« January 2007 |
| March 2007 »
Robert Reich says watch out, the bubble bursting may not be over:
Why the Stock Market Tumbled -- and What's to Come, by Robert Reich: As of
right now (11:15 am Pacific time, Wednesday), it looks like Wall Street is
putting a the best face possible on yesterday's "correction." (A "correction" is
a Wall Street euphemism for "holy shit!") But it's way too early for a sigh of
relief. When the stock market takes a big hit, ... ask yourself two questions:
What underlying speculative trend has been getting out of control? And what was
the wake-up call that alerted investors to it?
This time, the out-of-control trend has been excess liquidity... (excess
petro-dollars, excess sino-dollars, excess saving in the rest of Asia) that
investors have been overly optimistic in lending money and buying stocks. In
other words, they’ve taken on way more risk than they’ve thought...
The biggest speculative bubble has been in China – which isn’t surprising
given the growth of China’s economy and the under-regulation of its financial
markets. Because global financial markets are so intertwined, that bursting
bubble has hurt investors all over the world. ...
There have been other excess-liquidity speculative bubbles right here in
America, too. One prime example has been sub-prime loans... When the housing
market started to tumble, some of these risky loans have revealed just how risky
Another liquidity bubble has emerged in hedge funds and private-equity funds,
which have so much money they’re buying up whatever they see. When these bubbles
burst, the noise will be loud enough to shake foundations from New York to San
The wake-up call this time was Alan Greenspan, the Oracle of Ayn Rand, whose
visage had been beamed by satellite to a group in Hong Kong on Monday (New York
time). Greenspan warned the gathering of excess liquidity in global financial
markets, leading to over-optimism, and he predicted a recession later this year.
Too early yet to tell how big this explosion will be.
Also from Robert Reich:
Time to Join a Union (Or At Least Have the Right To).
Posted by Mark Thoma on Wednesday, February 28, 2007 at 01:15 PM in Economics, Financial System |
When Robert Samuelson said in 2002 that we shouldn't worry about how much the
Iraq war will cost when formulating policy, he underestimated the cost of the
war by hundreds of billions of dollars. But he still believes that the cost of
the war should not impact Iraq policy:
A $2 Trillion Footnote?, by Robert J. Samuelson, Commentary, Washington Post:
...As the situation in Iraq has deteriorated, some readers have suggested that I
revisit [my September 2002 column ... "A War We Can Afford."] and confess to
error. Let me take up their invitation, because today's ferocious war debate
raises many of the same issues.
Yes, that column made big mistakes. The war has cost far more than I (or
almost anyone) anticipated. Still, I defend the column's central thesis, which
remains relevant today: Budget costs should not shape our Iraq policy. Frankly,
I don't know what we should do now. But in considering the various proposals --
President Bush's "surge," fewer troops or redeployment of those already there --
the costs should be a footnote. We ought to focus mostly on what's best for
To be sure, the war's costs have been huge. Since September 2001, Congress
has provided $503 billion for Iraq, Afghanistan and related activities... The
administration's request for fiscal 2007 ... and fiscal 2008 would bring the
total to $746 billion. Iraq represents about 70 percent of that. By contrast, my
original column put the cost of an Iraq war at up to $80 billion. ...
As to the future, the CBO has created two "illustrative scenarios"... By CBO
estimates, the scenarios would involve extra spending from 2009 to 2017 of $269
billion and $696 billion, respectively.
Finally, the war has created costs that, though they don't appear in accounts
labeled "Iraq," are properly attributed to Iraq. Trucks, helicopters and tanks
are wearing out at faster rates; they'll have to be replaced or refurbished.
Recruiting costs have risen. Veterans' disability benefits and health costs are
increasing. ... Linda Bilmes, a Harvard budget expert ... estimates the present
value of future disability and health benefits at $300 billion to $600 billion.
The war on terrorism has clearly worsened the long-term budget outlook. How
then can I treat that so lightly? What's missing is context..., the federal
budget now totals nearly $3 trillion annually. Suppose the war's ultimate costs
reach $2 trillion by 2017... That's a big number, perhaps too big. It's also a
wild guess. Still, the CBO estimates all federal spending over the same period
(2002-17) will total $48 trillion; war spending would be about 4 percent. In the
same period, the income of the U.S. economy ... would total an estimated $248
trillion; war spending would be less than 1 percent of that. The point, as I
said in 2002, is that we're so wealthy we "can wage war almost with pocket
With hindsight, it seems almost incontestable that the Iraq war should never
have been fought. It has eroded our global power, weakened our military and
resulted in thousands of American and Iraqi deaths. What I most regret about my
earlier column is that it seemed to bless a war, when I was mainly trying to
focus attention on questions more important than money. Given the headline (I
wrote it) and the fact that those questions came at the end of the column ("Is
this war justifiable? . . . What would happen if we don't fight? What will
happen if we do?"), the reaction was understandable. In truth, I was uncertain
about the war then, just as I'm unsure of what to do now.
But I am certain -- now as then -- that budget consequences should occupy a
minor spot in our debates. It's not that the costs are unimportant; it's simply
that they're overshadowed by other considerations that are so much more
important. We can pay for whatever's necessary. If we decide to do less because
that's the most sensible policy, we shouldn't delude ourselves that any
"savings" will rescue us from our long-term budget predicament, which involves
the huge costs of federal retirement programs. Just because the war is unpopular
doesn't mean it's the source of all our problems.
The total cost of the war as a percentage of overall federal spending or cumulative income
over the 2002-20017 time period may be small, but it's what is sacrificed at the margin
that matters. What else could we have done with the money spent on the war,
currently around $200 billion a year? Schools, roads, health care, environmental
investments, port inspectors, preschool, police, there is a long list of
valuable alternative uses for the money used to pay for the war.
Posted by Mark Thoma on Wednesday, February 28, 2007 at 02:25 AM in Budget Deficit, Economics, Iraq and Afghanistan |
This WSJ commentary from Amy Finkelstein of MIT discusses the costs and benefits of adopting universal health insurance:
The Cost of
Coverage, by Amy Finkelstein, Commentary, WSJ: Thanks to widespread concern
about the millions of Americans without health insurance, several states have
recently mandated universal coverage... Massachusetts enacted legislation...;
other proposals are brewing in California, Pennsylvania and elsewhere. Such
reforms are likely to affect health-care spending...
For evidence of how such programs can lead to increased spending, just look
at the effects of the introduction of Medicare in 1966. Medicare provides
health-insurance coverage to virtually all Americans aged 65 and over. Prior to
its enactment, only about one-quarter of these individuals had any meaningful
health insurance. As a result of Medicare's introduction, about three-quarters
of the elderly ... gained health-insurance coverage. (For perspective, this is a
similar increase in the share .. as ... will happen in Massachusetts under its
new universal coverage program.)
Research I conducted shows that Medicare had a substantial effect on the
health-care sector. By 1970, the program caused a 37% increase in hospital
spending. This is an enormous number. If I extrapolate from the Medicare ... to
... the ... overall spread of insurance -- both public and private -- between
1950 and 1990, it suggests that it is responsible for about half of the sixfold
growth in real per capita health-care spending during this period.
Why does increased health insurance lead to increased health spending? One
factor is that when individuals have insurance, they tend to consume more health
Another reason is that hospitals and doctors respond to the increased demand
for health care by changing some of the ways in which they practice medicine.
For example, hospitals were more likely to adopt new medical technologies after
Medicare... because ..., with greater insurance coverage, there were more people
who could afford these new technologies. ... All of this contributes to higher
Of course, the effect of health insurance on health spending tells us only of
the costs of expanding health insurance coverage. We can also ask, what are the
benefits? And once again, we can learn something from the Medicare experience.
Robin McKnight of the University of Oregon and I have examined the data, and as
best we can tell, Medicare did not have any effect at reducing elderly mortality
in its first 10 years of existence. Of course, mortality is only one measure of
health, and it is possible that other aspects of health improved. It is also
possible that in the long run, the new technologies adopted ... because of
Medicare had important health benefits that our 10-year analysis would not
While the health benefits from Medicare therefore remain uncertain, we found
clear evidence of a different type of benefit: It provided substantial financial
protection to the elderly. Prior to Medicare, they faced the risk of large
out-of-pocket medical expenditures. About one in 10 of elderly individuals spent
one-fifth of their annual income on medical expenses... By 1970, we estimate
that Medicare had reduced this risk of extremely large out-of-pocket medical
expenditures by half.
What all this means is that, as best we can tell, the elderly were not
foregoing life-saving treatments prior to Medicare. Rather, they were getting
these treatments, albeit at large or even enormous personal financial cost. But
overall Medicare did not so much save lives as it did provide financial
security. This is the goal of insurance -- not to prevent an awful event from
occurring, but to make sure that if it does occur you are not devastated
The Medicare experience offers valuable lessons for today. Recent state
efforts to create universal health-insurance coverage would reduce the fraction
of the population in a state without insurance by similar amounts as did the
introduction of Medicare... And if that program is any guide, we may perhaps see
changes in the structure of the health-care system, such as the development and
adoption of new medical technologies. We are likely to witness an improvement in
the financial security of the currently uninsured. There are also likely to be
increases in health-care spending -- quite possibly substantial ones.
The paper she co-authored
with Robin is noted and briefly discussed here. The paper itself is here. Here's a non-technical summary.
Here are some statistics related to the paper Robin has used in presentations. This table shows that medical
spending is very skewed: If you order people according to their spending on
health care, the top 10% of spenders account for 72% of all spending and the top
1% of spenders account for 30% of all spending.
Source: Berk & Monheit (1992)
|Share of health care spenders
||Cumulative share of US medical spending
It's the people in the tails, of course, that use most of the resources and receive most of the benefits from adopting universal insurance coverage.
Posted by Mark Thoma on Wednesday, February 28, 2007 at 12:15 AM in Economics, Health Care, University of Oregon |
Is Japan's protection of its agricultural industry justified by the fact that
it is an island nation, or should Japan drop its worries about food security and end the subsidies it
gives to domestic farmers? First, here's Malcolm Cook of the Lowy Institute for
International Policy in Australia writing for Project Syndicate. He's
hopeful Japan's protectionist tendencies in agriculture are subsiding, and that Japan will lead the way for others to relax their agricultural protections. An editorial from the Japan Times follows and gives additional perspective:
Japan is showing the way forward for agricultural free trade, by Malcom Cook,
Project Syndicate: Last year was a bad one for free trade. The Doha Round
was supposed to make agriculture the centerpiece of negotiations... But instead of breathing life into
free trade in food, rural protectionism in rich countries seems to have killed
the Doha Round... Most galling, agriculture is a small and declining part of
these "rich club" economies...
Continue reading "Japan's Food Security" »
Posted by Mark Thoma on Tuesday, February 27, 2007 at 01:23 PM in Economics, International Trade |
Is there anything economists won't study? Should there be?:
Economist Qualified To Solve Puzzle of Autism?, by Mark Whitehouse, WSJ: In
the spring of 2005, Cornell University economist Michael Waldman noticed a
strange correlation in Washington, Oregon and California. The more it rained or
snowed, the more likely children were to be diagnosed with autism. ...
[This] soon led Prof. Waldman to conclude that something children do more
during rain or snow -- perhaps watching television -- must influence autism.
Last October, Cornell announced the resulting paper in a news release headlined,
"Early childhood TV viewing may trigger autism, data analysis suggests."
Prof. Waldman's willingness to hazard an opinion on a delicate matter of
science reflects the growing ambition of economists -- and also their growing
hubris, in the view of critics. Academic economists are increasingly venturing
beyond their traditional stomping ground, a wanderlust that has produced some
powerful results but also has raised concerns about whether they're sometimes
going too far. ...
Such debates are likely to grow as economists delve into issues in education,
politics, history and even epidemiology. Prof. Waldman's use of precipitation
illustrates one of the tools that has emboldened them: the instrumental
variable, a statistical method that, by introducing some random or natural
influence, helps economists sort out questions of cause and effect. Using the
technique, they can create "natural experiments" that seek to approximate the
rigor of randomized trials -- the traditional gold standard of ... research. ...
But as enthusiasm for the approach has grown, so too have questions. One
concern: When economists use one variable as a proxy for another -- rainfall
patterns instead of TV viewing, for example -- it's not always clear what the
results actually measure. Also, the experiments on their own offer little
insight into why one thing affects another.
"There's a saying that ignorance is bliss," says James Heckman ... at the
University of Chicago who won a Nobel Prize in 2000... "I think that
characterizes a lot of the enthusiasm for these instruments." Says MIT economist
Jerry Hausman, "If your instruments aren't perfect, you could go seriously
In principle, the best way to figure out whether television triggers autism
would be to do what medical researchers do: randomly select a group of
susceptible babies at birth to refrain from television, then compare their
autism rate to a similar control group that watched normal amounts of TV. If the
abstaining group proved less likely to develop autism, that would point to TV as
Economists usually ...[cannot] perform that kind of experiment. ... Instead,
economists look for instruments -- natural forces or government policies that do
the random selection for them. First developed in the 1920s, the technique helps
them separate cause and effect. Establishing whether A causes B can be
difficult, because often it could go either way. If television watching were
shown to be unusually prevalent among autistic children, it could mean either
that television makes them autistic or that something about being autistic makes
them more interested in TV. ...
Prof. Waldman and his colleagues had such [techniques]... in mind when they
approached autism and TV. By putting together weather data and government
time-use studies, they found that children tended to spend more time in front of
the television when it rained or snowed. Precipitation became the group's
instrumental variable, because it randomly selected some children to watch more
TV than others.
The researchers looked at detailed precipitation and autism data from
Washington, Oregon and California -- states where rain and snowfall tend to vary
a lot. They found that children who grew up during periods of unusually high
precipitation proved more likely to be diagnosed with autism. A second
instrument for TV-watching, the percentage of households that subscribe to
cable, produced a similar result. Prof. Waldman's group concluded that
TV-watching could be a cause of autism.
Criticism quickly arose, illustrating some of the perils of the economists'
approach. For one, instruments are often too blunt. As Prof. Waldman concedes,
precipitation could be linked to a lot of factors other than TV-watching -- such
as household mold -- that could be imagined to trigger autism. ... "It is just
too much of a stretch to tie this to television-watching," says Joseph Piven,
director of the Neurodevelopmental Disorders Research Center at the University
of North Carolina. "Why not tie it to carrying umbrellas?"
Also, Prof. Waldman's findings do nothing to explain the mechanism by which
television would influence autism, a gap that instrumental variables are
inherently unable to fill. That's one reason many autism researchers think he
shouldn't have publicized his results or made recommendations to parents. "I
think this is irresponsible," says Dr. Klin of Yale. "We should not provide
clinical advice unless there is scientific evidence to substantiate it." ...
David Card, a professor at the University of California, Berkeley, who has
done influential work on the minimum wage, fears that the fascination with the
instrumental-variables technique "leads to interest in topics that economists
are not particularly well-trained to study."
Those who favor the method say it's just one tool among many -- all of which
have flaws -- and is intended to help fill in the picture. ... Prof. Waldman
welcomes the scrutiny, saying he hopes his work will also provoke autism
researchers to conduct clinical trials. "Obviously this is an unusual thing for
an economist to be looking at," says Prof. Waldman. "Maybe I was overconfident.
Posted by Mark Thoma on Tuesday, February 27, 2007 at 12:36 AM in Economics, Methodology |
John Taylor says the plan to ship U.S. currency into Iraq after the fall of
Saddam Hussein was a big success:
Billions Over Baghdad, by John B. Taylor, Commentary, NY Times: Earlier this
month, the House Committee on Oversight and Government Reform held a hearing
that criticized the decision to ship American currency into Iraq just after
Saddam Hussein’s government fell. As the committee’s chairman, Henry Waxman of
California, put it .., “Who in their right mind would send 360 tons of cash into
a war zone?” His criticism attracted wide attention, feeding antiwar sentiment
and even providing material for comedians. But a careful investigation ...
paints a far different picture.
The currency that was shipped into Iraq in the days after the fall of Saddam
Hussein’s government was part of a successful financial operation that had been
carefully planned months before the invasion. Its aims were to prevent a
financial collapse in Iraq, put the financial system on a firm footing and pave
the way for a new Iraqi currency. ...
The plan ... had two stages ... designed to work for Iraq’s cash economy, in
which checks or electronic funds transfers were virtually unknown and shipments
of tons of cash were commonplace.
In the first stage, the United States would pay Iraqi government employees
and pensioners in American dollars. These were obtained from Saddam Hussein’s
accounts in American banks, which ... amounted to about $1.7 billion. Since the
dollar is a strong and reliable currency, paying in dollars would create
financial stability until a new Iraqi governing body was established... The
second stage of the plan was to print a new Iraqi currency for which Iraqis
could exchange their old dinars.
The final details of the plan were reviewed in the White House Situation Room
by President Bush and the National Security Council on March 12, 2003. I
attended that meeting. Treasury Secretary John Snow opened the presentation with
a series of slides. ... [A] slide indicated that we could ship $100 million in
small denominations to Baghdad on one week’s notice. President Bush approved the
To carry out the first stage of the plan, President Bush issued an executive
order on March 20, 2003, instructing United States banks to relinquish Mr.
Hussein’s frozen dollars. From that money, 237.3 tons in $1, $5, $10 and $20
bills were sent to Iraq. During April, United States Treasury officials in
Baghdad worked with the military and the Iraqi Finance Ministry officials ... to
make sure the right people were paid. The Iraqis supplied extensive
documentation of each recipient of a pension or paycheck. ...
On April 29, Jay Garner ... reported to Washington that the payments had
lifted the mood of people in Baghdad during those first few confusing days. Even
more important, a collapse of the financial system was avoided.
This success paved the way for the second stage of the plan. In only a few
months, 27 planeloads (in 747 jumbo jets) of new Iraqi currency were flown into
Iraq from seven printing plants around the world. Armed convoys delivered the
currency to 240 sites around the country. From there, it was distributed to 25
million Iraqis in exchange for their old dinars, which were then dyed, collected
into trucks, shipped to incinerators and burned or simply buried.
The new currency proved to be very popular. It provided a sound underpinning
for the financial system and remains strong, appreciating against the dollar
even in the past few months. Hence, the second part of the currency plan was
also a success...
One of the most successful and carefully planned operations of the war has
been held up in this hearing for criticism and even ridicule. As these facts
show, praise rather than ridicule is appropriate: praise for the brave experts
in the United States Treasury who went to Iraq in April 2003 and established a
working Finance Ministry and central bank, praise for the Iraqis in the Finance
Ministry who carefully preserved payment records in the face of looting..., and
yes, even praise for planning and follow-through back in the United States.
Posted by Mark Thoma on Monday, February 26, 2007 at 07:56 PM in Economics, Financial System, Iraq and Afghanistan |
post from earlier today noted that there is evidence that the relationship
between inflation and measures of real activity such as the unemployment rate
has weakened in the last twenty-five years. I want to return to this topic.
There are two types of causality we can examine with respect to the relationship between unemployment and inflation (there are others as well). The first is how a monetary (aggregate demand) shock that impacts inflation affects unemployment and other measures of real
activity. It's possible that unemployment reacts less to a change in monetary
policy than it did in the past. The second type
of causality is how a shock to unemployment or output, perhaps from a
supply-shock such as a change in productivity or a real cost shock, affects
inflation in subsequent periods. The first is a demand driven change in the
economy while the second originates on the supply side. This will address the first type - demand driven fluctuations of the kind that generate Phillips curve type movements in inflation and measures of real activity.
The causality here runs from monetary policy shocks to inflation to
unemployment. I am
going to use an expectations augmented Phillips curve framework to illustrate
ideas. It's not the most up-to-date framework, but the ideas carry through to more modern theoretical structures and
it has the advantage of being a simple and familiar structure.
The following figure shows two short-run Phillips curves, one for an expected
inflation rate of π0 and one for an
expected inflation rate of π1. Consider the PC labeled PC(πe
= π0). This curve shows that if the inflation rate is equal to its
expected value of π0, then
the unemployment rate will be at the natural rate, U*. However, if
the inflation rate is different than what is expected, then the economy will
slide along the short-run Phillips curve and output will differ from its natural
For example, suppose that agents expect an
inflation rate of π0, but
the actual inflation rate turns out to be, unexpectedly, the lower rate of
π1. Then instead of ending up at the
natural rate rate, i.e. at point A, the economy will move to point B and the
unemployment rate will increase. Thus, any unexpected inflation causes
deviations from the natural rate of output.
If the lower inflation is permanent, over time
expectations will adjust to reflect the lower actual inflation rate. That is,
over time, the expected inflation rate will drop from πe = π0 to πe = π1 and the Philips curve will shift downward as shown in the
diagram. As the Phillips curve shifts down, the economy will move from point B
to point C as the unemployment rate returns to the natural rate.
Notice that the path of unemployment in response
to an unexpected shock is from point A to B to C as unemployment first rises,
then falls back to its initial level. But what if the change in policy was
expected rather than unexpected? In this case, the fall in unemployment is less
If the change in inflation is anticipated in
advance, then the PC will shift as the inflation rate changes and the economy
can move from point A to point C without as much (or with perfect flexibility
without any) increase in unemployment. That is, with some degree of price and
wage rigidity present, an unexpected change in inflation will move the economy
from A to B to C, while an expected change will move more directly from A to C
as shown, for example, by the dashed line in the diagram. Thus, importantly,
anticipated changes lead to much less variation in unemployment than
This means that one explanation for increased
stability (when causality is from policy to real activity) is that policy is
easier to anticipate than in the past. Has this happened in the last twenty five
years, i.e. is this a realistic assumption? It seems so for at least three
reasons, the use of interest rate rules that have stabilized both actual and
expected inflation making them more predictable, transparency about how the
interest rule is implemented, and increased credibility.
Since the 1980s, the Fed has followed an
interest rate rule and it has, at the same time, attempted to be much more
transparent and communicative about its policy procedures. To the extent that
this has allowed policy to be predicted more accurately, the economy should be
Increased credibility since the 1970s is also
important. If the monetary authority says it is committed to a policy of
lowering inflation and announces such intentions, but then allows inflation to
continue to creep upward so that it loses credibility (as the Fed did in the
1970s), then there will be much more uncertainty about Fed policy and therefore
much less predictability. All of these factors - committing to a rule,
increasing transparency, and enhancing credibility allow policy to be predicted
with less error and, according to the model above as well as more modern
versions of it, the economy ought to stabilize. With a more stable economy, a
given change in inflation will be associated with smaller changes in real
Posted by Mark Thoma on Monday, February 26, 2007 at 05:46 PM in Economics, Inflation, Unemployment |
My latest at Cato Unbound:
How Should Changes in Inequality Be Measured and Assessed?,
by Mark Thoma, Cato Unbound: I am pleased to see that Alan Reynolds is finally
taking a closer look at some of the evidence that works against his
claim that inequality has been stagnant in recent decades, though he predictably
dismisses it. I will not convince him the evidence is valid, and he most
certainly has not convinced me that it isn't, so I encourage anyone who is still
puzzled about the evidence that profits have been mismeasured and that it
matters for assessing changes in inequality in recent years to look at the research and draw their own
conclusions. I have no doubt that a fair reading of the evidence will lead to
the conclusion that inequality may in fact be worse than we thought which runs
opposite of Reynolds' claims. The essence is fairly simple, if we're mismeasuring real investment, then we are also mismeasuring profits. Given the
concentration of corporate ownership at higher incomes, and the extent of the
mismeasurement, this correction matters.
One additional note on Reynolds' responses since my
last post, then I'd like to move on to other issues, particularly
those raised in the contributions others have made to this debate. Given
Reynolds wholly unsubstantiated and uncalled for attack on the ethics of Piketty
and Saez in a
commentary on the opinion pages of the Wall Street Journal where
he accuses them of fabricating results in academic journals to support an
agenda, and given other things he has said at other times, it made me chuckle to
say in his latest response that "all we have seen so far" are
"comments about my temperment or assumed policy agenda" as though no evidence
rebutting his stance has been presented, just personal attacks on his character
or charges that he's pursuing an ideological agenda.
Reynolds says there's not a strand of evidence that he's wrong ("no evidence has
yet been presented to show any significant and sustained increase in
inequality"). Not a strand he'll acknowledge anyway, but as has been pointed out
in previous posts here, and has been documented elsewhere in
many different ways, there's overwhelming evidence against his claims.
I want to follow up on the post from Dirk Krueger and Fabrizio Perri ("Inequality
in What?") because I think they bring something important to the
discussion, the academic underpinnings of how we approach the measurement and
assessment of inequality changes. In their introduction they say:
Continue reading "How Should Changes in Inequality Be Measured and Assessed?" »
Posted by Mark Thoma on Monday, February 26, 2007 at 11:52 AM in Economics, Income Distribution |
Paul Krugman explains the similarity between presidential elections and high
school popularity contests and the trouble that similarity has caused us. In an
attempt to avoid such problems this time around, he poses some questions for
Democratic candidates that are intended to cut through their superficial,
well-crafted images, test their knowledge of the issues, and gauge their "judgment, seriousness and courage":
Substance Over Image, by Paul Krugman, Commentary, NY Times: Six years ago a
man unsuited both by intellect and by temperament for high office somehow ended
up running the country.
How did that happen? First, he got the Republican nomination by locking up
the big money early.
Then, he got within chad-and-butterfly range of the White House because the
public, enthusiastically encouraged by many in the news media, treated the
presidential election like a high school popularity contest. The successful
candidate received kid-gloves treatment — and a free pass on the fuzzy math of
his policy proposals — because he seemed like a fun guy to hang out with, while
the unsuccessful candidate was subjected to sniggering mockery over his clothing
and his mannerisms.
Today, with thousands of Americans and tens of thousands of Iraqis dead
thanks to presidential folly, with Al Qaeda resurgent and Afghanistan on the
brink, you’d think we would have learned a lesson. But the early signs aren’t
Enough already. Let’s make this election about the issues. Let’s demand that
presidential candidates explain what they propose doing about the real problems
facing the nation, and judge them by how they respond. ... So here are some
questions for the Democratic hopefuls. (I’ll talk about the Republicans another
First, what do they propose doing about the health care crisis? All the
leading Democratic candidates say they’re for universal care, but only John
Edwards has come out with a specific proposal. The others have offered only
Second, what do they propose doing about the budget deficit? There’s a
serious debate within the Democratic Party between deficit hawks, who point out
how well the economy did in the Clinton years, and those who, having watched
Republicans squander Bill Clinton’s hard-won surplus on tax cuts for the wealthy
and a feckless war, would give other things — such as universal health care —
higher priority than deficit reduction.
Mr. Edwards has come down on the anti-hawk side. But which side are Mrs.
Clinton and Mr. Obama on? I have no idea.
Third, what will candidates do about taxes? Many of the Bush tax cuts are
scheduled to expire at the end of 2010. Should they be extended, in whole or in
part? And what ... about the alternative minimum tax...?
Fourth, how do the candidates propose getting America’s position in the world
out of the hole the Bush administration has dug? All the Democrats seem to be
more or less in favor of withdrawing from Iraq. But what do they think we should
do about Al Qaeda’s sanctuary in Pakistan? And what will they do if the
lame-duck administration starts bombing Iran?
The point of these questions isn’t to pose an ideological litmus test. The
point is, instead, to gauge candidates’ judgment, seriousness and courage. How
they answer is as important as what they answer.
I should also say that although today’s column focuses on the Democrats,
Republican candidates shouldn’t be let off the hook. In particular, someone
needs to make Rudy Giuliani, who seems to have become the Republican
front-runner, stop running exclusively on what he did on 9/11.
Over the last six years we’ve witnessed the damage done by a president
nominated because he had the big bucks behind him, and elected (sort of) because
he came across well on camera. We need to pick the next president on the basis
of substance, not image.
Previous (2/23) column:
Paul Krugman: Colorless Green Ideas
Next (3/2) column: Paul Krugman: The Big Meltdown
Posted by Mark Thoma on Monday, February 26, 2007 at 12:15 AM in Economics, Politics |
Greg Ip reports that the relationship between inflation and unemployment
seems to have shifted over time. Variations in output and unemployment in the
current time period appear to have less influence over future inflation than
they did twenty five years ago:
Makers At Fed Rethink Inflation's Roots, by Greg Ip, Wall Street Journal:
For decades, a simple rule has governed how the Federal Reserve views the
nation's economy: When unemployment falls too low, inflation goes up, and vice
But Fed officials have rethought that notion. They believe it takes a far
bigger change in unemployment to affect inflation today than it did 25 years
ago. Now, when inflation fluctuates, they are far more likely to blame temporary
factors, such as changes in oil prices or rents...
One explanation for why inflation is influenced less by changes in
unemployment is that the American public has come to expect inflation to remain
stable. When inflation moves up or down, it is less likely to get stuck at the
new level because companies and workers don't factor the change into their
expectations... Another explanation is that the Fed is better at adjusting
interest rates in anticipation of swings in unemployment before those swings can
This ... doesn't mean unemployment can be ignored. But it does mean that in
the short run, a period of high or low joblessness would be less likely to alter
the Fed's view of inflation and trigger an immediate change in interest rates. A
shift in public expectations of inflation, however, would carry more weight in
the Fed's calculations. ...
Though the trend has been under way for 25 years, only recently has intensive
research by Fed economists and others incorporated it into mainstream thinking.
"Among the feet-on-the-ground Fed inflation forecasters, who do this for a
living, there's been a lot of concern for the last 10 years about whether
there's...less of a relationship between output and future inflation," says
Harvard University economist James Stock. "The accumulation of evidence occurs
at a snail's pace. The evidence now is a lot stronger."
Mr. Stock and fellow economist Mark Watson at Princeton University presented
evidence ... in late 2005 that inflation's long-term trend has varied little
since 1984, and that most fluctuations were the result of temporary
disturbances, such as a change in energy prices. ...
While a given drop in unemployment is less likely to spark inflation, the
potential is still there. The Fed's staff estimates it takes up to twice as much
additional unemployment to achieve a percentage drop in inflation as it did
before 1984. ...
What Stock and Watson have shown (e.g. see “Has
Inflation Become Harder to Forecast?") is that inflation is both harder and
easier to forecast at the same time. It's easier because it is more stable.
Thus, the root mean square error for even fairly naive forecasts has fallen over
time as inflation has stabilized. However, inflation has become harder to
forecast because changes in real activity such as unemployment or output have
less predictive power for future inflation than in the past.
What is the source of the change in the relationship? At the end of the paper
Stock and Watson say:
One thing this paper has not done is to attempt to link these changes in time
series properties to more fundamental changes in the economy. The obvious
explanation is that these changes stem from changes in the conduct of monetary
policy in the post-1984 era, moving from a reactive to a forward-looking
stance... But obvious explanations are not always the right ones, and there are
other possibilities. To a considerable extent, these other possibilities are
similar to the ones raised in the context of the discussion of the great
moderation, including changes in the structure of the real economy, the
deepening of financial markets, and possible changes in the nature of the
structural shocks hitting the economy. We do not attempt to sort through these
explanations here, but simply raise them to point out that the question of
deeper causes for these changes merits further discussion.
I think it's a combination of technological change (in particular, computers
and digital technology that improved business processes, e.g. inventory
management) and better monetary policy. Monetary policy has improved by reducing
unexpected policy changes through transparency and enhanced credibility, and the
implementation of inflation targeting rules that have stabilized both expected
and actual inflation.
Posted by Mark Thoma on Monday, February 26, 2007 at 12:06 AM in Economics, Inflation, Unemployment |
Larry Summers looks to history for lessons China can use to limit the chances that it follows Japan into a "lost
decade of deflation and considerable deterioration in its international
History holds lessons for China and its partners, by Lawrence Summers, Financial
Times (free): A rising Asian power has emerged as an export powerhouse and
enjoys rapid, export-led growth fuelled by extraordinarily high savings and
investment rates. Its technological capacity is upgraded at prodigious rates and
its businesses threaten an ever greater swathe of industry in Europe and the US.
Its high level of central bank reserves and burgeoning current account surplus
lead to claims that its exchange rate is being unfairly manipulated.... Its
financial system is ... heavily regulated in ways that favour domestic
institutions and has close ties to government and industry. Rapid productivity
growth holds down product prices but asset price inflation is rampant.
US congressional leaders demand radical action to contain the economic
threat. Delegations of senior US economic officials engage in “dialogue” ...,
warning of the congressional demons who stand ready to act if “results” are not
All of this describes what is happening in and with China today. It also
describes the Japanese economy in the late 1980s and early 1990s before its lost
decade of deflation and considerable deterioration in its international
relations. While there are obvious differences, notably China’s much lower level
of development, the similarities are striking enough to invite an effort to draw
some lessons for China and its partners from the earlier Japanese experience. [...read
After discussing the lessons to be learned from the causes of Japan's
difficulties, including policy errors made by Japanese officials, he notes that pressure on other countries to reform their economic systems and policies can be counter-productive:
These lessons contrast sharply with those drawn by some observers in and out
of China, who attribute Japan’s deflation and consequent poor performance to its
willingness to accede to US pressure for exchange rate appreciation. ...
[There is a] need for modesty regarding economic policy dialogues that seek
to create pressure for change. Events and national and political decisions, not
international communiqués, shape economic outcomes. The impact of events beyond
the control of governments – the collapse of Japan’s asset markets, information
technology’s spur to US productivity growth, the Asian financial crisis –
dwarfed the issues debated in economic dialogues.
Even where government policies might have significant impact, there is no
evidence that Japan in the 1980s and 1990s made any changes in domestically
sensitive structural policy areas such as housing finance, social security or
retail regulation in response to the US Structural Impediments Initiative or its
successors. Policy in areas of this kind is shaped by domestic politics; if
heavy-handed pressure makes it easier for special interests to invoke
nationalism as they resist change, high-profile dialogues can be
counter-productive. In a world where goodwill is scarce, heavy-handed dialogues
engender resentments that spill over into other spheres. ...
Posted by Mark Thoma on Sunday, February 25, 2007 at 11:11 AM in China, Economics |
Linda Beale of ataxingmanner takes on a recent Wall Street Journal
editorial on "Bill Clinton's AMT Bomb":
Wall Street Journal AMT Editorial, by Linda Beale: The Wall Street Journal
is an important source of financial news, but people should not expect to read
its editorial page without their spin antennae turned on. Today's editorial on
the AMT is a good example of the way the Journal does partisan (and misleading)
spin. It's titled "Bill Clinton's AMT Bomb," Wall Street Journal, Feb. 23,
What's wrong with it?
Continue reading "Republicans Could Have Diffused the "AMT Bomb," But Didn't" »
Posted by Mark Thoma on Sunday, February 25, 2007 at 10:06 AM in Economics, Politics, Taxes |
Louis Uchitelle of the NY Times says there is reason to doubt the claim that
labor market protections in Europe and Japan explain most of the differences in output
growth and other measures of economic performance between Europe, Japan, and the U.S.:
Job Security, Too, May Have a Happy Medium, by Louis Uchitelle, NY Times:
For more than a decade, many American economists have pointed to Europe and
Japan as prima facie evidence that layoffs in the United States are a good
thing. The economies in those countries were not nearly as robust as this
country’s. And the reason? Too much job security...
American employers, in sharp contrast, have operated with much more
“flexibility.” Hiring and firing at will, they shift labor from where it is not
needed to where it is needed. ...
This shuffling out of one job and into another shows up in the statistics as
nearly full employment. Never mind that the shuffling does not work as
efficiently as the description implies or that many of the laid-off workers find
themselves earning less in their next jobs, an income roller coaster that is
absent in Europe and Japan. A dynamic economy leaves no alternative, or so the
reasoning goes among mainstream economists.
“Trying to prevent this creative destruction from happening is a recipe for
less economic growth and less productivity,” said Barry Eichengreen ... at the
University of California, Berkeley.
Starting in the mid-1990s, Europe and Japan did wallow in recession or weak
growth while the American economy expanded at a spectacular clip. But no longer.
Growth is slowing in the United States just as it speeds up in the 25-nation
European Union and in Japan. Unemployment rates in those countries are also
beginning to come down...
As the gaps close, does that mean that job security, in the European and
Japanese style, is the right way to go after all? The question would be easier
to answer if the European Union countries and Japan had stuck to their orthodox
job security. They have not. On their way to revival, they adopted some of
“A number of countries have found ways to make their labor markets more
flexible, without sacrificing their greater commitment to a government role in
equalizing incomes,” said Paul Swaim, a senior economist at the Organization for
Economic Cooperation and Development in Paris.
So the old dichotomy — insecurity versus security — is gradually giving way
to a new debate. “It is obviously the right mix of security and insecurity that
has to be achieved,” said Richard B. Freeman ... at Harvard...
The guideposts in this search for the right mix should not be just economic
growth rates and unemployment levels. These are too often affected by business
cycles. Many American economists, bent on demonstrating the payoff from layoffs,
paid relatively little attention to the cyclical reasons for the
underperformance of Japan and Europe. “Sometimes we forget these cyclical
forces,” said Sanford M. Jacoby ... at the University of California, Los
Cycles count. But so do labor policies.
In some European countries, employers are using temporary and part-time
workers much more than they did in the past. That gives them leeway to expand
and contract their work forces without having to add full-timers who are
protected against layoffs. ...Japan ... also relies for “flexibility” on
part-timers and temps.
If cost-cutting is necessary in Japan, there is a pecking order, says Yoshi
Tsurumi, an economist at Baruch College in Manhattan... Dividends are cut first,
then salaries — starting at the top. Finally, there are layoffs — if attrition
is not enough to shrink staff. “The matter of flexibility is important,” Mr.
Tsurumi said, “but the Japanese notion is to retrain and transfer people within
Elsewhere, France and Germany have eased job protection for employees of
small businesses. ... And the Danish model is getting a lot of attention.
Employers in Denmark are relatively free to lay off workers, but the state then
steps in with benefits that replace 70 percent of the lost income for four
years. Government also finances retraining and education, pressuring the
unemployed to participate and then insisting that they accept reasonable job
offers or risk cuts in their benefits.
The Danish government devotes 3 percent of the nation’s gross domestic
product to retraining, compared with less than 1 percent in the United States.
And, of course, everywhere in Europe, the state pays for health insurance and
for pensions that often encourage early retirement by replacing big percentages
of preretirement income.
“What the Europeans and the Japanese understand is that modern economies can
sustain social protections without killing the golden goose,” said Jared
Bernstein, a senior economist at the Economic Policy Institute in Washington.
That is an understanding that perhaps will take root among American
economists and policy makers, deprived as they now are of their long-running
contention that job security resulted in weak economic growth in Europe and
Here's a pretty lukewarm endorsement of the flexicurity model in a working
paper from Jianping Zhou at the IMF. The paper makes a point similar to a point
made above, that part of Denmark's success has been from reforms since the 1980s
giving people an increased incentive to train for and take new jobs. In
particular, eligibility for programs has been tightened while the time people
are allowed to be on some programs has been shortened. Still, relative to many
countries, the programs offer substantial income protection:
for All? Balancing Flexibility with Security: The Flexicurity Model, by Jianping
Zhou, February 2007: ...V. Concluding Remarks The Danish flexicurity
model has been widely praised for its association with a low unemployment rate
and a high standard of social security for the unemployed. The model combines a
high degree of labor market flexibility with a high level of social protection.
While most European countries are facing chronically high unemployment rates and
the needed labor market reforms often face strong political opposition, the
flexicurity model looks increasingly attractive to policymakers in Europe.
However, whether the Danish model should and can be adopted by other European
countries to reduce unemployment is not obvious. First, Denmark has
traditionally had a combination of a flexible labor market and a high level of
income protection. Economic performance under this system has varied, as
demonstrated by the economic crisis during the early 1980s and the remarkable
labor market performance in recent years. Second, other countries have been able
to reduce their high unemployment rates to low levels with rather different
social models (e.g., Ireland, Sweden, and the United Kingdom). Finally, generous
unemployment benefits often raise moral hazard issues that might hinder
effective implementation of the Danish model. In this regard, a strict job
search requirement and tight eligibility criteria for unemployment benefits are
The Danish model is costly. The tax burden in Denmark is heavy because of the
need to finance the country’s high spending on labor market programs and
unemployment benefits. As most countries that are tempted to adopt the Danish
model will typically start from a high unemployment level, a move toward the
Danish model will, in the short run, trigger a sharp increase in the cost of
unemployment benefits and active labor market policies, thereby widening the tax
wedge, with an adverse impact on labor demand and supply. This implies that the
Danish model may not be suitable for countries facing high unemployment and
budgetary difficulties. Using a calibrated model for France, the paper finds
that implementation of the flexicurity model could be costly, and reduction in
structural unemployment during the first few years might be limited.
Nonetheless, certain key aspects of the Danish model could usefully be
studied and considered by other countries. Among others, they include the
various relationships between the population’s willingness to accept labor
market flexibility, its confidence in a well functioning social safety net, and
the accompanying need to develop effective labor market policies in order to
avoid high costs and perverse incentives. The Danish government’s constant
awareness and analysis of the challenges facing the flexicurity model and its
ability to respond to them with policy actions are noteworthy in this regard.
For instance, since the economic crisis in the early 1980s, reforms have been
implemented to shorten the maximum period for participation in active labor
market programs and tighten the eligibility criteria for unemployment benefits.
Posted by Mark Thoma on Saturday, February 24, 2007 at 05:51 PM in Economics, Social Insurance |
Bill Gates continues his crusade to allow more high-skilled immigrants into
How to Keep the U.S. Competitive, by Bill Gates, Commentary, Washington Post: ...Innovation is the source of U.S. economic leadership and the foundation for
our competitiveness in the global economy. Government investment in research,
strong intellectual property laws and efficient capital markets are among the
reasons that America has for decades been best at transforming new ideas into
The most important factor is our workforce. Scientists and engineers trained
in U.S. universities -- the world's best -- have pioneered key technologies such
as the microprocessor, creating industries and generating millions of
But our status as the world's center for new ideas cannot be taken for
granted. Other governments are waking up to the vital role innovation plays in
Two steps are critical. First, we must demand strong schools so that young
Americans enter the workforce with the math, science and problem-solving skills
they need to succeed in the knowledge economy. We must also make it easier for
foreign-born scientists and engineers to work for U.S. companies. ...
Our schools can do better. Last year, I visited High Tech High in San Diego;
it's an amazing school where educators have augmented traditional teaching
methods with a rigorous, project-centered curriculum. Students there know
they're expected to go on to college. This combination is working: 100 percent
of High Tech High graduates are accepted into college, and 29 percent major in
math or science, compared with the national average of 17 percent.
To remain competitive in the global economy, we must build on the success of
American competitiveness also requires immigration reforms that reflect the
importance of highly skilled foreign-born employees. Demand for specialized
technical skills has long exceeded the supply of native-born workers with
advanced degrees, and scientists and engineers from other countries fill this
This issue has reached a crisis point. Computer science employment is growing
by nearly 100,000 jobs annually. But at the same time studies show that there is
a dramatic decline in the number of students graduating with computer science
The United States provides 65,000 temporary H-1B visas each year to make up
this shortfall -- not nearly enough to fill open technical positions.
Permanent residency regulations compound this problem. Temporary employees
wait five years or longer for a green card. During that time they can't change
jobs, which limits their opportunities to contribute to their employer's success
and overall economic growth.
Last year, reform on this issue stalled as Congress struggled to address
border security and undocumented immigration. As lawmakers grapple with those
important issues once again, I urge them to support changes to the H-1B visa
program that allow American businesses to hire foreign-born scientists and
engineers when they can't find the homegrown talent they need. This program has
strong wage protections for U.S. workers: Like other companies, Microsoft pays
H-1B and U.S. employees the same high levels...
Reforming the green card program to make it easier to retain highly skilled
professionals is also necessary. These employees are vital to U.S.
competitiveness, and we should welcome their contribution to U.S. economic
We should also encourage foreign students to stay here after they graduate.
Half of this country's doctoral candidates in computer science come from abroad.
It's not in our national interest to educate them here but send them home...
During the past 30 years, U.S. innovation has been the catalyst for the
digital information revolution. If the United States is to remain a global
economic leader, we must foster an environment that enables a new generation to
dream up innovations, regardless of where they were born. Talent in this country
is not the problem -- the issue is political will.
On High Tech, the fact that more graduates major in math and science in
college than at other schools (29% versus 17%) is not, in and of itself,
evidence that these schools work since a high degree of selectivity bias is
likely present (those who like math and science are more likely to enroll in a
"High Tech High" than other students, the web site says they get 3,000 applications for 300 slots). I agree completely with the message on
education, but worry that instead of building upon what works, we are too ready
to tear it all down and start over. We have a Gates Foundation small schools
initiative here in Eugene that broke an existing high school into three smaller
specialty schools (an International High School, a school specializing in
Invention, Design, Engineering, Arts, & Science, and North Eugene Academy of
Arts). If it works, great, but these are kids lives we are playing with and if
it doesn't work and outcomes deteriorate, the price of innovation, the risk,
becomes very localized and very steep for those students who participate in the failed experiments (and
it's not always voluntary). I wish there was a better
way to spread the risk of these experiments across the population rather than
localizing it in schools that are already, for the most part, having troubles.
As for immigration, I am generally supportive of open door policies. However,
I do want to point out that there is another solution for Gates and others. They
believe that there is plenty of talent in the U.S., that's not the problem, it's
just that workers lack the training they need. Microsoft could provide the
training itself instead of free-riding on the educational system. It takes a
little longer and costs more, of course, but consistent with advocates of
privatization and efficient markets, it forces Microsoft to internalize the
costs of training its workers, particularly specialized training. But I can't blame Microsoft for wanting to avoid
these costs if it can, and for wanting to increase the supply of labor as much
as possible by opening the borders to more high-skill immigration.
The shortage of U.S. graduates in this area may be because students have no certainty that
specialized skills in these areas will retain their value in the future, a
consequence of changes in technology that undermine existing skills over time,
digital technology that allows collaborative work to be performed outside of the
U.S., and the prospect of more temporary visas being issued in the future.
My observation is that there is a large set of talented students who respond
strongly to expected employment prospects when they choose a major, though there
is, of course, a time-delay between the appearance of shortages and surpluses in
particular areas and changes in the number of majors. But the effect is there.
If U.S. students perceive that an investment in computer science training
relative to investing their time elsewhere will have the largest long-run
payoff, any shortage will take care of itself. [And, as noted in comments, access to education may not be equal so
that another way to increase supply is to increase educational
opportunities within the U.S.]
In the long-run, due to technology and globalization and to comparative advantage, trying to close doors
to high-skilled workers is, for the most part, a losing battle. We can create
artificial barriers to foreign competition and steer our students in particular
directions but there is a danger that in doing so, we set them up for a bigger
fall later. If the walls keeping out foreign competition cannot be maintained in
a digital age, and if we artificially direct students to particular occupations, once the walls do come down people employed in these areas will be
very exposed and in danger of a large fall in income and employment prospects due to the increased
competition. For that reason, I think we are better off letting the walls come
down now, within reason of course, and allowing prices direct our students to the
places they will, so far as markets can predict, be most highly valued in the
Update: Dean Baker also comments in Bill Gates Comes to the Coward's Corner. PGL too.
Posted by Mark Thoma on Saturday, February 24, 2007 at 11:07 AM in Economics, International Trade, Regulation, Unemployment, Universities |
Here are two Economic Trends articles from the Cleveland Fed. The
first looks at parallels between declines in manufacturing and agricultural
employment, and the second characterizes extended mass layoffs since 2000:
Continue reading "Manufacturing Employment and Extended Mass Layoffs" »
Posted by Mark Thoma on Friday, February 23, 2007 at 10:53 PM in Economics, Unemployment |
This NBER paper by Eric Edmonds gives an overview of the recent empirical literature on child labor. Here's the conclusion:
Child Labor, by Eric V. Edmonds,
NBER WP 12926, February 2007: ... 6. Conclusion The recent boom in empirical work on child labor has
substantially improved our understanding of why children work and what the
consequences of that work might be. This survey aims to assess what we currently
know about child labor and to highlight what important questions still require
Child labor research needs to carefully define exactly what measures of time
allocation are being considered. Studies that consider too narrow a scope of
activities are apt to generate misleading conclusions. Children are active in a
wide variety of tasks and appear to substitute between them easily. Thus, if a
child is observed working less in one task (like wage work), one cannot assume
that she is working less. Moreover, though wage work appears less likely to be
associated with simultaneous schooling, differences in schooling associated with
variation in hours worked are much greater than those associated with location
of work. Work is typically classified as market work or domestic work. Domestic
work (often labeled "chores") is too often ignored in child time allocation
studies. For a given number of hours worked, domestic work appears as likely as
work in the farm or family business to trade off with school. Hence, studies of
child labor need to consider as wide a range of activities as the data permit.
There is considerable scope for learning about total labor supply or schooling
changes by looking at changes in participation in various disaggregate
Policy interest in child labor in today's rich countries arose during the
late 19th century because of what Zelizer (1994) terms the "sacralization" of
children's lives. She writes: "The term sacralization is used in the sense of
objects being invested with sentimental or religious meaning" (p. 11). This view
is behind much of policy's and the public's interest in child labor in
developing countries today. This issue arises within economics because of
concern about whether child labor is driven by agency problems –do parents fully
consider the tradeoffs and costs of work when sending their children to work?
However, despite some suggestive evidence, the primacy of agency problems in
determining child labor supply has yet to be established.
Instead, most contemporary research in economics on child labor is interested
because of the impact of work on human capital accumulation. There are a finite
number of hours in a day, so at some margin, there must be a tradeoff between
work and schooling. However, work and schooling are simultaneous outcomes of a
single decision-making process. Identifying a causal relationship between the
two seems likely to be an uninformative exercise. Moreover, work is not the
residual claimant on child time outside of school, and the incidence of children
who neither work nor attend school appears highest where schooling is the
lowest. Consequently, it is somewhat problematic to motivate interest in child
labor out of a concern for schooling. Studies of schooling should consider child
labor supply in attempts to understand schooling variation, but the existing
evidence is insufficient to motivate studying of child labor alone without
considering schooling if human capital is the researcher's only concern.
Researchers have considered several other consequences of child labor that might
go beyond the child's time constraint and agency problems such as whether there
are health consequences, externalities, effects on attitudes and values,
occupation choice, fertility, or local labor markets. Much of this work is in
The interconnection of child labor and poverty seems intuitive, but evidence
has been more difficult to establish. This is because the assertion that child
labor stems from poverty is often taken to imply that the only reason children
work is because of high marginal utility of income. The data are inconsistent
with this extreme view in general.
In fact, a more general description of the child labor problem is that the
child works when the utility from working today is greater than the utility
associated with not working. This raises several issues that the literature has
considered about why children work. Perhaps the most important issue is the
least researched: who makes child labor decisions –that is, whose marginal
There is some evidence that child time allocation is influenced by the net
return to schooling. While estimating the return to schooling is a challenge,
there is suggestive evidence that it influence child time allocation. Several
studies document a correlation between the employment opportunities open to
children inside and outside their household and child time allocation. Hence,
there should be situations when work is the most efficient use of child time,
and there is nothing in the literature which precludes this.
The fact that work can be optimal does not exclude the possibility that child
labor's prevalence owes less to its efficiency but more to the family's need for
the child's contribution to the household. There appears to be a fairly broad
consensus that credit constraints force families to make child labor decisions
without fully considering future returns to education, and several studies
document that declining poverty is associated with rapid declines in the
fraction of children who are working, especially in market work. For this to be
true, there needs to be both credit constraints among the very poor and
substantive changes in the marginal utility of the child's contribution as the
family exits poverty. However, while transitioning out of poverty may be
associated with declining economic activity levels, higher income households are
apt to have more employment opportunities both outside and inside the household.
This creates a difficult econometric problem for researchers if both labor
supply and labor demand change in opposite ways with rising income. A failure to
understand this has caused many to assert that there is little link between
poverty and child labor. Fortunately, as research progresses, there has been
increasing attention to all of the different factors that can influence child
While the quantity and quality of research on child labor has been increasing
dramatically in recent years, there are several omissions in the literature that
need to be resolved (beyond the agency issues we have already mentioned). Policy
appears to be largely operating in a vacuum from research. Namely, rhetoric is
increasingly directed against "worst forms of child labor," but I am not aware
of any current empirical work on why children select into worst forms that has
survived peer review in a contemporary mainstream economics journal. Moreover,
outside of conditional cash transfer programs, policies targeted at these worst
forms and more common forms of child labor are not being evaluated in a
scientific way as far as I can find. This is unfortunate. Not only could more
effective policies be designed but fundamental questions about why children work
could be answered in the process. Hopefully, future work on child labor will aim
to combine rigorous research on these unanswered questions with formal
evaluation of child labor policy. [Link to Edmonds'
papers on child labor, link to this paper]
Posted by Mark Thoma on Friday, February 23, 2007 at 09:01 PM in Academic Papers, Economics |
Now that the scientific debate over global warming is all but over, Paul Krugman looks
at what we can do limit greenhouse gas emissions:
Colorless Green Ideas, by Paul Krugman, Commentary, NY Times: The factual
debate about whether global warming is real is, or at least should be, over. The
question now is what to do about it.
Aside from a few dead-enders on the political right, climate change skeptics
seem to be making a seamless transition from denial to fatalism. In the past,
they rejected the science. Now, with the scientific evidence pretty much
irrefutable, they insist that it doesn’t matter because any serious attempt to
curb greenhouse gas emissions is politically and economically impossible.
Behind this claim lies the assumption, ... that any substantial cut in energy
use would require a drastic change in the way we live. To be fair, some people
in the conservation movement seem to share that assumption.
But the assumption is false. Let me tell you about ... an advanced economy
that has managed to combine rising living standards with a substantial decline
in per capita energy consumption, and managed to keep total carbon dioxide
emissions more or less flat for two decades, even as both its economy and its
population grew rapidly. And it achieved all this without fundamentally changing
a lifestyle centered on automobiles and single-family houses.
The name of the economy? California.
There’s nothing heroic about California’s energy policy... [T]he state has
adopted ... conservation measures that are ... the kind of drab, colorless stuff
that excites only real policy wonks. Yet the cumulative effect has been
The energy divergence between California and the rest of the United States
dates from the 1970s. Both the nation and the state initially engaged in
significant energy conservation after that decade’s energy crisis. But
conservation in most of America soon stalled...
In California, by contrast, the state continued to push policies designed to
encourage conservation, especially of electricity. And these policies worked.
People in California have always used a bit less energy ... because of the
mild climate. But the difference has grown much larger since the 1970s. Today,
the average Californian uses about a third less total energy than the average
American, uses less than 60 percent as much electricity, and ... emit[s] only
about 55 percent as much carbon dioxide.
How did the state do it? In some cases conservation was mandated directly,
through energy efficiency standards for appliances and rules governing new
construction. Also, regulated power companies were given new incentives to
And yes, a variety of state actions had the effect of raising energy prices.
In the early 1970s, the price of electricity in California was close to the
national average. Today, it’s about 50 percent higher. ... As the higher price
of power indicates, conservation didn’t come free. Still, it’s striking how
invisible California’s energy policy remains...
So is California a role model for climate policy? No and yes. Even if America
as a whole had matched California..., we’d still be emitting about as much
carbon dioxide now as we were in 1990. That’s too much.
But California’s experience shows that serious conservation is a lot less
disruptive, imposes much less of a burden, than the skeptics would have it. And
the fact that a state government, with far more limited powers than those at
Washington’s disposal, has been able to achieve so much is a good omen for our
ability to do a lot to limit climate change, if and when we find the political
Previous (2/19) column:
Paul Krugman: Wrong is Right
Next (2/26) column: Paul Krugman: Substance Over Image
Posted by Mark Thoma on Friday, February 23, 2007 at 12:15 AM in Economics, Environment, Regulation |
James Galbraith looks for progressive alternatives to the Hamilton Project:
Kind of Economy?, by James Galbraith, The Nation: In a debate over the
Democratic future, no one should confuse the Hamilton Project with the
Republican past. Robert Rubin and his associates have invited a broad dialogue
on economic inequality and strategic investment, and on many specific policy
questions--including education, health, taxes and wages--they will define the
high-profile, wholly respectable neo-Clintonian position in the season ahead.
There's nothing wrong with that.
But these advances come at a price ... in two areas: the world trading system
and domestic fiscal policy. ... Indeed, one purpose of the Hamilton Project, it
seems clear, is to propose just enough creative social advances--such as wage
insurance, better teacher pay and healthcare reform--so as to divert discussion
from the bedrock commitments to free trade and a balanced budget.
Progressives shouldn't let this happen. And yet we have our own work to do...
We need to be talking trade and budgets, not simply ... to contest Rubin's
worldview, but to build one of our own that is realistic, compelling and also
serves larger purposes, including environmental survival and social justice.
On trade, the Hamiltonians favored the North American Free Trade Agreement,
while most populists and progressives opposed it. This fight has been replayed
endlessly, and it continues to color the arguments over ... free-trade
agreements now under negotiation. But ... it's time to get over it. Whether
NAFTA created or cost jobs initially, the economies of Mexico and the United
States are now about as integrated as they are going to get, and the effect is
basically finished. ... Almost all discussion of outsourcing now focuses on
China and India...
So what's the debate these days really about? Why are the Hamilton Projectors
so passionate about "free trade"?
Continue reading "James Galbraith on Progressive Alternatives to the Hamilton Project" »
Posted by Mark Thoma on Friday, February 23, 2007 at 12:06 AM in Economics, Policy |
This video is from
"Unchained Goddess" (An excerpt on global warming from a Frank Capra
science movie of 1958)
Posted by Mark Thoma on Thursday, February 22, 2007 at 06:14 PM in Economics, Environment, Video |
Tyler Cowen argues that "The complaint of 'cultural imperialism' is looking
Countries Remain Resistant to American Cultural Exports, by Tyler Cowen,
Economic Scene, NY Times: ...Loyalties to cultural goods and services — be
it heavy metal music or the opera — are about social networking and choosing an
identity and an aspiration. That is, we use culture to connect with other people
and to define ourselves...
Local culture commands loyalty when people are involved in networks of status
and caste, and they pursue religious and communal markers of identity. Those
individuals use local cultural products to signal their place in hierarchies.
Globalization is most likely to damage local culture in regions like
Scandinavia that are lightly populated, not very hierarchical and looking for
new global cultural symbols. But the rest of the world’s population is in
countries — China and India, of course, but also Brazil, Mexico, Egypt and
Indonesia — that do not fit that description. ...
Hollywood movies are popular in Europe in part because of the successes of
European welfare states and of European economic integration. Western Europe has
become more equal in its treatment of citizens, it has moved away from an
aristocratic class society, and it has strong global connections. All those
factors favor an interest in American and global popular culture... Social
democracy, which the Europeans often hold up in opposition to the American
model, in fact aided this cultural invasion by making Europe more egalitarian.
Many smaller countries have been less welcoming of cultural imports. ... The
complaint of “cultural imperialism” is looking increasingly implausible. ...
Culture is not a zero-sum game, so the greater reach of one culture does not
necessarily mean diminished stature for others. In the broad sweep of history,
many different traditions have grown together and flourished. American popular
culture will continue to make money, but the 21st century will bring a broad
mélange of influences, with no clear world cultural leader. [full
Update: I just saw this:
How Eminem can save the Middle East:
Marc Lynch: Some conservatives criticise the presence of
western culture in the Middle East. But rap music resonates deeply with many
Posted by Mark Thoma on Thursday, February 22, 2007 at 01:11 AM in Economics |
Timothy Garton Ash of Oxford University and a senior fellow at the Hoover
Institution at Stanford University says that Karl Marx "was prescient" in his
description of global capitalism:
Will capitalism fall victim to its own success?, by Timothy Garton Ash,
Commentary, LA Times: What is the elephant in all our rooms? The global
triumph of capitalism. Democracy is fiercely disputed. Freedom is under threat,
even in old democracies like Britain. Western supremacy is on the skids. But
everyone does capitalism.
Americans and Europeans do it. Indians do it. Russian oligarchs and Saudi
princes do it. Even Chinese communists do it. And now the members of Israel's
oldest kibbutz, that last best hope of egalitarian socialism, have voted for
salaries based on individual performance. Karl Marx is turning in his grave. Or
perhaps not, because some of his writings eerily foreshadowed our era of
globalized capitalism. His prescription failed, but his description was
What, after all, are the big ideological alternatives? Hugo Chavez's "21st
century socialism" still looks like, at most, a regional phenomenon best
practiced in oil-rich states. Islamism — billed as democratic capitalism's great
competitor in a new ideological struggle — offers no alternative economic system
(aside from the peculiarities of Islamic finance) and does not appeal beyond the
Muslim umma. Most anti-globalists are better at pointing out the failings
of global capitalism than they are at suggesting systemic alternatives.
"Capitalism should be replaced by something nicer," read a placard at a May Day
Does the lack of any clear ideological alternative mean that capitalism's
triumph is secure? Far from it. For a start, the history of capitalism hardly
supports the view that it is an automatically self-correcting system. ...[G]lobal
markets are now more than ever constantly out of equilibrium — and teetering on
the edge of a larger disequilibrium. Again and again, capitalism has needed the
visible hands of political, fiscal and legal correction to complement the
invisible hand of the market.
And the bigger it gets, the harder it can fall. An oil tanker is more stable
than a dinghy, but if the tanker's internal bulkheads are breached and the oil
starts swilling from side to side in a storm, you have the makings of a major
disaster. Increasingly, the world's capital is like oil in the holds of one
giant tanker, with ever fewer internal bulkheads to stop it from swilling
Then there is inequality. One feature of globalized capitalism seems to be
that it rewards its high performers disproportionately. What will be the
political effects of having a small group of super-rich people in China, Russia
and India or other countries where the majority are super-poor? In more
developed economies, such as Britain and the U.S., ... if a lot of middle-class
people begin to feel that they are personally losing out as a few fund managers
get stinking rich and jobs are outsourced to India, you may have a backlash.
Watch Lou Dobbs on CNN for a taste of the rhetoric to come.
Above all, though, there is the inescapable dilemma that this planet cannot
sustain 6.5 billion people living like today's middle-class in its rich north.
In just a few decades, we would use up fossil fuels that took about 400 million
years to accrete — and change Earth's climate as a result. Sustainability may be
a gray and boring word, but achieving it is the biggest single challenge to
global capitalism today. However ingenious modern capitalists are in finding
alternative technologies ... somewhere down the line richer consumers will have
to settle for less rather than ever more.
Marx thought capitalism would have a problem finding consumers for the goods
that improving techniques of production enabled it to churn out. Instead, it has
become expert in a new branch of manufacturing: the manufacture of desires. It's
that core logic of ever-expanding desires that is unsustainable on a global
scale. But are we prepared to abandon it?
We may be happy to insulate our lofts, recycle our newspapers and bicycle to
work, but are we ready to settle for less so others can have more? Am I? Are
Posted by Mark Thoma on Thursday, February 22, 2007 at 12:33 AM in Economics, International Finance, International Trade |
Diane Coyle asks "Why do non-economists persist in such as dismissive view of
the subject, which flies in the face of plentiful evidence? And why should
economists like me care?":
Economics, the soulful science, by Diane Coyle: Would you agree with the
following statement? "[Economists] should take credit for the deteriorating
quality of existence. For it is their philistine notions of personal and
national welfare that have helped to ruin the natural world; confused technology
with culture; reduced art to money, time to interest, sexual relations to
pornography, friendship to advantage, and liberty to shopping, and wasted whole
generations who, because they have only been taught to think in categories of
money, have, in Schopenhauer's phrase, 'missed the purpose of existence'."
If so, you'd have plenty of company. This was the writer James Buchan,
ranting in Prospect... He represents an extreme, perhaps, but such views about
economics are to be found repeatedly expressed in political and literary
journals. Even the Financial Times, from time to time, indulges in
economist-bashing. A column by Philip Ball on its op-ed pages ... made the same
points: economists have an arid view of human nature, miss all that is rich and
complex about life, and reduce everything to the profit motive.
Even sophisticated critics of the establishment, like the brilliant
economists Deirdre McCloskey and Paul Ormerod make this claim. ...
What is truly bizarre about this persistent and frequent set of claims -
economics ignores or over-simplifies reality, is based on a false conception of
human nature, is only about money, thinks the world operates like a machine - is
how untrue it is. Those who make the claims haven't been reading any of the
economics published since about 1980. The caricature never represented reality
all that accurately, but a whole generation of research has made it completely
Two questions arise. Why do non-economists persist in such as dismissive view
of the subject, which flies in the face of plentiful evidence? And why should
economists like me care?
On the latter question, the answer is that the conventional criticism has set
the tone for a popular view that economists are, although wrong, extremely
powerful: evil Svengalis of government policy. The risk is that public opinion
turns against influence of economics on public policy - at a time when the
hidden renaissance in economics during the past twenty years or so has vastly
increased its potential contribution to public policy. ...
There could be many [reforms] with the potential to improve policies based on
a growing body of careful evidence, thanks to the impact of computers and new
data sets during the past twenty years. The quality of outcomes will be greatly
impoverished if voters distrust the technical economic decision-making behind
What about the first question - why do people hate us, still, after all these
years? We certainly haven't done ourselves great favours. Economists are
typically very bad at communicating, and lag behind natural scientists in
grasping the need to engage with public opinion in a new way. But at the heart
of it, I believe, is the reluctance of many people to accept that human
behaviour can appropriately be modelled at all - that is, adequately described
at a general level in a few relatively simple rules. ...
I believe (as I argue in my book The Soulful Science) that economics offers a
uniquely powerful way of thinking about society, and how individuals make
choices in their social context. Other approaches, those of the other social
sciences, or history or literature and music, are valid too - I feel no need to
dismiss them. But only economics with its choice-based models emphasises the
opportunity costs and trade-offs that inevitably arise from the social and
physical realities of our existence.
Posted by Mark Thoma on Thursday, February 22, 2007 at 12:15 AM in Economics, Methodology |
Stephen Gordon at Worthwhile Canadian Initiative:
Economics and climatology: Why perfect markets are like a dishpan, Worthwhile
Canadian Initiative: Brian Ferguson at A Canadian Overview makes an
Ever wonder why so many economists are sceptical
about man-made global warming? It's because we've had a lot of humbling
experience with just how quickly large scale computer models can go very badly
wrong. Remember when we had inflation and unemployment under control through
There are some interesting parallels between the atmospheric sciences
(climatology and meteorology) and economics: they study highly complex systems,
the available data are non-experimental, and their results have significant
policy implications. Not surprisingly, both rely heavily on models as tools for
understanding what is going on and why. Of course, models need not be based on a
computer simulation, or even mathematics. As Paul Krugman notes, you can put one
together using some
ordinary household appliance ...[read
Update: Here's another view from Michael Perelman, someone I first met long ago during my undergraduate days at CSU Chico where was a faculty member in the Economics Department: Economics as a Science of Modeling: A
Posted by Mark Thoma on Wednesday, February 21, 2007 at 01:23 PM in Economics, Environment, Methodology |
Robert Reich is trying to broker a deal: renewed trade authority for the
president in return for labor standards on future trade deals:
A Labor Standard for Future Trade Deals: Minimum Half Median, by Robert Reich:
The Bushies want to renew the President's authority to negotiate trade deals...
This gives House and Senate Dems an opportunity to win a long-sought Democratic
goal -- putting labor standards into all future trade deals.
But what sort of labor standard? If workers in developing nations were
required to have the same, or even nearly, the level of wages and working
conditions as Americans, jobs wouldn't go to developing nations. This would be a
back-door form of protectionism.
Here's a better idea. First, borrow from standards already issued by the
International Labor Organization -- barring slave labor, forced labor, and the
labor of young children under 12. ILO standards also recognize the ... right of
all workers to form unions. ...
Step two: Encourage developing nations to raise their labor standards as
their economies grow. The easiest way to do this is to require that they set a
minimum wage that's half their median wage. With this ... standard in place,
more of their people will share the gains from trade. ...
Market fundamentalists will object that establishing any minimum wage in a
developing nation will force some poor workers out of jobs and into the black
market. But that's what market fundamentalists argued almost seventy years ago
when America first established our own minimum wage. A minimum wage -- like
minimum health and safety standards -- is the hallmark of a civilized society.
The biggest hurdle is that this "minimum half median" standard will force the
United States to set and keep our own minimum wage at half our median -- which
would be about $7.50 in today's dollars...
This seems reasonable. For many decades, America's minimum wage was roughly
half its median wage; only since the late 1970s has it fallen much lower than
Posted by Mark Thoma on Tuesday, February 20, 2007 at 06:18 PM in Economics, International Trade, Politics, Unemployment |
I have a new post up at Cato Unbound:
It’s Time to Ask the Next Question,
by Mark Thoma, Cato Unbound: I had hoped to move on to new issues, but that
will have to wait as I want to respond to some of what Alan Reynolds says in his reply essay...
This is part of the Conversation phase and reacts to Reynolds' "Why Change the Subject." After pointing out several ways in which Reynolds mischaracterizes the evidence
on inequality and what I say about it, here's how it ends:
...If you only look at evidence on one side of the issue, cherry pick results,
start in specific years (and insist everyone else follow suit), use the “right”
measures of income or wealth, ignore data problems that work against your
results, and so on, and so on, you might be able to argue, if everything falls
in your favor, that inequality is no worse since 1988. But that does not fairly
characterize the overall evidence.
This debate reminds me of the debate over global warming, though using the
word debate implies there is more disagreement than there really is. There are
three questions in the global warming debate. The first question is whether
global warming exists. The second question is, if it does exist, what is
causing it. The third question is what to do about it. In order to avoid the
consequences involved with the third step, doing something about it, there are
many who try to cloud the issue and keep the first question alive and kicking
for as long as possible, or claim the cause is from natural forces that we can
do nothing about.
The inequality debate appears to be unfolding similarly with those who would
like to avoid policies to address inequality, policies such as more progressive
taxation, hoping to keep the first question open as long as possible or claiming
that the rise in inequality is the inevitable result of natural market forces
and we should not interfere.
There is a role for skeptics, but there is also a time to accept that the
preponderance of evidence points in one direction and to begin to think about
and implement corrective measures. I believe an important question is how we
respond to inequality – will it be through progressive taxation, minimum wage
legislation, changes in the structure of health care, investments in education
and retraining programs, wage insurance and so on, or will we do nothing?
The question of what to do is linked to the causes of rising inequality. Has
inequality been rising because of tax policy, the decline in unions, the rising
skill premium, global competition and changing technology, a falling minimum
wage in real terms, or for other reasons? How much does each factor contribute?
Is the income of those who have experienced the largest gains based upon
economic fundamentals, i.e. does their pay reflect their contribution to
production, or does the pay of, say, CEOs depend upon market failures that allow
departures from competitive market outcomes?
There are lots and lots of important questions to be answered involving both
equity and efficiency (many of which do not require rising inequality since
1988, just its existence) and as I said in my first essay, it will be too bad if
attempts to cloud the issue divert us from discussing how best to respond to
income and wealth inequality.
So far, we have:
Posted by Mark Thoma on Tuesday, February 20, 2007 at 04:11 PM in Economics, Income Distribution |
Martin Wolf looks at Russia's return to economic and political systems from its past:
As long as it is trapped, the Russian bear will growl, by Martin Wolf,
Commentary, Financial Times: The Russian bear is awake. But this is ... a
Russia ... caught in a failed transition. So long as this continues, Russia will
disturb its neighbours and disappoint its citizens. Is there a chance of
something better? Yes, but it is a small one. ...
We need to ask what sort of a country Russia has become. The answer is a
“limited access order”, in the language of a recent paper co-authored by the
Nobel-laureate economic historian Douglass North... In such an order, an elite
uses the political system to create rents and uses the rents to stabilise the
political system. It is an order based on a balance of power among insiders and
the exclusion of outsiders. Russia has always been an extreme example of such an
order in European history. ...
Thus has Russia gone “back to the future”. Today’s system of rent-seeking in
a centralised state is similar to earlier ones, with the difference that it is
now natural resources, rather than “souls” that are the most valuable asset.
Historically, the Russian elite has done a tacit deal with the Russian people:
“as individuals you are nothing; but as Russians you are great”. Now, again, Mr
Putin offers Russians a share in a restored Russia in return for depriving them
of an effective political voice. It is an old bargain and, the polls suggest, it
What has made this restoration both successful and fragile is the source of
the rents and so the power: Russia’s natural resources. The Russian economy has
enjoyed a superb turnround: gross domestic product was up by 73 per cent between
the third quarters of 1998 and 2006...
Yet, as the latest economic survey from the Organisation for Economic
Co-operation and Development makes plain, “growth has largely been underpinned
by temporary factors”: the now lost legacy of the devaluation of 1998; the high
prices of resource exports; and the exploitation of now exhausted spare
capacity. Meanwhile, investment is only 18 per cent of GDP; oil production is
stagnating; and, above all, the reform process itself has stalled. ... Russia is
a country with high corruption, and an ineffective and repressive state... It is
also quite poor...
Professor North and his co-authors contrast a limited-access society with an
“open-access” one – a society in which the economy and politics are open to
competition. As they note, a close relationship exists between the two...
The most important point about the state in an open-access society is that it
provides services to the people at large. It must do so if those in power are to
stay there. The move from limited to open-access societies is then also a move
from the state as master to the state as servant. That is, alas, the move Russia
has failed to make. ...[I]t has consequences.
Among those consequences is that Russia’s government views attempts to make
the government subservient to the people in countries of the former Soviet Union
as a political threat. ... It is trapped in an outmoded and dysfunctional view
of Russia’s political future. This is a tragedy for itself and an inescapable
worry for its neighbours.
The big question is whether Russia will evolve into an open-access society
able to take its place as a close friend of the open-access societies to its
west. The paper by Prof North and co-authors argues that there are three
pre-conditions: a rule of law for the elites; perpetual organisations for the
elites; and effective political control over the military.
Russia is not there yet. Maybe it never will be. But a collapse in oil prices
would help, by shrinking rents and forcing reforms...
Posted by Mark Thoma on Tuesday, February 20, 2007 at 01:08 PM in Economics |
As you may have noticed, I like to rerun old columns from economists
occasionally and I've presented past columns from quite a few people. This one
is from Greg Mankiw. It's from Fortune magazine and it was written in
1999 while Bill Clinton was president:
How to Screw Up Social Security, by By N. Gregory Mankiw, Fortune issue: March
15, 1999: Having trouble saving for your retirement? Try this simple
solution: Borrow some money at 7%, buy stocks that return 10%, and pocket the 3%
difference. Still running short? Don't worry--just do it again.
This is, of course, ridiculous advice. Buying equities with borrowed money is
a risky strategy, and no one should do it without understanding those risks. But
this is in effect what President Clinton proposes we do as a nation. He wants to
"save Social Security" in part by selling some government bonds and using the
proceeds to invest in stocks.
It is easy to see why he'd be tempted: Over the President's lifetime, stocks
have outperformed bonds by a large margin, on average--about 6% per year. And
over the past decade, the gap has been even larger. Owning bonds seems like a
sucker's bet. Why not return the Social Security system to solvency by taking
advantage of the huge equity premium? (Hell, while we're at it, why not fund the
Pentagon, welfare, and Amtrak by buying stock on margin?)
Alan Greenspan has objected to this idea, fearing that if the government
owned a large share of corporate America, capital would be allocated on
political rather than economic grounds. There's another problem, however, a
problem pointed out in the fine print in most mutual fund ads: "Past performance
cannot guarantee future results." Sadly, the SEC does not require a similar
disclaimer on State of the Union addresses.
So let's consider the downside. Suppose the federal government put some of
the Social Security trust fund in equities. Now suppose that the next decade
turns out less like the early 1990s and more like the early 1930s, when the Dow
Jones industrial average fell from 381 to 41--or like Japan today, where the
stock market is still at less than half the level it reached a decade ago. What
Clearly, Social Security would be in big trouble. Not only would baby-boomers
be starting to retire, automatically boosting government spending on retirement
programs, but the market collapse would likely coincide with a recession,
reducing tax revenue. With the trust fund drained by low stock prices, Social
Security benefits would almost certainly be cut. A lot.
One might argue that this downside isn't so bad. After all, the President
proposes to invest only 15% of the trust fund in stocks--much less than the
typical private pension plan. But this overlooks the fact that because the
government taxes capital gains and 401(k) distributions, it already has a large
implicit position in equities. Indeed, that position is one reason for the
current budget surplus; if the stock market tanks, the budget will swing back
toward deficit, even without a direct government holding of equities.
Although the downside risk is far from negligible, it could still be a risk
worth taking. Buying stocks rather than bonds does work out, on average, and we
would be irrational to avoid risk at all costs. But there are several reasons to
think it's a bad bet.
First, it seems an unlikely coincidence that the President's proposal comes
on the heels of several years of truly exceptional stock returns. If we take a
look at history, however, the stock market isn't nearly as impressive: In the
19th century, the average premium for investing in stocks over bonds was less
Second, the stock market's historical performance reflects a large amount of
good luck. We live in the world's richest country, at the end of the most
prosperous century ever; it should come as no surprise that the market has done
so well. The future may give us a similarly lucky draw, but let's not count on
Third, some economists see the large historical equity premium as an anomaly
that's already been corrected. Most measures of stock market valuation are now
at historical extremes. Perhaps this is because investors, realizing stocks were
undervalued in the past, have corrected the problem. If so, stocks are unlikely
to keep outperforming bonds by the same margin.
None of this means equities should be excluded from the debate over Social
Security reform. But the risks of holding equities should be brought into the
open and stressed. One advantage of privatization proposals, advocated by many
members of Congress, is that they are clear about where the risk would fall.
The President's plan, by contrast, emphasizes the upside of equity ownership
without mentioning the downside--just the way they'd do it in Vegas.
Posted by Mark Thoma on Tuesday, February 20, 2007 at 02:07 AM in Economics, Social Insurance |
Barney Frank says he won't support an explicit inflation target:
Fed chief warned on inflation target, by Krishna Guha, Financial Times: It
would be a “terrible mistake” for the Federal Reserve to adopt any form of
inflation target to guide its interest rate decisions, Barney Frank, the
Democratic chairman of the House financial services committee, has told the
Mr Frank ... said such a target “would come at the expense of equal
consideration of the other main goal, that is employment”. His comments come as
Fed policymakers enter the later stages of a far-reaching strategy review that
has included detailed debate over the merits of adopting an inflation target.
Ben Bernanke, chairman of the Fed, believes that the bank would be better off
with a relatively flexible inflation target – one that would be achieved on
average, rather than within a specific time, giving maximum latitude to respond
to output shocks.
However, Fed watchers say that, in order to make any such change, Mr Bernanke
would need at least the tacit consent of key figures in Congress. Mr Frank’s
unequivocal statements suggest this consent will still be difficult to secure...
In an interview, Mr Frank told the FT that Mr Bernanke “has a statutory
mandate for stable prices and low unemployment. If you target one of them, and
not the other, it seems to me that will inevitably be favoured.” ...
Advocates of an inflation target at the Fed say it is important to
distinguish between the relatively rigid form of target used, for instance, by
the Bank of England, and the relatively flexible form favoured by Mr Bernanke.
Mr Frank, though, said he would not support even a flexible target “without
equal attention to unemployment also”. He agreed that Mr Bernanke and his
colleagues probably had an implicit inflation target in mind already, but said
it would be dangerous to make it explicit.
“I think when you make it more transparent you enhance its importance,” Mr
Frank said. “No question he has something in his head. But when you make it
public you lose flexibility.”
Mr Frank said he would listen to the Fed chairman’s arguments, but suggested
he was quite firm in his views. “I am always willing to talk to him,” he said.
“But he is as likely to change my mind as I am to change his.”
To help with the discussion, let the rule for monetary policy be of the standard modified Taylor rule
fft = a + bfft-1 + c(yt-yt*) + d(πt
- πt*) + ut
where ff is the federal funds rate target, y is output,
π is inflation, and u is the uncontrollable part of
policy. A * indicates the target value of a variable and a, b, c, and d are
choice parameters for the Fed. The parameters c and d determine how forcefully
the Fed responds to deviations from its output and inflation targets. (In more general models the deviations might be expected future deviations rather than the deviations today, there are issues about whether to use real-time or revised data, the rule can have additional terms, and there are other issues as well such as what target to adopt when market imperfections are present, but this will suffice.)
Barney Frank says we must pay "equal
attention to unemployment.” If he means that the
Fed should respond as forcefully to deviations of output from target as it does
deviations of inflation from target, that is at odds with current monetary
theory which states that the best way to stabilize output and employment -
Barney Franks' concern - is to respond more forcefully to inflation deviations
than to output deviations. Thus, the value of d is around three times as
large as c in standard formulations. If he means the Fed should take account of deviations of output from target (or employment deviations), they already do that.
As to explicit inflation targeting, the
issue is whether to announce the value of πt*,
the inflation target. Barney Frank is worried this will elevate the importance
of inflation deviations, but nothing I know of suggests that announcing πt*
changes the values of d or c.
Targeting inflation is a means to an end - that of output and employment
stability just as Barney Frank wants - and not an end in and of itself. Both
theory and evidence tell us that the Fed can stabilize employment and output around
their long-run trends, but it cannot change the long-run trends themselves with monetary
policy. Thus, the best the Fed can do is to stabilize the economy
around these long-run trends and that, we believe, requires stable and low
inflation and an aggressive response to deviations of inflation from target.
Barney Frank has his heart in the right place, no doubt at all about that,
but he is looking at the economy and at monetary policy through a theoretical
lens that is no longer used by macroeconomists. That being the case, it's too
bad he has said his mind is all but closed on this matter. I would hope instead
that he would devote effort to understanding why an explicit inflation target is
on the table and favored by so many people who study monetary policy. There is a need for Congressional oversight, and for Congress to step in if the Fed steps beyond certain bounds, but this is not the time for Congress to interfere, particularly if the interference is based upon a faulty understanding of the purpose of the policy.
I am not 100% convinced that an inflation target is needed, though I lean
that way. But I am convinced that people such as Bernanke and Mishkin (and
others on the FOMC along with their staffs) know this literature as well as
anyone, anywhere, and I trust them to deliberate carefully and come to the best
possible decision they can make. But that won't be possible if interference from
Congress prevents them from doing what their collective judgment says is best.
Posted by Mark Thoma on Tuesday, February 20, 2007 at 12:15 AM in Economics, Monetary Policy |
Here are Thomas Palley's reform proposals for Sarbox:
Expand Sarbox, Not Shrink It, by
Thomas Palley: There is a growing business chorus calling for shrinking the
Sarbanes – Oxley Act (Sarbox) regulating U.S. capital markets. Recently, a
self-appointed “blue ribbon” committee financed by Wall Street interests called
for making shareholder class action suits more difficult to bring, lowering the
legal liability of auditors and directors, and easing accounting certification
requirements. In response, the Securities and Exchange Commission (SEC) appears
to be moving to implement some of this wish list.
However, corporate behavior over the last few years speaks for expanding
Sarbox, not shrinking it. Thus, the CEO pay problem has continued – exemplified
by recent massive termination payments to Bob Nardelli of Home Depot and Henry
Mckinnell of Pfizer. Major accounting restatements continue at large
corporations. And most importantly, there is the CEO stock option backdating
scandal, which may extend to one thousand companies and appears to implicate
boards of directors, including outside directors.
This backdating scandal scotches the notion that America’s corporate
governance problem concerns a “few bad apples” and makes plain that the problem
is the “barrel”. That speaks to expanding Sarbox rather than shrinking it.
Here is a set of reforms entirely different from those in the Wall Street
blue ribbon Committee’s report. These reforms address the rotten barrel problem,
thereby truly improving corporate governance and making America a better place
for savers and investors.
Continue reading "Thomas Palley: Expand Sarbox" »
Posted by Mark Thoma on Monday, February 19, 2007 at 06:53 PM in Economics, Regulation |
An email says:
You might wish to discuss this article on your blog. The article traces the
development of MNC’s up to the present. It is a celebration of the MNCs and
their positive impact on globalization.
Unfortunately, Palisiano (CEO of IBM) does not address the issue of corporate
power in distorting the market place and in controlling governments themselves
(think K Street). Nor does he seriously address the rising global inequality of
wealth (think sweat shop labor).
Nor does he address the issue of global warming, environmental decay, and
resource depletion—and the ability of MNC’s to cast doubt on the seriousness of
these issues. All of these issues are the dark underside of globalization, on
which I tend to focus. He frames the discussion in such a way as to avoid these
issues—most economists follow his lead.
Anyway, the article is worth discussing. Most economists would agree with
I'm a bit rushed until much later today and can't do much with this, so, quickly, here's the
beginning and end of the article along with a link to the whole thing.
Hopefully, some of you can provide analysis:
The Globally Integrated Enterprise, by Samuel J. Palmisano, Foreign Affairs:
Beyond Multinational The multinational corporation (MNC), often seen as a
primary agent of globalization, is taking on a new form, one that is promising
for both business and society. From a business perspective, this new kind of
enterprise is best understood as “global” rather than “multinational.”
Continue reading ""The Globally Integrated Enterprise"" »
Posted by Mark Thoma on Monday, February 19, 2007 at 12:51 PM in Economics, International Trade, Technology |
Paul Krugman explains why Hilary Clinton and others should have followed John Edward's lead and admitted they were wrong
to vote for the Iraq war resolution:
Wrong Is Right, by Paul Krugman, Admit Errors Commentary, NY Times: Many
people are perplexed by the uproar over Senator Hillary Clinton’s refusal to
say, as former Senator John Edwards has, that she was wrong to vote for the Iraq
war resolution. Why is it so important to admit past error? And yes, it was an
The answer ... in two words: heckuva job. Or, if you want a longer version:
Medals of Freedom to George Tenet, who said Saddam had W.M.D., Tommy Franks, who
failed to secure Iraq, and Paul Bremer, who botched the occupation.
For the last six years we have been ruled by men who are pathologically
incapable of owning up to mistakes. And this pathology has had real, disastrous
The experience of Bush-style governance, together with revulsion at the way
Karl Rove turned refusal to admit error into a political principle, is the main
reason those ... words... “I was wrong” matter so much to the Democratic base.
The base is remarkably forgiving toward Democrats who supported the war. But
the base and, I believe, the country want someone in the White House who doesn’t
sound like another George Bush..., someone who doesn’t suffer from an
infallibility complex, who can admit mistakes and learn from them.
And there’s another reason the admission by Mr. Edwards ... is important. If
we want to avoid future quagmires, we need a president who is willing to fight
the inside-the-Beltway conventional wisdom..., which still — in spite of all
that has happened — equates hawkishness with seriousness about national
security... By admitting his own error, Mr. Edwards makes it more credible that
he would listen to a wider range of views.
In truth, it’s the second issue, not the first, that worries me about Mrs.
Clinton. Although she’s smart and sensible, she’s very much the candidate of the
Beltway establishment... Still, she’s at worst a triangulator, not a
megalomaniac; she’s not another Dick Cheney.
I wish we could say the same about all the major presidential aspirants.
Senator John McCain, whose reputation for straight talk is quickly getting
bent out of shape, appears to share the Bush administration’s habit of rewriting
history to preserve an appearance of infallibility. Last month he asserted that
he knew full well what we were getting into by invading Iraq: “When I voted to
support this war,” he said on MSNBC, “I knew it was probably going to be long
and hard and tough...”
But back in September 2002, he told Larry King, “I believe that the operation
will be relatively short,” and “I believe that the success will be fairly easy.”
And as for Rudy Giuliani, there are so many examples of his inability to
accept criticism that it’s hard to choose.
Here’s an incident from 1997. When New York magazine placed ads on city buses
declaring that the publication was “possibly the only good thing in New York
Rudy hasn’t taken credit for,” the then-mayor ordered the ads removed...
Now imagine how Mr. Giuliani would react on being told, say, that his choice
to head Homeland Security is actually a crook. Oh, wait.
But back to Mrs. Clinton’s problem. For some reason she and her advisers
failed to grasp just how fed up the country is with arrogant politicians who can
do no wrong. I don’t think she falls in that category; but her campaign somehow
thought it was still a good idea to follow Karl Rove’s playbook, which says that
you should never, ever admit to a mistake. And that playbook has led them into a
Previous (2/16) column:
Paul Krugman: The Health Care Racket
Next (2/23) column: Paul Krugman: Colorless Green Ideas
Posted by Mark Thoma on Monday, February 19, 2007 at 12:15 AM in Economics, Iraq and Afghanistan, Politics |
An interview with Barney Frank on the economy and Federal Reserve policy:
With economic fairness for all, MarketPlace:
KAI RYSSDAL: They weren't just debating the war on Capitol Hill today, there
were also hearings on the state of the economy. Fed Chairman Ben Bernanke ...
said inflation looks like it will weaken, and numbers out today on wholesale
prices backed them up. But the House Financial Services Committee was after ...
balanced economic growth with social fairness. We gave Congressman Barney Frank
a call. He's a Democrat from Massachusetts and the chairman of the House
Financial Services Committee. ...
If you look at the numbers, sir, if you just look at unemployment, and
inflation, and gross domestic product, the economy seems to not be doing so
badly. Why do you feel the need for this conversation now?
FRANK: Well, because the economy and the people in the economy are not
identical. Then, we have this problem with even President Bush acknowledged last
week that inequality has been increasing. Now, inequality is necessary in the
capital system. It performs a lot of important functions. But the problem has
been that the real wages, take home pay for the average worker, and I'm talking
about the great majority of workers, has been somewhat negative. It's actually
declined a little bit. We have a good Gross Domestic Product. But it has
unfortunately . . . the increase has gone disproportionate to a very small
number of people.
RYSSDAL: Just to make sure I understand, it seems to me you're making sort of
a moral argument here...
FRANK: Oh, yeah. It's a moral argument to me that, I think, it is wrong to
have a situation in which people work very hard because of the circumstances,
legally and otherwise, in which they find themselves don't get increases. I
think that there's a moral problem here. But it also becomes a political
problem. We're in gridlock now. What's happened now is that, that the average
citizen has said, look, don't come to me and tell me you want a trade bill.
Don't come to me and tell me that I should support a more generous immigration
policy from the standpoint of letting people in because I think I'm getting hurt
by it. People who want to see trade promotion authority expanded. People who
want to see an immigration bill of the sort the President talked about, and want
to see no obstacles to the implementation of technology must understand that as
long as we have these obstacles to fair treatment for working people, the
political system won't allow it.
RYSSDAL: Are you ready to try to deny things to the president, like
fast-track and like an immigration bill, if he doesn't, at least listen to your
FRANK: Yes and no. I certainly am prepared to deny him fast-track and the
trade bills. On other areas, like immigration, I am supportive of the
Administration position. But until we do something about this anger, I'm afraid
it won't be successful.
RYSSDAL: Let me get back to your hearings for just a second. I spent some
time watching you and Fed Chairman Ben Bernanke on C-Span. You seemed to spend a
lot of time on inflation and the Fed's policy on interest rates. It seem to me
you didn't really buy Mr. Bernanke's arguments about the way the economy is
FRANK: Well, I think that there is a bias there to focus on the potential
danger of inflation, while ignoring the very real current danger of inequality.
Now, he's acknowledged inequality, and I appreciate that. And that's a real
advance. I mean, you don't generally get that from a Republican-appointed
chairman of the Federal Reserve. But I was quoting his own monetary report. He
said, first of all, in the monetary report, production is below the economy's
potential, and we'll stay that way for a few quarters. And we'll probably get up
to potential, but not above it.
FRANK: Secondly, he said, inflation seems to be under control. Reading those
two, I'm then surprised to turn the page and see them say, And therefore, our
major concern is to worry about inflation happening. And if you focus
excessively on the possibility of inflation, even when there is no real
indication of it, then you are inclined to do things that make it harder to
reach the full economic potential. And I do think growth alone doesn't provide
the kind of equity I'd like to see. But the absence of growth guarantees that we
won't have it.
RYSSDAL: Barney Frank, Democrat of Massachusetts, chairman of the House
Financial Services Committee. Congressman, thanks for your time.
FRANK: Thank you.
When presented with this, here's how Bernanke responded:
Bernanke, Sparring With Frank, Says Fed May Lift Rate, by Vivien Lou Chen and
Craig Torres, Bloomberg: Federal Reserve Chairman Ben S. Bernanke, in his
first clash with the Democratic-controlled House of Representatives, signaled
the central bank will need to raise interest rates if inflation accelerates.
Bernanke sparred with House Financial Services Committee Chairman Barney
Frank of Massachusetts, who said it was ''troubling'' the Fed chief was biased
toward raising rates even while forecasting only moderate growth. Frank said he
didn't understand why inflation was the main concern and wanted to be ''kept
involved'' with the Fed's decision-making.
''If inflation becomes higher for some reason, then the Federal Reserve would
have to respond to it,'' Bernanke said ... in response to Frank's questioning...
''We have had a period where inflation has been above where we'd like to see
it as far as consistency where price stability is concerned,'' the Fed chairman
said. ''In order for this to continue in a sustainable way, inflation needs to
be well- controlled.'' ...
Frank said the question for the Fed should be whether it will consider
lowering rates, not raising them, because the economy is expanding below its
There are theoretical reasons to believe that responding more forcefully to
increases in inflation stabilizes output and employment in the long-run. While
allowing some inflation today may increase employment presently, and hence be
politically attractive, the costs of eliminating the inflation later can be even
larger and the Fed is, I believe, correct to resist letting inflation begin
drifting upward once again. If output growth weakens considerably, the story
changes, but for now a policy of holding the federal funds rate steady is
difficult to criticize.
Posted by Mark Thoma on Monday, February 19, 2007 at 12:06 AM in Economics, Monetary Policy, Politics |
Jagdish Bhagwati reviews Will Hutton's The Writing on the Wall: Why We
Must Embrace China as a Partner or Face It as an Enemy:
Made in China, by Jagdish Bhagwati, NY Times Book Review: It is only 20
years since Japan was getting under the skin of many Americans. They feared that
the 21st century would be Japan’s, as the 19th had been Britain’s and the 20th
America’s. ...America near the end of the 20th seemed to be in the grip of what
I have called a “diminished giant syndrome.” These worries appear astonishing
now. For well over a decade Japan has been deeply mired in macroeconomic
failure, its feared dominance having dissolved into dreary ordinariness.
Is China now poised to turn the 21st century into its century? Or will it,
despite its phenomenal nearly two-digit annual growth over the past 15 years,
rejoin the human race with a slower economy? Or is it possible that its powerful
locomotive will, as Japan’s did, shift into reverse gear?
Certainly, any number of popular writers believe China will only continue to
go up and up, turning into a gigantic power. Some economists, like Richard
Freeman and Alan Blinder, agree. Will Hutton, the former economics editor of ...
The Guardian, calls this the prevailing view, and in his interesting book “The
Writing on the Wall,” he seeks to overturn it.
He is hardly the only one. ... Signs of looming difficulties are not hard to
find. Standard economic analyses indicate that China is likely to face problems
with its exchange-rate policy, its financial sector and the inefficiency of its
state-owned enterprises. Hutton certainly knows his economics... But his central
thesis is that China’s main problem is not the inadequacy of its capitalist
economics, but the limitations of its Communist politics.
Indeed, it’s true, as Hutton shows in great detail, that China faces a number
of critical economic difficulties that are directly traceable to its lack of
democracy. He mentions ..., for example, .. environmental destruction... [T]he
Chinese experience shows dramatically, as the Russian experience did, that
environmental damage is likely to become ever more crippling in the future
because there are no democratic institutions like public opposition and a free
press to countervail and contain it.
Similarly, because China has an authoritarian regime, it cannot fully profit
from the information revolution, thus inhibiting the technology that is at the
heart of growth today. The PC (personal computer) is incompatible with the C.P.
(Communist Party). So India ... has moved dramatically ahead of China in
computer technology. ... Hutton ... points out, too, that China damages itself
by seeking to control and stifle what its citizens can learn and disseminate.
“Yahoo, Microsoft and Google are part of the cultural yeast of globalization,”
he says, “yet each has been at the receiving end of China’s Internet firewall of
And it’s not just growth prospects that are handicapped. China’s
authoritarianism creates political uncertainties that are equally problematic.
Democratic governments facilitate orderly change; Communist regimes do not. ...
Asked many years ago by the economist Robert Heilbroner how China would evolve,
the Sovietologist Padma Desai answered: It all depends on whether Mao Zedong or
Zhou Enlai dies first.
What’s more, China’s authoritarianism is a breeding ground for corruption. As
Hutton says, “The morality of revolution — that the end justifies the means —
becomes a morality that justifies corruption.” Consider how the phenomenon of
“takings” — commissars and their cronies appropriating land from peasants — has
led to numerous disruptions. In a political system lacking the essential
attributes of a functioning democracy, social groups can’t turn to a free press
to take up their cause, or an independent judiciary to appeal to, or opposition
parties to embrace their complaints. Revolts are what they have left.
All of these are problems within China. But the lack of freedom is likely to
affect its trade strategy as well. As its flood of exports leads to ever
increasing fears of job loss and reduced wages in the United States, there will
be a strong temptation on the part of the American government to exploit human
rights violations as a way of rolling back Chinese goods. When Japan was the
perceived threat, those who feared competition, like the carmakers in Detroit
and the chip manufacturers in Silicon Valley, had no convenient basis for their
complaints and were forced simply to demonize Japan as a wicked trader. In
China’s case, the protectionist critics can credibly assail its lack of
democracy and human rights abuses.
The question, then, is whether, the Chinese Communists will be able to make
the necessary accommodations... Or will China’s leaders dig in their heels,
suppressing dissent and opposition and possibly precipitating political and
economic chaos? It’s anybody’s guess; and Hutton is not particularly helpful on
He does think, however, that the West can actively help the Chinese make the
wiser choice, and a major part of his book ... is devoted to arguing for
engagement rather than confrontation. So he supports China’s participation in
the World Trade Organization and opposes protectionism. But the question,
frankly, is: How does one make an 800-pound gorilla move in the right direction?
Offering it Jessica Lange isn’t going to make any difference; and kicking it in
the rear, a course Hutton rightly counsels against, will not accomplish much
In the end, no matter what the West does, China is going to make its own
choices, the way it did when, after nearly three decades of really bad
economics, it turned to reforms under Deng Xiaoping. The giant everyone had
expected to rise up in the 1950s continued snoring until the 1980s. Now it has
awakened, and all the rest of us can do is watch as it takes its own faltering
Posted by Mark Thoma on Sunday, February 18, 2007 at 02:18 PM in China, Economics |
Jim Hamilton says there's potentially a big story concerning the reasons for Saudi Arabia's cuts in oil production that the press hasn't noticed:
Saudi oil production cuts, by Jim Hamilton: This is a potentially huge story that is not being adequately investigated by the financial press...
Update: A follow-up:
Study sees harmful hunt for extra oil, by Carola Hoyos, Financial Times: All
the world’s extra oil supply is likely to come from expensive and
environmentally damaging unconventional sources within 15 years, according to a
This will mean increasing reliance on hard-to-develop sources of energy such
as the Canadian oil sands and Venezuela’s Orinoco tar belt.
A report ... calculates that the world holds 3,600bn barrels of
unconventional oil and gas that need a lot of energy to extract. ...
Only 15 per cent of the 3,600bn is heavy and extra-heavy oil, with the rest
being even more challenging.
The study makes clear the shift could come sooner than many people in the
industry had expected, even though some major conventional oil fields will still
be increasing their production in 2020. Those increases will not be enough to
offset the decline at other fields.
“It becomes unclear beyond 2020 that conventional oil will be able to meet
any of the demand growth,” ... The report added that natural gas products such
as liquids and condensate would also become important sources of growth.
The increasing reliance on unconventional oil will require a substantial
reshaping of the energy industry. ...
[T]he challenge is huge, said Matthew Simmons, an industry banker who sent
shock waves through the oil world when he questioned whether Saudi Arabia, the
most important oil source, would be able to continue to expand production.
“The ability to extract this heavy oil in significant volumes is still
non-existent,” he said in a recent speech.
“Worse, it takes vast quantities of scarce and valuable potable water and
natural gas to turn unusable oil into heavy low-quality oil.” ...
Posted by Mark Thoma on Saturday, February 17, 2007 at 06:02 PM in Economics, Oil |
This is a review of Hitler's Beneficiaries: Plunder, Racial War, and the Nazi Welfare State, by Götz Aly. The book argues that Hitler exploited self-interest to maintain his grip on power:
Handouts From Hitler, by Dagmat Herzog, NY Times Book Review: What was life like for a typical non-Jewish German under Nazism? Answers vary. A discredited though still popular view has it that the Third Reich was a nightmarish inferno where informants, scoundrels and sadists ruled through fear and intimidation. ...
Another position ... is that Germany in the 1930s and early ’40s was a land gripped by Jew-hatred. In this view, the German populace ... required little or no incentive to summon both disgust and rage at the Jews in its midst...
Yet another interpretation focuses on the tremendous personality cult that surrounded Hitler. German citizens were so entranced by the vision of a better National Socialist world to come that they happily submitted to the allures of fascism. In one version ..., typical Germans are cast as unwitting victims of an unparalleled propaganda campaign (and thus also come to represent a cautionary tale of how media manipulators can redirect an innocent society...). In more sophisticated versions, the German people are understood to have been taken in by Hitler’s charisma not least because the remilitarization he initiated ... was a balm to wounded national pride.
The provocative power of Götz Aly’s “Hitler’s Beneficiaries,” available in this fine English translation after having created a fierce debate in Germany, is that it seeks to move beyond each of these explanations. That it is not wholly successful does not diminish its intellectual significance as a fresh model for grasping how the Nazis gained such broad support...
In Aly’s view, Nazism secured the compliance of the German people not because of Hitler’s charisma or Goebbels’s propaganda, nor because of its anti-Semitic policies or the Gestapo’s ruthlessness. A majority of Germans were not seduced or scared by the Nazis. On the contrary, their loyalty to the regime was bought and paid for — quite literally so.
According to Aly, who teaches at the University of Frankfurt, millions of care packages of plundered items were sent back home from the occupied territories by Wehrmacht soldiers who were themselves given hearty rations and plenty of disposable cash. Clothing and household objects that had once belonged to Jews were sold at affordable prices at government-organized public auctions, or simply handed out free as emergency relief. And the Nazis also introduced a progressive income tax that shifted a far greater tax burden onto corporations and the very rich.
“Hitler’s Beneficiaries” argues that nothing more than an unremarkable pursuit of self-interest led most Germans to pledge allegiance to the Nazi regime. Germans wanted their children to have nice Christmas gifts. They wanted to set aside money for retirement. They wanted to send a special someone back home ... perfumed soap from France. Citizens were sated with decent wages, generous overtime pay and innovative pension plans — that is, through the establishment of a complex, if absolutely amoral, welfare state.
Aly, in short, makes a serious and well-researched attempt to put the “socialism” back in National Socialism. And in so doing, he offers his own explanation for why so many Germans closed their eyes to the systematic expropriation of Jewish property and ultimately to the deportation of their Jewish fellow citizens...
Aly makes the case that although goods and gold, stocks and bonds, real estate and savings accounts stolen from murdered Jews accounted for at best 5 percent of the Third Reich’s operational revenues, this 5 percent was often the essential piece that stabilized the vulnerable economies of the occupied nations. The money allowed the regime to pass the costs of war and occupation onto the occupied while keeping the local populations and the German soldiers alike quiescent and complacent...
This was grand larceny on a scale seldom seen in the modern world. From Tunisia to Greece, Czechoslovakia to the Netherlands, France and Italy to Serbia and Romania, Aly walks us through the Aryanization process. He demonstrates how Jewish property was first nationalized via a variety of tricks ... and then funneled into German government coffers, and eventually into keeping the working and lower middle classes satisfied. He also shows that in a number of instances the urgency of the thievery process hastened deportations and killings.
“Hitler’s Beneficiaries” is based on a wealth of military and economic documents, and it is chock full of data on consumer spending power, money-laundering techniques, and bankers’ and civil servants’ inventiveness in making theft look legal — or invisible. ... The evidence is powerful on its own terms. Yet the connections Aly draws are not equally persuasive.
When “Hitler’s Beneficiaries” first appeared in Germany in 2005, scholars challenged Aly’s figures. ... Aly’s rebuttals to his critics have been included in this English edition. ...
The more significant problems have to do with interpretation. First, there is Aly’s monochromatic notion of human nature — the assumption that Germans under Nazism were moved primarily by material self-interest...
The second difficulty has to do with assumptions about causation. It is Aly’s great accomplishment to demonstrate that World War II could not have gone on for as long as it did, nor the German populace kept content for as long as it was, without the expropriation of the property and monies of slaughtered Jews. But correlation is not causation, and illustrating connections does not prove motivation. ...
“Hitler’s Beneficiaries” offers stark proof that the murder and the theft were in many cases integrally linked. The Holocaust was unquestionably accompanied by outrageous greed. Yet this fact cannot make us conclude that greed alone drove the Holocaust.
Posted by Mark Thoma on Saturday, February 17, 2007 at 02:25 PM in Economics |
Robert Shiller looks at the relationship between social unrest and inequality across countries. He argues that how inequality is perceived to arise is an important contributing factor to social problems, and that building trust in economic relationships is the key to overcoming perceptions of inequities:
Inequality and its discontents, by Robert J Shiller, Project Syndicate: Leaders around the world seem to be convinced that inequality and lack of broad participation in economic growth, if allowed to persist, will lead to social discord and even violence. But is inequality the real problem?
As Indian Prime Minister Manmohan Singh put it ..., “Even as absolute poverty may be reduced by growth, inequalities can get sharpened. This can be politically and socially extremely destabilising.” So India must “take steps that reduce social and economic inequalities, without hurting the process of growth and without reducing the incentives for individual enterprise and creativity.” ...
Such arguments have the ring of common sense. If people believe that they will share in overall economic growth, they should be more likely to support social peace. If they do not, unrest will become more likely.
However, social scientists have found it difficult to prove that point. In fact, some statistical analyses of the correlation between inequality and social conflict conclude that there may even be an inverse relationship: societies that are more unequal tend to show less conflict, because the rich are better able to control the poor.
There is some evidence that social unrest follows from inequality. The economists Alberto Alesina and Roberto Perotti have shown that, after controlling for several other factors, high-inequality countries do tend to have more social instability...
Nevertheless, one wonders why the evidence that inequality causes social unrest is not stronger. One part of the problem may be that it is not always inequality per se that causes social discord, but also how inequality is perceived to have come. Unrest may reflect more a sense of betrayal – that others are not living up to their implied promises or are not behaving honourably.
Indeed, a sense of trust in others’ intentions is central to a functioning economy. Lawyers write a lot of contracts, and courts spend a lot of time enforcing them, but these institutions cannot cover everything. Most economic relationships depend on good will, a basic inclination to do the right thing even if no one is checking.
Trustworthiness is hardly universal. But the business world is built on our intuitive knowledge of when we can trust people fairly well and when we can’t trust them much at all. We design contracts around imperfect trustworthiness and construct elaborate institutions that take account of the hills and valleys of human honour. When these function well, we have a general sense that, even though people are not always trustworthy, basic fairness prevails. ...
By contrast, when inequality is perceived as the result of a breakdown in trusting relationships, it can lead to bitterness, and, ultimately, social unrest. This frequently occurs in times of rapid economic change. For example, in a rapidly globalising world, people may have to leave their long-term employers, with whom they have built a sense of trust... In such cases, inequality may be perceived more intensely, for people may link it with the loss of good will.
What Singh, Lula, and other world leaders really seem to want is to strengthen trust and cooperation even amidst a rapidly changing economy. If they succeed in devising policies, laws, and incentives that achieve this, a by-product would likely be a reduction in inequality, which one hopes would reinforce the improved sense of trustworthiness.
If he is saying that rising inequality is the result of solid underlying economic fundamentals, that people are fairly rewarded for their contributions to the economy but rapid economic change obscures this from view generating misperceptions and lack of trust, I don't agree. It is entirely possible that the perceptions of unfairness are justified in many of these countries and that trust will reemerge only when the economic system itself is changed to ensure that government policy, market failures, cronyism, and other departures from solid economic fundamentals are not the source of the unequal distribution of goods and services. Trust follows action.
Posted by Mark Thoma on Saturday, February 17, 2007 at 06:22 AM in Economics, Income Distribution |
Two Nobel prize winning economists, Michael Spence and Thomas Schelling, discuss strategies to prevent the
proliferation and use of nuclear weapons:
Mr. Counterintuition, by Michael Spence, Commentary, OpinionJournal (Free):
On a recent Sunday, I showed up on Tom Schelling's doorstep for lunch... Tom,
now 86 years of age, was my Ph.D. thesis adviser at Harvard...
The last time I saw Tom ... was in Stockholm in December 2005, when ... he
received the Nobel Prize in economics for the originality and impact of his
applications of game theory to negotiation, nuclear deterrence, global warming,
and the surprising effect of preferences for diversity on the composition of
neighborhoods. If Tom's work has a leitmotif, it is counterintuition. ...
Tom tells me that he "was in South Korea shortly after North Korea exploded
their [recent] nuclear device. ... "The first mission should have been to
encourage the three countries most threatened, Taiwan, South Korea and
Japan--all of whom have the capacity to develop nuclear weapons--to reaffirm
their commitment to the NPT ... with support from the U.S. and the leading
nuclear powers, signaling that they had no intention of using North Korea as an
excuse to start building weapons. I view this as a significant missed
opportunity on the part of the international community and the U.S. to reaffirm
the deep importance of the non-proliferation regime."
Tom Schelling expects Iran to get nuclear weapons. "Once a country becomes
the owner of nuclear weapons, it is imperative that they learn to deal with them
responsibly." He pointed out that it took the U.S. 15 years after World War II
to learn to think seriously about the security of its weapons. Before that,
weapons did not have combination locks, let alone complex electronic security
The issue of learning to be a responsible owner of these weapons goes beyond
security and codes. "The Soviet Union," Tom says, "always had civilian officials
in charge of the weapons, and never let an aircraft carrying nuclear weapons out
of Soviet airspace. China has a very separate army unit for this purpose. Who
has control, are they trustworthy... And if [control is] given to civilians, is
that an act of mistrust of the military that may have adverse consequences? What
are the safeguards against theft, sabotage or unauthorized use, and how will the
weapons be protected and hence be credible with respect to retaliation and
"These issues were addressed collectively and quietly by the nuclear powers
during the Cold War. There was, for much of the Cold War, a surprising,
effective, direct and entirely unofficial conversation involving policy makers
and 'military' intellectuals..." This took placed because of the recognition on
the part of all nuclear powers that there was a shared interest in elevating the
level of competence in the nuclear club. "India and Pakistan and China were all
involved in these conversations and have deep knowledge of the issues and best
practices. Iran should probably be the next member of the group with North Korea
to follow. Perhaps China ... could start the process by organizing a conference
... with ... India, Pakistan, and then Iran and North Korea."
It was clear to me that Tom ... was deeply worried that in the post-Soviet
period, the isolation of the newly arrived owners of weapons would lead to
seriously inadequate strategic preparation, and therefore imperfect deterrence,
and the risk of miscalculation or misuse.
"Except for the end of World War II and the devices exploded over Hiroshima
and Nagasaki, nuclear devices have not been used, and we have come to understand
that they are useful for deterrence and not really for anything else. Part of
the learning process is learning to be deterred." Iran and North Korea probably
think they need nuclear weapons to prevent being attacked by us or others
hostile to them. They need to learn that success in this limited objective
consists of never using them. ...
Our conversation turns to present times... Terrorists, Tom insists, "also
need to understand that nuclear devices are really only useful for deterrence.
They would be unlikely to have the capacity to deliver them on planes or
missiles, and would be more likely to smuggle them into a hostile country and
... then threaten to detonate them if attacked--or unless their aims and
conditions are met. The object should be not to blow up a city but to deter
attacks on their country, region or organization." One is struck, once again, by
the counterintuitive nature of the strategic issues related to these
weapons--one has, to a large extent, a powerful strategic interest in the
sophistication of one's enemies. ...
China worries Tom; but typically, it is our approach to China, and not
Chinese policy, that is the source of his discomfiture. "I believe that we do
not pay enough attention to China. China has a small, well-managed nuclear
arsenal, which they have never brandished or threatened to use. China does not
react well when we treat it as if it were irresponsible. Recently China
conducted a test and shot down a satellite, and was criticized for contributing
to the militarization of space. What appears not well known in the U.S. is that
China has been trying to negotiate treaties on outer space, antisatellite
weapons, and limiting the production of fissile material for a number of years,
and has not been able to get the U.S. to participate. Since we are clearly
developing antisatellite capabilities, accusations against China for escalation
are viewed by them and others as hypocritical."
Here, on display, was perhaps his most striking characteristic--intellectual
courage, and an unwillingness to pander to public opinion. ... In the latter
stages of the Vietnam War, and at considerable personal cost, he led a group of
12 scholars to Washington to object to the invasion of Cambodia. He thought the
invasion was a costly mistake, and not strategically or morally justified. For a
period of time, he lost his place at the official table in the formulation of
military policy and strategy. But his interest and his influence continued. ...
Posted by Mark Thoma on Saturday, February 17, 2007 at 01:11 AM in Economics, Politics |
FedViews, FRBSF (no permalink): Mark Spiegel of the Federal Reserve Bank of
San Francisco gives his view of the outlook for the economy:
Continue reading "FRBSF: The Outlook for the Economy" »
Posted by Mark Thoma on Friday, February 16, 2007 at 08:45 PM in Economics, Monetary Policy |
I wondered the same thing as Willem Buiter. Should the Federal Reserve Chair
talk only about matters directly related to monetary policy, or is it okay to
discuss broader issues such as inequality, minimum wages, and Social Security without making the direct connection to monetary policy evident? This is from Martin Wolf's
Willem Buiter: Martin's Column "Why America will need some elements of a
welfare state", refers extensively to a recent speech by Ben Bernanke...
I believe it is a serious mistake for central bankers to express public views
on politically contentious issues outside their mandates. The mistake is no less
serious for being made so commonly by central bankers all over the world.
Central bank Governors have a lengthy and unfortunate track record of holding
forth in public on matters that are outside the domains of their mandate (in the
case of the Fed, monetary policy and financial stability)... With the exception
of the Governors of the Bank of England and the Reserve Bank of New Zealand,
every Governor on the block appears to want to share his or her views on
necessary or desirable fiscal, structural and social reforms. Examples are
social security reform and the minimum wage, subjects on which Alan Greenspan
liked to pontificate when he was Chairman of the Board of Governors of the
Federal Reserve System. Jean-Claude Trichet cannot open his mouth without some
exhortation for fiscal restraint or structural reform rolling out. In the case
of Chairman Bernanke's speech, equality of opportunity, income distribution,
teenage pregnancy and welfare dependency are clearly not part of the (admittedly
broad) three-headed mandate of the Fed: maximum employment, stable prices and
moderate long-term interest rates. ...
When the Head of a central bank becomes a participant, often a partisan
participant, in public policy debates on matters beyond the central bank's
mandate..., the institution of the central bank itself is politicised and put at
risk of becoming a partisan-political football. This puts at risk the central
bank's operational independence in the management of monetary policy and in
securing financial stability.
Central bankers, Mr. Bernanke included, should 'stick to their knitting' (if
I may borrow Alan Blinder's phrase). Being the head of an institution with the
national and global visibility of the Fed or the ECB gives one an unparalleled
platform for addressing whatever one considers the great issues of the time. The
temptation to climb that unique pulpit must be near-irresistible. Nevertheless,
unless the text for the sermon concerns monetary policy or financial stability,
that temptation is to be resisted in the interest of the institutional integrity
and independence of the central bank.
As I've said before, I agree.
Posted by Mark Thoma on Friday, February 16, 2007 at 12:22 PM in Economics, Monetary Policy |
Paul Krugman on the tactics insurance companies use to avoid paying medical
Health Care Racket, by Paul Krugman, Commentary, NY Times: Is the health
insurance business a racket? Yes, literally - or so say two New York hospitals,
which have filed a racketeering lawsuit against UnitedHealth Group and several
of its affiliates...
[T]he lawsuit illustrates perfectly the dysfunctional nature of our health
insurance system, a system in which resources that could have been used to pay
for medical care are instead wasted in a zero-sum struggle over who ends up with
The two hospitals accuse UnitedHealth of operating a "rogue business plan"
designed to avoid paying clients' medical bills. ... The legal outcome will
presumably turn on whether ... it can be proved that UnitedHealth deliberately
misled plan members. But it's a fact that insurers spend a lot of money looking
for ways to reject insurance claims. And health care providers, in turn, spend
billions on "denial management," employing specialist firms ... to fight the
So it's an arms race between insurers ... trying to find claims they can
reject, and doctors and hospitals, who ...[try] to outsmart or challenge the
insurers. And the cost of this arms race ends up being borne by the public...
Of course, ...[t]he best way ... to avoid paying medical bills is to avoid
selling insurance to people who really need it. An insurance company can
accomplish this ... through marketing that targets the healthy, and through
underwriting: rejecting the sick or charging them higher premiums. ...
Like denial management, however, marketing and underwriting cost a lot of
money. McKinsey & Company ... recently released an important report dissecting
the reasons America spends so much more on health care than other wealthy
nations. One major factor is that we spend $98 billion a year in excess
administrative costs, with more than half ... accounted for by marketing and
underwriting - costs that don't exist in single-payer systems.
And this is just part of the story. McKinsey's estimate of excess
administrative costs counts only the costs of insurers. It doesn't ... include
other "important consequences of the multipayor system," .... The sums doctors
pay to denial management specialists are just one example.
Incidentally, while insurers are very good at saying no to doctors, hospitals
and patients, they're not very good at saying no to more powerful players. ...
McKinsey estimates that the United States pays $66 billion a year in excess drug
costs, and overpays for medical devices like knee and hip implants, too.
To put these numbers in perspective: McKinsey estimates the cost of providing
full medical care to all of America's uninsured at $77 billion a year. Either
eliminating the excess administrative costs of private health insurers, or
paying what the rest of the world pays for drugs and medical devices, would by
itself more or less pay the cost of covering all the uninsured. And that doesn't
count the many other costs imposed by the fragmentation of our health care
Which brings us back to the racketeering lawsuit. If UnitedHealth can be
shown to have broken the law - and let's just say that this company, which is
America's second-largest health insurer, has a reputation for playing even
rougher than its competitors - by all means, let's see justice done. But the
larger problem isn't the behavior of any individual company. It's the ugly
incentives provided by a system in which giving care is punished, while denying
it is rewarded.
Previous (2/12) column:
Paul Krugman: Scary Movie 2
Next (2/19) column: Paul Krugman: Wrong is Right
Posted by Mark Thoma on Friday, February 16, 2007 at 12:15 AM in Economics, Health Care |
Daniel McFadden, winner of the Nobel Prize in Economics in 2000, evaluates the Medicare Part D prescription coverage program. He says that so far the results indicate the program has worked reasonably well, but "caution is advised" before implementing programs of this type in other segments of the health care industry:
A Dog's Breakfast, by Daniel L. McFadden, Commentary, WSJ: Last year, Medicare underwent a major expansion with the addition of Part D prescription drug coverage. A controversial feature of this new program was its organization as a market in which consumers could choose among various plans offered competitively by different insurers and HMOs, rather than the single-payer, single-product modelâ¦
Part D is a massive social experiment on the ability of a privatized market to deliver social services effectively. ...[M]y research group has monitored consumer choices and outcomes from the new Part D market. I will summarize our findings, but first I want to provide some perspective on the American health-care system...
Most Americans are aware that our health-care system is in deep trouble, a dog's breakfast of private providers and insurers that has weak and inconsistent incentives for quality control and cost containment. Many consumers cannot obtain health insurance at reasonable cost, and financing the system is stressing employers, pension funds, and the government's Medicare and Medicaid programs.
In terms of health delivered per dollar of cost, our system is grotesquely inefficient. ... Canada's single-payer system costs â¦ about half our expenditure... The Canadian ... outcomes are typical of developed countries, where government managed and financed systems predominate. The extra cost of our system is not buying us better health. ...
In the future, things are going to get much worse. If current trends continue, health care in the U.S. as a proportion of GDP will rise to 40% by 2050, a level that will break the current system...
There are a number of reasons for this gathering storm. First, the U.S. population is getting older, and the old require more medical maintenance. Second, we are getting wealthier, and staying alive is the ultimate luxury good. Third, we demand expensive medical innovations... About a third of all medical costs are incurred in the last year of life, and are at best marginally effective. The incentives in the system do not force hard choices.
To deal with this future, three substantial reforms are needed. First, we need to wring out some of the inefficiencies. Something like 30% of our health costs come from administrative overhead, legal costs and defensive medicine. These could be largely eliminated...; we just need to emulate best practice in other developed countries.
Second, we need universal health insurance coverage, with active emphasis on preventive medicine... Perhaps this can be accomplished by cobbling together existing sources of finance, as in Gov. Arnold Schwarzenegger's current proposal for California. However, eventually we will have to go to a system that is not channeled through employers, something like a tax-financed medical voucher system.
Third, we need incentives that match choice of expensive treatments with consumers' willingness to pay for them, a benefit-cost analysis that places treatment choices and financial responsibility on the individual.
This brings us to Medicare Part D. This experiment in privatizing the prescription drug insurance market ... gives the individual the right, and responsibility, to make insurance plan choices that are in his or her self-interest. If consumers are up to this task, then their choices will ensure that the plans, and insurers, that succeed in the market are ones that meet their needs. However, if many are confused or confounded, the market will not get the signals it needs to work satisfactorily. ...
So, how well has the Part D market worked? ...
Continue reading "Daniel McFadden: An Evaluation of Medicare Part D" »
Posted by Mark Thoma on Friday, February 16, 2007 at 12:06 AM in Economics, Health Care |
Wang Yong of Shanghai Daily says
Brad DeLong "has a valid point":
Deng's legacy: Equality, justice and openness, by Wang Yong, Commentary,
Shanghai Daily: The American economist J. Bradford Delong says that China
would have been much stronger if Deng Xiaoping had come to power in 1956 instead
of 1976. ...
You can't turn history back, and you can't be sure whether China's soil for a
market economy, even in its most pristine form, would have been fertile in 1956.
But Delong has a valid point: All of China has Deng Xiaoping to thank for her
prosperity and freedom...
Next Monday marks the 10th year since Deng passed away... Most people, of
course, remember the great leader for his dedication to a socialist market
economy and an open-door policy. But why did he prefer an open market economy?
What made him believe that markets exist in both socialist and capitalist
I think Deng's philosophy is more important than his economic policies. ...
In his mind, the fundamental difference between socialism and capitalism is that
the former advocates common prosperity, while the latter focuses largely on
efficiency and accommodates extreme inequalities.
Deng's pragmatic and democratic spirit is best reflected in his thinking
about common prosperity. To achieve that goal, he allowed for some people
getting rich ahead of others.
He did not sacrifice efficiency just to preserve the utopian idea of
equality, which proved elusive in the people's communes late Chairman Mao
invented in the 1950s and 1960s.
But Deng never ever allowed for extreme inequalities, though some Chinese
economists since Deng's death have preached that they are inevitable in an
advancing economy. In particular, Deng hated inequalities caused by official
corruption. He once said that high-level officials must be strictly monitored
for corruption. ...
Quite a few people have misunderstood Deng as an advocate of efficiency only.
Deng's most important legacy is to do away with extreme inequalities, especially
those resulting from official corruption.
Indeed, official corruption has been rampant in many parts of the country in
the past decade, and with it, the awkward justification by certain economists,
such as Zhang Weiying from Peking University, ... that corruption and inequality
are inevitable if efficiency is to be advanced.
But don't think the current Chinese leadership will allow inequality to
develop to a dangerous point. Common prosperity has always been an ideal of the
Communist Party of China, although many other countries have long ago abandoned
this idea as beyond human reach.
To achieve common prosperity is not just a purely economic matter. It
requires leadership to heed even the voice of the smallest sparrow falling to
the ground. ...
It will be interesting to see how the tensions between common prosperity and
a market economy are managed as China develops further. Brad DeLong has one
Bill Gates, Paul Allen, Steve Ballmer, and the other hundred-millionaires of
Microsoft are brilliant, hard-working, entrepreneurial, and justly wealthy. But
only the first 5% of their wealth can have any justification as part of an
economic reward system to encourage entrepreneurship and enterprise. And the
last 95% of their wealth? It would create much more happiness and opportunity if
divided evenly among the citizens of the United States or the world than if they
were to consume any portion of it.
Moreover, an unequal society cannot help but be an unjust society. The very
first thing that any society's wealthy try to buy with their wealth is a head
start for their children. And the wealthier they are, the bigger the head start.
Any society that justifies itself on a hope of equality of opportunity cannot
help but be undermined by too great a degree of inequality of result.
For me, equality of opportunity is an important principle, and also an area
where we have room to improve.
As just one example:
Long before children turn 5, there are already enormous gaps in their
abilities. One study found that 3-year-olds with professional parents know about
1,100 words on average, while 3-year-olds whose parents are on welfare know only
525. Much of the gap is caused by environment...
And there's evidence that opportunity, at least as reflected in income
mobility, has declined in recent decades:
[A]cademic studies suggest that income mobility in the US is no better than
that in France or Britain. It's actually lower than in Canada and is approaching
the rigidity of Brazil. That marks a change from the past… From 1950 to 1980,
Americans were more and more likely to see their offspring move up - or down -
the income ladder. … Today, it could take five or six generations to close the
gap between poverty and middle-class status, calculates Mr. Mazumder [an
economist at the Federal Reserve Bank of Chicago].
And there are other ways in which opportunity appears to have fallen as well.
I'm not much for ex-post redistribution policies when everyone has an equal
chance at success, but when opportunity is limited for some groups through no
fault of their own, and when opportunity is potentially declining with time,
it's harder to maintain that position.
Posted by Mark Thoma on Friday, February 16, 2007 at 12:03 AM in China, Economics, Income Distribution, Policy |
Robert Frank argues for a single-payer health care system with universal
coverage supported by a voucher system:
A Health Care Plan So Simple, Even Stephen Colbert Couldn’t Simplify It, by
Robert H. Frank, Commentary, NY Times: In his State of the Union address,
President Bush proposed tax cuts to make health insurance more affordable for
the uninsured. The next day, Stephen Colbert had this to say on his show on
Comedy Central: “It’s so simple. Most people who can’t afford health insurance
also are too poor to owe taxes. But if you give them a deduction from the taxes
they don’t owe, they can use the money they’re not getting back from what they
haven’t given to buy the health care they can’t afford.”
Just so. As health economists have long known, market incentives induce
private insurers to spend vast sums to avoid people who may actually require
health care. This problem is mitigated (though not eliminated) by
employer-provided group policies. Because Mr. Bush’s proposal would steer people
toward individual policies, it would actually strengthen the incentive to shun
unhealthy people. Such people can now keep their insurance by not changing jobs.
But no private company would want them as individual policyholders...
Continue reading "Single-Payer Health Care and Vouchers" »
Posted by Mark Thoma on Thursday, February 15, 2007 at 10:09 AM in Economics, Health Care, Politics |
Edward Prescott, winner of the 2004 Nobel Prize in Economics, defends globalization:
'Competitive Cooperation' by, Edward C. Prescott, Commentary, WSJ: Of all the thankless jobs that economists set for themselves when it comes to educating people about economics, the notion that society is better off if some industries are allowed to wither, their workers lose their jobs, and investors lose their capital -- all in the name of the greater glory of globalization -- surely ranks near the top. This is counterintuitive to many people (politicians among them), because they view it the government's economic responsibility to protect U.S. industry, employment and wealth against the forces of foreign competition. If the government has any economic role at all, surely this must be it.
Actually, no. Government has a higher calling ..., which is to provide the opportunity for people to seek their livelihood on their own terms, in open international markets, with as little interference from government as possible. That doesn't mean we shouldn't provide short-term social insurance policies to aid those displaced by foreign competition, but the purpose of that aid should be to prepare workers, not protect them. ...
[B]roadly speaking -- and these broad operating principles matter -- those countries that open their borders to international competition are those countries with the highest per capita income. ...
How to explain this phenomenon? The answer lies predominantly with competition ... [I]t is useful to consider the example of the U.S., which, from its early days, created wealth from the healthy competition among businesses and industries in its member states. ...
This same competitive cooperation has been firing the economic engine of Europe for 50 years... And there is other evidence throughout the world for the benefit of international openness. Like the U.S., Australia is also a tale of competition among member states... The five wealthy countries of Eastern Asia -- Taiwan, Singapore, Japan, South Korea and Hong Kong -- were not so well off just a few decades ago, but their subsequent commitment to export markets and international competition put them on an upward trajectory that has improved the lives of millions of people.
And what of Latin America? Unfortunately, the region provides a case study in the perils of protectionism. ... [There is] much evidence to support ... that competitive barriers are to blame for Latin America's retarded growth. ...
Of course, many other factors account for marginal differences in productivity and wealth among countries that are already wealthy -- tax rates being key among those factors -- but they are comparative "frosting on the cake," and the cake in this case is the institutional commitment to international competition. ...
Protectionism is seductive, but countries that succumb to its allure will soon have their economic hearts broken. Conversely, countries that commit to competitive borders will ensure a brighter economic future... This lesson should not be lost on the U.S., the paragon of competitive growth, where politicians and policy makers are contemplating whether to construct more protective barriers. It is openness that gives people the opportunity to use their entrepreneurial talents to create social surplus, rather than using those talents to protect what they already have (or to protect rents, as economists like to say). Social surplus begets a rising standard of living, which begets growth, which begets social surplus, and so on. Rent protection stops growth cold and keeps people poor.
People in all countries are motivated to improve their condition, and all countries have their share of talented risk-takers, but without the promise that a competitive system brings, that motivation and those talents will only lie dormant. ...
Posted by Mark Thoma on Wednesday, February 14, 2007 at 11:02 PM in Economics, International Trade |
Arnold Kling responds to my post on global warming and Social Security. I said:
Here's what I've noticed. Some of the same people who argue there's too much uncertainty about the climate 75 years in the future to justify drastic action now use the so-called crisis in Social Security funding 75 years from now (which is far more uncertain than climate change) to argue for drastic change today.
He says he's guilty as charged, but for good reason:
Social Security and Global Warming, by Arnold Kling: ...The reason we should try to fix Social Security now is that the cure can be painless now. The problem is that under conservative assumptions about productivity, promised future benefits exceed future revenues by an ever-growing amount. So cut promised future benefits, and then if productivity does well, you can restore benefits if you like. The point is, planning for the worst case scenario does not hurt anybody in the non-worst-case scenario.
In the case of global warming, taking drastic steps now to prevent the worst-case scenario has real costs, against benefits that are potentially nil--in fact likely nil, for a variety of reasons. So, contra Jane and Mark, it is possible to be rationally precautionary about Social Security and not so much about global warming--or precautionary in a different way about global warming, as I've been suggesting.
As an aside, I disagree with Mark's assessment of the relative likelihood of a Social Security crisis and a global warming crisis. ...
If I were to put numbers on it, my subjective probabilities would be that there is about a 5 percent chance of a significant shortfall in Social Security down the road, and less than a 1 percent chance of a climate catastrophe caused by carbon dioxide emissions. The climate catastrophe is potentially much, much worse, which makes it a legitimately larger worry. But the cost of acting now on Social Security is essentially zero, and the cost of acting now on carbon dioxide emissions is huge…
Arnold also says, in reference to a December 2004 post by Jane Galt about him:
Before I plead guilty, let me remind Mark that Jane Galt made this point over two years ago.
I appreciate the reminder. I didn't have a blog until a few months after Jane's post and had only just discovered econ blogs at that time so he's right, I missed that one.
I'm confused about something though. If you were to tell me that I will receive 1 million dollars on the day I turn 67 would that change my behavior today? Yes. I'm pretty sure it would. Would I feel better off today? Yes again.
So, go in the other direction. If you tell me I will have less money in the future because my benefits will be cut, maybe not by a million dollars but by enough to matter, will that change my behavior today? Yes it will, and I’ll feel worse off.
More importantly, is it reversible like Arnold says? Suppose I give up a vacation and save instead because I believe benefits will be cut in the future. I can't always reverse that later (I can't necessarily climb the same mountain or ski the same slopes when I'm older, and even if there's no physical constraint, the opportunities will differ with
time). Or maybe the benefit cuts make it so I can't simultaneously send a child to college and save as much as I need to for retirement due to resource constraints. How does cutting future benefits, even probabilistically, leave me unaffected in such a case?
The point is that changing expected future benefits alters the time paths for consumption and saving (a premise, or at least a hope, of those in favor of privatization of Social Security) which, contrary to the claim above, does affect people "in the non-worst-case scenario."
Update: Angry Bear has more, including rebuttal comments by Arnold Kling.
Posted by Mark Thoma on Wednesday, February 14, 2007 at 08:22 PM in Economics, Environment, Social Security |
Robert Reich says worrying about balancing the budget is stupid:
Why Balancing the Budget is a Stupid Idea, by Robert Reich: When Bill Clinton was in the White House and the Republicans ran Congress, it was Republicans who demanded that the federal budget be balanced. That was because they wanted to cut federal spending. Now that George Bush is in the White House and Democrats run Congress, it’s Democrats who are outraged by what they consider to be an irresponsibly rosy scenario in the President’s new budget, which he claims will be balanced by 2012. Impossible, say the Democrats, who want to roll back his tax cuts on the wealthy.
Let’s call a time-out here and ask ourselves why it’s so important to balance the federal budget in the first place. The federal budget is just an accounting convention – and a lousy one at that. It doesn’t distinguish between three types of spending: (1) spending that's necessary to pay off obligations made in the past, (2) spending intended to make us better off today, and (3) spending to make us more productive in the future.
Any family knows the difference between past, present, and future – between, say, paying down the mortgage, going on an ocean cruise, or paying college tuition for the kids. You’ve got to honor past obligations, because your credit-worthiness depends on it. ... Meanwhile, you’ve got to live today on the basis of what you can afford to do today. That ocean cruise may be tempting but if you haven’t saved enough for, forget it. It’s an extravagance. And you should make investments in the future. Even if you have to borrow to send the kids to college you should do so because that’s a smart investment. And smart investments will help your family live better in the future and pay off its loans more easily.
But the federal budget doesn’t at all resemble a family budget. The federal budget is a static account that tells us nothing about past, present, or future. Price supports designed to protect today’s farmers are treated the same way as education and health care for our nation’s children. ... Social Security surpluses show up in the budget as this year’s revenues that offset this year’s expenses. But in reality the surpluses are payments by post-war boomers who are still working – but who in a few years will be retired and making big withdrawals. What look like revenues will soon turn into big liabilities. The federal budget hides this inconvenient fact.
No one in their right mind should worry about balancing this silly agglomeration. Hats off to politicians (like John Edwards) who recognize this. We should worry instead about putting aside enough to deal with past obligations, devoting no more than we can now afford to current needs, and making adequate future investments – even if we have to borrow in order to make them.
Update: PGL at Angry Bear disagrees.
Posted by Mark Thoma on Wednesday, February 14, 2007 at 01:18 PM in Budget Deficit, Economics |
Robert Samuelson is at it again:
Welfare State Stasis, by Robert J. Samuelson, Commentary, Washington Post:
...In 1956, defense dominated the budget; the Cold War buildup was in full
swing. The welfare state, which is what "payments to individuals" signifies, was
modest. Now everything is reversed. ... The welfare state has made budgeting an exercise in futility. Both liberals
and conservatives, in their own ways, peddle phony solutions. ...
It might help if Americans called welfare programs -- current benefits for
select populations, paid for by current taxes -- by their proper name, rather
than by the soothing (and misleading) labels of "entitlements" and "social
insurance." That way, we might ask ourselves who deserves welfare and why. ...
[M]ost Americans don't want to admit that they are current or prospective
welfare recipients. They prefer to think that they automatically deserve
whatever they've been promised simply because the promises were made. ...
To the archive:
Fire Insurance is not Welfare and Neither is Social Security, by Mark Thoma: Robert
Samuelson, and many others, appear to believe that any time there is a transfer
of income between individuals or groups it is welfare. This is wrong.
According to Samuelson:
Welfare is a governmental transfer from one group to another for the benefit
of those receiving. The transfer involves cash or services (health care,
education). We have welfare for the poor, the old, the disabled, farmers and
corporations. Social Security is mainly welfare...
Not it isn’t. Social Security is mainly a means of insuring against economic
risk. It is fundamentally an insurance program, not a saving program, and as
such it is not welfare.
Just because an economic activity transfers income from one person or group
to another does not make it welfare. ... Social Security is ... insurance ...
against economic risk as I explain in
Op-Ed piece. ...
There is an important distinction between needing insurance ex-ante and
needing it ex-post. Insurance does redistribute income ex-post, but that doesn't
imply that it was a bad deal ex-ante (i.e., when people start their work lives).
Angry Bear agrees with me on this and the two of us have been independently
saying the same thing (in fact, I first encountered AB in a Google search for
Social Security, insurance, and risk). As AB said (the
full text is well worth reading):
What does all of this have to do with Social Security? Those who are
hard-working, fortunate, and not too profligate will have a large nest egg at
retirement and Social Security will account for only a small portion of their
retirement portfolio. This is tantamount to paying for insurance and then not
needing it. This happens all the time -- every year someone fails to get sick or
injured and, while surely happy in their good health, would have been better off
not buying insurance. That's the nature of insurance: if you don't need it, then
you'll always wish you hadn't purchased it. Only in the context of retirement
insurance is this considered a crisis.
On the other hand, those with bad luck or insufficient income will not have a
nest egg at retirement. Because of Social Security, instead of facing the risk
of zero income at retirement, they are guaranteed income sufficient to subsist.
This is precisely like the insurance example I worked through above: people
with good outcomes will wish they hadn't paid into the insurance fund; those
with bad outcomes will be glad they did. Ex-ante, everyone benefits
from the insurance. Overall, society is better off because risk is reduced;
because people are risk-averse, the gains are quite large.
When I think of welfare, I think of pure money transfers from one group to
another without any economic basis for the transfer. In such cases, one person’s
gain arises from another’s loss. But economic activity that results in the
exchange of goods and services is different. It is not a zero sum game. One
person’s gain does not come at the expense of someone else.
The main feature of Social Security is not welfare as Samuelson asserts. The
main feature is insurance against economic risks and as such it makes us
collectively better off. Calling it welfare when it isn’t is misleading and
causes unnecessary class distinctions and resentments from the losers ex-post.
More importantly, it ignores and obscures the important role Social Security
plays in society as insurance against the economic risks we all face.
If you think you are so rich and powerful that you don’t need such insurance,
consider this. The stock market collapse of 1929 at the onset of the Great
Depression wiped out substantial quantities of wealth. The typical stock was
worth only one sixth its pre-crash value once the bottom was reached. Whatever
insurance existed in the stock market evaporated as the crash unfolded.
It wasn’t the poor jumping out of windows on Wall street. If you think it
can’t happen to you, think again.
[See also "The
Need for Social Insurance."]
Posted by Mark Thoma on Wednesday, February 14, 2007 at 12:15 AM in Economics, Social Insurance, Social Security |
A lot of money is spent in the health care business just trying to figure out
who will pay the bills, something that doesn't happen with a single-payer
Health Claims Spawn a New Arms Race, by Vanessa Fuhrmans, WSJ: Four years
ago, Paluxy Valley Physicians of Glen Rose, Texas, was struggling to recoup more
than $500,000 in denied or unpaid claims from insurers. Two of its eight doctors
left the practice, while three others had to borrow $100,000 to keep it afloat.
To turn things around, the medical practice turned to Boston-based
athenahealth Inc., one of the biggest of hundreds of companies in a lucrative
niche: helping doctors wring payments from health plans. Athenahealth's software
flagged and corrected the complex coding for thousands of claims, preventing
them from getting hung up in insurers' Byzantine rules. Today, Paluxy Valley has
whittled its claims outstanding to $179,000 and repaid the bank loan. ...
"The insurers outcode us, they outsmart us and they have more manpower," says
Shari Reynolds, the administrator at Paluxy Valley... "Now at least we have a
Doctors increasingly complain that the insurance industry uses complex,
opaque claims systems to confound their efforts to get paid fairly for their
work. Insurers say their systems are designed to counter unnecessary charges...
Like many tug-of-wars over the health-care money pot, the tension has spawned a
booming industry of intermediaries.
It's called "denial management." Doctors, clinics and hospitals are investing
in software systems costing them each hundreds of thousands of dollars to help
them navigate insurers' systems and head off denials. They're also hiring
legions of firms that dig through past claims in search of shortchanged payments
and tussle with insurers over rejected charges. "Turn denials into dollars,"
promises one consultant's online advertisement.
The imbroglio is costing medical providers and insurers around $20 billion --
about $10 billion for each side -- in unnecessary administrative expenses,
according to a 2004 report by the Center for Information Technology Leadership,
a nonprofit health-technology research group based in Boston. ...
The denial-management industry's rise shows how much of medical spending is
consumed by propping up and doing battle over an arcane patchwork of claims
systems. Roughly 30% of physicians' claims are denied the first time around.
Sales of physician-billing and practice-management technology grew 25% to more
than $7.5 billion last year...
Here's more on a related topic, health care and genetic testing. I think this is a step in the right direction:
Congress May Prohibit Genetic Testing for Jobs, Health Coverage, by William
Roberts, Bloomberg: The Democratic-controlled Congress, with the backing of
President George W. Bush, may soon pass the first U.S. legislation preventing
the use of genetic testing by employers and insurers.
The measure ... would prohibit health plans from
denying coverage or charging higher premiums based on a person's genetic
predisposition to disease. It also bars companies from collecting genetic
information on employees.
The legislation had been stalled in the Republican-led House for more than a
decade because of opposition from business groups such as the U.S. Chamber of
With the Democrats now in charge, prospects for passage ''look excellent,''
said Representative Louise Slaughter, a New York Democrat who sponsored the
Scientists and other supporters of the legislation say the lack of privacy
protections has hampered research on treatments for cancer and other diseases.
They say volunteers have been reluctant to participate in genetic testing to
identify a predisposition to disease because confidentiality couldn't be
The Senate approved the bill in 2005 by a 98-0 vote. Slaughter said it died
in the House because Republican leaders ''would not even hold a hearing'' on it.
''The drug companies and the insurance companies were dead set against it,'' she
Does this matter?:
Individuals with genetic conditions twice as likely to report health insurance
denial, EurakAlert: A new study published in the February 2007 issue of the
American Journal of Medical Genetics reveals that individuals with genetic
conditions are twice as likely to report having been denied health insurance
than individuals with other chronic illnesses. ...[This is] believed to be the
first large-scale study to systematically compare and contrast the health
insurance experiences, attitudes, and beliefs of persons with genetic conditions
versus individuals with other serious medical conditions. ...
"Anyone with chronic medical conditions should be legitimately concerned
about access to health insurance, but individuals with genetic conditions may
have additional reasons to worry," said principal investigator Nancy Kass, ScD,
deputy director for public health at the Johns Hopkins Berman Institute of
Bioethics and a professor at the Johns Hopkins Bloomberg School of Public
Health. "We learned that there is considerable concern about being denied health
insurance because of a genetic condition, as well as maintaining some privacy
about the status of that condition." ...
Almost all of the individuals in the study ... said they obtained their
health insurance through either their employer ... or their spouseâs employer...
Nearly half of employed individuals ... said they felt they could not leave
their jobs because they would lose their health insurance. Individuals with
genetic conditions were also more likely to report trying to obtain additional
health insurance compared to individuals with other serious medical conditions.
Only 67.2 percent of these individuals reported success in obtaining additional
health insurance. ...
The Health Insurance Portability and Accountability Act (HIPAA) expressly
forbids a group health insurance plan from using genetic information to
establish rules for eligibility or continued eligibility. HIPAA also prohibits
insurance companies from treating genetic information as a "pre-existing
condition in the absence of the diagnosis of the condition related to such
information." Individuals cannot be denied health care coverage for a medical
condition as a result of a genetic marker for the condition. However,
individuals can be denied if they have symptoms of genetic disease. As such,
HIPAA provides no protection for the vast majority of respondents in the new
"As we spoke to family after family, it became clear that people with all
types of medical conditions are quite worried about access to health insurance
and make life changes in order to preserve their access to it," added Kass. "But
people with genetic conditions may face additional challenges... Bioethicists
are problem-finders, and we found a big one." ...
It's not clear to me what the new legislation offers over and above the HIPAA,
but any additional protection is welcome.
Posted by Mark Thoma on Wednesday, February 14, 2007 at 12:14 AM in Economics, Health Care |
Iran should provoke the U.S. right up to the point where the marginal
benefit from an additional unit of provocation - higher oil revenues from a
rising risk premium - just equals the marginal cost:
Troubled Waters Over Oil, by James Surowiecki, The New Yorker: The past few
months haven’t been easy for Iran’s President, Mahmoud Ahmadinejad. His refusal
to halt Iran’s uranium-enrichment program led the United Nations to impose
sanctions... Inflation in Iran has exploded... In the country’s recent municipal
elections, Ahmadinejad’s political allies were crushed, and clerics and
lawmakers have begun criticizing him in public. Worse still, through the second
half of 2006 the price of oil tumbled almost thirty per cent, a disaster for an
economy as dependent on oil revenue as Iran’s. ... And then the Bush
Administration said that it had authorized U.S. troops to detain or kill any
Iranians found to be working with the Iraqi insurgency, and dispatched a second
aircraft-carrier group to the Persian Gulf, sparking rumors that a military
strike against Iran was in the works.
This latest confrontation with the U.S. should have been the capper...
Strangely, though, it may instead have brought about an upturn in his fortunes.
Soon, oil prices started to rise, jumping twenty per cent in just two weeks. As
a result, the Iranian regime suddenly has an extra twenty million dollars or so
to spend every day, a windfall that will help Ahmadinejad to placate his critics
and solve some of his country’s more pressing economic problems.
The jump in oil prices wasn’t entirely a geopolitical phenomenon—the cold
snap in the U.S. was also a big factor—but it was driven in part by an increase
in what oil traders call the “risk premium.” ... In the current confrontation
between the U.S. and Iran, ...[there is a] a perverse set of incentives:
whenever the U.S. says things that make a military conflict with Iran seem more
likely, the price of oil rises, strengthening Iran’s regime rather than
weakening it. The more we talk about curbing Iranian power, the more difficult
It’s hard to measure the risk premium exactly, but most estimates suggest
that in the past couple of years ... it has accounted for somewhere between ten
and twenty dollars on each barrel of oil. ... Ten months ago ... when Iranian
leaders were talking about their progress in enriching uranium, and were
threatening to attack Israel in response to any U.S. attack, the price of oil
rose to more than seventy-five dollars a barrel. The economic consequences of
this are not trivial; in the past few years, the inflated risk premium has given
Iran tens of billions of dollars that it would otherwise not have had.
This helps Ahmadinejad enormously, because Iran has made huge commitments to
government spending that can be kept only by relying on oil revenue. ...
The persistence of the risk premium means that Ahmadinejad ... has an
economic incentive to say confrontational things that spook the oil market. But
the effect of his pronouncements is limited, because traders know that
self-interest is likely to keep Iran from doing anything that would cut off the
supply of oil. What really keeps the risk premium high is the American penchant
for public responses to Iran’s provocations. So cooling down the martial
rhetoric—even if we plan to take military action eventually—would likely bring
oil prices down for a time, making Iran weaker. ... Talking tough may look like
a good way of demonstrating U.S. resolve, but when tough talk makes our opponent
richer and stronger we may accomplish more by saying less.
Posted by Mark Thoma on Wednesday, February 14, 2007 at 12:06 AM in Economics |
James Pethokoukis at U.S. News & World Report's blog Capital Commerce emails:
Bush's Secret Plan to Save Social Security,
by James Pethokoukis: Is the Social Security solvency "crisis" really not a crisis at all? Maybe
not, if Edward Lazear, chairman of President Bush's Council of Economic
Advisers, has his numbers correct. Yesterday, Lazear held a media briefing about
the 2007 Economic Report of the President. During the press conference, Lazear said the
following about the future rate of productivity growth:
I wouldn't necessarily say 3 percent. But I would expect that we could expect
to see high rates, perhaps not quite at the 3 percent level, but somewhere
higher than 2 percent. I would expect somewhere closer to 3 percent...
...Now here is why Lazear's prediction is
important: Higher productivity growth–and the stronger economy and higher wages
that it implies–would completely solve Social Security budget woes for the next
75 years. Right now, the Social Security Administration is assuming that
long-term productivity growth is 1.7 percent. An alternative, rosier forecast
has it at 2 percent. If the rosier forecast were correct, the 75-year shortfall
would be 25 percent less. But if Lazear's even more optimistic prediction is
right, the 75-year shortfall would be eliminated.
Here is what economist Brad DeLong ... wrote in his
popular blog on the topic: "Each 0.1 percentage point increase in the growth
rate of productivity reduces the long-horizon Social Security deficit by
approximately 0.1 percent of taxable payroll. Elementary. Obvious to everyone
who has even a surface knowledge of how our current system works. Real wage and
productivity growth of 3 percent per year ... would wipe out the 75-year
Now DeLong doubts such growth is possible. But Lazear thinks it is doable
with the right policies: "And I think we do have that kind of an economy,
because, again we have a relatively low-tax economy, we have an economy that's
open to trade for the most part, we've encouraged foreign investment, all of
which have been important and instrumental in creating our economic growth."
Those on the left might also add other factors that they think are necessary
for growth, such as greater public investment in basic scientific research or a
modified social insurance system–improved healthcare, wage insurance–to make
worried workers more willing to take entrepreneurial risks like starting their
own business. ...
Here's what I've noticed. Some of the same people who argue there's too much uncertainty about the climate 75 years in the future to justify drastic action now use the so-called crisis in Social Security funding 75 years from now (which is far more uncertain than climate change) to argue for drastic change today.
Posted by Mark Thoma on Tuesday, February 13, 2007 at 02:31 PM in Economics, Social Insurance, Social Security |