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Sunday, December 31, 2006

Varian: Fiat Money

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:

Why Is That Dollar Bill in Your Pocket Worth Anything?, by Hal Varian, Economic Scene, NY Times: Why is that dollar bill in your pocket worth anything? One answer is that it's valuable because it says it is. To the left of the portrait of George Washington, the dollar proclaims: "This note is legal tender for all debts, public and private."

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.)

Here is the story Mr. King told:

Continue reading "Varian: Fiat Money" »

    Posted by on Sunday, December 31, 2006 at 06:58 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (5)


    DeLong: How Much Do We Owe Our Distant Descendants?

    Brad DeLong has posted a version of this on his blog, but in case you missed it:

    Global warming tax: How much do we owe our distant descendants?, J Bradford DeLong, Project Syndicate: What do we owe to our great-great-great-grandchildren? What actions are we obligated to take now in order to diminish the risks to our descendants and our planet from the increasing likelihood of global warming and climate change?

    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.

      Posted by on Sunday, December 31, 2006 at 04:37 PM in Economics, Environment, Policy | Permalink  TrackBack (0)  Comments (63)


      "The Chewbacca Defense"

      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.

      Update: This is related: Ignorance and inequality. This too: The Rich, the Right, the Facts. Both are from 1992, address very similar issues, and put this into a broader perspective.

      Update: Paul Krugman has a  brief follow-up here, and then here.

        Posted by on Sunday, December 31, 2006 at 12:06 PM in Economics, Income Distribution, Methodology | Permalink  TrackBack (0)  Comments (80)


        The Email Files

        A few things I've received by email recently:

        Continue reading "The Email Files" »

          Posted by on Sunday, December 31, 2006 at 11:43 AM in Economics, Miscellaneous | Permalink  TrackBack (0)  Comments (2)


          Single-Payer Health Insurance: You Don't Know What's Good for You

          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:

          Health Care Problem? Check the American Psyche, by Anna Bernasek, Economic View, NY Times: What is the most pressing problem facing the economy? A good case can be made for the developing health care crisis. ... There is a solution, proven effective for hundreds of millions of people: single-payer health insurance.

          [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.

          Continue reading "Single-Payer Health Insurance: You Don't Know What's Good for You" »

            Posted by on Sunday, December 31, 2006 at 12:18 AM in Economics, Health Care, Market Failure, Policy | Permalink  TrackBack (0)  Comments (29)


            Saturday, December 30, 2006

            Exchange Rate Clubs and the Monetary Approach

            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. ...

            Continue reading "Exchange Rate Clubs and the Monetary Approach" »

              Posted by on Saturday, December 30, 2006 at 04:41 PM in Economics, International Finance, International Trade | Permalink  TrackBack (1)  Comments (12)


              Settling the Score on Census Top-Coding of Income Data

              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).

              It looks as though Reynolds strikes again!

              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.

              Update: Krugman has a follow-up response here, "The Chewbacca Defense."

                Posted by on Saturday, December 30, 2006 at 12:01 PM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (63)


                The "7-Year-Old's Soccer Syndrome"

                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.

                Continue reading "The "7-Year-Old's Soccer Syndrome"" »

                  Posted by on Saturday, December 30, 2006 at 08:10 AM in Economics, Iraq and Afghanistan, Policy | Permalink  TrackBack (1)  Comments (32)


                  Friday, December 29, 2006

                  Paul Krugman: Iraq and All That

                  From Nitpicker, an audio interview with Paul Krugman about "Writers Who Got Iraq Right":

                    Posted by on Friday, December 29, 2006 at 05:40 PM in Economics, Iraq and Afghanistan | Permalink  TrackBack (0)  Comments (26)


                    Feeding Frenzy

                    Robert Reich looks back at 2006:

                    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.

                      Posted by on Friday, December 29, 2006 at 03:51 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (10)


                      FRB Cleveland: Labor Turnover

                      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.

                      Continue reading "FRB Cleveland: Labor Turnover" »

                        Posted by on Friday, December 29, 2006 at 02:14 PM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (3)


                        FRB San Francisco: Mortgage Innovation

                        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.

                        Continue reading "FRB San Francisco: Mortgage Innovation" »

                          Posted by on Friday, December 29, 2006 at 02:11 PM in Economics, Housing | Permalink  TrackBack (0)  Comments (3)


                          FRB Dallas: The Perils of Using Preliminary Data

                          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.

                          Continue reading "FRB Dallas: The Perils of Using Preliminary Data" »

                            Posted by on Friday, December 29, 2006 at 02:11 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0)


                            Paul Krugman: A Failed Revolution

                            The Republican revolution is over:

                            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.

                            _________________________
                            Previous (12/25) column: Paul Krugman: Helping the Poor, the British Way
                            Next (1/1) column: Paul Krugman: A Healthy New Year

                              Posted by on Friday, December 29, 2006 at 12:15 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (37)


                              Bush Considers Economic Stimulus Package

                              Here's a story from the Washington Post with a few "editorial" changes:

                              Bush Considers Economic Package for Displaced Americans, by Michael Abramowitz and Robin Wright, Washington Post: As he puts the finishing touches on his revised economic plan, President Bush is considering new economic initiatives to go along with a possible increase in defense spending to help stabilize the economy, according to officials familiar with the administration's plans.

                              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:

                              Continue reading "Bush Considers Economic Stimulus Package" »

                                Posted by on Friday, December 29, 2006 at 12:06 AM in Economics, Iraq and Afghanistan, Policy, Unemployment | Permalink  TrackBack (0)  Comments (17)


                                What Would Genghis Kahn and Others Do in Iraq?

                                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:

                                  Posted by on Friday, December 29, 2006 at 12:03 AM in Economics, Iraq and Afghanistan | Permalink  TrackBack (0)  Comments (29)


                                  Thursday, December 28, 2006

                                  Conscientious Objections to Invisible Hands and Other Moral Sentiments

                                  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.

                                  Continue reading "Conscientious Objections to Invisible Hands and Other Moral Sentiments" »

                                    Posted by on Thursday, December 28, 2006 at 04:32 PM in Economics, History of Thought | Permalink  TrackBack (1)  Comments (7)


                                    It's the Price, Not the Thought, That Counts?

                                    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; Part 2; Part 3; Part 4; Part 5; Part 6; Part 7; Part 8; Part 9; Part 10

                                    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. ...

                                    Continue reading "It's the Price, Not the Thought, That Counts?" »

                                      Posted by on Thursday, December 28, 2006 at 12:33 PM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (31)


                                      Friedman and Galbraith

                                      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:

                                      John Kenneth Galbraith understood capitalism as lived - not as theorized, by Joseph E. Stiglitz, Commentary, CSMonitor: Economists John Kenneth Galbraith and Milton Friedman believed that ideas mattered. ... As public intellectuals who didn't shy from taking political stances, they each gave heft to ideological causes - Mr. Friedman to free-market conservative ideology, Mr. Galbraith to the progressive tradition. ...

                                      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:

                                      Milton Friedman: Objective scientist first, free-market promoter second, by Mark Skousen, Commentary, CS Monitor: Above all, economist Milton Friedman was an independent, objective thinker who systematically applied the scientific method to economic problems... He was without peer in achieving this intellectual imperialism, and his fame and accomplishments result from his scientific prowess rather than mere ideology.

                                      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. ...

                                      FriedmangalbraithYet 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.

                                      [Update: From comments, this this puts the photo in context and makes it clear Stigler intended the comment in a light-hearted fashion.]

                                        Posted by on Thursday, December 28, 2006 at 12:33 AM in Economics | Permalink  TrackBack (0)  Comments (29)


                                        Universal 401(k) Accounts

                                        Tyler Cowen wants to use universal 401(k) accounts to reduce income inequality:

                                        Universal 401(k) Accounts Would Bring the Poor Into the Ownership Society, by Tyler Cowen, Economic Scene, NY Times: Of the current proposals to address income inequality, the universal 401(k) is the most likely to bring general prosperity.

                                        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. ...

                                          Posted by on Thursday, December 28, 2006 at 12:15 AM in Economics, Policy, Social Security | Permalink  TrackBack (0)  Comments (27)


                                          Wednesday, December 27, 2006

                                          MaxSpeaks, I Listen

                                          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:

                                          Who Let the (Blue) Dogs Out?, MaxSpeaks: The answer of course is the electorate, God bless them. The November results empowered the avatars of fiscal constipation, as James Carville used to say before his own passageways became impassable.

                                          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.

                                          On the other hand, we have advice like this:

                                          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.

                                          My follow up posts More on Democrats and the Deficit, Republicans and the Deficit, and particularly from today, Avoiding the Budgetary Bait and Switch explain my position in more detail. We aren't as far apart as it might appear.

                                            Posted by on Wednesday, December 27, 2006 at 03:03 PM in Budget Deficit, Economics, Politics | Permalink  TrackBack (0)  Comments (8)


                                            Stiglitz: Economic Risks in 2007

                                            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.

                                              Posted by on Wednesday, December 27, 2006 at 02:41 PM in Economics | Permalink  TrackBack (0)  Comments (32)


                                              Avoiding the Budgetary Bait and Switch

                                              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.


                                              [Health care has been a topic of much recent discussion, e.g. from yesterday see Ezra Klein, Going universal, Commentary, Los Angeles Times and Raging Lefty Watch, by Daniel Gross. On taxes, I don't oppose revenue neutral changes designed to minimize economic distortions and promote fairness. But that's not what we got.]

                                                Posted by on Wednesday, December 27, 2006 at 01:14 AM in Budget Deficit, Economics, Health Care, Policy, Social Security, Taxes | Permalink  TrackBack (0)  Comments (34)


                                                Controlling Malaria

                                                Jeff Sachs says efforts to distribute mosquito nets in Africa to help fight malaria have been hindered by a desire to promote markets:

                                                Getting Practical in Controlling Malaria, by Jeffrey D. Sachs, Project Syndicate: Many international assistance programs fail because they are badly designed and/or too complicated. The result is that the poor don’t get the help they need, and taxpayers in rich countries lose confidence in the use of their aid funds.

                                                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.

                                                  Posted by on Wednesday, December 27, 2006 at 12:15 AM in Economics, Policy | Permalink  TrackBack (1)  Comments (39)


                                                  Tuesday, December 26, 2006

                                                  Poverty and Inequality Analyses

                                                  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:

                                                  Poverty analysis:

                                                  New policy institute: http://www.npi.org.uk/reports/mpse%202006.pdf

                                                  Inequality:

                                                  Institute for fiscal studies: http://www.ifs.org.uk/publications.php?publication_id=3575

                                                  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.

                                                    Posted by on Tuesday, December 26, 2006 at 11:33 AM in Economics, Income Distribution, Policy | Permalink  TrackBack (0)  Comments (25)


                                                    Poverty Rates in Recent Years

                                                    In a recent commentary in the Washington Times, Alan Reynolds says:

                                                    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.”

                                                    However you measure it, we can do better.

                                                      Posted by on Tuesday, December 26, 2006 at 12:15 AM in Economics, Income Distribution, Politics | Permalink  TrackBack (1)  Comments (38)


                                                      Office-Park Populists

                                                      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.” ...

                                                      Continue reading "Office-Park Populists" »

                                                        Posted by on Tuesday, December 26, 2006 at 12:01 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (42)


                                                        Monday, December 25, 2006

                                                        Paul Krugman: Helping the Poor, the British Way

                                                        Paul Krugman looks at how much progress we've made in the war on poverty in recent decades and finds it's not nearly enough:

                                                        Helping the Poor, the British Way, by Paul Krugman, Commentary, NY Times: It’s the season for charitable giving. And far too many Americans, particularly children, need that charity. ...

                                                        [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.

                                                        _________________________
                                                        Previous (12/22) column: Paul Krugman: Democrats and the Deficit
                                                        Next (12/29) column: Paul Krugman: A Failed Revolution

                                                        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:

                                                        Poverty analysis:

                                                        New policy institute: http://www.npi.org.uk/reports/mpse%202006.pdf

                                                        Inequality:

                                                        Institute for fiscal studies: http://www.ifs.org.uk/publications.php?publication_id=3575

                                                        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.

                                                          Posted by on Monday, December 25, 2006 at 12:15 AM in Economics, Income Distribution, Policy | Permalink  TrackBack (0)  Comments (76)


                                                          Sunday, December 24, 2006

                                                          Twas The Night Before Christmas

                                                          Here's a repeat from last year, the Gutenberg EBook: Twas The Night Before Christmas:


                                                          G1

                                                          Continue reading "Twas The Night Before Christmas" »

                                                            Posted by on Sunday, December 24, 2006 at 03:00 PM in Economics, Miscellaneous | Permalink  TrackBack (0)  Comments (2)


                                                            Republicans and the Deficit

                                                            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.

                                                              Posted by on Sunday, December 24, 2006 at 03:06 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (36)


                                                              Saturday, December 23, 2006

                                                              What Happens at the North Pole Stays at the North Pole...

                                                                Posted by on Saturday, December 23, 2006 at 09:59 PM in Economics, Miscellaneous | Permalink  TrackBack (0)  Comments (6)


                                                                More on Democrats and the Deficit

                                                                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.

                                                                The genial Tyler Cowen is ... uncharacteristically cutting:

                                                                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.

                                                                  Posted by on Saturday, December 23, 2006 at 06:39 PM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (45)


                                                                  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. 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.


                                                                  Note
                                                                  : Please see this follow-up with more on Krugman's recommendation.

                                                                    Posted by on Saturday, December 23, 2006 at 02:16 PM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (1)  Comments (33)


                                                                    What Is It Good For?

                                                                    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.

                                                                    Here are the two commentaries:

                                                                    Continue reading "What Is It Good For?" »

                                                                      Posted by on Saturday, December 23, 2006 at 10:00 AM in Economics, Iraq and Afghanistan | Permalink  TrackBack (1)  Comments (12)


                                                                      The Sociable Suburbs: Sprawl is Good?

                                                                      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.

                                                                      Here's the paper, "Social Interaction and Urban Sprawl."

                                                                        Posted by on Saturday, December 23, 2006 at 12:34 AM in Academic Papers, Economics | Permalink  TrackBack (0)  Comments (36)


                                                                        Why Don't Movie Theaters Have More Variation in Their Prices?

                                                                        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:

                                                                        Sorting out bundling and antitrust law from a seat at the Saturday double feature, by Hal Varian, Commentary, New York Times, 2001: Remember double features? Back in the 1950's, movie theaters used to show two films for a single price. But there was a catch: often only one of the two films was worth seeing.

                                                                        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.

                                                                        Continue reading "Why Don't Movie Theaters Have More Variation in Their Prices?" »

                                                                          Posted by on Saturday, December 23, 2006 at 12:15 AM in Economics | Permalink  TrackBack (0)  Comments (14)


                                                                          "Moderating Growth Doesn't Change Inflation. Central Banks Change Inflation."

                                                                          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):

                                                                          ff rate= real rate + inflation + 1.0*(real economic activity gap) +0.5* (inflation - inflation target),

                                                                          which can also be written

                                                                          ff rate= real rate + inflation target + 1.0*(real economic activity gap) +1.5* (inflation - inflation target),

                                                                          so the response coefficient on inflation is 1.5 in either case. I should have been more clear about that in the letter.

                                                                          Thanks Kevin.]

                                                                          Here's the Economic Letter:

                                                                          Continue reading ""Moderating Growth Doesn't Change Inflation. Central Banks Change Inflation."" »

                                                                            Posted by on Saturday, December 23, 2006 at 12:04 AM in Environment, Inflation, Monetary Policy | Permalink  TrackBack (0)  Comments (2)


                                                                            Friday, December 22, 2006

                                                                            Reich: An Introduction to Economic Populism

                                                                            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.

                                                                            Continue reading "Reich: An Introduction to Economic Populism" »

                                                                              Posted by on Friday, December 22, 2006 at 01:05 PM in Economics, Income Distribution, Policy | Permalink  TrackBack (0)  Comments (17)


                                                                              Paul Krugman: Democrats and the Deficit

                                                                              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.

                                                                              _________________________
                                                                              Previous (12/11) column: Paul Krugman: Outsourcer in Chief
                                                                              Next (12/25) column: Paul Krugman: Helping the Poor, the British Way

                                                                              Update: Brad DeLong updates his post on Krugman's commentary with:

                                                                              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.

                                                                                Posted by on Friday, December 22, 2006 at 12:15 AM in Economics, Politics | Permalink  TrackBack (2)  Comments (90)


                                                                                Barriers to Entry in Professional Services: Quantity or Quality?

                                                                                I don't think Dean Baker will Beat the Press over this one. This is a point he has made many times:

                                                                                Illegal Immigration: A Rich American's Game, by Froma Harrop, Commentary, Providence Journal: There's a popular game in America that goes, I'll cut your wages, but you don't cut mine. And the outsourcing of your factory job to China is a good thing, because it makes my paycheck go further at Wal-Mart. We hear this theme a lot in the debate over illegal immigration. ...

                                                                                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.

                                                                                Update: In comments, Dean Baker adds:

                                                                                Mark,

                                                                                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.

                                                                                  Posted by on Friday, December 22, 2006 at 12:11 AM in Economics, Income Distribution, Market Failure, Regulation | Permalink  TrackBack (0)  Comments (28)


                                                                                  Set to the Tune of...

                                                                                  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.

                                                                                  More of that here (pdf).

                                                                                    Posted by on Friday, December 22, 2006 at 12:03 AM in Economics, Miscellaneous | Permalink  TrackBack (0)  Comments (2)


                                                                                    Thursday, December 21, 2006

                                                                                    Child Abuse and Crime

                                                                                    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.

                                                                                      Posted by on Thursday, December 21, 2006 at 02:52 PM in Academic Papers, Economics | Permalink  TrackBack (0)  Comments (13)


                                                                                      "No Rational Person Would Want to Marry Homo Economicus"

                                                                                      This is Robert Frank on the costs and benefits of commitment:

                                                                                      When It Comes to a Search for a Spouse, Supply and Demand Is Only the Start, by Robert Frank, Economic Scene , NY Times: The economist’s model of the informal market for marriage partners resembles the standard supply and demand model for ordinary goods.

                                                                                      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.

                                                                                        Posted by on Thursday, December 21, 2006 at 02:43 AM in Economics | Permalink  TrackBack (0)  Comments (18)


                                                                                        The Birth of the Tiebout "Voting with Feet" Model

                                                                                        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.

                                                                                          Posted by on Thursday, December 21, 2006 at 02:34 AM in Economics | Permalink  TrackBack (0)  Comments (2)


                                                                                          "Heavens to Murgatroid!"

                                                                                          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!"

                                                                                            Posted by on Thursday, December 21, 2006 at 01:32 AM in Economics, Miscellaneous | Permalink  TrackBack (0)  Comments (6)


                                                                                            "How Inequality of Wealth Destroys Liberty"

                                                                                            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.

                                                                                            Continue reading ""How Inequality of Wealth Destroys Liberty"" »

                                                                                              Posted by on Thursday, December 21, 2006 at 12:15 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (43)


                                                                                              Wednesday, December 20, 2006

                                                                                              Are All Charities Created Equal?

                                                                                              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.

                                                                                                Posted by on Wednesday, December 20, 2006 at 07:20 PM in Economics, Policy, Taxes | Permalink  TrackBack (0)  Comments (40)


                                                                                                What About Iraq's Oil?

                                                                                                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.

                                                                                                  Posted by on Wednesday, December 20, 2006 at 02:09 PM in Economics, Iraq and Afghanistan, Oil, Press | Permalink  TrackBack (1)  Comments (77)


                                                                                                  Reich: More Troops to Iraq? Really?

                                                                                                  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.

                                                                                                    Posted by on Wednesday, December 20, 2006 at 02:34 AM in Economics, Iraq and Afghanistan, Politics | Permalink  TrackBack (1)  Comments (87)


                                                                                                    Does Ben Bernanke Think You Should Get a Raise?

                                                                                                    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.

                                                                                                      Posted by on Wednesday, December 20, 2006 at 12:15 AM in Economics, Monetary Policy, Unemployment | Permalink  TrackBack (0)  Comments (16)