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The Federal Reserve Open Market Committee has decided to cut the federal funds rate to 4.50%. The decision was not unanimous with Kansas City Fed president Thomas Hoenig preferring no change. Thus, the vote was 9-1 (the committee currently has two positions unfilled). Also, only six banks submitted requests to lower the discount rate. It's clear from the statement that the Committee does not want to set up expectations of further cuts with the fairly direct statement that "after this action, the upside risks to inflation
roughly balance the downside risks to growth."
Here's the Press Release:
The Federal Open Market Committee decided today to lower its target for the
federal funds rate 25 basis points to 4-1/2 percent.
Economic growth was solid in the third quarter, and strains in financial
markets have eased somewhat on balance. However, the pace of economic expansion
will likely slow in the near term, partly reflecting the intensification of the
housing correction. Today’s action, combined with the policy action taken in
September, should help forestall some of the adverse effects on the broader
economy that might otherwise arise from the disruptions in financial markets and
promote moderate growth over time.
Readings on core inflation have improved modestly this year, but recent
increases in energy and commodity prices, among other factors, may put renewed
upward pressure on inflation. In this context, the Committee judges that some
inflation risks remain, and it will continue to monitor inflation developments
The Committee judges that, after this action, the upside risks to inflation
roughly balance the downside risks to growth. The Committee will continue to
assess the effects of financial and other developments on economic prospects and
will act as needed to foster price stability and sustainable economic growth.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman;
Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S.
Kroszner; Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh.
Voting against was Thomas M. Hoenig, who preferred no change in the federal
funds rate at this meeting.
In a related action, the Board of Governors unanimously approved a
25-basis-point decrease in the discount rate to 5 percent. In taking this
action, the Board approved the requests submitted by the Boards of Directors of
the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis,
and San Francisco.
Posted by Mark Thoma on Wednesday, October 31, 2007 at 11:25 AM in Economics, Monetary Policy |
David Leonhardt lists "basic facts" about taxes "that ideology can’t change":
Plain Truth About Taxes and Cuts, by David Leonhardt, NY Times: You’re going
to hear a lot about taxes over the next two years. ... There are big
philosophical questions about taxes that facts alone can’t answer. ... But there are also some basic facts that ideology can’t change. If you keep
these five in mind, you will have an easier time keeping up with the debate:
As a group, the rich pay a greater share of taxes than in the past.
The top 1 percent of taxpayers — those with adjustable gross income of at least
$267,000 in 2004 — paid more than 25 percent of all federal taxes that year,
according to the Congressional Budget Office. That was up from 15 percent in
1979. People sometimes pick nits with these statistics... But don’t get bogged down in all this. The big picture is clear enough. The
main reason for the trend is also clear.
The affluent are paying more of the taxes because they’re making so much
more money. ...A family in that top 1 percent of earners paid a total
federal tax rate — including everything from payroll taxes to income taxes to
capital gains taxes — of 30 percent in 2004. That was down from 41 percent a
decade before. Since the 1950s, tax rates on high-income families have generally
The top earners pay a bigger share of the government tab than in the past
because their incomes have risen so sharply — even more sharply than their tax
bills. ... The affluent, in short, are paying less in taxes on every dollar they earn
but earning many more dollars.
Corporate taxes have dropped significantly in recent decades.
...Everyone from Mr. Rangel on the left to Fred Thompson on the right is saying
that high corporate taxes are hurting American companies. But the effective
corporate tax rate isn’t any higher than it has been on average over the last 25
years, and it’s far lower than it was in the 1960s and ’70s.
“A dirty little secret is that the corporate income tax used to raise a fair
amount of revenue,” says Richard Clarida, a Columbia University economist and
former Treasury Department official under Mr. Bush.
What’s going on here? This country really does have a high corporate tax
rate, but it also has so many loopholes that companies can often avoid paying
the tax. A much smarter policy, economists say, would include a lower rate with
fewer loopholes. ...
The nation’s total tax bill hasn’t changed much over the years. Put it
all together — less corporate tax collection and lower individual tax rates,
combined with more income for the people who face the highest tax rates — and
the trends mostly cancel each other out. The taxes that the federal government
took in last year equaled 18.4 percent of the gross domestic product, almost
exactly the average since 1980. ...
The obvious conclusion is that moderate shifts in taxes don’t dictate
economic growth. Mr. Bush’s father and Bill Clinton raised taxes — and the
economy grew for almost the entire decade of the 1990s. The current
administration has cut taxes — and the economy has grown for almost all of this
So if short-term economic growth were the only thing to worry about, you
could make a good argument either for cutting taxes or for raising them.
Unfortunately, there is another problem out there.
The budget deficit is worse than either party says it is. ...White
House officials are absolutely correct when they note that the current budget
deficit isn’t especially large. But it will soar in coming years, as baby
boomers ... move onto
the Social Security and Medicare rolls
If nothing changes over the next couple
of decades, the United States will build up a debt burden... There are several ways to prevent that. Taxes could be raised across the
board, or they could be raised on the affluent. Or the Medicare budget — a much
bigger problem than Social Security — could be held in check if the government
figured out how to say no to some expensive medical procedures. Or all of the
above could happen. But something has to give. No amount of clever argument can
pay the bills.
Just one complaint: There is no direct attempt in this set of "truths" to debunk the
supply-side myth that tax cuts have paid for themselves, a myth that will
survive so long as those making the claim are not revealed as hacks pushing
falsehoods. [Note: That tax increases increase revenues is implied in the last paragraph where raising taxes across the board fixes the deficit, but there's no direct challenge to this pervasive myth. Since the topic is "basic facts that ideology can’t change," and given the prominence of this myth among supply-side advocates, it seems to me the myth ought to be addressed directly.]
Posted by Mark Thoma on Wednesday, October 31, 2007 at 02:34 AM in Budget Deficit, Economics, Taxes |
As soon as you read this from Pete Du Pont:
Inconvenient Tax Truths: Al Gore believes global warming is "an inconvenient truth." Here are some economic truths that America's liberal leadership finds too inconvenient to support. ... Tax rate reductions increase tax revenues. This
truth has been proved at both state and federal levels, including by President
Bush's 2003 tax cuts on income, capital gains and dividends. Those reductions have raised federal tax receipts by $785 billion.
There's no need to read any further, he's revealed himself (yet again) as a
political hack. The saddest part is that some people actually believe these
It's also too bad that under Rupert Murdoch the Wall Street Journal's editorial page has continued to print these lies to support an ideology, lies that helped to push through tax cuts that did not raise revenues by $785 billion or at all, but instead lowered revenues by hundreds of billions of dollars according to Congressional Budget Office estimates. [Just to be clear, this is about the editorial pages, not the news pages, e.g. see Greg Ip's excellent story on changes in the Fed under Bernanke for an example of the difference in quality].
Posted by Mark Thoma on Wednesday, October 31, 2007 at 02:25 AM in Budget Deficit, Economics, Politics, Taxes |
Andrew Oswald and Nattavudh Powdthavee explain how to assess the value of
losses from bereavement of loved ones, and more generally how to put "values on all sorts of things that we care for":
A New Approach to
Awarding Compensations in Courts, by Andrew Oswald and Nattavudh Powdthavee, Vox
EU: Economists are known to be able to put a monetary value to anything. For
instance, the contingent valuation method – a survey-based method which asks
individuals “how much compensation would you demand for the destruction of X” or
“how much are you willing to pay to preserve X” – has been used to calculate the
monetary valuations for many of the non-marketable resources that come without
immediate price-tags attached. For example, the contingent valuation approach
has been used in the literature to calculate the willingness to pay for
contaminated residential property and the willingness to pay to prevent oil
So the question is: can judges use the same method to assign pecuniary
amounts to be awarded to tort victims in situations that do not appear to have
any intrinsically financial aspect such as losses from bereavement of loved
Yes, at least in principle. Although we imagine that answering questions like
“what number of euros would compensate you for the death of your daughter” is
likely to be hard for everyone, and morally offensive to many. As a result, most
judges are left to their own devices to award compensation packages they think
would make sense in court, and they do so by using the rule of thumb that have
no conceptual foundations that are based on solid, scientific findings. This
often leads to judges awarding financial settlements that can seem so small in
real life compared to the shock a loss of loved one can bring. For example, the
Fatal Accident Act 1976 provides a lump-sum at currently £10,000 damages for
bereavement (that is, approximately €14,000), which is available only to the
husband or the wife of the deceased and not to the children for a loss of a
parent. In today’s term, this makes up only around 3% of the lifetime income for
a successful white-collar worker.
From a scientific point of view, this raises a question of whether we can
develop a systematic method to calculate a reasonable compensation package that
would reflect as close to the genuine damages generated by bereavement as
Continue reading "A Monetary Value for Almost Anything" »
Posted by Mark Thoma on Wednesday, October 31, 2007 at 12:33 AM in Economics |
Posted by Mark Thoma on Wednesday, October 31, 2007 at 12:06 AM in Links |
Wow. Another Paul Krugman post is probably overkill, but I just noticed this
paper by Anna Schwartz and Edward Nelson, "The Impact of Milton Friedman on
Modern Monetary Economics: Setting the Record Straight on Paul Krugman’s “Who
Was Milton Friedman?”" cites this blog in the list of references:
Krugman, Paul (2007d). “Supply-Side Economics: Paul Krugman Responds.”
“Economist’s View” web site, April 11. (URL: http://economistsview.typepad.com/economistsview/2007/04/supplyside_econ.html)
That's kind of cool. Here's Brad DeLong's take on the paper and underlying
debate over the 'liquidity trap':
Krugman Is Right!, by Paul Krugman: Alex Tabbarrok writes:
Marginal Revolution: Assorted Links: The Impact of Milton Friedman on Modern
Monetary Economics. A nice review by Edward Nelson and Anna Schwartz of
Friedman's thought and influence over monetary policy that also, in the author's
words, sets the record straight on Paul Krugman's 'Who was Milton Friedman'...
I tend to be on Paul's side of this--especially on the issue of the
'liquidity trap'. In a liquidity trap, (a) short-term interest rates are
essentially zero and (b) banks have excess reserves. Normally the Federal
Reserve changes people's behavior by trading short-term government bonds (which
pay interest) for bank reserves (which allow banks to expand their deposits and
loans). Fewer government bonds in the economy means more appetite by banks to
buy corporate bonds and thus to finance corporate investment. More bank reserves
means banks have more freedom to make direct loans as well.
But in a liquidity trap bonds pay no interests, and banks have more than
enough reserves to cover their lending to all the borrowers they think are
credit worthy. So when the Federal Reserve swaps government bonds for bank
reserves it is swapping two assets that are equivalent. Why should this change
anybody's behavior? The only reason is that banks think that they might be short
of reserves and want more at some unknown point in the future, but can this have
a big impact on the economy?
I would say no: that Paul Krugman's approach to the liquidity trap is right.
Posted by Mark Thoma on Tuesday, October 30, 2007 at 04:50 PM in Economics, Monetary Policy |
Posted by Mark Thoma on Tuesday, October 30, 2007 at 04:32 PM in Economics |
Posted by Mark Thoma on Tuesday, October 30, 2007 at 04:23 PM in Economics, Politics |
Posted by Mark Thoma on Tuesday, October 30, 2007 at 03:42 PM in Economics |
Jonathan Chait looks at Rudy Giuliani's economic policies and his ideas about freedom:
Economaniac, by Jonathan Chait, The New Republic: ...Compared to other
Republican presidential contenders, Giuliani identifies himself as a
"supply-sider" ... more aggressively and has mopped up more financial
support from oil, gas, and other bastions of the financial right. But economic
right-wingery has conquered the GOP so thoroughly that there's not much Giuliani
can do to stand out, platform-wise. What truly sets him apart is the apparent
depth of his convictions, and the extent to which he is willing to follow the
right's philosophical premises through to their grim conclusion.
Consider Giuliani's position on health care reform. ... Like many Republicans, Giuliani's proposed
health care reform is to provide a tax deduction for individual health care. Of
course, the value of a tax deduction is proportionate to your income... If you
don't earn enough to owe income taxes, or if you have a pre-existing condition
and can't afford coverage, a tax deduction would probably be worthless.
Giuliani's tax deduction remedy would therefore do virtually nothing to cover
the uninsured. ...
Giuliani ... is not indifferent to the plight of the uninsured. He actually
seems to revel in it:
I don't like mandating health care ... because it erodes what
makes health care work in this country--the free market, the profit motive. A
mandate takes choice... We've got to let people make choices.
We've got to let them take the risk--do they want to be covered? Do they want
health insurance? Because, ultimately, if they don't, well, then, they may not
be taken care of.
...Of course, this analysis is insane, unless you think most of the uninsured
lack coverage because they'd rather splurge at Best Buy than spend money on
health insurance. Alas, this appears to be exactly what Giuliani believes. "[The
uninsured] may be buying a television, ... they may be buying a cell phone," he
said at last week's debate. ...
Giuliani's extreme ... economic right-wingery seems to flow from a
deep-seated punitive impulse, which he has transferred from the shiftless New
York City underclass to vast swaths of the population. Giuliani has echoed the
language of economic libertarianism with more frankness, and less pretense of
compassion, than any recent Republican presidential candidate. ...
Giuliani, of course, is careful not to antagonize social conservatives. But
his campaign is in fact an attempt to define social conservatism out of the
Republican platform. While most Republicans define their party's values by
invoking three parts--small government, strong military, social conservatism--
Giuliani only mentions the first two. A recent editorial in the pro-Giuliani New
York Sun proposed a list of GOP values. Item one was a belief that tax cuts make
revenues rise. Social issues did not make the list at all. Last winter, Giuliani
told a crowd at the Hoover Institution that the GOP must redefine itself around
economic issues--health care, school choice, taxes--as the "Party of Freedom."
Of course, Giuliani's vision of "freedom" is not necessarily about liberating
the human spirit. "[F]reedom is not a concept in which people can do anything
they want, be anything they can be," he once explained as mayor. "Freedom is
about authority." ...
You can't be all you can be? Dang, I was counting on that. I remember hearing somewhere - I think it was from some freedom protection organization - that you could.
Posted by Mark Thoma on Tuesday, October 30, 2007 at 12:33 AM in Economics, Politics |
Tim makes a bold call on the outcome of the Fed's rate setting meeting:
And So It Begins, by Tim Duy: The Fed begins a two-day meeting today,
with market participants widely expecting a rate cut. I am mentally prepared to
be on the wrong side of this call, joining the lonely few, but I just can’t
tease another rate cut out of the incoming data.
In my mind, the argument for a rate cut hinges on one crucial assumption –
that the market is expecting a rate cut, and the Fed will not want to
''The Fed is reluctant to ease,'' says Louis Crandall, chief economist at
Jersey City, New Jersey-based Wrightson ICAP LLC, a unit of ICAP Plc, the
world's largest broker for banks and other financial institutions. ''But it also
doesn't want to unsettle the financial markets unnecessarily.''
If the Fed fails to ease, so the story goes, they will be blamed for failure
to communicate effectively. After all, given their push for transparency,
shouldn’t they make an effort to send a signal when the markets are headed in
the wrong direction? The problem with this view is that Fed Chairman Ben
Bernanke does not believe it is his job to lead markets around by the nose like
his predecessor. I think under the new regime, the Fed expects their comments to
be taken at face value. And I think they are pretty effectively communicating
their view on the economy: Outside of housing, there is minimal spillover, and
whatever spillover exists is completely expected. From
Bernanke on October 15 (italics mine):
Continue reading "Fed Watch: And So It Begins" »
Posted by Mark Thoma on Tuesday, October 30, 2007 at 12:24 AM in Economics, Fed Watch, Monetary Policy |
Hi. We're from the government, and we don't want to help:
Bigger Budget? No, Responds Safety Agency, by Stephen Labaton, NY Times: The
nation’s top official for consumer product safety has asked Congress in recent
days to reject legislation intended to strengthen the agency, which polices
thousands of consumer goods, from toys to tools.
On the eve of an important Senate committee meeting to consider the
legislation, Nancy A. Nord, the acting chairwoman of the Consumer Product Safety
Commission, has asked lawmakers in two letters not to approve the bulk of
legislation that would increase the agency’s authority, double its budget and
sharply increase its dwindling staff.
Ms. Nord opposes provisions that would increase the maximum penalties for
safety violations and make it easier for the government to make public reports
of faulty products, protect industry whistle-blowers and prosecute executives of
companies that willfully violate laws.
The measure is an effort to buttress an agency that has been under siege
because of a raft of tainted and dangerous products manufactured both
domestically and abroad. ...
Ms. Nord’s opposition to important elements of the legislation is consistent
with the broadly deregulatory approach of the Bush administration... Tony Fratto,
a White House spokesman, said that Ms. Nord had not coordinated her effort to
kill the legislation with the White House. But he said that the administration
shared many of her concerns and that Allan Hubbard, President Bush’s top
economic adviser..., was preparing to send a letter to Congress “that is
probably even more forceful than Ms. Nord’s.” ...
Ms. Nord, who before joining the agency had been a lawyer at Eastman Kodak
and an official at the United States Chamber of Commerce, criticized the
measure... Some of Ms. Nord’s complaints were similar to the ones that business
groups and manufacturers have raised, including that the legislation would be
unnecessarily burdensome. But in other areas, like whistle-blower protection,
her complaints went beyond those of industry. ...
Consumer advocates also said they were stunned by the letter. ...
The agency has suffered from a steady decline in its budget and staffing in
recent years. Its staff numbers about 420, about half its size in the 1980s. It
has only one full-time employee to test toys. And 15 inspectors are assigned to
police all imports of consumer products under the agency’s supervision...
Posted by Mark Thoma on Tuesday, October 30, 2007 at 12:15 AM in Economics, Regulation |
Posted by Mark Thoma on Tuesday, October 30, 2007 at 12:06 AM in Links |
Dean Baker is amazed:
The End Is Near! Post Publishes Column Defending Social Security, by Dean
Is that a trumpet I hear in the distance? Why are the rivers flowing backwards?
And who are those four guys on horses?
Yes, the Washington Post has published a column arguing against the Social
Security crisis story. Robert Ball, the former Social Security commissioner, a
member of the 1983 Greenspan commission, and a great defender of the system got
700 words in the paper this morning to make the case. Read it carefully, most of
us will probably not live to see another such piece in the pages in the Post.
Here's the article:
A Social Security Fix For 2008,
by Robert M. Ball, Washington Post: In the Oct. 19 editorial " Mr. Giuliani's No-Tax Pledge," The Post stated:
"It's no more responsible for Republicans to rule out tax increases [to
strengthen Social Security] than it is for Democrats to insist on no benefit
cuts." The Post praised, as a "bipartisan blend," President Ronald Reagan's
acceptance of a 1983 fix that included both.
I take exception. It's the essence of responsibility, in my view, to insist
on no benefit cuts.
In 1983, I served on the National Commission on Social Security Reform
(better known as the Greenspan Commission)... What was right in 1983 -- a
balanced package of benefit cuts and tax increases as part, roughly half, of the
final agreement -- would be wrong today.
Social Security benefits are modest by any measure and are already being cut
-- by raising the age of eligibility for full benefits and by deducting
ever-rising Medicare premiums from benefit checks. So the benefits provided for
under present law will replace, on average, a lower percentage of prior earnings
than in the past. To cut them further would undermine all that Social Security
has achieved -- exposing millions of vulnerable people, both elderly and
disabled, to needless economic hardship.
Social Security has never been more important to more Americans than it is
now. Private pension plans continue to dwindle -- currently covering only about
20 percent of private-sector employees -- and the national rate of savings
hovers around zero. We just can't afford to cut Social Security benefits
Social Security benefits are vital... About a third of
the elderly rely on Social Security for 90 percent or more of their income;
two-thirds count on it to supply at least half of their income. The program
lifts 13 million elderly beneficiaries above poverty.
Without Social Security, 55 percent of the disabled -- and a million children
-- would live in poverty. The program is particularly important to women and
minorities. It provides 90 percent or more of the incomes of almost half of all
unmarried women age 65 and older..., and it is the sole source of income for 40 percent of elderly
African Americans and Hispanic Americans.
Social Security is the nation's most effective anti-poverty program. But it's
much more than that. For every worker it provides a solid base on which to try
to build an adequate level of retirement income. To weaken that foundation would
be grossly irresponsible.
The good news is that there's no need to weaken it. ... The program
can be brought into close actuarial balance over the long run with just
three revenue-enhancing changes that are desirable in any case:
• Gradually increase the maximum amount of
earnings covered by Social Security so that the traditional goal -- covering 90
percent of all earnings -- is once again achieved. This change would affect only
the 6 percent of earners...
• Allow Social Security to improve earnings by investing some of its assets
-- up to 20 percent, say -- in equities, as just about all other public and
private pension plans do.
• Provide a new source of income by retaining a residual estate tax and
dedicating it to Social Security. ...
Dedicating the income from the tax to Social Security would considerably improve
the progressivity of Social Security financing as well as increasing revenue.
Presidential candidates should be expected to discuss Social Security
financing. But in 2008 they shouldn't be held to a 1983 formula. We're in a
different time, with different needs -- and there are much better options
available than benefit cuts.
Posted by Mark Thoma on Monday, October 29, 2007 at 10:53 AM in Economics, Press, Social Insurance, Social Security |
Fear the fear mongers:
Fearing Fear Itself, by Paul Krugman, Commentary, NY Times: In America’s
darkest hour, Franklin Delano Roosevelt urged the nation not to succumb to
“nameless, unreasoning, unjustified terror.” But that was then.
Today, many of the men ... with a significant chance of receiving the
Republican nomination ... have made unreasoning, unjustified terror the
centerpiece of their campaigns.
Consider ... the fact that Rudy Giuliani is taking foreign policy advice from
Norman Podhoretz, who wants us to start bombing Iran “as soon as it is
Mr. Podhoretz, ... a founding neoconservative, tells us that Iran is the
“main center of the Islamofascist ideology against which we have been fighting
since 9/11.” The Islamofascists, he tells us, are well on their way toward
creating a world “shaped by their will and tailored to their wishes.” Indeed,
“Already, some observers are warning that by the end of the 21st century the
whole of Europe will be transformed into a place to which they give the name
Do I have to point out that none of this makes a bit of sense?
For one thing, there isn’t actually any such thing as Islamofascism — it’s
not an ideology; it’s a figment of the neocon imagination. ... And Iran had
nothing whatsoever to do with 9/11...
Beyond that, the claim that Iran is on the path to global domination is
beyond ludicrous. Yes, the Iranian regime is a nasty piece of work...,
and it would be a bad thing if that regime acquired nuclear weapons. But let’s
have some perspective, please: we’re talking about a country with roughly the
G.D.P. of Connecticut...
Meanwhile, the idea that bombing will bring the Iranian regime to its knees
... is pure wishful thinking. ... Mr. Podhoretz, in short, is engaging in what
my relatives call crazy talk. Yet he is being treated with respect by the
front-runner for the G.O.P. nomination. And Mr. Podhoretz’s rants are, if
anything, saner than some of what we’ve been hearing from some of Mr. Giuliani’s
Thus, ... Mitt Romney asserted that America is in a struggle with people who
aim “to unite the world under a single jihadist Caliphate. To do that they must
collapse freedom-loving nations. Like us.” ... And Mike Huckabee, whom reporters
like to portray as a nice, reasonable guy, says that if Hillary Clinton is
elected, “I’m not sure we’ll have the courage and the will and the resolve to
fight the greatest threat this country’s ever faced in Islamofascism.” Yep, a
bunch of lightly armed terrorists and a fourth-rate military power — which
aren’t even allies — pose a greater danger than Hitler’s panzers or the Soviet
nuclear arsenal ever did.
All of this would be funny if it weren’t so serious.
In the wake of 9/11, the Bush administration adopted fear-mongering as a
political strategy. Instead of treating the attack as what it was — an atrocity
committed by a fundamentally weak, though ruthless adversary — the
administration portrayed America as a nation under threat from every direction.
Most Americans have now regained their balance. But the Republican base,
which lapped up the administration’s rhetoric about the axis of evil and the war
on terror, remains infected by the fear the Bushies stirred up — perhaps because
fear of terrorists maps so easily into the base’s older fears, including fear of
dark-skinned people in general.
And the base is looking for a candidate who shares this fear.
Just to be clear, Al Qaeda is a real threat, and so is the Iranian nuclear
program. But neither of these threats frightens me as much as fear itself — the
unreasoning fear that has taken over one of America’s two great political
Posted by Mark Thoma on Monday, October 29, 2007 at 12:33 AM in Economics, Politics, Terrorism |
Posted by Mark Thoma on Monday, October 29, 2007 at 12:06 AM in Links |
Larry Summers on the falling dollar:
How America must handle the falling dollar, by Lawrence Summers, Commentary,
Financial Times: ...The dollar’s decline may provoke anxiety but it should
not be a surprise... There is nothing very new about a decline in currency of a
country running a large current account deficit and whose economy is softening.
But in important respects the situation of the dollar is almost without
The vast majority of the US current account deficit is now being funded by
central banks accumulating reserves as they seek to avoid appreciation of their
home currencies. While the US dollar is usually viewed as a floating rate
currency, substantial and critical parts of the world economy operate with
currencies pegged to dollar parities or at least managed with them in mind. ...
Some means of engagement must be found with those who have yolked their
currencies and so their financial policies to that of the US.
The US has responded in an ad hoc way by carrying on a “strategic dialogue”
with China – by far the largest economy with an exchange rate linked to the
dollar – backed by congressional threats ... and references to communiqués from
the Group of Seven leading industrial nations. In reality the dialogue is
anything but strategic. Like so much of American international policy in recent
years, it seems to confuse the firm statement of legitimate desire with the
serious conduct of diplomacy.
Think of the questions Chinese policymakers must ask themselves. What
is the highest US priority – global financial stability or market access for
well-connected US firms? Can the US take yes for an answer or is it a certainty
that a new president will insist in 18 months on a new set of economic diplomacy
accomplishments with China? In which areas, if any, is the US prepared to adjust
its policies in response to global interests? Given that the Chinese authorities
have presided over nearly double digit annual growth for a generation, do US
officials who make assertions about what is in China’s interest have the
experience and knowledge of China that should cause their views to be taken
seriously? Why is China being singled out? How could China – even if it wished
to – act in ways that the US prefers without appearing to yield to international
Maintaining global financial stability and the role of the dollar requires a
more strategic approach – a task that, given the political calendar, is likely
to fall to the next US administration.
The G7 process has lost its focus on exchange rate issues ... [and] is
something of an anachronism in the current international context. It needs to be
radically reinvented, starting with a change in its composition. ... Two
principles stand out.
First, any new approach must be premised on the desirability of a strong,
integrated global economy that benefits the citizens of all countries, not on
the idea that economists or politicians can calculate “fair” exchange rates. The
right and potentially effective case for adjustments in the current alignment of
exchange rates relies on their unsustainability and the distortions they induce
in macroeconomic policies, not on ideas of fairness to workers.
Second, multilateralism is better politics and economics than unilateralism
but it must not become an excuse for inertia. Any new group should be as large
as necessary and no larger, should meet with some frequency and should include
central bankers. It should be analytically informed but everyone should know
that key decisions will ultimately be taken by senior officials in the national
interest, not by international organisations.
The stakes are high. Well-managed finance cannot on its own make a country
stable and prosperous, let alone the world. But history tells us that poorly
managed finance foments instability and economic insecurity.
Is the Yuan Really Appreciating?, by pgl
Posted by Mark Thoma on Sunday, October 28, 2007 at 05:04 PM in Economics, International Finance |
Tyler Cowen responds to a
Should we use mercenaries at all?, by Tyler Cowen: Over
at Mark Thoma's, Bernard Yomtov asks a very good question:
Why should there be mercenaries at all, given the existence of a large and
well-trained Army? The mercenaries are former soldiers. Their functions are
military and could be carried out by regular soldiers. The only reason I can see
for using them is precisely to have people doing military jobs who are outside
the normal chain of command, and not subject to normal laws, rules, and
regulations governing the conduct of soldiers. In other words, it is to have
people who do not work for government in the way that they
Most private contractors today do not serve in the function of soldiers but
rather they deliver, ensure, and guard supplies. This should be evaluated on a
case-by-case basis, but often the private sector does a better job and without
major legal problems.
Security guards, however, are often "mercenaries." A general or top Iraqi
official for instance might be guarded by Blackwater employees. The critics have
not shown that Blackwater employees misbehave at a higher rate than do U.S.
soldiers, so the comparative case against Blackwater -- as opposed to the more
general case against the war -- is mostly shrill rhetoric. It is possible to pay
Blackwater employees bonuses for good performance rather than just give medals,
plus they are on a higher pay scale in the first place. Nonetheless my judgment
call is that issues of perception and accountability are important enough in
contemporary Iraq that we should be using contractors less in these capacities
the column indicated), but the temptation to use them is based on more than
just sheer political abuse.
Contractors lower the cost of good operations, contractors lower the
operational (but not social) cost of bad operations, contractors magnify the
costs of mistaken Executive preferences, and contractors can raise new problems
of monitoring. If you don't think the first item on this list is at work, there
is good reason to cut back on contractors in Iraq.
But if you view the scope and use of contractors as a more general decision,
rather than something which can be fine-tuned for each war, it is no longer such
a simple choice.
I do not believe contractors should be used as combatants. Supply and support
missions are another matter, and if by chance private contractors come under
unexpected attack they should defend themselves, but they should not be put into
such situations intentionally. Killing, if it has to be done at all, should not
be done by contract, government or otherwise. Death is not just another good to
be traded in the marketplace and I refuse to treat it that way even if, somehow,
we do manage to save a few bucks along the way (and the economics can cut both ways, i.e., there are arguments
about externalities that undercut the argument for contractors, e.g. who paid to
train the people that Blackwater now uses and how much of the saving comes from
taxpayers footing the bill for the training, but that just scratches the surface
of externalities such as contractors not fully internalizing the cost of killing civilians
or harming Iraqi property).
If I thought that using mercenaries would save lives overall, including the
lives of innocent Iraqi bystanders, then I would consider the option even if it costs
more, not less - as it does. These are lives we are talking about, not widgets
produced by xyz. If pay for soldiers is the problem, if we get better service
from Blackwater because they are paid more, then fix it - we're paying the
Blackwater employees with tax dollars already and I have no problem at all with
paying people willing to enter into combat as U.S. soldiers very, very well for
that risk. But it's hard for me to believe that money is the motivating factor
in combat when one's life is, very literally, on the line.
For me, it's akin to executions. If we have to have them (and we don't, and
shouldn't), it should be the government who does the killing. Period. We might
save money by contracting the executions out to the private sector, and probably
would, but is that how you want it to be done? If not, how is war different?
Again, for me, killing should never be part of an economic transaction between
government and the private sector. If we must defend ourselves, if killing must
be done, it should not be carried out as a for profit activity. I understand and
support the use of contractors in support roles - providing for the needs of
people in combat - but war zones are not a place where economic incentives much
matter. The institutions that support markets are completely absent for one
thing, staying alive trumps all, and the discipline of the military, not the
discipline of the market, is what provides incentives to curtail behavior such
as shooting anything that moves in order to stay alive. Markets have their
places, but war zones are not among them.
Posted by Mark Thoma on Sunday, October 28, 2007 at 12:51 PM in Economics, Iraq and Afghanistan, Market Failure |
Posted by Mark Thoma on Sunday, October 28, 2007 at 11:52 AM in Economics, Housing |
Posted by Mark Thoma on Sunday, October 28, 2007 at 12:06 AM in Links |
To Know Contractors, Know Government, by Tyler Cowen, Economic Scene, NY Times: Allegations of misbehavior by employees of Blackwater USA in the shooting
deaths of 17 Iraqis have brought the military’s use of private contractors into
question. But whatever the possible sins of the Blackwater firm, the overall
problem is not private contracting in itself; ... but rather ... the sins and
virtues of their customers, namely their sponsoring governments.
It is easy to rail against contractors for holding money above loyalty to
country; Halliburton, for instance, has been a target of this criticism. But...
private ships licensed to carry out warfare, helped win the American Revolution
and the War of 1812. ... Today, many of our allies receive payment, either
implicitly or explicitly, to support American efforts. War is, among other
things, an economic undertaking, so the profit motive in military affairs isn’t
always bad or ignoble.
When it comes to supplying troops, or protecting high-ranking officials,
private military contractors often offer greater flexibility and rapidity of
response. The employees, many of whom are former soldiers or operatives, tend to
have more experience than current, mostly younger soldiers.
The recent comeback of private contracting suggests that central governments
have become weaker again, at least relative to the tasks they are undertaking.
Alexander Tabarrok ... traced the history of private contractors in a
study, “The Rise, Fall, and Rise Again of Privateers” (The Independent
Review, spring 2007 ). He showed that public navies and armies began to displace
private contractors in the 19th century, as governments became more powerful and
Today, America no longer has a draft, its military bureaucracy can be
inflexible and the public wishes to be insulated from the direct impact of war.
Contractors are a symptom of government weakness, but are not the problem
itself. The first Persian Gulf War, which enjoyed greater international support,
was not reliant on contractors to nearly the same degree.
Among many Iraqis, Blackwater and other companies have a reputation for
getting the job done without much caring about Iraqis who get in the way. But
part of the problem may stem from economic incentives. If Blackwater is assigned
to protect a top American official, who is later assassinated, Blackwater may
lose future business. A private contractor doesn’t have a financial incentive to
protect Iraqi citizens, who are not paying customers. Ultimately, this reflects
the priorities of the United States military itself. American casualties are
carefully recorded and memorialized, but there is no count of Iraqi civilian
It is harder to recognize when private contractors are being underemployed.
During the Rwandan civil war in the 1990s, the United Nations debated using two
private contractors, Executive Outcomes or Sandline International, to intervene.
The U.N. rejected the notion and instead turned to a poorly trained Zairean
police contingent. We’ll never know how private contractors would have fared,
but the Zaireans were ineffective; some 800,000 Rwandans were murdered.
Yet the use of contractors is not a free lunch.
Compared with the military, contractors are not subject to direct scrutiny by
Congress and they are not covered by international law with the same clarity.
Excessive use of private contractors erodes checks and balances, and it
substitutes market transactions, controlled by the executive branch, for
traditional political mechanisms of accountability. When it comes to Iraq, we’ve
yet to see the evidence of a large practical gain...
When private contractors are combined with government troops, the contractors
usually can’t do much better than the setting in which they are asked to
When things are going well and the “good guys” are in control, the
flexibility and experience of military contractors can make things go even
better. But when the environment is hostile and events are spiraling out of
control, the incentives of private contractors may lead to many mistakes.
Note that a serious issue for Blackwater — the allegations about needless
deaths of innocent civilians — has also been an issue for United States
government forces from the beginning of the conflict.
Most of all, contractors are appealing when a victory is possible in
relatively quick order. The potential accountability problems won’t linger for
long; conversely, few contractors will look good when a conflict runs on for
Currently, the chances of establishing a stable Iraqi government appear quite
low. ... If so, we should be cutting back on private contractors, as the critics
are suggesting, because there is no desirable end in sight. Of course, those
same reasons suggest troop cutbacks as well.
In the next conflict, however, the temptation to use contractors may again be
strong. What if private contractors offer a real chance of making a positive
Private contractors may not respect virtue for its own sake, but like most
businesses, they will respect the wishes of their most powerful customers, in
this case governments. What is wrong with Blackwater may, most of all, mirror
what is wrong with Uncle Sam.
Posted by Mark Thoma on Saturday, October 27, 2007 at 05:04 PM in Economics, Iraq and Afghanistan, Market Failure |
New results on the impact of environmental change on the world's agricultural
ozone will damage crops, Nancy Stauffer, MIT Energy Initiative: A novel MIT
study concludes that increasing levels of ozone due to the growing use of fossil
fuels will damage global vegetation, resulting in serious costs to the world's
The analysis, reported in the November issue of Energy Policy, focused on how
three environmental changes (increases in temperature, carbon dioxide and ozone)
associated with human activity will affect crops, pastures and forests.
The research shows that increases in temperature and in carbon dioxide may
actually benefit vegetation, especially in northern temperate regions. However,
those benefits may be more than offset by the detrimental effects of increases
in ozone, notably on crops. Ozone is a form of oxygen that is an atmospheric
pollutant at ground level.
The economic cost of the damage will be moderated by changes in land use and
by agricultural trade, with some regions more able to adapt than others. But the
overall economic consequences will be considerable. According to the analysis,
if nothing is done, by 2100 the global value of crop production will fall by 10
to 12 percent.
"Even assuming that best-practice technology for controlling ozone is adopted
worldwide, we see rapidly rising ozone concentrations in the coming decades,"
said John M. Reilly, associate director of the MIT Joint Program on the Science
and Policy of Global Change. "That result is both surprising and worrisome."
Continue reading "Environmental Change and Agricultural Output" »
Posted by Mark Thoma on Saturday, October 27, 2007 at 01:08 PM in Economics, Environment, Science |
This is part of an interview with Paul Krugman on the relationship between
the right-wing and the media, and other matters:
Where Does the
Right-Wing End and the Media Begin? By Rory O'Connor, AlterNet: I had the opportunity to sit down this week with ... Paul Krugman... He
certainly pulled no punches during our conversation...
Rory O' Connor: ...What role if any do the media play in movement
Paul Krugman: The media are a very important force... They shape perceptions,
and they conceal issues. Look at the 2000 presidential campaign, for example,
where the media were so heavily biased against Al Gore. That's what brought Bush
to within a Supreme Court decision of the White House. ...[T]he role of the
media in not telling you reasons why you should be skeptical about the course of
the war, for example, it's enormously important. ...
[T]here are several major parts of the news media that are for all practical
purposes part of "movement conservatism" -- Fox News, the New York Post, the
Washington Times -- and in which other news organizations are intimidated, at
least to some extent. I sometimes talk about ... "asymmetrical intimidation." If
you say a true but unflattering thing about Bush or in fact about any other
prominent conservative, oh, boy! People are going to go after you. I mean, I've
got people working full-time going after me, right? But if you say a false,
unflattering thing about a Democrat or a progressive, no risk ... And that
shapes coverage, no question about it. It's better now, but it's still very
asymmetric. The other thing ... about the media is their addiction to the
trivial. We've got the most substantive election coming up, I think, ever. ...
And what are we seeing news stories about? John Edwards' hair and Hillary
Clinton's laugh ... this is horrifying! And again -- it's asymmetric. ...
ROC: It sounds like you're saying there's a bias in the media. If you are,
what is the bias?
PK: The media's bias, a large part of it is in fact right-wing bias, because
they are effectively part of the right wing. Fox News ... there's ... no liberal
equivalent..., there is no network that, if a conservative got the Nobel Peace
Prize, would have responded the way Fox News did to Al Gore's Peace Prize...
Beyond that, there's two things at least; first, the hatred of substance --
they really want to talk about all that trivia -- and there's also the fetish of
evenhandedness. ... Way back in the 2000 campaign, I wrote ... that if Bush said
the earth was flat, the headline would read: "Opinions Differ on Shape of the
Planet." I was thinking specifically about what Bush was saying about taxes and
Social Security, which were just out and out lies! But no one would say that,
and they still won't. It's better now, a little, but they still won't say it...
[T]he Big Lies are all on the right right now. So it works much more to their
ROC: Do you think it's possible that economics is driving politics in the
Continue reading ""Where Does the Right-Wing End and the Media Begin?"" »
Posted by Mark Thoma on Saturday, October 27, 2007 at 12:24 AM in Economics, Iraq and Afghanistan, Politics, Press |
Should anthropologists help the military in Iraq?:
A True Culture War By Richard A. Shweder, Commentary, NY Times: ...A few
weeks ago this newspaper reported on an experimental Pentagon “human terrain”
program to embed anthropologists in combat units in Iraq and Afghanistan. It
featured two military anthropologists: Tracy (last name withheld), a cultural
translator viewed by American paratroopers as “a crucial new weapon” in
counterinsurgency; and Montgomery McFate, who has taken her Yale doctorate into
active duty in a media blitz to convince skeptical colleagues that the occupying
forces should know more about the local cultural scene.
How have members of the anthropological profession reacted to the Pentagon’s
new inclusion agenda?
Continue reading "Culturally Sensitive Battle" »
Posted by Mark Thoma on Saturday, October 27, 2007 at 12:15 AM in Economics |
Posted by Mark Thoma on Saturday, October 27, 2007 at 12:06 AM in Links |
Continuing with today's housing bubble theme (Krugman, Leijonhufvud), here's the latest Economic
Letter from the San Francisco Fed reviewing research that tries to explain the
existence of asset price bubbles:
Asset Price Bubbles, by Kevin J. Lansing, FRBSF Economic Letter: Nowhere does history indulge in repetitions so often or so uniformly as in
Wall Street. When you read contemporary accounts of booms or panics the one
thing that strikes you most forcibly is how little either stock speculation or
stock speculators today differ from yesterday. The game does not change and
neither does human nature.
--From the thinly disguised biography of legendary speculator Jesse Livermore,
by E. Lefèvre (1923, p. 180).
Speculative bubbles have occurred throughout history in numerous countries
and asset markets. The term "bubble" was coined in England in 1720 following the
famous price run-up and crash of shares in the South Sea Company. The run-up led
to widespread public enthusiasm for the stock market and a proliferation of
highly suspect companies attempting to sell shares to investors. One such
venture notoriously advertised itself as "a company for carrying out an
undertaking of great advantage, but nobody to know what it is." The epidemic of
fraudulent stock-offering schemes led the British government to pass the
so-called "Bubble Act" in 1720, which was officially named "An Act to Restrain
the Extravagant and Unwarrantable Practice of Raising Money by Voluntary
Subscription for Carrying on Projects Dangerous to the Trade and Subjects of the
United Kingdom." Throughout history, speculative bubbles have usually coincided
with outbreaks of fraud and scandal, followed by calls for more regulation once
the bubble has burst (see Gerding 2006).
Economists use the term "bubble" to describe an asset price that has risen
above the level justified by economic fundamentals, as measured by the
discounted stream of expected future cash flows that will accrue to the owner of
the asset. The dramatic rise in U.S. stock prices during the late 1990s,
followed similarly by U.S. house prices during the early 2000s, are episodes
that have both been described as "bubbles." This Economic Lett
describes some research that attempts to account for the behavior of asset price
Continue reading "What Causes Asset Price Bubbles?" »
Posted by Mark Thoma on Friday, October 26, 2007 at 12:06 PM in Economics, Financial System, Monetary Policy |
Axel Leijonhufvud on the linkages between monetary policy and financial
instability. He argues that "Inflation targeting might mislead us into pursuing
a policy that is actively damaging to financial stability":
Bubble, bubble, toil and
trouble, by Axel Leijonhufvud, Project Syndicate: Editors’ note: This is
shortened version of the author’s Policy Insight “Monetary
and Financial Stability“.
As recently as twenty-five years ago, monetary stability in the United States
was based on the Federal Reserve System’s control of the quantity of money.
Financial stability was ensured by the comprehensive regulations of the Glass-Steagal
act. Today, these regulations are gone and a great wave of innovations has
entirely changed the financial landscape. And we no longer know how one might
define the “quantity of money” for control purposes.
Continue reading "Axel Leijonhufvud: Bubble, Bubble, Toil and Trouble" »
Posted by Mark Thoma on Friday, October 26, 2007 at 11:43 AM in Economics, Financial System, Housing, Monetary Policy |
The causes and consequences of ineffective regulation of financial
A Catastrophe Foretold, by Paul Krugman, Commentary, NY Times: “Increased
subprime lending has been associated with higher levels of delinquency,
foreclosure and, in some cases, abusive lending practices.” So declared Edward
M. Gramlich, a Federal Reserve official. ...
Mr. Gramlich said those words in May 2004. And it wasn’t his first warning.
... Mr. Gramlich, who recently died of cancer, ... tried to get Alan Greenspan
to increase oversight of subprime lending as early as 2000, but got nowhere.
So why was nothing done to avert the subprime fiasco? Before I try to
answer..., there are a few things you should know.
First, the situation for both borrowers and investors looks increasingly
dire. A new report from Congress ... predicts ... two million foreclosures on
subprime mortgages by the end of next year. That’s two million American families
facing the humiliation and financial pain of losing their homes.
At the same time, investors who bought assets backed by subprime loans are
continuing to suffer severe losses. ...
Second, much if not most of the subprime lending that is now going so
catastrophically bad took place after it was clear ... that there was a serious
housing bubble, and after people like Mr. Gramlich had issued public warnings...
As late as 2003, subprime loans accounted for only 8.5 percent of the
value of mortgages issued in this country. In 2005 and 2006, the peak
years of the housing bubble, subprime was 20 percent of the total — and
the delinquency rates on recent subprime loans are much higher than
those on older loans.
So, once again, why was nothing done to head off this disaster? The answer is
In a paper presented just before his death, Mr. Gramlich wrote that “the
subprime market was the Wild West. Over half the mortgage loans were made by
independent lenders without any federal supervision.” What he didn’t mention was
that this was the way the laissez-faire ideologues ruling Washington — a group
that very much included Mr. Greenspan — wanted it. They were and are men who
believe that government is always the problem, never the solution, that
regulation is always a bad thing.
Unfortunately, assertions that unregulated financial markets would take care
of themselves have proved as wrong as claims that deregulation would reduce
As Barney Frank ... put it ... the lessons ... are clear: “To the extent that
the system did work, it is because of prudential regulation and oversight. Where
it was absent, the result was tragedy.” ...
In his final paper, Mr. Gramlich stressed the extent to which unregulated
lending is prone to the “abusive lending practices”... The fact is that many
borrowers are ill-equipped to make judgments about “exotic” loans, like subprime
loans that offer a low initial “teaser” rate that suddenly jumps after two
years, and that include prepayment penalties preventing the borrowers from
undoing their mistakes.
Yet such loans were primarily offered to those least able to evaluate them.
“Why are the most risky loan products sold to the least sophisticated
borrowers?” Mr. Gramlich asked. “The question answers itself — the least
sophisticated borrowers are probably duped into taking these products.” And “the
predictable result was carnage.”
Mr. Frank is now trying to push through legislation that extends moderate
regulation to the subprime market. Despite the scale of the disaster, he’s
facing an uphill fight: money still talks in Washington, and the mortgage
industry is a huge source of campaign finance. But maybe the subprime
catastrophe will be enough to remind us why financial regulation was introduced
in the first place.
Posted by Mark Thoma on Friday, October 26, 2007 at 12:42 AM in Economics, Financial System, Market Failure, Regulation |
Andrew Gelman has some interesting graphs:
Some cool graphs of rich states and poor states, by Andrew Gelman: I'll take advantage of Paul Krugman's recent
link to our paper on income and voting by putting up some cool scatterplots
that we made recently. It started with our maps of which states Bush and Kerry
would've won if only the votes of the poor, middle-income, and rich were
We noticed that the familiar red-blue pattern (rich northeast and west coast
supporting the Democrats, rest of the country supporting the Republicans) showed
up clearly among rich voters, but not among the poor or middle class.
There are also some interesting scatterplots in Andrew's post. Summarizing the plots:
[F]or each income category, we show Bush's
vote share for each state, plotted along with the state's income. For poor
voters, there is no systematic difference between rich and poor states. But for
middle-income and especially for rich voters, there is a very strong pattern of
rich states supporting the Democrats and poor states supporting the Republicans.
Posted by Mark Thoma on Friday, October 26, 2007 at 12:33 AM in Economics, Politics |
Posted by Mark Thoma on Friday, October 26, 2007 at 12:06 AM in Links |
Chris Hayes on the use of email to spread rumors and the difficulty people have debunking the rumors once they have gone this route:
I’ve got a
cover story in the latest
the Nation about the hidden but potent institution of the right-wing email
forward. Here’s the first page:
On February 27, 2001, two members of the American Gold Star Mothers, an
organization of women who've lost sons or daughters in combat, dropped by the
temporary basement offices of the new junior senator from New York, Hillary
Clinton. They didn't have an appointment, and the office, which had been up and
running for barely a month, was a bit discombobulated. The two women wanted to
talk to the senator about a bill pending in the Senate that would provide
annuities for the parents of those killed, but they were told that Clinton
wasn't in the office and that the relevant staff members were otherwise engaged.
The organization later submitted a formal request in writing for a meeting,
which Clinton granted, meeting and posing for pictures with four members of the
But the story doesn’t end there. In May of that year, the right-wing website
NewsMax, a clearinghouse for innuendo and rumor, ran a short item with the
headline “Hillary Snubs Gold Star Mothers.” Reporting via hearsay—a comment
relayed to someone who then recounted it to the column’s author—the article
claimed that Clinton and her staff “simply refused” to meet with the Gold Star
Mothers, making hers the “only office” in the Senate that snubbed the group.
At first the item didn’t attract much attention, but it quickly morphed into
an e-mail that started ricocheting across the Internet. “Bet this never hits the
TV news!” began one version. “According to NewsMax.com there was only one
politician in DC who refused to meet with these ladies. Can you guess which
politician that might be?... None other than the Queen herself—the Hildebeast,
Before long, the Gold Star Mothers and the Clinton office found themselves
inundated by inquiries about the “snub,” prompting the Gold Star Mothers to post
a small item debunking the claim on their website. When that didn’t stem the
tide, they posted a lengthier notice. “These allegations were not initiated by
the Gold Star Mothers…. This is a fabricated report picked up by an individual
using the Gold Star Mothers as an instrument to discredit Senator Clinton…. We
do not need mischievous gossip and unfounded lies to promote our organization.
Please help stop it now.”
That plea notwithstanding, the e-mail continues to circulate to this day.
Anyone who’s been following politics for the past fifteen years won’t be
surprised to find Hillary Clinton the subject of a false and damning right-wing
smear. We’ve all become familiar with the ways the Republican noise machine
transmits lurid bits of misinformation and tendentious attacks from the
conservative fringe into the heart of American political discourse, the process
by which a slightly misdelivered joke by John Kerry attracts the ire of Rush
Limbaugh and ends up on the front page of the New York Times.
But in some senses, the kind of under-the-radar attack embodied in the Gold
Star e-mail—which never made the jump to Fox or Drudge—is even harder to deal
with. “It’s a Pandora’s box,” says Jim Kennedy, who served as Clinton’s
communications director during her first Senate term. “Once [the charges] are
out in the ether, they are very hard to combat. It’s very unlike a traditional
media, newspaper or TV show, or even a blog, which at least has a fixed point of
reference. You know they’re traveling far and wide, but there’s no way to rebut
them with all the people that have seen them.”
Such is the power of the right-wing smear forward, a vehicle for the
dissemination of character assassination that has escaped the scrutiny directed
at the Limbaughs and Coulters and O’Reillys but one that is as potent as it is
invisible. In 2004 putative firsthand accounts of Kerry’s performance in Vietnam
traveled through e-mail in right-wing circles, presaging the Swift Boat attacks.
Last winter a forward began circulating accusing Barack Obama of being a secret
Muslim schooled in a radical madrassa (about which more later). While the story
was later fed through familiar right-wing megaphones, even making it onto Fox,
it has continued to circulate via e-mail long after being definitively debunked
by CNN. In other words, the few weeks the smear spent
in the glare of the mainstream media was just a tiny portion of a long life
cycle, most of which has been spent darting from inbox to inbox.
Posted by Mark Thoma on Thursday, October 25, 2007 at 02:25 PM in Economics, Politics |
Robert Reich says "the case for substantially raising marginal income tax
rates on the rich" is clear:
Who Pays the Dollars that Finance Bush's War? More on a Fair Tax Burden, by
Robert Reich: President Bush has just sent Congress an “emergency” request
for an extra $46 billion in expedited funds for Iraq, Afghanistan and other
national security needs. That’s in addition to the $145 billion in war-related
spending included in Bush’s original 2008 budget. Which brings me back to the
subject of who’s gonna pay for all this. ...
[T]he principle for who’s gonna pay should be equal sacrifice. Equal
sacrifice means that in paying taxes, people ought to feel about the same degree
of pain – regardless of whether they’re wealthy or poor. This means that someone
earning $2 million a year ought to pay a larger portion of her income in taxes
than someone earning $20,000 a year. Even Adam Smith saw the wisdom of a
graduated tax. “The rich should contribute to the public expense, not only in
proportion to their revenue, but something more in proportion,” he wrote.
(Wealth of Nations, vol. 2, ed. Campbell, Oxford U Press, 1976, p. 840.)
Traditionally during wartime, taxes have been raised substantially on top
incomes to help pay the extra costs of war. The estate tax was imposed by
wartime Republican presidents Lincoln and McKinley. It was maintained through
World War I, World War II, the Korean War, and the Cold War. Now, under Bush,
with Bush's war costing more and more, it's being phased out.
During World War I the marginal income tax on the richest Americans rose to
77 percent; during World War II it was over 90 percent. In 1953, with the Cold
War raging, Republican president Dwight Eisenhower refused to support a
Republican bill to reduce the top rate, then 91 percent. By 1980, the top
marginal rate was still at 70 percent.
Combine this logic with the facts I shared with you two blogs ago – about how
large a share of national income and wealth the super-rich now claim – and the
case for substantially raising marginal income tax rates on the rich should be
* Postscript: The blogger who asserts that 84.6 percent of all federal taxes are
paid by the top 25 percent of income earners, and over a third are paid by the
top 1 percent, advances a specious argument. First, most Americans pay more in
payroll taxes than in income taxes; in addition, state sales taxes have grown
faster than almost any other form of taxation. Both payroll taxes and sales
taxes take a much bigger portion of the paychecks of lower-income Americans than
of higher-income. Viewed as a whole, the current tax system is quite regressive.
Second, and more to the point, it’s irrelevant how much of the total income
tax burden is paid by the top 25 percent, or even the top 1 percent. The ethical
and logical issue is what sort of sacrifice individuals are making, or should be
expected to make, rather than what sacrifice an economic “class” is making as a
whole. The rich have become so wealthy that even if each wealthy American paid a
very small share of his or her incomes in taxes, the rich would still, as a
group, account for a large share of total income taxes. I find it ironic that
conservatives who extol the virtues of individualism and abhor so-called “class
warfare” would resort to such a deceptive argument.
And, though I think Reich has in mind a net increase in taxes rather than revenue neutral offsets that increase progressivity, along these
A Tax Plan as Trial Run for ’09 Law, by Edmund L. Andrews, NY Times: The
House’s leading Democratic tax writer will propose a sweeping overhaul of the
tax code on Thursday that would increase taxes on many people with incomes above
$200,000 but cut them for most others.
The bill, [is] to be introduced by Representative Charles B. Rangel of New
York ... Mr. Rangel has acknowledged that he does not expect to enact such a
bill this year, and President Bush would almost certainly veto legislation that
raises taxes on the wealthy. ...
Posted by Mark Thoma on Thursday, October 25, 2007 at 12:24 AM in Economics, Income Distribution, Iraq and Afghanistan, Taxes |
The Fed is moving to increase transparency:
Fed Plans Transparency Steps, by Greg Ip, WSJ: Federal Reserve officials are
nearing consensus on several steps to make their deliberations more transparent
to the public, but are likely to defer one of Chairman Ben Bernanke's
longstanding goals: an explicit inflation target.
The centerpiece of their new communications steps would be the release of
economic forecasts of policy makers four times a year, instead of the current
two times, with additional detail and background... Moreover, the horizon for
those forecasts would be extended to three years from two.
The ... Fed had hoped to finalize them by this month. But the fallout of the
market turmoil that erupted in August has complicated the agenda of next week's
meeting of the policy-making Federal Open Market Committee and it may defer
decisions on its communications policy to a later meeting. ...
While the idea of setting an inflation target hasn't been shelved, officials
say it needs more discussion. ... For Mr. Bernanke, deferral of an inflation
target represents a setback, but he can chalk up a tactical victory for forging
a consensus on other steps. ...
At his nomination hearing in 2005, Mr. Bernanke restated his preference for a
target while promising "extensive discussion and consultation" and "no
precipitate steps." ...
The FOMC as a whole is still not ready to take the step. One concern is that
Congress, having taken a more populist turn since Democrats took power in 2006,
could perceive a target as subordinating the Fed's responsibility for
employment, despite Mr. Bernanke's insistence to the contrary. Another is that
officials don't think the current system is broken.
At present, the FOMC meets eight times a year, and at two of its meetings,
members submit forecasts for the current and next year on growth, inflation and
unemployment that are included in a report to Congress. The "central tendency"
of those forecasts -- a range that excludes the extreme projections -- garners
the most attention. ...
At present, the post-meeting FOMC statement and the minutes aren't expected
to be altered significantly.
A recent paper by Orphanides and Wieland is related to the release of the
economic forecasts more often and with more detail. According to this paper from
a recent conference at the St. Louis Fed, the "midpoints of the central
tendencies" used as "proxies for the modal forecasts of FOMC" are better at
explaining policy decisions and deviations from the Taylor rule than data on
actual economic conditions. Simply put, if you want to understand the Fed's policy decisions, look at the FOMC forecasts, not the actual data on the economy available at the time:
Economic Projections and Rules-of-Thumb for Monetary Policy, by Athanasios
Orphanides and Volker Wieland, October 2007: Abstract Monetary policy
analysts often rely on rules-of-thumb, such as the Taylor rule, to describe
historical monetary policy decisions and to compare current policy to historical
norms. Analysis along these lines also permits evaluation of episodes where
policy may have deviated from a simple policy rule... One interesting question
is whether such rules-of-thumb should draw on policymaker forecasts of economic
conditions or recent outcomes of key variables such as inflation and
unemployment. ... We investigate this proposition in the context of FOMC policy
decisions over the past 20 years using publicly available FOMC projections from
the biannual monetary policy reports to the Congress (Humphrey-Hawkins reports).
Our results indicate that FOMC decisions can indeed be predominantly explained
in terms of the FOMC's own projections rather than recent economic outcomes.
Thus, a forecast-based rule-of-thumb better characterizes FOMC decision-making.
We also confirm that many of the apparent deviations of the federal funds rate
from an outcome-based Taylor-style rule may be considered systematic responses
to information contained in FOMC projections.
Posted by Mark Thoma on Thursday, October 25, 2007 at 12:15 AM in Academic Papers, Economics, Monetary Policy |
Posted by Mark Thoma on Thursday, October 25, 2007 at 12:06 AM in Links |
The CBO has estimated the cost of the war based upon two scenarios:
Summary At the request of Chairman Spratt, the Congressional Budget
Office (CBO) has totaled the funding provided through fiscal year 2007 for
military and diplomatic operations in Iraq and Afghanistan and other activities
associated with the war on terrorism, as well as for related costs incurred by
the Department of Veterans Affairs (VA) for medical care, disability
compensation, and survivors’ benefits. In addition to totaling the funding
provided to date, CBO has projected the total cost over the next 10 years of
funding operations in support of the war on terrorism under two scenarios
specified by the Chairman. Those scenarios are meant to serve as an illustration
of the budgetary impact of two different courses in the war on terrorism but are
not intended to be a prediction of what will occur.
Appropriations for U.S. Operations in Iraq and Afghanistan and for the War on Terrorism (Billions of dollars)
Including both funding provided through 2007 and projected funding under the
two illustrative scenarios, total spending for U.S. operations in Iraq and
Afghanistan and other activities related to the war on terrorism would amount to
between $1.2 trillion and $1.7 trillion for fiscal years 2001 through 2017 (see
Table 1). A final section of this testimony briefly compares parts of CBO’s
estimate to a frequently cited estimate prepared by two academic researchers,
Linda Bilmes and Joseph Stiglitz. ...
According to this,
there is an additional $700 billion in interest expenses bringing the total
(under the $1.7 trillion dollar scenario) to $2.4 trillion. There is more to say but, unfortunately, I am short on time, so I will leave it to you to add more detail in comments. [Update: More here.]
Posted by Mark Thoma on Wednesday, October 24, 2007 at 02:34 PM in Economics, Iraq and Afghanistan, Terrorism |
Tim is losing sleep:
Runaway Rate Cut Train?, by Tim Duy: I agonize over this stuff. Constantly. And it is not
really part of my job. Just can’t get it out of my mind.
It is even more agonizing when expectation flip-flop so
strongly, from rate cut to no rate cut back to rate cut certainty. From
Fed Chairman Ben Bernanke’s speech kicked off a shift in
expectations, reinforced by additional Fed speakers. The ongoing risk
management theme was reiterated by new
Chicago Fed President Charles Evans:
To me, the uncertainties about how financial conditions might evolve and affect
the real economy mean that risk management considerations have an important role
in the current policy environment…However, there is a less benign possibility.
Housing demand and prices could weaken a good deal more than we expect — either
because a new shock hits the sector or because we have underestimated the
weakness already in train….
I want to emphasize that I do not see this extreme outcome as likely. But it is
one of those high cost outcomes that we should guard against. The challenge is
to calibrate the insurance in light of the lower probability of the spillover
The upshot of such speeches has been to entrench
expectations that as long as housing is deteriorating, the downside risks to the
economy are too great to be ignored, and therefore rate cuts will continue
regardless of the relatively minimal impact the housing downturn has had on the
rest of the economy. Still unsteady credit markets argue further for additional
Continue reading "Fed Watch: Runaway Rate Cut Train?" »
Posted by Mark Thoma on Wednesday, October 24, 2007 at 12:33 AM in Economics, Fed Watch, Monetary Policy |
Jonathan Chait tries to figure the periodic episodes of hysteria over Social Security:
Fear Factor, by Jonathan Chait, The New Republic: The beginning of the fall
season brought to Washington another periodic upsurge of entitlement hysteria.
... Affected parties tend to furrow their brows and scold politicians in
particular, and Americans in general, for our myopia in the face of the
demographic tidal wave of retiring baby boomers who will drown the federal
budget with unsustainable benefits. ... Those afflicted with entitlement
hysteria are identifiable not by the realization that big social programs will
need a fix--which is widely understood-- but by the urgency and gravity of their
There's some truth to their analysis, but it misses the point in a crucial
way. The two largest entitlement programs, Social Security and Medicare, are in
very different shape. The Social Security Trust Fund is scheduled to last until
2042, at which point we'll have to hike up taxes or trim spending a bit.
Medicare, on the other hand, faces a day of reckoning in 2019.
Yet one of the oddities of the entitlement hysterics is that they are far
more obsessed with the minor problems of Social Security than with the massive
problems of Medicare. Indeed, ... they inevitably follow the same pattern: They
begin with an ominous summation about entitlements--thus lumping together
Medicare with Social Security--then swiftly proceed to demand that Social
Security be shored up forthwith.
Russert's recent harangue at the Democratic presidential debate was a classic
example. He began by warning of the crisis faced by "Social Security and
Medicare" but proceeded to ask no fewer than 14 questions about Social Security,
and zero about Medicare. ...
Should they stop being hysterical about Social Security and start being
hysterical about Medicare? Well, that would be a start, but it would still elide
the deeper problem. The reason Medicare is in such worse shape than Social
Security is that it has to account for exploding health care costs. Their focus
on demographics and greedy baby boomers is entirely misplaced. Indeed, the
"entitlement problem" is mostly--three-quarters, to be precise--a function of
rising health care costs.
Since you can't solve the entitlement problem without solving the health care
problem, one might think that the entitlement hysterics would have gradually
moved on to becoming health care hysterics. ... Yet this is another puzzling
thing about entitlement hysteria: the sheer persistence of the obsession.
...[W]hy do they consider this to be a matter of such unique urgency? Put aside
the war in Iraq, for which plenty of people (including me) lack any confident
solution. In addition to the health care crisis, there's global warming. There
are numerous loosely secured nuclear sites throughout the world... There are
numerous diseases threatening the lives of millions of Africans whose deaths
could be prevented at relatively modest expense. ...
Compared to such disasters, the entitlement nightmare scenario isn't so
nightmarish. If we do absolutely nothing to fix Social Security, then, 35 years
from now, the program will have to start paying out three-quarters benefits, or
we'll have to raise taxes. It's not ideal, but it doesn't keep me awake at
Yes, the fix would be easier and fairer if we implemented it sooner. But the
closer we get to Social Security's insolvency date, the easier it will become
politically to do the fix. The last major fix to Social Security, implemented in
1983, came about just as the Trust Fund was on the verge of insolvency. ...
Ten or 20 years ago, you could plausibly deem Social Security's finances
among the most pressing national problems. Those who were willing to take on the
problem were admired for their farsightedness, bipartisanship, and seriousness
of purpose. Social Security's place on our list of national problems has long
since been overtaken, but, among Washington establishment types who remember
those days, the issue retains its totemic significance. Entitlement hysteria has
become less a response to a crisis than an expression of statesmanship. ...
It's an ideological fight and Social Security is the battleground. Finances are (mis)used in an attempt to motivate change, anything to shake up the system, but among the more hysterical finances are not the real concern.
Posted by Mark Thoma on Wednesday, October 24, 2007 at 12:24 AM in Economics, Politics, Social Security |
I hope we aren't reduced to this type of solution to the global warming
How to Cool the Globe, by Ken Caldera, Commentary, NY Times: Despite
growing interest in clean energy technology, it looks as if we are not going to
reduce emissions of carbon dioxide anytime soon. The amount in the atmosphere
today exceeds the most pessimistic forecasts made just a few years ago, and it
is increasing faster than anybody had foreseen. ...
What can be done? One idea is to counteract warming by tossing small
particles into the stratosphere (above where jets fly). This strategy may sound
far-fetched, but it has the potential to cool the earth within months.
Mount Pinatubo, a volcano in the Philippines that erupted in 1991, showed how
it works. The eruption resulted in sulfate particles in the stratosphere that
reflected the sun’s rays back to space, and as a consequence the earth briefly
If we could pour a five-gallon bucket’s worth of sulfate particles per second
into the stratosphere, it might be enough to keep the earth from warming for 50
years. Tossing twice as much up there could protect us into the next century.
A 1992 report from the National Academy of Sciences suggests that naval
artillery, rockets and aircraft exhaust could all be used to send the particles
up. The least expensive option might be to use a fire hose suspended from a
series of balloons. Scientists have yet to analyze the engineering involved, but
the hurdles appear surmountable.
Seeding the stratosphere might not work perfectly. But it would be cheap and
This is not to say that we should give up trying to reduce greenhouse gas
emissions. ... Think of it as an insurance policy, a backup plan for climate
Which is the more environmentally sensitive thing to do: let the Greenland
ice sheet collapse and polar bears become extinct, or throw a little sulfate in
the stratosphere? The second option is at least worth looking into.
Posted by Mark Thoma on Wednesday, October 24, 2007 at 12:15 AM in Economics, Environment, Science |
Posted by Mark Thoma on Wednesday, October 24, 2007 at 12:06 AM in Links |
Paul Krugman defends one of the claims in his book:
White male math, Paul Krugman: So, people ask why, in The Conscience of
a Liberal, I downplay the role of issues other than race in swinging the
political balance in favor of the GOP. The answer, basically, is the math: once
you take the great southern switch into account, there isn’t much left to
In some correspondence with Larry Bartels, whose “What’s
the matter with “What’s the matter with Kansas?”" is must reading for anyone
trying to understand modern American political, economy, the issue of how the
Democrats lost white males came up. Larry points out that you really need to
separate out the South. Here’s what he had to say:
Unless you have a peculiar nostalgia for the racially coercive Democratic
monopoly of the Jim Crow era, it makes sense to focus on the rest of the
country. There, the Democratic share of the two-party presidential vote among
white men was 40% in 1952 and 39% in 2004.
White men didn’t turn against the Democrats; Southern white men
turned against the Democrats. End of story.
Here's the abstract from the Bartels article along with the table showing the
numbers Krugman is referring to. The discussion surrounding the table is also
matter with “What’s the matter with Kansas?, by Larry Bartels: Abstract: Thomas Frank’s
What’s the Matter with Kansas? asserts that the Republican Party has forged
a new “dominant political coalition” by attracting working-class white voters on
the basis of “class animus” and “cultural wedge issues like guns and abortion.”
My analysis confirms that white voters without college degrees have become
significantly less Democratic; however, the contours of that shift bear little
resemblance to Frank’s account. First, the trend is almost entirely confined to
the South, where Democratic support was artificially inflated by the one-party
system of the Jim Crow era of legalized racial segregation. (Outside the South,
support for Democratic presidential candidates among whites without college
degrees has fallen by a total of one percentage point over the past
half-century.) Second, there is no evidence that “culture outweighs economics as
a matter of public concern” among Frank’s working-class white voters. The
apparent political significance of social issues has increased substantially
over the past 20 years, but more among better-educated white voters than among
those without college degrees. In both groups, economic issues continue to be
most important. Finally, contrary to Frank’s account, most of his white
working-class voters see themselves as closer to the Democratic Party on social
issues like abortion and gender roles but closer to the Republican Party on
And on to table 1:
Table 1 provides a different way of looking at the growing electoral
importance of income differences within Frank’s white working class. The rows of
the table present separate tabulations of changing Democratic support over the
whole period from 1952 through 2004 among voters in the upper, middle, and lower
thirds of the income distribution in each election year. The first entry in the
first column of the table,−5.9, represents the overall decline in Democratic
presidential support among white voters without college degrees over the 14
presidential elections covered by the NES surveys. ... Reading down the first
column, we see that the decline in support for Democratic candidates was much
greater – almost 15 percentage points – among the most affluent members of this
group (with family incomes in the top third of the national income
distribution). On the other hand, the Democratic vote share among the least
affluent members of this group (those in the bottom third of the national income
distribution) actually increased by almost five percentage points.
It should be clear from these comparisons that material economic
circumstances have become more important, not less important, in structuring the
presidential voting behavior of Frank’s white working class over the course of
the past half-century. While it is true that Democratic presidential candidates
have lost significant support among this group, those losses turn out to be
heavily concentrated among its middle- and upper-income segments, and indeed
have been partially offset by increasing support for Democratic candidates among
working-class whites with low incomes.
Whereas the rows of Table 1 differentiate Frank’s white working-class voters
on the basis of income levels, the columns present separate tabulations of
changing Democratic support for the South and for the rest of the country.
These separate tabulations suggest a third and even more striking lacuna in
Frank’s account of the decline in Democratic support among white working-class
voters over the past half-century. Focusing on the overall trends, in the first
row of the table, we see that the Democratic presidential vote share has
declined by almost 20 percentage points among southern whites without college
degrees. Among non-southern whites without college degrees it has declined by
one percentage point. That’s it. Fourteen elections, 52 years, one percentage
The remaining entries in the table provide similar comparisons of southerners
and non-southerners within each income segment of Frank’s white working class.
In every case, we see a similar 20-point gap between the South and the rest of
the country. Among the most affluent segment, the difference is between a
substantial ten-point Republican shift outside the South and a massive 32-point
Republican shift in the South. Among the least affluent segment, a ten-point
Republican shift in the South has been more than counterbalanced by an 11-point
Democratic shift in the rest of the country. (On the other hand, within each
region we see a similar 20-point difference in the shifts observed among voters
in the top and bottom thirds of the income distribution; the economic and
regional trends are largely independent and both quite powerful.)
To a good approximation, then, the overall decline in Democratic support
among voters in Frank’s white working class over the past half-century is
entirely attributable to the demise of the Solid South as a bastion of
Democratic allegiance. In the first half of the 20th century the historical
legacy of the Civil War and the contemporary reality of Jim Crow racial politics
induced southern whites to maintain “unquestioning attachment, by overwhelming
majorities, to the Democratic party nationally” (Key 1949, 11). However,
dramatic action on civil rights issues by national Democratic leaders in the
early 1960s precipitated a momentous electoral shift among white southerners
(Carmines and Stimson 1989), eventually replacing an anomalous Democratic
majority with a much less anomalous Republican majority.
Posted by Mark Thoma on Tuesday, October 23, 2007 at 04:50 PM in Economics, Politics |
Richard Clarida says the fall in the dollar isn't over yet:
The Dollar's Got Further to Slide, by Richard Clarida, Commentary, WSJ:
Nearly every day in recent weeks seems to bring news that the dollar has fallen
to record lows against the euro and other major currencies. Important factors
include the Fed's bold -- but appropriate -- 50 basis-point cuts in the Federal
Funds rate and the discount rate, and the policies we are likely to see in
coming months from the European Central Bank and the Bank of England. ...
Since the August 2006 [FOMC] meeting, at which the Fed announced at least a
pause if not an end to the interest-rate hike cycle, the dollar [has drifted
There are several reasons for this, and these reasons suggest the dollar
downdraft is likely to continue for some time to come. First, the U.S. economy
in the second half of 2006 slipped into what has now been more than a year of
below-trend growth. Moreover, this occurred in the context of buoyant global
This relative U.S. underperformance is likely to continue, as the economy
works through the headwinds of the housing contraction and consumer retrenchment
in the face of tighter credit conditions and a soft labor market. But a U.S.
recession is not necessarily in the cards, in large part because the Fed will
probably ease more in future months to provide insurance against an economic
It appears as though the trade deficit has peaked, and it starting to decline
as a result of slower U.S. growth, a robust global economy, and a weaker dollar.
Indeed, all of the increase in the trade deficit between 2004 and 2006 was due
to higher oil prices. The non-oil trade deficit has been more or less constant
since 2004, and is now starting to show clear evidence of decline. ...
As the U.S. economy moves from being an engine of global growth to a path
that is in line with the average of other major countries, the trade deficit
will narrow and a weaker dollar will be part of that adjustment. This adjustment
need not be inflationary.
Currencies can depreciate because of bad monetary policy, as was the case for
the U.S. in the 1970s. But they can also depreciate with sound monetary policy
if currency adjustment is called for -- as it is now -- to rebalance the
domestic and global economies as the U.S. trade deficit shrinks.
The world financial system is undergoing an evolution, as economies from Asia
to the Middle East to Europe allow more flexibility in their exchange rates
and/or peg them against a basket of currencies and not just the dollar.
Reserve diversification will continue, and sovereign wealth funds will likely
invest across a broader range of assets than reserve managers do at present. All
of these developments will keep the dollar downdraft going for some time.
A U.S. inflation surge is not likely, although the Fed will face upward
pressures on inflation from sources that were not so prominent until recent
years -- a possible slowdown in productivity growth and booming commodity
prices, as well as the weaker dollar.
But ultimately the U.S. inflation rate will be up to the Fed. At present,
with core inflation measures within the Fed comfort zone, and payrolls
contracting, the Fed is now rightly focused on cutting interest rates to preempt
a U.S. recession.
Posted by Mark Thoma on Tuesday, October 23, 2007 at 12:33 AM in Economics, Inflation, International Finance |
Psychologists vs. economists, by Andrew Gelman: This is fun because, as an outsider to both fields, I can just stand back and watch. Dan Goldstein writes:
Someone agreed to give a talk to the University Economics
Society here next week with the title: “Why Psychologists know more
about Economic Behaviour than Economists”. Any suggestions JDMers might
have would be interesting.
The query led to "a flurry of responses," including:
You could exploit an inadvertent ambiguity in your talk title, and claim that
you meant that psychologists know more about economic behaviour than they do
about economists. Indeed, economists are mysterious beings. Many persevere in
the belief that people must behave optimally, at least on average, and they seem
perpetually baffled by basic psychological phenomena that seem completely
intuitive to one’s proverbial grandparent. I feel that psychologists indeed
understand them quite poorly.
Perhaps the core argument is that we [Psychologists] go out and look at the
animals (at least now and then) while the economists very rarely do.
The answer seems to be quite simple. Economists are bound to the ‘rational
model’ whereas psychologists are not.
What economists think about psychologists:
1. Psychologists only study rats, pigeons, college freshman, and crazy people.
2. (Perhaps due to the above,) psychologists are not very rational.
What psychologists think about economists:
1. Economists stubbornly hold to a rational model of man(kind) that (they must
know) is obviously wrong.
2. Economists can never agree about what will happen to our economy.
I'll now give a few comments of my own. First, my impression is that, within
academia, economics has a higher status than psychology. Thus you see
psychologists sniping at economists but not much of the reverse: economists
probably don't spend much time thinking about psychologists. It reminds me of
when I used to teach at Berkeley: we could always get a rise out of the students
by mentioning Stanford. But, at Stanford, if you mention Berkeley, nobody cares.
On the substance of the matter, of course psychologists will be able to
explain some aspects of economic behavior better than economists can, and
economists will be able to explain other aspects of economic behavior. I'd trust
the economist more on the price of food and I'd trust the psychologist more on
the question of what food a person will actually buy. I don't know that either
side would know "more" than the other.
Posted by Mark Thoma on Tuesday, October 23, 2007 at 12:24 AM in Economics |
the US just tired of Bush, or have conservatives had it?, by Michael Tomasky,
Commentary, Comment is Free: ...Let me offer what I think is the most
important undercurrent question of next year's election: have Americans tired of
conservatism, or have they merely tired of corrupt and incompetent conservatism?
Americans have now experienced a conservative government failing them. But
what lesson will they take? That conservatism itself is exhausted and without
answers to the problems that confront American and the world today? Or will they
conclude that the problem hasn't been conservatism per se, just Bush...? ...
Conservatives will do their best to convince us it's just Bush, it's not the
movement itself that is at fault, but the Iraq war and other failures such as the push to
privatize Social Security and eliminate the estate tax came with the full support and approval of
conservatives. The bills the Republican congress sent to Bush that increased spending while cutting taxes were certainly not Bush acting alone. And I don't recall conservatives objecting when the administration rewarded political allies with positions within the administration or by awarding them government contracts, a key part of the administration's collapse when events like Katrina and Iraq revealed the consequences of such patronage. It's hard to deny that the Bush administration suffers from
competency problems, and part of the article linked above says Republican candidates are attempting to exploit that to their advantage, but I don't think it's Bush alone that is the problem. For the most part, he has been faithful to the conservative movement and, when Republicans had a majority, rubber stamped whatever congress sent his way.
So my answer is all of the above, that it's both not one or the other. Bush certainly hasn't helped the
conservative movement, but the policies and the less than desirable results that have followed in Iraq and elsewhere cannot be attributed to Bush acting outside of core conservative principles.
Posted by Mark Thoma on Tuesday, October 23, 2007 at 12:15 AM in Economics, Politics |
Posted by Mark Thoma on Tuesday, October 23, 2007 at 12:06 AM in Links |
I hear the criticism that shrill liberals (or even shriller conservatives) do
nothing but preach to the converted, hence they provide no useful function:
Malefactors of Megawealth, by David Kennedy, NY Times: ...Like the rants of
Rush Limbaugh or the films of Michael Moore, Krugman’s shrill polemic may
hearten the faithful, but it will do little to persuade the unconvinced or to
advance the national discussion of the important issues it addresses. It may
even deepen the very partisan divide he denounces.
I think this is wrong, and not just because of the silly equivalence drawn between Limbaugh and Krugman. First, I don't buy that these voices cannot reach
beyond the confines of the converted. Given the responses I've seen to Krugman
and others, many of these voices penetrate the other side of the political fence
quite well, generate responses, and in doing so help to advance national discussion on these issues. I have no doubt, for example, that Krugman has helped to promote national discussion on a variety of issues from health care to inequality to trade policy to Iraq.
But suppose it is true - suppose one does nothing but preach to the converted
- does that mean there is nothing useful happening in the exchange?
What those with a voice can do is give people the arguments they need to
rebut the other side's arguments in the daily exchanges at the water cooler at work, at dinner parties, at family
gatherings, and so on. Whenever political arguments come up in the course of conversation
they will have heard both the arguments and the counterarguments and they will
be much better able to defend their views (and much less likely to be swayed by
misleading messages from the other side). Echoing good arguments on various sites can reinforce this
effect even if it is mostly talking to people with similar overall views. Thus, even if it's true the someone like Krugman sways nobody directly
(a proposition I doubt), there is still an indirect effect where the arguments
that he gives to others can be used to win the smaller day to day discussions
between people, the discussions that impact the marginal undecided voter.
That's also why I don't mind having (tolerable and rational) conservatives in comments.
They make their arguments, then we hear the rebuttal, excellent rebuttal in most cases. The arguments are out
there whether I allow them in comments or not, so the important part is to
generate effective counterargument that can be used more generally as people
interact with others and these arguments come up in the course of the discussion. Winning the little battles in social discussions is important, and preaching to the converted is a key step in enabling people to have the persuasive arguments they need to be effective in arguing for their ideas.
Posted by Mark Thoma on Monday, October 22, 2007 at 12:33 PM in Economics |
I am very pleased to see this, and not just because there's a link to this
site. I've been frustrated with the press on the 'Laffer curve, tax cuts have
paid for themselves' issue because the press has enabled a big lie. It's a lie
Republican candidates, even the president, can still repeat with very little
attention from the mainstream media. No matter how often reputable economists on the right and the left have said this is a lie, the press has ignored it and allowed it to continue unquestioned. Some of you around here are probably tired of hearing about it (though see here), but it's a lie with consequences. The tax
cuts that went through were sold on false premises - what it costs us is far
greater than advocates said, advocates who claimed it would actually increase
revenue and cost us nothing. It does cost us, hundreds of billions of
dollars so far, and that cost has not been presented honestly to the public by
either the advocates of the tax cuts or the press reporting on the issue. Without an adequate understanding of the true costs, the public discussion on the issue is distorted and the result is bad public policy.
The big lie matters, and the sooner the press starts to call politicians on
it, the better for us all. There are encouraging signs, Jon Chait's recent book being one example and this being another, but it's still possible to tell the lie with little consequence from the mainstream media. Here's James Surowiecki (whom I've come to respect as
an excellent reporter on economics):
The Tax Evasion: The Great Lie of Supply-Side Economics, by James Surowiecki,
The New Yorker: In American politics, supply-side economics is the monster
that will not die. The supply-side argument that, in the United States, tax-rate
cuts pay for themselves ... has little or no support within the mainstream
economic profession, and no hard empirical data to back it up.
demonstrated that both the Reagan tax cuts of the nineteen-eighties and the
tax cuts put through under the current Administration shrank government revenues
and led to bigger budget deficits.
Yet the absence of proof for supply-side theory has not dimmed Republicans’
devotion to it. Last month, President Bush
told Fox News that his tax cuts had “yielded more tax revenues, which allows
us to shrink the deficit.” Dick Cheney
insists that “sensible tax cuts increase economic growth and add to the
federal treasury.” Every major
candidate ... is on the record as saying that tax cuts pay for themselves.
And, just last week, a New York Sun editorial
published a list of what “the Republican Party stands for.” First on the
list? “Reductions in top marginal tax rates . . . lead to greater government
revenues in the long run.”
This supply-side orthodoxy is striking in a couple of ways. First, it
requires Republican politicians to commit themselves publicly to a position that
is wrong—and wrong not as a matter of ideology or faith but as a matter of fact.
... Second, despite the fact that the supply-side faith has no grounding in
reality, within the Republican Party there is little room for dissent on the
subject, as Jonathan Chait
details in his new book, “The Big Con.” Last week, the blogger
Megan McArdle wrote that she had a book review for an unnamed right-wing
publication spiked because in it she dared suggest that, in the U.S., tax cuts
decreased government revenues.
The cynical explanation for the persistence of the supply-side dogma is that
it’s simply cover for cutting taxes for the rich. But the supply-side orthodoxy
has flourished for other reasons, too. To begin with, the absurd idea that tax
cuts pay for themselves is based on an idea that is not at all absurd, which is
that tax rates can have an impact on people’s behavior. Increase taxes too much,
and people may work less ... and invest less..., and so the economy will grow
more slowly. The opposite can happen if you cut taxes. (How much of an impact
tax rates have ... is a
subject of much
debate in economics, but it’s inarguable that they do matter.) What
supply-siders have done is start with that reasonable idea and extrapolate it to
They’re aided in that extrapolation by the simple fact that the American
economy grows over time. As a result, even if you cut taxes the federal
government will eventually take in more tax revenue than it once did. And that
allows supply-siders to fashion a spurious syllogism: taxes were cut in 2001,
government revenues are higher in 2007 than they were in 2001, therefore the tax
cuts increased revenue. The comparison that really matters in analyzing the
impact of the tax cuts, of course, is ... the comparison between actual tax
revenue in 2007 and what tax revenue would have been in 2007 had there been no
tax cuts in 2001. And
studies that make these types of
one by Bush’s own Treasury Department ... find that government revenues
would be greater had taxes not been cut. But that hasn’t stopped President Bush
from claiming victory.
In one sense, of course, it’s odd that a Republican President should treat
higher government revenues as a point of pride. Historically, after all,
Republicans have been the party of small government...
The conservative pundit Larry Kudlow recently
attacked the Republican candidates for failing, in their most recent debate,
to explain what spending cuts they would advocate to accompany the tax cuts they
propose. But Kudlow should hardly have been surprised, because supply-side
rhetoric suggests that spending cuts aren’t really necessary. ... This
tax-cut-and-spend approach is the promise of a free lunch, something that voters
like to hear. The appeal of that promise may make it easier for politicians to
run a campaign. But the fraudulence of the promise makes it awfully hard to run
Update: Maybe I spoke too soon:
The Case of the Missing Surowiecki Column, by Felix Salmon: Memo to Jeff
Bercovici: What's with Jim Surowiecki's column in this week's New Yorker? It's
right there on the website – complete with no fewer than nineteen
hyperlinks. (Someone give this guy a blog!) But it's in the "online only"
section: if you pick up the actual magazine, it skips straight from the Talk of
the Town section to the feature well, which means that Surowiecki's "Financial
Page" is a page only in metaphor.
The most charitable explanation I can think of is that the New Yorker decided
the column was simply too reliant on its hyperlinks to work in print. But if
that's the case, why didn't they just ask Surowiecki to write a different
column, or to rewrite this one so that it worked in print form? ...
I can't remember Surowiecki ever being banished from the print edition like
this before, which is why it's so bittersweet to read this, from Mark Thoma:
I am very pleased to see this, and not just because there's a link to this
site. I've been frustrated with the press on the 'Laffer curve, tax cuts have
paid for themselves' issue because the press has enabled a big lie. It's a lie
Republican candidates, even the president, can still repeat with very little
attention from the mainstream media. No matter how often reputable economists on
the right and the left have said this is a lie, the press has ignored it and
allowed it to continue unquestioned.
He's writing, of course, about Surowiecki's column, which is about
supply-side economics. And it turns out that the one time he singles out "the
press" for praise in exposing the lie is also the one time that the article
remains unprinted by any physical press.
Posted by Mark Thoma on Monday, October 22, 2007 at 12:24 PM in Budget Deficit, Economics, Politics, Press, Taxes |
Paul Krugman is unimpressed with Treasury Secretary Paulson’s rescue plan for
Gone Baby Gone, by Paul Krugman, Commentary, NY Times: It pains me to say
this, but this time Alan Greenspan is right about housing. ...[H]is latest
pronouncement — that the market rescue plan being pushed by Henry Paulson, the
Treasury secretary, is likely to make things worse rather than better — looks
all too accurate.
To understand why, we need to talk about the nature of the mess. ... Today,
when a bank makes a home loan, it ... quickly sells the mortgage off to
financial engineers, who chop up, repackage and resell home loans pretty much
the way supermarkets chop up, repackage and resell meat.
It’s a business model that depends on trust. You don’t know anything about
the cows that contributed ... to your ... ground beef, so you have to trust the
supermarket when it assures you that the beef is U.S.D.A. prime. You don’t know
anything about the subprime mortgage loans that were sliced, diced and pureed to
produce that mortgage-backed security, so you have to trust the seller — and the
rating agency — when they assure you that it’s a AAA investment.
But in the case of housing-related investments, investors’ trust was
betrayed. Supposedly safe investments suddenly turned into junk bonds when the
housing bubble burst. ...
Thus, when two hedge funds run by Ralph Cioffi of Bear Stearns imploded last
summer, it came as a huge shock to many investors, and helped trigger a market
The funds borrowed huge amounts, and invested the proceeds in questionable
mortgage-backed securities. Even worse, “more than 60 percent of their net worth
was tied up in exotic securities whose reported value was estimated by Cioffi’s
own team.” We’re profitable because we say we are — just trust us. That hasn’t
ever caused problems, has it?
Stories like this have led to a crisis of confidence..., and ... people are
parking their money in government debt because they don’t trust private
borrowers. And the result is a shortage of liquidity — the ability to raise cash
— that is greatly damaging the economy.
Which brings us to the rescue plan proposed by a group of large banks, with
Mr. Paulson’s backing.
Right now the bleeding edge of the crisis in confidence involves worries that
there may be large losses hidden inside so-called “structured investment
vehicles” — basically hedge funds that borrow from the public and invest the
proceeds in mortgage-backed securities. The new plan would create a “super-fund”
... which would seek to restore confidence by, um, borrowing from the public and
investing the proceeds in mortgage-backed securities.
The plan, in other words, looks like an attempt to solve the problem with
smoke and mirrors. ...
[T]he bursting of the housing bubble means that someone, somewhere, has to
accept several trillion dollars in losses. A significant part of these losses
will fall on mortgage-backed securities. And given this reality, the “conduit”
looks like a really bad idea.
I’d put it like this: Investors aren’t putting their money to work because
they don’t know where the bad debts are. And when investors need clarity, the
last thing you want to be doing is pumping out more smoke.
Mr. Greenspan’s take ... seems broadly similar. “If you believe some form of
artificial non-market force is propping up the market,” he said, “you don’t
believe the market price has exhausted itself.”
Translated: this rescue scheme could be seen as an attempt to hide the bad
debts everyone knows are out there, and as a result could delay any return of
trust to the markets.
Alan Greenspan is making sense.
Posted by Mark Thoma on Monday, October 22, 2007 at 12:33 AM in Economics, Financial System, Housing |
The "oldest person ever to be recognized by the Swedes, in any
The Road to a System that Works (Without Shooting People),
by David Warsh, Economic Principles: ...It is a truism
that most Nobel Prizes are won by researchers who tumble onto their topics in
their twenties and often have all but nailed them down by their late thirties.
Thus, even before they left Harvard University, where they had been
undergraduates and graduate students in the 1970s, Eric Maskin ... and Roger Myerson
... were firmly on the trail of the ideas that led to their recognition
last week, "implementation theory" and "the revelation principle." Both men are
How is it that Leonid Hurwicz, of the University of Minnesota, shares the
spotlight with two economists more than thirty years younger? At 90, Hurwicz is
the oldest person ever to be recognized by the Swedes, in any discipline.
There has to be a story in that.
The modern theory of mechanism design, as presented today in microeconomics
texts, is a hard-edged and high-tech topic, especially auction theory -- a body
of knowledge that informs the sale of radio-spectrum licenses and timber-harvest
rights; structures cap-and-trade emissions schemes and incentive systems
designed to lead expert panelists to tell the truth; and which determines the
price of advertising on Google and the mechanics of transactions on eBay. The
theory is not complete, of course; far from it. Even the best-understood
mechanisms, auctions, are no more than a metaphor for more general forms of
But in fact the roots of our understanding of economic mechanisms trace back
to a topic intensely debated by European intellectuals in the years immediately
after World War I -- could a planned economy, such as that of Germany during the
war, succeed? Could patriotic bureaucrats, operating without the benefit of
markets, prices and money, be depended on to make better decisions than
self-interested entrepreneurs? ...
Continue reading "Leonid Hurwicz" »
Posted by Mark Thoma on Monday, October 22, 2007 at 12:24 AM in Economics |