« February 2007 |
| April 2007 »
The battle for the heart and soul of the Democratic Party. Here's the issue,
in a nutshell:
[In 1992] Clinton famously exploded that his whole economic vision and
political future were being held hostage by "a bunch of fucking bond traders."
At another planning session ..., Clinton declared with sarcastic disgust: "Where
are all the Democrats? We're all Eisenhower Republicans … . We stand for lower
deficits and free trade and the bond market. Isn't that great?"
And here's part of a much longer essay by Robert Kuttner on the role of Robert Rubin
and Wall Street in the Democratic Party:
Friendly Takeover, by Robert Kuttner, American Prospect: In April 2004, AFL-CIO president John Sweeney grew concerned that John Kerry
was getting too much of his economic advice from the Wall Street wing of the
Democratic Party. ... In the general
election, he would need the unions. Sweeney proposed a private meeting to
discuss living standards as a campaign issue, and the candidate invited the
labor leader to his Beacon Hill home. Sweeney arrived ...,
bringing his policy director, Chris Owens, and Jeff Faux of the Economic Policy
Institute. There, seated in the elegant living room, were Robert Rubin and two
longtime lieutenants: investment banker and former Rubin deputy Roger Altman,
and fellow Clinton alum Gene Sperling -- Kerry's key economic advisers.
In a three-hour conversation, the group discussed the deficit, taxes, trade,
health care, unions, and living standards. The labor people urged the candidate
to go after Wal-Mart's low wages. Rubin countered that a lot of people like
Wal-Mart's low prices. Kerry eventually announced that the meeting needed to
wrap up... Sweeney and his colleagues were ushered
out the door; Rubin, Altman, and Sperling remained. "Wall Street was in the room
before we arrived," says Faux, "and they were there after we left."
Now, more than two years after Kerry lost a winnable election, the Democrats
have taken back both chambers of Congress, running on an economic platform far
more populist than Kerry's. With the strongest field in decades, they could win
the presidency in 2008. Though Hillary Clinton is running as an economic
centrist, a ticket led by John Edwards, Barack Obama, or Al Gore (if he gets in)
would probably run a robust campaign on pocketbook issues. But if the Democrats
do take back the White House, they are likely, once again, to find Bob Rubin in
their living room. ...
Continue reading "Should Democrats Dump Wall Street?" »
Posted by Mark Thoma on Saturday, March 31, 2007 at 04:05 PM in Economics, Policy, Politics |
Should we use science-based proposals for alleviating global warming such as
putting particles in the upper atmosphere to deflect solar energy? Do we know
enough about the risks of such wide-scale manipulation of the environment to be
sure we know how this would turn out?
weigh risks of climate 'techno-fixes', by Moises Velasquez-Manoff, The Christian
Science Monitor: Faced with the specter of a warming planet and frustrated
by the lack of progress..., some scientists ... seek a way to give humanity
direct control over Earth's thermostat.
Proposals run the gamut from space mirrors deflecting a portion of the sun's
energy to promoting vast marine algal blooms to suck carbon out of the
atmosphere. The schemes have sparked a debate over the ethics of climate
manipulation, especially when the uncertainties are vast and the stakes so high.
For many scientists, the technology is less an issue than the decision-making
process that may lead to its implementation. [Graphic
showing some of the proposals.]
Environmental policy driven purely by cost-benefit analyses cannot, they say,
effectively point the way on large issues like climate change. But even as many
scientists caution against unintended, even catastrophic consequences of
tinkering with climate, they concede that the more tools humankind has to
confront a serious problem, the better.
Others wonder if the mere hint of a quick-fix solution will only provide a
false sense of security and hamper efforts to address the root problem: carbon
emissions from a fossil fuel-based economy. And then there's the trillion-dollar
question: In a politically fractured world, how will technologies that affect
everyone be implemented by the few, the rich, and the tech-savvy? ...
[G]eoengineering, ... subtracting a fraction of the sun's energy from the
earth equal to that trapped by human-emitted greenhouse gases ..., is not a new
idea, but only recently has it moved toward the scientific mainstream. In 2006,
Nobel Laureate Paul Crutzen ... published a paper on injecting particles into
the upper atmosphere to reflect incoming sunlight and cool the earth. Climate
scientists have since run scenarios on climate models and first reports found
that it might work. In November last year, NASA cohosted a conference on the
Continue reading "Should We Use Science to Manipulate the Climate?" »
Posted by Mark Thoma on Saturday, March 31, 2007 at 04:32 AM in Economics, Environment, Policy, Science |
Is the recent slowdown in productivity growth permanent? Maybe, but let's
Productivity Lull Might Signal Growth Is Easing, by Greg Ip, WSJ: The U.S.
productivity boom that began in the mid-1990s is showing signs of running out of
steam. If it proves more than a temporary lull, slower growth in productivity --
that is, output per hour worked -- could lead to slower growth in living
standards, more difficultly paying for the baby boomers' retirements and a
greater risk of inflation. ...
Official measures have slowed since the late 1990s, when an acceleration in
productivity growth made possible faster growth, lower unemployment, lower
inflation and lower interest rates. It fueled a boom in business investment and
stock prices. Today, in contrast, productivity growth has slowed, business
investment has turned down and inflation is proving stubborn.
"All the elements of the good years of the '90s have now turned around," said
Robert Gordon, an economist at Northwestern University...
Continue reading "The Recent Decline in Productivity Growth" »
Posted by Mark Thoma on Saturday, March 31, 2007 at 12:57 AM in Economics, Technology |
In rational expectations models, it is usually assumed that agents understand
the nature of the equilibrium in the economy in which they operate. That is,
they are able to solve the complex set of equations that describe the economy
and calculate the equilibrium outcome. Many people object to rational
expectations models because this information requirement seems too stringent -
how can the average person solve such equations? And if they cannot, how can
expectations be rational?
One answer to this is to toss someone a ball and say "catch." Somehow, we
don't know exactly how because as explained below it's "technically impossible,"
but somehow they are able to solve the differential equation problem and easily
catch the ball. The discussion below is about baseball, but it describes a
similar process - how players are able to solve what appear to be impossible
problems using what economists call the "as if" principle - they behave as if
they they are able to solve the underlying mathematical problem, e.g. firms behave as if they can set
MC=MR and consumers behave as if they can solve the equations needed to maximize
their utility. The discussion also covers topics such as findings from the
psychology literature on whether "clutch hitters" really exist, and there are
connections to the learning literature in economics through the descriptions of
the simple algorithms used to solve the problems such as catching a fly-ball. Mostly though I just thought
it was interesting and tried to connect it to economics to justify posting it:
The psychology of baseball, EurakAlert: It’s the seventh game of the World
Series — bottom of the ninth inning, your team is down 4-3 with runners on
second and third — and you’re on deck. You watch as your teammate gets the
second out. That means you’re up with a chance to win a championship for your
team...or lose it.
You’re known as a clutch hitter, and you’ve hit safely in 22 straight games —
an impressive streak to be sure. But as you step into the batter’s box, your
hands are sweating and your mind is racing. You think about the last time you
faced this pitcher and the curveball he threw to strike you out. You look at him
standing on the mound and he looks tired. You try to pick up clues from his body
language. How fast is his fastball today? Will he tempt you with that curveball
Psychologists are asking different questions: Does your recent hitting streak
really matter? Is there even such a thing as a clutch hitter? Will the pitcher’s
curveball fool you? And then there are the more basic questions: How is it
possible to hit a 100 m.p.h. fastball without being able to see it for more than
a split second? How is it that even sandlot players — mere children — can
intuitively do the complex geometry needed to get to precisely the right spot to
catch a fly ball?
University of Missouri psychologist Mike Stadler uses research from dozens of
behavioral scientists, plus some of his own, to try answering these complicated
questions in his new book, The Psychology of Baseball. "Baseball turns out to be
a good laboratory for studying psychological phenomena," Stadler says, "because
you’re pushing the human system to its limits. And that’s a good way to see how
the system works."
Psychologists have been studying baseball players almost as long as the Red
Sox had been disappointing fans in Boston, and much of the attention has
naturally focused on the most heroic part of the game: hitting. Baseball’s great
sluggers, such as Babe Ruth, Ted Williams, and Albert Pujols, make it seem so
effortless, which makes it hard to accept the scientific consensus that hitting
is basically impossible. That’s right, impossible. Why? A ball thrown by a major
league pitcher reaches speeds of 100 m.p.h. and an angular velocity (the speed
in degrees at which the ball travels through your field of vision) of more than
500 degrees per second. A typical human can only track moving objects up to
about 70 degrees per second. Add to this the fact that it takes longer to swing
a bat than it does for a pitch to go from the pitcher’s hand to the catcher’s
mitt, which means a hitter must start his swing before the ball is released and
has less than a half a second to change his mind. All that equals impossible.
Continue reading "Doing the Impossible" »
Posted by Mark Thoma on Saturday, March 31, 2007 at 12:33 AM in Economics, Science |
When I moved to Oregon from California in the late 1980s, it didn't take me
long to realize it would be best if I put Oregon license plates on my car:
Problems in your town? Blame it on Californians, by Angie Wagner, The Associated
Press: It's dead inside Favorites bar this afternoon, where the propped-open
door spills a bit of light onto the ancient Elvis pinball machine and the grumpy
man puffing on a cigarette in front of the video poker machine.
There's no food here, unless you count the vending machine against the green
wall. Owner Ray Medrano had to make a choice: Close the kitchen or ban smoking
in the joint altogether. His customers love their smokes more than their food,
so the kitchen lost. For Medrano, there's only one despicable group of people to
blame for Nevada passing a smoking ban that eliminates smoking in restaurants
and bars that also serve food: Californians.
''California has a negative influence on our society,'' he says, glancing
around as cigarette smoke fills the stuffy place. ... It's a popular refrain
from many in the West. When Californians move in, it's always their fault when
things change. They infect the rest of the region with their politics and
questionable driving. They make housing prices soar.
Sure, it's been 30 years since Oregonians first slapped ''Don't Californicate
Oregon'' bumper stickers on their cars, but, like the song by the Red Hot Chili
Peppers, ''Californication'' is still alive and well.
''I think it's just such a common desire to say things were really calm and
great here and then these people came in,'' says Patty Limerick, history
professor ... of the University of Colorado's Center of the American West.
Since 1991, the number of Californians moving out topped the number of people
moving into the state. And where do they go? The top five states Californians
moved to between 2000 and 2005 were Arizona, Nevada, Texas, Washington and
For many Californians, they want what eludes them in their state - open
space, clean air and not so much traffic. So they sell their houses for a chunk
of change, move somewhere else in the West, buy a bigger house and start driving
up the housing prices, much to the dismay of locals.
Sherrie Watson has lived in Coeur d'Alene, Idaho, since she was 16 and is
quite fed up with Californians. ''They complain how cold it is. And they just
moved here because it is cheaper and to 'get away,' but then they keep saying
things like, 'We did it in California this way, so why don't you change? They came here because they liked it the way it was when they visited, but
then they want to change it...''
Picking on Californians
has almost become a sport, with people trying to come up with the catchiest
slogans or blogging about how annoying Golden Staters are. Montanan Tom Heatherington runs a Web site called www.montana-sucks.com that
sells T-shirts and bumper stickers that say: ''Montana sucks. Now go home and
tell all your friends.''...
Yep, lower wages, higher housing prices, ruined culture -- we need a wall.
Posted by Mark Thoma on Friday, March 30, 2007 at 06:45 PM in Economics |
Jeff Lacker has a nice discussion of the relationship between inflation,
unemployment, and economic policy. If you want to learn more about the modern
formulation of the Phillips curve and the policy issues surrounding it, this is a good source of information. Those who are familiar with the traditional Phillips
curve story and inflation bias from the
time-inconsistency literature may want to skip to the discussion in the section
on "The Modern Phillips Curve." The
"hybrid" Phillips curve is discussed here, and policy is
discussed in this section. Here's the speech:
Inflation and Unemployment, by Jeffrey M. Lacker President, Federal Reserve Bank
of Richmond: I recently had the opportunity to guest-teach a couple of
business school economics classes. It was great to be back in the classroom. ...
I opened my discussions with a pair of questions, asking students to put
themselves in the place of a monetary policymaker choosing a target for the
federal funds rate. First I gave them a set of hypothetical facts about the
state of the economy – a slowdown in housing in the wake of multi-year housing
boom; rising mortgage default rates; preliminary indicators of a possible
slowing in business investment. And then I asked them: “What are you going to
do?” The students dutifully responded that this situation could call for a
reduction in the funds rate. They’d obviously been doing their homework.
Next, I gave them a set of hypothetical facts about inflation – core PCE
inflation, on a year-over-year basis, has been above 2 percent for nearly three
straight years; after some signs of moderation, recent months’ inflation numbers
have moved higher; energy prices have been fluctuating around historically
elevated levels and futures markets predict further increases to come; and labor
compensation is rising after a relatively flat period. Same question: “What are
you going to do?” Once again, their response came right out of the textbook – an
increase in the funds rate is needed to counter rising inflation, other things
The trick of course is that both sets of hypothetical facts are drawn from
the same period – basically right now. My objective was to underscore the fact
that sometimes monetary policy decisions are not obvious, and that figuring out
the appropriate policy action requires as complete a picture as possible of the
state of the economy. Interpreting that picture can be a challenging task.
The situation I presented to the students represents a policy-making dilemma.
The actions needed to bring down inflation could work against our desire to see
the real outlook solidify. The facts appear to present the policymaker with a
tradeoff. You can address one – inflation or real growth – but that puts the
other at risk.
There is an element of truth to characterizing this situation as a tradeoff.
But that characterization is also, I think, an extreme over-simplification and
can be highly misleading. Monetary policy actions today are capable of affecting
inflation and unemployment both now and in the future. Consequently, it is a
mistake to view policy decision-making as a sequence of one-shot trade-offs.
Some understanding of how inflation and unemployment interrelate over time is
essential. I’d like to devote my remarks ... to the relationship between
inflation and the real side of the economy and to what I think that relationship
implies for policy-making.
Continue reading "Jeffrey Lacker: Inflation and Unemployment" »
Posted by Mark Thoma on Friday, March 30, 2007 at 01:03 PM in Economics, Macroeconomics, Monetary Policy |
PGL at Angry Bear reminds Greg Mankiw that tax cuts don't pay for
Tax “Cuts”: Fill My Mug and Pass the Popcorn, by PGL: Greg Mankiw provides
this parable about tax policy:
Suppose that every day, ten men go out for beer and the bill for all ten
comes to $100. If they paid their bill the way we pay our taxes, it would go
something like this:
The first four men (the poorest) would pay nothing. The fifth would pay $1.
The sixth would pay $3. The seventh would pay $7. The eighth would pay $12. The
ninth would pay $18. The tenth man (the richest) would pay $59. So, that's what
they decided to do.
The ten men drank in the bar every day and seemed quite happy with the
arrangement, until one day, the owner threw them a curve. "Since you are all
such good customers," he said, "I'm going to reduce the cost of your daily beer
by $20." Drinks for the ten now cost just $80.
Let me interject something here from Greg's post. The story goes on and after
the price cut:
[T]he bar owner ... proceeded to work out the amounts each should pay [after
the 20% reduction]. And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to
drink for free. But once outside the restaurant, the men began to compare their
savings. "I only got a dollar out of the $20," declared the sixth man. He
pointed to the tenth man," but he got $10!" "Yeah, that's right," exclaimed the
fifth man. "I only saved a dollar, too. It's unfair that he got ten times more
"That's true!" shouted the seventh man. "Why should he get $10 back when I
got only two? The wealthy get all the breaks!" "Wait a minute," yelled the first
four men in unison. "We didn't get anything at all. The system exploits the
The nine men surrounded the tenth and beat him up. ... And that, boys and
girls, journalists and college professors, is how our tax system works. ...
Back to PGL:
Greg continues with this parable, which can also be found here, commenting on
the distribution of this alleged tax cut. I guess this is supposed to be a
comment on the 2001 tax cut but there’s something missing here. In the real
world, we did not get a tax cut – only a tax shift. Yes, government spending did
not decline so somebody will have to pay more in taxes someday.
So let’s finish his parable by assuming that the owner raised the price of
the munchies such as popcorn and the beer nuts. One cannot talk about talk about
the distribution of the change in tax policy without bringing in the total
picture. Yet, we often see our conservative friends implicitly denying that
either sales taxes or employment taxes (or both) will have to be increased. Of
course, this is one of many myths that get created when one falls for the free
lunch fallacy that permeates Republican discussions of fiscal policy.
Hey bartender – pour me another pint and give me some more popcorn. It’s all
free – right?
I'll note too that the fact that the owner can cut 20% off the bill and
still make a profit ought to raise some eyebrows among the patrons - that's no
small amount of monopoly power. In a competitive market, the owner could not do
this. In addition, this is not how we analyze the general equilibrium effects of change in the burden of taxes after a tax change. Even with partial equilibrium analysis, when taxes are increased the customers will not face 100% of the burden, the burden is
shared between the owner and the customers. In the opposite direction, when
taxes are cut, the reduced burden is shared as well. That's missing from this
As to Greg's the main point, questions about the equity of tax cuts, the other thing missing is what taxes pay for. Making the good in the story
beer (i.e. something we could do without) and then allowing the same quantity to
be purchased at a lower price is not a parable that relates to government
spending. Unlike this made-up story with it's made-up resentments, taxes fund
government services - something must be given up when taxes are cut, or taxes
must be raised in the future as PGL notes. In the case where programs must be cut, if it's essential social programs,
then I hope that people do raise questions of basic equity. Cutting estate taxes
when we cannot afford pre-school programs for disadvantaged children would be a
much better parable for Greg to tell. We could point fingers at the
disadvantaged and call them whiners for asking if paying for estate tax-cuts by not fully funding programs such as these is fair - but I suspect
we won't hear that story.
Posted by Mark Thoma on Friday, March 30, 2007 at 11:03 AM in Economics, Income Distribution, Taxes |
This Wall Street Journal article asks if the government is "outsourcing its
brain," that is, assuming it has one:
Government 'Outsourcing Its Brain'?, by Bernard Wysocki Jr., WSJ: ...Since
the 2001 terrorist attacks and wars in Afghanistan and Iraq, the federal
government's demand for complex technology has soared. But Washington often
doesn't have the expertise to take on new high-tech projects, or the staff to
oversee them. As a result, officials are increasingly turning to contractors ...
that operate some of the government's most sensitive and important undertakings.
The risk of this approach, in the words of Warren Suss, a ... consultant and
expert on federal computer outsourcing, is that the government could wind up
"outsourcing its brain." The number of private federal contractors has soared to
7.5 million, four times bigger than the federal civilian work force itself...
Congress, meanwhile, is learning how hard it is to keep tabs on these
The government still buys pencils and office furniture, but now relies on
others for sophisticated technology work, especially what's known as "systems
integration" -- pulling together complex information networks for the military,
homeland-security personnel and others.
"Our ignorance is their gain," says Richard Skinner, inspector general at the
Department of Homeland Security. Projects currently under way range from the
design of next-generation military computer networks to the oversight of a $30
billion electronic "fence" being built along the Mexican border.
Outsourcing originally sprang from concerns about overspending and
mismanagement by the government itself. Starting in the 1980s, agencies realized
it was cheaper to buy certain services directly from companies. In the 1990s,
teaming up with the private sector became a popular idea, in part as a way to
reduce the number of federal employees on the books.
Today, the potential pitfalls are legion. Big contracts are notorious for
cost overruns and designs that don't work, much of which takes place under loose
or ineffective government scrutiny. ...
Democratic Rep. Henry Waxman of California, new chairman of the House
Oversight and Government Reform Committee, has castigated the Department of
Homeland Security for lax oversight... Outsourcing details to private
contractors "can be a prescription for enormous fraud, waste and abuse," Rep.
Waxman said... One flashpoint ... is whether contractors hire other contractors
without enough controls or competition. In March, Rep. Waxman introduced a bill
that would put limits on contracts awarded without competitive bidding. ...
Fueling the growth ... is a move toward giant, complex projects, awarded by
Uncle Sam but pulled together by what's called a "lead systems integrator." Big
contractors have become even more powerful in the post-9/11 era, some say,
because the government has turned conservative, preferring to award contracts on
critical national-security projects to proven players, especially as
knowledgeable civil servants retire.
The U.S. government "is losing their system engineering, program management,
acquisition expertise," said Kenneth Dahlberg, CEO of Science Applications
International Corp., of San Diego... He vowed that his company, one of the
biggest federal contractors with 44,000 employees, would be there to fill the
When there is lack of accountability and market-imposed discipline due to political connections, uninformed
oversight (perhaps due to appointing non-experts into critical government
positions, which may again relate to political connections), lack of competition
in the contract award process, market failure, or for other reasons, there's no reason to believe that private
companies will perform better than government. I'm not opposed to privatization
when it's done properly, but large, politically connected, private sector firms
lacking the proper incentives can be every bit as wasteful and inefficient as
government. [There are several examples of this in the article].
One minor quibble. The article says, "The government still buys pencils and
office furniture, but now relies on others for sophisticated technology work."
Pencils and office furniture aren't a counterexample, instead they are good
examples of when the government should privatize. Buying pencils and furniture
from the private sector means the government is relying on others for the work
of producing these goods, as they should. It's unlikely that the government
could produce either pencils or furniture cheaper itself. But it's a mistake to
conclude from cases such as these that the private sector is better at producing
all goods and services.
Posted by Mark Thoma on Friday, March 30, 2007 at 01:49 AM in Economics |
Paul Krugman from 1999. I like this one - it uses a simple, entertaining fable to illuminate important issues in international finance such as whether developing countries should stabilize their exchange rates:
A Monetary Fable, by
Paul Krugman: Once upon a time, the world had a single currency, the globo.
It was generally well managed: the Global Reserve Bank (popularly known as the
Glob), under its chairman Alan Globespan, did a pretty good job of increasing
the global money supply when the world threatened to slide into recession,
trimming it when there were indications of inflation. Indeed, in later years
some would remember the reign of the globo as a golden age. Businessmen in
particular liked the system, because they could buy and sell anywhere with a
minimum of hassle.
But there was trouble in Paradise. You see, although careful management of
the globo could prevent a boom-bust cycle for the world as a whole, it could not
do so for each piece of that whole. Indeed, it turned out that there were often
conflicts of interest about monetary policy. Sometimes the Glob would be
following an easy-money policy because Europe and Asia were on the edge of
recession; but that easy money would fuel a wild speculative boom in North
America. Other times the Glob would feel obliged to tighten money to head off
inflation in North America, intensifying a developing recession in Latin
America. And there was nothing regions could do about it.
Over time frustration over this impotence built up; and when the Glob failed,
through policy misjudgements, to prevent a serious global recession the system
broke up. Each region introduced its own currency: Europe adopted the euro,
Latin America the latino, North America the gringo, and so on. But how should
these local currencies be managed?
Continue reading "A Monetary Fable" »
Posted by Mark Thoma on Friday, March 30, 2007 at 12:15 AM in Economics, International Finance |
Robert Reich notes a new report from NASA that "some
100,000 asteroids and comets routinely pass between the Sun and the Earth's
orbit. About 20,000 of these orbit close enough to us that they could one day
hit the Earth and destroy a major city." Here's more:
Deep Impact A new NASA report on killer asteroids ought to spook people into
action, by Robert B. Reich, American Prospect: According to a new report
from the National Aeronautics and Space Administration, ... over a thousand
...[asteroids] are large enough (almost a mile wide in diameter) and their
orbits close enough to us as to pose a real potential hazard of crashing into
the Earth with enough force to end most life on this planet. ...
Continue reading "Killer Asteroids" »
Posted by Mark Thoma on Thursday, March 29, 2007 at 06:03 PM in Economics, Science |
Martin Wolf says the welfare state is contributing to the demise of the
The war on the traditional family, by Martin Wolf, Commentary, Financial Times:
Incentives matter. If society rewards uneducated young women for becoming single
parents, they will adopt that as their career. That is precisely what British
politicians have done...
This is not how politicians put it. ...[They do not] admit that their aim is
to eliminate the committed married couple from the poorer sections of British
society. But that is the inevitable effect of trying to ensure that the choices
of parents have no bearing on the economic welfare of their children.
It is not excessive to describe the resulting policies as a “war” on the
traditional family. That is what it is, as Patricia Morgan, a well-known analyst
in this area, argues...
Before the welfare state, both members of a couple
needed one another – and, if possible, the extended family – because caring for
children is incompatible with simultaneously earning an adequate income for a
family. That has not changed. The difference is only that taxpayers now provide
“By the end of the century,” Ms Morgan writes, “73 per cent of lone parents
were receiving family credit [to bolster wages] or income support; 57 per cent
were receiving housing benefit and 62 per cent council tax benefit. The figures
for couples with children were 11 per cent, 8 per cent and 11 per cent
The economic penalties for trying to create and sustain a stable and
committed couple are, for those on moderate incomes, substantial. But the
economic incentives for “faking it” are impressive.
Joint annual income now has to reach something like £50,000 gross before the
couple suffers no loss from declaring a relationship. If a boyfriend who earns
£380 a week pretends not to live with a non-working lone mother who has two
children under 11, the couple will be £9,018 a year – no less than 60 per cent –
better off than if the relationship is declared. Marriage has become
economically damaging. So has honesty.
Why is the welfare system structured this way? One reason is the overriding
aim of eliminating child poverty, regardless of the choices of parents; the
other is the presumed desirability of liberating mothers from dependence on a
Yet it is assumed that incentives have no bearing on behaviour. The evidence
is overwhelmingly against this absurd idea. Trying to eliminate child poverty by
subsidising the form of family that is most likely to suffer from it is like
trying to bale out a boat with a sieve.
The social consequences are severe. In a world in which the state replaces
the father, uneducated young men are permanent adolescents, useful to father
children but lacking any other valuable social role. We know that unmarried men
are far less likely to work than married ones. This is partly because they are
less marriageable. It is also because they have less incentive to work.
Continue reading "Martin Wolf: The War on the Traditional Family" »
Posted by Mark Thoma on Thursday, March 29, 2007 at 01:57 PM in Economics, Social Insurance |
Evan Koenig of the Dallas Fed compares today's economy with the economy in
2000-01 and finds reasons to be both optimistic and pessimistic about the
Différence, National Economic Update, by Evan F.
Koenig, FRB Dallas: There are several disturbing similarities between the
U.S. economy's recent behavior and its behavior in 2000–01, but also some
One similarity is the drag on growth coming from
investment. Chart 1 shows the combined contribution to annualized GDP (gross
domestic product) growth from residential and business equipment and software
investment, measured in percentage points. Note that in 2005–06, just as in
2000–01, this contribution dropped from a positive 1 percentage point
to a negative 1 percentage point.
Back in 2000–01, of course, most of the decline was due
to a collapse of equipment and software investment. This time around, the
housing sector has been feeling most of the pain.
Despite nearly equal drags from investment, GDP growth
slowed by 4 percentage points in 2000–01, versus only 2 percentage points in
Chart 2 shows the source of the difference: consumption
growth. In 2000–01, consumption spending’s contribution to GDP growth fell by
about 2 percentage points. Over the past couple of years, in contrast,
consumption’s growth contribution has held comparatively steady.
Chart 3 slices the data differently: It compares monthly
nonfarm payroll job gains in the goods-producing and service-providing sectors.
It is striking that while goods-producing job growth has slowed by about as much
as it did in 2000, service-providing job growth has held up much better than it
did in the lead-up to the 2001 recession.
Neither residential investment nor goods-producing job
growth seems likely to improve anytime soon.
In the residential sector, the 30-percent plunge in
building permits and decelerating new-home prices we’ve seen since the fall of
2005 are an ill omen for future investment and job growth (Chart 4).
Consistent with this glum near-term outlook, new-home sales resumed their slide
in January, after an upward spike in December. Sales are now down 31.5 percent
from their July 2005 cyclical high. Residential construction and associated
specialty-trade jobs account for about 15 percent of employment in the
Recent data on new orders for durable manufactured goods
give a similarly discouraging view of near-term prospects for investment and
factory job growth (Chart 5). Factories account for about 63 percent of
employment in the goods-producing sector.
The big question is whether the drags from housing and
manufacturing will let up before weakness there begins spilling over to the rest
of the economy.
Update: See Calculated Risk for discussion of charts 4 and 5.
Update: David Altig at macroblog provides further analysis.
Posted by Mark Thoma on Thursday, March 29, 2007 at 11:37 AM in Economics, Monetary Policy |
The Center on Budget Policy and Priorities reports on changes in the
progressivity of federal taxes over time:
New Study Finds "Dramatic"
Reduction Since 1960 in the Progressivity of the Federal Tax System, by Aviva
Aron-Dine, CBPP: In a new study, Thomas Piketty and Emmanuel Saez ...
examine how the progressivity of the federal tax system has changed over time.
Unlike previous analyses, theirs examines effective federal tax rates going back
to 1960, including income, payroll, corporate, and estate taxes, and provides
data for income groups reaching up to the top one-hundredth of one percent (.01
percent) of the population. Several crucial findings emerge from their study.
“The progressivity of the U.S. federal tax system at the top of the income
distribution has declined dramatically since the 1960s.” As Figure 1 shows,
since 1960, average federal tax rates for middle-income households have
increased and then declined modestly. Over the same period, high-income
households saw sharp drops in their federal tax rates.
Moreover, the drops were largest for the very highest-income households. The
average tax rate declined by a larger amount for households in the top one
hundredth of 1 percent of the income scale (where incomes in 2004 averaged about
$15 million) than for households in the top tenth of 1 percent (where incomes
averaged above $3.7 million) or for households in the top 1 percent (where
incomes averaged about $850,000). ...
“Large reductions in tax progressivity since the 1960s took place primarily
during two periods: the Reagan presidency in the 1980s and the Bush
administration in the early 2000s.” ...
As Piketty and Saez point out, economists generally assess whether a tax
system is progressive based on whether the distribution of after-tax income is
more equal than the distribution of pre-tax income. They assess whether a tax
cut is progressive based on whether it makes the distribution of after-tax
income more or less equal.
Like others who have examined the effects of the 2001 and 2003 tax cuts,
Piketty and Saez find that the tax cuts made the distribution of after-tax
income less equal. ... In short, the tax cuts were regressive.
Because it omits the effects of those tax cuts enacted in 2001 that were not
fully phased in by 2004 (such as the repeal by 2010 of the estate tax and of the
provisions of the tax code that reduce the value of itemized deductions and
personal exemptions for households at high income levels), Piketty and Saez’s
simulation substantially understates the regressivity of the tax cuts once they
are fully in effect. Even so, it offers additional confirmation that the tax
cuts were regressive.
In sum, Piketty and Saez’s new study shows that the federal tax system has
become much less progressive over the past several decades, and the 2001 and
2003 tax cuts have continued this trend. Over much the same several decades,
pre-tax income inequality has grown as well. Thus, during a period in which
economic forces have been generating increased pre-tax inequality, changes in
the tax system have exacerbated rather than mitigated the widening of the income
The new results showing that income inequality continues to widen have been covered here before, the CBPP details the results here, and today's NY Times summarizes the results as well:
Income Gap Is Widening, Data Shows, by David Cay Johnston, NY Times: Income
inequality grew significantly in 2005, with the top 1 percent of Americans —
those with incomes that year of more than $348,000 — receiving their largest
share of national income since 1928... The top 10 percent, roughly those earning
more than $100,000, also reached a level of income share not seen since before
Continue reading "The "Dramatic" Reduction in the Progressivity of Federal Taxes" »
Posted by Mark Thoma on Thursday, March 29, 2007 at 02:43 AM in Economics, Income Distribution, Taxes |
There are both costs and benefits to financial innovations such as subprime
mortgages. Can regulation reduce the costs without affecting the benefits?:
'Irresponsible' Mortgages Have Opened Doors to Many of the Excluded, by Austan
Goolsbee, Economic Scene, NY Times: "We are sitting on a time bomb," the mortgage analyst said — a huge
increase in unconventional home loans like balloon mortgages taken out by
consumers who cannot qualify for regular mortgages. The high payments, he
continued, "are just beginning to come due and a lot of people ... now risk
losing their homes because they can’t pay the debt."
He would have given great testimony at the current Senate hearings on
subprime mortgage lending. The only problem is, he said it in 1981 — when soon
after several of the alternative mortgage products like those with adjustable
rates and balloons first became popular.
When Senator Christopher J. Dodd, Democrat of Connecticut, gave his opening
statement ... at the hearings lambasting the rise of "risky exotic and subprime
mortgages," he was actually tapping into a very old vein of suspicion against
innovations in the mortgage market.
Almost every new form of mortgage lending ... has tended to expand the pool
of people who qualify but has also been greeted by a large number of people
saying that it harms consumers and will fool people into thinking they can
afford homes that they cannot.
Congress is contemplating a serious tightening of regulations to make the new
forms of lending more difficult. New research from some of the leading housing
economists in the country, however, ... suggests that regulators should be
mindful of the potential downside in tightening too much.
A study conducted by Kristopher Gerardi and Paul S. Willen from the Federal
Reserve Bank of Boston and Harvey S. Rosen of Princeton,
Households Benefit from Financial Deregulation and Innovation? The Case of the
Mortgage Market ..., shows that the three decades from 1970 to 2000
witnessed an incredible flowering of new types of home loans. These innovations
mainly served to give people power to make their own decisions about housing,
and they ended up being quite sensible with their newfound access to capital.
Continue reading "Regulating Mortgage Markets" »
Posted by Mark Thoma on Wednesday, March 28, 2007 at 09:58 PM in Economics, Housing, Regulation |
Free Exchange, the blog at the Economist, says:
Big Brother Bush?, Free Exchange: On the face of it,
this study ... seems damning: the Bush justice department has investigated
seven times as many Democratic politicians at the local level as it has
Republicans. This is not true at the state and federal level. Liberal blogs have
interpreted this as the Bush justice department going after the opposition
wherever the sunlight of national media doesn't shine.
Possibly so. But it seems to me that there is another, at least equally
parsimonious explanation: local officials in cities are, as far as I know,
overwhelmingly disproportionately Democrats. Cities are also much more likely to
be targeted by corruption investigations, for two reasons: they offer more
opportunities for corruption, because they provide more services, and officials
are much more removed from the local population; and they offer opportunities
for bigger thefts. ... Also, small towns or counties have fewer officials, which
means fewer people in on any corruption, which means fewer whistle-blowers to
take down a conspiracy.
This thesis would also explain why there is no variation at the national and
state levels; statewide offices offer sufficient scope for corruption in any
state that any illicit activity is likely to bring Justice swooping down.
And indeed, when I look at
the list of local investigations, they seem to be disproportionately
concentrated in urban areas. To decide that this is a plot of some kind, I would
have to compare the results from the Bush justice department to the Clinton
justice department, an obvious check that the authors inexplicably decline to
make. Instead, they calculate the
chi-square as if Republican and Democratic politicians were randomly (i.e.
basically evenly) distributed throughout the population. I'd declare this study
not worth the paper it's written on, if only it weren't in electronic format.
Jane Galt follows with:
All politics is local,
Asymmetrical Information: Gack. This terrible, terrible
study on Justice department investigations is all over my
blogs. Over at Free Exchange, we
discuss why it's so awful...
At Matt Yglesias', commenter Brett Bellmore
points out that it may even worse than that; according to him, the study
didn't look at actual incidents, but only media accounts. Needless to say, the
majority of media accounts of federal corruption investigations are going to
come from major daily papers. And where do you find major daily papers? In big
cities. And who dominates the political scene in big cities?
Is this really all you can expect from a communications professor? Someone
needs to take their computers away until they promise to take Statistics 101 and
actually listen this time, instead of just staring blankly at the pretty shapes
on the board.
If you go to the update, by sure to read the response by the authors in the
comments. I didn't find the arguments particularly compelling. The linked post in the update tries to raise
lots of questions, but it doesn't actually refute the study as far as I could determine. For example, there aren't any statistical tests, though part 1 of the post does say things like:
This does make a noticeable difference in the percentages, though it does not by
itself destroys the authors’ thesis.
In any case, here's another response. Paul Krugman
discussed the study here, and this is his response to a comment appearing in
Jim C., Austin, Tex.: ...[T]here is a possible flaw in your logic that should
not go unsaid. I do not know what the ratio of Republican to Democratic local
and state officials is. Conventional wisdom is that there are many more Dems in
local and state office than Reps. I don't know if this is true. But, say, for
instance, there is a 2:1 ratio of Dems to Reps. This would make your data less
horrific, but still highly biased. ... Raw numbers of this magnitude generally
hold up under scrutiny, but it would be nice to confirm their validity in
comparison with the pool of possible candidates for each group.
Moreover, we do not know the affiliation of the various U.S. Attorneys who
chose to protect their jobs or their futures, to paraphrase your statements. One
might argue that doesn't matter, but if that's the case, then the entire notion
of partisanship is diminished. If it's simply a matter of pressure and bribery,
then it doesn't matter much what the affiliation of the particular U.S. Attorney
Paul Krugman: Good point, but Shields and Cragan have already taken account
of it. This is their
analysis. There were slightly more Democrats than Republicans in public
office, but only slightly, and they did statistical tests to show that the
proportion of Democratic investigations was far more than could be explained by
the proportion of Democrats in office. Look at the appendices and the
chi-squared tests, he said wonkishly.
Posted by Mark Thoma on Wednesday, March 28, 2007 at 04:32 PM in Economics, Politics |
Joseph Stiglitz says the European model provides the foundation for
building a better world:
Europe's success points the way to better world, by Joseph E. Stiglitz, Project
Syndicate: In some quarters, pessimism dominated the recent celebrations marking the
European Union's 50th birthday. Unease about the EU's future is ...
understandable, especially given the uncertainty surrounding efforts to revive
the Constitutional Treaty.
But the European project has been an enormous success... Europeans should not
be dismayed by comparisons of GDP growth in Europe and, say, the United States.
Of course, Europe faces great challenges in perfecting its economic union,
including the need to reduce unemployment and boost the economy's dynamism.
But, while GDP per capita has been rising in the US, most Americans are worse
off today than they were five years ago. An economy that, year after year,
leaves most of its citizens worse off is not a success.
More important, the EU's success should not be measured only by particular
pieces of legislation and regulation, or even in the prosperity that economic
integration has brought. After all, the driving motivation of the EU's founders
was long-lasting peace.
Economic integration, it was hoped, would lead to greater understanding...
Increased interdependence would make conflict unthinkable. The EU has realized
that dream. Nowhere in the world do neighbors live together more peacefully, and
people move more freely and with greater security, than in Europe, owing in part
to a new European identity... This stands as an example that the world should
A multi-polar world
Here, too, Europe has led the way, providing more assistance to developing
countries than anyone else (and at a markedly higher fraction of its GDP than
The world has faced a difficult period during the past six years. The
commitment to democratic multilateralism has been challenged, and rights
guaranteed under international conventions, such as the Convention Against
Torture, have been abrogated.
Many lessons have emerged, including the dangers of hubris and the limits of
military power, and the need for a multi-polar world. Europe, with more people
than any nation except China and India, and the largest GDP in the world, must
become one of the central pillars of such a world by projecting ... "soft power"
- the power and influence of ideas and example.
Indeed, Europe's success is due in part to its promotion of a set of values
that, while quintessentially European, are at the same time global. The most
fundamental of these values is democracy... The second value is social justice.
An economic and political system is to be judged by the extent to which
individuals are able to flourish and realize their potential. ...
Europe has succeeded in part because it recognizes that the rights of
individuals are inalienable and universal, and because it created institutions
to protect those rights. America, by contrast, has witnessed a massive assault
on those rights, including that of habeas corpus - the right to challenge one's
detention before an independent judge.
Fine distinctions are made, for example, between the rights of citizens and
non-citizens. Today, only Europe can speak with credibility on the subject of
universal human rights. For the sake of all of us, Europe must continue to speak
out - even more forcibly than it has in the past.
Likewise, ... with our environment - the scarcest of all of our resources. In
this area, too, Europe has taken the lead, especially concerning global
While economic integration helped achieve a broader set of goals in Europe,
elsewhere, economic globalization has contributed to widening the divide between
rich and poor within countries and between rich and poor countries.
Another world is possible. But it is up to Europe to take the lead in
Posted by Mark Thoma on Wednesday, March 28, 2007 at 02:53 PM in Economics |
Federal Reserve Chairman Ben Bernanke testified today before the Joint
Economic Committee of Congress. In his remarks, he clarified the Fed's position
and indicated that there should be no expectation of a rate cut any time soon:
Bernanke plays down need for rate cuts, by Krishna Guha, Financial Times:
The Federal Reserve sees no need to cut interest rates in the light of adverse
recent economic data, Ben Bernanke said on Wednesday. The Fed chairman said ”to
date, the incoming data have supported the view that the current stance of
policy is likely to foster sustainable economic growth and a gradual ebbing in
The Federal Reserve chairman also emphasised that the US central bank remains
concerned about the threat that inflation will not moderate as expected, arguing
that high levels of resource utilisation could still fuel price rises. He added
the US central bank was not as confident in its outlook as it had been a couple
of months ago, when it was increasingly upbeat about the prospects for a soft
Mr Bernanke’s remarks ... offered no hint that the Fed yet believes that it
will have to cut interest rates soon, as the market expects. But he recognised
that “uncertainties around the outlook have increased” and said the Fed would
respond in the light of incoming economic data.
His comments came as the Department of Commerce released figures showing
durable goods orders bounced back only weakly in February after a sharp plunge
in January. ... Mr Bernanke told the Joint Economic Committee of Congress “the
possibility that the recent weakness in business spending will persist is an
additional downside risk.”
The Federal Reserve chairman hinted the weakness in business spending had
come as a surprise to the Fed ... However, Mr Bernanke added “despite the recent
weak readings, we expect business investment in equipment and software to grow
at a moderate pace this year”...
Moreover, the Fed chairman signalled that he was less alarmed than many
investors by the distress in the subprime mortgage market. “At this juncture…the
impact on the broader economy and financial markets of the problems in the
subprime market seem likely to be contained,” he said ... adding “we will
continue to monitor this situation closely.”
He reiterated the Fed’s view that the drag from cut-backs in residential
investment should “wane” as builders work off the inventory of unsold new homes
– though he recognised that the housing market correction “could turn out to be
more severe than we currently expect...”
Overall, Mr Bernanke indicated that the US central bank remains relatively
upbeat on the prospects for US growth. ... Mr Bernanke reiterated a series of
reasons why the Fed remains concerned about inflation. “The high level of
resource utilisation remains an important upside risk to continued progress on
reducing inflation,” he said. The Fed chairman refered to the “tightness in the
labour market” and to difficulties firms face hiring qualified workers.
Allan Meltzer, in a comment about Larry Summers' recent column calling on the
Fed to ease policy in response to any signs of weakness in the economy, explains
why the Fed is reluctant to ease too quickly:
Allan Meltzer: We all have heard many times that those who forget their
history are likely to repeat it. One of the main reasons that the Great
Inflation continued from 1965 to 1979 was that the Federal Reserve (and the Bank
of England) put great weight on unemployment and too little weight on inflation.
In the 1970s the Federal Reserve waited for unemployment to get above 7 per cent
before it abandoned any effort to lower inflation.
The US saw both inflation and the unemployment rate rise to postwar peaks.
Paul Volcker ended this policy by letting unemployment rise as required to bring
down inflation. The public supported him.
Larry Summers wants to repeat the earlier mistakes. Even before the
unemployment has started to rise, he wants the Fed to anticipate the rise and
react against it by lowering interest rates.
An economy that cannot accept some temporary increase in the unemployment
rate will live with increasing inflation followed by low investment, declining
real wages, and higher unemployment. Fortunately, most of the members of the
Open Market Committee understand that. And the public as in 1979-80 will demand
an end to the policy.
The Big Picture,
NYT, and the
Here is the text of Bernanke's prepared remarks:
Testimony of Chairman Ben S. Bernanke, by Ben Bernanke, Federal Reserve Chair:
Chairman Schumer, Vice Chairman Maloney, Representative Saxton, and other
members of the Committee, thank you for inviting me here this morning to present
an update on the outlook for the U.S. economy. I will begin with a discussion of
real economic activity and then turn to inflation.
Continue reading "Bernanke's Testimony before the Joint Economic Committee of Congress" »
Posted by Mark Thoma on Wednesday, March 28, 2007 at 12:02 PM in Economics, Fed Speeches, Monetary Policy |
David Wessel and Bob Davis of the Wall Street Journal give an update on Alan Blinder's views on
globalization and his estimate that trade will put tens of millions of jobs at
risk [Update: free link to article
related data on jobs at risk and offshoring]:
Free Trade Spurs Second Thoughts, by David Wessel and Bob Davis, WSJ: For decades, Alan S. Blinder ... argued, along with most economists, that
free trade enriches the U.S. and its trading partners, despite the harm it does
to some workers. "Like 99% of economists since the days of Adam Smith, I am a
free trader down to my toes," he wrote back in 2001. ...
Yet today Mr. Blinder has changed his message... Mr. Blinder ... remains an implacable opponent of tariffs and trade barriers.
But now he is saying loudly that a new industrial revolution -- communication
technology that allows services to be delivered electronically from afar -- will
put as many as 40 million American jobs at risk ... in the next decade or two.
.... The job insecurity those workers face today is "only the tip of a very big
iceberg," Mr. Blinder says.
The critique comes as .... skepticism about allowing an unfettered flow of
goods, services, people and money across borders is intensifying... Some critics are going public with reservations they've long harbored
quietly. Nobel laureate Paul Samuelson ... damns "economists' over-simple
complacencies about globalization" and says rich-country workers aren't always
winners from trade. He made that point in a 2004 essay that stunned
Mr. Blinder's answer is not protectionism, a word he utters with ... contempt...
Rather, Mr. Blinder still believes ... [n]ations prosper by focusing on things
they do best -- their "comparative advantage" -- and trading with other nations
with different strengths. He accepts the economic logic that U.S. trade with
large low-wage countries like India and China will make all of them richer --
eventually. He acknowledges that trade can create jobs in the U.S. ... But he
says the harm done when some lose jobs and others get them will be far more
painful and disruptive than trade advocates acknowledge. ...
His critique puts Mr. Blinder in a minority among economists, most of whom
emphasize the enormous gains from trade. "He's dead wrong," says Columbia
University economist Jagdish Bhagwati... Mr. Bhagwati says that in highly
skilled fields such as medicine, law and accounting, "If we do a real balance
sheet, I have no doubt we're creating far more jobs than we're losing."
Mr. Blinder says that misses his point. The original Industrial Revolution,
the move from farm to factory, unquestionably boosted living standards, but
triggered an enormous change in "how and where people lived, how they educated
their children, the organization of businesses, the form and practices of
governments." He says today's trickle of jobs overseas, where they are tethered
to the U.S. by fiber-optic cables, is the beginning of a change of similar
dimensions, and American society needs similarly far-reaching changes to cope.
"I'm trying to convince a bunch of economists who are deeply skeptical and hard
to convince," he says. ...
When he talked about trade in the past, Mr. Blinder emphasized its great
benefits. ... As a Clinton aide, he helped sell the North American Free Trade
Agreement... He was silent when his former Princeton student, N. Gregory Mankiw,
then chairman of President Bush's Council of Economic Advisers, unleashed a
political firestorm by ... appearing indifferent to pain caused to those whose
jobs go overseas. "Does it matter from an economic standpoint whether items
produced abroad come on planes and ships or over fiber optic cables?" Mr. Mankiw
said at a February 2004 briefing. "Well, no, the economics is basically the
same....More things are tradable than...in the past, and that's a good thing."
Mr. Blinder says he agreed with Mr. Mankiw's point that the economics of
trade are the same however imports are delivered. But he'd begun to wonder if
the technology that allowed English-speaking workers in India to do the jobs of
American workers at lower wages was "a good thing" for many Americans...
Mr. Blinder began to muse about this in public. ... At the urging of former
Clinton Treasury Secretary Robert Rubin, Mr. Blinder wrote an essay, "Offshoring:
The Next Industrial Revolution?" published last year in Foreign Policy. ...
In that paper, he made a "guesstimate" that between 42 million and 56 million
jobs were "potentially offshorable." Since then he has been refining those
estimates, by painstakingly ranking 817 occupations ... to identify how likely
each is to go overseas. From that, he derives his latest estimate that between
30 million and 40 million jobs are vulnerable.
He says the most important divide is not, as commonly argued, between jobs
that require a lot of education and those that don't. It's not simply that
skilled jobs stay in the US and lesser-skilled jobs go to India or China. The
important distinction is between services that must be done in the U.S. and
those that can -- or will someday -- be delivered electronically with little
degradation in quality. The more personal work of divorce lawyers isn't likely
to go overseas, for instance, while some of the work of tax lawyers could be.
Civil engineers, who have to be on site, could be in great demand in the U.S.;
computer engineers might not be. ...
Mr. Blinder says there's an urgent need to retool America's education system
so it trains young people for jobs likely to remain in the U.S. Just telling
them to go to college to compete in the global economy is insufficient. ... It
isn't how many years one spends in school that will matter, he says, it's
choosing to learn the skills for jobs that cannot easily be delivered
electronically from afar.
Similarly, he says any changes to the tax code should encourage employers to
create jobs that are harder to perform overseas. ... Mr. Blinder says the focus
should be on jobs with person-to-person contact, regardless of pay and skill
levels -- from child day-care providers to physicians.
Mostly he wants to shock politicians, policy makers and other economists into
realizing how big a change is coming and what new sectors it will reach. "This
is something factory workers have understood for a generation," he says. "It's
now coming down on the heads of highly educated, politically vocal people, and
they're not going to take it."
Here's the Foreign Affairs article by Alan Blinder, "Offshoring:
The Next Industrial Revolution?," (draft
version in case link is blocked), and a summary of some of its contents is
Jobs are Safe from Offshoring?." Also, "The
New Globalization" looks at the work of Blinder, Grossman, and others.
Posted by Mark Thoma on Wednesday, March 28, 2007 at 12:24 AM in Economics, International Trade, Unemployment |
Eric Rauchway of Open University explains the disappearance of economic
historians from history departments:
Where are the
Economic Historians?, by Eric Rauchway, Open University: Darrin McMahon asks
"about the fortunes of economic history and of the understanding (or not) of
economics by historians." As I believe the only economist on the Open U
contributor list is Lawrence Summers, whose response to this query may not come
quickly, I will offer my 2 cents.
My university, UC Davis, hosts one of the best collections of economic
historians in the country: Gregory Clark, Peter Lindert, Alan Olmstead, and Alan
M. Taylor. I can say this without immodesty, because not one of them is in my
department--the History Department--they're all economists. Nor is this
atypical. Off the top of my head--this is not a comprehensive list--I can name
sharp scholars of the economics of the Great Depression (Christina Romer, Brad
DeLong; Ben Bernanke before he became Fed chair), nineteenth-century
globalization (Jeffrey Williamson, Lance Edwin Davis), railroads (Robert Fogel),
immigration and internal migration (Claudia Goldin, Joseph P. Ferrie), slavery,
emancipation, and reconstruction (Fogel, Goldin, Stanley Engerman, Richard Sutch,
Gavin Wright), who all work outside history departments, as indeed do most of
the authors who publish in the Journal of Economic History. You can still
find economic historians in history departments--Sutch's coauthor Roger L.
Ransom; Robin L. Einhorn, William R. Summerhill, Niall Ferguson--but they're no
longer so thick on the ground as once they were.
What happened? Partly, technical innovations in economic methods made it
difficult for the untrained to understand the new economic history. ...
Economic history might have moved out of history departments for market
reasons as well. If, to pursue economic history, you had to master technical
skills that would make you eligible for an appointment in an economics
department, you would probably prefer that to an appointment in a history
department: economists get paid more because they're eligible for employment in
government and business as well as universities.
Is this split a Bad Thing? Well, if traditional historians continue to keep
abreast of changes in economic history relevant to their work and vice versa, so
they can incorporate it into their teaching and scholarship, then it's probably
I wish I could reassure Eric that economic history is alive and well within
economics departments generally. I cannot, and that's a loss for our profession. I was fortunate enough to be forced to take both history of economic thought and U.S. economic history during graduate school, and face a core exam if I didn't learn them well enough, but that is no longer the case in most programs. In may cases, the courses are no longer offered at all.
Posted by Mark Thoma on Tuesday, March 27, 2007 at 06:06 PM in Economics, Universities |
These are difficult choices:
Setting a price for putting off death, by Daniel Costello, LA Times: What is
the value of a few months of life? That question is at the center of one of the
most controversial debates in medicine today involving a new generation of
hyper-expensive cancer drugs.
On Tuesday, the Food and Drug Administration approved GlaxoSmithKline's
Tykerb, a once-a-day pill for late-stage breast cancer patients that costs
nearly $35,000 a year. It's the latest of half a dozen new cancer therapies with
names such as Avastin and Tarceva that can run as much as $100,000 for an annual
Although the medications work much longer in some patients, they help extend
the lives of most for only a few months.
The drugs' sky-high costs compared with their relatively small health
benefits have sparked arguments among policymakers and medical professionals
about what to do with the growing number of people who are depleting their life
savings on the drugs or, worse, who can't get them at all.
More broadly, they ask, is this the best way for society to spend its
increasingly limited healthcare dollars? ...
Drug companies and many patients insist even incremental gains are
worthwhile. Small clinical advances are likely to turn into larger ones over
time, and patients who can afford the treatments say they deserve them. ...
But doctors, patient advocates and healthcare economists warn that the drugs
are simply too expensive at a time when medical costs are rising rapidly...
The costs aren't borne only by those who are sick. Because insurers pay for
almost all federally approved drugs, the costs of covering them would eventually
spill into the nation's overall medical bill and therefore would raise
everyone's insurance premiums.
This year, cancer drugs are expected to account for nearly 22% of the
nation's drug bill, up from 13% in 2002...
The debate also is raging among oncologists, who admit being torn about
wanting to give patients marginally effective drugs that could cause serious
financial harm. "These drugs are good, but it's important to remember they
aren't a cure," said Peter Eisenberg, an oncologist at California Cancer Center
in Greenbrae, Calif. "Drug companies are in another world if they think people
can afford these things." ...
The targeted cancer drugs and better detection are helping reshape cancer
treatment, leading some to believe a corner has been turned in the fight against
Last year, cancer deaths fell for a second straight year. ... But those gains
have to be taken in context of what else the money spent on cancer treatment
could have been used for, said Peter Neumann, director of the Center for the
Evaluation of Value and Risk at Tufts-New England Medical Center. "In terms of the cost of a life saved, it's possible other areas of medicine,
like better disease prevention or better cardiovascular care, may be more
Although it's a vague metric, one historical tool used to judge the value of
a medical intervention is known as the Quality Adjusted Life Year, which is
essentially a rule of thumb that a year of prolonged life is worth around
$50,000 in today's dollars.
By that standard, some of the new cancer drugs may not be worth their costs
when measured against their benefit to society, Neumann said. ...
My family faced this choice a couple of weeks ago. I wasn't part of the decision, but my observation from listening to those who were is that they fell ill-equipped to evaluate the benefits of treatment and there was considerable uncertainty over what choice was best. In the end, I think they were comfortable with the choice, but as others related their own stories and experiences, it seemed to me that families are rarely sure they have done the right thing. At the memorial gathering at my parent's house this topic came up somehow, and I heard tales on both sides - keeping people alive when it was very expensive and the quality of life was extremely poor, and cases where the choice to withhold treatment was second-guessed. I know there are lots of places to go for help and support, but it seems to me that families still need more guidance from the health professionals who are directly involved in treatment. But maybe it's just hard no matter what you do.
More generally, to me life is not just another good to be allocated by the price system and it bothers me that how long you live
may depend upon how much wealth you manage to inherit or accumulate. I don't
know for sure how to fix this problem, but there is a part of me that believes
that where life and death is concerned, everyone, rich and poor alike, should
have access to the same care and treatment options.
Posted by Mark Thoma on Tuesday, March 27, 2007 at 01:04 PM in Economics, Health Care |
I think Tim is glad winter quarter is over:
Back in the Game, by Tim Duy: My Christmas lights are still up. It is
almost April, and my Christmas lights are still up. I used to tell myself, “I’ll
never be that kind of guy.” You know, the type that thinks the lights go down on
the Fourth of July, hell or high water. To be sure, my house is located off the
road, secluded a bit from public view, so most people never notice the lights,
keeping my little secret just that, a secret. That is, until my son notices the
lights and insists they be plugged in, exposing my shame to the whole
neighborhood – “He’s that kind of guy,” I can hear them all saying.
Which is a long way to say that winter term became a hole that seemed to get
deeper the more I worked. I can’t even really say how it happened, although the
endless stream of students will pretty much decimate what would otherwise have
been a decent workday. And with my wife returning to work after maternity leave,
Tuesdays, the day I watch the kids, just became a little more hectic as we
settled into a new routine. You would be amazed how many exciting things happen
on Tuesdays! Not just at my house, either. Just a few weeks ago global markets
got a little scary. You may have noticed; myself, it was a rare day that I did
not catch a bit of news.
As always, I have to put my attention toward the work that pays the bills
first, somewhat unfortunate as Fed watching became a bit more interesting of
late. Of course, the economy got more interesting first. The details have been
covered far and wide, and can be summed up with one word: softer. A relief for
the bears, especially after the initial, and, as it turned out, optimistic read
on 4Q06 GDP growth. Expectations of stabilization in housing have yet to be
realized. I can’t say that I am surprised; I have tended to believe that the
downside in housing would progress longer than the bulls anticipated, but the
damage would evolve more slowly than the bears anticipated. The tightening
conditions in the mortgage market, particularly the subprime area, are knocking
out another round of marginal buyers, promising to extend the housing weakness.
The consumer is starting to look a bit anemic – a term that could also be
applied to February’s employment report. More disconcerting to me has been the
recent numbers on capital spending. Still, a bright spot was the stronger
February ISM reading, belying concerns of a freefall in manufacturing and
perhaps foretelling a more promising durable goods report this week. And initial
jobless claims are not signaling impending doom either.
At the same time,
productivity growth looks to be slowing down, while
inflation remains stubbornly high. Perhaps a couple of more quarters
of weak GDP growth are all that is needed to bring inflation back down. I hope
so, but nagging at me is the possibility that potential growth is off a bit more
than anticipated; this is especially the case if the productivity slowdown is
not simply a mid-cycle pause and labor force growth rates are slowing as well.
Regarding the latter, I still believe the decreased labor force participation
rates are a secular trend. Moreover, the story I hear every time I venture forth
into the real world comports with David Altig’s
take on the JOLTS report. Simply not enough skilled workers left to
All in all, the data suggested to me that the downside risks to growth were
rising, but that inflation was still a concern, especially if potential output
growth has pulled back. Lacking much guidance from Fedspeak (although, in
retrospect, Chicago Fed President Michael Moskow had uttered some dovish
remarks), the odds favored a steady policy from the Fed. Instead, the Fed
managed a policy statement that pulled us about as close to neutral as possible
while still keeping one eye on inflation. I don’t think the Fed was acting in
response to recent market turbulence (a “Bernanke put”); I think it reflects
policymaker’s honest assessment of the economy. I also find myself in agreement
Greg Ip today, who warns against expecting an imminent rate cut. To be
sure, the Fed will eventually cut rates, but market participants have been
consistently disappointed on this call since Hurricane Katrina. The Fed is
usually not quick to cut rates.
So that is a starting point to getting back into the game. I foresee better
time management this term – not a big surprise, as I have the Spring off from
Perhaps I will even get to those Christmas lights.
Posted by Mark Thoma on Tuesday, March 27, 2007 at 12:19 AM in Economics, Fed Watch, Monetary Policy |
This estimates that "America's tort system imposes ... an annual "tort tax"
of $9,827 on a family of four." That's approximately $2,457 per person:
Tax, by Lawrence J. Mcquillan and Hovannes Abramyan, Commentary, WSJ: Economists have long
understood that America's tort system acts as a serious drag on our nation's
economy. Although many excellent studies have been conducted, no single work has
fully captured the true total costs, both static and dynamic, of excessive
The good news: We now have some reliable figures. The bad news: The costs are
far higher than anyone imagined. Based on our estimates, and applying the best available scholarly research,
we believe America's tort system imposes a total cost on the U.S. economy of
$865 billion per year. This constitutes an annual "tort tax" of $9,827 on a
family of four. ...
How does the legal system extract such an astounding amount from our economy?
We applied the rent-seeking theory of transfers from economic science to pick up
where past studies -- including the highly regarded Tillinghast-Towers Perrin
study -- leave off. We began by examining the static costs of litigation --
including annual damage awards, plaintiff attorneys' fees, defense costs,
administrative costs and deadweight costs from torts such as product liability
cases, medical malpractice litigation and class action lawsuits. The annual
static costs, $328 billion per year, are well in excess of previous Tillinghast
But $328 billion is only the beginning. After all, litigation doesn't just
transfer wealth, it also changes behavior, and often in economically
unproductive ways. Any true estimate of the costs of America's tort system must
also include these dynamic costs of litigation -- the impact on research and
development spending, the costs of defensive medicine and the related rise in
health-care spending and reduced access to health care, and the loss of output
from deaths due to excess liability.
Consider the impact of medical liability concerns on the health-care sector.
It is a well documented fact that the fear of litigation prompts doctors to
engage in expensive defensive medicine..., which must be added to any
comprehensive estimate of litigation costs.
At the margin, higher health-care costs also reduce access to care for
patients. We estimate that the additional $124 billion in liability-based health
care costs adds 3.4 million Americans to the rolls of the uninsured. Uninsured
people are more likely to suffer from a number of diseases and serious or even
fatal conditions. Economically, the result is that more Americans are absent
from the workforce and their productivity declines -- a total loss of output we
estimate to be $39 billion per year.
Excessive liability also hampers innovation. ... As liability costs increase,
companies respond by shifting funds from research and development into fighting
litigation and withholding or withdrawing products from the market. Less R&D
spending means fewer new products and less innovation. ...
An overly expensive liability system also increases the cost of many
risk-reducing products and services, at the expense of human lives. ... Our
analysis ... estimate[s] the human cost of a failure to enact reforms.
Based on data from previous studies, we determined that more than 77,000
people would have been alive today and contributing to the workforce, but are
not because of a failure to enact comprehensive tort reforms in the states...
What we're left with, then, are annual dynamic costs of $537 billion
resulting from our litigation system. Add that to the static costs of $328
billion and you arrive at the total of over $865 billion per year.
In this study we do not venture to propose a specific litigation-reform
agenda. But we do provide all who are concerned with this issue some hard
numbers to work with. And if you're wondering who the victims are of a tort
system out of control, the answer today: almost everyone.
The tort law system and associated economics is not an area I know a lot
about, but the opening sentence, "Economists have long understood that America's
tort system acts as a serious drag on our nation's economy" brings up a
question. What would the economy be like without a tort system at all? The tort
system offers important protections and also offers the institutional structure
needed to help capitalism function more efficiently (e.g. economic torts and
competition law). I'm sure there are problems that could be fixed, i.e.
eliminating the "excessive" part of litigation - as I said this is not a
familiar area for me - but I find it hard to believe that the tort system itself
imposes a serious drag on the economy or that most litigation can be classified
as "excessive." If there was no system at all, I think we would be much worse
The authors say they are estimating "the true total costs of "excessive
litigation." But it looks to me like they estimate the cost of all litigation,
not just the excessive part, however excessive might be determined. That is,
they assume that all costs are excessive in their estimates. Here's how the
Council of Economic Advisors handled this in a 2002
(the CEA uses a much better methodology for estimating the costs as compared to
the methodology outlined above and arrives at lower figures):
[R]ecognizing the controversy that exists about the incentive effects of tort
liability in general, and punitive damages in particular, this paper will
consider several scenarios. For our most cautious estimates of the size of the
“litigation tax,” we make the very strong assumption that both economic (e.g.,
loss of wages, medical expenses) and non- economic (e.g., pain and suffering,
loss of consortium, punitive) damages are currently set at an optimal level. We
then consider an intermediate case that treats non- economic damages as
essentially random and therefore part of the litigation tax. Finally, we
consider the case in which all of the costs of the U.S. tort system are treated
as economically excessive, which would result if both economic and non-economic
damages were largely random and failed to provide proper incentives
That brings up a second point. The article concludes by reminding us of the
$865 billion dollar cost estimate. In a part I cut, there's an attempt to
magnify this number by noting that "It is equivalent to the total annual output
of all six New England states, or the yearly sales of the entire U.S. restaurant
But as noted above, that's only around $2,457 per person. And there is no
estimate whatsoever of the benefits from the legal protections offered by the
tort system. Certainly there are some benefits, and I can easily imagine that if
there were no legal protection at all that we would each incur costs higher than (likely too large estimate of)
$2,457 as people took advantage of the lack of legal protection.
For these reasons, I don't think this tells us a whole lot about the net
social value of the tort system. We don't know the cost of this system relative
to an optimal system, e.g. if the optimal system costs $2,350 per person then
the cost of the present system isn't so large, and we don't know the benefits of
the present system relative to the optimal system or or relative to having no
system at all (which would be optimal for some). It is also not as thorough as
the CEA paper in covering the range of possible estimates due to variations in
the assumptions about tax incidence, calculation of deadweight losses, the
degree of excessive litigation, and so on. I don't mean to imply the CEA
document is the final word, for example the
EPI sees things quite differently
("[M]ost commonly alleged economic costs and impacts and ... have little or no
basis in reality"), but it does appear to be on much firmer methodologically
footing. But even it makes no attempt to estimate the benefits.
Posted by Mark Thoma on Tuesday, March 27, 2007 at 12:15 AM in Economics |
Here are sections from the transcript of a Supreme Court case about the economics of price maintenance agreements and whether they
should remain illegal on a per se basis under antitrust law. The issue in this particular case is:
Justices Hear Arguments About Pacts on Pricing, by Linda Greenhouse, NY Times:
A 96-year-old rule that treats as an automatic antitrust violation any agreement
between a manufacturer and its retailers to adhere to a minimum resale price is
considered archaic and out of touch by the Bush administration and economists of
the Chicago school.
But it still has friends, and several of them sit on the Supreme Court. A
Supreme Court argument on Monday laid to rest any expectation that the [per se]
rule against “resale price maintenance” would go quietly...
Continue reading "Resale Price Maintenance and Consumer Welfare" »
Posted by Mark Thoma on Tuesday, March 27, 2007 at 12:03 AM in Economics, Market Failure |
Daniel Gross recounts the actions of William McAdoo who "executed a series of
maneuvers in the chaotic fall of 1914 that turned America into the global
The Unknown Financial Superhero, by Daniel
Gross, Slate: The list of American government financial superheroes is relatively short.
... But a lively new book
by New York University economist William Silber, When Washington Shut Down
Wall Street: The Great Financial Crisis of 1914 and the Origins of America's
Monetary Supremacy, makes a convincing plea for the inclusion of William
McAdoo in the Dollar Pantheon. ...
Silber argues, as Woodrow Wilson's Treasury secretary, McAdoo executed a
series of maneuvers in the chaotic fall of 1914 that ... enabled the United
States to seize the mantle of economic leadership from London. Almost a century
later, the crown remains ours, if tenuously.
When war broke out in Europe in the summer of 1914, the U.S. economy was
still immature, a global debtor with an unloved currency that was subject to
recurring panics. After a particularly nasty one in 1907, the United States
decided to join the rest of the developed world and create a central bank. But
by 1914, Congress and the president had yet to hammer out all the details.
In the summer of 1914, panicked Europeans, who supplied much of the capital
to the United States, were cashing in their U.S. stocks and bonds and dollars
for gold, and repatriating the precious metal. That was bad news for U.S.
securities, for the dollar, and for American banks, which didn't have enough
gold to meet their commitment to redeem paper currency for hard metal. There was
no Federal Reserve that could protect the dollar by raising interest rates. And
J.P. Morgan, who had functioned as a sort of private Federal Reserve during his
long career, had died the previous year.
McAdoo, essentially devising monetary policy on the fly, sprung into action
with a series of unprecedented measures. First, to stop foreigners from cashing
in their U.S.-based assets for gold, he essentially ordered the New York Stock
Exchange to close its doors on July 31, 1914. The NYSE would remain shut for
nearly four months. Brokers were unhappy, but the draconian move halted capital
Next, to stop a run on the banks, he flooded the system with new currency.
The Aldrich-Vreeland Act of 1908, which authorized the creation of the Federal
Reserve, had established an emergency currency that banks could access in times
of need. McAdoo made a big public show of chartering armored convoys to deliver
gold, and then emergency currency, to the New York Subtreasury building across
from the New York Stock Exchange. These actions, Silber argues, allowed banks to
hold on to their supplies of gold while providing borrowers with access to
There was more. ...McAdoo helped orchestrate a bailout for New York City,
which owed huge sums to foreign creditors. And he quickly developed the strategy
that would help bring gold back into the country, thus allowing the banks to
retire the emergency currency and the stock exchange to reopen. There was
significant demand in Europe for U.S. agricultural commodities, especially
cotton. But given the hazards of the Atlantic during wartime, shippers weren't
eager to book cargoes. At McAdoo's urging, Congress in August 1914 created the
Bureau of War Risk Insurance, which would allow shippers to obtain
government-backed insurance for their cargoes.
By the late fall of 1914, things were falling into place. The Federal Reserve
Banks formally opened in November 1914. The dollar rallied against the British
pound. Shipping traffic revived, and foreign buyers paid in gold, which allowed
American banks to start phasing out the emergency currency. The New York Stock
Exchange reopened on Dec. 12, 1914. And as the United States stuck to the gold
standard and emerged as a peaceful hub of trade, the dollar gained greater, um,
currency and respect. The United States, for so many years a global borrower,
was well on the way to becoming a global lender. ...
The final transfer of power from London to New York wouldn't come until
after the war... It's also possible to make too much of the role played by any
Why did McAdoo triumph? Silber argues that it's because the former railroad
executive, who had no formal economics education, thought like a businessman. He
acted quickly and decisively, and focused on an exit strategy. Of course, McAdoo
could not have succeeded without the support of President Woodrow Wilson, who
happened to be his father-in-law. In March 1914, McAdoo had made one of the
smartest career moves any executive can make: He got engaged to the boss's
Posted by Mark Thoma on Monday, March 26, 2007 at 09:20 PM in Economics, Financial System |
Let me see if I can help out in the dispute over using "Economics 101" in
Economics 101, by Felix Salmon: I think we should implement a new corollary
to Godwin's Law – call it McArdle's Law, after
this blog entry at Free Exchange – saying that any time someone mentions
"Economics 101" in a debate, they've automatically lost. The point of the Free Exchange blog is that people who criticize arguments as
being "Economics 101" are generally on the wrong side of the argument. But then
again, people who praise arguments as being "Economics 101" are generally
This relates to the use of
theoretical models, so think of a different kind of model, one we are all
familiar with, a map.
A map showing only major arterials is like Economics 101 - it is a bare boned
sketch showing only the major roads. A detailed map of a major city, say San
Francisco for illustration, is like a more advanced course - it has all the
major arterials and considerably more detail as well.
Which model should you use, the Economics 101 style bare-boned map showing
only major roads, or the very detailed map showing each and every road and
perhaps other details as well?
It depends upon the question being asked. If I
want to know how to get from Los Angeles to San Francisco, if that is the
question, the bare-boned map that highlights I5 and other major roads is much
more useful than a map showing every road that exists between the two cities.
And I probably don't need the map to show me where bus stops are, parks,
underground pipes and electrical wires, population densities, or the many, many
other things it would be possible to show on the map. Such detail gets in the
way and obscures the path between the two cities, i.e. it
makes the answer harder to find. A map showing only the major roads, or better
yet just the detail I need to get from one city to the other, is best for this
But if I ask a different question, e.g. how to get from my house to a
friend's house in the heart of the city, just showing the major roads won't do
at all. I need sufficient detail to allow me to navigate smaller streets. I need
a much more detailed model.
And if I ask yet a different question, e.g. how hard would it be to walk or
ride a bike, then I may want to include elevations on the map, i.e. contour
lines, to allow me to determine the difficulty of traversing the distance, maybe
other things as well, e.g. foot and bike paths, not just roads for cars.
There is no one model to use to answer questions. A model should be detailed
enough to capture all the major influences relative to the question one is
trying to answer, but detail beyond that just gets in the way. A model is not an
attempt to reflect every possible detail of the real world, that is far too
complicated a task.
A model is an attempt to isolate and highlight the specific
factors that relate to the question you are trying to answer so that we can
understand why a particular phenomena exists, and how various actions might
affect the outcome. Thus, for some questions, Economics 101 is all that is
needed, but for other questions it won't be adequate at all.
But we shouldn't
rule out the use of Economics 101 type models on a per se basis just because they are simple to
use, for some questions such models are quite useful precisely because of their simplicity and transparency. Complication in and of itself is not
Posted by Mark Thoma on Monday, March 26, 2007 at 01:32 PM in Economics, Methodology |
Greg Mankiw says Tyler Cowen reports a striking health care fact:
Striking Health Care Fact, by Greg Mankiw:
Tyler Cowen reports:
As of 2003, the average income of a French physician was estimated at
$55,000; in the U.S. the comparable number was $194,000....Did I mention that
health care is a labor-intensive industry? This is the major reason why French
health care is cheaper than U.S. health care.
Let's take a closer look at this. According to the
Since the end of the 1960s, the number of doctors increased from 60,000 to
more than 185,000 at the beginning of the 21st century. There are three doctors
for every 1,000 habitants, which is an average ratio when compared to other
So, there are 185,000 physicians, and, assuming the salary numbers given are
correct, the difference in income between US and French physicians is $194,000 -
$55,000 = $139,000. Thus, the total savings sounds like quite a bit,
(185,000)($139,000) = $25,715,000,000. But, there are 62,752,136 people in France
according to the
Factbook, so on a per capita basis the difference is only ($25,715,000,000/62,752,136), or around $410 per person.
we know that
The United States spent an average of $6,102 a person on it in 2004, ...
while Canada spent $3,165 a person, France $3,159, Australia $3,120 and Britain
So the difference in physician salaries only explains $410 of the $2,943
difference in costs (about 14% - I should acknowledge that some of these numbers are from different years, but all are during or close to 2003 so that shouldn't make much difference). Greg and Tyler may respond that they meant
salaries generally, not just physicians, but that's not what is being claimed.
For example, Tyler says "This is the major reason why French health care is
cheaper than U.S. health care. France also spends less per unit on other inputs,
such as prescription drugs," so it's clear he meant physicians alone in
identifying the "major reason" for the difference in health care costs.
But why are lower physician costs a bad thing? Are Tyler and Greg saying that
French physicians are not as good, i.e. that the lower salaries cause them to be
of lower quality? If so, they should make that case directly and explain why health outcomes are better in France with lower quality physicians (Tyler covers this to some extent, though not the lower physician quality part, and he does note he'd like to see US physician salaries fall). If they are not making the claim that doctors in France are inferior due to the pay scale, then it seems
to me they have presented yet another reason to support moving to a single-payer
system - better or equal quality physicians at lower cost.
A visit to a GP's office (half of the doctors in France are GPs) had a
reimbursement capped at 20 Euros, again circa 2003. It is not hard to pay ten
times that amount in the U.S.
But the French Embassy notes:
On the surface, it appears that health insurance reimburses medical care
providers less in France than in other European countries. However, more than 80
percent of French people have supplemental insurance, often provided by their
Finally, I found this part of the French Embassy's write-up of their system
The French government provides a number of diverse and comprehensive
healthcare rights. For more than 96 percent of the population, medical care is
either entirely free or is reimbursed 100 percent. The French also have the
right to choose among healthcare providers, regardless of their income level.
For example, they can consult a variety of doctors and specialists or choose a
public, private, university or general hospital. Moreover, the waiting lists for
surgeries found in other government supported healthcare systems do not exist in
The Medical care establishment is made up of three types of institutions:
public hospitals, private clinics and not-for-profit healthcare. ...
Private clinics have quite a different history from public hospitals. They
were started by surgeons and obstetricians and eventually evolved into private
hospitals. A 1991 law requires all doctors in private clinics to share medical
files with their colleagues and to create a Medical Care Commission to form
Another sector of the French healthcare system consists of not-for-profit
private hospitals. These hospitals were originally denominational and currently
make up 14% of the inpatient services among French Medical Care Institutions.
They are financed through endowments like public hospitals, but have the
right to privacy like private clinics. The cooperation between the public and
private sector in the French healthcare system is a positive feature that allows
citizens to avoid waiting lists for surgeries, which are often associated with
socialized medicine. Indeed, private medical care in France is particularly
active in treating more than 50% of surgeries and more than 60% of cancer cases.
This unique combination of government financed medical care and private medical
services produces a health care system that is open to all and provides the
latest in medical technology and treatment.
Update: In comments, Tyler says:
No, I didn't mean physicians' salaries alone, I meant unit prices alone. The point is not that French doctors are worse, rather that we do not reap those cost savings simply by choosing more government intervention.
To avoid further confusion, here's more of Tyler's post:
Many people (Jon Chait also) argue that France has the best health care
system in the world.
As of 2003, the average income of a French physician was estimated at
$55,000; in the U.S. the comparable number was $194,000. A visit to a GP's office (half of the doctors in France are GPs) had a
reimbursement capped at 20 Euros, again circa 2003. It is not hard to pay ten
times that amount in the U.S.
Did I mention that health care is a labor-intensive industry? This is the major reason why French health care is cheaper than U.S. health
care. France also spends less per unit on other inputs, such as prescription
Note that France still spends more than all or most other European systems, namely about 11 percent of gdp. When comparing health care outcomes, France only does slightly better
than many Mediterranean countries with obviously non-enviable health
care systems. It is not obvious that France does better on health care outcomes than
Japan, again a country with non-enviable health care institutions. ...
It is easy to argue that the French system is better than that of the United
States. But a defender of the French system must, in reality, fight "a war on
two fronts"... The French system does not ... appear noticeably better than many
other cheaper systems around the world. It does spend more money producing
"customer satisfaction" and papering over some of the obvious inhumanities of
the cheaper systems. That's why it is easy to hold up as a model. ...
If we are going to be umm...transitive here, let's have the debate where it
belongs: expensive health care with marginal impact on measured health outcomes
vs. saving lots of money and giving people much less in the way of health care
services. I do think there is a good case for the latter, though looking toward
the future I would myself prefer the former.
I might add I do favor taking action to lower doctors' wages in the United
States. Letting in a greater number of qualified foreign doctors is step number
one. But if we're going to criticize the U.S. system for its costliness, let's
put the blame where it belongs.
I interpreted "This is the major reason" and "putting the blame where it belongs" and Greg's post as saying doctor's salaries explain the majority of the difference in costs, but Tyler apparently meant the blame should be placed more broadly.
Setting aside the debate about how different outcomes actually are, I understand the argument about comparing France to other European countries and to Japan. I haven't argued for France's system in particular myself, so in the parts of Tyler's post where he is arguing that France is not the best system in the world I think we are talking past each other to some degree - I was responding to Greg's post above which led with the point about doctor's salaries and was about France versus the U.S. alone. But I don't follow Tyler's contention in the comment that the large difference in costs between single-payer systems and the U.S. generally, or for France and the U.S. in particular, cannot be explained by differences in how the systems operate. That is likely affected to some degree by our different interpretations of what the data say about health care quality across the various systems.
Posted by Mark Thoma on Monday, March 26, 2007 at 10:26 AM in Economics, Health Care, Policy |
Paul Krugman on the declining support for the Republican Party:
Emerging Republican Minority, by Paul Krugman, Commentary, Turning Left, NY
Times: Remember how the 2004 election was supposed to have demonstrated,
once and for all, that conservatism was the future of American politics? I do:
early in 2005, some colleagues in the news media urged me, in effect, to give
up. “The election settled some things,” I was told.
But at this point 2004 looks like an aberration, an election won with
fear-and-smear tactics that have passed their sell-by date. Republicans no
longer have a perceived edge over Democrats on national security — and without
that edge, they stand revealed as ideologues out of step with an increasingly
liberal American public.
Right now the talk of the political chattering classes is a report from the
Pew Research Center showing a precipitous decline in Republican support. In 2002
equal numbers of Americans identified themselves as Republicans and Democrats,
but since then the Democrats have opened up a 15-point advantage.
Part of the Republican collapse surely reflects public disgust with the Bush
administration. ... But polling data ... suggest that the G.O.P.’s problems lie
as much with its ideology as with one man’s disastrous reign.
For the conservatives who run today’s Republican Party are devoted, above
all, to the proposition that government is always the problem, never the
solution. For a while the American people seemed to agree; but lately they’ve
concluded that sometimes government is the solution, after all, and they’d like
to see more of it.
Consider, for example ... in 1994, the year the Republicans began their
12-year control of Congress, those who favored smaller government had the edge,
by 36 to 27. By 2004, however, those in favor of bigger government had a
And public opinion seems to have taken a particularly strong turn in favor of
universal health care. Gallup reports that 69 percent of the public believes
that “it is the responsibility of the federal government to make sure all
Americans have health care coverage,” up from 59 percent in 2000.
The main force driving this shift to the left is probably rising income
inequality. ... Interestingly, the big increase in disgruntlement over rising
inequality has come among the relatively well off — those making more than
$75,000 a year.
Indeed, ... the big income gains have been going to a tiny, super-rich
minority. It’s not surprising, under those circumstances, that most people favor
a stronger safety net — which they might need — even at the expense of higher
taxes, much of which could be paid by the ever-richer elite. ...
So what does this say about the political outlook? It’s difficult to make
predictions... But at this point it looks as if we’re seeing an emerging
After all, Democratic priorities — in particular, on health care, ... seem to
be more or less in line with what the public wants.
Republicans, on the other hand, are still wallowing in nostalgia — nostalgia
for the days when people thought they were heroic terrorism-fighters, nostalgia
for the days when lots of Americans hated Big Government.
Many Republicans still imagine that what their party needs is a return to the
conservative legacy of Ronald Reagan. It will probably take quite a while in the
political wilderness before they take on board the message of Arnold
Schwarzenegger’s comeback in California — which is that what they really need is
a return to the moderate legacy of Dwight Eisenhower.
Previous (3/19) column:
Paul Krugman: Don’t Cry for Reagan
Next (4/2) column: Paul Krugman: Distract and Disenfranchise
Posted by Mark Thoma on Monday, March 26, 2007 at 12:15 AM in Economics, Politics |
The administration admits "inequality is real," realizes the political need
to appear concerned about it, but doesn't believe inequality is inherently a bad
Bush Reorients Rhetoric, Acknowledges Income Gap, by Greg Ip and John D.
McKinnon, WSJ (free): Until January, President Bush seldom acknowledged the
widening gap between the rich and the middle class. Then, in a speech, he
declared: "I know some of our citizens worry about the fact that our dynamic
economy is leaving working people behind. ...Income inequality is real." He has
raised the subject several times since.
This isn't a sudden change in Mr. Bush's economic philosophy,
but rather a change in tactics forced by the changing political environment, say
current and former administration officials and outsiders in touch with the
Top White House economic officials still don't consider today's
inequality -- the growing share of income going to those at the top -- an
inherently bad thing; they believe it simply reflects the rising rewards
accruing to society's most skilled and productive members. Nor do they see merit
in various Democratic proposals to reduce inequality, such as ending Mr. Bush's
tax cuts on the highest-earners, raising the minimum wage, making it easier to
form unions and including labor standards in trade agreements.
But Democrats' takeover of Congress makes avoiding the issue
difficult... Pushed by Treasury Secretary Henry Paulson, ... the administration
is reorienting its rhetoric. ...
In his January speech, Mr. Bush cited several education
initiatives he thinks are particularly important in addressing inequality --
making schools more accountable for their performance; improving math and
science education; and making it easier for lower-income students to afford
To offset globalization's impact, the administration is
pondering improvements in Trade Adjustment Assistance, a federal program to aid
workers hurt by trade. That program is up for renewal this year.
But the administration hasn't yet offered any sweeping
proposals to resist the market forces producing inequality -- and probably
won't. Indeed, skeptics say the administration will address inequality only as
much as needed to win votes in Congress, where the widespread public belief that
globalization benefits only a small share of Americans has become an obstacle to
Bush-backed efforts to liberalize trade and foreign investment. ...
Continue reading "Rising Inequality: Does the President Feel Your Pain?" »
Posted by Mark Thoma on Monday, March 26, 2007 at 12:03 AM in Economics, Income Distribution, Politics |
Larry Summers gives U.S. policymakers advice on how to respond to the
possibility of an economic slowdown:
As America falters, policymakers must look ahead, by Lawrence Summers,
Commentary, Financial Times (free): ...With clear evidence of a crisis in
the subprime US housing sector, risks of its spread to other credit markets,
sharp increases in market volatility, reminders of the fragility of global carry
trades and signs of slowing economic growth, there is ... apprehension...
While it would be premature to predict a US recession, there are now strong
grounds for predicting that the US economy will slow down very significantly in
Continue reading "Summers: Policymakers Should Look Forward, Not Back" »
Posted by Mark Thoma on Sunday, March 25, 2007 at 02:06 PM in Economics, Policy |
Jonathan Chait analyzes Republican opposition to the idea that global warming
exists, that it is caused by humans if it does exist, and to doing anything
Why the right goes nuclear over global warming, by Jonathan Chait, Commentary,
LA Times: Last year, the National Journal asked a group of Republican
senators and House members: "Do you think it's been proven beyond a reasonable
doubt that the Earth is warming because of man-made problems?" Of the
respondents, 23% said yes, 77% said no. In the year since that poll, ...[t]he
U.N.'s Intergovernmental Panel on Climate Change released a study, with input
from 2,000 scientists worldwide, finding that the certainty on man-made global
warming had risen to 90%.
So, the magazine asked the question again last month. The results? Only 13%
of Republicans agreed that global warming has been proved. As the evidence for
global warming gets stronger, Republicans are actually getting more skeptical.
Al Gore's recent congressional testimony on the subject, and the chilly
reception he received from GOP members, suggest the discouraging conclusion that
skepticism on global warming is hardening into party dogma. Like the notion that
tax cuts are always good or that President Bush is a brave war leader, it's
something you almost have to believe if you're an elected Republican.
How did it get this way? The easy answer is that Republicans are just tools
of the energy industry. It's certainly true that many of them are. Leading
global warming skeptic Rep. Joe L. Barton (R-Texas), for instance... The bottom
line is that his relationship to the energy industry is as puppet relates to
But the financial relationship doesn't quite explain the entirety of GOP
skepticism on global warming. For one thing, the energy industry has
dramatically softened its opposition to global warming over the last year, even
as Republicans have stiffened theirs.
The truth is more complicated — and more depressing: A small number of
hard-core ideologues (some, but not all, industry shills) have led the thinking
for the whole conservative movement.
Your typical conservative has little interest in the issue. Of course,
neither does the average nonconservative. But we nonconservatives tend to defer
to mainstream scientific wisdom. Conservatives defer to a tiny handful of
renegade scientists who reject the overwhelming professional consensus.
National Review magazine, with its popular website, is a perfect example. It
has a blog dedicated to casting doubt on global warming, or solutions to global
warming, or anybody who advocates a solution. Its title is "Planet Gore." The
psychology at work here is pretty clear: Your average conservative may not know
anything about climate science, but conservatives do know they hate Al Gore. So,
hold up Gore as a hate figure and conservatives will let that dictate their
thinking on the issue.
Meanwhile, Republicans who do believe in global warming get shunted aside.
...Gannett News Service recently reported that Rep. Wayne Gilchrest asked to be
on the Select Committee on Energy Independence and Global Warming. House
Republican leader John Boehner of Ohio refused to allow it unless Gilchrest
would say that humans have not contributed to global warming. The Maryland
Republican refused and was denied a seat.
Reps. Roscoe Bartlett (R-Md.) and Vernon Ehlers (R-Mich.), both research
scientists, also were denied seats on the committee. Normally, relevant
expertise would be considered an advantage. In this case, it was a
disqualification; if the GOP allowed Republican researchers who accept the
scientific consensus to sit on a global warming panel, it would kill the party's
strategy of making global warming seem to be the pet obsession of Democrats and
The phenomenon here is that a tiny number of influential conservative figures
set the party line; dissenters are marginalized, and the rank and file go along
with it. No doubt something like this happens on the Democratic side pretty
often too. It's just rare to find the phenomenon occurring in such a blatant
You can tell that some conservatives who want to fight global warming
understand how the psychology works and are trying to turn it in their favor.
Their response is to emphasize nuclear power as an integral element of the
solution. Sen. John McCain, who supports action on global warming, did this in a
recent National Review interview. The technique seems to be surprisingly
effective. When framed as a case for more nuclear plants, conservatives seem to
let down their guard.
In reality, nuclear plants may be a small part of the answer, but you
couldn't build enough to make a major dent. But the psychology is perfect.
Conservatives know that lefties hate nuclear power. So, yeah, Rush Limbaugh
listeners, let's fight global warming and stick it to those hippies!
The thinking may have been led by a few, but they found many willing followers. I
think the influence of business in the GOP, not just the energy industry, is a
factor. The fear is that any policy to address global warming will require
business to implement costly changes, or, in the case of unilateral action by the U.S., reduce competitiveness causing profit to fall. Thus the policies, and even the idea the global warming exists are resisted. With Libertarians
joining them based on their general opposition to any government interference,
opposition has become, as Jonathan notes, part of the party's core principles.
Update: Brad DeLong says Jonathan Chait should ask a deeper question:
Why have the industry shills and the hard-core ideologues led the
thinking for the whole conservative movement? They have led the
thinking because the energy industry has funded them.
Posted by Mark Thoma on Sunday, March 25, 2007 at 08:46 AM in Economics, Environment, Policy, Politics |
A review of Barry Eichengreen's The European Economy Since 1945:
Coordinated Capitalism and Beyond:
Boom and Bust, by Sheri Berman, Book Review, NY Times: Postwar European
history falls neatly into two periods. From 1945 to 1973, the countries of
Western Europe recovered rapidly from the almost unimaginable devastation caused
by World War II and then took off, growing faster than the United States and
more than twice as fast as their own historical trends. From 1973 to the
present, however, their economies have struggled with low growth and high
As a result of this divided history, the so-called European model has both
cheerleaders and naysayers. Social democrats and others on the left focus on the
first period, applauding the continent’s ability to generate high living
standards while cushioning individuals and societies from the ravages of
unfettered markets. Right-wing critics and free marketeers focus on Europe’s
contemporary problems, arguing that the continent’s generous welfare benefits
and heavy regulation condemn it to continuing decline.
Both views contain some truth. But since the same conditions that led to
success in one era have produced problems in the next, neither interpretation
fully explains the story. In “The European Economy Since 1945,” Barry
Eichengreen ... of Berkeley presents not only a comprehensive account of
Europe’s postwar economic experience but also an important analysis of
capitalist development more generally.
Drawing on his credentials as both an economist and a political scientist,
Eichengreen argues that the key ... lies in recognizing that the recipe for
growth varies, depending on one’s position in the economic race. In the years
after 1945, Europe needed to recover from the war and catch up with the United
States. This involved what economists call “extensive growth”... After the war,
Europe developed a variety of institutions well suited to these tasks.
Large trade unions, employer organizations and corporatist arrangements,
Eichengreen shows, helped labor-market partners reach and sustain long-term
agreements to limit wage demands, ensure high levels of investment and plan for
routine industrial restructuring. Unions agreed to hold down labor costs and in
return were given either representation on corporate boards (Germany), influence
over government planning and policy making (Sweden and France) or the ability to
dole out government jobs and funds (Austria). Strong welfare states helped
cement this bargain, providing workers with generous benefits to offset their
wage restraint and the unemployment generated by industrial restructuring. ...
And the government bureaucracies of nationalized industries helped mobilize and
coordinate the resources necessary for the relatively clear-cut tasks associated
with catch-up growth.
All this worked just as it was supposed to, generating prosperity across the
continent. By the early 1970s, however, the potential for extensive growth had
been largely exhausted. Europe’s businesses and infrastructure had been rebuilt,
its labor force transferred from agriculture to manufacturing, the latest
technology imported and adopted. At this point, Eichengreen says, “the continent
had to ... switch from growth based on brute-force capital accumulation and the
acquisition of known technologies to growth based on increases in efficiency and
internally generated innovation” — that is, to “intensive growth.”
The problem, of course, was that Europe was now saddled with institutions ill
suited to the creativity and flexibility that intensive growth demands. As
Eichengreen puts it, “the continent’s very success at exploiting the
opportunities for catch-up and convergence after World War II doomed it to
difficulties thereafter.” The new situation called for flexible and mobile work
relationships, technological novelty and the financing of risky ventures — none
of which Europe’s postwar institutions were good at. ... (Eichengreen adds that
a similar dynamic has played out in Eastern Europe, since Soviet institutions
were not bad at extensive growth but awful at intensive growth.)
Eichengreen backs up his argument with reams of data and detailed examples...
He reminds us that economic development calls for much more than simply the
unleashing of market forces; it demands institutions capable of generating the
resources, skills and relationships necessary to handle the particular economic
challenges a country has to face at a particular time. And by demonstrating how
institutions helpful in one era can become counterproductive in another,
Eichengreen has important lessons about the future to teach both policy makers
“The European Economy Since 1945” should make readers wary of universal
prescriptions for economic policy, since it shows how the fit between policies
and circumstances is clearly ... important...
So what should the nations of Europe do now that the advantages of their
“economic backwardness” have been fully exploited? Without settling the debate
between the European model’s supporters and detractors, Eichengreen suggests
that international competition is compelling Europe to abandon its distinctive
model and become more flexible.
This will not be easy. Eichengreen himself stresses the difficulty of
institutional change... Yet thanks to political will and creative policymaking,
as Eichengreen points out, some countries on the continent, particularly the
Nordic ones, have managed to adapt successfully. They are keeping themselves
internationally competitive even while continuing to provide social benefits in
health, education and social insurance far above American standards. Others,
like France and Germany, will have to follow their lead. Otherwise, they will
probably face the decline the pessimists have long been predicting.
Economist's review of the book. In the
debate between the Sachs and Easterly camps over economic development, this is
[Eichengreen] reminds us that economic development calls for much more than
simply the unleashing of market forces; it demands institutions capable of
generating the resources, skills and relationships necessary to handle the
particular economic challenges a country has to face at a particular time.
Update: Here is the first chapter.
Posted by Mark Thoma on Sunday, March 25, 2007 at 12:07 AM in Economics, Social Insurance |
If you are interested in inflation dynamics and recent research suggesting
that inflation dynamics have changed, this speech by Federal Reserve governor
Frederic Mishkin looks at three important questions:
- What is the available evidence on changes in inflation persistence in
- What is the available evidence on changes in the slope of the Phillips
- What role do other variables play in the inflation process?
The speech summarizes and interprets research on these
questions, and discusses the impact of the research on the conduct of monetary
policy. As I've explained before, I am in agreement with his conclusions about the role of policy in anchoring expectations and how this has changed estimated inflation dynamics, and what this implies for monetary policy and inflation targeting. Too bad my monetary theory and policy class ended last week - I can't make them read this [Update: Brad DeLong provides a nice summary of the sections discussing the role of policy in anchoring expectations]:
Inflation Dynamics, by Frederic S. Mishkin, Federal Reserve Governor: Under
its dual mandate, the Federal Reserve seeks to promote both price stability and
maximum sustainable employment. For this reason, we at the Federal Reserve
are acutely interested in the inflation process, both to better understand the
past and--given the inherent lags with which monetary policy affects the
economy--to try to forecast the future. We economists have made some important
strides in our understanding of inflation dynamics in recent years. To be sure,
substantial gaps in our knowledge remain, and forecasting is still a famously
imprecise task, but our increased understanding offers the hope that central
banks will be able to continue and perhaps even improve upon their successful
performance of recent years.
Today, I will outline what I see as the key stylized facts that research has
in recent years uncovered about changes in the dynamics of inflation and will
present my view of how to interpret these findings. The interpretation has
important implications for how we should think about the conduct of monetary
policy and what we think might happen to inflation over the next couple of
years. I will address these two issues in the final part of the talk.
Continue reading "Frederic Mishkin: Inflation Dynamics" »
Posted by Mark Thoma on Saturday, March 24, 2007 at 01:41 PM in Economics, Fed Speeches, Monetary Policy |
Mohamed A. El-Erian of the Harvard Business School and Nobel laureate in economics Michael Spence say there's nothing puzzling or hard
to understand about global imbalances, declining risk spreads, flattened yield
curves, and declining market volatility. However, their analysis of these
changes leads them to conclude that global imbalances raise "considerable
challenges, as does the ability to maintain an orderly global reconciliation
process over time":
Currents, by Mohamed A. El-Erian and Michael Spence, Commentary, WSJ: For
the past few years, the U.S. has generated insufficient domestic savings to
cover its investment needs. The difference has been covered by large capital
inflows from abroad, the counterpart of which is the much-discussed current
account deficit, which has been running at unprecedented rates of 6%-7% of GDP.
This has raised concerns about its sustainability,
including whether it will end in a sudden and disorganized manner that sharply
reduces growth in the global economy and causes problems in global capital
markets. And underlying the concern is a kind of puzzlement about the
configuration of global savings -- one that runs counter to virtually every text
book description: The world's richest country appears to be saving at a low rate
and has to borrow from poorer, developing countries to maintain its consumption
Let's analyze this puzzle, beginning with the U.S. The financial assets of U.S. households have risen rapidly in the past 10
years, at rates well above inflation. The most dramatic increase occurred in
household real estate, principally housing. At least some of these increases in asset values were not anticipated,
relative to ... long-term ... savings and consumption plans... [I]t ... seems reasonable that U.S. households would consume a portion
of their windfall ... over time.
The recent shakiness in the subprime mortgage market has created uncertainty
as to whether this dynamic will be sustained. ... More generally, the potential
pressure on house prices could also reduce household's propensity to consume out
of their accumulated equity windfall. And ... there is concern in ... capital
markets that global growth could be negatively impacted.
These concerns are worth monitoring carefully -- and they highlight a more
general issue...: While individual consumption and savings decisions may have
been largely rational, that does not mean that the decisions of individual
households "add up" properly in the aggregate... In fact they easily might
not have. ...
[W]e can consume and invest more than output
by importing more than we export -- and we did. Hence the trade deficit.
However, this ability is dependent on the ability and willingness of the rest of
the global economy to accommodate the US desire for higher consumption by
investing in the US. That accommodation has been forthcoming from emerging
economies generally, including OPEC and China, as well as from Japan.
Their initial reaction to their improved external trade balances has been
primarily to recycle the funds to the "risk free assets," U.S. Treasuries and
Agencies. By financing U.S. consumption, many surplus countries are also meeting
their domestic objectives, to promote exports, increase employment and build up
significant reserve cushions to deal with the possibility of sudden disruptions
in global capital markets.
This constellation of conditions was largely unanticipated by both markets
and policy makers, and as a result it has been reflected in a host of unusual
economic and market outcomes -- referred to as conundrums, aberrations, puzzles,
etc. The most visible is ... global "imbalances"; also of note is the excessive
compression in risk spreads, the unusual collapse in market volatility, the
inverted shape of the U.S. yield curve...
Now to the future. Over time, emerging markets will inevitably divert more of
their assets to more sophisticated investments abroad. ... One effect will
surely be to put upward pressure ... on the cost of capital in the U.S., as the
incremental demand for treasuries declines.
While the shift is inevitable, it would be unlikely that the emerging
economies as a group would deliberately ... undermine global economic markets.
There will also be domestic pressure on policy makers in emerging countries to
gradually shift their emphasis away from the producer and towards the consumer.
That will mean lowering the savings rate relative to investment, increasing
consumption and letting it assume a more important role (relative to exports...)
in driving growth.
Under this state of the world, domestic consumption in the rest of the world
picks up over time, facilitating the needed adjustment in the U.S. The result is
a gradual journey to a more normal relationship between assets and income
returns, with savings moving to a more normal long-run pattern.
But this process is not automatic and faces significant disruption risks; and
it is particularly sensitive to "policy mistakes." Among these policy mistakes, protectionism measures in the U.S. would derail
the global adjustment So, too, would the inability of emerging economies to
navigate their complex policy challenges.
Geopolitical shocks would also be a problem... Finally, significant "market
accidents" ... associated with excessive leverage and ... sudden and large
portfolio changes and credit rationing, would add to the policy complexity.
So where does all this leave us? The current configuration of global
imbalances, while highly unusual is not a real puzzle. It is the result of a
series of individual decisions in both advanced and emerging economies that were
largely rational when considered at the micro level. ...
The aggregation of these decisions at the national and international levels
raises considerable challenges, as does the ability to maintain an orderly
global reconciliation process over time. The fundamental question, therefore, is
whether these global considerations will be sufficient to minimize the risk of
"policy mistakes" in a world that is subject to geo-political risk and bouts of
One thing that bothers me about this story is that it begins with a run-up in
asset prices as the source of global imbalances:
Let's analyze this puzzle, beginning with the U.S. The financial assets of U.S. households have risen rapidly in the past 10
years, at rates well above inflation. The most dramatic increase occurred in
household real estate, principally housing.
However, prices are endogenous variables,
and therefore this explanation leaves the primary driving force behind the
run-up in asset prices unexplained. Jim Hamilton looks at the housing market in "Bubble, bubble, toil, and trouble."
His analysis is concerned with whether or not housing prices have departed from
underlying fundamentals, and he doesn't believe that they have. He
Low interest rates and rapid population and employment growth relative to the
supply of available housing were the main factors driving house prices up...
that, Jim adds:
The one thing to which I think I was not paying enough attention two years
ago was the role of lax credit standards and even fraud (, ) in addition
to low interest rates as factors fueling the boom. I have been coming around to
the view that there may have been some significant market failures behind that.
My first worry here is about Fannie Mae and Freddie Mac, and the second concerns
whether some of our institutions have the right incentives for fund managers to
properly value lower-tail risks. This ready availability of credit, over and
above the low interest rates themselves, I now believe was an important factor
contributing to the real estate boom.
I would also mention regulatory restrictions as an important factor, e.g. see
Edward Glaeser's on
zoning regulations or Krugman on
Flatlands and Zoned Zones.
But many people blame (or thank) the Fed for driving interest rates so low.
Which opens the door to "Did
the Fed Do It?" from David Altig. David isn't so sure that the Fed is to
blame for the escalation in housing prices:
Did The Fed Do It?, macroblog:
The ISI Group's Andy Laperriere, writing on the opinion page of yesterday's Wall
Street Journal, says the answer is yes (at least in part):
Federal Reserve officials and
most economists believe the problems in the subprime mortgage market will remain
relatively contained, but there is compelling evidence that the failure of
subprime loans may be the start of a painful unwinding of a housing bubble that
was fueled by easy money and loose lending practices...
The ... fallout
from the second major asset price bubble in the last decade should prompt some
broader questions. For example, what role did the Fed's loose monetary policy
from 2002-2004 play in fueling the housing bubble? Should the Federal Reserve
reexamine its policy of ignoring asset bubbles?
I know that the easy money claim has become something of a meme,
but I often find myself pondering this picture:
What's the story here? That the long string of federal funds rate
cuts beginning in January 2001 caused the decline in long-term interest rates --
including mortgage rates -- that commenced a full half-year (at least) before
the first move by the FOMC? That low levels of short-term interest rates have
kept long-term rates well below their pre-recession peaks? Then what to make of
the fact that rates at the longer end of the yield curve have barely budged in
the face of a 425 basis point rise in the funds rate target? Maybe it's "long
and variable lags"? Should we then be expecting that big jump in long-term
rates any day now? I guess it's still a conundrum. But maybe, then, we should
be a little circumspect about the finger pointing?
OK, here's part of the Laperriere article I can get behind:
It's not the size of foreclosure losses as a share of the economy
that matters, it is the effect those losses have on the availability of credit.
Like I said.
In a recent
Fed Chair Ben Bernanke says the Fed still has the ability to affect long-term
The empirical literature supports the view that U.S. monetary policy retains
its ability to influence longer-term rates and other asset prices. Indeed,
research on U.S. bond yields across the whole spectrum of maturities finds that
all yields respond significantly to unanticipated changes in the Fed’s
short-term interest-rate target and that the size and pattern of these responses
has not changed much over time (Kuttner, 2001; Andersen and others, 2005; and
Faust and others, 2006). ...
[G]lobalization of financial markets has not materially reduced the ability
of the Federal Reserve to influence financial conditions in the United States.
But, ... globalization has added a dimension of complexity to the analysis
of financial conditions and their determinants, which monetary policy makers
must take into account.
I'm also intrigued by David's suggestion, and hopefully more evidence can
settle whether previous research has this wrong. But for now, my policy
recommendations will still account for the possibility that the Fed can affect
Posted by Mark Thoma on Saturday, March 24, 2007 at 04:17 AM in Economics, Financial System, Housing, Market Failure, Monetary Policy |
Here's another response to Paul Krugman's "Who
Was Milton Friedman?" [previous
response from Anna Schwartz and Edward Nelson along with and Paul Krugman's reply]:
Milton Friedman in China, by
Bertrand Horwitz, Reply by Paul Krugman, In response to Who Was Milton Friedman?:
To the Editors:
Paul Krugman's "Who Was Milton Friedman?" [NYR, February 15] is the best
brief popular summary I have thus far read of the contributions of Professor
Friedman, "the economist's economist" and the greatest exponent of free markets
since Adam Smith as Krugman rightly contends. ...
Friedman's contributions ... were clearly described..., but a few other
important results of his influence were missed. Much has been written about his
and his students' ("the Chicago Boys") impact on the significant improvement of
the economy during the Chilean dictatorship, but neither Krugman nor others even
in memoriam have noted Friedman's effect on Chinese economic policy at crucial
periods in its development. When he first visited China in 1980 the only policy
guidelines the authorities set down following the breakdown of Mao's crumbling
disorder were so-called pragmatic rules: "cross the river and feel the rocks"
and then "seek the truth from facts." The "river" was not named and the place to
"look" was not specified. In the meetings he had with the Chinese leaders,
Friedman strongly emphasized the importance of unfettered markets, pointing to
China's neighbor, Hong Kong, as a model to be followed.
This indeed, up to a point, is the road that has been taken. Again in 1988,
the Chinese authorities, deeply worried by double-digit inflation which they
knew undercut the Nationalists before 1949, sought his advice. Rumors had been
spreading then that in Shanghai there was a run on the banks and even ordinary
people were approaching foreigners with shouts of "wai hui, wai hui" (foreign
exchange). The greatest spokesman for monetarism and his students had analyzed
the causes of inflation in more than a dozen countries and had persuasively
shown that the quantity theory of money works, that inflation indeed is a
phenomenon of "too much money chasing too few goods," and that the application
of price controls and rationing was a "cure" which would only worsen the
situation. Friedman's advice was taken and since then China's inflation has been
within a small, acceptable range.
Further missing from Krugman's summary is Friedman's theoretical contribution
to the adoption of flexible foreign exchange rates. Until his analysis,
flexibility was rejected on the grounds that such rates would be unacceptably
unstable because of speculation. And it was Friedman whose faith in free markets
led to his promulgating the negative income tax. When families' incomes fall
below a certain level, they should be sent checks, using the money as they see
fit. Missing also is Friedman's contribution to statistics—a nonparametric test
is named after him. Whether his contributions will stand up to the test of time
remains to be seen, but as he was so fond of saying: "the proof of the pudding
is in the eating." Or as Einstein similarly said about theoretical physics: "the
test of truth is experience." -- Bertrand Horwitz Asheville, North Carolina
Paul Krugman replies: I wasn't aware of the China story, and am glad to have
it out there.
I didn't bring up exchange rate policy because I don't think Friedman can be
said to have made a deep intellectual contribution on the subject. Nonetheless,
his advocacy of flexible rates does illustrate two of his great virtues.
First, on this as on other issues he showed himself much less doctrinaire and
much more realistic than many of his acolytes: many conservative economists are
drawn to visions of a restored gold standard or a world currency, dismissing the
problems such a system would create; Friedman knew better.
Second, his famous paper on flexible rates is a masterpiece of writing, with
a brilliant analogy: achieving international adjustment by changing the exchange
rate, rather than by depending on thousands of firms to change their prices, is
like shifting to daylight savings time, rather than depending on thousands of
firms to change their working hours.
More on the reference to "cross the river and feel the rocks" is in "Mo
zhe shi tou guo he," or, "Cross
the River by Groping the Stone Under Foot." A comparison of the "Beijing
Consensus" with the "Washington Consensus [that] emerged from the neoliberal
revolution that swept the globe with the arrival of the Thatcherite and
Reaganite schools of thought and power" is part of the discussion.
Posted by Mark Thoma on Friday, March 23, 2007 at 05:40 PM in Economics |
New York Fed president Tim Geithner, who hasn't been shy about warning about
financial risks from financial market innovation, doesn't seem too concerned
that problems in the subprime mortgage market will spread and cause wider
disruptions. Here's part of a longer speech:
Credit Markets Innovations and Their Implications, by Timothy Geithner, NY Fed
President: ...The latest wave of credit market innovations has elicited some concerns about
their implications for the stability of the financial system, concerns similar
to those associated with earlier periods of rapid change in financial markets.
Will the most recent credit market innovations amplify credit cycles,
contributing to "excessive" lending in times of relative stability, and then
magnify the contraction in credit that follows? Will they introduce greater
volatility in financial markets? Will they create greater risk of systemic
These concerns have been heightened in some quarters by the problems
currently being experienced in the subprime mortgage sector. It will take some
time before the full implications are understood and the full impact can be
assessed. As of now, though, there are few signs that the disruptions in this
one sector of the credit markets will have a lasting impact on credit markets as
Indeed, economic theory and recent practical experience offer some
reassurance against both these specific concerns and more general worries about
the implications of credit market innovations for the performance of the
financial system. ...
There are ... compelling arguments in favor of a generally positive
assessment of the consequences of innovation. Does experience provide support
for these arguments, or are these changes too new for us to know? ...
We are now well into the third decade of experience with the consequences of
these earlier innovations, and this history offers some useful lessons for
evaluating the probable impact of the latest changes in credit markets.
The ease with which the U.S. financial system absorbed the substantial scale
of corporate defaults that peaked in recent years in 2002 provides some support
for the argument that broader and deeper capital markets make the system more
resilient. In general, there does not seem to be strong empirical support for
the proposition that derivatives increase volatility in financial markets. ...
Credit market innovation does not appear to have resulted in a large increase
in leverage in the corporate sector, as some had feared. ...
Default rates do not appear to have risen, nor recovery rates fallen as these
credit innovations have spread, despite concerns they might lead to excess
lending, the mis-pricing of credit risk and more messy and more complicated
workouts, resulting from the greater diffusion of the investor base.
And although the sources of the broad moderation in GDP volatility observed
in the United States over the past two decades are still the subject of debate,
the fact that this moderation occurred during a period of extensive innovation
in credit and other financial markets should provide some comfort for those who
expected the opposite.
Innovations in credit markets are inevitably accompanied by challenges.
Indeed, the history of innovation in financial markets provides many examples of
periods of rapid change accompanied by fraud and abuse, by challenges in
assessing value and risk, by concerns about the adequacy of investor and
consumer protection, and by unexpected behavior of prices, defaults and
correlations. To some degree, these types of problems are the inevitable
consequence of change and innovation.
Although recent experience as well as theory provide some reassurance..., these judgments require qualification.
Some aspects of this latest wave of innovation are different in
substance ... from their predecessors. ... [B]road changes in financial markets
may have contributed to a system where the probability of a major crisis seems
likely to be lower, but the losses associated with such a crisis may be greater
or harder to mitigate.
What should policymakers to do mitigate these risks?
We cannot turn back the clock on innovation or reverse the increase in
complexity around risk management. We do not have the capacity to monitor or
control concentrations of leverage or risk outside the banking system. We cannot
identify the likely sources of future stress to the system, and act preemptively
to diffuse them.
The most productive focus of policy attention has to be on improving the
shock absorbers in the core of the financial system, in terms of capital and
liquidity relative to risk and the robustness of the infrastructure. ...
The Federal Reserve is actively involved in a range of efforts... The stronger these shock absorbers, the more resilient markets will be in the
face of future shocks, and the more confident we can be that banks will be a
source of strength and of liquidity to markets in periods of stress and that the
financial system will contribute to improved economic performance over time.
Here's more from the Fed from the last few days:
Update: See also "Toothless Fed, Part 2 (Risk Management Shortcomings)" from Yves Smith at naked capitalism.
Posted by Mark Thoma on Friday, March 23, 2007 at 04:08 PM in Economics, Fed Speeches, Financial System, Monetary Policy |
Jane Galt says:
I have a new bloggingheads up with Jonathan Chait, during which I complained
about the general tendency for health care books to engage in "argument through
anecdote", where the data plays a distant second fiddle to the heartrending
stories about x person who didn't get good treatment. So single-payer advocates
drag out some American woman who didn't get a breast exam until it was too late,
and opponents counter with the Canadian guy who died on the waiting list to see
I'm sympathetic to the data-based versus anecdote point she is making, but in
this case I wondered if her impression wasn't partly due to what she chooses to
read. Ezra Klein comments along these lines, and he also gives some useful
comparisons between the U.S. and single-payer systems - the main reason for the
Arguing Health Care, by Ezra Klein: Is Megan's problem with health care
writing really that the literature is too narrative-driven? Yikes. She
should read some issues of Health Affairs, or the Annals of Internal
Medicine, or the New England Journal of Medicine. This is not a
debate that lacks for data.
Meanwhile, Megan actually gets a few things wrong in her argument with Chait.
She suggests that waiting lines are longer in Europe. That's, uh, untrue. France
and Germany don't have waiting lists. Americans do, by the way, with around 40%
of patients waiting one month or more for elective surgery. She then suggests
that moving to a French or Canadian system would require walking back the
medicine we actually provide, telling people they can't have MRIs anymore.
That's similarly incorrect. Care utilization in France and Germany is as high --
and in France, higher -- than it is in America. But they pay less per unit of
care. And the technology isn't radically different. Germany actually has more CT
scanners per million than we do, while the French have three less. The French
and the Germans both have more physicians per capita and more acute care beds.
Oh, and the French and Germans pay less, and don't have 47 million uninsured.
All this information -- and more! -- can be found in various data-heavy books
on the subject, like Thomas Bodenheimer and Kevin Grumbach's wonderful
Understanding Health Policy. The thing is, they tend to point towards the
same conclusions Jon Cohn's book does, albeit with fewer anecdotes. One reason I
spend less time arguing health care with libertarians these days is that it
doesn't seem productive. If you really don't want to believe that other system's
in the world are better, you won't. If the costs, outcomes, access, and equity
advantages offered by the French, German, Japanese, Scandinavian, or Veteran's
Affairs systems don't convince you, you simply don't want to be convinced. There
are issues, like card check, where I see how the counterargument could be
convincing and understand it is, to some degree, a values judgment. Health care
isn't one of those issues.
There's a bit more here.
Posted by Mark Thoma on Friday, March 23, 2007 at 03:39 PM in Economics, Health Care |
William Easterly has spent much of his career applying economic analysis to
very poor countries:
Poverty Trap, by William R. Easterly, Commentary, WSJ: There is a sad law I have noticed in my economics career: the poorer the
country, the poorer the economic analysis applied to it. Sub-Saharan Africa,
which this month marks the 50th anniversary of its first nation to gain
independence, Ghana, bears this out.
There has been progress in many areas over the last 50 years -- ... yet the
same poor economics on sale to Ghana in 1957 are still there today. Economists
involved in Africa then and now undervalued free markets, instead coming up with
one of the worst ideas ever: state direction by the states least able to direct.
African governments are not the only ones that are bad, but they have ranked
low for decades on most international comparisons of corruption, state failure,
red tape, lawlessness and dictatorship. Nor is recognizing such bad government
"racist"... Instead, corrupt and mismanaged governments ... reflect the unhappy
way in which colonizers artificially created most nations, often combining
antagonistic ethnicities. Anyway, the results of statist economics by bad states
was a near-zero rise in GDP per capita for Ghana, and the same for the average
African nation, over the last 50 years.
Why was state intervention considered crucial in 1957? Africa was thought to
be in a "poverty trap," since the poor could not save enough to finance
investment necessary to growth. Free markets could not get you out of poverty.
The response was state-led, aid-financed investment. Alas, these ideas had
already failed the laugh test... The U.S. in 1776 was at the same level as
Africa today, yet it escaped the poverty trap. The same was also true for the
history of Western Europe, Australia, Japan, New Zealand and Latin America. All
of these escapes from poverty happened without a state-led, aid-financed "Big
In the ensuing 50 years, there have been plenty more examples of poor
countries which grew rapidly without much aid -- China and India (who each
receive around half a percent of income in foreign aid) being the most famous
recent examples. Meanwhile, aid amounted to 14% of total income year in and year
out in the average African country since independence.
Despite these reality checks, blockbuster reports over the last two years by
the U.N. Millennium Project (led by Jeffrey Sachs), Mr. Sachs again in his book
"The End of Poverty," the U.N. Development Program (UNDP), the Tony Blair
Commission for Africa, and the U.N. Conference on Trade and Development (Unctad)
have all reached what the UNDP called "a consensus on development": Today Africa
needs another Big Push. Do they really think nobody is paying attention?
Africa's poverty trap is well covered in the media, since it features such
economists as Angelina Jolie, Madonna, Bono and Brad Pitt. But even Bill Gates
... expressed indifference to Africa's stagnant GDP, since "you can't eat GDP."
Mr. Gates apparently missed the economics class that listed the components of
GDP, such as food.
The World Bank and the International Monetary Fund have good economists who
have criticized state intervention. Under the pressure of anti-market activists,
alas, they have soft-pedaled these views lately in favor of ... U.N.-led
Millennium Development Goals...
The cowed IMF and the World Bank never mention the words "free market" in
thousands of pages devoted to ending poverty. ... World Bank economists are so
scared of offending anyone on Africa that they recite tautologies. The press
release describing the findings of the 2006 World Bank report "Challenges of
African Growth" announces: the "single most important reason" for Africa's
"lagging position in eradicating poverty" ... is "Africa's slow and erratic
growth." The next World Bank report may reveal that half a dozen beers has been
identified as the single most important reason for a six-pack.
Today Unctad (in its 2006 "Big Push" report) still offers to make possible
government "infant-industry policies" for "small, fragmented economies" by
setting up a regional market, presumably so Burkina Faso and Niger can help
absorb the potential output of the Togolese automobile industry.
Unctad lacks everything but chutzpah: All aid to Africa, it said, should be
moved into a new U.N. Development Fund for Africa, to which Unctad helpfully
offered its "in-house experience"... Unctad will thus permit the economics of
Africa to at last "escape from ideological biases," so we can finally understand
"why economic activity should not be left entirely to market forces."
The free market is no overnight panacea; it is just the gradual engine that
ends poverty. African entrepreneurs have shown what they are capable of. They
have, for example, launched the world's fastest growing cell phone industry to
replace the moribund state landlines. What a tragedy, therefore, that aid
agencies have foisted the poorest economics in the world on the poorest people
in the world for 50 years. The hopeful sign is that many independent Africans
themselves are increasingly learning the economics of how to get rich, rather
than of how to stay poor.
With that attitude you almost want him to be wrong. There seems to be little
love lost between Sachs and Easterly. Right or not, Sachs is clearly well-intentioned.
A couple of comments, or questions rather about his examples in support of the free market approach to development. He says "In the ensuing 50 years, there have
been plenty more examples of poor countries which grew rapidly without much aid
-- China and India ... being the most famous recent examples." Are these
examples of free markets at work once government stepped aside, or are they
cases where the state has provided substantial direction as the big push to get the ball
rolling? Should we wonder why he doesn't mention countries where the strict
free-market approach has failed and paved the way for populist alternatives?
Nobody knows for sure what the secret is to escaping poverty, and the answer may lie somewhere between the strict free-market and the heavy-handed state intervention approaches. But whatever the answer, given what we know presently, the case for a strict free-market approach is not as clear as Easterly implies.
Posted by Mark Thoma on Friday, March 23, 2007 at 01:15 AM in Economics |
Jeffrey Sachs wants us to stop "chasing other species off the planet":
Absent-minded killers, by Jeffrey Sachs, Project Syndicate: ...We humans are now so aggressively fishing, hunting, logging, and growing
crops in all parts of the world that we are literally chasing other species off
the planet. Our intense desire to take all that we can from nature leaves
precious little for other forms of life.
In 1992, when the world's governments first promised to address man-made
global warming, they also vowed to head off the human-induced extinction of
other species. The Convention on Biological Diversity, agreed ... to conserve
Unfortunately, like so many other international agreements, the Convention on
Biological Diversity remains essentially unknown, un-championed, and
unfulfilled. That neglect is a human tragedy. For a very low cash outlay - and
perhaps none at all on balance - we could conserve nature and thus protect the
basis of our own lives and livelihoods. We kill other species not because we
must, but because we are too negligent to do otherwise.
Consider a couple of notorious examples. Some rich countries, such as Spain,
Portugal, Australia, and New Zealand, ... engage in so-called "bottom trawling".
Bottom trawlers drag heavy nets over the ocean bottom, destroying ... marine
species in the process. Complex and unique ecologies, most notably underground
volcanoes known as seamounts, are ripped to shreds, because bottom trawling is
the "low cost" way to catch a few deep sea fish species. One of these species,
orange roughy, ... already is being fished to the point of collapse.
Likewise, in many parts of the world, tropical rainforest is being cleared
for pastureland and food crops. The result is massive loss of habitat and
destruction of species, yielding a tiny economic benefit at a huge social cost.
After cutting down a swath of rainforest, soils are often quickly leached of
their nutrients... As a result, the new pastureland or farmland is soon
abandoned, with no prospect for regeneration of the original forest and its
Because these activities' costs are so high and their benefits so low,
stopping them would be easy. Bottom trawling should simply be outlawed; it would
be simple and inexpensive to compensate the fishing industry during a transition
to other activities. Forest clearing, on the other hand, is probably best
stopped by economic incentives, perhaps combined with regulatory limits. Simply
restricting ... land clearing probably would not work, since farm families and
communities would face a strong temptation to evade legal limits. On the other
hand, financial incentives would probably succeed, because cutting down forest
... is not profitable enough to induce farmers to forego payments for protecting
Many rainforest countries ... suggest the establishment of a rainforest
conservation fund by the rich countries, to pay impoverished small farmers a
small amount ... to preserve the forest. A well-designed fund would slow or stop
deforestation, preserve biodiversity, and reduce emissions of carbon dioxide
[from] the burning of cleared forests. At the same time, small farmers would
receive a steady flow of income, which they could use for micro-investments...
[W]e should designate a global network of protected marine areas, in which
fishing, boating, polluting, dredging, drilling, and other damaging activities
would be prohibited. Such areas not only permit the regeneration of species, but
also provide ecological benefits that spill over to neighbouring unprotected
We also need a regular scientific process to present the world with the
evidence on species abundance and extinction, just as we now have such a process
for climate change. Politicians don't listen very well to individual scientists,
but they are forced to listen when hundreds of scientists speak with a united
Finally, the world should negotiate a new framework ... to slow human-induced
climate change. There can be little doubt that climate change poses one of the
greatest risks to species' viability. ...
These measures are achievable... They are affordable, and in each case would
ultimately deliver large net benefits. Most importantly, they would allow us to
follow through on a global promise. It is too painful to believe that humanity
would destroy millions of other species - and jeopardise our own future - in a
fit of absent-mindedness.
Posted by Mark Thoma on Friday, March 23, 2007 at 12:15 AM in Economics, Environment, Regulation |
Continuing with "Don’t Cry for Reagan," for those still battling this one out, here's more Reagan versus Bush:
The Great Taxer, by
Paul Krugman, Commentary, NY Times, June 2004: Over the course of this week
we'll be hearing a lot about Ronald Reagan, much of it false. A number of news
sources have already proclaimed Mr. Reagan the most popular president of modern
times. In fact, though Mr. Reagan was very popular in 1984 and 1985, he spent
the latter part of his presidency under the shadow of the Iran-Contra scandal.
Bill Clinton had a slightly higher average Gallup approval rating, and a much
higher rating during his last two years in office.
We're also sure to hear that Mr. Reagan presided over an unmatched economic
boom. Again, not true: the economy grew slightly faster under President Clinton,
and, according to Congressional Budget Office estimates, the after-tax income of
a typical family, adjusted for inflation, rose more than twice as much from 1992
to 2000 as it did from 1980 to 1988.
But Ronald Reagan does hold a special place in the annals of tax policy, and
not just as the patron saint of tax cuts. To his credit, he was more pragmatic
and responsible than that; he followed his huge 1981 tax cut with two large tax
increases. In fact, no peacetime president has raised taxes so much on so many
people. This is not a criticism: the tale of those increases tells you a lot
about what was right with President Reagan's leadership, and what's wrong with
the leadership of George W. Bush.
The first Reagan tax increase came in 1982. By then it was clear that the
budget projections used to justify the 1981 tax cut were wildly optimistic. In
response, Mr. Reagan agreed to a sharp rollback of corporate tax cuts, and a
smaller rollback of individual income tax cuts. Over all, the 1982 tax increase
undid about a third of the 1981 cut; as a share of G.D.P., the increase was
substantially larger than Mr. Clinton's 1993 tax increase.
The contrast with President Bush is obvious. President Reagan, confronted
with evidence that his tax cuts were fiscally irresponsible, changed course.
President Bush, confronted with similar evidence, has pushed for even more tax
Mr. Reagan's second tax increase was also motivated by a sense of
responsibility — or at least that's the way it seemed at the time. I'm referring
to the Social Security Reform Act of 1983, which followed the recommendations of
a commission led by Alan Greenspan. Its key provision was an increase in the
payroll tax that pays for Social Security and Medicare hospital insurance.
For many middle- and low-income families, this tax increase more than undid
any gains from Mr. Reagan's income tax cuts. In 1980, according to Congressional
Budget Office estimates, middle-income families with children paid 8.2 percent
of their income in income taxes, and 9.5 percent in payroll taxes. By 1988 the
income tax share was down to 6.6 percent — but the payroll tax share was up to
11.8 percent, and the combined burden was up, not down.
Nonetheless, there was broad bipartisan support for the payroll tax increase
because it was part of a deal. The public was told that the extra revenue would
be used to build up a trust fund dedicated to the preservation of Social
Security benefits, securing the system's future. Thanks to the 1983 act, current
projections show that under current rules, Social Security is good for at least
38 more years.
But George W. Bush has made it clear that he intends to renege on the deal.
His officials insist that the trust fund is meaningless — which means that they
don't feel bound to honor the implied contract that dedicated the revenue
generated by President Reagan's payroll tax increase to paying for future Social
Security benefits. Indeed, it's clear from the arithmetic that the only way to
sustain President Bush's tax cuts in the long run will be with sharp cuts in
both Social Security and Medicare benefits.
I did not and do not approve of President Reagan's economic policies, which
saddled the nation with trillions of dollars in debt. And as others will surely
point out, some of the foreign policy shenanigans that took place on his watch,
notably the Iran-contra scandal, foreshadowed the current debacle in Iraq
(which, not coincidentally, involves some of the same actors).
Still, on both foreign and domestic policy Mr. Reagan showed both some
pragmatism and some sense of responsibility. These are attributes sorely lacking
in the man who claims to be his political successor.
Update: Email brings approval ratings for Bush, Nixon, Clinton, and Reagan (click on figure for larger version):
Posted by Mark Thoma on Friday, March 23, 2007 at 12:09 AM in Budget Deficit, Economics, Politics, Taxes |
Jared Bernstein looks at the differences between the president's budget
proposal and the House Budget Committee's proposal for spending and revenue:
Show us the money, by Jared Bernstein, Comment is Free: Well, with both the
Democratic House and Senate having weighed in on President Bush's 2008 federal
budget, the battle lines are taking clear shape.
Today, the House Budget Committee released its mark-up of the budget
resolution, a document that sets broad budgetary outlines and preferences - on
spending and revenue targets... In this case, there are some clear lines of
demarcation from the president's budget that are worth noticing.
First, on the so-called sunset clause under which the president's tax cuts
are due to expire in 2011: they say, if you want to cut taxes, you've got to
find the money. (This idea is called pay-as-you-go, or paygo). And second, in
some key areas of domestic programmes, most notably healthcare for poor kids,
where Bush cuts, the House and Senate Democrats spend.
The part of all this that is sure to get the most attention is the expiration
of the Bush tax cuts enacted in 2001 and 2003. Though it's fair to say
conservatives never intended for the sun to set, to sell the cuts they had to
build in their demise by the end of the decade. Now they go around saying that
allowing the cuts to expire would amount to a massive tax increase.
But since it would take new legislation to extend the cuts, Democrats
legitimately make the case that to do so would be to enact yet another round of
tax cuts. Which brings us to the second point: paygo. ... [P]ay-as-you-go ...
mean[s] that any tax cut must be offset with either a tax increase or a cut in
entitlement spending. ... But beyond that, it means the tax-cut zombies have a
new, big problem.
For years, they have been able to ignore the fiscal implications of their
massive tax cuts. They could wave hands and argue that the cuts would pay for
themselves ... (even when their own agencies were submitting reports saying that
wouldn't happen). Or they could simply ignore the fact that both current (the
wars in Iraq and Afghanistan) and looming (healthcare) expenses were going to
lead to large and damaging deficits.
In other words, as long as the grown-ups are away, you can have all the guns
and butter you want. Well, paygo means the grown-ups are back in the room.
Bush and the Republican minority are starting to get really fired up about
all this and are accusing the Democrats of massive tax increases. But ..., if
Bush and the Republicans want to extend the cuts, they are going to need to find
Which bring us to a final point. The president does go after entitlements,
cutting them by $52bn over five years, and the Democrats are already taking flak
for not joining him there. But here's why that is not fair: before this budget
discussion even started, the White House ruled out any tax increases to pay for
Under these conditions, the Democrats have to fight their way out of a tight
box. Even with the sunsets, vital public healthcare spending will ultimately
have to fall. In fact, the president's budget threatens health coverage to more
than 1 million children by 2012.
With this resolution, they are essentially saying they are going to take the
revenue from the expiring cuts and spend it on their priorities, which include
expanding the very child healthcare programme the president is cutting... You
want to cut more taxes? Show us the money...
And, from the Center on Budget and Policy Priorities today, "Key Argument Against Applying Pay-As-You-Go To Tax Cuts Does Not Withstand
Scrutiny" which will make it even harder for Republicans to argue against
the need to pay for any further tax cuts.
I worry that deficit hawkishness will cause the deficit numbers themselves will take precedence over the
programs they represent, i.e. that the desire to show progress on the budget
deficit will lead to unwise cuts in necessary programs. The current deficit
isn't a problem, it's the long-term outlook that we need to worry about, and
focus on current deficit numbers is more for show than for real budgetary dough.
There are political gains to be made from deficit reduction in the short-run,
and certainly a return of discipline is needed after the excesses of the last
few years, but we need to be careful how we go about resolving
projected budgetary imbalances and keep in mind that the long-run is the focus. I have much more confidence that Democrats will
exercise sound judgment than I do for Republicans, e.g. not cutting taxes on the
wealthy if it means giving up health care for children. On this point, Jared
True, [Democrats] are keeping mum on big forthcoming budgetary constraints.
But when the powers that be are ready to entertain the possibility that there
are other ways to deal with the challenge of entitlements - specifically
healthcare - than cutting them, the Democrats will come back to the table.
Posted by Mark Thoma on Thursday, March 22, 2007 at 02:30 PM in Budget Deficit, Economics, Taxes |
Robert Reich comments on the problems in the sub-prime mortgage market:
The Fed and the Sub-Prime Lending Debacle, by Robert Reich: What the Fed
does or fails to do has more effect on the nation’s poor than any other policy
making body. When the Fed decides to fight inflation by raising interest rates
and cooling the economy, it’s the poor who are the first to be drafted into the
inflation fight because their jobs are the most tenuous, and they’re the first
to lose them. When the Fed decides to ease up and reduce rates, it’s the poor
who are among the first to get the new jobs because employers who are most
likely to hire at the start are small service businesses offering jobs at the
bottom rungs of the wage scale. The best example of this occurred in the late
90s, when Alan Greenspan bucked conventional economic wisdom and decided that
the economy could safely grow fast enough that unemployment dropped to around 4
percent. The result was to create more jobs for people in the bottom fifth of
the income ladder – whose total income therefore began to rise for the first
time in decades.
But the Fed affects the poor in another way, too. It determines their access
to credit. And here as well, the Fed's decisions can either be a great boon to
poorer Americans or a huge curse, depending on how responsibly the Fed manages
the credit markets. In this respect, it’s done a lousy job in recent years. In
the early 2000s, rates were so low that banks didn’t know what to do with all
the extra money they had on hand. But instead of keeping an eye on bank lending
standards, the Fed looked the other way. The result: Credit standards were
disregarded in a tidal wave of sub-prime lending to the poor home buyers – often
without down payments, often with mortgage interest rates that would rise if and
when the prime rate went upward. Then what happened? The Fed raised short-term
rates seventeen consecutive times, catching poor borrowers in the very trap the
Fed allowed banks to set for them. So now millions of poorer Americans face
foreclosures on their homes, and sub-prime lenders are in trouble.
Will anyone hold the Fed responsible? Answer: No. Does anyone know how to
hold the Fed responsible? Answer: No.
See also "Does
Debt Get Enough Credit?" for my views on this, and "Regulation
of Mortgage Markets" for a summary and analysis of the regulatory structure. [Update: Tanta at Calculated Risk also comments in Cole Testimony: Cui Bono?, "I want to point out ... the one place in this document where I think the Fed has
really drunk a little of the Kool Aid."]
We've all been critical of regulators to one degree or another, so I should let the Fed defend itself. This is testimony from Roger Cole, the Federal Reserve's Director of Banking
Supervision and Regulation given today before the Senate Committee on Banking, Housing, and
Mortgage markets, by Roger T. Cole, Federal
Reserve: Introduction Chairman Dodd, Ranking Member Shelby,
members of the Committee, I appreciate the opportunity to discuss mortgage
lending, the recent rise in mortgage delinquency and foreclosure rates,
particularly in the subprime sector, and the Federal Reserve’s supervisory
The Federal Reserve is concerned about recent developments in mortgage
markets and has been closely monitoring the effects of these developments on the
financial health of mortgage borrowers and lending institutions. Regarding
safety and soundness of the banking system, less than half of subprime loans
have been originated by federally regulated banking institutions. To date, the
deterioration in housing credit has been focused on the relatively narrow market
for subprime, adjustable-rate mortgages, which represent fewer than one out of
ten outstanding mortgages. Borrower performance deterioration in the subprime
market has been concentrated in loans made very recently, especially those
originated in late 2005 and 2006, and problems in those loans started to become
apparent in the data during the latter half of 2006.
As in past credit cycles, market investors and lenders have begun to
implement more appropriate underwriting standards and to change their risk
profiles. Some borrowers are clearly experiencing significant financial and
personal challenges, and more subprime borrowers may join these ranks in the
coming months. We are mindful that any action we take should not have the
unintended consequence of limiting the availability of credit to borrowers who
have the capacity to repay. I will shortly offer some suggestions to address
these challenges, including the potential for lenders to work with troubled
We know from past cycles that credit problems in one segment of the economy
can disturb the flow of credit to other segments, including to sound borrowers,
creating the potential for spillover effects in the broader economy. Nevertheless, at this time, we are not observing spillover effects from the
problems in the subprime market to traditional mortgage portfolios or, more
generally, to the safety and soundness of the banking system.
Subprime lending has grown rapidly in recent years and has expanded
homeownership opportunities for many individuals. It is important to ensure
that these gains are not eroded by the recent increase in delinquencies and
foreclosures in the subprime market. It is especially important to preserve
homeownership for the many low- and moderate-income borrowers who have only
recently been able to achieve the goal of owning a home.
Later in my testimony, I will discuss the recent activity in mortgage markets
and the possible causes for the increases in delinquencies and foreclosures in
the subprime market. I will discuss the Federal Reserve’s ongoing efforts as a
banking supervisor to ensure that the institutions we supervise are managing
their mortgage lending activities in a safe and sound manner, including
assessing the repayment capacity of borrowers. ...
I will also discuss our efforts in the area of consumer protection, including
guidance to ensure that lenders provide consumers with clear and balanced
information about the risks and features of loan products at a time when the
information is most useful, before a consumer has applied for a loan. The
Federal Reserve Board has significant responsibilities as a rule writer for
several consumer protection laws, and I will discuss our efforts to date to
improve the effectiveness of our regulations in this area as well as our plans
to continue this work in the near and longer term.
Continue reading "The Fed's View of the Sub-Prime Mortgage Market" »
Posted by Mark Thoma on Thursday, March 22, 2007 at 12:34 PM in Economics, Financial System, Housing, Regulation |
Tyler Cowen argues against single-payer health insurance:
Abolishing the Middlemen Won't Make Health Care a Free Lunch, by Tyler Cowen,
Economic Scene, NY Times: Proponents of single-payer national health
insurance note that private health insurance has overhead costs of 10 to 25
percent of expenditures. Medicare, by contrast, has overhead costs of about 2 to
3 percent, and socialized European health care systems generally have low
overhead costs as well. That is why single-payer supporters claim that we can
save money by substituting government for private insurance. But this would
shift overhead costs, not reduce them.
The monitoring, marketing and overhead costs of private insurance are what
allow more expensive medical treatments through the door. It is precisely
because competing insurance companies spend money evaluating the appropriateness
of claims that they are willing to pay for so many heart bypasses, extra tests,
private hospital rooms and CT scans. ...
European systems are relatively good at providing prenatal care or mending
someone hit by a car. Few people would try to get these services unless they
were really needed. No one but an expectant mother, for instance, will show up
for a prenatal checkup; nor would excess prenatal checkups cost a great deal.
The unwillingness of European systems to spend on overhead means they will do
best specializing in these kinds of services.
Health insurers cannot just offer expensive tests, technologies, hospital
rooms and surgeries for older patients for the taking. Doctors will too often
recommend these services and receive reimbursement, even to the point of
financial abuse. Medicare has this problem to some extent.
When it comes to these discretionary benefits, European systems are more
likely to make people wait for them, more likely to make the service
inconvenient or uncomfortable, or simply not make the services available in the
first place. All of these features discourage those who don’t really need care,
and, of course, some people simply go elsewhere and pay out of their own
pockets. Either way, the overhead costs have been shifted onto patients and
On average, European systems are relatively good for the young, who are
generally healthy and need treatment for obvious accidents and emergencies, with
transparent remedies. European systems are less effective for the elderly, the
primary demanders of discretionary medical benefits. ...
American citizens could, if they wanted, replicate many features of Canadian
and European systems, but in the private sector. They, or their employers, could
join stringent but cheap managed care plans. Health maintenance organizations
were popular 15 years ago, but Americans didn’t like being told that they
couldn’t have a treatment, or that they would have to wait. That experience
showed that Americans are willing to pay for insurance company overhead costs,
if it means they sometimes get more in return.
Private insurance also provided earlier access to prescription drugs ... for
20 years or more before Medicare did. The competition among private insurers may
appear wasteful, but over time it stimulates better and more complete coverage.
Nor are Canadian and European health care systems as cheap as they look.
Measuring health care expenditures as a share of national income does not count
waiting costs or the lack of availability of many advanced technologies and
As ... populations age and the value of medical technology grows, the
overhead costs of private insurance will prove an increasingly wise investment.
... In the long run, the hidden and indirect costs of single-payer systems are
harder to measure and thus are ultimately harder to control.
Middlemen and marketing costs have long been viewed with suspicion by critics
of commerce. But these practices are usually signs of market sophistication, not
waste. The gains from abolishing private insurance and its overhead costs are an
illusion. TANSTAAFL, or "There Ain’t No Such Thing as a Free Lunch."
But TISATAAWL, or "There is such a thing as a wasted lunch," a lunch someone else could have
eaten had it not been tossed in the trash.
Here are a few quotes in
rebuttal from Paul Krugman who has written quite a bit about this. Quite a few resources are wasted simply fighting over who pays the bills, and in marketing and underwriting policies (while some of the overhead costs would be shifted to the private sector as noted above, there are still substantial savings from eliminating waste).
one estimate of what could be saved by switching to a single-payer system:
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. ... 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.
Another consideration is the savings that come from preventive care, something
single-payer insurers have an incentive to provide, but private insures do
Americans spend more on health care per person than anyone else... Yet we
have the highest infant mortality and close to the lowest life expectancy of any
wealthy nation. How do we do it?
Part of the answer is that our fragmented system has much higher
administrative costs than ... the rest of the advanced world. ... In addition,
insurers often refuse to pay for preventive care ... because [the] long-run
savings won’t necessarily redound to their benefit.
cost control from spending money on overhead, one of the benefits cited
above from the up to 25% spent on overhead costs?:
[T]o get health reform
right, we'll have to overcome wrongheaded ideas as well as powerful special
interests. For decades we've been lectured on the evils of big government and
the glories of the private sector. Yet health reform is a job for the public
sector, which already pays most of the bills directly or indirectly and sooner
or later will have to make key decisions about medical treatment. ...
Consider what happens when a new drug or other therapy becomes available.
Let's assume that the new therapy is more effective ... than existing therapies
..., but that the advantage isn't overwhelming. On the other hand, it's a lot
more expensive... Who decides whether patients receive the
new therapy? We've traditionally relied on doctors to make such decisions. But ..., the high-technology nature of modern medical spending has given
rise to a powerful medical-industrial complex that seeks to influence doctors'
decisions. ...[D]rug companies in particular spend more marketing their products
to doctors than they do developing those products ... They wouldn't do that if
doctors were immune to persuasion.
So if costs are to be controlled, someone has to act as a referee on doctors'
medical decisions. During the 1990's it seemed, briefly, as if private H.M.O.'s
could play that role. But then there was a public backlash. It turns out that
even in America, with its faith in the free market, people don't trust
for-profit corporations to make decisions about their health.
Despite the failure ... to control costs with H.M.O.'s, conservatives
continue to believe that the magic of the private sector will provide the
answer. ... [I]s giving individuals responsibility for their own health spending
really the answer to rising costs? No.
For one thing, insurance will always cover the really big expenses. We're not
going to have a system in which people pay for heart surgery out of their health
savings accounts and save money by choosing cheaper procedures. And that's not
an unfair example. The Brookings study puts it this way: "Most health costs are
incurred by a small proportion of the population whose expenses greatly exceed
plausible limits on out-of-pocket spending."
Moreover, it's neither fair nor realistic to expect ordinary citizens to have
enough medical expertise to make life-or-death decisions about their own
treatment. A well-known experiment ... carried out by the RAND Corporation...
found that when individuals pay a higher share of medical costs out of pocket,
they cut back on necessary as well as unnecessary health spending. ...
Eventually, we'll have to accept the fact that there's no magic in the private
sector, and that health care - including the decision about what treatment is
provided - is a public responsibility.
Next, what about the
comparison to to other countries, are waiting times, etc. as bad as implied?
...Employment-based health insurance is the only serious source of coverage
for Americans too young to receive Medicare and insufficiently destitute to
receive Medicaid, but it's an institution in decline. ... The funny thing is
that the solution - national health insurance ... - is obvious. But to see the
obvious we'll have to overcome pride - the unwarranted belief that America has
nothing to learn from other countries - and prejudice - the equally unwarranted
belief, driven by ideology, that private insurance is more efficient than public
insurance. Let's start with the fact that America's health care system spends
more, for worse results, than that of any other advanced country. In 2002 the
United States spent $5,267 per person on health care. Canada spent $2,931;
Germany spent $2,817; Britain spent only $2,160. Yet the United States has lower
life expectancy and higher infant mortality than any of these countries.
But don't people in other countries sometimes find it hard to get medical
treatment? Yes ..., but so do Americans. ... The journal Health Affairs recently
published ... a survey of the medical experience of "sicker adults" in six
countries, including Canada, Britain, Germany and the United States. ... It's
true that Americans generally have shorter waits for elective surgery ...
although German waits are even shorter. But Americans ... find it harder ... to
see a doctor when we need one, and our system is more, not less, rife with
medical errors. Above all, Americans are far more likely than others to forgo
treatment because they can't afford it. ...
The authors of the study compared the prevalence of such diseases as diabetes
and hypertension in Americans 55 to 64 years old with ... a comparable group in
England. Comparing us with the English isn't a choice designed to highlight
American problems: Britain spends only about 40 percent as much per person on
health care..., ... Moreover, England isn't noted either for healthy eating or
for a healthy lifestyle.
Nonetheless, the study concludes that "Americans are much sicker than the
English."... What's ... striking is that being American seems to damage your
health regardless of your race and social class. That's not to say that class is
irrelevant. ... In fact, there's a strong correlation within each country
between wealth and health. But Americans are so much sicker that the richest
third of Americans is in worse health than the poorest third of the English. ...
[I]nsurance companies ... devote a lot of effort and money to screening
applicants... This screening process is the main reason private health insurers
spend a much higher share of their revenue on administrative costs than do
government insurance programs like Medicare, which doesn't try to screen anyone
out. ... [P]rivate insurance companies spend large sums not on providing medical
care, but on denying insurance to those who need it most. What happens to those
denied coverage? Citizens of advanced countries ... don't believe that their
fellow citizens should be denied essential health care because they can't afford
it. And this belief in social justice gets translated into action... Some ...
are covered by Medicaid. Others receive "uncompensated" treatment, ... paid for
either by the government or by higher medical bills for the insured. ...
At this point some readers may object that I'm painting too dark a picture.
After all, most Americans ... have private health insurance. So does the free
market work better than I've suggested? No: to the extent that we do have a
working system of private health insurance, it's the result of huge though
hidden subsidies. ...
I'm not an opponent of markets. ... I've spent a lot of my career defending
their virtues. But the fact is that the free market doesn't work for health
insurance, and never did. All we ever had was a patchwork, semi-private system
supported by large government subsidies. That system is now failing. And a rigid
belief that markets are always superior to government programs - a belief that
ignores basic economics as well as experience - stands in the way of rational
thinking about what should replace it.
For more, see the links
here. Single-payer isn't perfect, but all things considered it's the better solution.
Posted by Mark Thoma on Thursday, March 22, 2007 at 12:41 AM in Economics, Health Care |
Has regulatory oversight of mortgage markets been too lenient?:
Scrutinized In Mortgage Meltdown, by Greg Ip and Damian Paletta, WSJ: The
well-publicized woes in the business of subprime mortgages ... are raising a big
question: Are regulators partly to blame?
Federal regulators over the past decade issued rules to tighten standards for
making loans to borrowers with blemished credit or low incomes. Yet standards
still declined and the volume of loans surged in the past two years.
One reason: Changes ... have moved large swaths of subprime lending from
traditional banks to companies outside the jurisdiction of federal banking
regulators. In 2005, 52% of subprime mortgages were originated by companies with
no federal supervision... Another 25% were ...[only] indirectly supervised by
the Federal Reserve...
"What is really frustrating about this is [federal regulators] don't have
enforcement authority to do anything with these state-licensed, stand-alone
mortgage lenders," says Fed Reserve Governor Susan Bies.
Yet even where federal regulators have jurisdiction, they sometimes have been
slow to grapple with the explosive growth in especially risky practices and
quick to shield federally regulated banks... The underlying belief, shared by
the Bush Administration, is that too much regulation would stifle credit for
low-income families, and that capital markets and well-educated consumers are
the best way to curb unscrupulous lending.
The industry argues the system is working. "Market discipline in this
industry is swift, can be severe, and is more effective in changing lending
practices than any potential changes in regulation," says Doug Duncan, chief
economist at the Mortgage Bankers Association. ... Consumer advocates counter
that families have been losing their homes and savings to excessively burdensome
loans for years. ...
"Perhaps we all should have done something earlier and faster," says Sheila
Bair, ... chairman of the Federal Deposit Insurance Corp. ... "Early on,
regulators didn't see extensive consumer complaints and credit distress," she
adds, noting that rising home prices masked some of the problems. ...
There is widespread agreement that the biggest shortcoming in the regulation
of mortgages is the patchwork of state and federal oversight. Amid rapid
evolution in industry practice, the system leaves many market segments barely
supervised, and some supervised by multiple regulators.
Lenders that aren't federally regulated are generally state-licensed. But
many state regulators lack the resources and mandates of their federal
counterparts. Some of the biggest subprime blowups have happened in California.
The home-state regulator, the California Department of Corporations, has 25
examiners to oversee more than 4,800 state-licensed lenders, including many of
the country's largest subprime companies. By comparison, San Francisco-based
Wells Fargo & Co. alone has 34 examiners from the federal Office of the
Comptroller of the Currency [OCC] and the equivalent of 12 Fed examiners
assigned to it.
Federal regulators, meanwhile, have tended to focus more on the solvency of
the institutions they oversee and less on individual consumer complaints. ...
Public disciplinary actions by federal bank regulators are rare. ... Federal
regulators say they spot and correct problems quietly during the examination
process before they reach the point where public enforcement action is needed.
Regulators appointed by President Bush often have been more sympathetic to
industry concerns about red tape than their Clinton administration predecessors.
When James Gilleran, a former California banker and bank supervisor, took over
the OTS in December 2001, he became known for his deregulatory zeal. At one
press event in 2003, several bank regulators held gardening shears to represent
their commitment to cut red tape for the industry. Mr. Gilleran brought a chain
He also early on announced plans to slash expenses to resolve the agency's
deficit; 20% of its work force eventually left. ...[H]is successor, Mr. Reich, a
former community banker, has reversed many of Mr. Gilleran's cuts. Citing
"understaffing," he hired 80 examiners last year and plans to add 40 more this
Last fall federal bank regulators, at the urging of consumer groups and after
extensive debate, proposed standards on "nontraditional mortgages" that they
thought would compel banks to make "teaser" loans only to consumers who could
pay the highest interest. ... However, with the subprime market already
imploding, some bankers and regulators worry the new guidance could boost
defaults by making it harder for strapped borrowers to refinance.
Recent events have prompted regulators to join the industry in calling for
national laws to oversee the mortgage market. "Congress needs to seriously
consider a national anti-predatory lending law that would apply to all mortgage
lenders," said Ms. Bair. Ms. Bies shares that view, but also warns enforcement
powers are needed. ...
Posted by Mark Thoma on Thursday, March 22, 2007 at 12:33 AM in Economics, Financial System, Regulation |
David Leonhardt on our love-hate relationship with debt:
Once Again, Debt Is Miscast as the Villain, by David Leonhardt, NY Times:
Later this year, the National Film Preservation Foundation is going to
re-release a silent movie from 1912 called “The Usurer’s Grip.” It’s a
cautionary tale about borrowed money that revolves around the Jenkses, a
fictional middle-class family who need a $25 loan so their young daughter can be
treated for consumption. After a loan shark tricks Mr. Jenks into borrowing at
an interest rate of 180 percent, the family is brought to the brink of ruin. ...
Just like the Jenkses, thousands of families have recently fallen sway to the
sweet promises of moneylenders. Today’s version of the story typically involves
a house that a buyer couldn’t actually afford or a refinanced mortgage that had
a devil lurking in the fine print. As everyone knows by now, delinquencies and
foreclosures have started rising, and they will certainly rise further. ...
Now, a lot of people are saying that the economy is finally going to pay the
price for its spendthrift ways. Which, when you stop and think about it, is
roughly the same warning we have been hearing since at least 1912.
Americans have a very strange relationship with debt. We seem to take on more
of it than any other society ever has, but, boy, do we like to beat ourselves up
about it. Benjamin Franklin implored his fellow citizens, for the sake of their
own independence, not to become “a slave to the lender.” ...
[I]t’s important to remember that the mortgage market is following a classic
cycle that nearly every other form of consumer credit has also followed. When
somebody comes up with an innovation, be it consumer loans, credit cards or
creative mortgages, it inevitably leads to an explosion of borrowing that
includes a good amount of excess and downright abuse. After the abuse is cleaned
up, though, most families end up better off.
That’s what I find so appealing about “The Usurer’s Grip.” It came out at a
time very much like today, when the excesses were becoming so obvious that they
obscured almost everything else. The producer of the movie was ... Arthur Ham,
... arguably the Progressive movement’s leading crusader against the
consumer-loan business, according to Lendol Calder, ... an expert on debt. To
Mr. Ham, moneylenders were “sharks, leeches and remorseless extortioners” with
“an arrogant disregard of human rights.”
And some clearly were. But Mr. Ham didn’t really distinguish between the true
sharks and the lenders who were in fact selling a useful new product, namely
loans for ordinary families. To him, anyone charging a higher interest rate than
banks then charged businesses (6 percent) was a crook.
This, Mr. Calder argues, made the message of the movie “more wrong than
right.” Mr. Ham himself came to realize as much in the years that followed. By
1916, he had teamed up with the better elements of the lending business to pass
laws that set a standard rate of 42 percent — an eye-popping rate by today’s
standard but, at the time, still progress. “It was the birth of the modern
personal finance business,” Mr. Calder says.
It’s easy to see everything since then as a step in the wrong direction...
But think about what life was like before easy money. Think about how hard it
would be to buy a house or pay for college if a 42 percent interest rate still
Some of the changes are surprisingly recent. Just a generation ago, a
temporary setback, like illness, divorce or job loss, was much more likely to
force a family to take drastic measures than it is today. That’s in large
measure because of debt, which allows families to smooth out the rough edges of
their financial lives. ...
Mortgages are a big part of this story. ... If you take out a mortgage today,
you’ll pay thousands of dollars less in upfront fees than you would have in the
mid-80s. ... Home buyers who know they’re going to live in their house for only
a few years now also have the ability to get an interest rate that reflects
their situation. The 30-year fixed-rate mortgage isn’t the only game in town.
Of course, people in the mortgage business ... like to argue that the current
problems are mere footnotes compared with all the progress. They are wrong about
that. The excesses were real, and they were big. We’re still figuring out just
The solution will have to involve new guidelines, voluntary or
government-imposed, that force lenders to be clearer about the terms they’re
offering borrowers. But as long as we take tough measures to clean up the mess,
we’ll end up with a healthier mortgage market than we had beforehand. And then
we can go looking for the next form of debt to captivate and torment us.
If we decide to go the regulatory route, I'm not sure that forcing "lenders
to be clearer about the terms they’re offering borrowers" is the solution. The
story that borrowers did not understand the terms of their loans doesn't ring
true to me, though I have no real evidence one way or the other and may have to
change my mind about that. It seems more likely to me that buyers were overly
optimistic about prices continuing to rise, the ability to rent condos and other
investment properties to tenants, to believe whatever they needed to believe to
justify the purchase.
I think there is a market failure here, an asymmetry in the information that
buyers have relative to the information possessed by real estate agents and
lenders. When the lender tells the buyer that the rental rate on condos is 86%,
or whatever, buyers cannot easily verify these claims and the claims are likely
to be believed, especially when the buyer wants to believe. These numbers and
others like them that are overly optimistic end up on the loan papers and are
ultimately used to justify the loan's approval. Perhaps an examination of the
quality of the data being used to justify some of these loans and more stringent
guidelines as to what is and what isn't acceptable would be a place to start. A
situation where, for example, it's common knowledge that the amount listed as
income on many high-risk loans is inflated isn't optimal. The shake-out in the
industry going on right now will cure some of the excesses, but the even so the
regulation of these markets needs to be reexamined.
But I think we have to be careful not to be overly restrictive and
inadvertently prevent worthy buyers from purchasing a home, and therefore I'd
err on the side of too many rather than too few loans when thinking about
regulating these markets. However, with reality-based, verifiable, and
reasonable guidelines in place, having lenders deny loans when borrowers cannot
meet the conditions is better than expecting buyers to turn down their dream
house when it's dangled in front of them.
Update: Caroline Baum's view is different. She is pushing Congress to take
a hands-off approach saying people took the risks and this is what happens, or,
in her words, "Early indications from Congress are that fingers will be pointed
at everyone except constituents." See "Government
Is 'Here to Help' Subprime Borrowers."
Posted by Mark Thoma on Wednesday, March 21, 2007 at 03:33 AM in Economics, Financial System, Regulation |
I don't have time to say much about this, but here it is anyway:
Global Warming Has Gone Hollywood by Robert Samuelson, Washington Post:
"[W]e need to solve the climate crisis. ... We have everything we need to get
started, with the possible exception of the will to act. ...' -- Al Gore,
accepting an Oscar for "An Inconvenient Truth''
Global warming has gone Hollywood, literally and figuratively. The script is
plain. As Gore says, solutions are at hand. We can switch to renewable fuels and
embrace energy-saving technologies, once the dark forces of doubt are defeated.
It's smart and caring people against the stupid and selfish. Sooner or later,
Americans will discover that this Hollywood version of global warming (largely
mirrored in the media) is mostly make-believe.
Most of the many reports on global warming have a different plot. Despite
variations, these studies reach similar conclusions. Regardless of how serious
the threat, the available technologies promise at best a holding action against
greenhouse gas emissions. Even massive gains in renewables (solar, wind,
biomass) and more efficient vehicles and appliances would merely stabilize
annual emissions near present levels by 2050. The reason: Economic growth,
especially in poor countries, will sharply increase energy use and emissions.
The latest report came last week from 12 scientists, engineers and social
scientists at the Massachusetts Institute of Technology. Called "The Future of
Coal,'' the report was mostly ignored by the media. The report makes some
admittedly optimistic assumptions: "carbon capture and storage'' technologies
prove commercially feasible; governments around the world adopt a sizable charge
(aka, tax) on carbon fuel emissions. Still, annual greenhouse gas emissions in
2050 are roughly at today's levels. Without action, they'd be more than twice as
Coal, as the report notes, is essential. It provides about 40 percent of
global electricity. It's cheap ... and abundant. It poses no security threats.
Especially in poor countries, coal use is expanding dramatically. ... By 2030,
coal use in poor countries is projected to double and would be about twice that
of rich countries (mainly the United States, Europe and Japan). Unfortunately,
coal also generates almost 40 percent of man-made carbon dioxide (CO2), a prime
Unless we can replace coal or neutralize its CO2 emissions, curbing
greenhouse gases is probably impossible. Substitution seems unlikely simply
because coal use is so massive. ...
Carbon capture and storage (CCS) is a bright spot: catch the CO2 and put it
underground. On this, the MIT study is mildly optimistic. The technologies
exist, it says. ... But two problems loom: First, CCS adds to power costs; and
second, its practicality remains suspect until it's demonstrated on a large
No amount of political will can erase these problems. If we want poorer
countries to adopt CCS, then the economics will have to be attractive. Right
now, they're not. Capturing CO2 and transporting it to storage spaces uses
energy and requires costlier plants. Based on present studies, ... the most
attractive plants with CCS would produce almost 20 percent less electricity than
conventional plants and could cost almost 40 percent more. Pay more, get less --
that's not a compelling argument. ...
[T]here are no instant solutions, and a political dilemma dogs most
possibilities. What's most popular and acceptable (say, more solar) may be the
least consequential in its effects; and what's most consequential in its effects
(a hefty energy tax) may be the least popular and acceptable.
The actual politics of global warming defy Hollywood's stereotypes. It's not
saints versus sinners. The lifestyles that produce greenhouse gases are deeply
ingrained in modern economies and societies. Without major changes in
technology, the consequences may be unalterable. Those who believe that
addressing global warming is a moral imperative face an equivalent moral
imperative to be candid about the costs, difficulties and uncertainties.
Posted by Mark Thoma on Wednesday, March 21, 2007 at 03:24 AM in Economics, Environment |
After the post on poorhouses, this description of the 1601 Elizabethan Poor
Law was suggested by email:
The 1601 Elizabethan Poor Law,
by Marjie Bloy: ...After the Reformation ..., it became necessary
to regulate the relief of poverty by law. During the reign of Elizabeth I, a
spate of legislation was passed to deal with the increasing problem of raising
and administering poor relief. [Here are some key historical dates in the years prior to the 1601 law followed by discussion of the law:]
Continue reading "The 1601 Elizabethan Poor Law" »
Posted by Mark Thoma on Tuesday, March 20, 2007 at 09:04 PM in Economics, Social Insurance |
Thomas Palley sends an email saying:
Given that the FOMC kiicked off its two day March meeting today, I thought
your readers might be interested in this take on monetary policy.
And here it is. I hold different opinions on some of these issues - I would
guess we would disagree on both implicit and explicit inflation targeting - but
that shouldn't prevent other opinions from appearing here:
Memo to Fed: Cut Rates, then
Reform Policy, by Thomas I. Palley: The US economy is showing signs of a
potentially rapid deceleration. In particular, there is accumulating evidence
that the housing sector slowdown may be becoming a meltdown. In many areas house
prices are falling, house sales are down nationally, and mortgage delinquencies
and foreclosures are rising - especially in the sub-prime market. This has
caused tremors in broader financial markets. The only good news is employment
and wages continue growing, but labor markets conditions are also widely viewed
as a lagging indicator.
This sobering picture argues for the Federal Reserve to immediately start
lowering interest rates. Additionally, the Fed must come to grips with the
problem of debt-financed asset inflation, which lies behind the current housing
bust. That calls for deeper policy reform.
An important element of the case for lower interest rates is the fact that
the tightening effects of earlier rate increases continue building because of
the long lags with which monetary policy works. Consequently, conditions are
still tightening despite the fact the Fed has been on hold since June 2006.
One lag concerns adjustable rate mortgages whose interest rates are adjusted
annually. That means rates on these mortgages have been rising throughout the
year despite the Fed’s rate pause, and they will continue rising for borrowers
whose rates are scheduled to be reset in the next three months. A similar
mechanism holds for mortgages with initial low teaser rates and mortgages with
one-time reset clauses that trigger after a fixed period.
Meantime, the spillover effects from the housing sector’s problems are
growing. Increased delinquencies and defaults have caused belated tightening of
credit standards, which promises to make mortgages more expensive and difficult
to obtain. That will reduce the number of homebuyers and also make re-financing
Increased defaults also mean more foreclosures, which will further lower home
prices. Currently, this impact is concentrated in lower priced homes served by
the sub-prime market. However, price reductions can be expected to ripple into
contiguous parts of the market, making re-financing more difficult for those
owners and even causing additional defaults.
Lastly, declining home prices and tightening credit standards will diminish
mortgage equity extraction, as is already happening. Since such cash outs have
been an important factor supporting robust consumer spending, this augurs weaker
In addition to lowering interest rates, the Fed must also address two
problems calling for deeper policy change. First, Chairman Bernanke’s close
identification with inflation targeting has created something of a bind. Though
the Fed has no official inflation target, it has allowed market opinion to
settle on the idea of an implicit two percent target. With inflation stubbornly
stuck above two percent, this means a rate reduction could dent the Fed’s
This confirms former Chairman Greenspan’s view that inflation targeting would
adversely limit the Fed’s flexibility and discretion. The clear implication is
that inflation targeting is a bad idea, and the Bernanke Fed should now distance
itself from that idea by abandoning chatter about inflation targeting.
A second problem is that a rate reduction could trigger renewed debt-financed
asset inflation, which highlights a major dilemma. If the Fed pushes rates too
high in its attempt to choke off wider inflationary effects of asset inflation,
it risks triggering a credit crunch and defaults as is now happening.
Conversely, if it does not push rates high enough it risks triggering
accelerated inflation as agents borrow more in anticipation of rising prices.
This implies a knife-edge situation, with the economy being held hostage by
One solution is quantitative regulation extending the system of margin
requirements to asset classes such as mortgages. This would enable the Fed to
vary the cost of those assets without changing interest rates, thereby damping
speculation without imposing collateral damage on the rest of economy.
As a graduate student, Chairman Bernanke wrote about how the Great Depression
was fostered by a cascade of bank failures that rippled through the financial
system. It would be ironic if he were now to preside over his own financial
crisis. Moving promptly to lower rates and enacting policy reform that gives the
Fed new tools for controlling asset inflation seems a good way to lessen that
Posted by Mark Thoma on Tuesday, March 20, 2007 at 01:34 PM in Economics, Monetary Policy |
I do not like Greenspan eggs and ham! I do not like them, Bernanke-I-am. But
the organizers of this charity auction are hoping somebody might:
Going, going, gone: one expensive breakfast with Greenspan, AFP: Deep-pocketed bidders battled Tuesday to win a coveted meeting with former
Federal Reserve chairman Alan Greenspan, one of a constellation of stars on
offer in a charity auction. ... Breakfast or tea for up to four people with
Greenspan and his wife, NBC correspondent Andrea Mitchell, carried an estimated
value of 5,000 dollars.
But that would be small change to any Wall Street type keen to get an insight
into the thinking of a man who ... still has the power to move markets. ...
Bidding ... ends on April 6.
Posted by Mark Thoma on Tuesday, March 20, 2007 at 01:31 PM in Economics, Monetary Policy |
David Cay Johnston reports on pressure IRS agents are feeling to end
corporate cases prematurely so that managers can meet case load goals and
I.R.S. Agents Feel Pressed to End Cases By, David Cay Johnston, NY Times:
The head of the Internal Revenue Service faces questions in Congress today about
auditors’ complaints that they are being forced to close corporate cases
prematurely, allowing billions in tax dollars to go unpaid. ...
The agency countered that it had increased the number of companies whose tax
returns it examined by a fourth since 2001, even though the number of auditors
was virtually the same. ... [T]he officials say they have shortened the average
time to complete an audit from almost two years in 2001 to less than 18 months
I.R.S. officials say the auditors who are complaining are mostly older agents
unwilling to adopt new approaches. ... Deborah M. Nolan, the I.R.S. official in
charge of auditing businesses with more than $10 million of assets, said that
her auditors recommended payment of almost $27 billion in additional taxes last
year, more than double the amount in 2001, but down 15 percent from 2005 when
added taxes totaled almost $32 billion...
Asked about data showing that additional taxes recommended for each audit are
up, the agents who were interviewed all said that this showed only how pervasive
tax cheating had become. ...
One veteran agent of the largest corporate audits compared the I.R.S. to a
crew that walks through an orchard instead of working from ladders. “You can
grab all the low-hanging fruit in a few highly productive hours, while leaving
most of the harvest untouched,” he said.
In an interview last week, Ms. Nolan ... reiterated her position that the
agency would “do the right thing” by keeping cases open past preset deadlines
when evidence points to large amounts of tax due.
All 21 agents interviewed over the last two months said that the I.R.S. paid
lip service to its “do the right thing” policy. They provided e-mail messages
and memos in which managers and executives made little or no mention of anything
but closing files quickly.
In one widely circulated directive, Cheryl P. Claybough, who oversees half
the audits of communications, technology and media companies, alternately
encouraged and chastised subordinates for not closing cases quickly enough,
while making only passing references to the “right thing” policy. ...
A Feb. 1 e-mail message from Kenneth L. Kates of the audit quality assurance
operation orders nine subordinates to complete their reviews of audits without
“We must have ten case apiece closed by 3-7-2007,” Mr. Kates wrote. “You must
keep me informed and make me aware immediately if you will have any problems
meeting this goal. The goal translates into two cases per week.”
All of the agents interviewed said they believed that the controlling factor
in determining whether their superiors qualified for cash bonuses and promotions
was their success at closing cases. “How the managers get paid; that’s the real
policy,” one auditor in Texas said.
Only in cases of blatant fraud, agents said, are deadlines ignored. A few
agents supplied e-mail messages and memos to support their statements.
Two auditors described separate training sessions that began with a few words
about the “right thing” policy, then focused entirely on closing cases by the
“What message do you think employees get when almost an hour is spent on
cycle time and overage, and doing the right thing gets a brief mention?” one
One agent, who said he had worked on some of the largest I.R.S. cases, said
he was admonished for resisting management pressure to close a case in which his
team believed that vast sums were due.
The agent said his team was forced to sign off on a closing agreement
allowing the company to permanently underpay its taxes by hundreds of millions
of dollars a year. When a taxpayer receives a formal closing agreement from the
I.R.S. .., the taxpayer may forever follow that practice, even if it violates
the tax law. ...
[O]ne of the agents ... said, “in most cases management is making these
decisions in order to drive case closure goals.”
Over and above whatever politics might be behind this policy, this is an
example of an
agency problem, i.e. the problem of having the incentives of those making
the decisions (cases processed) differ from the incentives needed to produce
optimal public policy (tax equity and efficiency). Performance goals can work,
but they have to be constructed carefully so that the incentives of decision
makers are consistent with overall policy goals. Basing bonuses of managers on
closed cases within a particular time frame does not appear to produce optimal corporate tax compliance policy.
Posted by Mark Thoma on Tuesday, March 20, 2007 at 02:43 AM in Economics, Taxes |