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Sunday, September 30, 2007

Ben Stein Watch: The Inaugural Edition

Ben Stein has Felix Salmon so upset that he has lost track of what month it is. I have to admit that I didn't actually read Stein's column, and still haven't, thereby avoiding a similar fate:

Ben Stein Watch: October 30, 2007, by Felix Salmon: I'm a uniter, not a divider. I'm a lover, not a fighter. I don't like to engage in the politics of personal destruction. But as Jonathan Landman might say, we have to stop Ben Stein from writing for the Times. Right now. And so, by popular demand, the first weekly Ben Stein Watch.

Stein uses his column this week to ask a question: "Is It Responsible to Shun Military Contractors?". Stein is a believer that investing isn't just about money:

I certainly believe in socially responsible investing for myself. I sold my tobacco shares long ago. (They have done fantastically well since then, but I don't regret my decision.)

Unfortunately, Stein doesn't tell us why he sold his tobacco shares. So we're going to just have to take a wild guess: maybe it's because cigarettes kill people?

Yet somehow Stein just can't comprehend why some socially responsible investors don't want to invest in arms manufacturers. "I don't understand this whole attitude," he writes. "Maybe someone can explain it to me."

Here, Ben, let me try, in words of one syllable:

Guns and bombs kill people.

Oh, damn, "people" is two syllables.

But let me rewind, to the very first sentence of Stein's column:

Henry Blodget should have started out as a writer.

I might point Stein to the second sentence of Blodget's wikipedia page:

Blodget received a Bachelor of Arts degree from Yale University and began his career as a freelance journalist and was a proofreader for Harper's Magazine.

Sigh....

Stein finishes up his column seemingly asking the SEC to regulate everything that absolutely anybody might conceivably invest in. He doesn't claim that this massive expansion of regulatory responsibilities would do any good, mind you; he just ends his column, cryptically enough, by saying that "the ladder of law should have no top and no bottom." It's a Bob Dylan lyric which Stein obviously loves, since this is the second time this year he's trundled it out.

So here's my idea. Since Stein clearly isn't being featured in the business section on the grounds of his economic expertise, he's obviously got this gig on the grounds of his celebrity status. Maybe the Times has no desire to replace Stein with someone (like DeLong, say) who actually knows what he's talking about - what they want is a writer who's vaguely familiar with economic concepts but who's also something of a household name. My suggestion: Bob Dylan.

    Posted by on Sunday, September 30, 2007 at 07:11 PM in Economics, Press | Permalink  TrackBack (0)  Comments (12)


    "A New Road for American Unionism"

    Clive Crook on unions:

    A new road for American unionism, by Clive Crook, Commentary, Financial Times (free): The grand General Motors settlement ... may or may not be a turning-point for America’s car industry. But it certainly draws attention to the role that unions still play in the US economy. The plight of the country’s carmakers ... hardly makes the case for unionism, you might think. But many American workers see things differently; many politicians too.

    The US has an unusually low rate of union membership. Barely 10 per cent of its workers are members (and as few as 7 per cent in the private sector), down from about 35 per cent in the 1950s. Whether you see this as a strength or a weakness most likely depends on whether you think the US economy is succeeding or failing. Weak unions make for flexibility and rapid growth in productivity, the engines of US economic pre-eminence. To see what strong unions do for industrial competitiveness, look at GM. But weak unions also squeeze wages at the bottom, worsen inequality and create economic insecurity, the issues that most preoccupy the country and its politicians. ...

    American workers have often been cool towards unions. In the mid-1990s polls generally found that only about a third of non-union workers wanted to join one. In the past few years, the proportion has risen to more than half. The Democrats’ beefed-up pro-union line is faithfully reflecting this shift in mood. Both spring from the economic strains and insecurity of which so many Americans complain.

    Continue reading ""A New Road for American Unionism"" »

      Posted by on Sunday, September 30, 2007 at 01:08 PM in Economics, Politics, Unemployment | Permalink  TrackBack (0)  Comments (31)


      links for 2007-09-30

        Posted by on Sunday, September 30, 2007 at 12:20 AM in Links | Permalink  TrackBack (0)  Comments (21)


        Saturday, September 29, 2007

        Alan Blinder: Who Caused the Mortgage Mess?

        Alan Blinder says it's time to start pointing fingers. All six of them:

        Six Fingers of Blame in the Mortgage Mess, by Alan S. Blinder, Economic View, NY Times: Something went badly wrong in the subprime mortgage market. In fact, several things did. And now quite a few homeowners, investors and financial institutions are feeling the pain. ...

        Finger-pointing is often decried both as mean-spirited and as a distraction from the more important task of finding remedies. I beg to differ. Until we diagnose what went wrong with subprime, we cannot even begin to devise policy changes that might protect us from a repeat performance. ... Because so much went wrong, the fingers on one hand will not be enough.

        The first finger points at households who borrowed recklessly to buy homes... They should have known better. But what can we do to guard against it happening again? Not much, I’m afraid. Gullible consumers have been around since Adam consumed that apple. ...

        It seems more promising to point a finger directly at lenders. Some lenders sold mortgage products that were plainly inappropriate for customers, and that they did not understand. ...

        Here, something can be done. For openers, we need to think about devising a “suitability standard” for everyone who sells mortgage products. Under current law, a stockbroker who persuades Granny to use her last $5,000 to buy a speculative stock on margin is in legal peril because the investment is “unsuitable” for her (though perfectly suitable for Warren Buffett). ...

        But who will create and enforce such a standard for mortgages? Roughly half of recent subprime mortgages originated in mortgage companies that were ... outside the federal regulatory system. ... We should place all mortgage lenders under federal regulation.

        That said, bank regulators deserve the next finger of blame for not doing a better job of protecting consumers and ensuring that banks followed sound lending practices. ...

        Regulators also need to start thinking about how to deal with a serious incentive problem. In old-fashioned finance, a bank that originated a mortgage also held it for years..., giving it a clear incentive to lend carefully. But in newfangled finance, banks and mortgage brokers originate loans and sell them quickly to a big financial firm that “securitizes” them...

        Securitization ... has ... made mortgages more affordable. ... But securitization sharply reduces the originator’s incentive to scrutinize the creditworthiness of borrowers. After all, if the loan goes sour, someone else will be holding the bag. We need to find ways to restore that incentive, perhaps by requiring loan originators to retain a share of each mortgage.

        But wait. Don’t the ultimate investors have every incentive to scrutinize the credits? ... The answer is yes — which leads me to point a fourth finger of blame. By now, it is abundantly clear that many investors, swept up in the euphoria of the moment, failed to pay close attention to what they were buying.

        Why did they behave so foolishly? Part of the answer is that the securities ... were probably too complex for anyone’s good — which points a fifth finger, this one at the investment bankers who dreamed them up and marketed them aggressively.

        Another part of the answer merits a sixth finger of blame. Investors placed too much faith in the rating agencies — which, to put it mildly, failed to get it right. It is tempting to take the rating agencies out for a public whipping. But it is more constructive to ask how the rating system might be improved. That’s a tough question because of another serious incentive problem.

        Under the current system, the rating agencies are hired and paid by the issuers of the very securities they rate — which creates an obvious potential conflict of interest. ... This needs to change, but precisely how is not clear.

        So that’s my list... But as we point all these fingers, let’s remember the sage advice of the late and dearly missed Ned Gramlich, the former Fed governor who saw the emerging subprime problems sooner and clearer than anyone. Yes, the subprime market failed us. But before it blew up, it placed a few million families of modest means in homes they otherwise could not have financed. That accomplishment is worth ... quite a lot.

        We don’t have to destroy the subprime market in order to save it.

          Posted by on Saturday, September 29, 2007 at 02:43 PM in Economics, Financial System, Housing, Regulation | Permalink  TrackBack (0)  Comments (53)


          Working their Way to the Bottom

          knzn peers into "the duffle bag of economists":

          Conflicting Opinions, by knzn: I know I should have been done with this last year, but after coming across this piece of Fedspeak..., I couldn't resist.

          You'd have to dig pretty far down in the duffle bag of economists to find one who actually believes in the Philips Curve...

          --Arthur Laffer, Founder and Chairman, Laffer Associates, Wall Street Journal, August 24, 2006

          The Phillips curve is a core component of every realistic macroeconomic model.

          --Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco, speech, Boston Fed Conference on Behavioral Economics, September 28, 2007

          (Perhaps they keep the realists at the bottom of the duffle bag?)

          My theory is that as the bag is jostled about, natural sorting causes heavyweight economists to drift to the bottom. Thus, one does have to dig down pretty far to find the most informed views.

            Posted by on Saturday, September 29, 2007 at 11:16 AM in Economics, Macroeconomics | Permalink  TrackBack (0)  Comments (25)


            The Economics of Time Travel

            Ever wonder how much it would cost to build a time machine? No? Well, if you ever do, here's the answer:

            Time machine possible says professor, Gold Coast News: Building a time machine that travels into the future is not science fiction - if you are a multi-trillionaire, a physics expert says.

            Dr Craig Savage, who lectures in relativity and quantum mechanics at the Australian National University, says it is possible for people to travel forward in time but the costs involved are too great.

            ''If you could build a spaceship that could go three quarters of the speed of light you would time travel one hour into the future for every hour of your time,'' he said.

            ''People have designed such spacecrafts at various times but they would just be unimaginably expensive to create. ''It's not an issue of technology, it's one of economics.''

            The cost of operating a time travelling machine, in relation to the cost of electricity, would be ten trillion dollars, Dr Savage estimates.

              Posted by on Saturday, September 29, 2007 at 10:17 AM in Economics, Science | Permalink  TrackBack (0)  Comments (29)


              "Trust Us"

              "Wartime economist" and libertarian David Henderson:

              War and the Constitution, by David R. Henderson: ...The U.S. Constitution is there to protect our rights, to tell the government the only things it can do. If the federal government does not have a specific power granted to it within the Constitution, then it does not have that power. Period. ...

              [O]ur rights... [are also protected by] the carefully thought-out division of powers within the U.S. Constitution. Why such a division of powers? Because no one is to be trusted with too much power. Incidentally, when Alberto Gonzales gave a talk at the Naval Postgraduate School in 2002 defending many of President Bush's unconstitutional actions, a colleague and I challenged him afterward. He tried to reassure us, saying, "Condi and others and I are looking out for how the president will play in history. We don't want him to look like some monster who destroyed our freedom. Trust us." I answered, "The Constitution is not based on trust, but on distrust."

              One of the most important things the government does is engage in war. For that reason, the Constitution gives the power to declare war solely to Congress. ...

              Consider why this matters. Think back to all the discussion before the U.S. government invaded Iraq in March 2003. One of the biggest issues was whether, and to what extent, Saddam Hussein had weapons of mass destruction. We now know that he didn't have such weapons – even many of Bush's defenders will admit his error. We don't even need to get into the issue of whether Bush was lying. Even if we assume the best – that Bush was saying what he thought to be true – the point is that we could have had a much better discussion of the issue if Bush had followed the Constitution. If Congress had actually decided to vote on whether or not to declare war on Iraq, they would have had a debate. If they had had a debate, there would have been multiple sources of information about the weapons of mass destruction. But by violating his oath to uphold the Constitution, Bush made sure that there wasn't an extensive debate. ...

                Posted by on Saturday, September 29, 2007 at 01:35 AM in Economics, Iraq and Afghanistan, Politics | Permalink  TrackBack (0)  Comments (24)


                links for 2007-09-29

                  Posted by on Saturday, September 29, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (0)


                  Friday, September 28, 2007

                  The Implications of Behavioral Research for the Phillips Curve

                  San Francisco Fed President Janet Yellen discusses the use of behaviorally based macroeconomic models incorporating features such as money illusion, rules of thumb, and concern for issues such as fairness and equity to improve the ability of the New Keynesian Phillips curve to explain macroeconomic data:

                  Implications of Behavioral Economics for Monetary Policy [1], Janet Yellen, SF Fed: I want to congratulate the Federal Reserve Bank of Boston for organizing a fascinating and thought-provoking conference. I applaud the Bank’s decision to establish a center to promote and support research in behavioral economics and concur wholeheartedly with the judgment that motivates these initiatives—that research in behavioral economics is broadening and enriching our understanding of decisionmaking. This research has the potential to strengthen the conceptual and empirical underpinnings of macroeconomic policy.

                  The Federal Reserve is one of a growing number of organizations that have already taken some implications of behavioral research to heart. This year, we began to automatically enroll new employees into our System’s savings plan, defaulting them into an asset allocation fund that includes fixed income, domestic, and international equity investments. Employees who do not want to participate can, of course, easily opt out. But our early experience mirrors well-known research findings: so far, an overwhelming fraction of employees who were defaulted in remain in. Of course, this choice reflects the Federal Reserve System’s appreciation of the striking findings of behavioral economics concerning the sensitivity of saving decisions to default enrollments.

                  In terms of the Federal Reserve’s public policy responsibilities, I can easily envision other ways in which explorations in behavioral economics could be of practical use. For example, one of the Federal Reserve’s responsibilities is to design consumer disclosures, including the information that borrowers receive from lenders when they take out a mortgage, apply for a credit card, or lease a new vehicle. As we have unfortunately seen recently, such disclosures have not always been effective in conveying the key information that is relevant to such decisions in a salient, understandable, and timely way. Indeed, recent research by the Federal Trade Commission[2] documents that a large fraction of mortgage borrowers fail to understand the financial implications of prepayment penalties and other complex loan features. To improve the effectiveness of such disclosures, the Federal Reserve has begun to use consumer testing techniques,[3] but there remains substantial scope for behavioral research to contribute to the design of more effective practices in the consumer disclosure area.

                  Today, however, I would like to focus on some implications of behavioral economics for the conduct of monetary policy. I will concentrate on implications of behavioral research for the Phillips curve, although the papers at this conference demonstrate that behavioral economics has implications for many other aspects of macroeconomic modeling, including the behavior of housing and other asset prices, and the specification of crucial components of aggregate demand, such as the consumption function.

                  Continue reading "The Implications of Behavioral Research for the Phillips Curve" »

                    Posted by on Friday, September 28, 2007 at 03:06 PM in Economics, Macroeconomics, Monetary Policy | Permalink  TrackBack (0)  Comments (36)


                    "I Really Believe That Economics Can Make the World a Better Place"

                    Frederic Mishkin is interviewed by Gary Stern of the Minneapolis Fed. The interview was conducted last May, but it wasn't posted until recently. The initial discussion on the health of the financial system is interesting given recent troubles in mortgage markets: 

                    Interview with Frederic Mishkin, The Region, FRB Minneapolis, May 8, 2007: "Now I have a seat at the table," said Frederic Mishkin in conversation with Minneapolis Fed President Gary Stern. "Now I'm able to bring my academic experience to actual policymaking, and that is a very exciting enterprise for me."...

                    In September 2006, Mishkin was appointed to the Fed's Board of Governors, thereby gaining his "seat at the table": the opportunity-and responsibility-to shape monetary policy for the nation. Given his academic background, it's difficult to imagine anyone better prepared for the job, but as Region readers are well aware (2006 Annual Report) the transformation of economic theory into effective policy is not a simple task. ...

                    Mishkin brings an almost tangible enthusiasm to the task of translating theory into policy. A conversation with him is a fast-paced journey through macro theory and international history, filled with anecdote, humor and a passion for the field. His zeal is contagious, fueled by the conviction that the work of economists can improve our well-being. "I believe that ideas really do matter," he says in the interview that follows. "I really believe that economics can make the world a better place."

                    BANK SUPERVISION Stern: Let's begin with a fairly general question. One of the rationales offered in the past for why banks are special and thus have an important role to play in the financial system is the opaqueness of their assets, their complexities and so forth. But, today, with improvements in technology, reduction in cost of information and a growing variety of financial market innovations, banks may be less special and so play a less important role in the financial system. Does this mean that banking is less important?

                    Continue reading ""I Really Believe That Economics Can Make the World a Better Place"" »

                      Posted by on Friday, September 28, 2007 at 12:06 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (9)


                      Paul Krugman: Hired Gun Fetish

                      Paul Krugman on the (mis)use of private security contractors in Iraq:

                      Hired Gun Fetish, by Paul Krugman, Commentary, NY Times: ...As far as I can tell, America has never fought a war in which mercenaries made up a large part of the armed force. But in Iraq, they are ... central to the effort...

                      And, yes, the so-called private security contractors are mercenaries. They’re heavily armed. They carry out military missions, but ... don’t answer to military discipline. On the other hand, they don’t seem to be accountable to Iraqi or U.S. law, either. And they behave accordingly.

                      We may never know what really happened in a crowded Baghdad square two weeks ago. Employees of Blackwater USA claim that they were attacked by gunmen. Iraqi police and witnesses say that the contractors began firing randomly at a car that didn’t get out of their way.

                      What we do know is that more than 20 civilians were killed, including the couple and child in the car. And the Iraqi version of events is entirely consistent with many other documented incidents involving security contractors.

                      For example, Mr. Singer reminds us that in 2005 “armed contractors from the Zapata firm were detained by U.S. forces, who claimed they saw the private soldiers indiscriminately firing not only at Iraqi civilians, but also U.S. Marines.” The contractors were not charged. In 2006, employees of Aegis, another security firm, posted a “trophy video” on the Internet that showed them shooting civilians, and employees of Triple Canopy, yet another contractor, were fired after alleging that a supervisor engaged in “joy-ride shooting” of Iraqi civilians.

                      Yet..., Blackwater has the worst reputation. On Christmas Eve 2006, a drunken Blackwater employee reportedly shot and killed a guard of the Iraqi vice president. (The employee was flown out of the country, and has not been charged.) In May 2007, Blackwater employees reportedly shot an employee of Iraq’s Interior Ministry...

                      Iraqis aren’t the only victims of this behavior. Of the nearly 4,000 American service members who have died in Iraq, scores if not hundreds would surely still be alive if it weren’t for the hatred such incidents engender.

                      Which raises the question, why are Blackwater and other mercenary outfits still playing such a big role in Iraq?

                      Don’t tell me that they are irreplaceable. The Iraq war has now gone on for four and a half years — longer than American participation in World War II. There has been plenty of time ... to find a way to do without mercenaries...

                      And the danger ... to American forces has been obvious at least since March 2004, when four armed Blackwater employees blundered into Fallujah in the middle of a delicate military operation, getting themselves killed and precipitating a crisis that probably ended any chance of an acceptable outcome in Iraq. Yet ... last year the State Department gave Blackwater the lead role in diplomatic security in Iraq.

                      Mr. Singer argues that reliance on private military contractors has let the administration avoid making hard political choices, such as admitting that it didn’t send enough troops... Contractors..., “offered ... additional forces, but with no one having to lose any political capital.” That’s undoubtedly part of the story.

                      But it’s also worth noting that the Bush administration has tried to privatize every aspect of the U.S. government it can, using taxpayers’ money to give lucrative contracts to its friends — people like Erik Prince, the owner of Blackwater, who has strong Republican connections. You might think that national security would take precedence over the fetish for privatization...

                        Posted by on Friday, September 28, 2007 at 12:33 AM in Economics, Iraq and Afghanistan | Permalink  TrackBack (0)  Comments (114)


                        "Does Lack of Liquidity Impair Entrepreneurs?"

                        Who's right, Smith or Plato?:

                        Does lack of liquidity impair entrepreneurs?, by Hans K. Hvide, Vox EU: One of the oldest ideas in the study of entrepreneurship is that entrepreneurs may be unable to establish a venture at an efficient scale due to liquidity-constraints arising from capital market imperfections. This idea can be traced back to Adam Smith, who in the Wealth of Nations stated that entrepreneurs: "have all the knowledge, in short, that is necessary for a great merchant, which nothing hinders him from becoming but the want of sufficient capital."

                        Business people and venture capitalists, on the other hand, caution that excess liquidity can facilitate overspending or adversely affect the entrepreneur’s motivation to perform. The idea that more liquidity can have a negative effect on performance can be traced back to Plato, who in the Republic wrote: "wealth is the parent of luxury and indolence". Who should we place our bets on, Adam Smith or Plato?

                        Continue reading ""Does Lack of Liquidity Impair Entrepreneurs?"" »

                          Posted by on Friday, September 28, 2007 at 12:24 AM in Economics | Permalink  TrackBack (0)  Comments (13)


                          The Great Moderation in Output

                          This work finds that The Great Moderation in output - the decline in the volatility of output in the mid 1980s - is due to declining variability in investment and consumer durables purchases, a result that suggests that better inventory management and financial innovation are at least part of the declining volatility story. It also finds that for understanding swings in GDP growth, "Tracking shifts in investment spending remains critical, but changes in household spending on nondurable goods are now more important than movements in consumer durables. Meanwhile, the fraction of jobs growth volatility attributable to firms in professional and business services has risen to the point where this sector has become the largest contributor to short-run swings in aggregate jobs growth.":

                          The 'Great Moderation' in Output and Employment Volatility: An Update, by Evan F. Koenig and Nicole Ball , Economic Letter, FRB Dallas: Volatility can wreak havoc on economies. Sudden, sharp ups and downs in business activity can make it difficult for consumers to plan their spending, workers to feel secure in their jobs and companies to determine their future investments. Because of their impact on expectations and business and consumer confidence, swings in the economy can become self-reinforcing. Volatility can also spill over into real and financial asset markets, where severe price movements can produce seemingly arbitrary redistributions of wealth.

                          It's good news, then, that the U.S. economy has become much more stable. On average, the five recessions from 1959 to 1983 were 47 months apart, lingered 12 months and were associated with a 2.17 percent peak-to-trough decline in real gross domestic product. By contrast, the 1990 downturn came after 92 months of expansion, lasted eight months and involved a 1.26 percent decline in GDP. The 2001 slump ended a record 120 months of uninterrupted growth, lasted eight months and entailed a GDP decline of only 0.35 percent. More generally, quarterly growth in both real GDP and jobs became markedly less volatile after 1983.[1]

                          Explanations for this "Great Moderation," as it's called, include structural changes in the economy, improved monetary policy and simple good luck.

                          Continue reading "The Great Moderation in Output" »

                            Posted by on Friday, September 28, 2007 at 12:15 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (9)


                            links for 2007-09-28

                              Posted by on Friday, September 28, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (1)


                              Thursday, September 27, 2007

                              "A Soldier in Iraq"

                              I will let this speak for itself. It's from "Gian P. Gentile, a lieutenant colonel in the U.S. Army, [and] a professor of history at the U.S. Military Academy at West Point":

                              A soldier in Iraq, by Gian P. Gentile, Commentary, International Herald Tribune: After spending 2006 in command of an armor reconnaissance squadron in some of West Baghdad's toughest neighborhoods, I learned to be very humble when linking causes to the effects I thought my unit produced. ... Many times the results had nothing to do with the military force that I applied.

                              During the second half of 2006, as civil war in Iraq grew and sectarian violence soared, my squadron was given the mission of pacifying the Sunni district in West Baghdad known as Ameriyah.

                              In early August, I took part in an operation ordered by the Iraqi government called "Operation Together Forward II." In Ameriyah, I essentially surged my squadron with the purpose of protecting the people and breaking the cycle of violence so that the Iraqi government could get some breathing space to function on its own.

                              Continue reading ""A Soldier in Iraq"" »

                                Posted by on Thursday, September 27, 2007 at 05:04 PM in Economics, Iraq and Afghanistan | Permalink  TrackBack (0)  Comments (16)


                                Jeffrey Sachs: World's Extreme Poor Face Triple Threat

                                Jeffrey Sachs says strong worldwide economic growth, especially in China and India, is a big part of the "triple threat of rising world demand, conversion of food into fuel, and climate shocks" that is driving food and commodity prices upward and making it more difficult for the world's extreme poor to meet their basic needs:

                                Applaud economic growth, but recognize its downsides, by Jeffrey Sachs. Project Syndicate: A fundamental global trend nowadays is growing natural resource scarcity. Oil and natural gas prices have soared in recent years. This past year, food prices have also skyrocketed, causing hardships among the poor and large shifts in income between countries and between rural and urban areas.

                                The most basic reason for the rise in natural resource prices is strong growth, especially in China and India, which is hitting against the physical limits of land, timber, oil and gas reserves, and water supplies. Thus, wherever nature's goods and services are traded in markets (as with energy and food), prices are rising. When they are not traded in markets (as with clean air), the result is pollution and depletion rather than higher prices.

                                Continue reading "Jeffrey Sachs: World's Extreme Poor Face Triple Threat" »

                                  Posted by on Thursday, September 27, 2007 at 04:05 PM in Economics | Permalink  TrackBack (0)  Comments (22)


                                  Robert Reich: Who Gets Hurt When the Dollar Slides

                                  Robert Reich says the costs and benefits of a fall in the dollar aren't distributed equally:

                                  Who Gets Hurt When the Dollar Slides, by Robert Reich: The dollar is now at a record low against the Euro, ... down so low it’s about equal to a Canadian dollar. What difference does all this make? Roman holidays may be more costly, but how many of us are going to Rome? Canada is pricier but ... so what?

                                  The biggest burden isn’t on American tourists. It’s on American consumers. Put simply: When the dollar drops, imports cost more. Lumber, plywood, and natural gas from Canada. ... Machine tools from Italy. When Middle-East and Russian oil is priced in euros rather than dollars – which it surely will be as the dollar continues to slide – our energy bills will be far higher. When China seriously revalues – which it has to do as the dollar drops – every big-box retailer in America will be charging far more.

                                  And plenty of American producers who had kept their prices down for fear of foreign competition, won’t any longer. As imports cost more, there’s less to fear. The real worry isn’t inflation, as Wall Street thinks. It’s our pocketbooks. The bitter truth is that even as American exports do better when the dollar drops, most Americans get poorer.

                                  Maybe we should get poorer. After all, the dollar’s tanking because we’ve been living beyond our means – borrowing some $2 billion a day from the rest of the world...

                                  But not all of us will get our comeuppance. Americans big enough to be able to shift their dollars into other currencies are doing just fine. That includes Wall Street investment houses, corporations with lots of cash, and the very rich.

                                  So who gets hurt as the dollar slides? It won’t be Warren Buffet, who’s already converted more than 20 billion bucks into other currencies. It will be those of us who can’t hedge against the fall, and whose dollars are already stretched to the limit.

                                    Posted by on Thursday, September 27, 2007 at 01:35 AM in Economics, Income Distribution, International Finance, International Trade | Permalink  TrackBack (0)  Comments (62)


                                    Shifting Out of Neutral

                                    Obsidian Wings:

                                    Nah, There's No Need for Net Neutrality After All, by publius: ...Verizon has apparently decided that pro-choice text messages are simply too controversial to ride over their wireless networks:

                                    Saying it had the right to block “controversial or unsavory” text messages, Verizon Wireless has rejected a request from Naral Pro-Choice America, the abortion rights group, to make Verizon’s mobile network available for a text-message program. . . .

                                    The dispute over the Naral messages is a skirmish in the larger battle over the question of “net neutrality” — whether carriers or Internet service providers should have a voice in the content they provide to customers.

                                    Don't know about you, but I'm pretty psyched to hand over control of the Internet to Verizon and Comcast (or, here in Texas, AT&T and Comcast).

                                    In other news, the highway department banned trucks that carry condoms from federal interstate highways. ...

                                      Posted by on Thursday, September 27, 2007 at 01:34 AM in Economics, Policy, Regulation | Permalink  TrackBack (0)  Comments (6)


                                      Alex Cukierman: The Revolution in Monetary Policymaking Institutions

                                      What factors explain the movement toward increased central bank independence over the last twenty years?:

                                      The Revolution in Monetary Policymaking Institutions, by Alex Cukierman, Vox EU: Twenty years ago and earlier, most central banks in the world functioned as departments of ministries of finance. They were expected - by law, custom, or both - to utilise their policy instruments to achieve a myriad of objectives, including high levels of growth and employment, provision of funds to government for the financing of public expenditures and addressing balance-of-payments problems.[1] They also were expected to maintain financial and price stability, but the price stability objective was one among several other objectives in the charter of the Bank and had no particular status. In some cases, like Spain and Norway, it did not even appear in the charter.[2] Paralleling this state of affairs, economic theory did not attribute particular importance to central-bank independence and the concept of credibility of monetary policy was in early stages of development. Furthermore, a notable legacy of the Keynesian revolution was the belief that a certain amount of inflation is conducive to economic growth.

                                      Although some banks had a reasonable amount of legal independence, the level of actual independence, particularly in developing countries, was usually lower than the one indicated in the law. Except for a few cases, central banks did not possess instrument independence and the responsibility for price stability was, at least implicitly, located in the ministry of finance and other economic branches of government. In a few developed economies (like the UK, Japan, the US and West Germany) with wide capital markets, price stability was maintained mainly through the actions of relatively conservative treasury departments or because of de-facto independent central banks.[3]

                                      Continue reading "Alex Cukierman: The Revolution in Monetary Policymaking Institutions" »

                                        Posted by on Thursday, September 27, 2007 at 01:25 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (10)


                                        Greenspan's "Pending Tsunami"

                                        If you haven't had your fill of Greenspan lately, here's one more. Bloomberg's John Berry says Greenspan's forecast for the next quarter century is not very persuasive:

                                        Greenspan Says 'Pending Tsunami' May Hurt Fed, by John M. Berry, Bloomberg: In the final chapter of his book, ''The Age of Turbulence,'' Alan Greenspan lays out what he sees for the next quarter-century: falling world saving, rising inflation, higher interest rates and extreme political pressure on the Fed to let 'er rip.

                                        His scenario isn't impossible. However, he doesn't really build a convincing case for it. ...[He] writes. ''...I fear that containing inflation through higher interest rates will be as unpopular in the future as it was when Paul Volcker did it more than 25 years ago.''

                                        Some of the reasons cited by Greenspan for his concern -- such as the potential for greatly increased federal government spending as the Baby Boom generation retires -- are certainly valid. Another, however, isn't.

                                        Greenspan says he believes that increased globalization has been a significant force holding down inflation and that that force is waning, which will make life more difficult for the Fed. ...

                                        However, in a June 2006 speech at a Boston Federal Reserve Bank conference, Fed Vice Chairman Donald L. Kohn challenged the proposition that globalization has had a significant impact on U.S. inflation.

                                        Kohn acknowledged that the pace of globalization had accelerated. Nevertheless, the impact of that on inflation, he said, ''is less obvious.'' For one thing, changes in exchange rates may absorb effects of inflation that might be transmitted from one country to another, he said.

                                        ''Many U.S. goods and most services are still produced domestically with little competition from abroad,'' Kohn said. ''In addition, the significant expansion of production in China and elsewhere has put substantial upward pressure on the prices of oil and other commodities, many of which are imported for use as inputs to production in the United States.

                                        ''Indeed, the effects of globalization on domestic inflation need not even be negative, especially in today's environment of strong global growth,'' he said.

                                        Greenspan doesn't exactly predict what inflation will be between now and 2030. ... Americans won't get angry enough to force politicians to let the Fed rein in inflation until it gets above about 5 percent, he says. Without a change in current policies regarding federal benefits for retirees, this ''pending tsunami'' may heighten inflation pressures to the point that the Fed would have to resort to double-digit interest rates to keep prices constrained.

                                        Would the public and the politicians stand for interest rates again being as high as they were in the early 1980s? Greenspan doubts it, citing past efforts by some members of Congress to limit the central bank's independence.

                                        The reality of that period, though, was that while there was a great deal of posturing by politicians, there was never a serious effort on Capitol Hill to interfere with Fed policy. ...

                                        Furthermore, at that point some economists -- and many politicians -- believed there was a trade-off between inflation and unemployment. That is, that you could create more jobs by accepting somewhat higher inflation. Economists now are sure that trade-off can work only in the short-term...

                                        And during the heady second half of the '90s, politicians saw convincingly that very low unemployment and very low inflation could co-exist. ...

                                        As for the next 25 years, keep in mind that as painful as Fed policies were a quarter-century ago, Volcker and his colleagues ultimately were successful.

                                          Posted by on Thursday, September 27, 2007 at 12:33 AM Permalink  TrackBack (0)  Comments (5)


                                          links for 2007-09-27

                                            Posted by on Thursday, September 27, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (1)


                                            Wednesday, September 26, 2007

                                            Alan Greenspan versus Naomi Klein

                                            This is part of a longer interview of Alan Greenspan and Naomi Klein:

                                            Alan Greenspan vs. Naomi Klein on the Iraq War, Bush's Tax Cuts, Economic Populism, Crony Capitalism and More, Democracy Now [Watch 128k stream, Watch 256k stream]: AMY GOODMAN: ...We welcome you both to Democracy Now! ... You worked with six presidents, with President Reagan, with both President Bushes. You worked with President Ford, and you worked with Bill Clinton, who you have called a Republican president; why?

                                            ALAN GREENSPAN: That was supposed to be a quasi-joke. ... I’m a libertarian Republican, which means I believe in a series of issues, such as smaller government, constraint on budget deficits, free markets, globalization, and a whole series of other things, including welfare reform. And as you may remember, Bill Clinton was ... doing much that same agenda... [H]e is a centrist Democrat. And that's not all that far from libertarian Republicanism. ...

                                            AMY GOODMAN: Alan Greenspan, let's talk about the war in Iraq. You said what for many in your circles is the unspeakable, that the war in Iraq was for oil. Can you explain?

                                            Continue reading "Alan Greenspan versus Naomi Klein" »

                                              Posted by on Wednesday, September 26, 2007 at 01:35 PM in Economics, Iraq and Afghanistan, Monetary Policy, Oil, Social Security, Taxes | Permalink  TrackBack (0)  Comments (86)


                                              Mishkin: Will Monetary Policy Become More of a Science?

                                              Federal Reserve Governor Frederic Mishkin reviews the progress economists have made in monetary theory and policy in recent decades, and he outlines nine key principles that successful central banks have incorporated into their policymaking activities. This won't be for everyone, the original is fairly long, and even the cut-down version below remains lengthy, but if you are interested in monetary policy this is a very nice summary of theoretical and empirical advances in recent decades, and where the literature is headed next:

                                              Will Monetary Policy Become More of a Science?, by Frederic S. Mishkin, Board of Governors of the Federal Reserve System: Over the past three decades, we have seen a remarkable change in the performance of monetary policy. By the end of the 1970s, inflation had risen to very high levels, with many countries in the Organisation for Economic Co-operation and Development (OECD) experiencing double-digit inflation rates (figure 1).

                                              Continue reading "Mishkin: Will Monetary Policy Become More of a Science?" »

                                                Posted by on Wednesday, September 26, 2007 at 09:45 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (11)


                                                Bush's Plan to Sink SCHIP

                                                Ronald Brownstein on Bush's opposition to expanding SCHIP:

                                                Will Bush veto his own priority?, by Ronald Brownstein, Commentary, LA Times: The tragedy in Washington's escalating confrontation on children's healthcare is that the legislation Congress is on track to approve this week with substantial bipartisan support advances precisely the goal President Bush claims as his priority.

                                                Bush ... threatened to veto the bill Congress is completing because he charges it directs too much aid toward middle-income families and would prompt too many of them to drop private insurance and enroll in SCHIP.

                                                But even conservative Senate Republicans such as Utah's Orrin Hatch and Iowa's Charles Grassley have complained that Bush's concerns are, to put it politely, overstated. The best studies of the legislation show that it predominantly focuses its benefits on struggling working families and targets uninsured kids more efficiently than the alternative Bush has touted. ...

                                                Bush is correct that some "crowd-out" of private insurance would occur as parents seek more comprehensive or affordable coverage: the CBO calculates that in addition to the nearly 4 million uninsured kids the final bill would cover, it would also cause another 2 million children with access to private coverage to switch to public plans. That means about one-third of the bill's spending would benefit kids who have, or could obtain, private insurance.

                                                That sounds inefficient, but every effort to expand access inevitably diverts some benefits to people with insurance. Bush, for instance, is touting tax incentives as the best way to increase coverage. But the independent Lewin Group has calculated that Bush's proposal would provide 80% of its benefits to people who already are insured -- and half to families earning $75,000 or more.

                                                Besides, in today's healthcare market, government "crowd-out" hardly seems the most pressing threat. Bush may be worried about middle-class families dropping private insurance, but the bigger problem by far is private insurers dropping middle-income families. The number of uninsured children, after declining steadily since 1998, has soared by 1 million over the last two years. The Urban Institute recently found that 40% of those kids live in the very families Bush wants to weed from the program...

                                                The real question is whether Bush wants an agreement or a fight that paints congressional Democrats as big spenders. Until recently, his administration hadn't worried much about expanding eligibility: Since 2006, it has allowed three states (and the District of Columbia) to extend SCHIP to families earning up to $61,000. Bush's sudden alarm about including those families suggests less a change in policy priorities than a shift in political strategy.

                                                  Posted by on Wednesday, September 26, 2007 at 02:07 AM in Economics, Health Care, Policy, Politics | Permalink  TrackBack (0)  Comments (36)


                                                  Politicizing Science

                                                  Should science be more political?:

                                                  Science must be more political, by Michael Schrage, Commentary, Financial Times: ...The great tragedy of science today, complain its champions, is its ugly and polarising politicisation. ...

                                                  Perhaps the tragedy, though, is not that science is too political – it is that science is not political enough. ... Public policy would be significantly better off if scientists were treated with greater scepticism and less deference.

                                                  Public debate would be far better informed if scientists were pushed to make their work more accessible, self-critical and contextually aware of findings in complementary technical disciplines. Politicians in democracies should not hesitate to exploit publicly the inherent uncertainties and legitimate disagreements in scientific analyses on sensitive issues. Highlighting science’s flaws – not unlike highlighting flaws in healthcare, national security and economic programmes – is good politics and even better policy.

                                                  Science as an enterprise may be objective; scientists as individuals are not. ... Scientists can be as vulgar, pigheaded and contemptuously dismissive of contrary evidence as any lawyer, civil servant, journalist or elite professional. ...

                                                  An individual scientist deserves much the same standing in a science policy debate as would a parent or teacher in policy disputes over education. Institutionally, however, America’s National Academies of Science, the UK’s Royal Society and the acronymed jumble of United Nations agencies have increasingly abandoned traditional roles as science “advisers” in favour of actively lobbying for their quantitative models and scenario extrapolations to be public policy planning tools. In effect, scientific institutions have evolved into “special pleaders”, as vested in the rightness of their recommendations as any influence-seeking industrial trade group or bar association. The “scientific objectivity” of their forecasts is achieved through negotiated committee consensus.

                                                  Unfortunately, most of these consensus declarations minimise methodological disagreements, competing interpretations and self-criticism. Judicial rulings by supreme courts may include two or three cogent dissenting views from the bench; elite science review committees typically do not. Are distinguished scientists less ideological and more objective about evidence than distinguished jurists? Hardly.

                                                  The core problem is fundamental confusion over scientific consensus in public policy. A scientific consensus on how to split the atom is not a policy consensus on which bombs or nuclear reactors to build; a scientific consensus around the origins and transmission of HIV/Aids is not a consensus about public health interventions; and scientific consensus about climate change is not policy consensus around carbon taxes or renewable energy. History teaches that culture, ethics, economics and, yes, politics overwhelmingly determine how scientific consensus ultimately translates into policy. Scientific consensus is overrated as a successful policy rationale. ...

                                                  But to the extent rational people insist “consensus science” justifies brave new policies, they invite closer scrutiny of how that consensus was reached. Here science does not do well. Ask physicists, molecular biologists, meteorologists, climatologists or economists what rules define “consensus” in their respective disciplines. Their answers will disappoint. No scientific consensus exists about what constitutes a scientific consensus.

                                                  Not 20 years ago, the scientific consensus declared the human genome filled with useless “junk DNA”. Today the emerging “consensus” insists junk DNA is useful after all. A century ago, elite scientific consensus said “eugenics” should determine the west’s population, immigration and education policy. How sustained should the perceived scientific consensus be before multi-billion-pound, life-and-death public policies are fixed around it? ...

                                                  Scientists will be more credible and persuasive not if they are less political but if their arguments are more accessible, more testable and, yes, more humble. Then again, that is just a ... hypothesis.

                                                  I don't have any problem at all with an honest debate over the validity of scientific claims used to support a particular policy. I do have a problem with dishonest debate, with distorting what science says to support or oppose a policy.

                                                  Uncertainty will be present in most cases, but the mere presence of uncertainty does not justify inaction. If a broad, though incomplete scientific consensus exists on a particular topic, and if the science implies that we face large costs of one sort or another in the future, precautionary action may still be justified. We can't just worry about the consequences if the science is wrong. We also need to worry about what might happen if it is right.

                                                    Posted by on Wednesday, September 26, 2007 at 12:24 AM in Economics, Politics, Science | Permalink  TrackBack (0)  Comments (34)


                                                    links for 2007-09-26

                                                      Posted by on Wednesday, September 26, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (7)


                                                      Tuesday, September 25, 2007

                                                      My First Day of Class

                                                      Me, with a bit of attitude as I project the syllabus onto the overhead to start class: For anyone who might be confused, this is Economics 493.

                                                      Someone in class, interrupting: Uhm, isn't this Economics 470?

                                                      Me: I guess it is. 493 must be my next class.

                                                      I am video taping both classes and will post them on the class web pages, and in the rush and worry about getting the camera set up and making sure everything works, I got a bit confused.  I think the videos will be pretty embarrassing - not sure I want my teaching revealed to the world, particularly since I don't usually teach one of the classes, History of Economic Thought, and not knowing which class you are teaching doesn't help at all. I haven't done live videos before, only ones I shot outside of class, so it will be interesting to see how this goes.

                                                        Posted by on Tuesday, September 25, 2007 at 02:16 PM in Economics | Permalink  TrackBack (0)  Comments (15)


                                                        "Which Institutions Matter for Economic Growth?"

                                                        How do institutions interact with economic growth? This research finds that, at least in the case examined, South Africa, the establishment of property rights is an important factor in unleashing economic growth. However, given the warnings of Dani Rodrik, I'm hesitant to generalize too much from this result. Dani's argument is that every country is unique in its institutional and social design so that each will also have it's own unique choke point that is inhibiting growth. For some countries it may very well be private property rights, but for others it may be something else entirely that needs to be changed to allow growth to accelerate. Nevertheless, whether it's identified a broader principle or not, this research is helpful because it tells us that when a country has conditions similar to those that existed in South Africa, the establishment of private property rights is a good place to start when considering what institutional reforms to implement:

                                                        Which institutions matter for economic growth?, by Liam Brunt, Vox EU: It is obvious that a country’s political, legal, economic and social institutions will affect its rate of economic growth. However, it is much more difficult to identify exactly which institutions matter and exactly how they matter. This is an issue of some practical importance. Countries are free to redesign their institutions in order to improve their economic performance. But, unless they can pinpoint the beneficial aspects of particular institutions, the only option is to import wholesale the institutional structures of another, more economically successful country. This happened in Japan in 1945 with respect to many US institutions and again recently in Dubai, which adopted the entire panoply of commercial law that regulates the City of London. However, in many cases it may be infeasible or inefficient to change the entire institutional régime, or it may be politically or socially unacceptable. For this reason, it would be useful if we had a better idea of exactly which aspects of which particular institutions were beneficial for stimulating growth. But the evidence on this matter is very mixed.

                                                        When we talk about “institutions”,  we are referring to something much broader than simply the set of easily recognisable legal entities, such as parliaments or central banks or unions (although these are all particular examples of institutions). An institution is any generally accepted procedure that governs the process of interaction between members of a society. For example, waiting in line is a well-known institution for allocating goods that is particularly popular in England. Property rights are a fundamental legal and economic institution, although the concept of a property right and the ways in which it might be regulated or enforced vary greatly across the world. Legal systems are another fundamental institution and here much attention has focused on the distinction between civil law and common law systems – the former being based on a set of statutes handed down by a supreme authority (such as the Code Napoléon), the latter being based on a corpus of case law formulated by judges (such as the English common law system). A second characteristic of legal systems that has attracted attention is the degree of independence of the judiciary from the legislative authorities (such as whether Supreme Court judges have to be reappointed regularly by the legislature). An important social and economic institution that is distinct from the legal system, yet closely related to it, is that of corruption; corruption provides an important and accepted framework for economic transactions in many countries, although is virtually absent from some others.

                                                        A challenge that we face in disentangling the economic impact of these and other institutions is that their occurrence tends to be very highly correlated across countries, due largely to the impact of colonial inheritance. For example, the English legal system is based on common law and the English governmental system is based on parliamentary democracy; therefore the former English colonies virtually all have a common law system and a form of parliamentary democracy. By contrast, the French and Spanish legal systems are based on the Code Napoléon and – at the time of colonisation – the French and Spanish governmental systems were quite autocratic; hence most former French and Spanish colonies have a civil law system and more autocratic governmental institutions (such as a prominent role for the Presidency). To make these various threads even more difficult to disentangle, the institutional factors may be correlated also with geography. For example, England colonised many territories in the temperate zones (North America, Australasia and southern Africa) whereas France and Spain colonised many territories in the tropics (West Africa, together with Central and much of South America). More worryingly, it has been argued that geography itself systematically influenced the type of institutions that were bestowed upon a colony, instituting more extractive forms of government in regions where there was a large indigenous population to be exploited. Yet geography can have a large impact on current economic performance in its own right, due to positive factors such as natural resource endowments (mineral deposits and so on) and negative factors such as the disease environment (notably the prevalence of malaria). Thus the correlation between geography and institutions makes it difficult to estimate the separate effects of each of them on economic growth.

                                                        Continue reading ""Which Institutions Matter for Economic Growth?"" »

                                                          Posted by on Tuesday, September 25, 2007 at 12:33 AM in Economics | Permalink  TrackBack (0)  Comments (48)


                                                          John Berry: Greenspan Sticks to His Guns, as Well He Should

                                                          John Berry says Greenspan shouldn't back down in the face of criticism:

                                                          Greenspan Sticks to His Guns, as Well He Should, by John M. Berry, Bloomberg: ...Greenspan's just-published book, ''The Age of Turbulence,'' ...[is an] exposition, with the help of former Fortune writer Peter Petre, of his background, his unusual bottom-up approach to analyzing the U.S. economy and his observations of and role in public policy over an eventful half century, including his 18 years at the Fed.

                                                          Greenspan admits to some mistakes and explains how he made them.

                                                          In other instances, he doesn't even begin to satisfy most of his critics because he still thinks his position is correct. The prime example is his view that it is impossible to know when a large increase in asset prices -- whether it's in equities or housing -- is a bubble. He argues that the Fed generally can't deflate a bubble without crunching the economy. On bubbles, Greenspan is right. ...

                                                          Robert Shiller ... noted that Greenspan has said that ''the world's monetary authorities cannot control bubbles. He is mostly right: the best thing that monetary authorities could have done, given their other priorities and concerns, is to lean against the real estate bubble, not stop it from inflating.'' ...

                                                          One mistake Greenspan acknowledges -- with very harsh words -- is his expectation that President George W. Bush would pursue a conservative fiscal course once his 2001 tax cut was in place.

                                                          Greenspan defends his support of a tax cut in his January 2001 Congressional testimony because he feared that, if very large projected budget surpluses materialized, they could eventually destabilize the economy. Even as he supported a tax cut, he urged that it be phased in and that if the revenue weren't there, that portions of the cut be rescinded.

                                                          Greenspan says he was warned the day before by former Treasury Secretary Robert Rubin that with a big tax cut, ''the risk is, you lose the political mind-set of fiscal discipline.'' He didn't change his testimony, and he agrees in the book that Rubin's prediction came true.

                                                          However, it is wrong for Greenspan's critics to claim that if he had opposed a tax cut one wouldn't have passed. There was going to be one no matter what Greenspan said. ...

                                                          And Greenspan's monetary policy?

                                                          In a review of the book ..., J. Bradford DeLong ... wrote, ''Greenspan is world famous because he was very good and very lucky'' as Fed chairman.

                                                          ''During his tenure at the Federal Reserve, he made roughly 36 substantive decisions about the direction interest rates should go. Six times I disagreed with him. Five of those six times, I was wrong,'' DeLong said. The one exception: He should have cut interest rates in the summer of 2000 after the stock market bubble burst, he said.

                                                          One can argue, as several Fed officials have, that the 50 basis-point increases in February 1995 and May 2000 were mistakes too.

                                                          Overall, Greenspan's record remains a sterling one.

                                                          Since we're quibbling, I have a couple. John Berry says that Greenspan argued for tax cuts because they "could eventually destabilize the economy." But that's not the full reason. He was afraid of the effect the government would have on the financial markets when the government invested the large surplus in the private sector. It isn't instability that he's worried about, it's inefficiency. He is ideologically opposed to government intervention (a strange position for someone in charge of the Fed to hold), and did not want to see free markets undermined. To avoid this problem, his solution was to accumulate the projected Social Security Trust Fund surplus in private accounts so that individuals rather than the government would participate in the private market, and to cut taxes to give any remaining surplus back to individuals (where it would be free from government control).

                                                          Another quibble. John Berry says "it is wrong for Greenspan's critics to claim that if he had opposed a tax cut one wouldn't have passed." That may be true, but that's not the main criticism. The criticism is that Greenspan did not speak out after his 2001 Senate testimony once it became clear that the surplus would not materialize.

                                                            Posted by on Tuesday, September 25, 2007 at 12:24 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (29)


                                                            links for 2007-09-25

                                                              Posted by on Tuesday, September 25, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (1)


                                                              Monday, September 24, 2007

                                                              The "Rad Con" Movement

                                                              The SF Chronicle on Robert Reich:

                                                              The Class Warrior, by Heidi Benson, Chronicle: From the pulpit of a lecture hall ... at UC Berkeley, Robert Reich is preaching about the perils of the wealth gap. "We haven't experienced inequality on this scale since the 1920s," Reich says, eyes flaring. "How much inequality are we willing to accept?"

                                                              It's the last lecture of the former secretary of labor's spring Wealth & Poverty class. ... "Today, I want to talk about leadership," Reich says. A hand shoots up.

                                                              "Flossie, is there something you'd like to say?" he asks. "I'd like to add a quip from H.L. Mencken," says a woman in her 70s who is auditing the course. Adjusting her glasses, she reads a passage from the Jazz Age populist: "On some great and glorious day the plain folks of the land will reach their heart's desire at last and the White House will be adorned by a downright moron."

                                                              Titters erupt. The attendant majority, all graduate students in their 20s, exchange knowing looks. That Flossie!

                                                              "Thank you for that," Reich says. "When I'm feeing too optimistic, I pick up my little volume of Mencken, and it always brings me right down."

                                                              Everyone knows where Reich stands. He's the guy on the Left. The wry optimist. As secretary of labor in the Clinton administration from 1992 to 1997, he implemented the Family and Medical Leave Act and helped raise the minimum wage. His proudest achievement during that time was "running a tight labor market," he says. "Income inequality actually started to reduce."

                                                              To Reich, it's not enough to identify a problem; solutions can and must be found. He aims for both...

                                                              "It is easier to summon political will when there is some semblance of social solidarity," he says. Though the nation is divided on many fronts, Reich believes the challenge can be met. "How do we close the gap between the social contract and social reality?" he booms. ...

                                                              Reich ... argues that while free-market capitalism has ascended worldwide since the Cold War, democracy has declined. "Since the 1970s, and notwithstanding three recessions, the United States economy has soared," he writes. New products are available at increasingly lower prices, and though health care costs more today, Americans are living longer, thanks to new drugs and medical technologies. The stock market has soared without spurring inflation.

                                                              But Reich believes these benefits have come at a cost. "Capitalism has become more responsive to what we want as individual purchasers of goods," he writes, "but democracy has grown less responsive to what we want together as citizens."

                                                              The seeds for today's income gap were sown, Reich believes, during Ronald Reagan's two terms as president. That was the birth of what he calls the "rad con" or radical conservative movement, to which he attributes the loss of middle-class jobs and government-championed tax cuts that gutted education and social services.

                                                              In his view, the frayed social safety net has compromised the cornerstone of the American dream - economic mobility - which allows the success of each generation to exceed the last.

                                                              "If you are born poor, chances are much greater than they were 30 years ago that you'll stay poor," Reich says.

                                                              But it's not capitalism's fault.

                                                              "Capitalism's role is to enlarge the economic pie," he says. "How the slices are divided - and whether they are applied to private goods like personal computers or public goods like clean air - is up to society to decide."

                                                              The means America has used in the past to temper inequality - including progressive income taxes, good public schools, trade unions that bargain for higher wages - have eroded, Reich says. And don't blame corporate executives, as they're just doing what comes naturally.

                                                              Reich calls corporate deal making that depletes jobs or harms the environment a natural response to competition. "This doesn't make them right," he writes, "but the only way to make them wrong . . . is to make them illegal. If we want them to play differently, we have to change the rules."

                                                              Citizens, he declares, must demand change at the polls... Reich ...[has a] theory of "The Four Horsemen of the Apocalypse" - the mechanisms people use to avoid change: Denial. Escapism. Scapegoating. Cynicism.

                                                              "We all use these avoidance mechanisms. They're comforting," he says, "But cynicism is the most insidious, the one I despair over, because it says, 'If the system is rigged, I don't have to take responsibility.' "

                                                              Here's where leaders make a difference, he insists.

                                                              "The job of leadership is to help people overcome denial and cynicism so they can close the gap between the ideal and reality," he says, citing Martin Luther King Jr., Mohandas Gandhi, Rachel Carson - and Al Gore. "Gore is more of a leader now that he's not an official," he adds. "You don't need formal authority to be a leader."

                                                              Reich's preoccupation with the decline of family income has raised the ire of conservatives for years. He was accused of "discrediting the Reagan record" by the National Review's Ramesh Ponnuru in 1995. ...

                                                              Reich isn't above hyperbole himself. But in his work ... he aims to do "the opposite of what Ann Coulter does," he says.

                                                              "I hope to offer a reasoned assessment of why I believe what I believe and invite others to engage in civil discourse," he says. ...

                                                              "People ask how I can be so optimistic, and it's a good question since I've spent half my adult life in government," he says. "But I've seen remarkable things happen. Who would have said a year ago that the Democrats would be controlling both houses of Congress?" ...

                                                              [I]n the new global marketplace, it is still the well educated and well connected who will benefit most, he contends. Society must do more to bridge that gap. "We could modulate it, just as some countries have," he suggests, by investing in early childhood education, access to college, health care and fair housing.

                                                              "I'm called a class warrior for my views," Reich says. "But failure to act on these trends invites real class warfare." ...

                                                                Posted by on Monday, September 24, 2007 at 02:16 PM in Economics, Income Distribution, Policy, Social Insurance | Permalink  TrackBack (0)  Comments (33)


                                                                "The G.O.P.'s Southern Strategy"

                                                                This is a follow-up to Paul Krugman's column today. A lot of people have been denying the existence of a Southern strategy. If it didn't exist, why apologize for it as Ken Mehlman did in 2005? The only real question is whether it still exists, and Bob Herbert and many others are convinced that the "G.O.P.'s Southern strategy, racist at its core, still lives":

                                                                An Empty Apology, by Bob Herbert, Commentary, NY Times, (July 18, 2005): One of President Bush's surrogates went before the N.A.A.C.P. last week and apologized for the Republican Party's reprehensible, decades-long Southern strategy.

                                                                The surrogate, Ken Mehlman, is chairman of the Republican National Committee. Perhaps he meant well. But his words were worse than meaningless. They were insulting. The G.O.P.'s Southern strategy, racist at its core, still lives.

                                                                "Some Republicans gave up on winning the African-American vote, looking the other way or trying to benefit politically from racial polarization," said Mr. Mehlman. "I am here today as the Republican chairman to tell you we were wrong." Read the rest of the column...

                                                                Update: Also see Bob Herbert's most recent column.

                                                                  Posted by on Monday, September 24, 2007 at 12:06 PM in Politics | Permalink  TrackBack (0)  Comments (31)


                                                                  Paul Krugman: Politics in Black and White

                                                                  Paul Krugman discusses a topic that gets far too little attention, racial politics:

                                                                  Politics in Black and White, by Paul Krugman, Commentary, NY Times: Last Thursday there was a huge march in Jena, La., to protest the harsh and unequal treatment of six black students arrested in the beating of a white classmate. ... Many press accounts of the march have a tone of amazement. Scenes like those in Jena, the stories seemed to imply, belonged in the 1960s, not the 21st century. ...

                                                                  But the reality is that things haven’t changed nearly as much as people think. Racial tension, especially in the South, has never gone away... And race remains one of the defining factors in modern American politics.

                                                                  Consider voting in last year’s Congressional elections. Republicans ... received a “thumping,” with almost every major demographic group turning against them. The one big exception was Southern whites, 62 percent of whom voted Republican in House races.

                                                                  And yes, Southern white exceptionalism is about race, much more than it is about moral values, religion, support for the military or other explanations sometimes offered. ... Republican politicians ... understand quite well that the G.O.P.’s national success since the 1970s owes everything to the partisan switch of Southern whites... Since the days of Gerald Ford, just about every Republican presidential campaign has included some symbolic gesture of approval for good old-fashioned racism.

                                                                  Thus Ronald Reagan ... started his 1980 campaign with a speech supporting states’ rights delivered just outside Philadelphia, Miss., where three civil rights workers were murdered. In 2000, Mr. Bush made a pilgrimage to Bob Jones University, famed at the time for its ban on interracial dating.

                                                                  And all four leading Republican candidates for the 2008 nomination have turned down an invitation to a debate on minority issues scheduled to air on PBS this week.

                                                                  Yet ... it would be wrong to suggest that the nation has made no progress. Racism, though not gone, is greatly diminished: ... we are truly becoming a more tolerant, open society.

                                                                  And the cynicism of the “Southern strategy” introduced by Richard Nixon, which delivered decades of political victories to Republicans, is now starting to look like a trap for the G.O.P. ...

                                                                  Republican ... contenders have snubbed not just blacks — who ... probably won’t vote for a Republican in significant numbers no matter what — but Hispanics. In July, all the major contenders refused invitations to address the National Council of La Raza, which Mr. Bush addressed in 2000. Univision, the Spanish-language TV network, had to cancel a debate ... because only John McCain was willing to come.

                                                                  If this sounds like a good way to ensure defeat in future elections, that’s because it is: Hispanics are a rapidly growing force in the electorate.

                                                                  But to get the Republican nomination, a candidate must appeal to the base — and the base consists, in large part, of Southern whites who carry over to immigrants the same racial attitudes that brought them into the Republican fold to begin with. As a result, you have the spectacle of Rudy Giuliani and Mitt Romney, pragmatists on immigration issues when they actually had to govern in diverse states, trying to reinvent themselves as defenders of Fortress America.

                                                                  And both Hispanics and Asians, another growing force in the electorate, are getting the message. Last year they voted overwhelmingly Democratic, by 69 percent and 62 percent respectively.

                                                                  In other words, it looks as if the Republican Party is about to start paying a price for its history of exploiting racial antagonism. If that happens, it will be deeply ironic. But it will also be poetic justice.

                                                                  Update: "Bubba isn't Who You Think"

                                                                  Paul Krugman with an update to today's column:

                                                                  Bubba Isn’t Who You Think, by Paul Krugman: ...I thought I’d mention an important point about Southern white voting...: namely, the poor whites are not the issue.

                                                                  In fact, if you look at voting behavior, low-income whites in the South are not very different from low-income whites in the rest of the country. You can see this both in Larry Bartels’s “What’s the matter with What’s the Matter With Kansas?” (pdf), Figure 3, and in a comprehensive study of red state-blue state differences by Gelman et al (pdf). It’s relatively high-income Southern whites who are very, very Republican. Can I get away with saying that rich white trash are the problem? Probably not. ...

                                                                  Contrary to what you may have read, the old-fashioned notion that rich people vote Republican, while poorer people vote Democratic, is as true as ever – in fact, more true than it was a generation ago. But in rich states like New Jersey or Connecticut, the relationship is weak; even the very well off tend to be only slightly more Republican than working-class voters. In the poorer South, however, the relationship is very strong indeed.

                                                                  This is why it’s true both that rich voters tend to be Republican, and that rich states tend to be Democratic.

                                                                  Gelman et al have a nice way of putting this:

                                                                  If we had to pick a “typical Republican voter,” he or she would be an upper-income resident of a poor state, and the “typical Democratic voter” would conversely be a lower-income resident of a rich state. But these are more subtle concepts, not directly readable off the red-blue map—and, in any case, we would argue that given the diversity among supporters of either party, choosing typical members is misleading.

                                                                   

                                                                    Posted by on Monday, September 24, 2007 at 12:33 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (93)


                                                                    links for 2007-09-24

                                                                      Posted by on Monday, September 24, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (5)


                                                                      Sunday, September 23, 2007

                                                                      "Does a Downward-Sloping Yield Curve Predict a Recession?"

                                                                      Charles Goodhart reviews research he has conducted with Luca Benation on the relationship between yield curves and recessions. The research "suggests that the additional predictive power of the yield curve – beyond the information in other macroeconomic variables – often appeared during periods of uncertainty about the underlying monetary regime":

                                                                      Does a downward-sloping yield curve predict a recession?, by Charles A.E. Goodhart, Vox EU: A downward-sloping yield curve has commonly been used as a leading indicator of a future recession. For much of last year long rates of interest were slightly below short rates in the US and elsewhere, although recent events have reversed this. Some saw the inverted yields curve as a portent of a coming decline in growth, and may have adjusted their portfolios accordingly. Yet growth has only fallen a little in the US, has strengthened in the euro-zone, and has remained resolutely stable in the UK.

                                                                      In current research[1] I, and my colleague Luca Benati of the ECB, have investigated why the yield curve has appeared to have had such predictive power for future output growth at times in the past, but also why this may now have largely disappeared. We examined the relationship between output, inflation, short term interest rates, and the spread (i.e., difference) between short and long rates, for the US and the UK since the Gold Standard era, and for the Eurozone, Canada and Australia in the Post-WWII period.

                                                                      Continue reading ""Does a Downward-Sloping Yield Curve Predict a Recession?"" »

                                                                        Posted by on Sunday, September 23, 2007 at 05:22 PM in Economics | Permalink  TrackBack (0)  Comments (10)


                                                                        Larry Summers: Beware Moral Hazard Fundamentalists

                                                                        Larry Summers says the moralists have it wrong:

                                                                        Beware moral hazard fundamentalists, by Larry Summers, Commentary, Financial Times (free): Central to every policy discussion in response to a financial crisis ... is the concept of moral hazard. Unfortunately, there is great confusion ... about ... when moral hazard is, and is not, a problem. ...

                                                                        The term “moral hazard” originally comes from the area of insurance. It refers to the prospect that insurance will distort behaviour, for example when holders of fire insurance take less precaution with respect to avoiding fire...

                                                                        In the financial arena the spectre of moral hazard is invoked to oppose policies that reduce the losses of financial institutions that have made bad decisions. In particular, it is used to caution against creating an expectation that there will be future “bail-outs”. ...

                                                                        Moral hazard fundamentalists misunderstand the insurance analogy... As a consequence, their proposed policies, if followed, would reduce the efficiency of the financial sector in normal times, exacerbate financial crises and increase economic instability. They are wrong in three crucial respects.

                                                                        Continue reading "Larry Summers: Beware Moral Hazard Fundamentalists" »

                                                                          Posted by on Sunday, September 23, 2007 at 03:06 PM in Economics, Financial System, Policy, Regulation | Permalink  TrackBack (0)  Comments (20)


                                                                          The Repo Man

                                                                          Jim Hamilton rebuts the appropriateness of the "Helicopter Ben" nickname Ben Bernanke appears to be acquiring. Jim explains why critics who believe the Fed recently increased the money supply substantially have it wrong. Here's Brad DeLong's version of Jim's remarks:

                                                                          "Helicopter Ben"?, by BradDelong: Jim Hamilton Says: Not Really Jim Hamilton writes:

                                                                          Econbrowser: Money creation and the Federal Reserve: There seem to be some misconceptions about the monetary consequences of actions that the Federal Reserve has taken to address liquidity needs.... I hope in this post to get beyond these sound bites, beginning if I may with some details of the process whereby money is created in the United States. Where did the cash in your wallet come from? Presumably you got it from your bank or ATM. And the reason that the bank was willing to give you that cash was that you already had deposits in an account with the bank, which were in effect credits to obtain cash when you wanted it.

                                                                          And where did your bank get that cash? If it is a member of the Federal Reserve, your bank got it from a Federal Reserve Bank... your bank had deposits in an account with the Fed, that give it credits to obtain cash when it wants it.... And where did those reserves come from?... the Fed purchased Treasury bills... paying for them by creating new reserves in the dealers' banks. The Fed now is the owner of the Treasury bills, and those banks now have new reserves, which they could use to obtain new dollar bills, if they desired.

                                                                          To follow what's happened over the last 6 weeks, it's necessary to add a few details to this basic story. For day-to-day fine-tuning of interest rates and the money supply, the Fed usually does not use outright purchases of Treasury securities, but is more likely instead to rely on repurchase agreements... on any given day the Fed's outstanding repos have created reserves and thus potential dollars in circulation... for the week ended August 8, just before the summer fireworks... the Fed held $791 billion in Treasury securities and $19 billion in repos....

                                                                          Beginning August 9, the Fed aggressively used repos.... The hundred billion dollar figure that some people use comes from adding together each day's repo operations, which is a completely nonsensical calculation. At the height of these operations (the week of August 9-15), Fed repos created an average of $18 billion in new daily reserves....

                                                                          [W]hat exactly happened to that $18 billion while it was in the banking system? The answer is-- absolutely nothing. Banks simply held these funds as excess reserves, with nobody withdrawing a single dollar bill. This tremendous increase in banks' desires to hold reserves beyond the amount that they were required was one of the remarkable aspects of this situation and the primary reason that the Fed needed to conduct such repo operations in the first place... reserve balances are now right back where they were on August 8, and currency in circulation is in fact $3 billion lower than it was. The Fed has done its job, and the kvetchers have done theirs....

                                                                          Now, I realize that this explanation may not be as entertaining as the whole Helicopter Ben meme. But on the other hand, it may be a whole lot more accurate...

                                                                          Let me present Jim Hamilton's argument in a different way and also say a little bit about the phrase "helicopter money". It's generally possible to write the money supply equation as follows:

                                                                          Continue reading "The Repo Man" »

                                                                            Posted by on Sunday, September 23, 2007 at 12:51 PM in Economics, Financial System, Monetary Policy | Permalink  TrackBack (0)  Comments (15)


                                                                            links for 2007-09-23

                                                                              Posted by on Sunday, September 23, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (6)


                                                                              Saturday, September 22, 2007

                                                                              "Economists and Other Humans Don’t Always See Eye to Eye"

                                                                              Austan Goolsbee says loss aversion may make the housing crash worse:

                                                                              A Reality Check for Home Sellers, by Austan Goolsbee, Economic View, NY Times: Economists and other humans don’t always see eye to eye. “Economists tend to think people are crazy because they won’t sell their houses for less than they paid for them — and people think economists are crazy for thinking things exactly like that,” said Professor Christopher Mayer ... at Columbia Business School and an authority on real estate economics. ...

                                                                              Classical economics can’t explain this behavior. That’s because people who refuse to sell their houses for less than they paid for them are violating a cardinal rule of the market: stuff is worth what it’s worth. It doesn’t matter what you paid for it. But when Professor Mayer and his co-author, David Genesove ... at the Hebrew University ... studied the Boston condominium market in the 1990s — scene of one of the biggest real estate busts in recent American memory — the actual patterns of human behavior did not seem to follow the standard rules at all.

                                                                              From 1989 to 1992, prices in Boston fell sharply, with condominium prices dropping as much as 40 percent. For a great many of those who bought condominiums during that period, selling could be done only at a significant loss. And, basically, many people refused to sell. ...

                                                                              [P]eople who had bought at the peak and were facing a loss generally listed their properties for significantly more than those who had bought at a time when prices were lower. Properties listed above the market price just sat there..., much of the market went into a deep freeze as many people held out for market prices that no one would reasonably pay.

                                                                              In classical economics, that’s not supposed to happen, but the episode did comport with the behavioral economics theory of loss aversion: people have a visceral — some might say “irrational” — hatred of losing money. They try to avoid doing so, even when it goes against their own best interests.

                                                                              Move ahead to September 2007. Many regions may be starting down a path like that of Boston’s market freeze of the 1990s. Wherever prices decline, look for lots of sellers holding out for unrealistic prices in a vain attempt to recoup their losses. It’s a hang-up that people have, and it can cause big problems. A number of houses with high prices just sit on the market while everyone waits. ...

                                                                              [E]conomists ... keep close tabs on this kind of behavior because the purchases of durable goods like furniture, appliances and televisions tend to run hand in hand with home purchases — and durables have a disproportionate influence on the business cycle. Further, because the freezing of the housing market makes it harder for people to move, it reduces the likelihood that they can quickly relocate for higher-paying jobs. Dysfunction in the housing market can spill over into the job market, too.

                                                                              So by being hung up about whether your condominium will sell for what you ... may be threatening the very performance of the economy... — provided that many others behave in a similar way.

                                                                              What is to be done? Well, if you are holding out for an above-market price to recoup your losses, perhaps you would do well to hear the advice that Professor Mayer gives his own family members.

                                                                              “If you want to sell your house then you list it at the market price and you sell it,” he said. “If you don’t really want to sell then don’t put it on the market. But don’t say you want to sell and then set the price so high that you spend the year cleaning up every morning, having people walk through your living room and look in your medicine cabinets and reject you. That’s just painful — and expensive.” ...

                                                                                Posted by on Saturday, September 22, 2007 at 04:05 PM in Economics, Housing | Permalink  TrackBack (0)  Comments (18)


                                                                                knzn: The Fed Should Target Unit Lbor Costs

                                                                                knzn says the Fed should target unit labor costs:

                                                                                Target Unit Labor Costs, by knzn: Last year (here and here, with related posts here, here, here, here, here, here, and here – or just read the August 2006 archives and my post from yesterday) I suggested that the Fed should target unit labor costs. Upon additional thought, I still think so. I won’t go through the whole argument again, but I want to note a few important points.

                                                                                He goes on to list five reasons for the Fed to follow this policy.

                                                                                knzn raises a good point - what price index should the Fed target? Here's Michael Woodford:

                                                                                One goal of my research has been to clarify which kinds of macroeconomic stabilization objectives best serve economic welfare. ... [I]t is not immediately obvious what the conventional goals of monetary stabilization policy --- especially the nearly universal emphasis that central banks place on maintaining a low and stable inflation rate --- have to do with consumer welfare; after all, the arguments of household utility functions generally are assumed to be the quantities of various goods and services, but not their prices. Nonetheless, I have shown that in familiar classes of sticky-price dynamic stochastic general equilibrium (DSGE) models --- models that incorporate key elements of ... empirical models of the monetary transmission mechanism... --- it is possible to show that the expected utility of the representative household varies ... with ... measures of price and wage inflation on the one hand and measures of real activity relative to a (time-varying) target level of activity on the other. .... The theory clarifies both the appropriate definition of ... stabilization objectives, and the appropriate relative weights to assign to them...

                                                                                The answer obtained depends, of course, on the structure of the economy. In particular, inflation variability reduces welfare because of the presence of nominal rigidities; the precise nature of these rigidities determines the appropriate form of the inflation-stabilization objective. For example, if wages are flexible ..., and price adjustments are staggered in the way assumed ... by Guillermo Calvo ..., then inflation variation results in distortions caused by the misalignment of prices that are adjusted at different times. The resulting welfare losses are proportional to the ... squared deviations of the inflation rate from zero. Other assumptions about the timing of price adjustments also imply that inflation variations reduce welfare, but with a different form of loss function...

                                                                                The theory also provides important insights into the question of which price index or indexes it is more important to stabilize. Again, the answer depends on the nature of the nominal rigidities. If prices are adjusted more frequently in some sectors of the economy than in others, then the welfare-theoretic loss function puts more weight on variations in prices in the sectors where prices are stickier... This provides a theoretical basis for seeking to stabilize an appropriately defined measure of "core" inflation rather than an equally weighted price index. .... Similarly, if wages are sticky as are goods prices, as implied by many empirical ... models, then instability in the rate of growth of a broad index of nominal wages results in distortions similar to those created by variations in goods price inflation. If [adjustments in] wages are staggered ..., then the welfare-theoretic loss function includes a term proportional to the squared rate of goods price inflation and another term proportional to the squared rate of wage inflation each period. In this case, optimal policy involves a tradeoff between inflation stabilization, nominal wage growth stabilization, and output-gap stabilization...

                                                                                Thus, though many people object to the Fed linking the federal funds rate to measures of core inflation (as opposed to overall inflation) and wage inflation (why slow the economy just as wages begin to catch up?), there is a theoretical basis for doing so within the class of sticky wage and price dynamic stochastic general equilibrium (DSGE) models (i.e. New Keynesian models). There are two key things about constructing an optimal index. First, the prices that are stickiest should receive the most attention (weight) in the overall index, flexible prices can take care of themselves. That is why you may want to eliminate oil and food prices, both of which are very flexible, as a first approximation to this principle. Second, the split between wage and price stickiness depends upon the relative degree of stickiness in each sector. If wages are much stickier than prices, than wages should receive more weight than prices. This is just the first point extended over both input and output prices, i.e. that sticky prices receive the most weight in the index. Woodford believes that the weight on price and wage inflation should be about equal, but that is an empirical matter and hence subject to dispute. But so long as wages do display stickiness, then they should be part of the Fed's decision rule.

                                                                                  Posted by on Saturday, September 22, 2007 at 01:26 PM in Economics, Monetary Policy | Permalink  TrackBack (1)  Comments (64)


                                                                                  EconoSpeak

                                                                                  Pro-Growth Liberal (PGL), in a post at EconoSpeak, says "Greg Mankiw Asks the Democrats a Good Question on Fiscal Policy." PGL has a few questions of his own.

                                                                                  EconoSpeak is a new blog featuring Kevin Quinn, PGL, Peter Dorman, Michael Perelman, Econoclast, B. Rosser, Sandwichman, and others to whom I apologize for leaving off the list.

                                                                                    Posted by on Saturday, September 22, 2007 at 12:15 PM in Budget Deficit, Economics, Politics, Taxes, Weblogs | Permalink  TrackBack (0)  Comments (2)


                                                                                    Philanthropy and the Common Good

                                                                                    Philanthropy is nice, but it's not a substitute for democratic government:

                                                                                    We Can't Rely on the Kindness of Billionaires, by David Nasaw, Commentary, Washington Post: "Giving," Bill Clinton's folksy, first-person tour of worthy causes and the good people who support them, is so relentlessly upbeat that only the most churlish professor would say a discouraging word about it. But the former president is so intent on celebrating 21st-century philanthropy -- and highlighting his and Hillary's role in promoting "the explosion of private citizens doing public good" -- that he blithely ignores a hard reality: Philanthropy and democracy don't get along nearly as seamlessly as "Giving" would have us believe.

                                                                                    Private giving is not the panacea for all that ails us. Clinton concedes early on that many problems "cannot be adequately addressed without more enlightened government policies," but he then devotes only 19 of his 211 pages to government's role in advancing the common welfare. In urging us to do good privately, he tacitly reinforces a lack of faith in the capacity of democratic governance to cure our social ills.

                                                                                    Continue reading "Philanthropy and the Common Good" »

                                                                                      Posted by on Saturday, September 22, 2007 at 11:43 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (9)


                                                                                      Captain Credit Crunch - New and Improved!

                                                                                      CreditCrunch

                                                                                      Not from Luskin.

                                                                                        Posted by on Saturday, September 22, 2007 at 11:34 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1)


                                                                                        links for 2007-09-22

                                                                                          Posted by on Saturday, September 22, 2007 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (1)


                                                                                          Friday, September 21, 2007

                                                                                          FRBSF: Changes in Income Inequality across the U.S

                                                                                          Tali Regev and Daniel Wilson of the San Francisco Fed look at whether offshoring, skill-based technical change, and immigration are associated with changes in regional income inequality in the U.S. in recent years. Their results "do lend tentative support to these theories":

                                                                                          Changes in Income Inequality across the U.S., by Tali Regev and Daniel Wilson, Economic Letter, FRBSF: Over the past four decades, overall income inequality has increased in the U.S. One particularly striking feature of the data is that the income gap has widened most between the top and the middle of the distribution, while it has remained relatively stable between the middle and the bottom. The causal forces behind the increase in inequality have been a topic of much debate among the public, the media, and policymakers (see, for example, Yellen 2006), as well as a rich field of research for economists.

                                                                                          Underlying these inequality trends are considerable differences across regions. Relating these differences to regional characteristics could help identify the sources of national growth in inequality; yet, surprisingly little research has done so. One exception, though now somewhat dated, is Topel (1994), who looked at the nine major regions of the U.S. and explored how the cross-regional variation in the demand for and supply of skilled labor, immigration, female labor force participation, and technical change can explain the regional variation in the growth of income inequality.

                                                                                          In this Economic Letter, we follow in that spirit, examining income trends at the county level between 1990 and 2000. Basing our analysis on leading theories of the growing gap between the top and middle of the distribution as well as the stable gap between the middle and the bottom, we explore whether county differences in skill levels, immigration levels, and vulnerability to offshoring—that is, relocating domestic operations overseas—appear to be associated with these trends. Our results do lend tentative support to these theories.

                                                                                          Continue reading "FRBSF: Changes in Income Inequality across the U.S" »

                                                                                            Posted by on Friday, September 21, 2007 at 12:15 PM in Economics, Immigration, Income Distribution | Permalink  TrackBack (0)  Comments (93)


                                                                                            FRBSF: The Economic Outlook

                                                                                            Eric Swanson of the San Francisco Fed with his view of the current economy and the economic outlook:

                                                                                            Continue reading "FRBSF: The Economic Outlook" »

                                                                                              Posted by on Friday, September 21, 2007 at 11:52 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (2)


                                                                                              The Wile E. Coyote Moment?

                                                                                              Here is Paul Krugman on recent talk about a fall in the dollar. If you cannot get to the Economic Policy paper cited below, a working paper version is here:

                                                                                              Is This the Wile E. Coyote Moment?, by Paul Krugman: Lots of buzz suddenly about the possibility of a sharp fall in the dollar. The Canadian dollar is back at parity with the greenback; there are rumors that the Saudis are planning to diversify into euros, and maybe even that the Chinese might break the dollar peg. A nice summary at Barry Ritholtz's blog The Big Picture.

                                                                                              I could say that I saw this coming; the problem is that I've been seeing it coming for several years, and it keeps not arriving (and I don't know if this is really it, even now.) The argument I and others have made is that the U.S. trade deficit is, fundamentally, not sustainable in the long run, which means that sooner or later the dollar has to decline a lot. But international investors have been buying U.S. bonds at real interest rates barely higher than those offered in euros or yen - in effect, they've been betting that the dollar won't ever decline.

                                                                                              So, according to the story, one of these days there will be a Wile E. Coyote moment for the dollar: the moment when the cartoon character, who has run off a cliff, looks down and realizes that he's standing on thin air -“ and plunges. In this case, investors suddenly realize that Stein's Law applies - "If something cannot go on forever, it will stop" - and they realize they need to get out of dollars, causing the currency to plunge. Maybe the dollar's Wile E. Coyote moment has arrived - although, again, I've been wrong about this so far.

                                                                                              Much more about all this in a thoroughly incomprehensible paper I recently published in the European journal Economic Policy. Don't bother clicking if you hate funny diagrams and Greek letters.

                                                                                                Posted by on Friday, September 21, 2007 at 03:06 AM in Economics, International Finance | Permalink  TrackBack (0)  Comments (21)


                                                                                                Privatization of Military Services

                                                                                                "Timothy K. Hsia is an Army infantry captain on his second deployment to Iraq":

                                                                                                Iraq needs contractors, by Timothy K. Hsia, Commentary, LA Times: From the time a soldier wakes up until he goes to sleep, he interacts with civilian contractors. Most of the focus has been on personal security detachments, or PSDs -- the bodyguards, like Blackwater. But by some estimates there are as many of 180,000 contractors, and PSDs make up only a small fraction of them. The majority of the jobs are service support for the troops and are filled by non-Americans. The effect of these civilians in the Iraq war has yet to be fully examined, and the legacy of their role will affect how our nation fights its future wars.

                                                                                                The trash being sifted and sorted ... is ... by civilians working for Toifor Co. When [a soldier] walks to the ... recreation facilities, he is greeted by more civilians who run the gym. As he leaves the gym, he can see civilians stacking up the bottled water. When the soldier turns in his laundry, it is to an East Asian civilian... When he enters the dining facility, he is greeted by Ugandan security guards who work for EOD Technology. These Ugandans make roughly $1,000 a month, meager by U.S. standards but considered a small fortune in their country. They also provide security at the forward operating bases -- the largest camps -- because there is not enough U.S. military manpower to do so.

                                                                                                While preparing for a mission, the soldier can expect technicians from General Dynamics or other major defense contracting companies aiding Army soldiers in the upkeep and maintenance of essential equipment. He can expect his Iraqi interpreter to work for a contractor... In addition, many Filipino drivers are responsible for ensuring that most of the heavy equipment ... reach their destinations after they're unloaded in Kuwait. ...

                                                                                                The majority of all this civilian activity usually goes unnoticed on the bases by soldiers and even more so by U.S. taxpayers, who generally think their taxes only support the military forces. After the Vietnam War, most of the combat-support duties were transferred from full-time soldiers to National Guard and Reserve units. But today that structure has been undercut as civilians have taken over those jobs. And these civilian contractors in the non-security roles are only a degree away from what we have historically called mercenaries. They may not be carrying weapons, but they nonetheless assist, equip, sustain and maintain the military force in Iraq.

                                                                                                This war has demonstrated that there are not enough soldiers to equip and sustain a deployed force continuously for multiple years and deployments. Although the Defense Department has not released any official census on the total number of contractors, some reports have indicated that contractors already outnumber soldiers.

                                                                                                The revolution in military affairs envisaged by Donald H. Rumsfeld ... has occurred. The military can deploy with fewer soldiers and still achieve the administration's goals. Implicit in this revolution, though, is the reality that civilian contractors have come to take a significant, vital and cloaked role in the country's prosecution of a war in which Americans are fooled by the actual numbers required to carry out a war.

                                                                                                The Romans found mercenaries to be a quick-fix solution. However, a temporary fix became a more permanent force that the Romans used when they found their own legions had become too expensive -- economically and politically. Let us hope that the United States does not follow the fate of the Roman Empire in this regard.

                                                                                                Continue reading "Privatization of Military Services" »

                                                                                                  Posted by on Friday, September 21, 2007 at 02:52 AM in Economics, Iraq and Afghanistan, Regulation | Permalink  TrackBack (0)  Comments (32)


                                                                                                  Thomas Palley: Inflation, Chinese Style

                                                                                                  Thomas Palley sends along his latest on China's battle against inflation, and the broader consequences of its anti-inflation strategy. William Polley says that Palley "gets it right":

                                                                                                  Inflation, Chinese Style, by Thomas Palley: China’s government recently announced inflation hit a ten-year high of 6.5 percent in August. This increase in inflation is directly related to global trade imbalances, yet China is trying to control inflation without addressing that problem. That carries two consequences. First, it is doubtful this strategy can work, which likely augurs rising Chinese inflation. Second, the strategy aims to shift the onus of global trade adjustment on the U.S., which may come back to haunt China and the global economy.

                                                                                                  China’s current inflation is a textbook case of prolonged under-valuation of a fixed exchange rate in tandem with export-led growth. As such, significant exchange rate revaluation should be a central element of its anti-inflation policy. However, instead of making such an adjustment China’s authorities are hoping to control inflation by exclusive reliance on tighter domestic monetary policy. It is doubtful this strategy can succeed because it leaves intact the inflationary impulse from China’s trade surplus and under-valued exchange rate.

                                                                                                  One important contributing factor in China’s inflation is the rise in global commodity prices, including oil and base metals, which are now feeding through into prices. Food prices are also on the rise owing to increased global prices for wheat and corn. Furthermore, China has been hit by a virulent outbreak of swine flu that has decimated its hog population, driving up the price of pork, which is China’s favored meat.

                                                                                                  In coastal areas, which have been the hub of China’s export-led growth, wages have started rising in response to rising living costs and in response to the gradual elimination of extreme surplus labor conditions.

                                                                                                  Most importantly, China is beset by significant asset price inflation that borders on an asset price bubble. This asset price inflation is the product of massive expansion of the money supply caused by China’s trade surplus. Dollars earned by Chinese exporters have flowed back to China and been converted into local money by the central bank, which has bought dollars at the fixed exchange rate to prevent appreciation. Holders of these money balances have then bought stocks and real estate to gain higher returns and to protect against potential inflation. This has driven up real estate prices, triggering a massive construction boom that has in turn caused inflation.

                                                                                                  The implication is clear. China is suffering from imported inflation caused by higher global commodity prices, domestic demand inflation caused by excess demand in export industries, and asset price inflation due to an increased money supply caused by China’s trade surplus.

                                                                                                  The under-valued exchange rate is a key culprit since it contributes to excess demand in export sectors and it also drives the money supply increase via the trade surplus – which has hit new record highs in 2007. That suggests significant exchange rate revaluation should be a central component of China’s anti-inflation strategy. Moreover, revaluation would also diminish the impact of global commodity price inflation because commodities are priced in dollars so that a revaluation lowers their domestic price in renminbi.

                                                                                                  Instead, China has chosen to rely exclusively on monetary tightening, raising interest rates and reserve requirements on bank deposits. This strategy is unlikely to work. First, there is already significant asset inflation and extensive debt-financed speculative investment, which means the monetary authorities are constrained from sufficiently meaningful tightening for fear of triggering a financial collapse.

                                                                                                  Second, raising reserve requirements on bank deposits lowers the return on deposits and makes them less attractive. That provides an incentive for depositors to spend their money or invest elsewhere, which spurs more inflation.

                                                                                                  Third, and most importantly, continuation of China’s under-valued exchange rate means continuing trade surpluses and large foreign direct investment inflows, which means further monetary expansion in China.

                                                                                                  Putting the pieces together, the picture is one of rising Chinese inflation, and with that comes the risk of inflation-triggered social and political problems. In this regard it is worth recalling that the Tiananmen Square disturbances of May 1989 were in part caused by industrial worker unrest over erosion of living standards by inflation.

                                                                                                  As for the global economy, China’s anti-inflation policy and continued refusal to adjust its exchange rate places the burden of trade imbalance adjustment squarely on the U.S. This adjustment will likely happen via recession and there are signs that process may already be underway. This is a sub-optimal approach, which is bad for all.

                                                                                                    Posted by on Friday, September 21, 2007 at 01:17 AM in China, Economics, Inflation, International Finance | Permalink  TrackBack (0)  Comments (4)


                                                                                                    Paul Krugman: Health Care Hopes

                                                                                                    Paul Krugman, unleashed (NY Times columns are now free):

                                                                                                    Health Care Hopes, by Paul Krugman, Commentary, NY Times: All the evidence suggests that it has finally become politically possible to give Americans what citizens of every other advanced nation already have: guaranteed health insurance. The economics of universal health care are sound, and polls show strong public support for guaranteed care. The only thing we have to fear is fear itself.

                                                                                                    Unfortunately, there’s a lot of that around.

                                                                                                    True, one kind of fear seems, provisionally, to have been overcome: the timidity of Democratic politicians scarred by the failure of the original Clinton health plan. ...

                                                                                                    John Edwards broke the issue of health care reform open ... when he proposed a smart and serious plan for universal health insurance — and bravely announced his willingness to pay for the plan by letting some of the Bush tax cuts expire. ...

                                                                                                    Senator Clinton delayed a long time... Still, this week she did deliver a plan, and it’s as strong as the Edwards plan — because unless you get deep into the fine print, the Clinton plan basically is the Edwards plan.

                                                                                                    That’s not a criticism; it’s much more important that a politician get health care right than that he or she score points for originality. Senator Clinton ... knows a good thing when she sees it.

                                                                                                    The Edwards and Clinton plans as well as the slightly weaker but similar Obama plan achieve universal-or-near-universal coverage through a well-thought-out combination of insurance regulation, subsidies and public-private competition. These plans may disappoint advocates of a cleaner, simpler single-payer system. But it’s hard to see how Medicare for all could get through Congress any time in the near future, whereas Edwards-type plans offer a reasonable second best that you can actually envision being enacted by a Democratic Congress and signed by a Democratic president just two years from now.

                                                                                                    To get there, however, would require overcoming a lot more fear.

                                                                                                    There won’t be a serious Republican alternative. The health care plans of the leading Republican candidates, such as they are, are the same old, same old: they principally rely on tax breaks that go mainly to the well-off, but will supposedly conjure up the magic of the market. As Ezra Klein ... cruelly but accurately puts it: “The Republican vision is for a world in which the sick and dying get to deduct some of the cost of health insurance that they don’t have — and can’t get — on their taxes.”

                                                                                                    But the G.O.P. nominee, whoever he is, won’t be trying to persuade the public of the merits of his own plan. Instead, he’ll try to scare the dwindling fraction of Americans who still have good health insurance by claiming that the Democrats will take it away.

                                                                                                    The smear-and-fear campaign has already started. The ... attacks probably won’t be effective enough to prevent a Democrat from winning next year. But that won’t be the end of the story: even if the Democrats take the White House and expand their Congressional majorities, the insurance and drug lobbies will try to bully them into backing down on their campaign promises.

                                                                                                    That’s why the long delay before Senator Clinton announced her health care plan made supporters of universal care, myself included, so nervous — a nervousness that is not completely assuaged by the fact that she finally did deliver. It’s good to know that whoever gets the Democratic nomination will run on a very good health care plan. What remains is the question of whether he or she will have the determination to turn that plan into reality.

                                                                                                      Posted by on Friday, September 21, 2007 at 12:33 AM in Economics, Health Care, Politics | Permalink  TrackBack (0)  Comments (70)