This is an interesting lesson in monetary economics for a variety of reasons: Using Iraq as the primary example, it illustrates exchange value versus use value, it shows some of the properties
that a medium of exchange must possess to circulate widely, and it shows the
relationship between the supply of money and its value. It also explains the
difference between fiat and commodity backed paper money, private versus
government issued money, how speculation can affect the value of the medium of exchange, and other lessons. This is Hal Varian with an Economic
Scene from January 2004:
Dollar bills are "fiat" money - they are valuable because the government in
power says so. People can, however, write contracts that specify payment in
other currencies. If a contract specifies payment in euros, dollars will not
fulfill the contract, despite what is printed on them.
A more profound, and perhaps slightly unsettling, reason that a dollar has
value is simply that lots of people are willing to accept it as payment. In this
view, the value of a dollar comes not so much from government mandate as from
social convention.
In the jargon of economists, the value of a dollar is a result of "network
effects." Just as a fax machine is valuable to you only if lots of other people
you correspond with also have fax machines, a currency is valuable to you only
if a lot of people you transact with are willing to accept it as payment.
Indeed, one can have currencies that have no government backing. Gold has
been used for centuries as a medium of exchange; cigarettes were used for
payment in prisoner-of-war camps in World War II; and countless other goods,
including cowrie shells and peacock feathers, have functioned as money
throughout history. They were money because people were willing to accept them
as payment for debts, public and private. Gold, cigarettes, cowrie shells and
peacock feathers all have "use value" in addition to their "exchange value."
These items were originally valued for their utility or their beauty, and they
became used as currency. It is rare to see a purely paper currency functioning
as money without the backing of some government or financial institution.
Rare, perhaps, but not unheard of. Mervyn A. King, governor of the Bank of
England, cited an interesting example - the Iraqi dinar - in the Ely Lecture
delivered at the recent American Economics Association meeting in San Diego.
(Mr. King's speech can be downloaded from http://www.bankofenglandco.uk/speeches/speech208.pdf.)
Almost everyone except the likes of ExxonMobil, US Vice President Dick
Cheney, and their paid servants and deluded acolytes understands that when
humans burn hydrocarbons, carbon dioxide goes into the atmosphere, where it acts
like a giant blanket, absorbing infrared radiation coming up from below and
warming the earth.
Likewise, almost everyone understands that while global warming might be a
much smaller or larger problem than existing models suggest, this uncertainty is
no excuse for inaction. ...
Finally, almost everyone agrees that governments, non-profit institutions and
energy companies should be spending far more to develop technologies that
generate non-carbon-emitting power, that remove it from the atmosphere to
forests or oceans, and that cool the earth by reflecting more of the sunlight
that lands on it.
Clearly, the world's rich countries should carry the burden of dealing with
climate change. After all, they could take an easy, emissions-intensive path to
industrialisation and wealth. Today, China, India and other developing countries
cannot, and it would be unfair to penalise them for that. ...
Economists like to think of things in terms of prices. And when economists
see behaviour that has destructive side effects, we like to tax it. Taxation
makes individuals feel in their wallets the destruction they are causing. ...
But it has to be the right tax. An SUV going 10 miles in the city and burning
a gallon of gasoline pumps about three kilograms of carbon into the atmosphere.
Should the extra global warming tax be US$0.05 a gallon, US$0.50 a gallon, or
US$1.50 a gallon? ...[T]he size of the tax hinges on a question of moral
philosophy: How much do we believe we owe our distant descendants?
The Australian economist John Quiggin has an illuminating discussion on
his website that comes down on the side of
a US$0.50/gallon tax, because he projects that spending today to reduce carbon
emissions is a good investment for the future. Assuming that annual per capita
income grows at about two-per cent per year worldwide, a marginal expenditure of
roughly US$70 today to cut carbon emissions would be worth it if ... the world
of 2100 would be US$500 richer in year-2006 purchasing power.
On the other hand, critics point out that the world today is poor: average
annual GDP per capita at purchasing power parity is roughly US$7,000. We expect
improved technology and its spread to make the world of 2100, at a two-per cent
annual growth rate, much richer: US$50,000 per capita of year-2006 purchasing
power. So the critics argue that we need the marginal US$70 per capita today
much more than the richer people of 2100 will need the US$500 that they would
gain from being spared the effects of global climate change.
But what the critics often don't say is that the same logic applies to the
world today. Average annual per capita incomes in the US, Japan and Western
Europe are currently around US$40,000, and less than US$6,000 for the poorer
half of the world's population. The same logic that says we need our US$70 more
than the people of 2100 need an extra US$500 dictates that we should tax the
world's rich more, as long as each extra US$500 in first-world taxes generates
as little as an extra US$70 in poor countries' per capita incomes.
In short, if the world's rich are stingy today toward our much richer
descendants, and if we want to leave our environmental mess to them to deal
with, we should be lavish toward the world's poor. Likewise, if we are stingy
today toward the world's poor, we should be lavish toward our descendants.
At least, that is what we should do, if our actions are based on some moral
principle, rather than that of Leonid Brezhnev: What we have, we hold.
Once again, Alan Reynolds has asserted that Paul Krugman's claims about the top-coding
of Census data are in error. Paul Krugman sends an email with his response:
Here's what I'd say about Reynolds on all this:
Here's what the CBO says: "CBO's adjustments have the biggest impact on
high-income households, substantially increasing the income of that group above
the levels reported by the Census Bureau." That is, the CBO explicitly states
that the income share numbers reported by the Census are lower than those they
estimate using their method in part because the Census data are top-coded. End
of story.
Reynolds has now made two stabs at this. The first time he started yelling
CBO! CBO! without, apparently, noting that the reason I pulled the quote was not
to defend the CBO procedures but to show that the people at CBO - who do,
presumably, know how the Census numbers are constructed - say that top-coding
does reduce the reported high-income share. So, by the way, do the people at EPI
(see
here). EPI actually does a lot of work trying to correct for the top-coding
problem that Reynolds says doesn't exist. Does Reynolds really want to claim
that these people don't know what the Census data contain?
On the second stab, Reynolds still does not, as far as I can tell, address
the issue of whether I was right to say that top-coding reduces estimates of top
incomes. Instead, he tells us that some researchers have access to the full
data. That doesn't change the fact that he made a false accusation.
I think the best way to understand what's going on is that Reynolds, rather
than admit that he was wrong, is engaging in the
Chewbacca defense.
On the broader issue: Reynolds says that various statistical issues have
created a false impression of rising inequality. Now, serious researchers, from
CBO to the IRS to Piketty and Saez, have looked at those issues, acknowledged
them, but concluded that they don't make enough difference to change the picture
in any fundamental way. How are those who aren't experts on these data to judge
these competing claims?
Well, here's where Reynolds's personal history becomes relevant. Over the
years he has repeatedly made demonstrably false accusations about the
unreliability of data indicating growing inequality. In each of the cases
documented by Brad and others, he did exactly what he did in his first response
to my note on top-coding: yelled about how the thing was all wrong without even
reading the material he was criticizing. At a certain point you just have to
dismiss him as not worth paying attention to.
One last point: we have a number of indicators other than government data on
what's happening to very top incomes and wealth - things like estimates of
executive compensation. All these indicators point to a continuing rapid rise at
the top compared with the middle. So any claim that the rising inequality we see
in both Census data and in tax returns is some kind of statistical illusion
faces an additional credibility problem.
According to this, there's one big obstacle stopping us from implementing a
single-payer health care system - the belief that doing so can reduce costs
without compromising overall health:
[S]ingle-payer ... calls for everyone to pay into one insurer, typically the
government or a public agency. The insurer then pays doctors, pharmacists and
hospitals at preset rates. Patients who want unapproved procedures and doctors
not willing to accept the standard payment remain free to deal with one another
directly, outside the system. ...
There’s only one catch. Most Americans just don’t believe it can be done. The
health care crisis may turn out to be more of a problem of ideology than
economics.
The economic case for a single-payer system is surprisingly strong. ...
Countries with single-payer systems have long records of spending less on health
care than the United States does. The United States spent an average of $6,102 a
person on it in 2004, ... while Canada spent $3,165 a person, France $3,159,
Australia $3,120 and Britain just $2,508.
At the same time, life expectancy in the United States ... was slightly lower
than it was in those other countries in 2004, the latest year for which complete
figures are available. And the United States had a higher rate of infant
mortality.
There is a long
comment by Ronald McKinnon on the link between exchange rates and
international adjustment at Martin Wolf's blog at the Financial Times. This is a
shortened version, just a part of the section at the end -- there's quite a bit
more at the (open) link given above:
Exchange Rate Clubs and the Monetary Approach Specialists in exchange rate economics fall into two distinct clubs: A and B.
Members of Club A, by far the larger group, have been brought up since they were
undergraduates on the elasticities model of the balance of trade. Besides being
algebraically tractable, the microeconomics of this model seem intuitively
plausible. With nominal export prices 'sticky' in each country’s currency in the
short run, the relative price effects of a depreciation in the nominal exchange
rate seem to go in the right direction for reducing a trade deficit. The
depreciating country’s exports become cheaper in world markets and it sells
more, and its imports become more expensive in the domestic currency so it buys
less, so the trade balance allegedly improves. Members of Club A focus on this
link between the real, i.e., inflation - adjusted, exchange rate and the real
trade balance. ...
In a recent comment on a post about income inequality, Cato fellow Alan Reynolds
says Paul Krugman is wrong about the top-coding of Census data and its implications for calculating the share of income received by the top groups. Reynolds starts by quoting
Krugman, then follows up with his assertion:
“The [Census] questionnaire is “top-coded”: if the individual interviewed has
earnings higher than $999,999, those earnings are recorded simply as $999,999.
Since a lot of income growth in the last few decades has taken place among
people with multimillion-dollar incomes, the Census data miss an important part
of the story.”
[This] came verbatim from a Paul Krugman column last September. It is entirely
wrong... The public use data are censored for privacy but incomes well above $1
million are definitely included in the income share attributed to the top
quintile and top 5%. Mr. Krugman’s related comment about the Census sample being
“limited” was just strange. ...
Paul Krugman emails in response:
Maybe Reynolds would like to talk to the people at CBO. Here's what they say in
a discussion of how they put together their income distribution numbers:
Adjusting
Income, CBO: The Census Bureau's distributional estimates derive from income
reported on the annual March CPS; CBO, however, adjusts those estimates to bring
them into line with the income reported to the Internal Revenue Service on tax
returns. CBO's adjustments have the biggest impact on high-income households,
substantially increasing the income of that group above the levels reported by
the Census Bureau. Those adjustments result in part from respondents to the CPS
underreporting their income relative to amounts appearing on tax returns and in
part from "top-coding" (the Census Bureau's practice of capping incomes in CPS
public-use files at specific levels).
Advantage Krugman (I added the link at the end). He adds that:
The relevant information appears on the first page of a
Google search for "top-coding" "income distribution"; funny that Reynolds would
accuse me of being in error without even doing the most elementary check.
Continuing with the practice of listening to
people who got things right about Iraq and terrorism instead of the usual
gang who mostly got it wrong, this is Richard Clarke on the "7-year-old's soccer
syndrome." Since this is an economics site, the theme is the "opportunity cost"
of the war in Iraq:
While You Were at War . . . , by Richard A. Clarke, Commentary, Washington Post:
In every administration, there are usually only about a dozen barons who can
really initiate and manage meaningful changes in national security policy. For
most of 2006, some of these critical slots in the Bush administration have been
vacant, such as the deputy secretary of state ... and the deputy director of
national intelligence... And with the nation involved in a messy war spiraling
toward a bad conclusion, the key deputies and Cabinet members and advisers are
all focusing on one issue, at the expense of all others: Iraq.
National Security Council veteran Rand Beers has called this the
"7-year-old's soccer syndrome" -- just like little kids playing soccer, everyone
forgets their particular positions and responsibilities and runs like a herd
after the ball.
In the end, there are only 12 seats at the conference table in the White
House Situation Room, and the key players' schedules mean that they can seldom
meet there together in person or on secure video conference for more than about
10 hours each week. When issues don't receive first-tier consideration, they can
slip by for months. ...
[Due to] the distraction of the Iraq war, ... seven key "fires in the in-box"
national security issues remain unattended, deteriorating and threatening, all
while Washington's grown-up 7-year-olds play herd ball with Iraq.
2006: The Year of Feeding at the Trough, by Robert Reich: It was perhaps the
worst congress of the twentieth century -- not a do-nothing congress, a do-awful
congress. It was a congress that dispensed so much lard you’d think they had a
pig-slaughtering house in the cloak rooms. At last count, the 109th Congress
handed out over $50 billion in earmarks to lobbyists who bundled campaign
contributions on their behalf. This congress also spent billions more in
corporate welfare for Big Oil, Big Pharma, Big Telecom.
And don’t forget the congressmen who put both their hands into the trough and
got back corporate gifts, junkets, and outright bribes. The Congressional Hall
of Shame grew bigger this year with the notable additions of Tom DeLay, Bob Ney,
and Duke Cunningham, all of whom got caught up in the Abramoff scandal. There
was also that $90,000 that turned up in Congressman William Jefferson’s freezer.
Also feeding at the trough this year were defense contractors like Haliburton,
who were found to have been wasting tens of billions of taxpayer dollars in Iraq
and Afghanistan...
In addition, the chief executives of some of America’s biggest companies who
handed themselves the largest salaries and bonuses on record, and – we now know
– stock options back-dated to maximize their value.
It was a year when investment bankers on Wall Street raked in even more. ...
How did they make all this money? Some, by timing trades. Others by taking
companies private, loading them up with debt, cutting their payrolls, and then
taking them public again. Others by monopolizing Initial Public Offerings and
getting in on the juiciest ones before the rest of the public.
Most of the cost of this feeding frenzy by politicians, defense contractors,
and Wall Streeters was borne by average workers, normal taxpayers, and small
investors. Most of them did only modestly in 2006. Median wages rose slightly
but adjusted for inflation were still below what they were in 2000, and health
and pension benefits shrank, overall. ...
But the biggest cost of all this has been to our democratic-capitalist system
itself. When people at the top abuse their power, the average person loses trust
in that system. The result is widespread cynicism. And if most people are
cynical, how can anything ever change?
Next, his forecast for 2007, or at least one potential scenario:
2007: there may be trouble ahead, by Robert B Reich, Comment is Free: In an
effort to prevent domestic social upheaval and to appease the Bush
administration, which has asked it to spend more money domestically, China
embarks on a large-scale program to improve its environment and social services.
This, along with rising world oil and commodity prices, leaves China with less
money to lend to the United States. ...
US interest rates rise considerably. Millions of American homeowners are
unable to pay their mortgages, resulting in a wave of bank foreclosures. Housing
and auto sales plummet and unemployment rises. Median wages drop, but America's
global rich, who have hedged their savings in foreign currencies, are richer
than ever. This fans the flames of economic populism and nationalism. In June,
Congress refuses to renew Bush's fast-track authority to make trade deals.
Meanwhile, the carnage in Iraq worsens.... President Bush says he seeks
"peace with honor" and asks for more time but congressional Democrats threaten
to withhold further defense appropriations unless American troops are withdrawn
by the end of the year. ... Polls show that only 15% of Americans approve the
job Bush is doing. He says he "doesn't care".
At the start of September, Senator Hillary Rodham Clinton officially
announces she will run for president..., but polls show her trailing Senator
Barack Obama among Democratic voters although Obama has still not yet announced.
At the same time, Senator John McCain, the Republican front-runner, lays out a
plan to make the US "energy independent" by 2020, and says China is a greater
long-term threat to the US interests than al-Qaida.
In October, Lou Dobbs ... declares he will run for president as a third party
"America First" candidate, promising to revive the economy and recreate good
middle-class jobs by shrinking the size of the US military and forcing other
nations to pay their "fair share" of policing the world, blocking the flow of
illegal immigrants into the U.S., and preventing American companies from
outsourcing jobs abroad. Early polling shows Dobbs with a surprising 35% of
likely voters.
Murat Tasci and Laura Kleinhenz of the Cleveland Fed look at recent movements
in the net hires rate—the difference between the hires rate and the rate of job
separations:
Economic Activity: Labor Turnover, by Murat Tasci and Laura Kleinhenz,
Cleveland Fed: One of the more useful recent additions to the menu of government statistics
available to economic analysts is the Bureau of Labor Statistics’ Job Openings
and Turnover Survey, commonly referred to as JOLTS. The survey, begun in 2001,
provides data on employment, job openings, hires, quits, layoffs, discharges,
and other separations from employment.
The net hires rate—the difference between the hires rate and the rate of job
separations of all sorts—has been positive since September 2005, consistent with
the employment growth evident from the usual payroll and household surveys
released on the first Friday of every month. The detail available from JOLTS
makes it clear that a big part of the story behind the employment picture this
year has been the recent decline in separations rate. At 3.2 percent, this is
the lowest separations rate since January 2004. Furthermore, the job openings
rate—a measure of job availability—has been increasing steadily, implying a
growing demand for labor.
This Economic Letter from John Krainer of the San Francisco Fed looks at how
the development of "alternative" mortgage products fits into the history of
innovation in the mortgage market, and how it has affected housing choices:
Mortgage Innovation and Consumer Choice, by John Krainer, FRBSF Economic Letter:
As 2006 draws to a close, one economic development that stands out over the year
is the slowdown in the housing sector. In particular, the slowdown raises
concerns about the perceived shift households have made toward "alternative"
mortgage products, which may leave them more exposed to negative effects from
higher interest rates and falling house prices. In this Economic Letter, I take a somewhat longer view and put alternative
mortgages in the context of the history of innovation in the U.S. mortgage
market. I then examine the ways in which this innovation may be affecting the
housing consumption decisions facing U.S. households.
Evan Koenig of the Dallas Fed has a nice discussion of how data revisions
complicate monetary policy:
Through a Glass, Darkly: How Data Revisions Complicate Monetary Policy,
by Evan F. Koenig, Economic Letter,
Federal Reserve Bank of Dallas: Over the course of any year, we receive a veritable tidal wave of numbers on
the U.S. economy's performance—readings on output, inflation, employment, productivity
and so much more. Policymakers, business operators, investors and the general public
look to these data to make economic decisions. Unfortunately, some early statistical
releases only imperfectly reflect what's happening. As more complete and accurate
data come out, the view they provide improves.
Looking at preliminary data, policymakers and others may misinterpret what they
see, leading to mistakes that could harm the economy. A better understanding of
the nature of the revisions that regularly alter the data should lessen the chances
of acting on information that doesn't accurately reflect economic realities.
A
Failed Revolution, by Paul Krugman, Commentary, NY Times: After first
attempting to deny the scale of last month’s defeat, the apologists have settled
on a story line that sounds just like Marxist explanations for the failure of
the Soviet Union. What happened, you see, was that the noble ideals of the
Republican revolution of 1994 were undermined by Washington’s corrupting ways.
And the recent defeat was a good thing, because it will force a return to the
true conservative path.
But the truth is that the movement ... was always based on a lie.
The lie is right there in “The Freedom Revolution,” the book that Dick Armey,
... the House majority leader, published in 1995. He declares that most
government programs don’t do anything “to help American families with the needs
of everyday life,” and that “very few American families would notice their
disappearance.” He goes on to assert that “there is no reason we cannot, by the
time our children come of age, reduce the federal government by half as a
percentage of gross domestic product.”
Right. Somehow, I think more than a few families would notice the
disappearance of Social Security, Medicare and Medicaid — and those three
programs alone account for a majority of nondefense, noninterest spending. ...
As long as people like Mr. Armey, Newt Gingrich and Tom DeLay were out of
power, they could run on promises to eliminate vast government waste that
existed only in the public’s imagination — all those welfare queens driving
Cadillacs. But once in power, they couldn’t deliver ... the government hasn’t
shrunk...
Unable to make good on its promises, the G.O.P., like other failed
revolutionary movements, tried to maintain its grip by exploiting its position
of power. Friends were rewarded with patronage: Jack Abramoff began building his
web of corruption almost as soon as Republicans took control. Adversaries were
harassed with smear campaigns and witch hunts: Congress spent six years ...
investigating a failed land deal, and Bill Clinton was impeached over a
consensual affair.
But it wasn’t enough. Without 9/11, the Republican revolution would probably
have petered out quietly... Instead, the atrocity created ... four extra years
gained by drowning out unfavorable news with terror alerts, starting a
gratuitous war, and accusing Democrats of being weak on national security.
Yet the Bush administration failed to convert this electoral success into
progress on a right-wing domestic agenda. The collapse of the push to privatize
Social Security recapitulated the failure of the Republican revolution as a
whole. Once the administration was forced to get specific about the details, it
became obvious that private accounts couldn’t produce something for nothing, and
the public’s support vanished.
In the end, Republicans didn’t shrink the government. But they did degrade
it. ...
Is that the end for the radical right? Probably not. ... Many of the ideas
that failed in the Bush years had previously failed in the Reagan years. So
there’s no reason to assume they’re gone for good.
Indeed, it appears that loss of power and the ensuing lack of accountability
is liberating right-wingers to lie yet again: since last month’s election, I’ve
noticed a number of Social Security privatizers propounding the same free-lunch
falsehoods that the Bush administration had to abandon in the face of demands
that it present an actual plan.
Still, the Republican revolution of 1994 is over. And not a moment too soon.
Among the steps being considered are short-term jobs and loan programs aimed
at winning back the waning local support for the Bush administration in
middle America, the officials said. ...
"The president is looking at a variety of ways to work with state governments
to provide new economic opportunities for Americans, which will be essential to
sustaining economic security and draining the influence of populists," said
Gordon Johndroe, the spokesman...
That view underscores how Bush is looking beyond just tax issues ... to
achieve stability in the economy. Officials said economic and political issues
were among the key elements discussed Thursday when Bush huddled here with his
top advisers to discuss the economy.
The president emerged after three hours to tell reporters that he has made
"good progress" on developing a new plan... But he said that he intends to hold
more consultations with economic advisers and U.S. lawmakers before formally
unveiling his plan sometime next month.
"The plan is taking shape," said one senior administration official who
briefed reporters outside the president's ranch, where Bush is spending the
holidays.
The senior official said Bush heard an extensive presentation about economic
conditions in the U.S...
Some U.S. officials think an economic package may be the most promising
element of a revised strategy, since it would deal with the Americans'
deteriorating economic conditions and growing disillusionment with the U.S.
economic policy. Others, however, have severe questions about whether such a
package would work years after the botched efforts to stimulate economic
activity.
The economic package now on the table focuses on three elements, and is
separate from the long-term jobs-creation program... One senior official
cautioned that all three elements have been discussed in some manner but that
the final package has not been determined.
One element ... is ... a short-term work program that would immediately hire
people in the neighborhood to clear up trash or do other small civil-affairs
jobs. ... It might also help wean young unemployed men from the streets or
prevent them from joining any of the armed gangs that are fueling escalating
inner city strife.
The second part would be a micro-loan program -- involving modest loans to
help individuals get businesses going -- to generate new economic activity in
poor neighborhoods. Unemployment is worse today than during the rule of Bill
Clinton.
The third part of the package, which has been developed in part by the
Treasury Department, would review dormant government employment programs to try
and determine which ones are economically viable and worth reopening. ...
In brief comments to reporters here, the president made clear that the focus
of his review is to strengthen the economy, which has been struggling...
"The key to success in our economic stimulus program is to have a government
that's willing to deal with the elements there that are trying to prevent this
from succeeding," Bush said. "We want to help them succeed." ...
Administration officials said they expect the president to unveil his full
plan for the economy sometime in the early part of January, but Bush and his
advisers made clear that more consultations are planned with U.S. lawmakers and
advisers -- and that there could well be another meeting of the Council of
Economic advisers before the plan is released.
"I fully understand it's important to have both Republicans and Democrats
understanding the importance of this stimulus package," Bush told reporters.
I changed a few words in the above. Here's what the article really says:
There is, of course, a very long history of invading armies taking over new
territory. Given that, and the trouble we've had in Iraq, I've wondered if there
is an historical template for how to take over a defeated country and whether we
ignored that historical template in Iraq. At one point I did some reading and sent a few
emails around looking for answers. I managed to learn a little bit about how this was done in the past, but not
enough.
So I was interested to see "How would four of the greatest war leaders in
history have handled Iraq?" in the LA Times, particularly the first one on Genghis Khan's takeover of Iraq in the 13th century:
David Warsh has a very nice discussion of Adam's Fallacy: A Guide to Economic Theology, the book by
Duncan Foley, and the relationship of Adam Smith's The Theory of Moral Sentiments
to his work in The Wealth of Nations:
On the influence and authority of conscience, and other considerations not
found in any economics textbook, by David Warsh: Duncan ... Foley was born
in 1942. His father was an industrial physicist, his mother an environmentalist.
Foley himself began attending Quaker meetings at age nine and joined the Society
of Friends at fifteen. He graduated from Philadelphia's famous Central High
School in 1960, from Swarthmore College in 1964 and went straight to Yale, where
he skipped the core courses and took the qualifying exam instead, obtaining his
Ph.D. in mathematical economics in just two years. In 1966, he moved to the
Massachusetts Institute of Technology, to teach and do research.
As a young man during the Vietnam War, he told interviewers recently, "I
remember almost fainting at times in micro theory course when I started to teach
indifference curves and Pareto efficiency theory. I kept asking myself, "Is this
an honest way to represent society and its contradictions to students?'"
Foley read Marx. He published mainstream papers: with Miguel Sidrauski,
with Karl Shell, with Robert Engle, with Martin Hellwig. He moved to Stanford
University in1973, and ... returned east to Barnard College of Columbia University in 1977.
After 22 years at Barnard, mostly teaching undergraduates, Foley moved
downtown to the New School in 1999, replacing Robert Heilbroner as the senior
figure there, with a view to building up the economics department. (He had
published four ambitious books in those uptown years as well...)
Now Foley has followed still further in his predecessor's footsteps, writing
an alternative version of Heilbroner's great book, The Worldly Philosophers.
Adam's Fallacy: A Guide to Economic Theology is a beautiful little book. It
contains some of the most lucid exposition of the core ideas of economics that I
have ever read. Laid out pretty much on the same plan as Heilbroner, though with
none of the attention to history that makes The Worldly Philosophers such a
gripping read, Adam's Fallacy leads the reader through the ideas of Adam Smith
("Adam's Vision"), David Ricardo and T.R. Malthus ("Gloomy Science"), Karl Marx
("The Severest Critic"), Alfred Marshall (who in "On the Margins" rates but a
single mention, in contrast to many entertaining pages on Thorstein Veblen),
and, finally, of the twentieth century trinity of John Maynard Keynes, Friedrich
von Hayek and Joseph Schumpeter ("Voices in the Air"). As a penetrating critic
of capitalist economic development, with its "immense opportunities, and its
equally immense social and moral stresses," Foley has few peers.
Yet Adam's Fallacy seems to me, at least in a certain way, to be profoundly
mistaken. The reason is simple to relate. Foley dwells entirely on what
economists have managed to make so far of The Wealth of Nations, and gives short
shrift to Smith's other book, The Theory of Moral Sentiments, and to the
relationship of the one to the other. Published in 1759, seventeen years before
the work for which Smith is remembered, Moral Sentiments is a compendium
of much that today's economics leaves out -- declares "exogenous," in the argot
of the field, "human nature" being quite beyond economists' models present-day
ability to address.
Market failure in everything: The boxed chocolates edition.
This is a good example of what can happen to consumers when they use price to
determine the quality of a differentiated product (via
Boing Boing, "I can't speak to the veracity of the claims in this ... investigative series, but I couldn't stop reading it.").
This chocolatier uses blocks of chocolate obtained from a chocolate maker, melts them,
puts the melted chocolate into rectangular forms, and sells it for mark-ups of several thousand
percent.
Here is the series of ten short reports entitled "What's Noka Worth?" They are interesting for the
economics and for what you'll learn about making chocolate:
Part 1: Four years ago, while standing on a mountaintop in Switzerland, a
pair of Canadian accountants, Katrina Merrem and Noah Houghton, decided to leave
the ledgers behind and enter the world of gourmet chocolate. Two years later,
they founded Noka Chocolate in Plano, Texas. ...
These two commentaries from the Christian Science Monitor discuss the work of John Kenneth Galbraith and Milton
Friedman. First, Joseph Stiglitz compares their receptions within the economics profession and their influence in the world more
generally:
But the two had a very different reception within the profession. Friedman
was a Nobel laureate whose works were taught in every graduate course in the
world; Galbraith was never accepted into the "fraternity." Friedman was seen as
a scientist; Galbraith as a social commentator. The contrast between their
physical and historical stature is ironic and unfair. In many ways, Galbraith
was a more critical observer of economic reality.
Galbraith's vivid depictions of ... American capitalism remain a sorely
needed reminder that all is not quite as perfect as the perfect market models -
with their perfect competition, perfect information, and perfectly rational
consumers - upon which so much of Friedman's analysis depended. Galbraith ...
strove to understand the world as it was, with all the problems of unemployment
and market power that simplistic models of competitive markets ignore. ...
Both lived through the Great Depression, but they gleaned different lessons.
Galbraith saw that the labor market did not work as well as the standard model
had predicted; he embraced Keynesian economics, and its call for government
action, at a time when the US economics establishment rejected these ideas...
What Galbraith understood, and what later researchers (including this author)
have proved, is that Adam Smith's "invisible hand" - the notion that the
individual pursuit of maximum profit guides capitalist markets to efficiency -
is so invisible because, quite often, it's just not there. Unfettered markets
often produce too much of some things, such as pollution, and too little of
other things, such as basic research. As Bruce Greenwald and I have shown,
whenever information is imperfect - that is, always - markets are inefficient;
hence the need for government action.
Galbraith reminded us that what made the economy work so well was not an
invisible hand but countervailing powers. He had the misfortune of articulating
these ideas before the mathematical models of game theory were sufficiently
developed... The good news is that today, more attention is being devoted to
developing models of these bargaining relationships, and to complex, dynamic
models of economic fluctuations in which speculation may play a central role.
While Friedman never really appreciated the limitations of the market, he was
a forceful critic of government. Yet history shows that in every successful
country, the government had played an important role. Yes, governments sometimes
fail, but unfettered markets are a certain prescription for failure. Galbraith
made this case better than most. ...
Galbraith's penetrating insights into the nature of capitalism - as it is
lived, not as it is theorized in simplistic models - has enhanced our
understanding of the market economy. ... [His passing] has left a gap in our
intellectual life: Who will stand up against the economics establishment to
articulate an economic vision that is both in touch with reality and
comprehensible to ordinary citizens?
There is a second commentary by Mark Skousen focusing on Milton Friedman:
As founder of the famous (University of) Chicago "school" of economics,
Friedman was a thoroughgoing empiricist and utilitarian, believing that all
theories must be subjected to rigorous testing. He was taught that the only
worthwhile theory was a simple one that could be validated or rejected with
empirical evidence. To test a theory, he developed sophisticated statistical
methods and econometric models.
In the 1950s, Friedman was one of the first to apply this methodology
consistently. Today, it is a universal technique among economists and social
scientists. ... Friedman felt that biases could be overcome by objective
examination. He discouraged labels. "I am not a supply-side economist," he
insisted. "I am not a monetarist economist. I am an economist."
Ironically, it was his painstaking, objective analysis in the landmark work,
"A Monetary History of the United States, 1867-1960," that gave him such labels.
In that work, he and coauthor Anna J. Schwartz asserted that the Great
Depression was not a failure of market capitalism, but of government policy.
They showed that the Federal Reserve acted ineptly ..., converting a
garden-variety recession into the worst economic catastrophe of the 20th
century. ...
His empirical studies at Chicago convinced him that "money mattered" more
than fiscal policy... Friedman also discovered that "long and variable lags" in
Federal Reserve policy would confound Keynesian efforts to fine tune the
economy. Instead, he advocated a steady monetary rule...
Through his books, ... Milton Friedman reinvigorated the world's faith in
capitalism. He discovered, through rigorous science, that markets work, and that
we as individuals are better suited to making our own decisions than our
government leaders or technocrats (the very opposite view of John Kenneth
Galbraith, who preferred centralized planning). He favored the invisible hand of
laissez faire over the heavy hand of government. ...
Yet
Friedman's empiricism also led him into disagreements with his free-market
supporters. He dismissed the conservative view that deficit spending was
necessarily bad, or that tax cuts stimulated the economy in the short run.
Friedman used the same strategy of "testing the evidence" when it came to Mr.
Galbraith's criticisms. For example, the evidence failed to support Galbraith's
contention that big business can manipulate customers at will or ignore
stockholders because of its size and power.
Well did Chicago colleague George J. Stigler say of these two economists:
"All great economists are tall. There are two exceptions: John Kenneth Galbraith
and Milton Friedman."
Not sure why the author chose to end with Stigler's dig at Galbraith. Not all of
Friedman's predictions withstood empirical testing either. The composite picture of
Galbraith and Friedman explains Stigler's (only half-correct) statement.
The core idea is simple. The federal government creates tax-free retirement
accounts for lower-income Americans, supplementing private accounts where they
already exist, and matching personal contributions to those accounts. The amount
of the match would depend on the income of the family and how much they save.
Gene B. Sperling, senior fellow at the Center for American Progress and the
best-known proponent of
this idea...
[C]urrently only 55 percent of Americans working full time hold a job with a
retirement savings plan; the rate is even lower for part-time workers and the
poor. Thus the bottom 60 percent of taxpayers receives only 10 percent of the
tax incentives for savings.
A universal 401(k) plan would spread these tax benefits more evenly and
induce more Americans to save. ... By directing the benefits toward the
neediest, the universal 401(k) savings plan tries to increase economic security
in a cost-effective manner.
There is an obvious way to pay for a universal 401(k) plan. For every dollar
spent on the universal 401(k), the federal government could spend one dollar
less on Medicare and Social Security benefits. ...[T]he resulting benefit
freezes and cuts would apply to all recipients, not just lower-income groups, so
the poor would still come out ahead.
Since the reform is revenue-neutral, it would not increase tax rates on the
work and savings decisions of wealthier Americans. In the longer run, the
increased savings and investment would, to some extent, help pay for the
additional government transfer of money to the poor.
America would move closer to President Bush’s vision of an ownership society,
while addressing income inequality. The poor get more upfront, and their
longer-run gains are greater... Furthermore, if we suspect that globalization
and information technology will erode future wage gains, increasing the extent
of capital ownership will spread the benefits from economic growth more evenly.
It may seem that what the poor need is more money to spend, but the universal
401(k) plan is taking a gamble by encouraging them to lock up more savings.
Perhaps support for a culture of savings and discipline is more important than
subsidizing additional spending.
The catch is this: the universal 401(k) plan would split the poor into two
classes. The first group would allow savings to accumulate and reap the wonders
of compound returns for their old age. But other low-income recipients would
undermine the intent of the plan. Either they still would not save or, as the
government added to their accounts, they would borrow more elsewhere or behave
more irresponsibly toward their future in other ways. Their net positions would
not much improve.
The uncomfortable truth is that many of the most effective antipoverty
measures leave more than a few people behind. A leveraged antipoverty plan
offers incentives for the poor to change their behavior in a favorable manner;
for these incentives to matter, it has to hurt not to save. If a universal
401(k) is to create a culture of savings and investment, it cannot extend the
same benefits to all of the poor.
Poor Americans who are hit by bad luck, like unforeseen medical expenses,
would create a policy dilemma. These individuals might seek to remove funds from
their 401(k) accounts, but a generous government match in savings would require
tough restrictions on removals. ... A successful universal 401(k) plan would
have to be run as a tough-minded investment opportunity and not as a welfare
program. ...
A fiscally responsible universal 401(k) plan would not make everyone happy.
Libertarians and conservatives would be suspicious of government-created
accounts. Liberals might not like freezing or reducing future expenditures on
Medicare and Social Security. But if we are looking for policy initiatives that
address real-world problems and offer something to each side, encouraging
low-income savings is a good place to start.
I would describe this as addressing wealth inequality more than income
inequality, but that is a minor quibble. As for the proposed policy, proposals
with government matches for saving coupled with opt-out saving programs are
worth considering as add-on accounts to the present social insurance system. But I can't
support the carve-out part of this proposal:
There is an obvious way to pay for a universal 401(k) plan. For every dollar
spent on the universal 401(k), the federal government could spend one dollar
less on Medicare and Social Security benefits.
I also see this differently:
It may seem that what the poor need is more money to spend, but the universal
401(k) plan is taking a gamble by encouraging them to lock up more savings.
Perhaps support for a culture of savings and discipline is more important than
subsidizing additional spending.
Perhaps not. The proposal doesn't just encourage the poor "to lock up more
savings," at the expense of consumption. If the poor, who are struggling to get
by as it is don't "change their behavior in a favorable manner" and voluntarily
save more, then "it has to hurt."
I don't think we should expect people who are having a tough time making ends meet to trade present for future consumption voluntarily, or that such a change necessarily represents a "favorable" change in behavior from their or society's perspective.
This seems relevant:
Up for
Review: 401(k) Industry, by Tom Lauricella, WSJ: In recent months, a series
of lawsuits has raised questions that longstanding business practices in the
[401(k) plan] industry may represent illegal forms of collusion. ... A November report by the
Congressional Government Accountability Office said some practices "may not be
in the best interest" of investors. ...
The GAO ... said current rules result in "piecemeal" disclosure and that
investors aren't given information that would help them determine whether they
were getting a good deal. The GAO also warned against some of the same practices
targeted by the lawsuits, saying they may hide conflicts of interest.
The GAO also said the Labor Department, which is responsible for regulating
401(k) plans, hasn't been collecting the kind of information on the plans that
it needs to do the job. ...
Max Sawicky at MaxSpeak ("MaxSpeak, You Listen") would agree, wholeheartedly in this instance, with this statement I made in the post Democrats and the Deficit:
I am not employed by anyone as a political strategist, for good reason, and
at times I am hopelessly naive about the politics surrounding many policy
actions ... but hopefully I'll learn.
Max
has been commenting on politics a lot longer than I have, so let's hear what he
has to say on the topic of the post, the deficit:
Combine the following political ingredients: a Democratic caucus leadership
aiming to forge a reputation as fiscally conservative, an enlarged "Blue Dog"
grouping of conservative Democrats, the long-suffering small-government
Republicans, and other Republicans in the White House and Congress happy to
oblige the the incoming Democratic leadership in its desire to avoid legislative
achievements.
Telling Bush he ought to be financing the war with taxes is a good idea. So
is getting rid of most pending earmarks, though remember, to get important
things done, sometimes you have to buy off the less scrupulous statesmen. I also
support PAYGO if applied to taxes and mandatory spending, with a caveat that
would take too long to explain in this post.
Without more money, Democrats will face "a real struggle for which wins out:
the political promises or the fiscal-responsibility promise," said Robert L.
Bixby, executive director of the Concord Coalition, a nonpartisan group that
opposes deficits. "If the public perceives that they're making real choices and
cutting back on some things they want to do politically because they're trying
to be fiscally responsible, then they can declare victory." But if people
perceive that they're honoring fiscal restraint in word but not in deed, then
they'll look pretty silly, Bixby said.
Evidently ol' Bob was in hibernatiion in 1993-2006, when fiscal
responsibility contributed to budget surpluses, a dozen years out of power on
the Hill for the Democrats, and the Bush tax cuts.
Krugman has it right, if after some evolution.
I had it
right a dozen years ago. Deficit reduction for the sake of balancing the
budget is jive.
Our friend
Mark Thoma suggests that the Charlie Brown Democrats take another run at the
football:
Thus, to me the optimal way to proceed is to pick a best strategy
irrespective of what might happen if you lose to Republicans in the future,
communicate it to people clearly so they know you see the problems and are
moving toward a workable solution, and propose and implement the policies with
single-minded, stay the course determination that does not blink in the face of
political harping from the other side.
Thoma overlooks a basic point: an essential quality in a policy is its
political durability. Whenever Democratic administrations amass budget
surpluses, whether at the Federal or state level, the Republicans start to whine
about being overtaxed, look there is all that money there not doing anything.
The temptation for a quick payout is the true opiate of the masses in a
democratic society.
He also suggests that while the surpluses facilitated tax cuts, they may also
have protected social programs. The actual record of Republicans in power
cutting spending is much more limited than their rhetoric, which both sides have
in interest in exaggerating, would suggest. The only serious action in this vein
was in the early and mid-80s. Nixon, Ford, Bushes I and II made no move to cut
social spending. Reagan did much less in his second term, even signing off on a
new entitlement for catastrophic health care.
Finally, I have a problem with the
DeLongian
formulation, shared in spirit by Thoma, about "balancing" Social Security
and Medicare finance. Here as well, the problem is not only the economics, but
the political reality that in matters of budgetary scruples, the Democrats are
trying to hold a formal dinner with a pack of feces-flinging monkeys.
Joseph Stiglitz looks at the lessons to be learned from 2006, and the risks
the U.S. and world economies face in 2007. He, along with many others (e.g. Larry Summers) believes that the risks are higher than currently reflected in
financial markets and that the "prospect of risk premiums returning to more normal levels is itself one of
the major risks the world faces today":
Will the Dam
Break in 2007?, by Joseph E. Stiglitz, Project Syndicate: The world survived
2006 without a major economic catastrophe, despite sky-high oil prices and a
Middle East spiraling out of control. But the year produced abundant lessons for
the global economy, as well as warning signs concerning its future performance.
Unsurprisingly, 2006 brought another resounding rejection of fundamentalist
neo-liberal policies, this time by voters in Nicaragua and Ecuador. Meanwhile,
in neighboring Venezuela, Hugo Chávez won an overwhelming electoral: at least he
had brought some education and healthcare to the poor barrios, which previously
had received little of the benefits of the country’s enormous oil wealth.
Perhaps most importantly for the world, voters in the United States gave a
vote of no confidence to President George W. Bush, who will now be held in check
by a Democratic Congress.
When Bush assumed the presidency in 2001, many hoped that he would govern
competently from the center. More pessimistic critics consoled themselves by
questioning how much harm a president can do in a few years. We now know the
answer: a great deal.
Never has America’s standing in the world’s eyes been lower. Basic values
that Americans regard as central to their identity have been subverted. The
unthinkable has occurred: an American president defending the use of torture,
using technicalities in interpreting the Geneva Conventions... Likewise, ...
corruption and incompetence have reigned under his administration, from the
botched response to Hurricane Katrina to its conduct of the wars in Afghanistan
and Iraq.
In fact, we should be careful not to read too much into the 2006 vote:
Americans do not like being on the losing side of any war. It was this failure
... that
led voters to reject Bush. But the Middle East chaos wrought by the Bush years
also represents a central risk to the global economy. Since the Iraq war began
in the 2003, oil output from the Middle East, the world’s lowest-cost producer,
has not grown as expected... Although most forecasts
suggest that oil prices will remain at or slightly below their current level,
this is largely due to a perceived moderation of growth in demand, led by a
slowing US economy.
Of course, a slowing US economy constitutes another major global risk. At the
root of America’s economic problem are measures adopted early in Bush’s first
term. In particular, ... a tax cut that largely
failed to stimulate the economy, because it was designed to benefit mainly the
wealthiest taxpayers. The burden of stimulation was placed on the Fed, which
lowered interest rates to unprecedented levels. While cheap money had little
impact on business investment, it fueled a real estate bubble, which is now
bursting, jeopardizing households that borrowed against rising home values to
sustain consumption.
This economic strategy was not sustainable. Household savings became negative
for the first time since the Great Depression, with the country borrowing $3
billion a day from foreigners. But households could continue to take money out
of their houses only as long as prices continued to rise and interest rates
remained low. Thus, higher interest rates and falling house prices does not bode
well for the American economy. ...
Making matters worse, unrestrained government spending further buoyed the
economy during the Bush years, with fiscal deficits reaching new heights, making
it difficult for the government to step in now to shore up economic growth as
households curtail consumption. Indeed, many Democrats, having campaigned on a
promise to return to fiscal sanity, are likely to demand a reduction in the
deficit, which would further dampen growth.
Meanwhile, persistent global imbalances will continue to produce anxiety,
especially for those whose lives depend on exchange rates. Though Bush has long
sought to blame others, it is clear that America’s unbridled consumption and
inability to live within its means is the major cause of these imbalances.
Unless that changes, global imbalances will continue to be a source of global
instability, regardless of what China or Europe do.
In light of all of these uncertainties, the mystery is how risk premiums can
remain as low as they are. Especially with the dramatic reduction in the growth
of global liquidity as central banks have successively raised interest rates,
the prospect of risk premiums returning to more normal levels is itself one of
the major risks the world faces today.
Bruce Bartlett is critical of the Bush administration's cut taxes, spend, and
claim it pays for itself policy:
Debts and deficits, by By Bruce Bartlett, Commentary, Washington Times: On Oct. 11, George W. Bush went before the television cameras to proudly
announce the budget deficit for fiscal 2006 ... was only $248
billion. This was a great success, he said, because in February the Office of
Management and Budget had estimated the deficit would be $423 billion.
If this is the standard for success, one wonders why we didn't do even
better. All Mr. Bush had to do was order OMB to make an even bigger mistake...
If it had wrongly projected the deficit to be $500 billion or $600 billion in
2006, then Mr. Bush could have announced an even bigger improvement...
In the real world, of course, people measure progress not against some
incorrect forecast but against actual results. By this standard, the numbers
don't look as good. Mr. Bush inherited a budget surplus of $128 billion in
fiscal 2001.. By the following year, fiscal 2002, the surplus was gone and the
government had a deficit of $158 billion, which rose to $378 billion in 2003 and
$413 billion in 2004, before falling to $318 billion in 2005 and $248 billion
last year.
But these figures greatly understate the budgetary turnaround. In January
2001, the Congressional Budget Office (CBO) estimated budget surpluses as far as
the eye could see. It projected an aggregate surplus of more than $2 trillion
between 2002 and 2006. Instead, we had an aggregate deficit of $1.5 trillion --
a deterioration of $3.5 trillion.
Yet these figures still understate the budgetary damage caused by the Bush
administration because it leaves out changes in the budgetary status of
entitlement programs such as Social Security and Medicare. ...
Over the next 75 years, these two programs have an unfunded liability of $44
trillion -- $15 trillion for Social Security and another $29 trillion for
Medicare.
What is really frightening is that Mr. Bush apparently has no clue the
problems of Medicare are twice as bad as Social Security's and are worsening
much faster. At the end of fiscal 2002, Social Security's unfunded liability was
$11 trillion and Medicare's was just $13 trillion. Today, Social Security is a
little worse, but Medicare is much, much worse.
Yet over and over again, Mr. Bush has said we must fix Social Security --
even if we have to raise taxes -- while saying nothing about the way Medicare is
hemorrhaging money. He can't because his massive, unfunded program for
prescription drugs in 2003 is the principal reason Medicare's financial problems
have gotten so much worse since 2002.
Medicare is the biggest worry, no disagreement there. But before we begin
using the deficit as a reason to begin slashing valuable social programs,
remember that we've had higher debt to GDP ratios in the past and survived. The
worry is the future and very specifically, as noted above, Medicare payments are
the biggest concern. Thus, getting our health care costs under control is an
essential step in bringing the budget into balance.
In light of that, we should be careful to avoid a bait (reducing the deficit) and
switch (from solving the health care problem to cutting other social programs)
on this issue, particularly since the deficit was enhanced by ill-advised tax
cuts.
A case in point has been malaria control. If rich countries adopt simpler and
more practical strategies to help Africa fight malaria, they can save millions
of Africans while building enthusiastic support among their citizens. ...
Malaria is largely preventable and completely treatable at low cost. ...
Prevention is best accomplished by modern anti-malaria bed nets, which are
treated with insecticide. These nets cover people while they sleep, and repel or
kill the mosquitoes, which tend to bite during the night. The nets reduce the
number of bites..., but they do not eliminate them. If people get bitten despite
the nets, they require treatment within a few hours of the onset of symptoms.
There are two major obstacles to solving the malaria problem. First, Africa’s
poor cannot afford insecticide-treated bed nets and the correct medicines. ...
Second, African villagers lack access to cars or trucks, so they have to walk
several miles to reach a clinic. An infected child is often dead or comatose by
the time a mother reaches a clinic.
If rich-country governments thought practically about malaria and recognized
that it is a full-scale emergency, they could support simple and practical
solutions: bed nets and timely access to medicine. Rich countries would buy bed
nets from companies that produce them and work with African governments to
distribute them free of charge to every African household. And they would work
with African governments to ensure that the correct medicines are available for
quick use within each village. ...
[T]he total cost of ... giving bed nets at no cost to all Africans, and
providing the right medicines within every village – is around ... $2.50 per
citizen of the rich countries.
But the rich countries have instead adopted failed strategies. Rather than
giving away bed nets, rich-country organizations ... sell them to the extreme
poor, albeit at heavily discounted prices. This policy reflects a shortsighted
ambition to promote markets rather than the direct and over-riding goals of
saving lives and removing bottlenecks to long-term economic development. The
tragic result has been extremely low use of nets throughout most of Africa,
since impoverished people lack the purchasing power to buy nets.
Second, donor governments have failed to promote simple ways to ensure the
availability of medicines in villages across the continent. Rather than shipping
medicines to each country on the basis of estimated needs, donor agencies have
set up a complicated purchasing system that has led to years of delay in getting
medicines to the villages. ...
People across Africa have shown that they are ready to mobilize their efforts
if we offer practical means to help them. ...
Felix at Economonitor has a different view:
Jeff
Sachs on malaria, by Felix Salmon: Jeffrey Sachs is fed up with malaria
programmes which fail, and he's surely right that malaria is both preventable
and not being prevented. But does he have the reasons, and the solutions, right?
...
I'm not convinced. ... Sachs knows full well that the reason for selling bed
nets is not "a short-sighted ambition to promote markets" – there's no market in
bed nets. Rather, there is quite a lot of evidence that Africa's poor value
things they pay for, and don't value things they get for free. As a result, bed
nets which have been paid for get used more, and more effectively, than bed nets
which have been given away.
Similarly, there's little evidence that Africa's governments have the
infrastructure and institutions in place to effectively and equitably distribute
malaria medicines which have been given to them for nothing. I worry that if the
world signed on to Sachs's plan tomorrow, the net result would be $2.5 billion
per year being spent on bed nets and medicines which would end up stockpiled
somewhere near an international airport. A system of payments for these things
creates an incentive to get them to where they are needed. Neither USAID nor
anybody else wants to make money from these programmes. But before we give up on
the small payments which do exist, I'd want to see some concrete evidence that
doing so results in positive outcomes in practice.
There is this recent piece of research:
How Small is
Zero Price? The True Value of Free Products, WP 06-16 by Kristina Shampan’er and
Dan Ariely, FRB Boston: Abstract ...[W]e propose that ...
the benefits associated with free products are perceived to be higher. We test
this ... [T]he results show that, in the zero-price condition, the proportion of
participants choosing the less attractive [good] dramatically increases... Thus,
individuals seem to act as if pricing a good as free not only decreases its
cost, but also adds to its benefits. ...
On the supply side, it seems reasonable that payments would be required to
get nets and drugs "where they are needed," e.g. a truck driver needs to be paid
to deliver drugs to villages.
On the demand side, I'm not familiar with the evidence that the poor in
Africa don't value the things they get for free. But suppose one villager gets a
net for free when all the neighbors had to pay for the identical net. It is
counterintuitive to me that it would be valued less just because it was free.
As I said, I'm not familiar with this evidence at all, so this is pure
speculation, but one reason demand can fall when price falls is lack of
information on quality. For example, when people are confused about the quality
of a good, they often use price as a signal for quality. This can lead, for example, to results where decreasing the price on a good such as a bottle
of wine decreases the quantity purchased because people infer from the lower price that the wine is of lower quality.
Demand curves aren't sloping upward
here, lack of information is causing a market failure. If consumers know that
the high and low priced wines are of identical quality, quantity demanded will go up when
the price goes down. It's only because price is being used as a signal for quality that such
results come about.
If the poor in Africa or anywhere else are used to being given stuff only
when it is junk, and being forced to pay at least a nominal fee when the good is
of even moderate quality, they will come to believe that free is a signal for
"low quality" or "doesn't work." Without good information, and with many such
experiences in the past, it would be natural to conclude that a free mosquito
net is more trouble than it's worth.
But setting speculation aside, in the end, I come down on the opposite side
of Felix's bottom line. Where he says:
But before we give up on the small payments which do exist, I'd want to see
some concrete evidence that doing so results in positive outcomes in practice.
I would say:
But before we continue to impose payments on the poor, even small ones, I'd want to see some
concrete evidence that doing so results in positive outcomes in practice.
Paul Krugman emails a follow-up to the discussion on poverty and inequality in
his recent column, and in the discussion in the post below this one. Here are links to the analyses for the UK:
You might also want to provide the sources for poverty and inequality
analyses. ...[H]ere they are:
The reason Britain's an interesting case is that there has been a real shift in policy, from
Thatcherism to an attempt to revive the welfare state after a period of
conservative ideological dominance. Continental Europe is less of a useful model
because it never had a Thatcher and never had a surge in inequality.
No economist who hopes to avoid professional ridicule would try to deny that
consumption is a better measure of long-term living standards than the most
widely cited income distribution figures, which do not even add transfer
payments or subtract taxes.
It's clear why the administration's defenders are pushing this point. Here's
a graph of income and consumption based measures of poverty taken from a recent
article from the
Minneapolis Fed on measuring poverty:
The green line is income based poverty and it has been increasing since 2000.
The consumption based measure shows more progress and that's why it is being
pushed on some editorial pages. But even with the consumption based measure, poverty is little
changed between 1998 and 2003 and the total decline since 1998 has been less
than 1%. Thus, while the consumption based measure does not show the increase in the poverty rate that income based measures show, it is still evident that progress has stalled in recent years as compared to the decline from 1993 through 1998.
As
Paul Krugman notes in comparing the change in poverty in the U.S. and in Britain:
And Britain’s poverty rate, if measured American-style — that is, in
terms of a fixed poverty line, not a moving target that rises as the
nation grows richer — has been cut in half since Labor came to power in
1997.
For the same time period, and using the best case consumption based measure, the rate
has only fallen by a little over a percentage point over the same time period in the U.S. (see graph). Thus, while it's easy to see why the administration prefers the consumption
based measure, even using this measure the U.S. has not done as well as Britain has over the same
time period. As Paul Krugman also notes, this is partly due to a difference in
the priorities of the two administrations.
I want to defend my colleagues against the claim made by Reynolds that they will face
ridicule if they question Reynold's preferred consumption based measure of poverty.
Actually, I'll let who economists who work in this area speak for themselves. This is from the article containing the graph shown above. See if you think these
economists ought to receive the "professional ridicule" Reynolds says they deserve rather than the respect accorded to colleagues engaged in serious research on important issues:
Poor
by what standard?, FedGazette, Minneapolis Fed: ...Not foolproof Add
it all up, and a different pattern emerges regarding poverty. A 2003 Census
report on material well-being noted, “As many (studies) show, the levels of
poverty and inequality tend to decrease using consumption-based figures, in
comparison with income-based measures.”
Recent studies have reinforced that notion. In a 2006 working paper for the
NBER, economists Bruce Meyer (University of Chicago) and James Sullivan (Notre
Dame) pointed out that the official poverty rate “suggests that poverty has
changed very little over the past three decades,” rising with recessions and
then subsequently falling. In contrast, “Consumption-based poverty rates often
indicate large declines, even in recent years when income-based poverty rates
have risen” (see chart).
Responding to questions via e-mail, Sullivan said that consumption “is a more
consistent measuring stick over time and that it is a better measure of the
well-being of the worse off.” He added, “Over the past three decades,
consumption poverty tells a more optimistic story than does income poverty ...
suggesting we are winning the war on poverty.”
Some economists prefer to look at consumption because it is less volatile
than income on an annual basis for most households. People smooth their
consumption based on long-term income expectations. Such a phenomenon is readily
apparent among those who lose a job. While their income might plummet,
consumption tends to fall much less dramatically. Such households tend to either
dip into savings or take on additional debt with the expectation that higher
income will return in due time.
All this is not to say that consumption wins the best-measuring-stick debate
hands down, even among advocates. Sullivan, for example, acknowledged “some
important practical concerns with switching to consumption,” including the fact
that consumption surveys are much smaller in scale than income surveys, making
it difficult to analyze local patterns because of sampling problems.
The consumption model has other blind spots. For example, it can only measure
total costs; it has no ability to distinguish the quality of purchases or the
utility of different types of purchases to a household. For example, a 2005
working paper by Thomas Deleire of Michigan State and Helen Levy of the
University of Michigan found that higher expenditures among single-mother
households during the 1990s “can be explained by a shift from food at home to
food away from home.” While that is positive in some senses—less work cooking at
home and more food “leisure”—an alternative explanation is that more meals were
eaten outside the home out of necessity and at higher cost to the household
budget, as more single mothers worked, either voluntarily or because of changes
to the welfare system in the 1990s. Better off? Hard to say for sure.
Sullivan and others also point out that income poverty has simple longevity
on its side. “I think it is well understood that there are flaws in the official
measure of poverty,” Sullivan said. “(But) we have been using the current
measure for about 40 years, so we have a nice time series that is generally
understood.” A 2005 article in the BLS's Monthly Labor Review noted that most
studies of well-being are based on income data “partly because of history and
also partly because of habit. Income data are accessible, comparable over time,
and of high quality.” International comparisons are possible only through income
because other measures like consumption are simply unavailable in most other
countries.
Austin Nichols, a research associate at the Urban Institute, a nonpartisan
economic and social policy research organization, has authored several recent
reports on poverty trends. “I think a lot of folks use the official poverty line
for the sake of convenience and comparability,” Nichols said via e-mail. That
might sound like faint praise, but Nichols said that “convenience and
comparability is not to be scoffed at.” Any new measure would not likely offer a
view of poverty dating back to the 1960s and could have “equivalent or greater
problems. ... At least the official poverty measure is understood by most
people, as are some of its limitations.”
In the end, everything is relative. Not even researchers within the same
organization agree on the best way to measure poverty. Gregory Acs is a senior
research associate at the Urban Institute. Along with his counterpart Nichols,
he has considerable experience with both poverty trends and the
definition-measurement issue.
Acs and Austin tend to disagree over the utility of consumption-based poverty
measures. According to Acs, “Ultimately, consumption is a better measure of
well-being than income, but I think it is harder to measure, and income is not a
bad proxy for consumption.” But Nichols responded, “I disagree that consumption
is a better measure of well-being,” in part because researchers don't know how
much consumption is financed by unsustainable borrowing. He added that
consumption measures “have just as many problems as income-based measures.”
This scholarly head butting illustrates the general difficulty of pinning
down who is poor and who is not. Said Acs, “I think Austin and I agree that
there are pros and cons to all the poverty approaches,” both income and
consumption.
The existing measure has stuck because “we have the most experience measuring
income ... (and) researchers and policymakers are by now quite aware of its
limitations,” according to Acs. “We want poverty to be an absolute measure of
deprivation, and I think that's asking too much of any single statistic.”
Jacob Hacker on the rise of "office-park populists" and its uncertain effect
on the political landscape:
The Rise of the Office-Park Populist, by Jacob Hacker, NY Times: On Election Day last month, Democratic candidates did something they haven’t
done for a while: they decisively won the middle class. Middle-income voters —
including white middle-income voters who have abandoned the party in droves in
recent years — preferred Democratic candidates by wide margins. Indeed, only
voters with family incomes in excess of $100,000 a year were more likely to
support Republicans ... in House races...
The conventional view among the pundit class is that this middle-class
restoration ... creates thorny new tensions. Motivated mainly by their disgust
with corruption, incompetence and the war in Iraq, middle-income voters are
foul-weather friends who will flee the party en masse if it speaks forthrightly
about, say, aiding the unemployed or the uninsured. ...
But... Middle-class voters didn’t rush to the Democrats despite all the
populist campaign messages, but — in large part — because of them. And they
didn’t do so merely in poor urban centers or regions ravaged by the loss of
manufacturing jobs but in relatively affluent exurban and suburban locales.
Senator-elect Jim Webb eked out victory in Virginia by running up huge margins
in the prosperous, white-collar north. Apparently he saw no conflict between his
electoral base and his loud insistence ... that his reason for running was to
“bring true fairness back to economic life.” ...
[F]our decades after L.B.J. declared war on poverty ..., I’m not sure whether
people understand how little progress we’ve made. In 1969, fewer than one in
every seven American children lived below the poverty line. Last year, although
the country was far wealthier, more than one in every six American children were
poor.
And there’s no excuse for our lack of progress. Just look at what the British
government has accomplished over the last decade.
Although Tony Blair has been President Bush’s obedient manservant when it
comes to Iraq, Mr. Blair’s domestic policies are nothing like Mr. Bush’s. Where
Mr. Bush has sought to privatize the social safety net, Mr. Blair’s Labor
government has defended and strengthened it. Where Mr. Bush and his allies
accuse anyone who mentions income distribution of “class warfare,” the Blair
government has made a major effort to reverse the surge in inequality and
poverty that took place during the Thatcher years.
And Britain’s poverty rate, if measured American-style ... has been cut in
half since Labor came to power in 1997.
Britain’s war on poverty has been led by Gordon Brown, ... Mr. Blair’s heir
apparent. There’s nothing exotic about his policies, many of which are inspired
by American models. But in Britain, these policies are carried out with much
more determination.
For example, Britain didn’t have a minimum wage until 1999 — but ...
Britain’s minimum wage rate is now about twice as high as ours. Britain’s child
benefit is more generous than America’s child tax credit, and it’s available to
everyone... Britain’s tax credit for low-wage workers is similar to the U.S.
earned-income tax credit, but substantially larger. And don’t forget ...
Britain’s universal health care system...
The Blair government hasn’t achieved all its domestic goals. ... But there’s
no denying that the Blair government has done a lot for Britain’s have-nots. ...
Providing a strong social safety net requires a higher overall rate of taxation
than Americans are accustomed to, but Britain’s tax burden hasn’t undermined the
economy’s growth.
What are the lessons...?
First, government truly can be a force for good. Decades of propaganda have
conditioned many Americans to assume that government is always incompetent...
But the Blair years have shown that a government that seriously tries to reduce
poverty can achieve a lot.
Second, it really helps to have politicians who are serious about governing,
rather than devoting themselves entirely to amassing power and rewarding
cronies.
While researching this article, I was startled by the sheer rationality of
British policy discussion, as compared with the cynical posturing that passes
for policy discourse in George Bush’s America. Instead of making grandiose
promises that are quickly forgotten — like Mr. Bush’s promise of “bold action”
to confront poverty after Hurricane Katrina — British Labor politicians propose
specific policies with well-defined goals. And when actual results fall short of
those goals, they face the facts rather than trying to suppress them and sliming
the critics.
The moral of my Christmas story is that fighting poverty isn’t easy, but it
can be done. Giving in to cynicism and accepting the persistence of widespread
poverty even as the rich get ever richer is a choice that our politicians have
made. And we should be ashamed of that choice.
Update: [Repeated from this post.] Paul Krugman emails a follow-up to the discussion on poverty and inequality in
his recent column, and in the discussion in the post below this one. Here are links to the analyses for the UK:
You might also want to provide the sources for poverty and inequality
analyses. ...[H]ere they are:
The reason Britain's an interesting case is that there has been a real shift in policy, from
Thatcherism to an attempt to revive the welfare state after a period of
conservative ideological dominance. Continental Europe is less of a useful model
because it never had a Thatcher and never had a surge in inequality.
After so much lately about Democrats, politics, and the budget deficit, let's move to the other side of the political spectrum and look at Republicans, politics, and the budget deficit. This is
Jonathan Chait:
Neocons and Bush deserve each other, by Jonathan Chait, Commentary, LA Times:
News reports are suggesting that Bush plans to send more troops to Iraq.
Neoconservatives have been urging ... more troops in general for years — even
before the war started. And that's not surprising. ... If you read old issues of
the Weekly Standard, which is the bulletin board of neoconservatism, you can
find calls for a bigger military going back to the Clinton administration. ...
Bush may have come to believe in the neoconservative mission for the nation's
military. But he never accepted the corollary about increasing the military. So
he ended up pursuing Dick Cheney's foreign policy with Bill Clinton's army.
In hindsight, we can see that the neocons made two huge blunders. The first
was to go along with Bush's enormous tax cuts. When Bush took office in 2001,
any halfway honest budget analyst would tell you that he was making a lot of
promises that didn't add up. The neocons calculated that, if they supported the
tax cuts like good party soldiers, Bush would grant them their defense budget
increases later on.
So the Standard enthusiastically boosted the tax cuts. Neoconservative
defense hawk Frank Gaffney concurred... "Those of us who look forward to helping
you succeed in your efforts to rebuild our defense posture appreciate that your
success in reducing taxes is a first and highly synergistic step toward that
goal," he wrote. "Consequently, you can count on us in the national security
community to support you in both of these important endeavors."
Whoops. It turned out there wasn't any money left over for a big troop
increase... Enraged at the lack of a defense hike, the Standard published an
editorial calling on then-Defense Secretary Donald H. Rumsfeld, and his deputy,
Paul Wolfowitz, to resign in protest of "the impending evisceration of the
military."
The Standard lamented its own gullibility. "Those of us who expressed concern
about the Bush administration's shorting of the military were told not to
worry," the editors wrote. "Bush had to pass his tax cut first. Then the damage
would be repaired in the [fiscal year] 2002 and FY 2003 budgets. But that's not
the way things have turned out."
Let me translate this passage: We thought Bush was just lying to the American
public, but now we discover he was lying to us also!
Let me quote one more passage from that editorial, because it's really
incredible. The Standard warned that Bush's budget would make an invasion of
Iraq all but impossible: "In practice, assembling a heavy armored force of even
four divisions to defeat Saddam's army and then occupy Iraq would require every
heavy unit based in Korea, Europe and the United States." Yet, just a few months
later, the neocons demanded the very war that they said would be impossible, to
be waged by that same eviscerated military.
But if they had only withdrawn their support earlier, before the big tax cut
and before Bush invaded with too small of an army to win, the United States
would be in much better shape today — and so would the neocons.
There has been a lot of discussion about the budget deficit lately, but the deficit itself is the wrong place to focus. We need to ask a straightforward question. What size government do we want and how do we fund it in the long-run?
We can't just pick whatever size government we want irrespective of our ability to pay for it. Nor can we pick whatever tax rates we want without consideration of our needs. How the party in power should react to a surplus or deficit depends upon an evaluation of our ability and willingness to pay for government relative to how well the existing level of government services is doing at meeting our goals. What do we need, what can we reasonably afford, and who should pay for it?
The answers aren't easy and they differ by party so this requires a political resolution, but it's still better to focus on these questions instead of on whether the deficit taken in isolation is too large or too small.
One way to characterize the discussion from Paul Krugman (with as assist from Brad DeLong) that has generated so much discussion recently is to first recognize that Krugman is starting with the premise of fiscal responsibility. Suppose we are able to generate a surplus relative to the existing budget through fiscally responsible policies. What should we do with that surplus?
We have needs now that are not being met, and we have needs in the future as well. Thus, given the two sets of needs, there is a choice to make. Do we spend the money now, as Krugman has advocated, or do we save it (reduce the deficit) to spend in the future?
Krugman's point is that political realities have lowered the probability that we will be able to meet future needs, and because of this the tradeoff has shifted from future needs toward present needs. It's hard to disagree with that point of view given recent experience, and thus it's hard to disagree with the recommendation to shift priorities to the present until a better commitment mechanism can be enacted. It's really a question of how strongly we can commit to the future and how important our future needs are relative to our present needs.
The Economist blog, Free Exchange, weighs in on the Paul Krugman article:
Beating around the Bush Budget, FreeExchange, The Economst: For a certain stripe of Democrat, one of the shining defenses of their lot is
that they are the "party of fiscal responsibility". A number of left-leaning
economists, notably Paul Krugman, have been leaning hard on this theme.
Perhaps too hard; it seems to have collapsed beneath them. On Friday, as
Mark Thoma points out,
Mr Krugman wrote ...[that] cutting the budget deficit is a very fine idea, but
unfortunately, it makes it difficult to hold onto power. Mr Krugman, along with
his supporters, seems to believe that this is somehow different from the
Republican position. It must be a very subtle difference, then.
Suppose the Democrats can free up some money...Should they use the reclaimed
revenue to reduce the deficit, or spend it on other things?
That is Paul Krugman, and the answer is that Rubinomics is dead and they
should spend the money. Deficit reduction is for "the long run." Even from Krugman's point of view, the use of "they" seems premature with a Republican
President and a hard-to-elect Democratic frontrunner candidate in the wings. More economically, I am pleased that the forthcoming fiscal destruction of the
United States has been averted, or at least held at bay for some time. It took
a mere mid-term election; cuts in spending or tax hikes were not necessary,
quite the contrary.
Brad DeLong argues that no, really, they're the party of fiscal
responsibility:
Most commentators--whether by accident or by design--have missed the
significance of this passage in Krugman's op-ed: "Nancy Pelosi, the incoming
House speaker, has promised to restore the "pay-as-you-go" rule that the
Republicans tossed aside in the Bush years. This rule would basically prevent
Congress from passing budgets that increase the deficit. I'm for pay-as-you-go.
The question, however, is whether to go further..." ...
The embrace of pay-as-you-go orders up a $300 billion rise in taxes at the
end of this decade. That's a significant amount of deficit reduction all by
itself, and a very significant change from Bush administration idiocy.
Actually, I make it about $250 billion by the CBO figures, but this assumes
that there is no bipartisan coalition for keeping the bits that don't benefit
"the rich". This seems like a big assumption; who doesn't want to keep taxes
low on the majority of voters? The problem is that while the wealthy got more
benefit, as individuals, from the Bush tax cut, they didn't do nearly so well
collectively against the poor and middle class, because there are just so damn
many of the latter.
According to the widely respected William Gale of Brookings, Mr Kerry's plan
to reinstate the top marginal income rate of 39%, and roll back the capital
gains and dividend taxes, would have gleaned about $50 billion a year for the
treasury. Going back to 1998 (so as to miss the effects of the stock market
bubble), we find that bringing back the estate tax in full force would raise
about
$28 billion in today's dollars. $78 billion is, to be sure, nothing to
sneeze at. But it is about 1/4 of the current budget deficit...
Closing the budget deficit will involve much more; either raising taxes on the
middle class, or dangerously stiff increases in marginal tax rates on the
wealthy. I will be interested to see whether the Democratic increase in PAYGO
survives this political reality.
I'm short on time - will try to weigh in later. But very quickly, let's be clear. Nobody,
not Krugman, not DeLong, mot me, not anyone I'm aware of is talking about increasing
the deficit. The question Krugman and DeLong are asking is how much to cut. Is 300 billion enough? Should it be even more? How
that turns them into the party of big spenders or makes them fiscally irresponsible as implied, especially after recent
experience with Republicans, is puzzling.
I am not employed by anyone as a political strategist, for good reason, and
at times I am hopelessly naive about the politics surrounding many policy
actions. I know most of you see economists as fairly political, but that's not my
experience. Most academic economists have a very specific area of specialization
and they devote their lives to answering questions that are very tightly
focused within that narrow area. Politics just doesn't come into play. All they care about is finding the right
answers to these questions, whatever they might be. For example, I'd estimate that I have no idea where at least a third of our faculty stand
ideologically, and we are a small group (approximately fifteen) who know each
other fairly well. I could guess their political orientations, probably somewhat
accurately, but I really don't know for sure. It never comes up.
So, in the year and a half or so since I started doing this, I've had to try
and catch up on the political side of things quite a bit. It's something I knew
very little about, and there's still lots I don't know - it's an ongoing process, but hopefully I'll learn.
With that said, I'd like to follow up on
Krugman's recent column. First, let's review the part of Krugman's
position I want to talk about:
Now the Democrats are back in control of Congress. ... Nancy Pelosi, the
incoming House speaker, has promised to restore the "pay-as-you-go" rule that
... would basically prevent Congress from passing budgets that increase the
deficit.
I'm for pay-as-you-go. The question, however, is whether to go further.
Suppose the Democrats can free up some money by fixing the Medicare drug
program, by ending the Iraq war and/or clamping down on war profiteering, or by
rolling back some of the Bush tax cuts. Should they use the reclaimed revenue to
reduce the deficit, or spend it on other things?
The answer, I now think, is to spend the money - while taking great care to
ensure that it is spent well, not squandered - and let the deficit be. By
spending money well, Democrats can both improve Americans' lives and, more
broadly, offer a demonstration of the benefits of good government. Deficit
reduction, on the other hand, might just end up playing into the hands of the
next irresponsible president.
In the long run, something will have to be done about the deficit. But given
the state of our politics, now is not the time.
The argument is that the surplus the Democrats accumulated under Clinton set
the stage for the Republicans to enact tax cuts:
And you can even argue that Mr. Rubin's surplus was a bad thing, because it
greased the rails for Mr. Bush's irresponsibility.
As Brad DeLong ... recently wrote ...: "Rubin and us spearcarriers moved
heaven and earth to restore fiscal balance to the American government in order
to raise the rate of economic growth. But what we turned out to have done, in
the end, was to enable George W. Bush's right-wing class war: his push for
greater after-tax income inequality."
This may be the naive part, but I want to have more faith in voters than
this. I'd like to believe that if Democrats do what is best and follow a very
specific, well communicated strategy, voters will reward them. I don't think
Democrats should condition their policies on what the Republicans might do
should they seize power again. Democrats need to do what is best according to
their core principles and according to what they believe best serves the
interests of voters generally. If that means beginning to re-accumulate the
surplus to start getting ready for a demographic surge in the future, so be it.
That's what we do. If it means taking any surplus that is recovered and spending
it wisely as Krugman suggests, that's fine too so long as that is what is best.
Thus, to me the optimal way to proceed is to pick a best strategy
irrespective of what might happen if you lose to Republicans in the future,
communicate it to people clearly so they know you see the problems and are
moving toward a workable solution, and propose and implement the policies with
single-minded, stay the course determination that does not blink in the face of
political harping from the other side.
I believe voters would respond positively to the Democrat party if it
vigorously defended a well-articulated plan to bring Social Security, Medicare,
and other programs into balance in coming decades and made it clear that it was
leaving politics by the wayside in the process. The deficit is not a big concern
at the moment, we can survive this, but projections into the future do need to
be considered and they raise concerns and risks that need attention now.
Paul Krugman has been doing this a lot longer than I have, and he has proven
time and again to be right when he has given advice. But I prefer not to worry
about how Republicans might take advantage of Democrats who do their best to
serve the interests of voters while they are in power. If Democrats do their jobs right and get these problems under control,
they shouldn't have to worry about Republicans regaining control anyway. In any case, I would prefer to turn over a
government with a smaller deficit to Republicans (if that is in the voter's
long-run interests) than a government further in debt. Handing Republicans a government
that requires fiscal adjustment and is deep in debt is an invitation to cut
valuable social programs.
Finally, along those lines, to Brad DeLong: Don't feel it was all for
nothing. The Republicans were going to cut taxes one way or the other, surplus
or not, come hell or high water (both came -Iraq and Katrina - and taxes were still cut). While the surplus you and others worked so hard to create may have
facilitated the tax cuts to some extent, it may have also protected valuable
social programs from being axed in order to pay for the tax cuts. There very
well may be many children who, without your efforts to move "heaven and earth to
restore fiscal balance to the American government," would be having a much worse
Christmas this year. For every child, every person, every family your efforts
helped, we are all thankful.
A couple of readings on the war you might find interesting. The first is by John
Kerry and it is about flip-flopping. The second compares the experience in
Iraq to the experience of King Leopold II of Belgium in the Congo. There are
interesting parallels.
According to this research, people in suburbs are, contrary to popular
belief, more sociable than their urban counterparts:
Suburbanites are sociable, researcher discovers, by Daniel Weintraub, Mercury
News: It is conventional wisdom in America that the suburbs are soulless
places where people lack the kind of intense connections with one another that
are almost inevitable in a vibrant, densely populated city center. Gated or not,
the suburbs conjure up an image of bedroom communities vacant by day and filled
at night with families locked behind their doors or in their own back yards,
distant from their neighbors in both a physical and social sense.
That view has helped inform government policies that push for more housing
density, public transit and centralization, while shunning what has become known
as sprawl.
Now comes a University of California-Irvine professor with research that
casts doubt on that wisdom... ''Social interaction is higher, not lower, in the suburbs,'' says Jan
Brueckner, an economics professor and editor of the Journal of Urban Economics.
Brueckner and his co-author, Ann Largey, took data from a survey of 15,000
Americans and ... showed that, other things being equal, suburban residents have
more friends and confidants, invite friends into their homes more often and have
greater involvement in community groups. People who live in less-densely
populated areas, Brueckner says, are more likely to join a hobby-oriented club,
attend club meetings and belong to a non-church-related group.
For every 10 percent decrease in density, for example, the chance of people
talking to their neighbors at least once weekly increases 10 percent, Brueckner
found, and involvement in hobby-oriented clubs jumps 15 percent.
''This appears to invalidate one of the frequently heard criticisms of urban
sprawl, that it's weakening the social bonds in our society,'' Brueckner told
me. ''That's not the case, according to our results.'' ...
Brueckner still is not sure why people in more urbanized areas are less
likely to interact. It could be, he says, that city neighborhoods offer more
theaters, museums and other forms of culture and entertainment, giving residents
less of a need to spend time with one another. The fear of crime could be
keeping people from interacting more. Or, the crowding typical in an urban
setting might lead residents to withdraw into their own space, seeking privacy.
''The old proverb may be true: 'Good fences make good neighbors,''' he says.
Brueckner's paper has not been published in a peer-reviewed journal. His
techniques will get serious scrutiny from colleagues... But he is
confident that his results will hold up. And if they do, policy-makers will have
to take notice.
Suburban development may complicate commute patterns and gobble up open
space. But if Brueckner is right, sprawl does not deaden a community's social
life. That's a conclusion that is ... worth taking
into account as we evaluate the consequences of different patterns of growth.
Why don't movie theaters charge different prices for movies, e.g. a low price for
low quality films and a higher price for movies that are more popular?:
Should we pay the same price for all movies?, EurakAlert: New research
explains how movie theaters may increase profits by moving away from uniform
pricing to variable pricing. The study is being published in an upcoming issue
of the International Review of Law & Economics.
Currently, consumers pay the same price for blockbusters and for flops, for a
movie on the Fourth of July and for a movie on a rainy day in January, for a
movie on Friday night and for a movie on Monday evening.
"We don't pay the same price for apples and oranges or for a hotel room on
weekdays and weekends. There is no solid economic justification to charge one
price for all movies, seven days a week, throughout the year," explains Barak
Orbach, an associate professor at The University of Arizona's Rogers College of
Law and one of the authors on the study [the other is Liran Einav, assistant professor of economics at Stanford
University]. "Under the present pricing model of
movie theaters, some money is left on the table."
While the authors recognize obstacles to variable pricing based on individual
movies, they argue that premiums for event movies, on weekends and holidays and
during the summer do not raise similar obstacles.
"Movie exhibitors would increase their profits by engaging in variable
pricing," says Orbach. "The industry's argument that uniform pricing must be the
best pricing model because it has always governed the industry is logically weak
and factually wrong," argues Orbach, who in another article shows that, until
the 1970s, variable pricing governed the industry.
Today, the prime exceptions to uniform pricing are matinee rates and
discounted days; however, discounts for seniors, students and children do not
represent price differentiation because they uniformly apply to all movies and
all show times.
Until the early 1970s, the industry used sophisticated price differentiation
schemes based on timing (premiums on weekends, holidays and high seasons) and
the film's anticipated demand (event movies, A movies and B movies). ... Orbach
... adds that during the past year quite a few theaters across the country have
experimented with variable pricing.
According to the study, the two primary forces that keep exhibitors from
adopting variable pricing are distributors' pressures to maintain uniform
pricing and concerns that variable pricing would antagonize moviegoers and keep
them at home.
Distributors tend to prefer uniform pricing because of the importance of the
opening weekend to the commercial success of the movie and concerns that
variable pricing would create problems with producers and directors. They are
also concerned that exhibitors may use variable pricing for creative accounting
that would hurt the distributors' share in box-office revenues.
Under present antitrust law, however, distributors are prohibited from any
intervention in box-office pricing, although such intervention may benefit
distributors and exhibitors. In practice, the distributors enforce uniform
pricing by refusing to deal with exhibitors who experiment with pricing. This
practice may be legally questionable, but it has never been challenged in court.
The researchers also explain how exhibitors can overcome moviegoers'
perceptions of fairness. "Consumers," explains Orbach, "may resent surcharges
but always welcome discounts." He suggests that, to facilitate a smooth
transition to variable pricing, exhibitors should start by offering discounts,
thereby establishing a variable pricing regime and keeping moviegoers happy.
Finally, the article dismisses the popular argument that variable pricing
would be too costly to administer and too confusing for moviegoers. "In the
past, moviegoers were sophisticated enough to handle non-uniform admission fees,
and there is no reason to believe that today's moviegoers are any less
sophisticated," says Orbach.
Since we're on the subject, here's more on movie pricing. This is an article
on bundling by Hal Varian that uses double-feature movies as a main example:
As we put it back then, ''Roses are red, violets are pink. If it's a double
feature, one's gonna stink.'' ... Double features were a result of a practice
known as block booking. If a theater wanted to buy a hit, it was forced by the
studios to buy a dud as well. Theater owners didn't want to show the duds on
their own, so they bundled them with another movie and showed them as part of a
double feature.
In 1962 the Supreme Court declared that block booking was a form of ''tying''
and was illegal under Section 1 of the Sherman Antitrust Act.
Is the title, which quotes Richmond Fed President Jeffrey Lacker, correct? Or
does moderating economic growth bring down inflation as constructs such as the
Phillips curve imply? The San Francisco Fed's Kevin Lansing takes a look at this
issue. The paper concludes that:
Empirical estimates suggest that changes in the level of labor resource
utilization, as measured by the unemployment gap, appear to be less useful for
forecasting inflation than in the past. If anything, the Phillips curve predicts
that core PCE inflation will drift upward over the next two years, because the
prevailing unemployment rate is below estimates of the natural rate.
A weighted moving average forecast attempts to disentangle permanent versus
temporary movements in the inflation rate. ... A retrospective evaluation of forecast
accuracy shows that the weighted moving average forecast generally outperforms
both the Phillips curve and a random walk forecast in predicting core PCE
inflation one year ahead. The weighted moving average predicts that core PCE
inflation will experience only a slight drop going forward because the current
rate is close to the estimated inflation target.
One part of the analysis uses results from a
Taylor rule to examine the policy implications of the analysis. In the version of the Taylor rule used here, the coefficient on the unemployment gap is 1.0 and the coefficient on the deviation of inflation from target
is .5. However, when the coefficient on the inflation term is less than 1.0,
many theoretical models exhibit indeterminacy (that is, it is necessary to increase the federal funds rate by more than 1% when inflation is expected to increase by 1% to avoid this problem). In addition, many, though
not all (e.g. when real-time data is used) estimates of this coefficient are
greater than 1.0 for data after 1980. Some discussion of this issue
and the reasons for the choice of these particular coefficient values would have been helpful. Repeating the analysis using output gaps rather than inflation gaps as a robustness check would have been interesting as well since much of the work in this area uses the output gap versions of these models.
[Update: Kevin Lansing, author of this Economic Letter, writes to clear
this up:
Re: the Taylor rule coefficient on the inflation gap, I used the form of the
rule that is written as follows, along the lines of Taylor (1993):
Robert Rubin and Rubinomics are popular topics today. While Paul Krugman is advising Democrats to abandon Rubinomics in the post below this one, in this post Robert Reich says Robert Rubin will soon become a populist if recent trends in
inequality continue:
An Introduction to Economic Populism, by Robert Reich: I keep hearing from
Dems in Washington, including a few newly-elected ones, who want to know what
kind of economics they ought to be supporting. They're worried about what's
happened to the jobs and wages of most Americans, but don't know where to turn.
I'm reminded of a philosophical conversation I had several years ago with my
good friend and cabinet colleague Bob Rubin... It started as a discussion of a
particular policy then being debated inside the Clinton White House but then
became more theoretical. It came down to two simple questions. Suppose a
proposed policy will increase the incomes of some people without decreasing the
incomes of any others. Should it be implemented? Bob and I agreed it should. But
suppose the people whose incomes will rise are already wealthier than everyone
else. Although no one will lose ground, inequality will widen. Should it still
be implemented? I won’t tell you where he and I came out on that second question. But we agreed that people who don’t share in such gains feel
relatively poorer. Widening inequality also further tips the balance of
political power in favor of the wealthy.
That conversation occurred a decade ago. Inequality is far more worrisome
now. The ... philosophical debate is coming up all the time these days, and it
helps explain the new economic populism. Consider, for example, the Bush [tax]
cuts. They’ve mainly benefited the top fifth of taxpayers. Supply-siders argue
the cuts ... pay for themselves so they haven’t enlarged the budget deficit.
That’s debatable but let’s make the heroic assumption the supply-siders are
correct and no one has been made worse off. Yet ... Real median wages have
barely budged since they were enacted. So the underlying question is whether
they’re justified by the fact that rich Americans have gained from them while no
one has lost ground. The answer is no. They’ve widened inequality.
Paul Krugman says Democrats should abandon Rubinomics. There's nothing wrong with the underlying economic principles, but the political climate does not support it:
Democrats and the Deficit, by Paul Krugman, Commentary, NY Times: Now that
the Democrats have regained some power, they have to decide what to do. One of
the biggest questions is whether the party should return to Rubinomics - the
doctrine, associated with former Treasury Secretary Robert Rubin, that placed a
very high priority on reducing the budget deficit.
The answer, I believe, is no. ... Rubinomics made
sense in terms of pure economics, [but] it failed to take account of the ugly
realities of contemporary American politics. ...
In a saner political environment, the economic logic behind Rubinomics would
have been compelling. ... Since the 1990s were an era of peace, prosperity and
favorable demographics..., it should have been a good time to put the federal budget in the
black. And under Mr. Rubin, the huge deficits of the Reagan-Bush years were
transformed into an impressive surplus.
But the realities of American politics ensured that it was all for naught.
The second President Bush quickly squandered the surplus on tax cuts that
heavily favored the wealthy, then plunged the budget deep into deficit by
cutting taxes on dividends and capital gains even as he took the country into a
disastrous war. And you can even argue that Mr. Rubin's surplus was a bad thing,
because it greased the rails for Mr. Bush's irresponsibility.
As Brad DeLong
... recently wrote ...: "Rubin and us spearcarriers moved heaven and earth to restore fiscal balance to the American
government in order to raise the rate of economic growth. But what we turned out
to have done, in the end, was to enable George W. Bush's right-wing class
war:
his push for greater after-tax income inequality."
My only quibble with Mr. DeLong's characterization is that this wasn't just
one man's class war: the whole conservative movement shared Mr. Bush's
squanderlust...
With the benefit of hindsight, it's clear that conservatives who claimed to
care about deficits when Democrats were in power never meant it. Let's not
forget how Alan Greenspan, ... the high priest of fiscal rectitude as
long as Bill Clinton was in the White House, became an apologist for tax cuts -
even in the face of budget deficits - once a Republican took up residence.
Now the Democrats are back in control of Congress.
... Nancy Pelosi, the incoming House
speaker, has promised to restore the "pay-as-you-go" rule that ... would basically prevent Congress from
passing budgets that increase the deficit.
I'm for pay-as-you-go. The question, however, is whether to go further.
Suppose the Democrats can free up some money by fixing the Medicare drug
program, by ending the Iraq war and/or clamping down on war profiteering, or by
rolling back some of the Bush tax cuts. Should they use the reclaimed revenue to
reduce the deficit, or spend it on other things?
The answer, I now think, is to spend the money - while taking great care to
ensure that it is spent well, not squandered - and let the deficit be. By
spending money well, Democrats can both improve Americans' lives and, more
broadly, offer a demonstration of the benefits of good government. Deficit
reduction, on the other hand, might just end up playing into the hands of the
next irresponsible president.
In the long run, something will have to be done about the deficit. But given
the state of our politics, now is not the time.
UPDATE: Most commentators--whether by accident or by
design--have missed the significance of this passage in Krugman's
op-ed: "Nancy Pelosi, the incoming House speaker, has promised to
restore the "pay-as-you-go" rule that the Republicans tossed aside in
the Bush years. This rule would basically prevent Congress from passing
budgets that increase the deficit. I'm for pay-as-you-go. The question,
however, is whether to go further..."
Restoring pay-as-you-go means that the Bush tax cuts expire at the
end of this decade--unless, that is, som coalition finds sufficient
spending reductions relative to the current baseline spending path to
pay for an extension of the tax cuts.
The embrace of pay-as-you-go orders up a $300 billion rise in taxes
at the end of this decade. That's a significant amount of deficit
reduction all by itself, and a very significant change from Bush
administration idiocy.
Illegal immigration is usually presented as a win-win situation: Undocumented
foreigners earn far more than they could back home. Consumers get a bargain.
Nowhere to be seen are America's working poor who ... have to compete with
illegal immigrants for jobs and housing. Low-skilled natives and legal
immigrants also end up subsidizing the undocumented because they tend to live in
the same communities, which must provide hospitals, police, schools and garbage
pickup.
Who doesn't suffer from illegal immigration? For starters, the people who
write about it. I speak of the journalism profession, which has the habit of
covering the issue by anecdotes. Reporters thrive on sympathetic stories about
illegal immigrants who work hard and go to church.
But, were a busload of illegals from Australia to turn up at their newspaper
and offer reportage at 10 percent below the going rate, the writers would call
the authorities so fast that your head would spin. And the publisher's argument
that thanks to the cheap Australians, he's able to trim a few cents off the
newsstand price would make no impression. ...
For some reason, the job of keeping prices low has fallen entirely on the
shoulders of the most vulnerable Americans. If we banged down CEO compensation
and sliced lawyers' pay by a third, the same thing would happen. Everyone's
prices would drop. The corporation could sell its products for less, and the
cost of legal services would fall.
No vocation keeps a tighter lid on immigration than the medical profession.
"If we let in 100,000 immigrant doctors," Richard Freeman, another Harvard
economist, recently told a group of journalists, "everyone in this room would
benefit." Except the American doctors.
Suggest a U.S. labor policy that depresses professional pay as a means of
keeping prices in check, and you get laughed out of the room. But say that
sitting on the wages of unskilled factory workers stems inflationary pressure --
a frequently made argument -- and the PhDs quietly nod in agreement.
And that's how the game is played. High pay for me. Low pay for you. The
folks at the economic bottom are obviously not making the rules.
One reason for licensing and other restrictions on professional services is
to ensure quality when there is asymmetric information. For example, if
consumers cannot determine the quality of medical care, then they cannot make correct relative quality comparisons and avoid less competent providers. This leads to market inefficiencies and sub-optimal care. To solve this, a group of doctors
can serve as a certifying agency and screen out applicants who do not meet
minimal requirements, and they can continue to monitor quality of care after licensing. Done properly, this can improve the market outcome.
What I am unsure of and need to look into more is the degree to which these
types of restrictions on who can be doctors, lawyers, etc., overcome the market
failure from asymmetric information as opposed to serving as a barrier to
entry that restricts supply and raises compensation. For example, to what degree
should foreign law schools, medical schools, and so on be recognized in the
U.S.? Is the real concern quality or quantity?
If, in fact, the restrictions on entry of foreigners into these professions
are in place mainly to overcome the information problem, then that is not a
concern, it overcomes a market failure and improves efficiency. But if the
restrictions are little more than an artificial restriction on supply to
maintain high wages, they ought to be removed.
There is one additional point here. There is not just a static question about whether foreign medical schools are currently up to U.S. standards. The more important point is if they were, there still would be substantial obstacles to their graduates practicing in the U.S.. They would have much more incentive to adjust their standards, if their graduates could then practice in the U.S. with the same ease as graduates of U.S. schools.
This sort of guarantee is central both for the schools and also the students.(why educate yourself to U.S. standards if you can't practice in the U.S. anyhow?) As long as it does not exist, there will be a serious barrier to foreign doctors and other professionals working in the U.S.
Canada's true dough has a variation of an old favorite, American Pie:
American
Pie, by true dough: CIBC's Avery Shenfield was feeling a little artsy when
he published the bank's latest weekly forecast. Here's an excerpt from his
rendition of 'American Pie':
A long, long time ago…
I can still remember,
how the data used to make us smile
And I knew that if they had the chance
That stores could make the shoppers dance
And, maybe, they’d be happy for a while.
But housing prices made them shiver
With no more tax cuts to deliver
Bad news on the wealth front
It couldn’t be much more blunt
I can’t remember if I tried
To have my VISA charred and fried
But something hit me deep inside
The day, the house boom died.
So buy, buy, the consumer won’t buy
Leaving Chevys at the levee
And Ford sales running dry
And Wall Street boys were drinking Perrier and rye
Singing this will be the day that I die This will be the day that I die.
From the NBER, the relationship between child abuse and crime:
Does Child Abuse Cause
Crime?, by Les Picker, NBER Digest: Child maltreatment, which includes both child abuse and child neglect, is a
major social problem. According to the U.S. Department of Health and Human
Services, over a million children are victims of maltreatment annually. Over
half a million children suffer serious injuries, and about 1500 children die,
making child maltreatment the leading cause of deaths from injuries in children
over a year old. In addition to this appalling immediate toll, child abuse is
thought to have many harmful long-term consequences.
In Does Child Abuse Cause Crime? (NBER Working Paper No.
12171), authors Janet Currie
and Erdal Tekin focus on the effect of child maltreatment on crime... They focus
on crime because it is one of the most socially costly potential outcomes of
maltreatment...
The authors find that child maltreatment roughly doubles the probability that
an individual engages in many types of crime. This is true even if we compare
twins, one of whom was maltreated when the other one was not. It is useful to
put this result in perspective... For example, using time-series data from New
York, previous researchers found that a single percentage point decline in
unemployment generates only a 2.2 percentage point decline in burglaries, and
that a 10 percent increase in the minimum wage leads to about a 3.5 percent
decrease in robberies in New York City.
The authors cite various studies that show that having access to a gun at
home increases the propensity to commit a variety of crimes, by about 30 percent
among adolescents. Decreases in gun ownership over the 1990s can explain up to a
third of the decline in crime over the same period. Exposure to firearm violence
approximately doubles the probability that an adolescent will engage in serious
violence over the subsequent two years, so that effects of maltreatment are
similar to those of exposure to gun violence.
One potential explanation for the large effects is that children who
experience maltreatment start engaging in crime earlier... Starting to engage in
criminal behavior early may increase illegal human capital by raising experience
in criminal activities, and decrease human capital in legitimate activities,
such as schooling or being in the labor market. This would further increase
criminal propensities.
Estimates suggest that the crime induced by abuse costs society about $6.7
billion per year at the low end and up to $62.5 billion at the high end...
It would be interesting to compare these figures to the cost of preventing
maltreatment, but few intervention programs have been proven to be effective in
rigorous studies. The sole exception is randomized trials of nurse home-visit
programs that start in infancy, which have shown that they can reduce the
incidence of substantiated cases of maltreatment by 50 percent. At a cost of
about $4,000 per child, the total cost of providing this service to all children
would be about $16 billion. Given that the crime induced by abuse is only one of
the social costs of maltreatment, these estimates suggest that such a home
visiting program might well pay for itself..., even based on conservative
estimates of the costs of crime. If society attaches some benefit to improving
the lives of poor children (beyond the value we attach to saving people money),
then the cost-benefit analysis of prevention programs begins to look even more
favorable.
The authors provide evidence that the apparent negative effects of
maltreatment on children's propensity to engage in crime are real and not simply
artifacts of other features of dysfunctional families. They find that being
maltreated approximately doubles the probability of engaging in many types of
crime and that the effects are worst for children from low socio-economic status
backgrounds. Perhaps unsurprisingly, boys are at greater risk for increases in
criminal propensities than girls. Sexual abuse appears to have the largest
effects on crime, perhaps justifying the emphasis on this type of abuse in the
literature and in the media. Finally, the probability of engaging in crime
increases with the experience of multiple forms of maltreatment as well as the
experience of involvement with Child Protective Services. These findings suggest
that criminal behavior increases not only with the incidence of maltreatment but
also with the severity of maltreatment.
Such models typically assume that people are rational and narrowly
self-interested (the celebrated homo economicus stereotype). ... Numbers on a
1-to-10 scale are sometimes used to represent the implicit value of [a person's]
endowment, with higher numbers representing combinations of intelligence, good
health, physical attractiveness, earning power and other personal
characteristics generally viewed as more desirable.
Each searcher is then assumed to follow the rule, “Marry the best person who
will have me,” with the result a mating pattern in which 10s pair with other
10s, 9s with other 9s, and so on. ...
[C]ritics are correct to complain that the economists’ simple account ignores
the emotional dimension of close personal relationships. ... Such [complaints]
have stimulated many economists to examine the role of emotion in human behavior
more closely. And it turns out that economic analysis of a specific commitment
problem that arises in searches for partners makes it clear why no rational
person would want to marry homo economicus.
To illustrate, consider the practical steps you must take once you decide to
settle down. Although you cannot meet and evaluate every potential mate, you ...
are drawn to one in particular, and that person happens to feel the same way
about you. You both want to move forward and start investing in your
relationship. You want to get married, buy a house, have children. Few of these
steps make sense, however, unless you expect your relationship to continue for
an extended period.
But what if something goes wrong? No matter what your mate’s vision of the
ideal partner may be, you know there is someone out there who comes closer to it
than you. What if that someone were to show up? Or what if you were to become
seriously disabled? If you thought your partner would leave under these
circumstances, it might not make sense to marry and have children in the first
place.
The marriage contract is one way of attempting to achieve the commitment you
desire, just as the lease is a way of solving a similar bilateral commitment
problem that landlords and tenants confront... But a formal legal contract
simply cannot create the kind of commitment people want in a marriage. ...
A far more secure commitment results if the legal contract is reinforced by
emotional bonds. The plain fact is that many relationships are not threatened
when a new potential partner who is kinder, wealthier, more charming and better
looking comes along. Someone who has become deeply emotionally attached to his
or her partner does not want to pursue new opportunities, even ones that, in
purely objective terms, may seem more promising.
That is not to say that emotional commitments are fail-safe. Who among us
would not experience at least mild concern upon hearing that his wife was having
dinner with George Clooney ..., or that her husband was having a drink with Uma
Thurman? Yet even imperfect emotional commitments free most couples from such
concerns most of the time.
The important point is that even though emotional commitments foreclose
potentially valuable opportunities, they also confer important benefits. An
emotional commitment to one’s spouse is valuable in the economist’s coldly
rational cost-benefit calculus because it promotes investments that both
partners want to make. But note the twist. These commitments work best when they
deflect people from thinking explicitly about their spousal relationships in
cost-benefit terms.
Evidence suggests that people who consciously approach those relationships in
such terms are much less satisfied with their marriages than others; and when
therapists try to get people to think in cost-benefit terms..., it often seems
to backfire. That may just not be the way evolution designed us to think about
close personal relationships.
Daniel Czamanski of Urban Economics and More describes how the idea for
Tiebout model came about:
Charlie Leven and Charlie Tiebout - the birth of a model, by urban economics
prof:
Charlie Leven was a guest in my urban economics class last week. He lectured about some aspects of the Tiebout "voting with feet" model. He then
proceeded to tell the class under what circumstances the model was born. It
turns out that a at a lunch at Northwestern University during the early 60s, the
two Charlies and another person whose name Leven did not recall discussed the
high property rates in Evanston. The third person at lunch, who was unmarried
and had no kids, announced that he is moving a few miles away from campus into
Chicago - where tax rates are lower.
In reaction, Charlie Tiebout proceeded to describe his model. At the end of the
lunch he announced that he is going to write it up and publish it.
If I am not mistaken this was his only contribution to urban economics.
This seems harsh. I was just a kid, but I kinda liked some of these cartoons:
Barberanism in cartoon land, by Martin Rowson, The Guardian: I've long
believed that the cartoon shorts produced in Hollywood in the 1930s, 40s and
50s, mostly outside the baleful Disney gulag, are among the greatest
achievements of western art.
These five-minute long essays in mayhem, featuring Bugs Bunny or Daffy
Duck..., and directed by the likes of Tex Avery, Friz Freleng and Chuck Jones
are (albeit silly) symphonies of joy. Right up there at the top stand Tom and
Jerry, created by William Hanna and Joe Barbera, who's just died aged 95.
When you watch those Tom and Jerry cartoons, you don't just get all the
victimless violence you could ever want, but also, frequently, a beauty which
can rival anything in the movies. These little films won seven Oscars, and would
often take up to a year to make. The technique was painstaking and very
expensive (which was why in 1956 MGM closed its animation division where they
made Tom and Jerry). The cartoons of that Golden Age should stand as a fitting
and enduring monument to Joe Barbera and Bill Hanna, and almost excuse their
later crimes. But not quite. ...
Although everyone born in the last 60 years might imagine that they have
happy childhood memories of The Flintstones, Yogi Bear, Huckleberry Hound or,
God help us, Scooby-Doo, the truth of the matter is that they're crap. Complete
and utter crap. Worse, they're shoddily made crap, after Hanna-Barbera devised
what they called "limited animation", more than halving the number of drawings
from 26 per second to 3000 for five minutes... And thus they effectively
destroyed animation for at least two generations, before it slowly began to claw
its way back to respectability in the mid-90s.
Worse, this tat debauched not only its audience but also people within the
profession. The great Mel Blanc, the voice of Bugs Bunny, Daffy Duck, Sylvester
the Cat and Porky Pig, ended his days voicing Barney Rubble. Friz Freleng, who
directed some of the best Bugs Bunnies in the 40s, bent the knee to market
forces and spent the 60s and 70s churning out The Pink Panther. Great theme, for
sure, but those cartoons, too, were crap. ...
If you doubt me, just remember The Banana Splits. Or The Hair Bear Bunch. Or
Shazam. I could go on, but I can't stand it. All I can suggest is that you get
hold of Johann Mouse: in five sublime minutes it's worth more than everything
Barbera knocked off in the next 40 years, and almost redeems his memory. But, as
I said, not quite.
"Now hoooooold on thar, Baba Looey! I'll do the "thinnin'" around here, and doooon't you forget it!"
Okay, some of them weren't so great technically or artistically, but without cutting the frames per
minute and other costs, cartoons may not have survived until the computer age brought cost-reducing technological change and turned things around. And, as the Simpson's makes clear, good writing is just as important as good animation. The best animation ever wouldn't have saved the Flintstones by the time The Great Gazoo showed up. "Touché and away!"
Economic inequality has been the topic of much discussion lately. Today while doing some Christmas shopping and thinking about some of the issues, I remembered (vaguely) the book Equality written in 1897 by Utopian Socialist Edward Bellamy.
Wikipedia describes
Bellamy as:
...an American author, most famous for his utopian novel set in the year
2000, Looking Backward ... He was the cousin of Francis Bellamy, most
famous for creating the Pledge of Allegiance to promote the sale of American
flags.
His books include Dr. Heidenhoff's Process (1880), Miss Ludington's
Sister (1884), Equality (1897) and The Duke of Stockbridge
(1900). His feeling of injustice in the economic system lead him to write
Looking Backward: 2000–1887 and its sequel, Equality.
According to Erich Fromm, Looking Backward is "one of the most
remarkable books ever published in America." It was the third largest bestseller
of its time, after Uncle Tom's Cabin and Ben-Hur: A Tale of the Christ.
It influenced a large number of intellectuals, and appears by title in many of
the major Marxist writings of the day. "It is one of the few books ever
published that created almost immediately on its appearance a political mass
movement." (Fromm, p vi). ... This political movement
came to be known as Nationalism.
A short story "The
Parable of the Water-Tank" from the book Equality, published in 1897,
was popular with a number of early American socialists. Less successful than its
prequel, Looking Backward, Equality continues the story of Julian
West as he adjusts to life in the future. ...
Here's Chapter 12, "How Inequality of Wealth Destroys Liberty," from the book Equality. As noted, the book continues the
story in Looking Backward with Julian West, who fell into a deep hypnotic sleep in 1887 and did not wake up until the year 2000, learning about and adjusting
to life in the year 2000. He is talking to Dr. Leete, a retired physician in Boston
who revived him after his 113 year-long slumber. The doctor is explaining the utopian public capitalism of the year 2000 and comparing it to life in the late 1800s. If you have forgotten what life was like for the poor living in
the tenements in New York city and other places at this time, it was
pretty bad. See, for example,
How the Other Half Lives. Here's the chapter. If you like these historical pieces, Chapter 23, "The
Parable of the Water-Tank," is interesting as well:
CHAPTER XII. How Inequality Of Wealth Destroys Liberty: "Nevertheless," said the doctor, "...There is another great and equal right of all men
which, though strictly included under the right of life, is by generous minds
set even above it: I mean the right of liberty--that is to say, the right not
only to live, but to live in personal independence of one's fellows, owning only
those common social obligations resting on all alike.
"Now, the duty of the state to safeguard the liberty of citizens was
recognized in your day just as was its duty to safeguard their lives, but with
the same limitation, namely, that the safeguard should apply only to protect
from attacks by violence. If it were attempted to kidnap a citizen and reduce
him by force to slavery, the state would interfere, but not otherwise.
Nevertheless, it was true in your day of liberty and personal independence, as
of life, that the perils to which they were chiefly exposed were not from force
or violence, but resulted from economic causes, the necessary consequences of
inequalities of wealth. Because the state absolutely ignored this side, which
was incomparably the largest side of the liberty question, its pretense of
defending the liberties of citizens was as gross a mockery as that of
guaranteeing their lives. Nay, it was a yet more absolute mockery and on a far
vaster scale.
More from Robert Reich. He asks, should charitable giving that doesn't directly
benefit the poor be tax deductible?:
Cost of Giving, by Robert B. Reich, American Prospect: 'Tis the season to be
jolly and also to make donations to your favorite charity. This year's
charitable donations are expected to total more than $200 billion, a new record.
Some 80 percent of them are made now, in the final weeks of the year.
But lots of charitable dollars -- especially from the wealthy... -- are going
to culture palaces: to the operas, art museums, symphonies, and theaters where
they spend much of their leisure time. They're also going to the universities
they once attended and expect their children to attend, perhaps with the help of
... "legacies."
These aren't really charitable contributions. They're more like investments
in the lifestyles the wealthy already enjoy and want their children to have,
too. They’re also investments in prestige -- especially if they result in the
family name engraved on the new wing of the art museum or symphony hall. ...
This year, the U.S. Treasury will be receiving about $40 billion less than it
would if the tax code didn't allow charitable deductions. ... I can see why a
contribution to, say, the Salvation Army should be eligible for a charitable tax
deduction. It helps the poor. But why, exactly, should a contribution to the
Guggenheim Museum or Harvard University? Not long ago, New York City's Lincoln
Center had a gala dinner supported by the charitable contributions of the
leaders of the hedge fund industry... I may be missing something here, but this
doesn't strike me as charity. I mean, poor New Yorkers don't often attend
concerts at Lincoln Center.
It turns out, in fact, that only an estimated 10 percent of all charitable
deductions this year will be directed at the poor. ... At a time in our
nation's history when the number of needy continue to rise, when government
doesn't have the money to do what’s necessary, and when America's very rich are
richer than ever, we should revise the tax code and limit the charitable
deduction to real charities.
Update: Thinking a bit more about this, what if the arts, etc. are public goods? E.g., what if the tax deductions are not intended to help the poor, but instead to help to rectify market failures in the provision of the arts? If that's the case, then a deduction to support the arts (and perhaps poor artists) can be justified on the basis of overcoming these market failures. Also, as noted in comments, there are other charities that cannot be classified on a rich-poor basis, e.g. the humane society. The public good argument comes into play here as well.
Christopher Hayes wants to know why "the word oil never crossed the lips of
any of the reporters at today’s press conference" with president Bush, and why
reporters don't ask about the establishment of permanent bases once the war has
ended:
Oil Law, by
Christopher Hayes: Listening to the President’s press conference...,
something caught my ear. ... Bush mentioned that a key to unifying the country
would be getting Iraq’s new oil law passed. The idea is, I imagine, that once
Iraq’s new government has figured out how to equitably share oil revenues among
various factions, everyone’s going to get along just fine. Of course, along with
bringing Iraqis together, the new law might just also provide a boon to American
energy companies A win-win!
As Antonia Juhasz shows in a new cover story for
In These Times (not yet on line), and
argued in the LA Times earlier this month, access to oil continues to drive
US policy in Iraq:
The Bush administration hired the consultancy firm BearingPoint more than a
year ago to advise the Iraqi Oil Ministry on drafting and passing a new national
oil law. Plans for this new law were first made public at a news conference in
late 2004 in Washington. Flanked by State Department officials, Iraqi Finance
Minister Adel Abdul Mahdi (who is now vice president) explained how this law
would open Iraq’s oil industry to private foreign investment. This, in turn,
would be “very promising to the American investors and to American enterprise,
certainly to oil companies.” The law would implement production-sharing
agreements. ...
In July, U.S. Energy Secretary Samuel Bodman announced in Baghdad that oil
executives told him that their companies would not enter Iraq without passage of
the new oil law. Petroleum Economist magazine later reported that U.S. oil
companies considered passage of the new oil law more important than increased
security when deciding whether to go into business in Iraq.
There are two elephants in the room when it comes to Iraq, and for some
reason the establishment press can never quite bring itself to broach the
subjects: permanent bases and access to oil. It’s fairly clear that Bush is not
going to withdraw from Iraq no matter what happens. Part of this is due to the
fact that he has decided that as long as we stay in Iraq we can’t lose the war,
and he doesn’t want to lose. But there’s also the not-so-minor fact that if we
withdraw from Iraq we’ll have a hard time establishing permanent bases and may
not have any secure access to the country’s oil.
So why is it the word oil never crossed the lips of any of the reporters at
today’s press conference?
Update: In response to comments, let me add that I think the form of the contracts/law matters. Access is
different from control/property rights and that's where people may
be talking past each other.
If, for example, the law gives U.S. companies the right to some of
the oil in return for developing the infrastructure destroyed in the
war, preferential treatment about who gets the development contracts,
etc. - the kind of cronyism we've seen again and again - that's one
issue, and one that merits raising. It's this phrase:
The law would implement production-sharing agreements.
that caught my eye in that regard.
If it's just access, the so long as the oil hits world markets, then that's another issue, and I agree that it won't affect price, etc.
Update: Angy Bears follow up - see PGL, then Steven Kyle.
Robert Reich wonders how Bush plans to pay for the additional troops he wants
to send to Iraq given the current state of the federal budget:
More Troops to Iraq? Really?, by Robert Reich: Bush said today he wants to
send more troops into Iraq. Hmmm. The war is already costing more than $2
billion a week. So how, exactly, are we going to afford the extra 20,000 troops
Bush wants?
Our soldiers comprise what’s called an "all-volunteer" army. ... You’re not
forced to do it. You’re paid to do it. Since Richard Nixon ended the draft in
1973, most of the people who join the military do so because it’s the most
attractive job available to them. Some are motivated by patriotism, of course,
but let’s not kid ourselves. People facing a choice between a job in the private
sector that’s near home and safe, and one in the military that’s thousands of
miles away and may not be safe, will choose to remain civilians – unless the
military job pays more. ...
When the unemployment rate is relatively low, as now ..., the Pentagon has to
pay even more to attract additional recruits. That’s why the defense
appropriations continue to raise military pay 3.1 percent a year, considerably
faster than civilian pay is rising. ...
The military is also offering signing bonuses up to $30,000 for jobs in high
demand. You can get up to a $150,000 cash bonus for re-enlisting if you’re with
the Special Forces. And all recruits are eligible for up to $50,000 to offset
the costs of higher education and up to $65,000 to pay back college loans. Not
to mention generous housing, child care, and health benefits.
But not even all this is enough. ...[T]he Pentagon has fallen behind its
targets for recruiting and re-enlisting soldiers for vital combat positions.
According to military experts, the war in Iraq and Afghanistan is scaring many
potential recruits away. No surprise, here. ...
It’s the law of supply and demand. If we want more people to sign up, and
stay signed up, we’ve got to pay them even more. But here’s the catch. Try
paying them much more and we run into an incontrovertible obstacle called the
federal budget deficit.
If you haven’t heard, the deficit is out of control. There’s no money left
for substantially higher pay and benefits for the troops. So where will the
extra troops come from? Will the White House try to reinstate the draft?
We could run the deficit up higher if we absolutely had to, so I don't think
a draft is the only option. Even though I didn't support the war, if I thought this was some magic way out, I'd support increasing troop levels irrespective of the budgetary consequences. But it's surely not something to try solely because it's the only option that avoids admitting defeat.
The question is whether the extra costs are worth
it. He doesn't mention the human costs, but those need to be included as well.
So are the expected benefits of increased troop levels high enough to justify
both the human and financial costs? I haven't been convinced of that. Not at all.
Update: It turns out that Bush does have an
economic plan
to stimulate the economy and help pay for the troop build-up. From today's news conference:
As we work with Congress in the coming year to chart a new course in Iraq and
strengthen our military to meet the challenges of the 21st century, we must also
work together to achieve important goals for the American people here at home.
This work begins with keeping our economy growing. … And I encourage you all to
go shopping more.
There's been a little bit of discussion lately about whether inflation
targeting holds down real wages and favors the interests of business over labor.
For instance,
Dean Baker wrote recently that:
[T]he most annoying part of the article is the comment, "wages have risen
so swiftly that some economists worry that they could push inflation up." This
is true, economists (including Federal Reserve Board chairman Ben Bernanke) are
very worried about wage growth, but it would have been worth noting the
implication of this statement. It implies that some economists believe that it
is unacceptable for workers to enjoy any wage gains - as soon as they start to
experience wage gains, inflation is a problem.
Many economists (perhaps most) hold a view like this, but the public should
be aware of this issue because it raises fundamental questions about economic
policy. Is the Federal Reserve Board always going to turn off economic growth
whenever the labor market tightens enough so that workers can benefit? If this
is the policy, shouldn't the people know?
See the
comments to this recent post for more examples of this sentiment
regarding Fed policy.
I've thinking about how to follow-up. This piece by Paul Krugman is a
good start. It's from 1999, but the issues are very similar:
Labor
Pains, by Paul Krugman: Alan Greenspan doesn't think you should get a
raise. And he doesn't want you to feel too secure in your job, because otherwise
you might demand that raise. I'm not putting words in his mouth. A few weeks
ago, addressing an audience of bankers, the usually Delphic chairman of the
Federal Reserve Board was uncharacteristically clear, warning that the United
States economy is ''steadily depleting the pool of available workers'' -- that
is, giving jobs to the previously unemployed. As a result, ''labor market
conditions can become so tight that the rise in nominal wages will start
increasingly outpacing the gains in labor productivity'' -- that is, workers who
know that jobs are plentiful will get big raises.
And that, Greenspan implied, would be a very bad thing. He didn't say what he
would do about it, but markets got the hint: bond prices immediately plunged, on
fears that the Fed would soon raise interest rates. Now to a man from Mars -- or
for that matter to a normal human being -- Greenspan's concerns might sound very
peculiar. After all, what's wrong with giving jobs to the jobless and higher
wages to the employed? But Greenspan is probably right to be worried. What is
less clear is whether it was a good idea for him to be so explicit.
Think of it this way. Once upon a time (say, back in the mid-70's, when
Gerald Ford was President and Alan Greenspan was his chief economist), the U.S.
economy was like a trendy restaurant -- one of those places where the tables are
set close together and the ceiling seems custom-designed to maximize the din.
What happens in that kind of environment is that everyone tries to talk above
the background noise so as to be heard by his or her companions. But by talking
louder, you yourself raise the noise level, forcing everyone else to talk
louder, praising the noise level still further, and eventually everyone is
shouting themselves hoarse. Substitute wage and price increases for speaking
volume and inflation for the overall noise level, and you have a capsule
analysis of the kind of inflationary spiral that the U.S. faced in the 1970's.
And the only way that the noise level (inflation) could be kept under control
was to keep a substantial number of tables vacant -- that is, by maintaining a
large reserve army of unemployed.
Today, of course, the situation is vastly improved. The economy is
flourishing, with unemployment at a 25-year low. (The restaurant is full again.)
Yet so far inflation is quiescent. (The noise level is tolerable.) This is
partly because exceptional productivity gains have made it possible for
companies to pay higher wages without raising prices. (A sound-absorbing
ceiling?) But it is also because, for reasons that nobody fully understands,
workers have been remarkably diffident about demanding higher wages, even in the
face of labor shortages. (Diners have mysteriously become more polite?) Everyone
is happy. But will the very exuberance of the diners bring the bad old days
back?
That's what Greenspan is worried about. What he said to the bankers was, in
effect, that no matter how good the acoustics, no matter how well behaved the
customers, if the restaurant gets sufficiently crowded there will be a shouting
match. And if that happens -- well, he'll just have to limit the number of
patrons. It's not that he is mean-spirited or a tool of capitalist oppression;
he's just doing his job. But you still have to wonder whether it was a good idea
to describe that job so explicitly and so honestly.
Yet
Friedman's empiricism also led him into disagreements with his free-market
supporters. He dismissed the conservative view that deficit spending was
necessarily bad, or that tax cuts stimulated the economy in the short run. 
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