.
Though it's mentioned, I don't think this pays enough attention to the role
of information technology in reducing the need for middle management and white
collar workers. Much of what these workers did in the past to track financial
information, manage inventory and raw materials, plan distribution and sales
strategies, and so on can now be done with a few mouse clicks on a computer or,
alternatively, digitally outsourced for cheaper processing elsewhere.
This is not fundamentally different from any other sort of productivity
shock, workers get displaced by new technology regularly, except that in recent
years there are more white collars in the mix of workers affected by the
technological innovation, a trend that may continue as information
technology continues to advance. The question is where these displaced workers
(or those who would have replaced them in future years) end up after the
transition. Will these workers be able to transform their skills
and move up to higher paying occupations or at least maintain their current
income, or will the displaced current and future workers mostly move down to
lower skill, lower paying jobs?
Given the outcome so far, we need to devote more attention to finding
policies that can help workers receive a larger share of the productivity gains
as we move to an increasingly information-based, geographically fractured,
low-skill abundant, highly specialized, and highly competitive global economy.
I'm not sure what fancy name to give "the next capitalism" or if it really needs
one, but if growing inequality continues to be one of its main features, calling it "the new
gilded age" as many do already might just stick.
Posted by Mark Thoma on Wednesday, October 25, 2006 at 12:42 AM in Economics, Income Distribution, Technology |
Robert Shiller has an optimistic outlook for worldwide GDP growth in coming
wealth of nations, by Robert J. Shiller, Project Syndicate: The new Penn
World Table, Version 6.2, comparing standards of living across countries, has
just been released. The ... numbers are valuable because they are of exceptional
quality and they correct systematically for relative price differences across
countries, which sometimes leads to surprising results.
Among the 82 countries for which 2004 data are now available, there is good
news: Real per capita gross domestic product rose by an average of 18.9 percent
between 2000 and 2004, or 4.4 percent per year. ... At that rate, real per
capita GDP will double every 16 years. ...
One surprise is that there was relatively little change in the ranking of
countries by real per capita GDP after 2000. Despite all the talk about the
Chinese economic miracle, China's ranking rose only slightly, from 61st (out of
82 countries in 2000) to 60th in 2004 -- even though per capita real GDP grew by
... 9.6 percent a year, the highest of the major countries.
Continue reading "Shiller: The Rising Wealth of Nations" »
Posted by Mark Thoma on Wednesday, October 25, 2006 at 12:39 AM in Economics, Income Distribution |
Tim Duy has a Fed Watch in anticipation of tomorrow's rate decision from the
Reappearing After a Long Absence, by Tim Duy: I have been missing in
action for the past few weeks, neglecting Fed watching as I pushed forward other
personal and professional commitments. Moreover, as I alluded to
the last time I wrote, events were unfolding in such a way that I had little
too add. Bond market bulls were pushing yields to remarkably low levels on the
back of “the Fed is about to ease” story. I found that story untenable then,
but experience has taught me that sometimes it is better to stand aside than get
in the way of a charging pack of bulls – or bears for that matter.
But I have been looking for a time to jump back into the water, and the start
of the FOMC’s two day meeting is as good an opportunity as any. Especially now
that yields have rebounded, and expectations of a rate cut have been pushed out
deeper into 2007. Of course, the outcome of this meeting is something of a
foregone conclusion, with the Fed comfortable to sit on the sidelines for the
time being. Incoming data still point to a slowdown in overall economic
activity, but inflation remains well above any reasonable comfort level. As a
group, the Fed still bets that the combination of slowing activity and
moderating energy costs will be enough to bring core inflation down, albeit
I find myself pulled in the same direction as
William Polley and
David Altig regarding the odds of a soft landing – it appears that the
housing and auto slowdowns are mostly sector specific event at this point. I
find David’s comments interesting:
In my line of business I have
the opportunity to hear from a lot of people who are, as they say, close to the
ground -- folks actually making stuff, hiring people, extending loans, putting
together deals. My thoroughly unscientific sense is that the distribution of
beliefs out there suggests things are more likely to get better than get worse.
This is consistent with my recent experiences as well – more complaints about
lack of labor than anything else. Of course, it is reasonable to respond that
the housing slowdown hasn’t had time to filter through the rest of the economy
just yet. In any event, I noticed a similar theme in the minutes from the
September FOMC meeting:
Although some survey evidence
suggested that some firms were trimming capital spending plans, participants
reported that their business contacts generally were quite positive about the
economic outlook and the strength of demand for their products.
Moreover, I am challenged to accept the hard landing story with
initial unemployment claims still hovering near 300k and consumer confidence
bouncing back, at least as reported in the
UMich preliminary numbers. Note also the rebound in commodity prices
reported many places, including
econbrowser. Will oil be far behind?
Regarding the outcome of this meeting, I think we are all looking to the
statement for some guidance – I anticipate something very similar to the last
(the one I wasn’t particularly happy with at the time). I cannot see that
they are eager to pull back from the inflation fears;
numbers just don’t support that move yet. No, I anticipate that the
asymmetric bias will remain in place. I am very interested to see if Richmond
Fed President Jeffery Lacker dissents for a third consecutive meeting. I don’t
see what would have changed his mind in the past few weeks, but the lack of a
dissent would be interpreted by market participants as putting a rate cut in the
near term back in play. They don’t want to send that message. I expect the
message they want to send is “With inflation rate uncomfortably high, rates will
be held steady for the foreseeable future, barring a clear, sharp deceleration
in economic activity. For now, our foot continues to hover over the break, not
Posted by Mark Thoma on Tuesday, October 24, 2006 at 04:23 PM in Economics, Fed Watch, Monetary Policy |
James Surowiecki says to be careful as you watch the housing market, particularly if you have entered the market speculatively - the
swing in posted prices that you see may not fully accurately reflect changes in
actual housing prices and there are questions about the long-term real returns in this market:
Safe as Houses?, by James Surowiecki, The New Yorker: In the past few
months, it’s been almost all bad news for the housing market. ... Yet, through
it all, one fact has continued to provide solace to anxious homeowners and
real-estate brokers alike: housing prices have stayed remarkably stable.
The lesson we’re supposed to take from this is that a home remains as solid
and safe an investment as ever. After all, we’re constantly told, you have to go
back to the Great Depression to find a full year in which housing prices fell.
Unfortunately, the numbers upon which these comforting conclusions
depend—namely, median home prices for the country—are unreliable and misleading.
Continue reading "Is Housing a Good Speculative Investment?" »
Posted by Mark Thoma on Tuesday, October 24, 2006 at 11:42 AM in Economics, Housing |
Robert Reich disagrees with Paul Krugman's message in his column "Don't Make Nice":
What the Dems Must Do When They Regain Control, by Robert Reich: Assuming
they win, should House Dems (and maybe Senate Dems as well, if they take control
there) focus on exposing the malfeasance of the Bush Administration – who knew
what and when with regard to WMD, torture, Katrina, payoffs to Abramoff, and all
the other rot – OR focus on how to turn the country around?
Anyone who say Dems can do both is living on another planet. A fundamental
strategic choice lies ahead: Either expose Bush or build the new agenda. Either
will require a huge effort to marshal facts and focus public attention. Either
will necessitate extensive public hearings and a concerted media strategy.
Either will be competing with a cacophony of campaign personalities, more bad
news from Iraq, and a likely slowing of the economy.
If both are tried simultaneously, the media will focus on the more
sensational – which will be dirt on the Bushies. Kiss the new agenda goodbye.
But there’s no point digging up more dirt. Bush isn’t running again. John
McCain, the Republican’s most likely choice for president, has nicely distanced
himself from the White House. He wouldn’t be tarnished.
Besides, the public and the media already know much of what’s gone wrong –
and they’re already suffering from outrage fatigue. And the Dems wouldn’t be
credible, anyway. It will be easy for Republicans to dismiss their efforts as
more of the same old partisan bickering.
The fact is, the public is sick and tired of mud-slinging. That’s one reason
it holds Congress in such low esteem.
But the Dems do need the public to know they have real answers for some of
the nation’s most pressing problems. It’s crucial to use the next two years to
establish credible ideas for what the nation can and must do in future years –
provide affordable health insurance, spread the benefits of economic growth,
partition Iraq and get out, stop nuclear proliferation, prevent a nuclear bomb
from falling into the hands of terrorists, and control global warming.
Either go negative or go positive -- that’s the Dem’s inevitable choice.
Going negative would be easy but also futile. The nation needs a positive agenda
that only the Dems can deliver.
I must be living on another planet. I think it's possible to do both should Democrats take control -- to deliver a positive agenda but still
fully investigate "the origins of the Iraq war and the cronyism and corruption
that undermined it." The press will focus on war related issues in any case and it's not clear how much Democrats can get done with
the expected (and even hoped for by many) gridlock over the next two years, so Democrats won't be able to do much beyond using "the next two years to
establish credible ideas." Standing up to the past and upholding their core principles rather than "cutting and running" from any investigation may be the means through
which Democrats gain the strength and power to implement the positive agenda
they've established and want to put into place.
Posted by Mark Thoma on Tuesday, October 24, 2006 at 12:24 AM in Economics, Iraq and Afghanistan, Politics |
With the elections approaching, the White House is
trumpeting and taking
credit for the news that:
The Dow Set Record Highs On Three Consecutive Days This Week
Setting aside the
confusion between real and nominal stock prices inherent in this statement from the White House web site, are Republican
administrations good for the stock market? Let's check in with Hal Varian in a
column from 2003:
Which Party in the White House Means Good Times for Investors?, by Hal Varian,
Economic Scene, NY Times, November, 2003: Does the stock market do better when a Republican
is president or when a Democrat is?
The answer is: It's not even close. The stock market does far better under
This perhaps surprising finding is examined by two finance professors at the
University of California at Los Angeles, Pedro Santa-Clara and Rossen Valkanov,
in an article titled "Political Cycles and the Stock Market," published in the
October issue of The Journal of Finance.
Professors Santa-Clara and Valkanov look at the excess market return - the
difference between a broad index of stock prices (basically the Standard &
Poor's 500-stock index) and the three-month Treasury bill rate - between 1927
and 1998. The excess return measures how attractive stock investments are
compared with completely safe investments like short-term T-bills.
Using this measure, they find that during those 72 years the stock market
returned about 11 percent more a year under Democratic presidents and 2 percent
more under Republicans - a striking difference. [chart]
Continue reading "Which Party is Good for the Stock Market?" »
Posted by Mark Thoma on Tuesday, October 24, 2006 at 12:15 AM in Economics, Politics |
Is Democratic control of the House a near certainty?:
Forecasting House Seats from Generic Congressional Polls, by Andrew Gelman:
My colleagues Joe Bafumi, Bob Erikson, and Christopher Wlezian just completed
their statistical analysis of seat and vote swings. They write:
Via computer simulation based on statistical analysis of historical data, we
show how generic vote polls can be used to forecast the election outcome. We
convert the results of generic vote polls into a projection of the actual
national vote for Congress and ultimately into the partisan division of seats in
the House of Representatives. Our model allows both a point forecast—our
expectation of the seat division between Republicans and Democrats—and an
estimate of the probability of partisan control. Based on current generic ballot
polls, we forecast an expected Democratic gain of 32 seats with Democratic
control (a gain of 18 seats or more) a near certainty.
...Here's the full paper. Compared to
our paper on the topic, the paper by Bafumi et al. goes further by
predicting the average district vote from the polls... The only criticism I'd make of this paper is that they might be understating
the uncertainty in the seats-votes curve (that is, the mapping from votes to
seats). ... I like this paper... It goes beyond what we did, and all of this is
certainly a big step beyond the usual approach of just taking the polls, not
knowing what to do with them, and giving up!
I want to believe . . . .
Posted by Mark Thoma on Monday, October 23, 2006 at 08:11 PM in Economics, Politics |
In Paul Krugman's recent column on stock options (Incentives
for the Dead), he cited a 1990 paper by Jensen and Murphy as one of the reasons
CEO compensation committees began offering stock options to CEOs. The idea in
Jensen and Murphy is that if the pay of CEOs does not rise and fall sufficiently
with company fortunes, then CEOs will have little incentive to manage the
companies efficiently. Linking pay to performance through stock options and
other means was intended to overcome this problem. As Krugman says:
They argued that a chief executive who expects to receive the same salary if
his company is highly profitable that he will receive if it just muddles along
won’t be willing to take risks and make hard decisions. “Corporate America,”
declared an influential 1990 article by Michael Jensen of the Harvard Business
School and Kevin Murphy of the University of Southern California, “pays its most
important leaders like bureaucrats. Is it any wonder then that so many C.E.O.’s
act like bureaucrats?”
The claim, then, was that executives had to be given more of a stake in their
companies’ success. And so corporate boards began giving C.E.O.’s lots of stock
Of course, the stock option scandal is partly about the "bait and switch"
that occurred - selling stock options as though they are linked to performance
and therefore provide the right incentives to CEOs, then backdating the stock
options to ensure that they paid off even if the company didn't perform
Krugman didn't mention it in his column, but the paper is worth reading for
another reason, its explanation of why executives weren't given sufficient
incentives. Jensen and Murphy say the reason was political pressure and social
norms which prevented companies from paying executives as much as they should:
Not How Much You Pay, But How, by Michael C. Jensen and Kevin J.
Murphy, Harvard Business Review: ...The arrival of spring means yet another
round in the national debate over executive compensation. ... Political figures,
union leaders, and consumer activists will issue now-familiar denunciations of
executive salaries and urge that directors curb top-level pay in the interests
of social equity and statesmanship. The critics have it wrong. There are serious
problems with CEO compensation, but “excessive” pay is not the biggest issue.
The relentless focus on how much CEOs are paid diverts public attention from the
real problem—how CEOs are paid. In most publicly held companies, the
compensation of top executives is virtually independent of performance. ... Is
it any wonder then that so many CEOs act like bureaucrats rather than the
value-maximizing entrepreneurs companies need to enhance their standing in world
Compensation policy is one of the most important factors in an organization’s
success. ... This is what makes the vocal protests over CEO pay so damaging. By
aiming their protests at compensation levels, uninvited but influential guests
at the managerial bargaining table (the business press, labor unions, political
figures) intimidate board members and constrain the types of contracts that are
written between managers and shareholders. As a result of public pressure,
directors become reluctant to reward CEOs with substantial (and therefore highly
visible) financial gains for superior performance. ... Are we arguing that CEOs
are underpaid? If by this we mean “Would average levels of CEO pay be higher if
the relation between pay and performance were stronger?” the answer is yes.
The point, then, is this: Those of us who say that the increase in inequality
has a lot to do with power and changing norms are ridiculed - but back when
people were arguing for a big increase in corporate pay (and they did say that
their proposed changes would increase the average level of pay), it was
considered perfectly sensible to say that power and norms were keeping CEO pay
Posted by Mark Thoma on Monday, October 23, 2006 at 03:09 PM in Economics, Income Distribution, Policy, Politics |
Jeffrey Sachs says we are ignoring, to our detriment and future peril, the
"unprecedented stresses on the physical environment" such as water shortages
which are "becoming a major obstacle to economic development in many parts of
the world" and a source of military conflict:
Water strategy over military strategy, by Jeffrey Sachs, Project Syndicate:
...Global economic growth and risiang populations are putting unprecedented
stresses on the physical environment, and these stresses in turn are causing
unprecedented challenges for our societies. Yet politicians are largely ignorant
of these trends. Governments are not organized to meet them and crises that are
fundamentally ecological in nature are managed by outdated strategies of war and
Continue reading "Sachs: Stresses on the Physical Environment Threaten Security" »
Posted by Mark Thoma on Monday, October 23, 2006 at 10:36 AM in Economics |
Paul Krugman tells Democrats that, should they gain power in the upcoming
election, it would be a mistake to give into calls for reconciliation and
bipartisanship since that will not end the divisiveness that plagues the
political process. Instead, Democrats need to stand strongly against any
compromises to their core principles and values and fully investigate "the
origins of the Iraq war and the cronyism and corruption that undermined it":
Don’t Make Nice, by Paul Krugman, If They Win..., Commentary, NY Times: Now
that the Democrats are strongly favored to capture at least one house of
Congress, they’re getting a lot of unsolicited advice, with many people urging
them to walk and talk softly if they win.
I hope the Democrats don’t follow this advice — because it’s bad for their
party and, more important, bad for the country. In the long run, it’s even bad
for the cause of bipartisanship.
There are those who say that a confrontational stance will backfire
politically on the Democrats. These are by and large the same people who told
Democrats that attacking the Bush administration over Iraq would backfire in the
midterm elections. Enough said.
Political considerations aside, American voters deserve to have their views
represented in Congress. And according to opinion polls, ... the public wants
politicians to stand up to corporate interests. ...[T]he latest Newsweek poll
... shows overwhelming public support for the agenda Nancy Pelosi has ... if she
becomes House speaker. The strongest support is for her plan to have Medicare
negotiate with drug companies for lower prices, which is supported by 74 percent
of Americans — and by 70 percent of Republicans!
What the make-nice crowd wants most of all is for the Democrats to forswear
any investigations into the origins of the Iraq war and the cronyism and
corruption that undermined it. But it’s very much in the national interest to
find out what led to the greatest strategic blunder in American history, so that
it won’t happen again.
What’s more, the public wants to know. ...[A]ccording to the Newsweek poll,
58 percent of Americans believe that investigating contracting in Iraq isn’t
just a good idea, but a high priority; 52 percent believe the same about
investigating the origins of the war.
Why, then, should the Democrats hold back? Because, we’re told, the country
needs less divisiveness. And I, too, would like to see a return to kinder,
gentler politics. But that’s not something Democrats can achieve with a group
hug and a chorus of “Kumbaya.” ...
As long as polarization is integral to the G.O.P.’s strategy, Democrats can’t
do much, if anything, to narrow the partisan divide. Even if they try to act in
a bipartisan fashion, their opponents will find a way to divide the nation —
which is what happened to the great surge of national unity after 9/11. One
thing we might learn from investigations is the extent to which the Iraq war
itself was motivated by the desire to have another wedge issue.
There are those who believe that the partisan gap can be bridged if the
Democrats nominate an attractive presidential candidate who speaks in uplifting
generalities. But they must have been living under a rock these past 15 or so
years. Whoever the Democrats nominate will feel the full force of the Republican
The truth is that we won’t get a return to bipartisanship until or unless the
G.O.P. decides that polarization doesn’t work as a political strategy. The last
great era of bipartisanship began after the 1948 election, when Republicans,
shocked by Harry Truman’s victory, decided to stop trying to undo the New Deal.
And that example suggests that the best thing the Democrats can do, not just for
their party and their country, but for the cause of bipartisanship, is what
Truman did: stand up strongly for their principles.
Previous (10/20) column:
Paul Krugman: Incentives for the Dead
Next (10/27) column: Paul Krugman: The Arithmetic of Failure
Posted by Mark Thoma on Monday, October 23, 2006 at 12:15 AM in Economics, Iraq and Afghanistan, Politics |
This report on the situation in Afghanistan is from the BBC News. It's not
encouraging. From an economic standpoint, corruption is a major problem:
On the road with the Taleban, by David Loyn BBC News: NATO troops in
Afghanistan have been facing a growing number of suicide bomb attacks. It was
hoped the troops would be able to make peace, win friends and provide security
for reconstruction projects, but now it seems the regime they removed is
beginning to return.
"You destroyed our government and all because of just one guest in our
country, Osama," said the man leading the war against the British. We sat late at night in what must have been the women's side of a house
commandeered for just that night by a man who stays constantly on the move. ... Taleban soldiers
... filled the room ... as we talked.
Continue reading ""On the Road with the Taleban"" »
Posted by Mark Thoma on Monday, October 23, 2006 at 12:06 AM in Economics, Terrorism |
Starting a family is riskier than it used to be. Increasingly, rather than
providing insurance against economic difficulties, the family is the source of
the problems. As Jacob Hacker says in this commentary from the Los Angeles Times, "The
family used to be a refuge from risk. Today, it is the epicenter of risk. And,
increasingly, families are a source of risk as well":
Till Debt Do Us Part?, by Jacob S. Hacker, Commentary, LA Times: ...It may
seem unromantic, but marriage has always been a vital economic institution as
well as a social one. A marriage is, among many things, a contract to secure the
welfare of an economic unit that, in most cases, includes children. The tale of
the last generation is how the value of that contract has declined, while its
costs and risks have increased — and how the vaunted nuclear family has suffered
as a result.
Consider personal bankruptcy... In 2001, married people with kids were twice
as likely to file for bankruptcy as single adults or childless couples. ...
Families also were more likely to lose their homes than were married couples
without children or than single adults — during an era in which foreclosure
rates have skyrocketed. They also were much more likely to be behind on their
credit card bills. And they were drowning in debt, with ... a level of debt not
seen among any other household type.
Clearly, something is financially amiss with the once rock-solid American
family. But what? Why hasn't the rising number of two-earner families protected
more Americans from the risks of financial disaster? The answer lies ultimately
in a simple fact:
Continue reading "Declining Family Value" »
Posted by Mark Thoma on Sunday, October 22, 2006 at 01:03 PM in Economics, Policy, Unemployment |
Jonathan Chait has a question for the president. If it's true that tax cuts
raise tax revenues as he claims, and if it's also true that he has restrained spending like he says he has in his speeches, then why
do we still have such a large deficit?
Bush's Silly Budget Logic, by Jonathan Chait, Commentary, LA Times: Alan D
Viard, a former Bush White House economist currently at the conservative
American Enterprise Institute, recently told the Washington Post: "Federal
revenue is lower today than it would have been without the tax cuts. There's
really no dispute among economists about that."
He's right. There's no dispute among economists. Conservative, moderate or
liberal, every credentialed economist agrees that the Bush tax cuts caused
revenues to drop. There is, however, a dispute between economists and
pseudo-economists. Supply-siders may be laughed at by real economists, but they
still enjoy a strong following among politicians, including, alas, the president
of the United States. Here is what President Bush said a week and a half ago:
"They said that we had to choose between cutting the deficit and keeping
taxes low — or another way to put it, that in order to solve the deficit we had
to raise taxes. I strongly disagree with those choices. Those are false choices.
Tax relief fuels economic growth, and growth — when the economy grows, more tax
revenues come to Washington. And that's what's happened. It makes sense, doesn't
Well, no, it doesn't make any sense at all. Bush, of course, is correct that
tax revenues have risen over the last few years. This is normal.
Except in certain extreme theoretical conditions, tax cuts cause revenues to
fall, and tax hikes cause them to rise. The economy also can affect revenues.
During an expansion, revenues can rise unusually fast, and during a recession,
they can drop unusually fast. ...
In the same speech in which he claimed that his tax cuts have caused revenues
to rise, Bush bragged that he's "restraining spending." So why do we still have
a deficit? I mean, he says he's kept spending down, he's caused revenues to
skyrocket and the economy is going great guns. Why are we still in the red?
And if Bush's own economists say his tax cuts caused revenue to drop — and
Viard isn't the only one — then how can he continually get away with insisting
As the evidence against the Laffer curve continues to accumulate, it's
getting harder to sell the myth that tax cuts pay for themselves, or at least I
hope it is. Because of that, tax-cut advocates will likely retreat to an
efficiency argument to support their cause.
One note. Jonathan Chait says:
Supply-siders may be laughed at by real economists...
Not quite. There are real economists that are supply-side advocates. But
supply-side economics has been misused and misrepresented to suit political ends
and that has tarnished its reputation, something that could have been avoided if
those "real economists" had voiced strong opposition to claims made on
behalf of the theory that were clearly wrong or wishful thinking at best.
Supply-side economics in the right hands, those of qualified real business
cycle theorists who are interested in how the world works rather than supporting an ideology or political party, has a lot to offer. For example, I read an interesting paper last week ("A
Theory of Demand Shocks") that combines a real business cycle framework with
a new classical style Lucas island model information structure, where the
information extraction problem concerns productivity shocks. But that is just
the tip of a large iceberg of very good research on real business cycles.
My view is that the debate over which view is correct - real business cycle
stories of aggregate fluctuations or new Keynesian style microfounded friction
models - is not all that productive. My objection comes when people dismiss the
demand side entirely. I believe both supply and demand shocks are important
sources of aggregate fluctuations and that models synthesizing New Keynesian -
Real Business Cycle theoretical models by imposing rigidities or other frictions
on a real business cycle structure (augmented with an enhanced demand side) is
ultimately where we will end up.
Posted by Mark Thoma on Sunday, October 22, 2006 at 03:00 AM in Budget Deficit, Economics, Politics, Taxes |
Are the poor "perfectly rational, just like everyone else" or should we
"attribute the behaviors of the poor to a unique “culture of poverty,” rife with
deviant values"? This research proposes a third view that lies between these two extremes where the poor, just like everyone else, are "neither perfectly calculating nor especially deviant":
Researchers seek to incorporate street psychology into economics by Chad Boutin,
Princeton Weekly Bulletin: Adjusting his laptop, Eldar Shafir punches up a table of figures that
represents the financial decisions of lower-income families in Trenton... In the
neighborhoods Shafir visits, though working people have the option of going to a
bank to manage their money, they also are surrounded by cashing services that
process checks for much higher fees. On his computer screen are numbers
comparing how many people visit each kind of institution.
“It’s astonishing. Most of the people we have met are willing to spend a lot
more to cash their checks at a service, because they feel that banks are
intimidating and unwelcoming,” says Shafir, a professor of psychology and public
affairs. “These are people who are not earning high incomes, but still would
rather spend more at a business where they are welcomed by a clerk who remembers
their mother’s name.” ...
Shafir and his fellow behavioral scientists are trying to ... change the
field of economics from within. Their goal is simple: to ensure that businesses
and the government take into account the way people actually think and behave
when making financial decisions. ...[S]tudents of economics ... have been
trained to idealize consumers as completely rational and impervious to
psychological factors... “It is commonly believed that people are responsible
for most of their own behavior, but research demonstrates the substantial
influence of situational factors on the way we think and act,” says Shafir...
Continue reading "Poor Choices" »
Posted by Mark Thoma on Sunday, October 22, 2006 at 01:17 AM in Economics, Policy |
The San Francisco Fed has an Economic Letter assessing of the Bank of Japan's policy of
quantitative easing from 2001 to 2006. Here's the introduction and conclusion to the study:
Did Quantitative Easing by the Bank of Japan "Work"?, by Mark M. Spiegel Vice,
FRBSF Economic Letter: On March 19, 2001, the Bank of Japan (BOJ)
embarked on an unprecedented monetary policy experiment, commonly referred to as
"quantitative easing," in an attempt to stimulate the nation's stagnant economy.
Continue reading "FRBSF: Did Quantitative Easing by the Bank of Japan Work?" »
Posted by Mark Thoma on Sunday, October 22, 2006 at 01:15 AM in Economics, Monetary Policy |
We've seen estimates of how much the Iraq war has cost the U.S., but what has
been the cost to Iraqis?:
Early Calculation of Iraq’s Cost of War, by Anna Bernasek, Economic View, NY
Times: Here's a basic question: What has been the cost of the Iraq war for
Iraq? ... Although several studies have dealt with the war’s cost to Americans,
there has been no comparable work addressing the cost to Iraqis.
Of course, the loss of human life has always been evident. Recently, the
United Nations estimated that 100 Iraqis were dying each day, on average, as a
result of the war. .... A recent study in The Lancet, the British medical
journal, placed the average daily figure at about 500...
The economic cost has been less visible. Published information on the subject
is very limited, although one economist, Colin Rowat, has made some preliminary
calculations... Professor Rowat, a specialist on the Iraqi economy at the
University of Birmingham in Britain, relied mainly on data from the
International Monetary Fund to estimate the war’s overall effect on the Iraqi
economy. His calculations are a work in progress, but what he has found so far
is sobering: the cost amounts to a cut of at least 40 percent in Iraq’s national
Continue reading "The Cost of the War for Iraq" »
Posted by Mark Thoma on Saturday, October 21, 2006 at 03:56 PM in Economics, Iraq and Afghanistan |
Not too long ago, I posted this graph showing a (not so) curious gap in t-statistics just below the 5% significance level in published work in political science, and a similarly surprising amount just above the 5% cutoff. This implies “scholars “tweak” regression specifications and samples to move barely insignificant results above conventional thresholds” using data mining and other techniques to manipulate the results. Edward Glaeser discusses this and other issues associated with empirical research and gives ten recommendations for "a more economic approach to empirical methods" and "paths for methodological progress." Here's the introduction to the paper:
Researcher Incentives and Empirical Methods, by Edward L. Glaeser, NBER Technical WP 329. October 2006 [open link]: I. Introduction A central theme of economics is respect for the power of incentives. Economists explain behavior by pointing towards the financial gains that follow from that behavior, and we predict that a behavior will increase when the returns to that behavior rise. Our discipline has long emphasized the remarkable things – from great inventions to petty crimes – that human beings can do when they face the right incentives.
But while economists assiduously apply incentive theory to the outside world, we use research methods that rely on the assumption that social scientists are saintly automatons. No economist would ever write down a model using the assumptions about individual selflessness that lie behind our statistical methods.
Continue reading "Econometricians Are *Not* Saintly Automatons" »
Posted by Mark Thoma on Saturday, October 21, 2006 at 12:41 PM in Economics, Methodology |
Recent news that the U.S. population has surpassed 300 million along with the discussions of welfare policy associated with the ten year anniversary of welfare reform legislation brings up thoughts of Thomas Malthus. In Malthus'
famous population theory,
population grows geometrically while food supply increases at the slower
arithmetic rate. Because of this, the size of the population will eventually
exceed the available food supply necessary to support it.
Malthus believes there are two solutions to the inevitable overpopulation problem.
First, there are preventive checks on population which reduce the birth rate.
Preventive checks consist of moral restraint such as abstinence which Malthus believes to be
virtuous, and vice such as prostitution and birth control which is not.
Second, there are positive checks on the population that increase the death
rate - famine, misery, plague, and war - which, in Malthus' view, are
unavoidable natural laws. They are unfortunate, but necessary to limit
population. In his view, these positive checks represent punishment for those
who are unable to limit population growth through moral restraint.
Malthus does not believe that positive checks can be avoided. If they
are, then people will starve for lack of food. Thus, if we abhor starvation, we
are foolish to try and prevent the positive checks to population:
It is an evident truth that, whatever may be the rate of increase in the
means of subsistence, the increase of population must be limited by it, at least
after the food has once been divided into the smallest shares that will support
life. All the children born, beyond what would be required to keep up the
population to this level, must necessarily perish, unless room be made for them
by the deaths of grown persons. ... To act consistently therefore, we should
facilitate, instead of foolishly and vainly endeavouring to impede, the
operations of nature in producing this mortality; and if we dread the too
frequent visitation of the horrid form of famine, we should sedulously encourage
the other forms of destruction, which we compel nature to use. Instead of
recommending cleanliness to the poor, we should encourage contrary habits. In
our towns we should make the streets narrower, crowd more people into the
houses, and court the return of the plague. In the country, we should build our
villages near stagnant pools, and particularly encourage settlements in all
marshy and unwholesome situations. But above all, we should reprobate specific
remedies for ravaging diseases; and those benevolent, but much mistaken men, who
have thought they were doing a service to mankind by projecting schemes for the
total extirpation of particular disorders. If by these and similar means the
annual mortality were increased ... we might probably every one of us marry at
the age of puberty, and yet few be absolutely starved. [source]
Where does this thinking lead? To the idea that there must be no government
relief for the poor:
A man who is born into a world already possessed, if he cannot get
subsistence from his parents on whom he has a just demand, and if the society do
not want his labour, has no claim of right to the smallest portion of food, and,
in fact, has no business to be where he is. At nature’s mighty feast there is no
vacant cover for him. She tells him to be gone, and will quickly execute her own
orders, if he does not work upon the compassion of some of her guests. If these
guests get up and make room for him, other intruders immediately appear
demanding the same favour. ... The order and harmony of the feast is disturbed,
the plenty that before reigned is changed into scarcity; and the happiness of
the guests is destroyed by the spectacle of misery and dependence in every part
of the hall, and by the clamorous importunity of those, who are justly enraged
at not finding the provision which they had been taught to expect. The guests
learn too late their error, in counter-acting those strict orders to all
intruders, issued by the great mistress of the feast, who, wishing that all
guests should have plenty, and knowing she could not provide for unlimited
numbers, humanely refused to admit fresh comers when her table was already full.
This statement was tempered in later editions of the Essay, but the
message that helping the poor would only serve to increase their numbers and
hence increase aggregate misery remained. The result of this was the Poor Law
Amendment of 1834. From
Some of Malthus's ideas were adopted in the harsh Poor Law Amendment of 1834.
The law abolished all relief for able-bodied people outside workhouses. A man
applying for relief had to pawn all his possessions and then enter a workhouse
before assistance was granted; his wife and children either entered a workhouse
or were sent to work in the cotton mills. In either case the family was broken
up and treated harshly in order to discourage it from becoming a public charge.
The work house was invested with a social stigma, and entering it imposed high
psychological costs. The law aimed at making public assistance so unbearable
that most people would rather starve quietly than submit to its indignities.
This system was to be the basis of English poor law policy until early in the
twentieth century. Malthus, who died four months after the Poor Law Amendment
was passed, must have regarded it as a vindication of his idea that there is not
room enough at nature's feast for every one.
Ultimately, in Malthus view, the difference between the rich and the poor
comes down to a difference in moral character. It is an attempt to convince us
that poverty is inevitable, that it is the consequences of poor choices and the
moral inferiority of the poor, and that there is little that can be done about
There is a long history of blaming the poor for being poor and downplaying
other possible sources of inequality arising from differences in power, social
position, institutional structure, and so on, followed by an argument that
attempts to help the poor only serve to increase the incentive for immoral
behavior. Increasingly, we appear to be heading down this road again. But before
we do, we should remember where it leads.
Posted by Mark Thoma on Saturday, October 21, 2006 at 12:15 AM in Economics, History of Thought, Income Distribution, Policy, Politics |
A video game designed to teach the principles of microeconomics:
Teach University Economics Class, by Nell Boyce, NPR, All Things Considered:
...[S]tudents taking ECON 201 at the University of North Carolina at Greensboro
... don't even come to class, they just log in to the Internet. The entire
microeconomics course is a video game that students play online to earn three
Sarbonians Crash-Land on Earth and Grapple with Economics of Survival
...The Sarbonian aliens are named after economics professor Jeff Sarbaum. "This is a game in which the students are literally immersed in a story. And
they take on the role of a character," he explains. "So all of the reading
material, all of the content, all of the examinations and homework, if you will,
are built inside the engine of the game."
The Sarbonians come from an alien world that knows no scarcity. After they
crash-land on Earth, the students have to grapple with economic challenges like
how to make and distribute goods, and how to trade with another group of aliens.
..."I believe we are the first ones to fully emerge students in a narrative
story and treat the whole course as a game," Sarbaum says...
In his microeconomics game, a robot acts like a tutor. As the game goes on,
the characters talk more and more like economists. ...
To gauge how well students are picking up on the concepts, they take
multiple-choice tests as they move through the different levels of the game. ...
Posted by Mark Thoma on Saturday, October 21, 2006 at 12:06 AM in Economics, Technology, Universities |
An email suggests this article on the New Left's struggle to build a social model in China that moves away from neoliberal ideas:
Left calls for a social alternative, by Pankaj Mishra, The New York Times
Magazine: One day earlier this year I met Wang Hui at the Thinker's Cafe
near Tsinghua University in Beijing, where he teaches. ... Co-editor of China's
leading intellectual journal, Dushu (Reading), and the author of a four-volume
history of Chinese thought, Wang ... has emerged as a central figure among a
group of writers and academics known collectively as the New Left.
New Left intellectuals advocate a "Chinese alternative" to the neoliberal
market economy, one that will guarantee the welfare of the country's 800 million
peasants left behind by recent changes. And unlike much of China's dissident
class, which grew out of the protests in Tiananmen Square in 1989 ..., Wang and
the New Left view the Communist leadership as a likely force for change.
Continue reading "China's New Left" »
Posted by Mark Thoma on Saturday, October 21, 2006 at 12:03 AM in China, Economics |
One more time,
There is Too a Short-Run Phillips Curve. This commentary disagrees with
economists who claim there is a permanent inflation-unemployment tradeoff.
However, it's been quite a long-time since anyone seriously suggested a
permanent tradeoff between inflation and unemployment, particularly since Phelps,
Friedman, Lucas and others came up with came up with the expectations augmented
short-run Phillips curve to rebut this idea. Thus, the commentary below strikes
at a position - a permanent tradeoff between inflation and output - that no
economist that I know of holds. It is the nature of the short-run Phillip's
curve that is at issue, how long the short-run tradeoff persists, the steepness
of the tradeoff, whether hybrid versions of the Phillips curve are needed, etc., and contrary to what
is stated in this commentary, the existence of a short-run Phillip's curve is
well-accepted. I do agree with the commentary's suggestion that somebody doesn't
understand this literature, but I doubt very much that it is Bernanke, Mishkin,
and others at the Fed that are the ones missing key pieces of this line of
Time to Throw the Phillip's Curve, by Jerry Bowyer, NRO: Last week the Nobel
committee announced that this year’s prize in economics would be going to Dr.
Edmund Phelps... This is good news indeed for advocates of supply-side
economics. Phelp’s principal academic achievement is his successful rebuttal of
one of the central tenets of modern Keynesianism: the Phillips curve.
Someone should alert the board of governors at the Federal Reserve of Phelps
vindication, since the minutes released from the Fed’s most recent meeting still
contain the same old Keynesian gobbledygook...
The Phillips-curve perspective is flawed. Attempts to stimulate growth and
employment by way of loose money inevitably fail... Phelps has disproved the
Phillips curve, at least as a long-run economic planning tool. He argues
persuasively that labor markets determine the unemployment rate over the long
Alan Greenspan, despite his better training, basically governed the central
bank as a Keynesian... One wonders what the world would look like now if not for
the pernicious doctrine that growth causes inflation. What if planners a
half-century ago never adopted the Phillips curve and the ’50s.. Imagine the
’70s without stagflation? What if Greenspan hadn’t destroyed the telecomm sector
in the late ’90s with his tight-money policy? ... How many people who are now
middle class would be affluent? How much global poverty would have been
alleviated if the U.S. economy had been even more powerful in recent decades,
able to drag that much more of the globe out of the muck and into prosperity?
A Nobel Prize for Dr. Edmund Phelps is an opportunity for the Federal
Reserve, Wall Street forecasters, and the financial press to bury forever the
enormously destructive theoretical error that is the Phillips curve.
economists believe "growth causes inflation" mischaracterizes the issue. Nobody
believes that growth is inflationary. Increases in productivity (i.e. growth in aggregate supply) puts downward pressure on prices.
It is growth in demand relative to growth in supply that matters, and if demand
growth outstrips supply growth, inflation will result.
Posted by Mark Thoma on Friday, October 20, 2006 at 12:57 PM in Economics, Macroeconomics, Monetary Policy, Technology |
Paul Krugman on "the growing scandal involving backdated stock options" as a reflection of our failure to "come to grips with the
epidemic of corporate misgovernance":
Incentives for the Dead, by Paul Krugman, Stock Options Commentry, NY Times:
I don’t know about you, but I need a break from political scandals. So let’s
talk about private-sector scandals instead — specifically, the growing scandal
involving backdated stock options...
To understand the issue, we need to go back to the original ideological
justification for giant executive paychecks. In the 1960’s and 1970’s, C.E.O.’s
of the largest firms were paid, on average, about 40 times as much as the
average worker. But executives wanted more — and professors at business schools
provided a theory that justified much higher pay.
They argued that a chief executive who expects to receive the same salary if
his company is highly profitable that he will receive if it just muddles along
won’t be willing to take risks and make hard decisions. ...
The claim, then, was that executives had to be given more of a stake in their
companies’ success. And so corporate boards began giving C.E.O.’s lots of stock
options... If the stock went up, these options would pay off; if the stock went
down, they would lose their value. And so, the theory went, executives would
have the incentive to do whatever it took to push the stock price up.
In the 1990’s, executive stock options proliferated — and executive pay
soared, rising to 367 times the average worker’s pay by the early years of this
decade. But the truth was that in many — perhaps most — cases, executive pay
still had little to do with performance. For one thing, the great bull market of
the 1990’s meant that even companies that didn’t do especially well saw their
stock prices rise.
Then there were the tricks that companies used... For example, after a
downward move in the stock price, ... the price at which the executive had the
right to buy stocks would be reduced to the new market price. Heads the C.E.O.
wins, tails he gets another chance to flip the coin.
What the backdating scandal reveals is that for many executives even that
wasn’t enough. To ensure that executives profited from newly issued options,
companies would pretend that the options had in fact been issued at an earlier
date, when the stock price was lower. ...
What’s wrong with backdating stock options? There’s a tax evasion aspect, but
the main point is the bait-and-switch. The public was told that gigantic
executive paychecks were rewards for exceptional performance, but in practice
executives were lavishly paid simply for showing up at the office.
And in some cases even that wasn’t required. Cablevision Systems gave options
to a deceased executive (in other words, to his heirs), backdating them to make
it appear that he had received them while still alive.
The moral of the story is that we still haven’t come to grips with the
epidemic of corporate misgovernance revealed four years ago by the Enron and
WorldCom scandals, then drowned out as a political issue by the clamor for war
with Iraq. Even now, we’re still learning how deep the rot went.
And there’s no reason to believe that the problem has been solved. ...[E]xecutive
compensation, which fell briefly after the Enron and WorldCom scandals, has shot
right back up.
So we’re still waiting for serious corporate reform. And don’t tell me that
everything must be O.K. because stocks have been rising lately. Remember, they
rose even faster in the 1990’s — and the 1920’s.
Previous (10/16) column:
Paul Krugman: One Letter Politics
Next (10/23) column: Paul Krugman: Don't Make Nice
Posted by Mark Thoma on Friday, October 20, 2006 at 12:15 AM in Economics, Income Distribution |
This theory of urban development which puts a vague notion of culture at the
center of the analysis is from The Manhattan Institute, a right-wing think tank
that has William Kristol and Peggy Noonan, among others, on its Board of
A Tale of Several Cities, by Julia Vitullo-Martin, Commentary, WSJ: ...Why
does Boston prosper ... while Philadelphia languishes...? Why does much of
Boston look like Hollywood's idea of a hip, fabulous place to live, while
downtown Philadelphia seems to be a bleak postindustrial landscape...?
The answers are not to be found in conventional 20th-century analysis, which
emphasized the ... decline of industrial jobs, the burdens of excessive
taxation, the inevitability of racial tensions and the dominance of geography.
After all, in traditional urban terms, Philadelphia and Boston are nearly twins,
both founded by Protestant-Anglo stock in the 17th century, both blessed with
prime locations, beautiful waterfronts, good vernacular housing, historic
buildings, Olmsted parks, renowned museums and fine universities. And both are
high-tax cities that have lost their industrial base. Yet one now thrives while
the other declines.
At least part of the answer stems from their underlying cultures. In his
"Puritan Boston and Quaker Philadelphia" (1979), E. Digby Baltzell argued that
Boston Brahmins, with their belief in authority and leadership, embraced a sense
of responsibility for civic life, while Philadelphia Gentlemen, with their
inward but judgmental Quaker ways were deeply unconcerned about their city's
welfare. Over the course of the 19th century and well into the 20th, they
abdicated their role in government and watched indifferently as Philadelphia
became, by the 1960s, the worst run city in the nation. The Brahmins ... cared
about their city -- and so, subsequently, did the Irish politicians with whom
they warred and the Italians who replaced the Irish.
Such cultural analysis -- long out of fashion as too soft (as as opposed to
econometrics) or too racist (who is to say that one culture is better than
another?) -- is due for a comeback. It starts to explain, in a way that mere
fiscal analysis does not, why Miami has become the gateway to Latin America, why
Los Angeles rules the Pacific Rim and why Chicago controls the Midwest. And it
helps us to understand how New York City moved in 30 years from the humiliation
of near bankruptcy to being the dominant city on earth.
The old answer of urban success was deterministic: taxes and geography.
Cities with superb natural harbors, for example, become the natural capitals of
trade... Yet as the historian Richard Wade has noted for years, against the tide
of his field, this theory has its flaws: If the sheer excellence of a harbor
truly determined a city's fate, then the greatest city in America would be Upper
What flourishing cities often have in common, instead, are two crucial
cultural characteristics: combativeness and cunning. New Yorkers, for example,
fought back from their 1975 bankruptcy with every tool at their disposal, fair
and unfair. ... New York armed itself with brilliant leadership, cut its bloated
operating and capital budgets, cajoled ... federal loan guarantees from
Congress, poured money into fixing up thousands of units of abandoned housing,
fought crime and graffiti -- and emerged triumphant. ...
That same energy contributes to New York's cyclical boom-and-bust nature,
regularly pushing speculation beyond the limits of an exuberant boom, thereby
encouraging a bust. New Yorkers have done this for centuries while, for example,
more temperate Chicagoans have not. Seemingly more stolid than New Yorkers,
Chicagoans have transformed Carl Sandburg's brawling city of big shoulders into
what is probably the most beautiful of postindustrial cities.
Chicagoans actually think about beauty in a way that New Yorkers do not,
caring for their public gardens -- which go unvandalized though they are also
unpoliced -- and embracing Mayor Daley's seemingly quixotic decision, 20 years
ago, to put flowers wherever he could fit them, starting with highway barriers.
(At the time, New York's parks commissioner, Gordon Davis, complained that he
couldn't even get his own staff to plant flowers in front of his headquarters.)
Cherishing their unparalleled lakefront -- originally a gift of businessman
Montgomery Ward -- Chicagoans keep it free of invasive development...
Cunning and combativeness, however, often restore cities financially without
making them many new friends ... But what makes cities successful -- or even just lovable -- can seldom be
quantified. Even Baltzell, who admired the mind and achievements of Puritan
Boston, said that his heart and loyalties were rooted in Quaker Philadelphia,
which he criticized so harshly. As poet Phyllis McGinley wrote, perhaps in
astonishment, "Some love Paris and some Purdue."
"The answers are not to be found in conventional 20th-century analysis." I
think 21st-century analysis can explain more than this implies. For example,
though these only scratch the surface, see
Before Glaeser, "Urban Economics Was Dried Up" or
The New York Paradox which "helps us to understand how New York City moved in 30 years from the
humiliation of near bankruptcy to being the dominant city on earth." In any case, it will take a lot more than this to
convince me that a theory of urban development that uses "cunning
and combativeness" and the supremacy of particular cultures as its primary explanatory variables dominates or even augments existing
theoretical explanations of urban success.
Posted by Mark Thoma on Friday, October 20, 2006 at 12:09 AM in Economics |