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Thursday, May 31, 2007

FRBSF: Anxious Workers

Continuing with the ongoing discussion on how economic security has changed over time, (see this post for a summary of the recent debate), Rob Valletta of the San Francisco Fed looks at this question and concludes that "worker anxiety about job stability and security is real rather than illusory. ... Overall, the findings ... suggest that observable changes in labor market outcomes in the U.S. may have contributed to anxiety, at least for some groups of workers":

Anxious Workers, Economic Letter, FRBSF: In recent years, the U.S. economy has expanded at a healthy pace, employment has grown substantially, and the unemployment rate has dropped to very low levels. Despite these favorable trends, some recent news stories have emphasized worker anxiety and uncertainty about their job stability and security, reinvigorating a theme that gained substantial prominence in the mid-1990s. Research economists who have investigated this topic in general have not subscribed to the view that rising worker anxiety reflects widespread, long-term changes in labor market conditions; rather, some have argued that claims of declining job stability are exaggerated (e.g., Stevens 2005), perhaps due to changes in employment conditions for small, high-profile groups, such as skilled white-collar workers.

In this Economic Letter, I explore trends in job stability and job loss and their consequences over the past two to three decades. The findings reported shed light on why some worker groups might have reason to feel anxious.

Declining job stability
Figure 1: Median tenure, aggregate
The most obvious and most commonly used measure of job stability and security is job tenure, essentially the length of time that a particular job lasts. Since 1983, the U.S. Bureau of Labor Statistics (BLS) has periodically published tabulations of years of tenure for wage and salary workers overall and by age and sex. Figure 1 displays selected results from the two most recent BLS tenure releases (U.S. BLS 2006; data back to 1983 are in the 2004 release), specifically, the median (midpoint) of the distribution of years of tenure reported for all respondents in the group. Tenure is measured at the time of the survey (January or February for each labeled year) and as such represents an "interrupted" measure of job duration that is shorter than the length of a typical completed job. Nevertheless, trends in this measure are likely to mirror trends based on estimates of completed job duration. Figure 1 shows that overall tenure increases a bit between 1983 and 2006, suggesting that job stability rose during this period. By sex, tenure was unchanged for men and rose noticeably for women.

Examining median tenure for the entire male and female workforces is a fundamentally flawed basis for making inferences regarding changing job stability, however, because it ignores the significant aging of the U.S. workforce that occurred over this period. As the BLS notes, population aging tends to increase measured tenure for the workforce as a whole, because young workers have not worked long enough to acquire much tenure, and typical career paths entail job shopping early on and more durable job matches later. For example, in 1983, median tenure for men aged 25-34 was 3.2 years, while it was 15.3 years for men aged 55 to 64.

Figure 2: Median tenure, by age (selected)A more careful examination of job stability is enabled by the BLS breakdown of median tenure for 16 groupings by sex and detailed age groups. Within these groups, median job tenure was flat or down since 1983 in all but two cases: women aged 35-44 and women aged 45-54, for whom median tenure rose about six months; by contrast, job tenure fell substantially for men in those same age groups (Figure 2). Job tenure also fell substantially for men aged 55-64, and it fell slightly for men aged 25-34. In percentage terms, median tenure fell about 30% for men aged 35-44 and 37 to 38% for men aged 45-64 (e.g., median tenure fell from 12.8 to 8.1 years for men aged 45-54, which is a 37% decline from the 1983 value). These declines in stability apply to a substantial share of the labor force: for example, men aged 35-64 accounted for nearly one-third of all employed individuals in 2006.

These figures on job tenure by age indicate that declining job stability is obscured by the changing composition of the workforce. The substantial decline in male job stability implied by the age group-specific figures cited here is largely confirmed by Farber (2007) using more elaborate statistical methods. His findings partly conflict with Stevens (2005), who found only a slight decline in the duration of longest jobs held by older male workers in various surveys conducted between 1980 and 2002 (preceded by an increase between 1969 and 1980). However, because Stevens's sample is limited to individuals aged 58-62 at the time of each survey, she excludes individuals born after 1944. As such, she ignores changes in job stability experienced by these more recent birth cohorts (including individuals up to age 61 in 2006).

The conflict between the sharp decline in male job stability and the slight increase in female job stability among workers aged 35-54 raises the important distinction between voluntary and involuntary job transitions. This distinction is obscured by data on job tenure, since changes in tenure can arise due to changes in either type of transition. In particular, rising tenure for women aged 35-54 is unsurprising, given the rising labor force attachment of women of prime child-rearing ages over this period, and it likely reflects voluntary behavior on their part (i.e., less frequent labor market withdrawal during child-rearing years). By contrast, declining job tenure for men of a similar age is unlikely to reflect a desire for shorter jobs but instead may reflect increasing incidence of involuntary job loss.

Job loss and job security

Data on involuntary job loss are available from the BLS Displaced Worker Survey (DWS), conducted every other year since 1984. This survey provides information on workers who involuntarily and permanently lost a job during the three years preceding the survey for such reasons as plant closures, slack work, or elimination of a position or shift. Farber (2005) analyzed results from every DWS survey through 2004 using consistent methods and found that, measured as a share of employment, the displacement rate in the 2004 survey (years 2001-2003) was almost as high as it was in the 1984 survey, despite a much lower unemployment rate in the later period. This indicates that permanent job loss has become a more important feature of the economy over the past few decades, relative to general labor market conditions as reflected in the unemployment rate. Moreover, Farber found that the upsurge in displacement during 2001-2003 was especially notable for the most highly educated workers, for whom rising anxiety has been a subject of recent news stories.

The DWS is a somewhat restricted sample, focusing on a subset of unemployed workers who lost jobs for particular reasons. Broader analysis also has been done, however. Using data from the monthly CPS surveys, which provide information on a representative sample of all unemployed individuals, Valletta (2005) uncovered a trend towards a rising share of involuntary job losers among the newly unemployed during the years 1976-2004. The implied increase in the importance of permanent job loss could be expected to contribute to workers' sense of insecurity over this period.

Important additional information regarding job security can be obtained through analysis of the pattern of job loss across worker groups. Valletta (1999) found that rising involuntary job loss was most pronounced for workers with substantial job seniority (based on data from the mid-1970s through the early 1990s). Job security is an important and valued job characteristic for these workers, as reflected in their relatively durable job attachments up to the point of involuntary separation. Increases in job loss for such workers likely contributed importantly to declining job stability and security over the sample frame in Figures 1 and 2 (at least through the early 1990s).

Increasingly severe consequences

The consequences of job loss also may contribute to worker anxiety. The primary consequence is lost earnings, an important component of which is the direct losses incurred during the period of time spent unemployed. Valletta (2005) found that unemployment durations have been rising over the past few decades, particularly for involuntary job losers, indicating that the direct earnings losses associated with job loss probably are rising as well.

Figure 3: Wage losses for displaced workersReduced earnings in jobs obtained following involuntary unemployment spells arguably are even more important than the direct earnings losses incurred during unemployment, since the indirect impact of job loss on earnings may be long lasting. Farber (2005) provided a detailed analysis of earnings losses in post-displacement jobs, using the DWS and a sophisticated statistical technique designed to isolate earnings losses due to displacement per se, uncontaminated by systematic differences in the characteristics of displaced and non-displaced workers. Figure 3 displays a selected subset of his findings. The decline in earnings due to displacement was about 17% on average for workers displaced during 2001-2003 (2004 survey), which represents an increase from losses of about 9 to 14% during comparable periods around past recessions (1981-1983 and 1991-1993). The figure also shows that the recent surge in post-displacement earnings losses was most pronounced for highly educated individuals, whose typical earnings loss was about 21% during the 2001-2003 period.

The consequences of job loss go beyond reduced earnings. In the United States, workers who lose jobs often lose health insurance coverage for extended periods, and workers with unstable job histories often find it difficult to accumulate adequate funds for retirement. Such losses reinforce the earnings losses associated with job instability and could be expected to deepen worker anxiety.

Discussion

The substantial declines in job stability for prime-age men documented here, in conjunction with the high rates of permanent job loss (relative to the unemployment rate) and large associated earnings losses found in other research, lend credence to the view that worker anxiety about job stability and security is real rather than illusory. At the same time, the burden of job loss and its consequences, most notably earnings losses, has shifted towards groups like the highly educated that may be especially visible in media coverage of labor market trends. Overall, the findings discussed here suggest that observable changes in labor market outcomes in the U.S. may have contributed to anxiety, at least for some groups of workers.

References

Continue reading "FRBSF: Anxious Workers" »

    Posted by on Thursday, May 31, 2007 at 02:43 PM in Economics, Monetary Policy, Social Insurance | Permalink  TrackBack (0)  Comments (33)


    Price Measurement for Monetary policy

    This is unlikely to be of much interest generally - it's a set of papers I want to have in the archives:

    Continue reading "Price Measurement for Monetary policy" »

      Posted by on Thursday, May 31, 2007 at 11:34 AM in Academic Papers, Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (2)


      Glenn Hubbard: Capitalism Against Climate Change

      Glenn Hubbard comes out in favor of using tradable permits to control carbon emissions:

      Capitalism Against Climate Change by R. Glenn Hubbard, Commentary, WSJ: The case for action to combat global climate change has grown increasingly compelling in recent years. Sadly the same cannot be said for specific proposals to address the problem. ... One recent ... proposal to balance a need for policy action with a mechanism for prudent economic risk management ...[is the] new recommendations by the National Commission on Energy Policy for an emissions trading program...

      Good environmental policy relies on sound science. Some of the science surrounding climate change is clear. ... Other aspects of the science are more ambiguous... This means that estimates of the likely temperature and climate changes over the next century span a fairly wide range. The potential effects on people and ecosystems are even more uncertain.

      Despite this uncertainty, most serious students of climate change believe that the likelihood of adverse climate change is sufficiently great to warrant action. But what action? ...

      [N]ear-term actions should not impose greater risks than the problem they seek to address. ... If you smell smoke at home, it would be silly to do nothing until you actually see flames, but you also should not hose down the house after one whiff of what might be smoke.

      For the global warming debate, uncertainty justifies neither inaction nor over-reaction. As the smoke analogy suggests, the United States should pursue a moderate policy that can be justified as we learn more about the threat of climate change and the costs of alternative responses.

      The NCEP proposal meets this test of taking serious action while not imposing economic risks greater than the threat of climate change itself. ... It does this using ... tradable permits. In such a system, the use of coal, oil and natural gas will require permits in proportion to their CO2 emissions, typically sold along with the fuel -- so individuals need not deal with the permit market.  ... And revenue from the auction of a portion of these permits could be used to reduce the corporate income tax, blunting adverse economic consequences. ...

      Over time, we know that new investment and technology will reduce costs; we do not want to force overly expensive reductions now when cheaper opportunities are just around the corner. Furthermore, pushing too hard too quickly will simply encourage emissions and jobs to move to other countries who have not yet adopted similar policies.

      This ... highlights that it is vital to develop global institutions for promoting and measuring emission reductions, institutions that prevent emissions from shifting overseas and encourage the lowest-cost abatement... Developing these international institutions is a tall order but it need not happen right away.

      Under the NCEP approach, the conversation among nations would become broader and deeper over time, much like the 50-year effort for the General Agreement on Tariffs and Trade and the World Trade Organization. What is important in the short run is that domestic policies have a forward-looking design that encourages both efficiency and global cooperation. ... A serious response to climate change must begin by turning our emissions downward without betting the bank. ...

      Looks like it's time for two former chairmen of the Council of Economic Advisers for the Bush administration, Glenn Hubbard and Greg Mankiw, to settle this tradable permit versus carbon taxes issue once and for all. I propose an Econoduel. Mankiw versus Hubbard, whiteboards only, any theory goes, and you cannot be saved by the end of period bell. We'll need a referee, so I'll suggest John Whitehead at Environmental Economics as he seems relatively unbiased - he doesn't think there's much difference between the tradable permits and carbon taxes and doesn't really care which one we put into place, as long as we do something. [Update: Please see John's follow-up on this.].

      There are different ways to approach the "should we respond aggressively" question, but let me stay within the example given above. Should we soak the house at the first whiff of smoke? The answer given above is no, but it depends on how you set up the scenario. Suppose that once you smell smoke, if you don't respond with full force and soak the house immediately and there is a fire, it will spread rapidly and burn down all 25 houses in the neighborhood (picture houses in a heavily wooded, dry and windy canyon). Thus, at the first whiff of smoke you have two choices, soak one house and suffer the associated losses with certainty, or, do nothing and risk losing all 25 houses if there really is a fire. Now, add that your experts are telling you there's a darn good chance there is in fact a fire, what should you do? Be prudent and wait until you know for sure?

      Now, Hubbard argues technology gives us a reason to wait. We can weave that into the story by adding in some chance that, even if we don't respond immediately, we still might find a way to save the other 24 houses. You smell smoke, the analysts say they're pretty sure it's fire, but if you don't act there's still some chance you'll discover a way to save the other houses. Now should you wait?

      But I'm reinventing the wheel. This has been covered:

      Risk, Uncertainty and Irreversibility, Decision Theory, and Global Warming, by Brad DeLong: Alex Tabarrok protests that you should not do expensive and irreversible things before you know what is going on. I think that there is an important distinction to be drawn in decision theory between (a) risk on the one hand, and (b) the interaction of uncertainty and irreversibility on the other.

      In general, briefly: As a baseline, you should start out thinking that you should do what it would be best to do if your central-case forecast were to come true. And then:

      1. Relative to that baseline, you should do more of things that reduce risks: a prudent portfolio should have some gold or silver in it (not much!) to guard against the potential inflationary collapse of fiat money systems and other political risks.
      2. Relative to that baseline, you should do less of things that increase risk: invest less in risky enterprises, and dump less carbon dioxide and methane into the atmosphere.
      3. You should delay doing expensive and irreversible things until you are confident that they are needed.
      4. You should prevent processes that could cause irreversible or incredibly-expensive-to-repair damage until you are confident that their effects will be harmless.

      The first two principles are the appropriate ones for dealing with risk. The last two principles are appropriate for dealing with the interaction of uncertainty and irreversibility.

      Thus if congress were on the verge of banning open-carbon-cycle power generation and vehicle operation in 2010, I would think that that was a bad idea because of principle 3. But congress isn't. The uttermost limit of political feasibility over the next decade is a fifty-cents-a-gallon-equivalent tax on carbon emissions. And that seems well-covered by principle 2. ...

      The discussion continues from there (Victor's example is similar to the one given above).

      Finally, I can't let this statement from Hubbard pass without comment:

      And revenue from the auction of a portion of these permits could be used to reduce the corporate income tax...

      Other ways to use these revenues come to mind.

      Update: Greg responds to the WSJ editorial. Also, with regard to the Economatch, I should have made clear that politics counts in the scoring. Tyler Cowen [ID check]and Felix Salmon also comment.

        Posted by on Thursday, May 31, 2007 at 12:33 AM in Economics, Environment, Policy, Politics, Regulation | Permalink  TrackBack (1)  Comments (67)


        Hal Varian: Copyrights That No One Knows About Don’t Help Anyone

        Hal Varian has a proposal to improve copyright law:

        Copyrights That No One Knows About Don’t Help Anyone, by Hal R. Varian, Economic Scene, NY Times: ...Under current law, a work is automatically copyrighted the moment it is “fixed in tangible form.” And these days, that copyright lasts virtually forever: 70 years after the death of the author, in most cases.

        Since there is no requirement to register a work and a copyright lasts so long, the legal owner ... can be difficult to find, particularly when the work is more than a few decades old. ... The costs of locating rights holders are an example of what economists call transactions costs. Not surprisingly, high transactions costs tend to discourage transactions from occurring.

        The so-called orphan works problem was examined by the Copyright Office in a 2006 report in which it proposed legislation to address the transactions costs issues. Under its proposal, if you conducted a “diligent search” to locate a rights holder .., you would be off the hook. ...

        Clarifying the rights and obligations ... would reduce transactions costs, and that should lead to a more efficient market... But does the proposed legislation go far enough? According to Lawrence Lessig, a Stanford University Law professor who is an expert in copyright law, it does not. He favors a system where authors receive an automatic copyright when they create new works, but they must register their copyright within 14 years to retain it past the initial period. ...

        Mr. Lessig envisions the Copyright Office as specifying the standards for registries but not necessarily operating them, since the private sector may be better positioned to build and maintain such systems. His inspiration is the domain name system used to register Internet sites. In that system, a standards body specifies the design, but ... individual organizations to carry out the necessary registries.

        The proposals by the Copyright Office and Mr. Lessig are not necessarily exclusive. If easily accessible copyright registries existed, the courts would probably find that simply searching the registries would satisfy the diligent search requirement. Creators of works with commercial potential would then have strong incentives to register their works. ...

        The orphan works legislation from the Copyright Office is still on the back burner in Congress. Let us hope that it soon gets the attention it deserves. Information plays a crucial role in today’s economy. Making it easy for creators and users of information to find each other should be a high priority for policy makers.

          Posted by on Thursday, May 31, 2007 at 12:24 AM in Economics, Policy, Regulation | Permalink  TrackBack (0)  Comments (8)


          "No Wonder We're Falling Behind"

          Jonathan Chait looks at the transformation of AEI magazine into a new publication that is "less dewy-eyed about the virtues of democracy and far more dewy-eyed about the virtues of the bottom line":

          American Pie, by Jonathan Chait, TNR (free): ...[A] column by American Enterprise Institute (AEI) economist Kevin Hassett ... points out that, over the last decade and a half, free-market dictatorships had faster economic growth than free-market democracies. The obvious explanation would be that dictatorships tend to be poorer countries (e.g., China) that can grow more quickly by catching up with modern technology. But Hassett offers up a different interpretation: Unlike democracies, dictatorships "are not hamstrung by the preferences of voters for, say, a pervasive welfare state." In other words, while Western democracies are held back by voters--with their pesky demands that citizens get health care and old people not be left to starve in the streets--autocracies march nobly toward a free-market paradise.

          I suppose it's good that, in the wake of Iraq, AEI is rethinking its zealous commitment to forcibly exporting democracy... But perhaps the think tank is now veering a bit too far in the opposite direction. ... AEI's magazine has ... relaunched itself with a new name (The American) and a new mission ("a magazine of ideas for business leaders"). ... The American now seems less dewy-eyed about the virtues of democracy and far more dewy-eyed about the virtues of the bottom line. ...

          In addition to Hassett's odd defense of dictatorships, the current issue defends CEO pay, expresses skepticism about global warming, and denounces corporate democracy. University of Chicago economists Gary Becker ... and Kevin Murphy contribute an essay titled "The Upside of Income Inequality." ... Becker and Murphy ... argue inequality has grown because "the labor market is placing a greater emphasis on education." Education makes people more productive; ergo, inequality is good. ...

          But the big rise in inequality is ... between the top 1 percent and everybody else. Wouldn't raising taxes a bit on the top 1 percent help alleviate inequality? Becker and Murphy reply that, while a fairer tax code ... would amount to "a tax on going to college." So, if we raise the top tax rate, then 18-year-olds will choose to become convenience store clerks rather than go to college and run the small risk that they'll one day get so rich that they could face a slightly higher marginal tax rate?

          But the issue's pièce de résistance is a cover story pleading for more lenient treatment of white-collar criminals. In the "good old days," author Luke Mullins reports, white-collar prisons allowed convicts to order takeout from fancy restaurants, sneak away for golf, and enjoy other trappings appropriate for men of their class. Alas, embarrassed by the "Club Fed" reputation, prison officials cracked down. Today, as Mullins's sympathetic subject tells us, white-collar prison is "a hellish place." ..."You've been giving orders your whole life," explains one advocate of more lenient conditions, "and now there's this buffoon with an IQ of twenty telling you to clean the toilet." Actually, ... as Mullins reveals two pages later, wealthy prisoners typically hire fellow cons to do such jobs for them. ...

          Why would The American develop such a strong sympathy for the suffering of white-collar criminals...? One might suspect this sudden concern was inspired by the potential wave of coming Bush administration indictments. But the real answer seems to be that The American sees the idea of rich criminals having an unpleasant time in prison as yet another sign of egalitarianism run amok. "As the widening gap between high- and low-income Americans has become a focus for politicians and journalists," laments Mullins, "arguments [for more lenient treatment] are unlikely to find much support."

          Ah, those irrational voters, hamstringing the government again. In China, rich crooks can just buy their way out of trouble. No wonder we're falling behind.

            Posted by on Thursday, May 31, 2007 at 12:15 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (12)


            Wednesday, May 30, 2007

            Economic Prosperity: Human Capital or Protestant Work Ethic?

            From Andrew Leigh (via Tim Worstall):

            Martin Luther’s Legacy, by Andrew Leigh [open link]: I’ve always found the studies that look at the effect of religion on economic growth a bit fluffy. But this very clever paper goes far further than previous work in explaining why Protestant countries and regions might grow faster. If you learn to read the bible, you can read other things too.

            Was Weber Wrong? A Human Capital Theory of Protestant Economic  History, by Sascha Becker & Ludger Woessmann: Max Weber attributed the higher economic prosperity of Protestant regions to a Protestant work ethic. We provide an alternative theory, where Protestant economies prospered because instruction in reading the Bible generated the human capital crucial to economic prosperity. County-level data from late 19th century Prussia reveal that Protestantism was indeed associated not only with higher economic prosperity, but also with better education. We find that Protestants’ higher literacy can account for the whole gap in economic prosperity. Results hold when we exploit the initial concentric dispersion of the Reformation to use distance to Wittenberg as an instrument for Protestantism.

              Posted by on Wednesday, May 30, 2007 at 05:22 PM in Academic Papers, Economics | Permalink  TrackBack (0)  Comments (28)


              Axel Leijonhufvud: Life Among the Econ

              Continuing the discussion on economic orthodoxy, this is Axel Leijonhufvud with what Chris Hayes calls "the ur-text for writings about the particularities of the economics profession." It's longer than usual, but worth it:

              Life among the Econ,* by Axel Leijonhufvud: The Econ tribe occupies a vast territory in the far North. Their land appears bleak and dismal to the outsider, and travelling through it makes for rough sledding; but the Econ, through a long period of adaptation, have learned to wrest a living of sorts from it. They are not without some genuine and sometimes even fierce attachment to their ancestral grounds, and their young are brought up to feel contempt for the softer living in the warmer lands of their neighbours. such as the Polscis and the Sociogs. Despite a common genetical heritage, relations with these tribes are strained-the distrust and contempt that the average Econ feels for these neighbours being heartily reciprocated by the latter-and social intercourse with them is inhibited by numerous taboos. The extreme clannishness, not to say xenophobia, of the Econ makes life among them difficult and perhaps even somewhat dangerous for the outsider. This probably accounts for the fact that the Econ have so far-not been systematically studied. Information about their social structure and ways of life is fragmentary and not well validated. More research on this interesting tribe is badly needed.

              Continue reading "Axel Leijonhufvud: Life Among the Econ" »

                Posted by on Wednesday, May 30, 2007 at 04:05 PM in Academic Papers, Economics, Methodology | Permalink  TrackBack (0)  Comments (10)


                George Borjas on the Proposed Point System for Allocating Visas

                This is an example of what economics studies - the allocation of scarce resources. In this case, the scarce resource is permission to immigrate to the United States and the question is how we should allocate the right to enter the U.S. among the many people wishing to come here.

                One solution is to implement a price system and let the impersonal marketplace solve the problem for us. Under this system, those most willing to pay get to enter. But this brings up issues of equity and fairness - under a market-based system of prices, poor immigrants from some countries such as Mexico would be effectively barred from entering.

                If that is unacceptable - if we want to offer immigration to a wider class of people - than how should we allocate the right to immigrate? Family connections? Education and skill levels? Should there be quotas for individual countries? Should we try to displace as few domestic workers as possible, or do we want to maximize economic growth no matter the impact on the current workforce? Should we give preference to those who would be helped the most?

                Here's George Borjas with a discussion the current proposal to solve this problem, a point system that allocates the positions based upon several characteristics, with education a key factor:

                The Proposed Point System: A Nod To The Economic Way of Thinking, by George Borjas: Buried deep in the 628-page immigration bill is a small table describing the point system that will determine whether a person qualifies to enter the United States in the future.

                A few caveats: First, the point system will not go into effect until 2015 or so. Second, the ... point system will apply to only about a third of the legal immigrants. Third, the bill does not define the "passing grade." I presume that since there will only be a limited number of merit visas, ... and visas would be granted to the higher-scoring applicants until they run out.

                Putting those qualifications aside, however, the point allocation to various types of skill characteristics doesn't seem bad at all. Why, if it wasn't for the amnesty and the guest worker program, this could be a proposal worth discussing. So let's give credit where credit is due--whoever came up with the actual point allocation knew what he/she was doing and had clearly looked at comparable point systems around the world.

                If the proposed point system were enacted, it would mark a fundamental change in the philosophy underlying U.S. immigration policy. In Heaven's Door, I argued that such a scheme would increase the economic benefits that immigration imparts on the United States. A common critical reaction was that the point system was un-American: that kind of system would have prevented our parents and grandparents and great-grandparents from ever coming to this country. The fact that politicians can now openly talk about merit immigration and award many extra points to those who have graduate degrees marks a sea change in the way the political elite thinks about immigration. If nothing else, it is a victory for those who think immigration policy should take into account the economic costs and benefits--regardless of how un-American that accounting might be.

                At the same time, I suspect that the enactment of such a system could have explosive political consequences. It would drastically change the ethnic composition of legal immigrants.

                Look at the graphics attached to this post and you will see that applicants with a science, technology, engineering or math background (STEM in the bill's jargon) are going to get an awful lot of points. A young worker in these fields would likely get at least 40 points because of his work experience, 28 points because of his education, and 15 more points because, more likely than not, he would be fluent in English. A total of at least 80 points (out of 100). Contrast this with the points that a high school dropout would get. Even if he is in an occupation that is rapidly growing (perhaps construction), that would only buy him around 20 to 30 points. And he would be unable to count on getting any "family preference points" because that provision doesn't trigger in until he has accumulated at least 55 points because of his skills.

                In short, there are large swaths of the world's population that would lose out in the points competition. A country where the vast majority of its population lacks even a high school diploma (let me think, hmmm....Mexico!) will not be sending too many immigrants with merit visas. And this change in the national origin mix of the immigrant population, for better or worse, will surely become a contentious point in the immigration debate.

                A point system is, essentially, a set of administered rather than market prices, i.e. it's a rule for allocating visas set by the government. Because of that, the government can change the point values as it wishes, and, as noted above, change the composition of the flows (e.g. more weight to family, more weight to the potential to improve the immigrants life, points for political oppression, etc.). Thus, in that sense, this is just a hidden way of imposing quotas - we can change proportions at will by adjusting point values and adding/deleting categories. For this reason, it's important to be clear about the goals of the program - what are we trying to maximize - and to evaluate the point system (and alternatives to it) in terms of its ability to achieve those goals.

                The reason to specify the goals of the visa program is that the evaluation of the costs and benefits of immigration depends upon the weighting used in the evaluation. If the goal of immigration is to maximize our economic growth, we will evaluate the benefits of immigration differently (and hence assign different point values to various categories) than if our goal is to reduce suffering in the world. Moving an engineer from Canada to the U.S. might improve growth, but it does less to alleviate world hardship than allowing a poor person from Mexico to come here. There are a wide variety of criteria to consider, and we cannot evaluate the costs and benefits of immigration (and then set an allocation mechanism to maximize net benefits) without first specifying what it is we are trying to maximize.

                Thus, first we should ask: what are our goals, what are we trying to accomplish with the immigration program? Then, assuming a point system is the best way to get there, we should choose the categories and the point values to come as close as we can to attaining our goals. Third, we should evaluate the success of the program and readjust point values as needed to improve the ability of the program to meets its objectives.

                I am uncomfortable with the fairness of a pure market system for the reasons given above, but I'm equally uncomfortable with an ad-hoc administered system. Whether we use a point system or some other mechanism to allocate the right to immigrate here, I believe we have to be very clear about what it is we are trying to accomplish with our immigration program. Given that, what should our goals be?

                  Posted by on Wednesday, May 30, 2007 at 02:43 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (9)


                  A Role for Heterodox Economists

                  This is my entry in the discussion of Chris Hayes' article on heterodox economists at TPM Cafe. It should appear early tomorrow. There are currently entries from Chris Hayes, Thomas Palley, Tyler Cowen, James Galbraith, Nathan Newman, Max Sawicky, and James Galbraith with a follow-up, and there are others yet to come. [Update: Here's the link to the post at TPM Cafe]


                  Most of the points to be made about Chris Hayes' recent article on heterodox economists and their place  within the economics profession have been made here already, so I am going to take a bit of a different approach and talk about one of the heterodox economists discussed in the essay.

                  One of the first heterodox economists mentioned  is Michael Perelman:

                  I strike up a conversation with economist Michael Perelman in the hallway. ... Perelman, who is there for the EPI reception, works at the margins of the discipline; he is one of a few hundred self-described "heterodox" economists at the conference. ... I ask him about how he relates to the so-called mainstream of his profession. "It's a mafia," he says quietly, his eyes roving over to the suits spilling out of the Freedom to Choose room.

                  I first met Michael in the late 1970s during my undergraduate days at California State University at Chico where he was a faculty member. I never took a class from Michael, and that is part of the story, but I also want to use his example to talk about how heterodox ideas are expressed within economics departments more generally.

                  Here's what the department website says about him today:

                  ...Michael Perelman, Professor of Economics, is the most prolific author in the Department of Economics at Chico. He enjoys teaching a wide range of courses including [principles of micro and macro], ... Economics of the Future ..., ...U. S. Economic History..., ...Economics of Big Business..., ...History of Economic Thought... and ... Marxist Economic Thought... His classes emphasize critical thinking about the application of economic thought... He likes to publish what is discussed in classes. To date, Professor Perelman has authored fifteen books.

                  "Although known for his radical views, Professor Perelman is widely respected throughout the campus. Dr. Perelman is a scholar of high productivity--he has a record of scholarly research, writing and presentations that is prodigious. Even more, his level of work has been consistently high since he joined our faculty in Economics in 1971." (Arno J. Rethans, Dean, College of Business)

                  Continue reading "A Role for Heterodox Economists" »

                    Posted by on Wednesday, May 30, 2007 at 03:33 AM in Economics, History of Thought, Universities | Permalink  TrackBack (0)  Comments (58)


                    Robert Reich: Stock Market Bull

                    Robert Reich analyzes the stock market and doesn't like what he sees:

                    Stock Market Bull, by Robert Reich: To understand why the stock market continues to be bullish despite the slowdowns in American productivity and in corporate profits, you have to go back to the old law of supply and demand... When the supply of something decreases while the demand for it stays up, its price rises. Here, I’m talking about supply and demand in publicly-traded stocks.

                    In case you hadn’t noticed, corporate America and Wall Street are in the process of privatizing a growing portion of America’s stock market. It’s happening in two ways. First, cash-rich companies are finding they can boost their stock prices faster by buying back their shares of stock than by investing in new factories, equipment, or R&D... Meanwhile, private equity firms are doing a record amount of leveraged buyouts – that is, taking publicly-traded companies private. ...

                    Last year, corporate buybacks and leveraged buyouts totaled about $600 billion. That was roughly 3 and a half percent of the whole value of the American stock market. ...[T]his year, the total is going to be ... about $900 billion. That’s another 4 and a half percent...

                    With the supply of publicly-traded shares shrinking like this, and with lots of global money out there to buy the shares that remain, it’s no wonder the stock market is going gang busters.

                    Yet at some point this bubble will burst. You see, the whole reason for companies buying back their shares, and for private-equity firms doing leverage buyouts, is to put all these shares of stock back on to the public market at some point in the future, at a higher price than before.

                    But if stock prices are now rising largely because the supply of publicly-traded shares is shrinking, and corporations are not making long-term investments, what happens when all this stock comes back on the market?

                    The loud thud you’ll hear will be the sound of shares falling back to earth.

                      Posted by on Wednesday, May 30, 2007 at 02:43 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (39)


                      "Mr. Dobbs Has a Somewhat Flexible Relationship with Reality"

                      CNN has been going downhill for awhile now:

                      Truth, Fiction and Lou Dobbs, by David Leonhardt, NY Times: The whole controversy involving Lou Dobbs and leprosy started with a “60 Minutes” segment a few weeks ago.

                      The segment was a profile of Mr. Dobbs, and while doing background research for it, a “60 Minutes” producer came across a 2005 news report... In the report, one of Mr. Dobbs’s correspondents said there had been 7,000 cases of leprosy in this country over the previous three years, far more than in the past.

                      When Lesley Stahl of “60 Minutes” sat down to interview Mr. Dobbs.., she mentioned the report and told him that there didn’t seem to be much evidence for it. “Well, I can tell you this,” he replied. “If we reported it, it’s a fact.”

                      With that..., Mr. Dobbs escalated the leprosy dispute into a full-scale media brouhaha. The next night, back on his own program, the same CNN correspondent who had done the earlier report, Christine Romans, repeated the 7,000 number, and Mr. Dobbs added that, if anything, it was probably an underestimate. A week later, the Southern Poverty Law Center — the civil rights group that has long been critical of Mr. Dobbs — took out advertisements in The New York Times and USA Today demanding that CNN run a correction.

                      Finally, Mr. Dobbs played host to two top officials from the law center on his program, “Lou Dobbs Tonight,” where he called their accusations outrageous and they called him wrong, unfair and “one of the most popular people on the white supremacist Web sites.” We’ll get to the merits of the charges and countercharges shortly...

                      Mr. Dobbs argues that the middle class has many enemies: corporate lobbyists, greedy executives, wimpy journalists, corrupt politicians. But none play a bigger role than illegal immigrants. As he sees it, they are stealing our jobs, depressing our wages and even endangering our lives. That’s where leprosy comes in.

                      “The invasion of illegal aliens is threatening the health of many Americans,” Mr. Dobbs said on his April 14, 2005, program. From there, he introduced his original report that mentioned leprosy...

                      According to a woman CNN identified as a medical lawyer named Dr. Madeleine Cosman, leprosy was on the march. As Ms. Romans, the CNN correspondent, relayed: “There were about 900 cases of leprosy for 40 years. There have been 7,000 in the past three years.” ...

                      Mr. Dobbs and Ms. Romans engaged in a nearly identical conversation a few weeks ago, when he was defending himself the night after the “60 Minutes” segment. ...

                      [T]he official leprosy statistics do show about 7,000 diagnosed cases — but that’s over the last 30 years, not the last three. The peak year was 1983, when there were 456 cases. ... Last year, there were 137. “It is not a public health problem — that’s the bottom line,” Mr. Krahenbuhl told me. “You’ve got a country of 300 million people. This is not something for the public to get alarmed about.”...

                      So Mr. Dobbs was flat-out wrong. ... Of course, he has never acknowledged on the air that his program presented false information twice. Instead, he lambasted the officials from the law center for saying he had. ...

                      I have been somewhat taken aback about how shameless he has been during the whole dispute, so I spent some time reading transcripts from old episodes of “Lou Dobbs Tonight.” The way he handled leprosy, it turns out, is not all that unusual.

                      For one thing, Mr. Dobbs has a somewhat flexible relationship with reality. He has said, for example, that one-third of the inmates in the federal prison system are illegal immigrants. That’s wrong, too. According to the Justice Department, 6 percent of prisoners in this country are noncitizens (compared with 7 percent of the population). For a variety of reasons, the crime rate is actually lower among immigrants than natives.

                      Second, Mr. Dobbs really does give airtime to white supremacy sympathizers. Ms. Cosman, who is now deceased, was a lawyer and Renaissance studies scholar, never a medical doctor or a leprosy expert. She gave speeches in which she said that Mexican immigrants had a habit of molesting children. Back in their home villages, she would explain, rape was not as serious a crime as cow stealing. ...

                      Finally, Mr. Dobbs is fond of darkly hinting that this country is under attack. He suggested last week that the new immigration bill in Congress could be the first step toward a new nation — a “North American union” — that combines the United States, Canada and Mexico. On other occasions, his program has described a supposed Mexican plot to reclaim the Southwest. In one such report, one of his correspondents referred to a Utah visit by Vicente Fox, then Mexico’s president, as a “Mexican military incursion.” ...

                      The most common complaint about him, at least from other journalists, is that his program combines factual reporting with editorializing. But I think this misses the point. Americans, as a rule, are smart enough to handle a program that mixes opinion and facts. The problem with Mr. Dobbs is that he mixes opinion and untruths. ...

                      [I]f Mr. Dobbs’s arguments were really so good, don’t you think he would be able to stick to the facts? And if CNN were serious about being “the most trusted name in news,” as it claims to be, don’t you think it would be big enough to issue an actual correction.

                        Posted by on Wednesday, May 30, 2007 at 12:24 AM in Economics, Press | Permalink  TrackBack (0)  Comments (37)


                        Tuesday, May 29, 2007

                        Thomas Palley: R.I.P. Trade Promotion Authority

                        Thomas Palley, one of the people interviewed in Chris Hayes' recent Nation article "Hip Heterodoxy," and "a dissident economist who received his PhD from Yale and once worked for the AFL-CIO, " sends along his latest on fast-track authority for trade agreements. [On the subject of heterodoxy, there is currently a nice discussion at TPM about heterodoxy in economics and I hope to contribute something to the discussion tonight or tomorrow, time permitting.]

                        Here's Thomas Palley expressing dissidence over trade promotion authority:

                        R.I.P. Trade Promotion Authority, by Thomas I. Palley: Trade promotion authority (TPA) - formerly known as fast-track negotiating authority - is set to expire on June 30, 2007. As a result, the Bush Administration and business interests are now lobbying Congress for its renewal. However, there are strong reasons to not just let TPA temporarily lapse, but also to permanently bury it.

                        After the November 2006 elections giving Democrats control of Congress, renewal of TPA appeared unlikely owing to the high degree of distrust and animosity toward the Bush Administration. Now, with Democrats and the Administration agreeing to include formal language on labor and environmental standards in the Peru and Panama free trade agreements, some are arguing for extending this newfound cooperation to renewal of TPA. That would be a serious mistake.

                        Not only would TPA renewal betray voters who no longer support the Administration, it would also miss a major opportunity to begin correcting course on globalization. Behind today’s flawed globalization lies a profoundly flawed policy process, and TPA is at the heart of that process.

                        The constitution gives Congress the right to decide upon trade relations with other countries. TPA has Congress ceding part of those rights by giving the President power to negotiate trade agreements that Congress can approve or disapprove but cannot amend or filibuster.

                        Opponents of TPA renewal have focused on two arguments. One argument is that such ceding of constitutional power is inappropriate, and Congress should reclaim this power as part of restoring a more balanced relationship between the legislative and executive branches.

                        A second argument is that absence of TPA would make it more difficult to sign new “free trade” agreements. This is because absent an up or down vote, agreements would get bogged down in Congressional special interest horse-trading. This is probably true, but it also constitutes a purely tactical argument for opposing TPA rather than an argument of principle.

                        An alternative argument for burying TPA concerns its distorting effect on trade policy. Over the last two decades the power of corporations has increased dramatically while that of labor has fallen. That power shift is reflected in the increased numbers of Washington K Street lobbyists working on behalf of corporations, which has increased corporate influence over policy and legislation. TPA plays into and amplifies this power shift.

                        Trade deals are negotiated by the office of the US Trade Representative (USTR), and then sent to Congress for approval. This negotiating process is stacked in favor of business. First, corporations get front seats at the negotiating table through regular detailed consultations, ensuring their interests are fully represented. Second, the trade bureaucrats who do the negotiating are subject to corrupting influences that bias negotiations.

                        One problem is that negotiators’ metric of success too easily becomes the number of deals signed, rather than getting good deals done. A second problem is that, as with other branches of government such as the Pentagon, there is a revolving door between USTR and business. Thus, trade negotiators who do good work for business are rewarded with plum K Street lobbying jobs, and Washington’s trade scene is crammed with persons who have followed this route. Furthermore, these lobbyists then have insider access to their former colleagues, thereby amplifying corporations’ representation advantage. The net result is business interests almost always trump those of workers.

                        TPA reinforces this jaundiced structure by reducing Congressional over-sight of trade, thereby short-changing the electorate’s interest. Bad agreements pass because the political costs of voting them down on account of specific problems are perceived as too high. Moreover, TPA provides individual congressmen with political cover, enabling them to retain favor with corporate sponsors without having to explain to constituents their lack of action.

                        The bottom line is that the balance of power and process of trade negotiation already favors corporate interests over those of ordinary people. TPA aggravates this pattern, which speaks for burying it and letting TPA rest in peace.

                          Posted by on Tuesday, May 29, 2007 at 02:07 PM in Economics, International Trade, Politics | Permalink  TrackBack (1)  Comments (7)


                          Lumps of Coal

                          Is liquefied coal the answer? It depends upon the question being asked. Here's Brad Plumer:

                          How Energy Independence Threatens the Environment, by Bradford Plumer, TNR: ...When environmentalists talk about energy policy, they usually focus ... on global warming. Many Democrats, however, prefer to frame the discussion in terms of "energy security." And who can blame them? Even people who shrug at the thought of rising temperatures agree that the country should wean itself off foreign oil. It's a hugely popular idea. And, since many of the policies that would free the United States from ... Opec would also curb carbon emissions, who would begrudge the Democrats this bit of clever framing?

                          But the strategy comes with a downside: ...Big Coal is teaming up with an array of Republicans and Democrats to tout liquefied coal as a substitute for gasoline... The country is sitting on vast coal reserves, they reason, so why not use those instead of tossing money at the House of Saud? There's just one catch: Liquefied coal would do little to reduce carbon emissions and, in all likelihood, would make things worse. Nevertheless, the idea continues to gain currency in Congress, in part because "energy security" is a sales pitch few politicians can resist.

                          The ... coal industry ... has fallen on hard times. .... Moreover, ... if Congress passes a strong emissions-reduction bill to deal with climate change, coal production could decline sharply... As a result, investors have been increasingly wary of financing new coal-related projects.

                          Liquefied coal could be just the life raft Big Coal needs. ... Unfortunately..., the Energy Department found that coal-to-liquid fuel could generate roughly twice the carbon emissions that regular gasoline does. Coal backers counter that, if the carbon released during liquefication could be captured and permanently stored underground, the fuel would be comparable in carbon impact to gasoline--that is, the status quo. But the technology for storing carbon underground remains unproved, and, even if it works, cost pressures may prevent it from being adopted on a large scale...

                          Yet, despite these problems with liquid coal, Democrats are hopping aboard. ... For their part, Republicans seem to have few qualms about coal. ...

                          Ironically, for all the hype, liquefied coal is hardly the cheapest or easiest way to achieve energy security. According to the National Coal Council, ... a tremendous coal-to-liquid push--involving $211 billion in investments over the next 20 years and a 40 percent increase in mining--would allow the United States to replace just 10 percent of its oil supply. By contrast, using that coal to generate electricity for plug-in hybrids would displace twice the oil and emit a fraction of the carbon.

                          Still, the Coal-to-Liquids Coalition insists that liquid coal is "among the most practical, promising answers to greater energy security." And, so long as official Washington continues to treat this dubious assertion as fact, Democrats who prefer to talk about energy independence first and global warming second will be playing right into Big Coal's hands.

                          See also Lawmakers Push for Big Subsidies for Coal Process for an example of the push to liquefy coal and more discussion of these issues.

                            Posted by on Tuesday, May 29, 2007 at 11:43 AM in Economics, Environment, Oil | Permalink  TrackBack (0)  Comments (41)


                            "Please, for the Love of God, Regulate Us"

                            Kevin Drum has more from Chris Hayes:

                            Revolt of the CEOs, by Kevin Drum: In the current issue of the Washington Monthly, Chris Hayes says that the collapse of the Republican Party has caused big corporations to take a fresh look at the world around them. And what they see is a lot of uncertainty over healthcare and a lot of uncertainty over climate change. And big corporations don't like uncertainty.

                            So, slowly but surely, they're starting to hop on board the national healthcare and global warming bandwagons. As Chris colorfully puts it, they're crying out, "Please, for the love of God, regulate us."

                            Well, maybe. But toward the end of his story there's this:

                            Revolt of the CEOs: ...In the absence of federal leadership, state governments have rushed in to fill the vacuum, passing rafts of legislation meant to encourage alternative energy use, curb carbon emissions, and provide health insurance for their citizens. The initiatives on both these fronts — from Massachussets Governor Mitt Romney's universal health care reform to New York Mayor Mike Bloomberg's recently unveiled congestion pricing — have triggered fears among corporations that they'll have to deal with a state-by-state patchwork of fifty different regulatory regimes, giving them a powerful incentive to support a comprehensive nationwide approach.

                            ...."The corporate guys are beginning to think this is going to happen," said Bill Galston, a senior policy adviser in the Clinton White House and a current fellow at the Brookings Institution, referring to health care and climate change legislation. "They are willing to make their peace with the welfare and regulatory state as long as they can have some say. What they don't want is for the train to leave the station and they're not in the first-class car."...

                            Now, don't get me wrong: even a little bit of movement is a good thing. And I don't care much what their motivation is. But a lot of what's happening here on the global warming front involves corporations trying to preempt tough state regulations with weaker federal rules — not exactly a sign of getting on the liberal bandwagon. Likewise, although some CEOs are genuinely concerned about skyrocketing healthcare costs..., [t]hat "seat at the table" they're asking for isn't because they all took vacations in Stockholm this winter and came away true believers in universal healthcare. It's because they want to make sure that if something is going to happen, it'll be as little as possible.

                            In other words: sure, this is good news. At the same time, keep your hand on your wallet. These guys need to earn a seat at the table, not just be given one.

                              Posted by on Tuesday, May 29, 2007 at 03:24 AM in Economics, Regulation | Permalink  TrackBack (0)  Comments (25)


                              Should India Liberalize its Capital Account?

                              Eswar Prasad of Cornell says it's time to liberalize India's capital account:

                              Cracking Open India's Capital Account, by Eswar S. Prasad, Commentary, WSJ: Capital account liberalization is back on the table in India. ... [A] government committee ... has ratcheted up the debate this year by arguing that to give Mumbai a fighting chance of becoming an international financial center, the capital account must be fully opened by the end of 2008.

                              Would India be putting the cart before the horse by plunging headlong into capital account liberalization? The financial system is still underdeveloped, the fiscal deficit remains high ... and the exchange rate is still managed... Under such circumstances, when the economy is not equipped to handle a gusher of capital flowing in or out, unbridled capital account opening in some emerging market economies has ended in tears.

                              Despite the risks, capital account liberalization could indeed prove to be a boon for India, but for a completely different set of reasons than the traditional ones...

                              The traditional view is that opening up to inflows allows capital-poor developing countries to import capital, increase domestic investment and grow faster. The problem for ... this view is that economists ... have found it difficult to detect the direct growth-enhancing benefits of foreign capital.

                              But a new paradigm has recently emerged in the academic literature... The real benefits of financial globalization to an emerging market economy ...[come from] the indirect "collateral" benefits associated with such capital... These indirect benefits may be crucial for India's development.

                              One of the key benefits is that openness to foreign capital catalyzes financial market development. Foreign investment in the financial sector tends to enhance competition, raise efficiency, improve corporate governance standards and stimulate the development of new financial products. ...

                              Liberalizing outflows has the salutary effect of giving domestic investors an opportunity to diversify their portfolios internationally. This means greater competition for domestic financial institutions...

                              Other indirect benefits associated with foreign capital include transfers of expertise -- technological and managerial -- from more advanced economies. When supported by liberal trade policies, foreign investment can help boost export growth. Foreign-invested firms also tend to have spillover effects in generating efficiency gains among domestic firms.

                              Notwithstanding these potential benefits, there is strident opposition in India to capital account opening. Some of it is based just on ideological opposition to foreign involvement in the economy. Dig deeper, though, and it turns out that much of the opposition comes from entrenched interests that view foreign-financed competition as an unwelcome intrusion that erodes the protection and privileges they have enjoyed... Indeed, a "shock" like capital account opening is just the tonic to shake up the system...

                              So why the rush towards a fully open capital account? What is so special about the end-of-2008 date...? In short, nothing. But deadlines do have a way of focusing the mind. ... It would give less room for reactionary forces to coalesce and block the reforms. ...

                              For an emerging market economy, the process of opening the capital account comes down to a delicate balance between the benefits it affords and the risks of disruptions to growth if things go wrong. For the Indian economy, which has made great strides in recent years, ... the risks are now smaller and well worth taking...

                              Update: Dani Rodrik offers a different perspective.

                               

                                Posted by on Tuesday, May 29, 2007 at 02:34 AM in Economics, India | Permalink  TrackBack (0)  Comments (16)


                                Glaeser: A First Step on Immigration

                                Edward Glaeser applauds "the true blue liberals and bedrock conservatives ... who came together to serve their country" on immigration reform:

                                With compromise, a first step on immigration, by Edward L. Glaeser, Commentary, Boston Globe: Last year, Americans for Democratic Action gave Senator Ted Kennedy a "liberal quotient" of 100 percent... The group gave Senator John Kyl of Arizona an equally perfect liberal quotient of 0... Kyl and Kennedy are as odd a couple as there is, yet together they proposed the Secure Borders, Economic Opportunity and Immigration Reform Act of 2007.

                                America's immigration system manages to treat immigrants terribly and provide porous borders. Both the country and its immigrants will benefit if our vast illegal population is replaced with an even larger legal immigrant population... To achieve those benefits, the friends and foes of immigration must come to terms.

                                Kennedy and Kyl remind us that the hallmark of leadership is wise compromise, not extremist zeal. Those presidential candidates on both the left and right who have bashed the bill offer an ultra partisan recipe for legislature failure... The bill can be improved, but for it to pass -- and that is the important thing -- all of us who care about immigration must compromise.

                                For the fans of Fortress America, the bill offers hundreds of miles of fences and vehicle barriers, 10,000 more border guards, and a commitment to punishing the employers of illegal immigrants. I'm not crazy about spending billions on a concrete cordon meant to exclude people who only want to live in America, but if that is the price of compromise, so be it.

                                The real problem with the secure borders "triggers" is that the bill's pro-immigration policies only start when the often amorphous security provisions are in place. Fuzzy rules are a recipe for future conflict. The most important ... fix for the bill is to require only objectively measurable triggers for starting the flow of visas.

                                The most contentious aspect of the bill is the Z visa program that offers temporary legal residence to illegal residents for around $5,000. Some critics are outraged at any kindness to illegal immigrants...

                                [P]ro-immigrant advocates object to the fee. The right to live in the United States is worth a lot more than that. The Z visa program may be imperfect, but basic humanity and national security make it vital that we move people from gray illegality into the mainstream.

                                For the friends of immigration, the bill also offers 440,000 visas per year that will be allocated partially on the basis of education and work history, and up to 200,000 temporary guest worker visas each year. I would like to see the tie between visas and education get stronger and I hope that many of these temporary workers can stay permanently...

                                The best reason to support immigration is that there is no better way to fight global poverty than to welcome the poor into America. ... I cannot see enjoying that privilege but wanting to deny it to others. The second-best reason to support immigration is that immigrants enrich our country with their work and service...

                                The bill's provisions for more visas of all forms are grounded in humanitarianism. Pure national interest drives the need for more of the H-1B visas, which target skilled workers. Human capital is critical for national success. More educated immigrants bring ideas and innovation, and are less likely to set off nativist ire.

                                I applaud the bill's provisions that will increasingly allocate visas on the basis of education and work history. While letting family connections drive visa policy might seem humane, we should target visas to those immigrants who will make the benefits of immigration most obvious. While I would rather have the guest worker program than not, our goal should be skilled immigrants committed to America, not transient workers.

                                While the bill can be strengthened, the first step is to applaud the true blue liberals and bedrock conservatives, like Kennedy and Kyl, who came together to serve their country.

                                The last sentence makes it sound like the illegal immigration problem is bigger than it actually is, and therefore that it is crucial to compromise core principles in order to combat the large threat that it imposes. The policy should fit the crime, and overstating the harm leads to an overzealous policy response.

                                If it is "vital that we move people from gray illegality into the mainstream," I don't see why he supports the $5,000 fee that will be charged if illegal immigrants want to obtain temporary legal residence. I support legalizing workers that are already here. However, because they are already here, charging them $5,000 to stay would likely bring far fewer illegal immigrants out of hiding than a much, much lower fee (offer them $250 to become legal and more would step forward). Here's a few more details about the program:

                                The legalization provision would enable most illegal immigrants to stay in the country indefinitely with Z visas that would be renewable every four years. They also could have the option to seek permanent legal residency by obtaining green cards, but they'd have to wait more than eight years and would have to return to their home countries to apply.

                                A fee of $5,000 is a lot to pay to keep doing what you are already doing. If the main goal is to document illegal workers, a high fee is counterproductive.

                                I also wonder about his contention that "there is no better way to fight global poverty than to welcome the poor into America." Immigration certainly helps those who come here and we should do as much as we can to help, but we can't absorb enough of the world's poor to cure global poverty on our own. Globalization, which brings economic growth and development to poor countries, offers a much broader reach and a better way to fight global poverty. In the long-run, development within Mexico is the answer to the illegal immigration problem. The real question is why capital, the traditionally more mobile factor of production, is not moving to Mexico to take advantage of low cost labor and what can be done to change that.

                                For more on immigration, here's some NotSoSneaky humor with a point.

                                  Posted by on Tuesday, May 29, 2007 at 12:15 AM in Economics, Immigration, Politics | Permalink  TrackBack (0)  Comments (16)


                                  Monday, May 28, 2007

                                  Larry Summers: Practical Steps to Climate Control

                                  Since the participation of developing countries is an essential component of any greenhouse gas reduction policy, how do we get developing countries to participate? Larry Summers has some "Practical steps to climate control":

                                  Practical steps to climate control, by Lawrence Summers, Commentary, Financial Times [free]: ..[T]he most important ...[factor in] global warming policy ... is what happens in the developing world. These countries will deliver three-quarters of the increase in global greenhouse gas emissions over the next generation, on current forecasts. ...[T]here is the additional reality that ... policies that restrict emissions in some places but not everywhere may just relocate emissions not reduce them.

                                  Developing countries recognise that today’s greenhouse gas problem was made mostly by industrial countries, that their own energy usage per capita represents about 20 per cent of ... industrial country usage and that their citizens have pressing material needs. They are also keenly aware of the uncertainty surrounding projections of economic growth, patterns of production and future energy technologies. It is easy to sympathise with their extreme reluctance to commit to levels of emissions decades from now that are lower than what industrial countries are emitting today.

                                  For these and other reasons, ... the Kyoto approach to climate change – through the setting of targets – could prove to be ... impractical, ultimately ineffective and perhaps even counterproductive because of the valuable political capital it consumes. ... I fear that commitments to vast reductions in emissions decades hence are no more real than commitments to end aggressions or war.

                                  What then should be done...? The place to start is with the recognition that it is much easier for governments to make and keep commitments to policies they can control than to outcomes they cannot assure. ...[E]mphasis should also be placed on concrete measures that will have meaningful impact.

                                  First, the US must engage in an energy efficiency programme ... without delay... As long as developing countries can point to the US as a free rider there will not be serious dialogue about what they are willing to do. I prefer carbon and/or gasoline tax measures to permit systems or heavy regulatory approaches because the latter are more likely to be economically inefficient and to be regressive. The key point is that after Kyoto, where there was US vision ... but no ... action, there must be real policy commitments.

                                  Second, the major industrial countries should commit to a very large increase in funding for research in technologies that offer the prospect of reducing ... greenhouse gases.. They should also ... commit to making intellectual property relating to clean energy available to developing countries on preferential terms. ...

                                  Third, the World Bank, and probably the regional development banks, should ... take on as a major mission the provision of subsidised capital for projects that have environmental benefits that go beyond national borders. There is much that can be done ... within developing countries, yet national governments have inadequate incentives to take account of global impacts. ...

                                  Fourth, a goal should be set of eliminating by 2025 the more than $200bn the world spends each year on energy subsidies...

                                  There is a final critical ... element... Given that ... developing ... countries are unlikely to make [significant changes] unless they see their own interests as at stake, it is essential that they be full participants in setting the global direction. ...

                                  Is all of this a sufficiently ambitious agenda? Perhaps not; and perhaps political efforts to generate commitments to ambitious if remote targets can be worthwhile as powerful forces for change, as with human rights in eastern Europe. But they must be married to more immediate if less dramatic steps that have real and practical effect.

                                    Posted by on Monday, May 28, 2007 at 03:42 PM in Economics, Environment, Policy, Regulation | Permalink  TrackBack (0)  Comments (20)


                                    Paul Krugman: Trust and Betrayal

                                    Paul Krugman says it's time to start treating "belligerent, uninformed posturing" on the war with the lack of respect it deserves:

                                    Trust and Betrayal, by Paul Krugman, Commentary, NY Times: “In this place where valor sleeps, we are reminded why America has always gone to war reluctantly, because we know the costs of war.” That’s what President Bush said last year, in a Memorial Day ceremony at Arlington National Cemetery.

                                    Those were fine words, spoken by a man with less right to say them than any president in our nation’s history. For Mr. Bush took us to war not with reluctance, but with unseemly eagerness.

                                    Now that war has turned into an epic disaster... Yet Congress seems powerless to stop it. How did it all go so wrong?

                                    Future historians will shake their heads over how easily America was misled into war. The warning signs ... were there, for those willing to see them, right from the beginning... But the nation, brought together in grief and anger over the attack, wanted to trust the man occupying the White House. ...

                                    It’s a terrible story, yet it’s also understandable...: nations almost always rally around their leaders in times of war, no matter how bad the leaders and no matter how poorly conceived the war.

                                    The question was whether the public would ever catch on. Well, to the immense relief of those who spent years trying to get the truth out, they did. Last November Americans voted overwhelmingly to bring an end to Mr. Bush’s war.

                                    Yet the war goes on.

                                    To keep the war going, the administration has brought the original bogyman back out of the closet. At first, Mr. Bush said he would bring Osama bin Laden in, dead or alive. Within seven months..., however, he had lost interest: “I wouldn’t necessarily say he’s at the center of any command structure,” he said in March 2002. “I truly am not that concerned about him.” ...

                                    But Osama is back: last week Mr. Bush invoked his name 11 times in a single speech, warning that if we leave Iraq, Al Qaeda — which wasn’t there when we went in — will be the winner. And Democrats, still fearing that they will end up accused of being weak on terror and not supporting the troops, gave Mr. Bush another year’s war funding.

                                    Democratic Party activists were furious, because polls show a public utterly disillusioned ... and anxious to see the war ended. But it’s not clear that the leadership was wrong to be cautious. The truth is that the nightmare of the Bush years won’t really be over until politicians are convinced that voters will punish, not reward, Bush-style fear-mongering. And that hasn’t happened yet.

                                    Here’s the way it ought to be: When Rudy Giuliani says that Iran, which had nothing to do with 9/11, is part of a “movement” that “has already displayed more aggressive tendencies by coming here and killing us,” he should be treated as a lunatic.

                                    When Mitt Romney says that a coalition of “Shia and Sunni and Hezbollah and Hamas and the Muslim Brotherhood and Al Qaeda” wants to “bring down the West,” he should be ridiculed for his ignorance.

                                    And when John McCain says that Osama, who isn’t in Iraq, will “follow us home” if we leave, he should be laughed at.

                                    But they aren’t, at least not yet. And until belligerent, uninformed posturing starts being treated with the contempt it deserves, men who know nothing of the cost of war will keep sending other people’s children to graves at Arlington.

                                    _________________________
                                    Previous (5/25) column: Paul Krugman: Immigrants and Politics
                                    Next (6/4) column: Paul Krugman: Obama in Second Place

                                      Posted by on Monday, May 28, 2007 at 12:15 AM in Economics, Iraq and Afghanistan, Politics | Permalink  TrackBack (0)  Comments (203)


                                      The Hip Heterodoxy Meets Herd Mentality and the Neoclassical Mafia

                                      Here are some highlights from Chris Hayes' longer article, "Hip Heterodoxy," followed by a few of the reactions:

                                      Hip Heterodoxy, by Christopher Hayes, The Nation: ...Every year a sizable portion of the nation's economists descend on some lucky city for the Allied Social Science Associations Annual Meeting, the economics field's largest gathering... Most academic disciplines have a similar annual convention, but no other can boast the same influence on American politics and policy--after all, Presidents don't appoint a council of anthropological advisers...

                                      This year's conference attendees are packed into the ... Chicago Hyatt. On the second evening, I come across two receptions... If you wanted to get a sense of the status hierarchies of the profession, this was a perfect tableau. On one side, a reception in honor of ... Milton Friedman... The room is packed and festive, with several Nobel laureates milling about... (A man behind me in line complains of the free drinks that "Milton wouldn't approve! Because we're not getting the true price of the drinks.") Across the hall, a reception hosted by the Economic Policy Institute (EPI), a left-liberal Washington think tank that advocates policies--higher minimum wage, easier paths to unionization, social insurance--that are in almost every detail the opposite of everything that Friedman stood for. In that room, perhaps thirty people gather, picking at the cheese cubes and shelling out $6 a drink... The EPI's Max Sawicky ... tells me the turnout is better than usual.

                                      After grabbing a free drink in the Friedman reception, I strike up a conversation with economist Michael Perelman... Perelman, who is there for the EPI reception ... is one of a few hundred self-described "heterodox" economists at the conference. ... I ask him about how he relates to the so-called mainstream of his profession. "It's a mafia," he says quietly, his eyes roving over to the suits spilling out of the Freedom to Choose room.

                                      Mafia is probably a tad hyperbolic, but there is undoubtedly something of a code of omertà within the discipline. Just ask Alan Blinder and David Card. ...[T]his past March, the Wall Street Journal ran a front-page article on Blinder's concerns about the massive dislocations that ... outsourcing trends might bring for American workers. He suddenly found himself under fire from fellow economists for stepping out of line. Card, a highly esteemed economist at the University of California, Berkeley, caught flak for his heresy not on trade but on the minimum wage. In 1994 he conducted a study to see whether an increase in the minimum wage in New Jersey had the negative effect on employment that basic neoclassical theory would predict. He found it didn't. ... The paper attracted a tremendous amount of ... criticism...

                                      As Card's and Blinder's experiences show, the "mafia" still flexes its muscles, but there are also signs that its hold on power is slipping. While the discipline remains dominated by a "neoclassical" consensus that is generally pro-market and suspicious of government intervention, an explosion of new research programs and methods have provided strong evidence that many of the pillars of that consensus rest on a foundation of sand. In fact, just before the reception, AEA president George Akerlof, a Nobel laureate as respected in the profession as they come, gave what was in many senses a radical address, attacking some of the discipline's most basic assumptions about what drives human economic behavior. (Three men standing near me in the Friedman reception had referred to it as "crap.") ...

                                      The Birth of Orthodoxy

                                      The term "heterodox"--like, say, "infidel"--is necessarily imprecise; it categorizes people by what they don't believe rather than what they do. In the case of heterodox economists, what they don't believe is the neoclassical model... Classical economics refers to the theories laid out by Adam Smith and David Ricardo in the eighteenth and nineteenth centuries, which emphasized the power of the "invisible hand" of the market...

                                      A hundred years after Smith, a group of "neoclassical" economists came along and added ... that humans are rational, utility-maximizing agents with fixed preferences, that they make decisions "at the margins" and that the mechanisms of supply and demand ... will lead to a general equilibrium whereby resources are allocated efficiently.

                                      That view dominated for the next sixty years until John Maynard Keynes came along in a period of global economic crisis and proposed a new way of looking at the economy... In the wake of Keynes's work..., economists had a problem on their hands. They had two models for how an economy worked: the neoclassical account ... and Keynes's account... In the 1940s and '50s, a series of legendary economists formally fused the two, producing the "neoclassical synthesis." Many of the pioneers of this work, from Paul Samuelson to Kenneth Arrow, were famously liberal. But their work stressed the ways in which markets, functioning on their own without interference, tended to an interdependence described as "general equilibrium." In their wake came a parade of libertarian economists, like Milton Friedman and his Chicago School colleagues, who pushed the neoclassical model to leave Keynes behind completely...

                                      [T]he cradle for much of our policy discussions can be found in the first chapter of just about any introductory economics textbook, where the basic precepts of the neoclassical framework are described under the rubric of "thinking like an economist."

                                      The problem, then, that heterodox economists face is that they are economists who don't "think like economists." Many point out that humans aren't ... nearly as rational as the theory would have them be... Others point out that humans are social creatures ... and ... institutions, habits, social mores and culture all mediate and drive economic behavior. Others say that ... prices don't arise from the simple intersection of supply and demand curves, while some argue that unequal power between different sectors of society affects how markets operate. Dissent from the mainstream of economics is not new; indeed, it's nearly as old as the profession itself. Marx was a kind of heterodox economist, as was Thorstein Veblen. John Kenneth Galbraith spent his whole life as an economic dissident...

                                      The chief complaint of heterodox economists is that the social hierarchy of the profession prevents their ideas from getting the hearing they deserve. Thomas Palley, a dissident economist who received his PhD from Yale and once worked for the AFL-CIO, says that many heterodox ideas "can't be rejected on scientific grounds. They meet all the tests of the profession--they don't meet tastes of the profession. So then you have to answer where the tastes come from."

                                      As a parable of how the boundaries of "taste" and acceptability are enforced, the tale of Notre Dame's economics department is instructive. For the past few decades Notre Dame has had one of the few economics departments where grad students interested in non-mainstream topics could study... But the faculty's heterodox focus froze it out of the top-ranked journals... In the early part of the decade, as Notre Dame pushed to raise its national stature, the department's poor ranking came under increased scrutiny...

                                      "They wanted a more highly ranked economics department...," David Ruccio told me... Ruccio emerged as de facto spokesperson for his heterodox brethren at Notre Dame. The administration  ... decided to create a new 'real department of economics' and make us the department of 'flaky economics.'" One department, which would focus on neoclassical economics, would get the name Department of Economics and Econometrics, as well as the money to hire several new tenure-track professors and the bulk of grad students, and the other, called the Department of Economics and Policy Studies, would be the home of the heterodox economists (who, it should be noted, constituted the majority of the department). Crucially, though, the heterodox department would be frozen out of the graduate student admissions process...

                                      Richard Jensen, the neoclassical chair of the department, defended the split as solely an issue of "standards." But it's precisely the validity of those standards that's at issue. "They don't see themselves as cleansing alternative approaches," says Frederic Lee. "They simply see themselves as saying, This is good economics, and that's bad economics."

                                      Of course, all disciplines set up boundaries, basic methodologies and ways of knowing and deny membership and recognition to those practitioners who work outside those boundaries. Doctors will say faith healers--or midwives, or acupuncturists--aren't engaging in medicine... [S]ome mainstream economists dismiss heterodox work as quackery...

                                      [E]nvironmental economist John Gowdy referred to this as the "Clint Eastwood defense: 'We ain't like that no more.'" ... There's a wide variety of empirical work being published." The empirical work that Gowdy and other heterodox economists tend to cite most is that of behavioral economists... What they routinely find is that the rational utility maximizer of the neoclassical model is a convenient fiction. A growing literature shows humans to be systematically biased in their calculations of risk, disposed to punish antisocial behavior, even at a cost to themselves. ... If you were to draw an intellectual Venn diagram of mainstream and heterodox economics, the behavioral economists would be in the intersecting section.

                                      But despite the fact that much of their work is devoted to upending Homo economicus, the behavioralists have achieved widespread mainstream acceptance. Daniel Kahneman ... won the Nobel Prize for his work in 2002. So then one has to ask, Just what set of characteristics defines what gets to be called "mainstream economics"? And the answer can seem maddeningly circular: Mainstream economics isn't defined so much by some limited set of ideas or approaches. Mainstream economics is that work done by mainstream economists and published in mainstream journals.

                                      The More Things Change...

                                      ...A month after the conference, I went to talk more with David Ruccio...[He said] "... Behavioral economists ... don't generally argue for abandoning the general equilibrium model, instead choosing to see their work as adding "frictions" to it. "It's what drives people like me crazy," Ruccio went on. "Because the more disturbing questions are ignored--unequal power or exploitation, those critiques never come in. They say, Look, we've changed. And we look and say, No, you haven't."

                                      'Shoots of Spring'

                                      No one would call Berkeley's George Akerlof a heterodox economist, but his ideas have always been iconoclastic. Back in the 1960s, he noticed that there was something systematically wrong with the market for used cars. His insight was that the problem was "asymmetric information"... Initially no journal would accept his paper "The Market for Lemons," but eventually it was published to much acclaim, and asymmetric information was recognized as a serious breakthrough. He shared the 2001 Nobel Prize for his work on the topic.

                                      Akerlof's AEA address was titled "The Missing Motivation in Macroeconomics," and its purpose was to argue that the basic theory of human behavior upon which neoclassical economics rests is incomplete and that the incompleteness leads to a host of theoretical errors. The "missing motivation" of the title were social norms, people's conceptions of how they should act, which Akerlof argued played a central role in people's economic activity. Once these social norms are integrated into economic theory, Akerlof argued, many of the anti-Keynesian arguments made by Friedman and his ilk begin to fall apart. ...

                                      If the heterodox economists were nonplussed or only grudgingly positive about the speech, many mainstream economists weren't psyched about it either. NYU's Mark Gertler ...[said]Akerlof was "stepping out of line," and one Chicago School economist I e-mailed said he "hated it" and added that it had made one of his colleagues "depressed."

                                      The word "depressed" caught my eye. You only get depressed by something you disagree with if you think others are going to find it persuasive--that is, if you think that the pendulum isn't swinging your way.

                                      "There's a recognition that it's pretty hard to believe in the rational expectations and equilibria which were sold to students in the 1980s, when you had to read them, and not only read them but send them up as your benchmark," Thomas Palley, the former AFL-CIO economist, told me. "In 1983 there were more voices and more possibility, but the world was closing. Now we're coming from a black hole and there are shoots of spring."

                                      I don't have the time I'd hoped to talk about this, so for the moment I'll pass along a piece of advice to any aspiring heterodox economists and then outsource the commentary from there.

                                      Here's the advice. When I was a first year graduate student, during discussions surrounding the work of Kuhn and Popper we were told something like:

                                      It's fine if you want to challenge the neoclassical model. But before doing so, you had better learn the neoclassical model just as well, or better than the people you will be challenging.

                                      It was good advice. It did not allow you to avoid learning the neoclassical model thoroughly even if you had doubts about it. Orthodox economists will question the ideas of heterodox economists from a neoclassical perspective and if they don't seem to understand all the subtleties of the standard model, they are less likely to be taken seriously.

                                      Here are some of the reactions to the article. First, Dani Rodrik:

                                      Is neoclassical economics a mafia?, by Dani Rodrik: Sort of, says Christopher Hayes in a very well-written and very interesting piece in The Nation. He says orthodox economists are a close-knit group and are quick to penalize those among them or from outside who overstep the boundaries. ...

                                      Hayes makes a number of good points about how ideology permeates a lot of thinking by orthodox economists. Anybody who strays from conventional wisdom is in danger of being ostracized. Some years ago, when I first presented an empirical paper questioning some of the conventional views on trade to a high profile economics conference, a member of the audience (a very prominent economist and a former co-author of mine) shocked me with the question "why are you doing this?"

                                      On the other hand I have never found neoclassical methodology too constraining when it comes to thinking about the real world in novel and unconventional ways. ... To me it represents nothing other than a methodological predilection for deriving aggregate social phenomena from individual behavior--and as such it is a very useful discipline for any social science. You say people have some preferences, they face certain constraints, take others' actions into account, and go from there. Neoclassical economics teaches you how to think, not what to think.

                                      So it has always been a bit difficult for me to understand the critique that neoclassical economics is necessarily driven by ideology or leads to foregone conclusions. ...

                                      George Borjas:

                                      Herd Mentality Among Economists, by George Borjas: ...Christopher Hayes ... is asking whether the "mafia" of neoclassical economists marginalize those economists who do not blindly follow the main assumptions of the neoclassical model, a model that many often mischaracterize as having pro-market ideological underpinnings.

                                      The article leaves unexplored one interesting anthropological aspect of Life Among the Econ: its herd mentality. The kind of research many economists do is motivated by, well, by the fact that other economists are doing it too. These research fads are most evident at the American Economic Association meetings... The meetings ... serve the purpose of being the job market... Anyone who has repeatedly sat down to interview the newly minted prospects can spot how the emergence of new topics or methodologies is immediately incorporated into the doctoral dissertations of a disproportionately large number of these newly minted economists.

                                      A personal anecdote helps makes the point. Around 1983 or 1984, in some of my first work on immigration, I ... discovered that the newer waves of immigrants were relatively less skilled than the older waves. I traveled around the country presenting the paper in many academic seminars.

                                      After one such seminar, a leading light of the labor economics profession took me aside and kindly said, "George, it's interesting. But why are you wasting your time on this?" The economist honestly felt that he was giving me good advice...

                                      Immigration as a topic worth studying was nowhere in the radar screen of most economists back then. The fads in labor economics at the time instead included implicit contract theory, the study of unions, and state dependence models, and there was the potential of my being left behind. I can't remember what I replied but, needless to say, I ignored the advice.

                                      Max Sawicky:

                                      Nerds on Parade, MaxSpeak: ...The Blinder and Card episodes are very telling. They point up the self-perpetuating elite of the profession as a vicious, reactionary priesthood. (Obviously there are exceptions.)

                                      [Update: David Warsh at Economics Principles has more along these lines in Outside, Inside. This post from Brad DeLong is also related.]

                                        Posted by on Monday, May 28, 2007 at 12:09 AM in Economics, Methodology | Permalink  TrackBack (0)  Comments (22)


                                        In Memoriam

                                        In the display shown in the pictures, each red flag represents one U.S soldier killed in Iraq, around 3,000 at the time, while each white flag represents six Iraqi civilians or soldiers killed in the war - there are over 100,000 white flags representing the estimated 655,000 dead Iraqis. That number from the Lancet study isn't accepted by everyone, but I don't want to argue the number today. Whatever it is, it's far, far too many. I can tell you this. Having seen this display on our campus, even if it's only one-to-one  (which is too low) rather than six-to-one, the display is still stunning.

                                        This is the display when it appeared at Reed college in March. Reed is is a private college north of us in Portland. These pictures don't fully reflect how much area the flags cover, but it gives you some idea (here too):

                                        Memorial252807
                                        (click on pictures for larger versions)

                                        Memorial152807

                                        And here are a couple of pictures from when it appeared on our campus around the same time:

                                        Memorial352807

                                        In this picture, my office is off-camera on the left side of the picture. This is just part of the display - there wasn't nearly enough lawn to hold all of the flags. I can't imagine how much ground it would have covered if they hadn't used white flags to represent more than one person:

                                        Memorial452807

                                        I believe this started at the University of Colorado.

                                          Posted by on Monday, May 28, 2007 at 12:06 AM in Economics, Iraq and Afghanistan | Permalink  TrackBack (0)  Comments (5)


                                          Sunday, May 27, 2007

                                          China and the Olympic Games: The Greatest National Coming-Out Party in History?

                                          I hadn't realized the full significance of the 2008 Summer Olympic Games in Beijing:

                                          China, the Olympic Games, and global leadership, by Orville Schell, Project Syndicate: The whole world, it seems, views China as the next great global power. A trip to Beijing does little to dispel that impression. Out of the welter of dust, noise, welders' sparks, flotillas of cement mixers and construction cranes, the setting for the 2008 Summer Olympic Games is taking shape. A visitor feels inconsequential in the chaotic vastness of this epic undertaking.

                                          But looking down on the scene from the half-finished Morgan Center, the luxury apartment complex (where annual rents are $800,000) and seven-star hotel that is arising beside the Olympic site, one is awestruck not only by the project's grandeur, but by its design daring... China's leaders view the Olympics not only as a national celebration, but also as the greatest national coming-out party in history.

                                          Feeling the Promethean energy unleashed in Beijing, it is easy to believe in China's aspirations to restore itself to a position of global wealth and power. ... But, to become a truly "great nation," China must make two great leaps. First, it must become more comfortable playing an active and constructive international role. China is now deeply involved in the world, especially the Third World, because of trade. But it maintains a 19th-century notion of sovereignty - namely, that a country's national territory, its leaders have an absolute right to do whatever they want without outside "interference." This view is not only out of step with international trends, but it also inhibits China from playing a useful role in world crises.

                                          China's leaders fear that if they begin to pronounce on the domestic record of other nations, much less join in sanctions or United Nations peacekeeping missions, they will help establish a precedent that would allow others to intrude on domestic Chinese affairs. But the Chinese government has just had a wake-up call in Sudan, from which China imports 50 percent of its oil. After doing little to pressure Sudanese strongman Omar al-Bashir into admitting UN peacekeepers to stem the killing in Darfur, China suddenly found the promise of an unsullied Olympics at risk.

                                          The actress Mia Farrow, for example, suggested that the 2008 Olympics might be remembered as "the genocide games." This got the Chinese leadership's attention. In a matter of days, an emissary was dispatched and Bashir relented. It was an important moment in China's evolution from a defensive to an offensive player on the international scene.

                                          China's second challenge concerns its hybrid capitalist-Leninist system of governance, which may not function well enough without democratic feedback and the rule of law. Party leaders may not become sufficiently attuned to the needs of China's people to respond to problems like corruption, environmental degradation, or peasant unrest before crises make them unsolvable.

                                          Although hardly democrats, President Hu Jintao and Premier Wen Jiabao already are expending large of amounts of time and resources on divisive social problems in the countryside, where ... income growth has lagged. Hu and Wen have cancelled national agricultural taxes, made rural schooling free, launched a new rural medical insurance plan, and guaranteed that, since there is still no title for holding private agricultural land, peasants are entitled to renew their long-term leases.

                                          So China may be edging toward a whole new way of interacting with the world and dealing with its people; its curious authoritarian capitalism may be inching toward some new, and possibly viable, model for long-term development. But, as Mao always noted, theory should not be confused with practice, and the sustainability of such a model remains untested. Indeed, no state run by a Communist Party has yet managed to reform itself sufficiently to modernize and develop successfully. In this, China is a both pioneer and a developmental curiosity.

                                          What kind of nation China aspires to be, and where it is ultimately headed, is still something of a conundrum. ... Beneath the surface are many threatening cracks. But to drive past the Olympic Green in Beijing will help make many Chinese believe that perhaps the center will hold in this unprecedented and unusual experiment of nation building.

                                          I wish I had a better sense of how the geopolitics of an emerging China will play out.

                                            Posted by on Sunday, May 27, 2007 at 04:23 PM in China, Economics, Politics | Permalink  TrackBack (0)  Comments (21)


                                            Poverty, Illiteracy, and Unemployment or a Clash of Civilizations?

                                            Bombing Muslim countries with jobs and education to end terrorism? The prime minister of Malasia, Abdullah bin Haji Ahmad Badawi, says attributing problems between the west and the Muslim world to a clash of civilizations diverts attention away from the real source of discontent. The key to stabilizing the Muslim world is to improve economic conditions and reduce the high levels of "poverty, illiteracy and unemployment":

                                            The real challenge for Muslim nations is economic, by Abdullah bin Haji Ahmad Badawi, Commentary, Financial Times: The divide between the Muslim world and the west has become the great issue of the decade. It has succeeded the cold war as the strategic issue of global concern. The terrorist attacks of September 11 2001 and the invasion of Iraq and Afghanistan, as well as the Palestinian issue, have created the impression of a clash of civilisations.

                                            The confrontation between the Muslim world and the west is inflicting enormous political, economic and security costs on both sides. The human cost is especially appalling on the Muslim side. It is in the interests of both the west and the Muslim world that this confrontation ends...

                                            [A] new “Economic Agenda for the Islamic World” ... must be a central pillar in our efforts to tackle the roots of unrest and help our own peoples, thus also addressing the causes of discontent that create breeding grounds for terrorism.

                                            There is a danger that today’s overwhelming focus on the Muslim world’s political relationship with the west is diverting attention from even more fundamental social and economic problems. The Muslim landscape that stretches from Morocco to Mindanao is more diverse than western commentators often suppose. There are peaceful countries where the people are wealthy, healthy and educated. However, these are sadly outnumbered by countries and regions that are under­developed, poor and in turmoil.

                                            Continue reading "Poverty, Illiteracy, and Unemployment or a Clash of Civilizations?" »

                                              Posted by on Sunday, May 27, 2007 at 12:42 PM in Economics, Iraq and Afghanistan, Politics | Permalink  TrackBack (0)  Comments (24)


                                              Is the "Age of Empires" Over?

                                              British historian Eric Hobsbawn says it is:

                                              A counsel of despair, by Alan Rusbridger, Commentary, Comment is Free: ...[C]ommunist historian Eric Hobsbawm..., [l]ooking like an elderly and defiant Woody Allen, ... defied the bar stool placed in deference to his 89 years and delivered a magisterial lecture on the declines of empires during his lifetime, which began in the same year as the Russian Revolution.

                                              He had seen the end of the British, Dutch, Belgian and Spanish empires. He had seen the rise and fall of the German and Soviet attempts at empire-building and soon, he predicted, the end of American attempts at imperial domination.

                                              The American empire was visibly weakening in front of our eyes. It was by far the most dangerous military force in the world, but in all other respects it was fading. ...

                                              Simon Schama had introduced him in tones of genuine admiration... Reviled by some colleagues for his refusal to repudiate communism after the Soviet invasion of Hungary - or, indeed, since - Hobsbawm came under further pressure to recant his life's work after the fall of the Berlin Wall in 1989.

                                              But here he was, nearly 20 years later, looking sharp as a pin and able to say, in effect: "Not so fast!"

                                              This was the world today: lacking the relative stability of the cold war, with numerous new nation states apparently incapable of governing themselves and in danger of disintegration. We were living in a period of deeply unstable global disorder. No return to the old systems was possible and it was extremely unclear what would replace empires. ...

                                              No modern state could ever again hope to rely on the obedience of subjects or to impose rule through a handful of rulers, even armed ones: for one thing, counter-insurgent access to weapons was too easy.

                                              The age of empires and foreign interventions was over. We would have to find alternative ways of ordering the world. "But so far," he ended, "we haven't found it and I can't tell you how it is going to be found. I shall be dead when people try to do so."

                                              Schama didn't quite let him off with what he called "a counsel of despair." He pointed to interventions in, for instance, Sierre Leone. Well, said Hobsbawm, he wasn't saying interventions could never work: but it helped if they were locally-inspired. Western attempts to impose "democracy" or a "superior" value system were doomed. And you were always faced with the problems of getting out of places in which you had no strategic interest. The United Nations wasn't the answer: it could not act without the agreement of the major powers, and when the powers didn't agree it didn't act. ...

                                                Posted by on Sunday, May 27, 2007 at 04:23 AM in Economics | Permalink  TrackBack (0)  Comments (8)


                                                Mediaeval Economic Teaching on Usury

                                                This material on usury is from an essay written in 1920. [There is another section on the just price doctrine that relates to the discussion of usury, but this was too long already]:

                                                An Essay on Mediaeval Economic Teaching, by George O'Brien, 1920: Chapter 3, Section 2 -- The Sale and Use of Money

                                                Sec. 1. Usury in Greece and Rome

                                                The prohibition of usury has always occupied such a large place in histories of the Middle Ages, and particularly in discussions relating to the attitude of the Church towards economic questions, that it is important that its precise foundation and extent should be carefully studied. The usury prohibition has been the centre of so many bitter controversies, that it has almost become part of the stock-in-trade of the theological mob orators. The attitude of the Church towards usury only takes a slightly less prominent place than its attitude towards Galileo in the utterances of those who are anxious to convict it of error. We have referred to this current controversy, not in order that we might take a part in it, but that, on the contrary, we might avoid it. It is no part of our purpose in our treatment of this subject to discuss whether the usury prohibition was or was not suitable to the conditions of the Middle Ages; whether it did or did not impede industrial enterprise and commercial expansion; or whether it was or was not universally disregarded and evaded in real life. These are inquiries which, though full of interest, would not be in place in a discussion of theory. All we are concerned to do in the following pages is to indicate the grounds on which the prohibition of usury rested, the precise extent of its application, and the conceptions of economic theory which it indicated and involved.

                                                We must remark in the first place that the prohibition of usury was in no sense peculiar to the Catholic Church in the Middle Ages, but, on the contrary, was to be found in many other religious and legal systems--for instance, in the writings of the Greek and Roman philosophers, amongst the Jews, and the followers of Mohammed. We shall give a very brief account of the other prohibitions of usury before coming to deal with the scholastic teaching on the subject.

                                                We can find no trace of any legal prohibition of usury in ancient Greece. Although Solon's laws contained many provisions for the relief of poor debtors, they did not forbid the taking of interest, nor did they limit the rate of interest that might be taken. In Rome the Twelve Tables fixed a maximum rate of interest, which was probably ten or twelve per cent, per annum, but which cannot be determined with certainty owing to the doubtful signification of the expression 'unciarum foenus.' The legal rate of interest was gradually reduced until the year 347 B.C., when five per cent, was fixed as a maximum. In 342 B.C. interest was forbidden altogether by the Genucian Law; but this law, though never repealed, was in practice quite inoperative owing to the facility with which it could be evaded; and consequently the oppression of borrowers was prevented by the enactment, or perhaps it would be more correct to say the general recognition, of a maximum rate of interest of twelve per cent. per annum. This maximum rate--the Centesima--remained in operation until the time of Justinian. Justinian, who was under the influence of Christian teaching, and who might therefore be expected to have regarded usury with unfavourable eyes, fixed the following maximum rates of interest--maritime loans twelve per cent.; loans to ordinary persons, not in business, six per cent.; loans to high personages (illustres) and agriculturists, four per cent.

                                                While the taking of interest was thus approved or tolerated by Greek and Roman law, it was at the same time reprobated by the philosophers of both countries. Plato objects to usury because it tends to set one class, the poor or the borrowers, against another, the rich or the lenders; and goes so far as to make it wrong for the borrower to repay either the principal or interest of his debt. He further considers that the profession of the usurer is to be despised, as it is an illiberal and debasing way of making money. While Plato therefore disapproves in no ambiguous words of usury, he does not develop the philosophical bases of his objection, but is content to condemn it rather for its probable ill effects than on account of its inherent injustice.

                                                Aristotle condemns usury because it is the most extreme and dangerous form of chrematistic acquisition, or the art of making money for its own sake. As we have seen above, in discussing the legitimacy of commerce, buying cheap and selling dear was one form of chrematistic acquisition, which could only be justified by the presence of certain motives; and usury, according to the philosopher, was a still more striking example of the same kind of acquisition, because it consisted in making money from money, which was thus employed for a function different from that for which it had been originally invented. 'Usury is most reasonably detested, as the increase of our fortune arises from the money itself, and not by employing it for the purpose for which it was intended. For it was devised for the sake of exchange, but usury multiplies it. And hence usury has received the name of [Greek: tokos], or produce; for whatever is produced is itself like its parents; and usury is merely money born of money; so that of all means of money-making it is the most contrary to nature.' We need not pause here to discuss the precise significance of Aristotle's conceptions on this subject, as they are to us not so much of importance in themselves, as because they suggested a basis for the treatment of usury to Aquinas and his followers.

                                                In Rome, as in Greece, the philosophers and moralists were unanimous in their condemnation of the practice of usury. Cicero condemns usury as being hateful to mankind, and makes Cato say that it is on the same level of moral obliquity as murder; and Seneca makes a point that became of some importance in the Middle Ages, namely, that usury is wrongful because it involves the selling of time. Plutarch develops the argument that money is sterile, and condemns the practices of contemporary money-lenders as unjust. The teaching of the philosophers as to the unlawfulness of usury was reflected in the popular feeling of the time.

                                                Continue reading "Mediaeval Economic Teaching on Usury" »

                                                  Posted by on Sunday, May 27, 2007 at 03:42 AM in Economics, History of Thought | Permalink  TrackBack (0)  Comments (16)


                                                  Saturday, May 26, 2007

                                                  "Rational is Not a Synonym for Good"

                                                  One of Robert's stochastic thoughts:

                                                  Kevin Drum attempts to explain economics to economists, by Robert Waldmann: Kevin Drum attempts to explain economics to economists.

                                                  I must be ironic right? I'm not suggesting that this guy with a degree in communications from Long Beach State has a better understanding of economics than most economists am I?

                                                  I am.

                                                  The man is a genius but makes it easy to miss this because his genius lies not only in his understanding but in his ability to make things obvious.

                                                  He argues two things that don't need to be argued.

                                                  Rational is not a synonym for good. Is he really suggesting that economists sometimes forget that? He is and we do.

                                                  Sometimes people make better choices about what should be done with other people's money than with their own, because when deciding whether to give their money to, say, the hard working poor, they have, uhm, a conflict of interest.

                                                  Surely the possible problem that I have a conflict of interest when I am deciding whether to keep my money or use it to help humanity can't be news to anyone?

                                                  Sure it can. It is a shocking idea to economists.

                                                  Drum does not understand how devastating his critique is (answer totally devastating). Neither did I, until Brad DeLong explained it to me.

                                                  Imagine we care about other people but not as much as we care about ourselves (shocking thought eh well a very very radical departure from standard assumptions in economics). This means that we might care a lot about a transaction or transfer which has no effect on our consumption, leisure or wealth. I am very glad that Bill and Melinda (and Warren) gave so much money and did it in such a very intelligent way (although I still hate windows). This is what we call in the biz an "externality" and it implies that the market outcome is not efficient. I don't especially like to pay taxes. I really really like the fact that rich people pay taxes to support social welfare programs (war in Iraq? no thank you). Both desires count to a utilitarian. It means that an outcome enforced through the coercive power of the state can make everyone happier than the free market outcome, because of the externality due to altruism.

                                                  To consider with Drum the case of Thomas Jefferson, without anything odd (dynamic inconsistency) the position as a slave owner who advocated abolition of of slavery can be perfectly rational. The slave owner might hate slavery, but not hate the enslavement of his own slaves as much as he loves living in luxury off the sweat of their brows. His ideal outcome would be to have all slaves but his own free. A rational anti slavery slave owner knows he's not going to get away with that. Second best would be abolition of slavery -- the desire to free everyone else's slaves outweighs the desire to keep his own. Third would be continued slavery. Finally the outcome he likes least would be to free his own slaves and live in relative poverty in a slave owning country.

                                                  Perfectly clear. So why is it that my "explanation" of Drum is ugly and unclear while his essay was clear and brilliant?

                                                  Update: I think Tim Haab's post illustrates Robert's point. Individually, he has no incentive to pay for the externalities he imposes while driving an SUV. As he says,

                                                  That's why they're called externalities. Voluntarily internalizing my own externalities would ruin my faith in rationality.

                                                  But as I was writing this, I noticed Robert posted an update which says it better:

                                                  update II: Tim Haab (who is not a jerk) definitely gets Kevin Drum's point as he clearly understands the fundamental difference between a) advocating policy which causes people to internalize externalities one hand and b) listening to kids in the back seat squabble for hours. Also he doesn't own any slaves which puts him a big one up on Thomas Jefferson.

                                                  Further commentary here and right here.

                                                  Robert goes on to say:

                                                  An interesting example of rational co-operative behavior which is not in the public interest is link begging, where bloggers attempt to reward other bloggers for links by linking back. Not as repulsive as self linking, but the first sometimes enables a rational egoist to trick Google, while the second is just pathetic.

                                                    Posted by on Saturday, May 26, 2007 at 12:24 PM in Economics, Methodology | Permalink  TrackBack (2)  Comments (41)


                                                    Libertarian Paternalism: Tell Me about It

                                                    There is a new Wall Street Journal Econoblog on "libertarian paternalism." Here's the introduction to the discussion:

                                                    Econoblog: Nudging as Policy, by Mario Rizzo and Richard Thaler, WSJ [alternate open link]: Should Policies Nudge People To Make Certain Choices? Driven by research in behavioral economics that suggests people don't always act in their own best interests, some economists are arguing for new policies that would challenge traditional "hard" tools for changing behavior, such as sin taxes and outright bans.

                                                    Such policies would often rely on default options that nudge, steer and coax -- but don't force -- individuals to make certain choices. Is this sensible governance?

                                                    The Online Journal asked Mario Rizzo, director of New York University's Program on the Foundations of the Market Economy, and Richard Thaler, professor of economics and behavioral science at the University of Chicago's Graduate School of Business, to hash it out.

                                                    The fourth and last round of the Econoblog summarizes the discussion:

                                                    Richard Thaler writes: Let's recapitulate. People make mistakes, so sometimes they can be helped. It is possible to help without coercion. That is libertarian paternalism. The concept can be and is used in both the public and private sectors. For example, in London, pedestrians from abroad are reminded by signs on the pavement to "look right" because their instincts from back home are to expect traffic to approach from the left. No one is forced to look right, but fewer pedestrians are hit by trucks.

                                                    Another example comes from Sweden, which launched a partial privatization of their social security system in 2000. The plan was open to any fund, which meant that participants faced 456 options. There was also a very well-designed default fund -- using private managers selected by the government -- that offered global diversification at very low fees (16 basis points). By any standard, both ex ante and ex post, the participants who selected their own portfolio of funds did worse than those who took the default plan. The main mistake the government made in designing this plan was to discourage participants from choosing the default fund, perhaps thinking, as Mario does, that choosing for oneself is always the best approach. ...

                                                    Continue reading "Libertarian Paternalism: Tell Me about It" »

                                                      Posted by on Saturday, May 26, 2007 at 02:34 AM in Economics | Permalink  TrackBack (0)  Comments (21)


                                                      The Breakdown of the Postwar Social Contract

                                                      Here's a small part of a much longer essay from the New York Review of Books:

                                                      The Specter Haunting Your Office, by James Lardner, NY Review of Books, Volume 54, Number 10: [Review of The Disposable American: Layoffs and Their Consequences by Louis Uchitelle Vintage; The Great American Jobs Scam by Greg LeRoy Berrett-Koehler; The Battle for the Soul of Capitalism by John C. Bogle Yale University Press.]

                                                      ...From their different vantage points, Uchitelle, LeRoy, and Bogle are writing about the breakdown of what some have called the postwar social contract, and about the rise of a new "money power" more daunting, in some ways, than that of the late 1800s and early 1900s. To gain their political ends, the robber barons and monopolists of the Gilded Age were content with corrupting officials and buying elections. Their modern counterparts have taken things a big step further, erecting a loose network of think tanks, corporate spokespeople, and friendly press commentators to shape the way Americans think about the economy. Much as corporate marketing directs our aspirations disproportionately toward commercial goods and services, the new communications apparatus wants us to believe that our economic wellbeing depends almost entirely on the so-called free market—a euphemism for letting the private sector set its own rules. The success of this great effort can be measured in the remarkable fact that, despite the corporate scandals and the social damage that these authors explore; despite three decades of deregulation and privatization and tax-and-benefit-slashing with, as the clearest single result, the relentless rise of economic inequality to levels so extreme that since 2001 "the economy" has racked up five straight years of impressive growth without producing any measurable income gains for most Americans—even now, discussions of solutions or alternatives can be stopped almost dead in their tracks by mention of the word government.

                                                      The rules, procedures, and understandings of the postwar social contract were designed for a world in which practical forces kept businesses anchored in geographical place, reinforcing the sense of obligation that many corporate leaders felt toward workers and communities. That being said, those arrangements were spectacularly successful in creating a broad, accessible, and secure middle class, and in bringing unprecedented transparency and fairness to the hazardous relations between individuals (whether customers, workers, neighbors, or shareholders) and corporations.

                                                      Continue reading "The Breakdown of the Postwar Social Contract" »

                                                        Posted by on Saturday, May 26, 2007 at 02:25 AM in Economics, Social Insurance | Permalink  TrackBack (0)  Comments (21)


                                                        Getting There is *Not* Half the Fun

                                                        Tim Haab at Environmental Economics explains why he drives an SUV:

                                                        Evidence of what I am willing to pay for my sanity, by Tim Haab, Environmental Economics: I'm packing up my big honkin' SUV tomorrow with my oversized family of 5 and driving 280 miles (one-way) to Lake Cumberland, Kentucky to visit with friends from Atlanta--who will be driving their oversized family of 5, 330 miles (one-way) in their big honkin' SUV. Based on the paltry gas mileage we will get--about 18 mpg--I'm figuring our family will consume about 31 gallons of gas.

                                                        At $3.50 a gallon that's $109. If we could somehow double our fuel efficiency to 36 mpg and still fit the family--say by buying a Toyota Camry Hybrid--we would save $54 in fuel cost round trip*. For a 4.5 hour one way trip, we are paying an extra $6 per hour to drive the SUV.

                                                        So I ask myself, am I willing to pay $6 per hour to have my 3 kids separated by 2 feet each--two in the middle row, one in the back--rather than be touching each other the whole trip.

                                                        Ummm...can I get a big 'Hell Yeah'?

                                                        *For those of you wondering who will pay for the externalities I create, that's an easy one...YOU. That's why they're called externalities. Voluntarily internalizing my own externalities would ruin my faith in rationality and cause me to have to completely reinvent economics. I'm just too lazy for that right now. Yes, I'm a jerk.

                                                        Update: Even though Tim claims to be a "jerk," there is debate on this point. Here too.

                                                          Posted by on Saturday, May 26, 2007 at 12:15 AM in Economics, Environment | Permalink  TrackBack (0)  Comments (26)


                                                          Friday, May 25, 2007

                                                          Christopher Hayes: Who's Afraid of Democracy?

                                                          Christopher Hayes reviews Bryan Caplan's new book, The Myth of the Rational Voter [Update at the end]:

                                                          Who’s Afraid of Democracy?, by Christopher Hayes, In These Times: ...For Bryan Caplan, ... author of The Myth of the Rational Voter: Why Democracies Choose Bad Policies, the minimum wage is an iconic example of the economically backwards policies favored by the foolish masses. “In theory,” he writes, “democracy is a bulwark against socially harmful policies, but in practice it gives them safe harbor.” Examining this “paradox” takes up [most] of the book, but his explanation is pretty simple: Voters are crazy.

                                                          The Myth of the Rational Voter is best understood in the context of a long-standing academic debate over whether democracy works. It’s a question that has two ... sub-components: Do democracies produce optimal policies for its citizens? And do democracies produce policies that accurately reflect the will of the majority?

                                                          The most sanguine observers say “yes” on both counts. But given that surveys consistently show that voters are distressingly ignorant about both ... policy ... and politics ..., it’s a difficult case to make. Another strain of thought is the so-called Public Choice school, which answers “no” to both questions. Public Choice theorists tend, like Caplan, to be free market enthusiasts and argue that democracies inevitably lead to bloated bureaucracies, trade protectionism and inefficient subsidies. These sub-optimal economic policies occur not because of their widespread popularity, but rather because the state’s agenda is so easily manipulated by special interests...

                                                          Caplan disagrees: Democracy fails to produce good policies precisely because it reflects the will of the majority. ...

                                                          What the people want, according to Caplan, is economic bollocks. To establish this point, he devotes a chapter to the Survey of Americans and Economists on the Economy (SAEE). Conducted in 1996, the survey asked economists and members of the general public questions about the economy, and found a divergence of opinion on almost every principle of policy...

                                                          Caplan attributes this divergence to four basic biases of the unwashed masses—anti-market bias (a skepticism that the price mechanism works), anti-foreign bias, make-work bias (a desire to create jobs even if it’s inefficient) and pessimistic bias, the tendency to believe the economy’s getting worse instead of better. Imagine the worldview of Lou Dobbs, and that’s roughly the belief system Caplan thinks is typical. Because these biases make people feel good about themselves, people hold to them even in the face of countervailing evidence. Or, more precisely, they hold to them irrationally.

                                                          Continue reading "Christopher Hayes: Who's Afraid of Democracy?" »

                                                            Posted by on Friday, May 25, 2007 at 09:36 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (89)


                                                            Paul Krugman: Immigrants and Politics

                                                            Paul Krugman says that when it comes to immigration reform policy, "it’s the political economy, stupid." Immigration reform that increases the number of workers without a voice in the political process, as the current bill likely will, comes at too high a price:

                                                            Immigrants and Politics, by Paul Krugman, Commentary, NY Times: A piece of advice for progressives trying to figure out where they stand on immigration reform: it’s the political economy, stupid. Analyzing the direct economic gains and losses from proposed reform isn’t enough. You also have to think about how the reform would affect the future political environment.

                                                            To see what I mean ... let’s take a look back at America’s last era of mass immigration..., which ended with the imposition of severe immigration restrictions in the 1920s. ...

                                                            [T]hen as now there were some good reasons to be concerned about the effects of immigration.

                                                            There’s a highly technical controversy going on among economists about the effects of recent immigration on wages. However that dispute turns out, it’s clear that the earlier wave of immigration increased inequality and depressed the wages of the less skilled. For example, a recent study ... suggests that in 1913 the real wages of unskilled U.S. workers were around 10 percent lower than they would have been without mass immigration. But the straight economics was the least of it. Much more important was the way immigration diluted democracy.

                                                            In 1910, almost 14 percent of voting-age males ... were non-naturalized immigrants. (Women didn’t get the vote until 1920.) Add in the disenfranchised blacks of the Jim Crow South, and what you had in America was a sort of minor-key apartheid system, with about a quarter of the population — in general, the poorest and most in need... — denied any political voice.

                                                            That dilution of democracy helped prevent any effective response to the excesses and injustices of the Gilded Age, because those who might have demanded ... labor rights, progressive taxation and a basic social safety net didn’t have the right to vote. Conversely, the restrictions on immigration imposed in the 1920s had the unintended effect of paving the way for the New Deal ... by creating a fully enfranchised working class.

                                                            But now we’re living in the second Gilded Age. And as before, one of the things making antiworker, unequalizing policies politically possible is the fact that millions of the worst-paid workers ... can’t vote. What progressives should care about, above all, is that immigration reform stop our drift into a new system of de facto apartheid.

                                                            Now, the proposed immigration reform does the right thing in principle by creating a path to citizenship for those already here. We’re not going to expel 11 million illegal immigrants, so the only way to avoid having ... a permanent disenfranchised class is to bring them into the body politic. ...

                                                            But the bill creates a path to citizenship so torturous that most immigrants probably won’t even try... Meanwhile, the bill creates a guest worker program, which is exactly what we don’t want to do. Yes, it would raise the income of the guest workers themselves, and in narrow financial terms guest workers are a good deal for the host nation — because they don’t bring their families, they impose few costs on taxpayers. But it formally creates exactly the kind of apartheid system we want to avoid.

                                                            Progressive supporters of the proposed bill defend the guest worker program as a necessary evil, the price that must be paid for business support. Right now, however, the price looks too high and the reward too small: this bill could all too easily end up actually expanding the class of disenfranchised workers.

                                                            _________________________
                                                            Previous (5/21) column: Paul Krugman: Fear of Eating
                                                            Next (5/28) column: Paul Krugman: Trust and Betrayal

                                                              Posted by on Friday, May 25, 2007 at 03:15 AM in Economics, Immigration, Politics | Permalink  TrackBack (0)  Comments (24)


                                                              The Long-Term Costs of the War in Iraq

                                                              How much will the Iraq war cost us?:

                                                              Experts Calculate Billions in Long-term Costs of War, PBS [Real Audio - Download - Streaming Video]: Congress has approved about $450 billion to date for the Iraq and Afghanistan wars, but economists also have been tabulating the long-term costs such as veterans' care. Economics correspondent Paul Solman explores the broader costs of the war.

                                                              JIM LEHRER: Now, what the war in Iraq is costing. Democrats in Congress are still trying to pass a war funding bill the president will sign. That legislation will provide money for military operations, but those funds are only part of the larger price tag. The NewsHour's economics correspondent, Paul Solman, has our report.

                                                              PAUL SOLMAN [NewsHour Economics Correspondent]: The cost of the Iraq war, it's a far cry from the original estimates.

                                                              DONALD RUMSFELD [Former U.S. Secretary of Defense]: The Office of Management and Budget estimated it would be something under $50 billion.

                                                              GEORGE STEPHANOPOULOS [Host, "This Week"]: Outside estimates say up to $300 billion.

                                                              DONALD RUMSFELD: Baloney.

                                                              PAUL SOLMAN: The $50 billion estimate turns out to be a modest fraction of what the war has actually cost thus far, the out-of-pocket, mainly military costs.

                                                              GREG SPEETER [National Priorities Project]: We're averaging, over the period of the war, about $275 million a day.

                                                              PAUL SOLMAN: Greg Speeter runs the National Priorities Project and its costofwar.com Web site, which tracks the spending per second. At this point, says Speeter, the total is close to $450 billion.

                                                              GREG SPEETER: That gives you some indication of just how expensive this war is.

                                                              PAUL SOLMAN: But, no, it really doesn't, according to those who've looked at the numbers more broadly. As economist Linda Bilmes explains...

                                                              LINDA BILMES [Harvard University]: Even if we withdrew all of our troops from Iraq tomorrow, the war would still keep costing us money for many, many years to come, because there are several long-term costs which are not included in the running costs of the war.

                                                              PAUL SOLMAN: With Nobel laureate economist and former Bill Clinton adviser Joe Stiglitz, Bilmes did a cost study that's received a lot of attention for its bottom line.

                                                              LINDA BILMES: The total cost of the war would be between $1 trillion and $2 trillion.

                                                              PAUL SOLMAN: But how do you get from $450 billion to as much as $2 trillion? Let's take the added costs one at a time.

                                                              First of all, says Professor Stiglitz, during any war...

                                                              JOSEPH STIGLITZ [Columbia University]: ... you use up equipment. Equipment gets depreciated, deteriorates, and much of that doesn't get replaced until after the war is over.

                                                              LINDA BILMES: There's also the cost of what's called resetting the military, retraining the troops and bringing the U.S. military force back up to its pre-Iraq strength.

                                                              PAUL SOLMAN: Plus, says Stiglitz...

                                                              Continue reading "The Long-Term Costs of the War in Iraq" »

                                                                Posted by on Friday, May 25, 2007 at 03:06 AM in Economics, Iraq and Afghanistan | Permalink  TrackBack (1)  Comments (50)


                                                                Has the World Decoupled from the U.S. Business Cycle?

                                                                Can the rest of the world boom while the U.S. experiences a slowdown?

                                                                Is U.S. Ceding 'Master of the Universe' Status?:, by Caroline Baum, Commentary, Bloomberg: ...The notion of a global growth cycle, with countries taking their cues from the U.S., is being challenged as Asia's developing economies continue to boom amid a slowdown in the U.S.

                                                                In this new age of globalization, synchronicity is out, decoupling is in. Yes, China and India are growing in ways that may be independent of the business cycle. ... Still, it's much too early to conclude that the U.S. slowdown will be a non- event for the rest of the world.

                                                                ''The oldest rule of economic forecasting in the modern era still holds, even in the earliest years of the 21st century,'' says Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York. ''When America sneezes, the world catches a cold.''

                                                                Weinberg reviewed 20 years of year-over-year and annual gross domestic product data for the U.S. and the six developed countries (Japan, Canada, Germany, France, the U.K., and Australia) he tracks. He found that the six economies' growth rates moved in the same direction as the U.S. two-thirds of the time. ...

                                                                The reason for believing synchronicity is still the operative model is ''the United States is still the largest importer of goods and services in the world,'' he says. Europe's ''gross imports may be larger,'' but much of that trade is with member countries. ...

                                                                It's somewhat surprising that the relationship between U.S. and foreign growth is contemporaneous, not lagged. After all, today's orders for foreign goods are clocked as imports (in the trade data) when they arrive in the U.S. a couple of months hence.

                                                                Weinberg says intuition implies a lagged relationship, but ''empirical evidence suggests there is not. The response of imports to demand is quick.''

                                                                Not everyone subscribes to the old U.S. cold-contagion model. Some economists argue the world has become increasingly immune to American viruses.

                                                                ''The evidence is overwhelming that the global economy has decoupled from the U.S.,'' says Alex Patelis, head of international economics at Merrill Lynch & Co. in London. ''Domestic demand growth elsewhere has accelerated, overcompensating for the negative U.S. impulse.'' ...

                                                                ''Global capital spending has increased faster than real consumer spending and overall GDP the past four years,'' says Joe Carson, director of global economic research at AllianceBernstein.

                                                                From 2003 through 2006, capital spending growth averaged 16.5 percent annually in emerging countries compared with 3.5 percent in the developed world, Carson says. Much of the increase was in ''infrastructure -- airports, ports, transportation systems, energy generation and other types of commercial and service-related projects'' -- which has different implications for global growth than investment to add capacity for consumer goods output, he says. ...

                                                                Global growth seems to be ''smoothing the U.S. business cycle'' and cushioning the profit cycle, with roughly 35 percent of first-quarter profits coming from international operations, Carson says.

                                                                So while U.S. imports (some other country's exports) have slowed, strong commodity prices suggest ''the world is holding up OK,'' Carson says. ...

                                                                In the study that found "the six economies' growth rates moved in the same direction as the U.S. two-thirds of the time," I don't see how causality from the U.S. to other countries was established if the relationship is contemporaneous as claimed. If the study is as simple as described - simply looking at whether growth rates move in the same direction or not without any controls or any attempts to identify structural shocks and causal relationships, it's hard to put much faith in the estimates. Because business cycles are so infrequent lately, and because there have been so many changes in the global economy in recent decades, this is a hard question to answer with any certainty.

                                                                  Posted by on Friday, May 25, 2007 at 02:43 AM in Economics | Permalink  TrackBack (1)  Comments (7)


                                                                  Frederic Mishkin: Estimating Potential Output

                                                                  This is a nice summary of how economists measure the economy's maximum sustainable level of output.

                                                                  The term "maximum sustainable level of output" is a better description of what we are trying to measure than the more common terms such "potential output" or "full employment." Let me try to illustrate with an example since it is sometimes confusing when economists talk about overheated economies producing more than their potential. How can an economy produce more than its maximum output level? For a graduate student, over the course of an entire quarter, there is a certain maximum sustainable level of effort. It might be, say, 14 hours of class and study per day on average. That is "full employment" or "potential output." But in the short-run it's possible to exceed  that level of output. Right before a test students can work 20+ hours a day, more than full employment, but such a level of output is not sustainable over the longer run. People need a minimum level of sleep, time to eat, etc. So, potential output for students is the level of effort that is sustainable day after day after day, not the most that can be accomplished in a given 24 hour time period.

                                                                  A business can do the same thing. If it has 10% of its trucks off the road for maintenance at any given time (i.e. "sleeping"), it can keep those on the road when demand is really high to deliver a little extra, keep workers overtime, run the production lines 24 hours a day without maintenance, etc. But that kind of effort, though possible in short bursts, is not sustainable over the longer haul (with the existing level of resources). Trucks and production lines have to be taken down for maintenance every so often or there will be big problems down the road, people won't work long days continuously, etc. Here, too, when we talk about potential output we don't mean how much the economy can produce in the short-run when it's overheated (sort of like just before an exam), but rather what it can do on a sustainable basis over time with a given quantity of inputs.

                                                                  More formally, then, we can define potential output as the level of output the economy would produce if labor and all other resources are fully and efficiently employed, where full employment means the maximum sustainable level of activity.

                                                                  But how do we actually measure potential output? Here's Frederic Mishkin with the details on three different approaches. It's not easy:

                                                                  Estimating Potential Output, by Governor Frederic S. Mishkin, Federal Reserve: This conference focuses on measurement issues, and in my remarks I want to focus on one of the most important measurement issues that we at the Federal Reserve and other central banks face:  How do we determine whether the economy is operating above or below its maximum sustainable level?  That is, how do we estimate the path of potential output?1

                                                                  The Federal Reserve operates under a dual mandate to achieve both price stability and maximum sustainable employment.  In that context, it is natural to think of potential output as the level of output that is consistent with the maximum sustainable level of employment:  That is, it is the level of output at which demand and supply in the aggregate economy are balanced so that, all else being equal, inflation tends to gravitate to its long-run expected value.

                                                                  The combination of the dual mandate and this definition suggests two reasons that estimating the path of potential output is so central to the conduct of monetary policy.  First, to evaluate whether our policies will help achieve the maximum sustainable employment objective of the dual mandate, we need know the level of future output that would be consistent with that objective.  Second, the level of output relative to potential output, which is referred to as the output gap, plays an important role in the inflation process.  When the actual level of output is above potential output--so that the output gap is positive--labor and product markets are excessively tight; then, if things such as expected inflation and temporary supply factors are held constant, inflation will tend to rise.  Conversely, when the output gap is negative and labor and product markets are slack, inflation will tend to fall.  Estimates of the future path of potential output are therefore needed to assess whether the projected path of output that is implied by current monetary policy will lead inflation to move in a direction that is consistent with price stability.

                                                                  Because estimates of potential output are an important part of central bankers' toolkits, the Federal Reserve and other central banks devote considerable resources to getting the best measures of potential output possible.  In this talk, I want to explore something that Bismarck warned us we shouldn't want to examine:  "what goes into the sausage"--or in this case, what goes into central bankers' thinking about how to estimate potential output.

                                                                  Broadly speaking, there are three basic approaches to estimating potential output: (1) aggregate approaches; (2) production function, or growth-accounting, approaches; and (3) the newest kid on the block, dynamic stochastic general equilibrium (DSGE) approaches.  Let's look at each of these in turn, with the major focus on the production function approach, one to which we at the Federal Reserve currently pay a lot of attention.

                                                                  Continue reading "Frederic Mishkin: Estimating Potential Output" »

                                                                    Posted by on Friday, May 25, 2007 at 12:15 AM in Economics, Methodology, Monetary Policy | Permalink  TrackBack (0)  Comments (11)


                                                                    Martin Feldstein: Why is the Dollar so High?

                                                                    In this paper, Martin Feldstein gives and explanation for why the dollar is so high:

                                                                    Why is the Dollar so High?, by Martin Feldstein, NBER WP 13114: Abstract The level of the dollar is part of a complex general equilibrium system. Nevertheless, it is helpful to recognize that the high level of the dollar is necessary to generate the current account deficit equal to the difference between national saving and investment. Understanding the high level of the dollar therefore requires understanding the reasons for the low level of national saving in the United States. Reducing the large current account deficit will require both a higher rate of national saving and a more competitive dollar. Although the necessary decline in the real value of the dollar can in theory occur without a decline in the dollar's nominal value, the implied magnitude of the fall in the domestic price level is implausible. A decline of the real value of the dollar that is large enough to reduce the current account deficit significantly requires a significant decline in the nominal value of the dollar.

                                                                    Link to paper

                                                                      Posted by on Friday, May 25, 2007 at 12:06 AM in Academic Papers, Economics, Financial System | Permalink  TrackBack (0)  Comments (12)


                                                                      Thursday, May 24, 2007

                                                                      Jeffrey Sachs: China's Lessons for the World Bank

                                                                      Jeff Sachs says the World Bank needs to learn the lessons provided by China's approach to economic development:

                                                                      China's lessons for the World Bank, by Jeffrey Sachs, Project Syndicate: The China Daily recently ran a front-page story recounting how Paul Wolfowitz used threats and vulgarities to pressure senior World Bank staff. ... At the same time, while the Wolfowitz scandal unfolded, China was playing host to the Africa Development Bank (ADB)... This is a vivid metaphor for today's world: while the World Bank is caught up in corruption and controversy, China skilfully raises its geopolitical profile in the developing world.

                                                                      China's rising power is, of course, based heavily on its remarkable economic success. ... I had the chance to participate in high-level meetings between Chinese and African officials at the ADB meetings. The advice that the African leaders received from their Chinese counterparts was sound, and much more practical than what they typically get from the World Bank.

                                                                      Chinese officials stressed the crucial role of public investments, especially in agriculture and infrastructure, to lay the basis for private-sector-led growth. In a hungry and poor rural economy, as China was in the 1970s and as most of Africa is today, a key starting point is to raise farm productivity. Peasant farmers need the benefits of fertiliser, irrigation, and high-yield seeds, all of which were a core part of China's economic takeoff.

                                                                      Two other critical investments are also needed: roads and electricity... Farmers might be able to increase their output, but it won't be able to reach the cities, and the cities won't be able to provide the countryside with inputs. The officials stressed how the government has taken pains to ensure that the power grid and transportation network reaches every village in China.

                                                                      Of course, the African leaders were most appreciative of the next message: China is prepared to help Africa in substantial ways in agriculture, roads, power, health, and education. And the African leaders already know that this is not an empty boast. All over Africa, China is financing and constructing basic infrastructure. During the meeting, the Chinese leaders emphasised their readiness to support agricultural research as well. They described new high-yield rice varieties, which they are prepared to share...

                                                                      All of this illustrates what is wrong with the World Bank, even aside from Wolfowitz's failed leadership. Unlike the Chinese, the bank has too often forgotten the most basic lessons of development, preferring to lecture the poor and force them to privatise basic infrastructure, rather than to help the poor to invest in infrastructure and other crucial sectors.

                                                                      The bank's failures began in the early 1980s, when, under the ideological sway of President Ronald Reagan and prime minister Margaret Thatcher, it tried to get Africa and other poor regions to cut back or close down government investments and services. For 25 years, the bank tried to get governments out of agriculture, leaving impoverished peasants to fend for themselves. The result has been a disaster in Africa... The bank also pushed for privatisation of national health systems, water utilities, and road and power networks, and grossly underfinanced these critical sectors.

                                                                      This extreme free-market ideology, also called "structural adjustment", went against the practical lessons of development successes in China and the rest of Asia. Practical development strategy recognises that public investments - in agriculture, health, education, and infrastructure - are necessary complements to private investments. The World Bank has instead wrongly seen such vital public investments as an enemy of private-sector development.

                                                                      Whenever the bank's extreme free-market ideology failed, it has blamed the poor for corruption, mismanagement, or lack of initiative. This was Wolfowitz's approach, too. Instead of focusing the bank's attention on helping the poorest countries to improve their infrastructure, he launched a crusade against corruption. Ironically, of course, his stance became untenable when his own misdeeds came to light. ...

                                                                      The good news is that African governments are getting the message on how to spur economic growth, and are also getting crucial help from China and other partners that are less wedded to extreme free-market ideology than the World Bank. ...

                                                                      The Wolfowitz debacle should be a wake-up call to the World Bank: it must no longer be controlled by ideology. If that happens, the bank can still do justice to the bold vision of a world of shared prosperity that prompted its creation after the second world war.

                                                                      Update: Here are two related discussion from Dani Rodrik:

                                                                      Can anyone be in favor of corruption?, by Dani Rodrik: I don't know, but I certainly am not. However, this is different from believing that corruption is the most serious problem facing developing countries. Many development newbies suffer from the corruption obsession, the view that anti-corruption policies ("governance reform") is the most direct route to achieving growth and equity. Wolfowitz  exhibited severe symptoms of this, and much of the commentary around his departure has been marked by a similar misunderstanding. ...

                                                                      I am not sure that it is good policy for the Bank to prioritize corruption--as a rule--over other problems that developing nations face. As I have stressed in my work with Ricardo Hausmann and Andres Velasco, the binding constraint on growth differs from country to country. In some cases (Zimbabwe?), governance problems are indeed the most serious binding constraint. In many others, the problems lie elsewhere--in low savings, poorly functioning financial markets, low entrepreneurship, poor infrastructure, and myriad other syndromes of underdevelopment.

                                                                      Let me make a bolder claim.  A development strategy that focused on anti-corruption in China would not have produced anything like the growth rate that this country has experienced since 1978, nor would it have resulted in 400 million plus fewer people in extreme poverty.   

                                                                      More on corruption in China, by Dani Rodrik: I mentioned in a recent post that a single-minded pursuit of anti-corruption would have probably derailed high growth in China. Bert Hofman, who is the lead economist of the World Bank in Beijing, sent me the following comment, which I thought would be useful to share with everyone.

                                                                      Sure enough, an anti-corruption strategy is not a development strategy, but not having the first may derail the latter. China is actually a case where rather stern action against corruption kept rent seeking in check, rents that were abound in a gradually reforming former centrally planned state.China's central party disciplinary inspection committee and State procoratorate are credible threats against corruption: last year, according to the Procurator Office, a total of more than 40,000 government employees (0.1 percent of total) were investigated for corruption, of which 29,000 were brought to court. Perhaps as important as the control of rent seeking has been the dissipation of some of the rents through decentralization, which gave investors at least some option to avoid predatory governments. Some of the rents that did accrue were officially condoned--e.g. by means of extrabudgetary funds, which depended largely on the entrepreneurial success of local  governments, and which were at least in part used for personnel emoluments.

                                                                        Posted by on Thursday, May 24, 2007 at 12:24 PM in China, Economics | Permalink  TrackBack (0)  Comments (32)


                                                                        The Pluralistically Ignorant Silent Majority?

                                                                        I'm pretty sure I'll be the only one who doesn't agree with this:

                                                                        A New Silent Majority, by Mark Buchanan, Commentary, NY Times: ...[W]hen the speaker of the House, the Democrat Nancy Pelosi, visited Syria and met with President Bashar al-Assad, a poll had 64 percent of Americans in favor of negotiations with the Syrians. Yet this didn’t stop an outpouring of media alarm.

                                                                        A number of CNN broadcasts  ... show[ed] Pelosi with a head scarf beside the title “Talking with Terrorists?”... The conventional wisdom on the principal television talk shows was that Pelosi had “messed up on this one” ... and that she and the Democrats would pay dearly for it.

                                                                        So it must have been a great surprise when Pelosi’s approval ratings stayed basically the same after her visit, or actually went up a little.

                                                                        A common explanation of this tendency toward [media] distortion is that the beltway media has attended a few too many White House Correspondents’ Dinners and so cannot possibly cover the administration with anything approaching objectivity. No doubt the Republicans’ notoriously well-organized efforts in casting the media as having a “liberal bias” also have their intended effect in suppressing criticism.

                                                                        But I wonder whether this media distortion also persists because ... many Americans think that what they see in the major political media reflects what most other Americans really think – when actually it often doesn’t.

                                                                        Psychologists coined the term “pluralistic ignorance” in the 1930s to refer to this type of misperception... A study back then had surprisingly found that most kids in an all-white fraternity were privately in favor of admitting black members, though most assumed, wrongly, that their personal views were greatly in the minority. Natural temerity made each individual assume that he was the lone oddball. ...

                                                                        In pluralistic ignorance, as researchers described it in the 1970s, “moral principles with relatively little popular support may exert considerable influence because they are mistakenly thought to represent the views of the majority, while normative imperatives actually favored by the majority may carry less weight because they are erroneously attributed to a minority.”

                                                                        What is especially disturbing about the process is that it lends itself to control by the noisiest and most visible. ... Their strong vocalization can produce “false consensus” ... as others, who think they’re part of the minority, keep quiet. As a consequence, the extremists gain influence out of all proportion to their numbers, while the views of the silent majority end up being suppressed...

                                                                        Over the past couple months, Glenn Greenwald at Salon.com has done a superb job of documenting what certainly seems like it might be a case of pluralistic ignorance among the major political media... Routinely, it seems, views that get expressed and presented as majority views aren’t really that at all. ...

                                                                        As most people get their news from the major outlets, these distortions – however they occur, whether intentionally or through some more innocuous process of filtering – almost certainly translate into a strongly distorted image in peoples’ minds of what most people across the country think. They contribute to making mainstream Americans feel as if they’re probably not mainstream, which in turn may make them less likely to voice their opinions.

                                                                        One of the most common examples of pluralistic ignorance, of course, takes place in the classroom, where a teacher has just finished a dull and completely incomprehensible lecture, and asks if there are any questions. No hands go up, as everyone feels like the lone fool, even though no student actually understood a single word. It takes guts, of course, to admit total ignorance when you might just be the only one.

                                                                        Last year, author Kristina Borjesson interviewed 21 prominent journalists for her book “Feet to the Fire,” about the run-up to the Iraq War. Her most notable impression was this:

                                                                        The thing that I found really profound was that there really was no consensus among this nation’s top messengers about why we went to war..., and if they weren’t clear about it, that means the public wasn’t necessarily clear about the real reasons. And I still don’t think the American people are clear about it.

                                                                        Yet in the classroom of our democracy, at least for many in the media, it still seems impolitic – or at least a little too risky – to raise one’s hand.

                                                                        He gives a lot of examples of "pluralistic ignorance" in the longer article and in the process seems to give the media a break - it's not a failure to do their job, it's a well-known psychological misperception problem that strikes us all, including reporters ("what certainly seems like it might be a case of pluralistic ignorance among the major political media").

                                                                        I'm not so sure about that. The public has surely been misled at times and "pluralistic ignorance" might explain some public misperceptions. But many of the examples of media distortions given in the article could have been avoided with more thorough reporting. Knowing what the polls actually say before reporting on them is not too much to ask. To me, "pluralistic ignorance" of the media doesn't quite cover this "typical" case of misreporting poll results:

                                                                        In a typical example in March, NBC’s Andrea Mitchell reported that most Americans wanted to pardon Scooter Libby, saying that the polling “indicates that most people think, in fact, that he should be pardoned, Scooter Libby should be pardoned.” In fact, polls showed that only 18 percent then favored a pardon.

                                                                          Posted by on Thursday, May 24, 2007 at 12:24 AM in Economics, Press | Permalink  TrackBack (0)  Comments (35)


                                                                          The Oracle's Apprentice

                                                                          How not to pick an investment fund manager:

                                                                          ‘The Apprentice: Omaha Edition,’ Starring Warren Buffett, by Austan Goolsbee, Commentary, NY Times: A number of years ago, in a moment of professional weakness, I bought exactly one share of Warren Buffett’s Berkshire Hathaway....

                                                                          For a brief moment, I thought his track record might disprove the economist’s mantra that no one can beat the market in the long term so it’s better to just invest in index funds like one that matches the S.& P. 500.

                                                                          The mantra comes from the rather compelling evidence that actively managed mutual funds cost too much and don’t always act in the shareholders’ interests. They churn stocks, for example — raising fees while also generating capital gains taxes for the investors. Their high fees sharply cut into investment returns in the long run. ...

                                                                          Berkshire Hathaway seemed like a mutual fund but without the bad incentives. Mr. Buffett doesn’t care about churning stocks to get bigger fees. He doesn’t do things at the expense of his shareholders. He is the Oracle of Omaha, for Pete’s sake. If anyone can beat the market, it’s him.

                                                                          Well, I still own that share, but it hasn’t worked out as well as I had hoped. My share has underperformed the S.& P. 500... My colleagues have mocked me incessantly, but I have remained a closet romantic, hoping that Mr. Buffett would renew his secret formula and prove my colleagues wrong.

                                                                          Then I found out that the 76-year-old Mr. Buffett had asked for applications from people wanting to become his successor. ...[H]e announced his ... search strategy: rather than decide from old-style résumés and interviews, he planned to choose three or four top candidates and then give each $5 billion or so to manage and see how they do. The winner gets the job.

                                                                          When I heard about this, the romance died. For all of Mr. Buffett’s reputation as the ultimate nonmutual fund, he may have just fallen into one of the biggest mutual fund traps of all — forgetting how incentives affect fund managers’ behavior. ...

                                                                          Glenn Ellison of the Massachusetts Institute of Technology and Judith Chevalier of Yale have shown how important incentives are. In their classic paper “Risk Taking by Mutual Funds as a Response to Incentives,” for example, they showed that investors ... chase winners ... despite the evidence indicating that mutual funds that win in one year do not necessarily perform better in subsequent years. Funds with the highest annual returns get a huge inflow of money compared with funds that did almost as well but were not at the very top.

                                                                          And since the amount of money a mutual fund makes depends on fees, not on the actual performance..., this gives the fund managers in the last quarter of the year some rather perverse incentives to take risks with the current investors’ money to try to influence the reported end-of-year return.

                                                                          In a fund doing well but not stellar in the first three quarters of the year, the manager has a clear incentive to take big risks. If the risks pan out, the payoff in the last quarter can raise the fund’s return enough to get it into a top 10 list, say, and attract a huge number of new investors. If the risk doesn’t pay off, the return will be lower but the fees won’t be too much lower than they were before.

                                                                          The study showed that managers responded rather directly to these incentives. The managers heading toward the top of the ranking increased their risk-taking significantly in the last quarter of the year whereas those in the middle played it extra safe.

                                                                          So think about what incentives you create by handing four people $5 billion and telling them that whoever has done best in two years will get the most prized job in the investment world.

                                                                          First place means a huge prize and second place means the same payoff as coming in last. Mr. Buffett has created an astounding incentive for managers to take risks, make a splash or otherwise make it to No. 1.

                                                                          Ms. Chevalier, in an interview, said she found the approach surprising. “The shorter the evaluation period, the worse it is,” she said. “But no matter what, it’s still pretty bad. “It doesn’t sound like a good hiring strategy,” she continued, “It sounds more like an episode of ‘The Apprentice.’ ”

                                                                          On the show, Donald Trump would fire someone from the team that earned less money, whether $1 less or $1 million less. That gave the contestants an incentive to do crazy things for the camera. But it’s no way to pick an investment manager. ...

                                                                            Posted by on Thursday, May 24, 2007 at 12:15 AM Permalink  TrackBack (0)  Comments (19)


                                                                            "The Importance of Humility in Foreign Affairs"

                                                                            Tim Adams "is more convinced than ever of the virtues of multilateral institutions -- the IMF, the World Bank and the like":

                                                                            A Bush Loyalist Gently States His Case to Neocons, by David Wessel, WSJ: When Timothy D. Adams, ... who spent a decade working for the current President Bush and his father, took the podium at a ceremony on his last day as the Treasury's top international official, he chose to speak about the importance of humility in foreign affairs.

                                                                            Humility. It isn't a word often used to describe President Bush's approach to the rest of the world... But Republicans skeptical of Mr. Bush's approach are emerging... Republican realists, who favor a more pragmatic, less ideological approach than the neoconservatives led by Vice President Dick Cheney, are ascendant. ...

                                                                            Mr. Adams ... visited about 55 countries in the past few years on behalf of the U.S. government. And that taught him something. "People envy us. They are in awe of us," he says in an interview. "But they're also anxious about us. They fear us. And those are a volatile combination of emotions that can undermine what we seek to do."

                                                                            Tough rhetoric, finger-wagging and lecturing isn't achieving American aims, he says. "In many places, they've stopped listening because we're so predictable in what we're going to say."

                                                                            The alternative? "We have to walk more gently, and we have to speak more gently," he says. That takes more time, he acknowledges, but it is more likely to succeed.

                                                                            Mr. Adams says he is more convinced than ever of the virtues of multilateral institutions -- the IMF, the World Bank and the like -- despite their obvious flaws. "We need to live by the rules that we want others to live by," he says. "Hypocrisy is an easy trap to fall into." ...

                                                                            Today, Mr. Adams ... can quote from memory the words Mr. Bush used in an October 2000 presidential debate with Al Gore: "If we're an arrogant nation, they'll resent us. If we're a humble nation, but strong, they'll welcome us."

                                                                            Mr. Adams, who remains a Bush loyalist, ducks a question about Iraq... But ask him what he is looking for in the next president, and this is what he says: "I'm looking for a candidate who wants to engage the world, who has spent time in the world, who understands we can't act alone. "We need to work in concert with others," he says.

                                                                            The U.S. confrontation with much of the rest of the globe over World Bank President Paul Wolfowitz ... suggests the Bush administration isn't yet a convert to Mr. Adams's approach.

                                                                            Still, there are signs, a few, that Mr. Bush is backing away from the tough-guy, go-it-alone attitude that has characterized his administration so far -- his deals with Democrats on immigration and trade, his reliance on the United Nations to restrain Iran's nuclear programs, his dependence (almost to a fault) on the six-party talks to pressure North Korea to curtail its nuclear programs, and his backing for Treasury Secretary Henry Paulson's slow romancing of the Chinese.

                                                                            Mr. Adams approves.

                                                                            Another "sign":

                                                                            Wolfowitz Successor List Emerges, by Greg Hitt, WSJ: The White House is starting to draw up a list of potential nominees to lead the World Bank, and former U.S. Senate Majority Leader Bill Frist ... is getting especially close scrutiny for the job. ...

                                                                            Despite calls from critics to consider a more wide-ranging set of candidates to succeed Paul Wolfowitz as president of the global antipoverty institution, Mr. Bush appears intent on following tradition by nominating an American. ...

                                                                            Bill Frist would be near the bottom of my list. I don't see how he would be much of an improvement over Wolfowitz. [I should note that Reuters has other favorites, U.S. Trade Representative  Robert Zoellick, and U.S. Deputy Treasury Secretary Robert  Kimmitt.]

                                                                              Posted by on Thursday, May 24, 2007 at 12:12 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (19)


                                                                              Risk in the Real Estate Securities Market

                                                                              I think it's been a little over 20 years since I last talked to Nancy. I wish she had better news:

                                                                              A House of Cards: Prof. Nancy Wallace Warns of Risk in Real Estate Securities: Earlier this year a flurry of bad news in the subprime mortgage market spooked Wall Street and generated more debate about the volatility of the residential real estate market. But the rapid meltdown in the subprime mortgage market was not as surprising to Haas School Professor Nancy Wallace, whose research has raised serious concerns about risk models widely used in the residential mortgage industry. Now Wallace predicts that limitations with risk-management methods in the securitized commercial mortgage market will lead to turmoil in that corner of real estate.

                                                                              "This is a wake-up call," Wallace says of the subprime mortgage collapse. "Banks became overly sanguine about the risks of these mortgages based on short-term performance measures without appropriate controls for the longer-run cycles and price volatility of real estate markets."

                                                                              Wallace, a professor at the Haas School since 1986 and chair of the Real Estate Group, has spent 18 years studying real estate price dynamics. In the past 12 years, she has expanded her research into options markets, particularly mortgage- and asset-backed securities. She has recently found that Wall Street banks and bond-rating agencies underestimate the risk of many of these new securities.

                                                                              In her latest research paper, Wallace examined the $478 billion commercial mortgage-backed security market, which has grown an average 18% per year since 1997. Mortgage-backed securities are bond-like assets that are created by bundling residential or commercial loans and selling them on the secondary market.

                                                                              Building A New Model

                                                                              Working with Haas Associate Professor Richard Stanton and Rice University Assistant Professor Christopher Downing, Wallace developed a new way to calculate the implied volatility of the return on properties underlying commercial mortgage-backed securities. The trio was the first to provide an empirical test of such a model, using a sample of 14,000 properties in 206 deals between 1996 and 2005. They found that the return volatilities by property types are substantially larger than those calculated by either rating agencies or investment banks.

                                                                              "Our estimates suggest that some investment-grade (as opposed to speculative) bonds in commercial mortgage-backed securities are likely to be at greater risk of default than current ratings suggest," Wallace says. "We are concerned that defaults will be higher than expected if there are even relatively modest commercial property market corrections."

                                                                              Wallace believes the models used by banks, Wall Street, and bond-rating agencies to estimate default risk and to price mortgage-backed bonds rely too heavily on aggregate indexes based on short-term performance without accounting for long-run real estate cycles.

                                                                              "The banks and rating agencies have been lulled into a sense of complacency about how volatile real estate returns are," she says.

                                                                              Nailing Down Mortgage Risk

                                                                              Wallace proved prescient in making a similar argument about the residential real estate market more than a year before defaults on the riskiest home loans soared to a four-year high in March. Wallace, Stanton, and Downing showed as early as 2005 that banks were incorrectly estimating default risk and prepayment in the residential market because their commonly used models did not properly account for the important role of housing price dynamics on borrower decisions.

                                                                              In another recent study, Wallace, Downing and Haas School Professor Dwight Jaffee were the first to document that banks were selecting the riskiest pools of home mortgages – the lemons – to sell into the securitized bond market. They found that those pools were more likely to contain mortgages in which borrowers prepaid or defaulted on their loans. This paper has drawn intense scrutiny from Freddie Mac and has helped to pressure the quasi-governmental entity into disclosing more information about underlying mortgages.

                                                                              Although loan cherry-picking by banks and Freddie Mac may sound like a bad practice, sound economics suggests that it increases liquidity to banks for lower quality loans. The transfer of termination risks into a variety of bonds allows a broad spectrum of suitable investors to participate in this market, Wallace explains.

                                                                              “It means that the market has innovated and created new capital market structures that really do solve a significant problem and provide much needed liquidity to lower-valued mortgage assets,” Wallace says. The challenge, as Wallace has shown, is to provide accurate and transparent models that investors can use to price and correctly calculate their true risk exposure.

                                                                                Posted by on Thursday, May 24, 2007 at 12:06 AM in Economics, Financial System, Housing | Permalink  TrackBack (0)  Comments (6)


                                                                                Wednesday, May 23, 2007

                                                                                Have You Hugged Your McJob today?

                                                                                Skip college and work at McDonald's if you want to get ahead:

                                                                                Management Professor Says McDonald's Commercial Is on Track, by Jacqueline Ghosen: McDonald's new advertising campaign to promote high-level career opportunities within the company is a great way to fight the connotation of dead-end drudgery and low wages that comes with "McJobs," according to Jerry M. Newman ... in the University at Buffalo School of Management.

                                                                                Having worked undercover at seven fast-food restaurants across the United States, including McDonald's, Burger King and Wendy's, Newman, author of "My Secret Life on the McJob," says that McDonald's has the right idea in its newest television commercial.

                                                                                The spot features Karen King, president of McDonald's USA East Division, extolling the virtues of the high schooler who gets a job at McDonald's, working hard and taking advantage of opportunities. Through a lightning-fast series of flashbacks, it is revealed that she is the "kid who worked at one McDonald's and now leads thousands."

                                                                                Newman believes that the best way to change the negative image of a "McJob" is by positively redefining the perception of the fast-food worker.

                                                                                "The skill sets that employees learn on the job will serve them well in the work force, whether they choose to move on to another industry or stay in fast food," says Newman.

                                                                                "A fast-food worker is able to handle a variety of demands and produce under pressure, a veritable Big Mac of reliability, integrity and workplace maturity," he adds.

                                                                                He points out the three top attributes of fast food workers that can redefine the McJob:

                                                                                • Reliability: Fast food doesn't tolerate workers who are late or absent. You learn this or you are gone.
                                                                                • Grace under Pressure: The daily lunch rush forces workers to learn that their limits are higher than they imagined. It's not called "fast food" for nothing. Workers also learn that it has to be done right the first time. Speed plus care equals high productivity.
                                                                                • Ability to Handle Constructive Criticism: Fast food workers are trained in environments where feedback is almost constant. They learn that feedback is a positive force necessary for growth; consequently they learn to not be defensive, but instead are open to receiving as well as giving constructive criticism.

                                                                                The managers are intolerant, you work your butt off while you are there for little compensation, and you should be prepared to be yelled at and cowed by the "feedback" that "is almost constant." Sounds great.

                                                                                  Posted by on Wednesday, May 23, 2007 at 03:06 PM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (28)


                                                                                  Borjas: Sondheim on Migration

                                                                                  George Borjas is puzzled by Puerto Rico's failure to behave according to economic theory:

                                                                                  Sondheim on Migration, by George Borjas: Ever since I was first exposed to the music from West Side Story as a teenager, some of Stephen Sondheim's lyrics stuck with me. They appear in the song America. In the movie version, Bernardo and Rita are arguing over the costs and benefits of migrating from Puerto Rico to New York.

                                                                                  BERNARDO: I think I'll go back to San Juan

                                                                                  ANITA: I know a boat you can get on

                                                                                  BERNARDO: Everyone there will give big cheer

                                                                                  ANITA: Everyone there will have moved here

                                                                                  Given the huge volume of migration from Puerto Rico to the United States in the 1950s, it is not surprising that Sondheim expected Puerto Rico to empty out. But the fact is that it didn't. And therein lies one of the great unsolved puzzles in the study of migration. There are no legal restrictions whatsoever that hamper the mobility of Puerto Ricans to the mainland--they are American citizens by birth--and transportation costs are low. ... Why hasn't Puerto Rico emptied out?

                                                                                  Between 30 to 40 percent of the Puerto Rican population chose to move out. But that means that about two-thirds did not. Why? If economic theory is right, it must be the case that there are huge costs associated with the migration. Since these costs are unlikely to be monetary in nature, they represent the fact that most people, if given the choice, would much rather stay where they are at. It is not hard to calculate the migration cost for the "marginal" migrant. And they are substantial: probably around $400,000 to $500,000. (...The half-million dollar range comes about if one assumes that a worker can, say, double his salary by migrating to the United States and the rate of discount is 5 percent...).

                                                                                  There's still another puzzle. There are also no restrictions that hamper the flow of capital between the two places. Yet despite all these unrestricted labor and capital flows, there is still a sizable income differential between the United States and Puerto Rico. By 2003, price-adjusted per-capita GDP in Puerto Rico was still only two-thirds that of the United States (according to the Penn World Table). Whatever happened to the factor price equalization theorem? If 60 years is not the "long run," maybe Keynes was right after all.

                                                                                  The fact that migration entails very high costs if an important--and often ignored--part of the economics of migration. The fact that wages don't equalize even when a "country" loses a large chunk of its population and there are unrestricted capital flows is both interesting and important. It should give some food for thought to those who view migration as a policy tool that can help alleviate many of the developing world's problems.

                                                                                  I'd be curious to know what stopped the inflow from Puerto Rico and how those factors might affect his and other estimates of migration from Mexico to the U.S. in the future. At what point would the flow from Mexico begin to ebb if the legal restrictions were removed and it was left to self-correct (that's a question, not a suggested policy)? What are the important factors determining the share that would leave Mexico permanently? Would it also be around one third? That would be around 36 million migrants, about triple the current level of illegal immigration.

                                                                                    Posted by on Wednesday, May 23, 2007 at 03:06 AM in Economics | Permalink  TrackBack (0)  Comments (36)


                                                                                    Efficiency versus Equity

                                                                                    Markets produce efficient outcomes when they work properly, but the outcome may not be equitable according to your or my sense of fairness.

                                                                                    During a long drive yesterday I started thinking about the goods and services where I would allow equity to override the market outcome, i.e. where I would allocate goods and services by some means other than the price allocation mechanism. These are the goods and services where it wouldn't be fair, in my view, to exclude someone just because their income is too low. It started when I passed Mount Shasta and thought about all the places that should never be closed to people just because they do not have sufficient means.

                                                                                    I should try to be clear about what I mean. I am not saying that everyone should have equal access to everything on this list, or that the price system shouldn't allocate goods when the price is not exclusionary. That is, to take one example, the price of water is low enough so that most people can afford it as part of their budgets (and we make public sources widely available), it doesn't bust the budget to buy water and the price system can be used to prevent wasteful usage. But if the price were so high that there were people who could not afford it at all or could not afford it without substantial sacrifice, then we would have to transfer money from the rich to the poor to make sure people had enough water to meet their basic needs. We do this now with energy - people who cannot afford to heat their houses in the winter are subsidized to ensure their basic energy needs are met. We don't think it's fair that someone should have to suffer the cold because they cannot afford to heat their house without sacrificing other critical needs.

                                                                                    Here's the list of goods and services I came up with where I would be willing to override the market outcome if it excludes people from participating, as much as I can remember from yesterday anyway:

                                                                                    Natural wonders, wilderness, the oceans, the mountains, etc.: We solve this through means such as national parks where, though there is a fee, it is usually low and allocation is done by lottery, by first-come, first-serve, etc. rather than through the price mechanism. I don't have a lot of complaints about this one, the the increasing move toward "pay to play" does raise equity concerns.

                                                                                    Information and education: This, of course, is the idea behind programs such as public education, Head-Start, public libraries and attempts to ensure access to the internet for all, even those who cannot afford computers. I think this is essential. My view is that if we overspend in these areas, so what? But not everyone agrees.

                                                                                    Health: Everyone should have access to health care. We don't do as well here as I'd like to see - it's inequitable as it stands.

                                                                                    Food and housing: These seem obvious and we recognize that people need to have food and shelter. But I think we could do a little better here too.

                                                                                    Garbage services, sewage services, phone service, etc.: Basic city services ought to be available to everyone. I doubt this is too controversial.

                                                                                    Travel: Price should never be a barrier for basic travel within cities and between cities. The basic means of travel - roads - should be available to everyone. I worry about the movement toward toll roads in this regard, but this turned out to be hard to think through and I don't have a good summary statement here. But as I was driving home from seeing my dad on his birthday, it just seemed like everyone ought to be able to do that. I'd make sure everyone could have driving lessons too. Schools used to do this, but I think that has changed. I don't know if driving lessons are now costly enough to be prohibitive for some, but if so, they shouldn't be.

                                                                                    Air and water: I talked about these a bit already, and these seem fairly obvious. But we should also be sure that income does not force people to endure pollution of air and water of differing degrees. That doesn't seem very equitable, though there is some evidence of this happening.

                                                                                    Sports: I don't know if all will agree, but I would make sure everyone had the opportunity to participate in sports. I think we do pretty well making sure that team sports are available to all. It's in the team's best interests to put the best possible team on the field, so steps are usually taken to make sure opportunity is extended to all. On individual sports, I'm not sure we do as well because there's less incentive to make the sports widely available. Tennis seems pretty available, but other individual sports don't seem as open to all (golf, e.g.). Still, overall, I think we do pretty well with equity here, even on individual sports.

                                                                                    Hunting and fishing: This might go under sports. In any case, if we are going to allow these activities, they ought to be available for all, particularly people who might actually benefit from the food it provides. I almost left it off - it doesn't seem that necessary today as it once was - but this is a traditional area for concerns of this type. Who had access to what mattered a lot at one time.

                                                                                    Art and books: Books were covered above under information, but I'm thinking more of fiction here. We have public libraries, public art museums, ballets do matinées for kids and also at very low prices for others. I realize some of this will be in private hands, but our culture should be available to everyone.

                                                                                    Music lessons: Maybe this should come under art and books, but here I have creation of art rather than consumption of art in mind. Every kid should be able to play a musical instrument, sing, etc., and have instruction. I'm not sure where to draw the line, but it would be okay with me if everyone had the chance to learn to play, say, the piano and I'm not sure they do. Schools used to do a good job with this, but it seems less so now and we could do better. I am the worst artist in the world, or nearly so, so I tend to forget about other kinds of art. I don't even know if people need art lessons in the same way they need music lessons, but if they do, I'd include those here too. Dance comes to mind as well.

                                                                                    This was a pretty casual exercise, so what did I forget or get wrong? Where and how would you draw the lines?

                                                                                    From Chris in comments:

                                                                                    Add security (you shouldn't have to be rich to be safe from crime).

                                                                                    And from Robinia:

                                                                                    I'm not that attached to the idea myself, but, over centuries, access to a decent burial has been a real issue for folks, and sometimes unaffordable.  I'd like to see a cultural shift such that the permanent use of land resources to house the dead is no longer seen as a basic human need, but, until then, it remains something that should not be denied based on inability to pay.  I think this was actually one of the first societally-ensured items (indigent burial grounds).

                                                                                      Posted by on Wednesday, May 23, 2007 at 02:43 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (30)


                                                                                      Are Hedge Funds Worth It?

                                                                                      Are hedge funds a good deal for investors?:

                                                                                      Worth a Lot, but Are Hedge Funds Worth It?, by David Leonhardt, NY Times: ...Institutional Investor’s Alpha magazine released its annual list of the highest paid hedge fund managers... James Simons, ... who was at the top of the list, earned $1.7 billion.... Down at No. 3 on the list, Edward S. Lampert of Greenwich, Conn., the investor who owns a large chunk of Sears, made $1.3 billion...

                                                                                      Today, Alpha magazine will release another big list, and this one offers a chance to answer another, arguably more important, question: Are these billionaire hedge fund managers really worth it?

                                                                                      The reason hedge funds are a license to print money is their fee structure. A typical fund charges a 2 percent management fee, which means that it keeps 2 cents of every dollar that it manages, regardless of performance. Mutual funds, on average, charge about 1 percent.

                                                                                      On top of the management fee, hedge funds also take a big cut — usually at least 20 percent — of any profits that exceed a predetermined benchmark. So in a good year, a fund’s managers bring in stunning amounts of money, and in a bad year, they still do very well. ...

                                                                                      Last year was actually a pretty tough year for the industry..., the Standard & Poor’s 500-stock index jumped 14 percent, while the average hedge fund returned less than 13 percent, after investment fees...

                                                                                      But the men ... who appear on Alpha’s list of top earners don’t manage average hedge funds. They manage the biggest funds in the world, the ones that are winning the Darwinian competition for capital, and many of them aren’t having any trouble beating the market. One of the funds at Mr. Simons’s firm ... delivered a net return of 21 percent last year. The other returned 44 percent after fees. And Mr. Simons, who relies on a fantastically complex set of algorithms, doesn’t charge “2 and 20”... He charges “5 and 44” — a 5 percent management fee and 44 percent of profits — yet he has still been doing very well by his investors for almost two decades.

                                                                                      I realize that a lot of people find 9- and 10-figure incomes to be inherently excessive. Or even immoral. From a strictly economic point of view, however, they are also perfectly rational. You cannot find anyone else who is providing the same returns as the best hedge fund managers at a lower price. If you don’t like it, you don’t have to give them your money.

                                                                                      (Even if you do like it, they probably won’t take your money. In exchange for being lightly regulated, hedge funds are open only to wealthy investors and big institutions.) ...

                                                                                      “The best performance is coming from the largest funds,” said Christy Wood, who oversees equities investments for the California Public Employees’ Retirement System, which, like a lot of pension funds, is moving more money into hedge funds.

                                                                                      But there is an irony to this influx of money. It all but guarantees that hedge fund pay over the next few years won’t be as closely tied to performance as it has been. The hundreds of millions of dollars that have flowed into hedge funds have made it all the harder for fund managers to find truly undervalued investments. The world is awash in capital. All that capital, of course, also translates into ever-greater management fees, regardless of a fund’s performance. ...

                                                                                      Outside of the highfliers on the Alpha list, ...[s]ince 2000, the average hedge fund hasn’t done any better, after fees, than the market as a whole, according to research by David A. Hsieh, a finance professor at Duke. Still, even mediocre managers, after a lucky year or two, are able to attract gobs of capital and charge “2 and 20.”

                                                                                      So are today’s hedge fund managers really worth it? Sure, but only if they deliver the sort of performance that Mr. Simons has, and very few will in the years ahead. More to the point, it’s extremely difficult to know who the stars will be.

                                                                                      In all sorts of walks of life, people tend to think that the past is a better predictor of the future than it really is. That’s why ... so many investors chase returns. The genius of the world’s hedge fund managers isn’t only in how they invest their money. It also lies in having set up an industry that takes advantage of a timeless human trait.

                                                                                        Posted by on Wednesday, May 23, 2007 at 02:07 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (12)


                                                                                        Richard Freeman: Labor Economics Redux

                                                                                        Richard Freeman reports on the state of labor economics. He seems pleased [Update: George Borjas comments on the report]:

                                                                                        Labor Economics Redux, by Richard B. Freeman, NBER: Labor economics has increased the number of tools it uses to analyze people's behavior in market settings by augmenting econometrics and models of rational behavior with increased analyses of field or laboratory experiments. This widening, and a greater focus on the ways economic institutions affect outcomes, as opposed to how hypothetical rational actors behave in ideal competitive settings, has helped the field to become an increasingly important and growing contributor to economic research. This growth is evidenced in the massive increase in the number of NBER Working Papers produced in the Labor Studies Program. ... Moreover, labor specialists have spawned additional programs at the NBER -- Education, Children, Aging - and smaller groups of labor researchers are working on particular topics, including personnel economics, shared capitalism, the science and engineering work force, immigration, and the economics of the welfare state in Sweden.

                                                                                        One reason for the growth in the NBER's Labor Studies Program has been the increased attention given to labor issues in economic debate. One of the great economic issues of our time relates to the differing economic performance of capitalist economies. In the 1980s many researchers sought to understand the great success of Japan. From the 1990s to the present, many analysts have sought to explain the difference between European Union and U.S. economic performance in terms of the more market-oriented labor institutions and weaker welfare state in the United States. Seeking to explain why some firms or establishments do better than others, other analysts have looked at differences in incentives and work practices. In international trade, the most contentious issue relates to how trade affects workers, including the likelihood and costs of displacement, the role of off-shoring in reducing demand for skilled as well as unskilled labor, and the impact of trade on earnings inequality.

                                                                                        The concern over rising inequality has generated a huge labor literature in which NBER researchers have played a significant role as they seek to document the effect of institutions, technology, and\or trade in the growth of inequality in wages and hours worked in the United States. In addition, there is always interest in such perennial labor topics as the minimum wage, unions, female labor force participation, immigration, discrimination, and crime. ...

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                                                                                          Posted by on Wednesday, May 23, 2007 at 12:33 AM in Academic Papers, Economics, Unemployment | Permalink  TrackBack (0)  Comments (3)


                                                                                          Jeffrey Lacker: The Inflation Outlook

                                                                                          Jeffrey Lacker discusses the outlook for inflation. He does not appear as convinced as some of the other committee members that slowing output growth by itself will cause inflation to moderate. Instead it will depend upon the ability of policymakers to influence and bring down inflation expectations. Along the way, he also hints at the Fed's numerical target range for inflation:

                                                                                          The Inflation Outlook, by Jeffrey M. Lacker, President, Federal Reserve Bank of Richmond: I am pleased to be with you tonight to discuss my views on the outlook for inflation.[1] In its most recent statements, the Federal Open Market Committee has identified "the risk that inflation will fail to moderate as expected" as its "predominant policy concern." This places current inflation and the inflation outlook squarely at center stage in thinking about the economy and monetary policy. So in my remarks..., I will take a closer look at inflation's recent behavior and the prospects for its future behavior. ...

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                                                                                            Posted by on Wednesday, May 23, 2007 at 12:24 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (8)


                                                                                            Tuesday, May 22, 2007

                                                                                            John Whitehead's Excellent Academic Adventures

                                                                                            John Whitehead continues his series describing his adventures at academic conferences. I think he has more fun at these conferences than I do. Sort of:

                                                                                            I'm in NOLA, by John Whitehead: I'm in New Orleans, LA for the CNREP 2007 -- Second National Forum on Socioeconomic Research in Coastal Systems. If you check out the agenda you'll notice that I'm scheduled to present something within the next hour or so. I hope. Presently I'm curled in a fetal ball at the Royal Sonesta Hotel suffering from a bout of anxiety. I'm not good enough, no one likes me, etc.

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                                                                                              Posted by on Tuesday, May 22, 2007 at 04:00 PM in Economics, Environment | Permalink  TrackBack (0)  Comments (2)


                                                                                              FRB New York: How Worrisome Is a Negative Saving Rate?

                                                                                              Charles Steindel of the New York Fed asks if we should be worried by the negative personal saving rate. The NY Fed's summary gives his answer:

                                                                                              Charles Steindel explains that when the U.S. personal saving rate took a negative turn in second-quarter 2005, it raised concerns that Americans may have to curtail spending and accept a lower standard of living as they pay off rising debts.

                                                                                              However, the risks to household well-being may be overstated, says Steindel. Taking a closer look at saving trends, he argues that the surge in energy costs may have temporarily dampened saving, while the accounting of household income from stock holdings may be skewing saving estimates. In addition, broad measures of saving have remained positive, and household wealth—assets such as stocks and homes, less debt—is on the rise.

                                                                                              Still, Steindel cautions, low levels of household, private and especially national saving may take a toll over the long run and thus bear watching now.

                                                                                              Here's the entire report:

                                                                                              How Worrisome Is a Negative Saving Rate?, by Charles Steindel, Current Issues in Economics and Finance, May 2007  Volume 13, Number 4, FRB NY: The U.S. personal saving rate’s negative turn in 2005 has raised concerns that Americans may have to curtail their spending and accept a lower standard of living as they pay off rising debts. However, a closer look at saving trends suggests that the risks to household well-being are overstated.

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                                                                                                Posted by on Tuesday, May 22, 2007 at 01:44 PM in Economics, Monetary Policy, Saving | Permalink  TrackBack (1)  Comments (17)


                                                                                                Krugman: But For, As If, and So What: Thought Experiments on Trade and Factor Prices

                                                                                                In a recent column, Paul Krugman said that while trade may not have had much impact on wages in the past, that may have changed due to the increased volume of trade from developing countries:

                                                                                                [I]mports from the third world, although they make the United States as a whole richer, make tens of millions of Americans poorer. How much poorer? In the mid-1990s ... economists, myself included, crunched the numbers and concluded that the ... effects ... on the wages of less-educated Americans were modest, not more than a few percent.

                                                                                                But... We’re buying a lot more from third-world countries today... Trade still isn’t the main source of rising economic inequality, but it’s a bigger factor than it was. So there is a dark side to globalization. The question, however, is what to do about it.

                                                                                                However, in this commentary opposing the inclusion of labor standards in the recent trade agreement, Jagdish Bhagwati responds to Paul Krugman with:

                                                                                                But this fear [that trade will lower wages] is not justified by facts. Most empirical studies of the effect on US wages of trade with poor countries have found little impact. My distinguished student, Paul Krugman, recently admitted in his New York Times column that he was among those who did this research. He then, unconvincingly, retreated into the assertion that “that may have changed” because the US is importing more from the poor countries now. However, increased imports need not have any effect on wages.

                                                                                                After reading the following paper Paul Krugman wrote in 1996, I would guess the "distinguished student" is puzzled why Jagdish finds it "unconvincing" that the effect of trade on wages should be larger now that trade with NIEs is about 2 1/2 times as large a share of GDP as it was in 1990. This simple analysis of why imports should affect wages explains Krugman's contention that the effects of trade on wages may be larger now than in the past, and it also explains why the estimate of the effects should be more or less proportional to the volume of trade.

                                                                                                Here are the thought experiments explaining why the effects of trade on wages should be larger as trade volume increases:

                                                                                                But For, As If, and So What: Thought Experiments On Trade And Factor Prices, by Paul Krugman, November 1996: In the last few years the impact of international trade on advanced-country wages has been hotly debated. Unusually, serious economists have not by and large argued about theory: with few exceptions they have agreed that a more or less classical Heckscher-Ohlin-Samuelson model is the best framework to use. Nor have they argued very much about the evidence. Instead, the major disputes have been philosophical: what does it mean to say that technology or trade has "caused" a given change in factor prices?

                                                                                                In this note I attempt to clarify and explain my own position in this debate. My view is that the most natural interpretation of an assertion that, say, international trade has "caused" wages for unskilled workers in advanced countries to decline by 2 percent is to view it as a "but-for" statement: but for the opportunities to import labor-intensive products offered by greater world integration, those wages would be 2 percent higher than they actually are. This interpretation leads, in turn, to the conclusion that the volume of trade must play a crucial role in any attempt to assess the effects of that trade; and it also leads to the conclusion that it is useful to calculate the factor content of trade - the net trade in factor services embodied in trade in goods.

                                                                                                To justify these claims, I present a sequence of three thought experiments on a simple trade model. There is nothing profound or difficult about these experiments - in fact, no algebra is necessary. The point, however, is that making sense of this debate is mainly a matter of asking the right questions; once you do so, the answers follow easily.

                                                                                                Continue reading "Krugman: But For, As If, and So What: Thought Experiments on Trade and Factor Prices" »

                                                                                                  Posted by on Tuesday, May 22, 2007 at 08:56 AM in Economics, Income Distribution, International Trade, Unemployment | Permalink  TrackBack (0)  Comments (31)


                                                                                                  Focus on Yuan "Misplaced and Counterproductive"

                                                                                                  Matthew Slaughter, a member of the Council of Economic Advisers from 2005 to 2007, says we should quit focusing on China's exchange rate policy and focus instead on real problems.

                                                                                                  Yuan Worries, by Matthew J. Slaughter, Commentary, WSJ:
                                                                                                  Fact 1: China runs a large and growing trade surplus with the United States. ... Fact 2: China focuses its monetary policy on fixing the exchange value of its currency, the yuan, relative to the U.S. dollar.

                                                                                                  Many policymakers and pundits connect these two facts by asserting that an unfairly low value of the dollar-yuan peg is causing the massive bilateral trade imbalance. ... These misgivings about the dollar-yuan peg are misplaced. Economic theory and data are very clear here on two critical points. Controlling a nominal exchange rate is a form of sovereign monetary policy. And monetary policy, in turn, has no long-run effect on real economic outcomes such as output and trade flows.

                                                                                                  Like all other central banks, the People's Bank of China uses its monopoly power over minting its money to control one nominal price. Since 1994 the PBOC has chosen to closely target the dollar-yuan price. In recent times, maintaining this target has required the PBOC to print yuan to buy dollars and thereby accumulate dollar-denominated assets on its balance sheet.

                                                                                                  Many central banks today use their sovereign power to fix a nominal short-term interest rate rather than a nominal exchange rate. The U.S. Federal Reserve targets the federal-funds rate; the European Central Bank targets the main refinancing operations rate; and the Bank of Japan targets the overnight call rate. But exchange-rate targets are by no means uncommon..., in 2005, 55.6% of the world's countries fixed their exchange rates. ...

                                                                                                  To select a policy target, each central bank must evaluate how alternatives might (or might not) influence its monetary-policy goals. Chinese capital markets today lack many of the microeconomic institutions that transmit changes in short-term interest rates into the broader economy... This may well be one reason the PBOC maintains its exchange-rate target: An interest-rate target might weaken its linkages to the real economy. And just like other central banks, the PBOC has been adjusting its target nominal price gradually, without dramatic changes that can have adverse short-run impacts.

                                                                                                  But hasn't the nominal dollar-yuan peg unfairly driven the long-run rise in trade imbalances? No. The exchange rate that matters for trade flows is the real exchange rate... Supply-and-demand pressures in international markets can, and do, alter ... the real exchange rate...

                                                                                                  To demonstrate this critical point, look to Europe. The yuan floats against European currencies such as the euro and the pound. If nominal exchange rates were driving trade flows as commonly alleged, then Chinese exports to the U.S. should have been growing faster than to Europe. The data show something completely different... Plotted together over that entire decade, these two series look nearly identical. This is because the same real economic forces -- e.g., China's relative abundance of less-skilled labor -- have been driving both sets of trade flows.

                                                                                                  Put it this way: In a counter-factual world where over the past decade China allowed the yuan to float against the dollar, the U.S. would still have run a large and growing trade deficit with China. The real economic forces of comparative advantage that drive trade flows operate regardless of which nominal prices central banks choose to fix.

                                                                                                  This week the U.S. government hosts Chinese officials for the second round of the Strategic Economic Dialogue. ... In China, further capital-market reform is needed to support economic growth... Here at home, the large aggregate gains the U.S. has realized from freer trade and investment with China have also generated hardship, too. Many American workers, firms and communities have been hurt, not helped, by Chinese competition.

                                                                                                  Issues like these are legitimate and real. But focusing on the dollar-yuan peg is a misplaced and counterproductive way to address them. ... Stop fixating on the fix.

                                                                                                  I think this is right. Devoting lots of time, energy, and political capital to China's interest peg policy is not an effective use of our policy resources. Even if we are successful at beating down the peg, not much will be gained and there are other more pressing issues to worry about.

                                                                                                  Update: knzn says Aaaargh!!!

                                                                                                  Aaaargh!!! (Slaughter on China), by knzn: Why do economists writing about China pretend not to know the difference between sterilized and non-sterilized intervention? We’ve been through this before, but the latest case in point is Matthew Slaughter, writing in the Wall Street Journal (and cited uncritically by Greg Mankiw and Mark Thoma)...

                                                                                                  Update: Brad Delong has even more comments critical of Slaughter's analysis. I don't disagree with the critiques, but I don't want to debate this too much because it will make it seem as though this is important for workers.  It's not - it might help a little, but this is not where I'd focus political energy (though Brad is worried about a slightly different issue, the source of imbalances and the potential for growing imbalances to unwind quickly). If the administration is successful and China does amend its currency policy, it may get more credit for helping workers than is due. I still believe (as I said above) that forcing China to change this policy will not do much to help American workers. Here's Paul Krugman on that point:

                                                                                                  Fixing Our Economy By Fixing Up Our Workers, by Paul Krugman, Money Talks: ...The pressure from China is greater because of the undervalued yuan. However, even with a big rise in China's currency, wages there would still be only 4 percent of U.S. levels, so currency issues are only a small part of the story.

                                                                                                  Update: David Altig says, in conclusion to a longer post analyzing this issue, that:

                                                                                                  I may be completely misinterpreting things, but it seems to me that the point is simply that the peg alone cannot be the biggest issue in the discussion.  I guess the disagreement here may be that the Slaughter piece puts more emphasis on the strains that trade-related adjustments in resource allocation inevitably bring, while pgl (and DeLong and knzn, I guess) are more concerned about distortions in resource allocation associated with questionable trade restrictions, capital controls, bad economic policy in the U.S., and so on.  Fair enough. But none of that is about the yuan peg per se, and I think Matthew Slaughter was right to say so.

                                                                                                    Posted by on Tuesday, May 22, 2007 at 12:24 AM in China, Economics, International Finance | Permalink  TrackBack (0)  Comments (31)


                                                                                                    Falling Star Cities

                                                                                                    Robert Shiller says rates of return on housing in "superstar cities" do not exceed rates of return elsewhere:

                                                                                                    Superstar cities may be investors' superstardust, by Robert J. Shiller, Project Syndicate: In a much-talked-about recent paper entitled "Superstar Cities," economists Joseph Gyourko, Christopher Mayer, and Todd Sinai argue that such high-status cities - not only London, Paris, and New York, but also cities like Philadelphia and San Diego - may show an "ever-widening gap in housing values" when compared with other cities.

                                                                                                    The authors seem to be saying, in effect, that a housing boom in these areas can go on forever. ... Many people view the superstar city theory as confirming their hunch that, despite the current slowdown in home prices elsewhere ..., investors can expect to make huge long-term gains by buying homes in these cities, even though the homes there are already expensive.

                                                                                                    But, as I have said in my debates with the authors, if one reads their paper carefully and thinks about the issues, one would see that there is no reason to draw such a conclusion.

                                                                                                    Why should home values in glamour cities increase forever? Gyourko, Mayer, and Sinai justify their claim by arguing that these cities really are unique.

                                                                                                    They have only limited land, and if one assumes ever-increasing GDP and rising income inequality, there will always be more and more wealthy people to bid up prices in these scarce areas. ...

                                                                                                    But what do these arguments really mean for the outlook for investments in homes in superstar cities? Let us consider the fixity of land. While there is only so much land in any one of the existing superstar cities, in every case, there are vast amounts of land where a new city could be started. ...

                                                                                                    Private developers ... tend to be ingenious at developing glamorous new areas from little towns within an hour's commute from major cities. It happens in so many places and so regularly that we take it for granted and rarely even notice it.

                                                                                                    Indeed, since the industrial revolution, the development of such new urban areas is a central theme in the history of the world. New cities are constantly ripening like so many cherries on a tree, drawing people away from older, original cities.

                                                                                                    And the new cities have a way of looking brighter and fresher than the old urban areas, which are often seen as jumbled and decaying.

                                                                                                    How much might we expect a home in a famous city to outperform other real estate as a long-term investment? The answer: not much at all.

                                                                                                    Prices in the cities that Gyourko, Mayer, and Sinai identify as superstars generally appreciated by no more than one or two percent a year more than in the average city from 1950 to 2000, and even that difference is probably largely due to an increase in the size and quality of homes. ...

                                                                                                    Finally, as Gyourko, Mayer, and Sinai themselves note, even these small long-term differences in home price across cities have tended to be offset by lower rent-price ratios in the superstar cities. For an investor, the rate of return is the sum of the rate of appreciation and the rent-price ratio, so the low rent-price ratio reduces the advantage of faster appreciation.

                                                                                                    Most of the popular attention that the "superstar cities" theory has received merely reflects the psychology of the housing boom that we have been seeing, as well as a wishful thinking bias. People want to believe...

                                                                                                      Posted by on Tuesday, May 22, 2007 at 12:15 AM in Economics, Housing | Permalink  TrackBack (0)  Comments (14)