There has been a great transformation in the nature of world trade over the
past three decades. Prior to the late 70s developing countries overwhelmingly
exported primary products rather than manufactured goods; one relic of that era
is that we still sometimes refer to wealthy nations as "industrial countries,"
when the fact is that industry currently accounts for almost twice as high a
share of GDP in China as it does in the United States. Since then, however,
developing countries have increasingly become major exporters of manufactured
goods, and latterly selected services as well.
From the beginning of this transformation it was apparent to international
economists that the new pattern of trade might pose problems for low-wage
workers in wealthy nations. Standard textbook analysis tells us that to the
extent that trade is driven by international differences in factor abundance,
the classic analysis of Stolper and Samuelson (1941) – which says that trade
can have very strong effects on income distribution – should apply. In
particular, if trade with labor-abundant countries leads to a reduction in the
relative price of labor-intensive goods, this should, other things equal,
reduce the real wages of less-educated workers, both relative to other workers
and in absolute terms. And in the 1980s, as the United States began to
experience a marked rise in inequality, including a large rise in skill
differentials, it was natural to think that growing imports of labor-intensive
goods from low-wage countries might be a major culprit.
But is the effect of trade on wages quantitatively important? A number of
studies conducted during the 1990s concluded that the effects of North-South
trade on inequality were modest. Table 1 summarizes several well-known
estimates, together with one crucial aspect of each: the date of the latest
data incorporated in the estimate.
For a variety of reasons, possibly including the reduction in concerns about
wages during the economic boom of the later 1990s, the focus of discussion in
international economics then shifted away from the distributional effects of
trade in manufactured goods with developing countries. When concerns about
trade began to make headlines again, they tended to focus on the new and novel
– in particular, the phenomenon of services outsourcing, which Alan Blinder
(2006), in a much-quoted popular article, went so far as to call a second
Industrial Revolution. Until recently, however, surprisingly little attention
was given to the increasingly out-of-date nature of the data behind the
reassuring consensus that trade has only modest effects on income distribution.
Yet the problem is obvious, and was in fact noted by Ben Bernanke (2007) last
year: "Unfortunately, much of the available empirical research on the influence
of trade on earnings inequality dates from the 1980s and 1990s and thus does
not address later developments." And there have been a lot of later
Figure 1 shows U.S. imports of manufactured goods as a percentage of GDP
since 1989, divided between imports from developing countries and imports from
advanced countries. It turns out that developing-country imports have
roughly doubled as a share of the economy since the studies that concluded that
the effect of trade on income inequality was modest. This seems, at first
glance, to suggest that we should scale up our estimates accordingly. Bivens
(2007) has done just that with the simple model I offered in 1995, concluding
that the distributional effects of trade are now much larger.
And there’s another aspect to the change in trade: as we’ll see, the
developing countries that account for most of the expansion in trade since the
early 1990s are substantially lower-wage, relative to advanced countries, than
the developing countries that were the main focus of concern in the original
literature. China, in particular, is estimated by the Bureau of Labor
Statistics (2006) to have hourly compensation in manufacturing that is equal to
only 3 percent of the U.S. level. Again, this shift to lower-wage sources of
imports seems to suggest that the distributional effects of trade may well be
considerably larger now than they were in the early 1990s.
But should we jump to the conclusion that the effects of trade on
distribution weren’t serious then, but that they are now? It turns out that
there’s a problem: although the "macro" picture suggests that the
distributional effects of trade should have gotten substantially larger,
detailed calculations of the factor content of trade – which played a key role
in some earlier analyses – do not seem to support the conclusion that the
effects of trade on income distribution have grown larger. This result, in
turn, rests on what appears, in the data, to be a marked increase in the
sophistication of the goods the United States imports from developing countries
– in particular, a sharp increase in imports of computers and electronic
products compared with traditional labor-intensive goods such as apparel.
Lawrence (2008), in a study that shares the same motivation as this paper,
essentially concludes from the evidence on factor content and apparent rising
sophistication that the rapid growth of imports from developing countries has
not, in fact, been a source of rising inequality. But this conclusion is, in my
view, too quick to dismiss what seems like an important paradox. On one side,
the United States and other advanced countries have seen a surge in imports
from countries that are substantially poorer and more labor-abundant than the
third-world exporters that created so much anxiety a dozen years ago. On the
other side, we seem to be importing goods that are more skill-intensive and
less labor-intensive than before. As we’ll see, the most important source of
this paradox lies in the information technology sector: for the most part there
is a clear tendency for developing countries to export labor-intensive
products, but large third-world exports of computers and electronics stand out
as a clear anomaly.
One possible resolution of this seeming paradox is that the data on which
factor-content estimates are based suffer from severe aggregation problems –
that developing countries are specializing in labor-intensive niches within
otherwise skill-intensive sectors, especially in computers and electronics.
I’ll make that case later in the paper, while admitting that the evidence is
fragmentary. If this is the correct interpretation, however, the effect of
rapid trade growth on wage inequality may indeed have been significant.
The remainder of this paper is in four parts. The first part offers an
overview of changing U.S. trade with developing countries, in a way that sets
the stage for the later puzzle. The second part describes the theoretical basis
for analyzing the distributional effects of trade, then shows how macro-level
calculations and factor content analysis yield divergent conclusions. The third
part turns to the case for aggregation problems and the implications of
vertical specialization within industries. A final part considers the
implications both for further research and for policy. ...
Implications of the analysis
The starting point of this paper was the observation that the consensus that
trade has only modest effects on inequality rests on relatively old data – that
there has been a dramatic increase in manufactured imports from developing
countries since the early 1990s. And it is probably true that this increase has
been a force for greater inequality in the United States and other advanced
What really comes through from the analysis here, however, is the extent to
which the changing nature of world trade has outpaced our ability to engage in
secure quantitative analysis—even though this paper sets to one side the growth
in service outsourcing, which has created so much anxiety in recent years.
Plain old trade in physical goods has become remarkably exotic.
In particular, the surge in developing-country exports of manufactures
involves a peculiar concentration on apparently sophisticated products, which
seems at first to put worries about distributional effects to rest. Yet there
is good reason to believe that the apparent sophistication of developing
country exports is, in reality, largely a statistical illusion, created by the
phenomenon of vertical specialization in a world of low trade costs.
How can we quantify the actual effect of rising trade on wages? The answer,
given the current state of the data, is that we can’t. As I’ve said, it’s
likely that the rapid growth of trade since the early 1990s has had significant
distributional effects. To put numbers to these effects, however, we need a
much better understanding of the increasingly fine-grained nature of
international specialization and trade.
Did Hillary Clinton oppose moving forward on NAFTA in 1993? Robert Reich
tells what he remembers:
Hillary and Barack, Afta Nafta, by Robert Reich: Was Hillary Clinton really
against NAFTA in 1993? I was in the administration then, and I remember her
position quite precisely. And I'll get to that in a moment. But before I do, I
want to say something: It’s a shame the Democratic candidates for president
feel they have to make trade – specifically NAFTA – the enemy of blue-collar
workers and the putative cause of their difficulties. NAFTA is not to blame.
... What happened? The economy ... crashed in late 2000, and the manufacturing
jobs lost in that last recession never came back. They didn’t come back for two
reasons: In some cases, employers automated the jobs out of existence... In
other cases, employers shipped the jobs abroad, mostly to China – not to
NAFTA has become a symbol for the mounting insecurities felt by blue-collar
Americans. While the ... winners from trade ... far exceed the losers, there’s
a big problem: The costs fall disproportionately on the losers -- mostly
blue-collar workers who get dumped because their jobs can be done more cheaply
by someone abroad...
Even though the winners from free trade could theoretically compensate the
losers and still come out ahead, they don’t. America doesn’t have a system for
helping job losers find new jobs that pay about the same as the ones they’ve
lost... There’s no national retraining system. Unemployment insurance reaches
fewer than 40 percent of people who lose their jobs... We have no national
health care system to cover job losers and their families. There's no wage
insurance. Nothing. And unless or until America finds a way to help the losers,
the backlash against trade is only going to grow.
Get me? The Dems shouldn't be redebating NAFTA. They should be debating how
to help Americans adapt to a new economy in which no job is safe. Okay, so back
to my initial question. The answer is HRC didn't want the Administration to
move forward with NAFTA, but not because she was opposed to NAFTA as a policy.
She opposed NAFTA because of its timing. She wanted her health-care plan to be
voted on first. She feared that the fight over NAFTA would use up so much of
the White House's political capital that there wouldn't be enough left when it
came to pushing for health care. In retrospect, she was probably right.
This is not a good sign. A lot of people are borrowing from their retirement
accounts to pay off debt:
Borrowing from the Nest Egg, by Lane Kenworthy: This news is discouraging,
but hardly unexpected. According to a
“Marketplace” report, a survey by the Transamerica Center for Retirement
here) finds that the share of workers borrowing from their 401(k)
retirement funds increased from 11% in 2006 to 18% in 2007. Nearly half of
those taking out such loans in 2007 cited the need to pay off debt, compared to
a quarter in 2006.
Stagnant wages and salaries, most spouses already employed, rising health
care and college tuition costs, higher mortgage debt loads, and falling home
values mean lots of American households — including many middle-income ones —
are pinched financially. The late 1990s economic boom lessened the strain for a
while. Then home equity loans helped. More recently,
credit card usage has jumped. Borrowing against retirement savings is the
logical next step.
This is why I wonder about the long-term participation rate in "opt out"
retirement accounts that are being promoted as a way to deal with the retirement
security problem. How many people will opt out of these accounts when economic
conditions for the household deteriorate temporarily for some reason? And once they opt out, will they opt back in? People who
are motivated enough to borrow against their retirement accounts - almost one
fifth in 2007 - would also be motivated enough to opt out of an automatic
savings plan. Many of the studies, at least the ones I have seen, do not track
people over long periods of time where this type of deterioration would be
present, and they do not follow people through a recession when the pressure to
opt out would be greatest. I'm not saying we shouldn't have these programs, they
do help some people save, and even if some people opt out at least they have a
source of funds to use when times get tough. The point, though, is that the
people most likely to opt out are the very ones we would like to see participate
in savings programs so that they have more than just Social Security available
during their retirement years. Because of that, we should be careful not to place too much
emphasis on opt-out types of mechanisms for solving the retirement security
problem. These accounts may not provide as much of a boost as we hope to key segments of
In 1998, Paul Krugman explained why housing and stock bubbles occur. The
answer? "Me want mammoth meat!":
The Ice Age Commeth,
by Paul Krugman: The more I look at the amazing rise of the U.S. stock
market, the more I become convinced that we are looking at a mammoth
psychological problem. I don't mean mammoth as in "huge" (though maybe that
too), but as in "elephant". Let me explain.
If you follow trends in psychology, you know that Freud is out and Darwin is
in. The basic idea of "evolutionary psych" is that our brains are exquisitely
designed to help us cope with our environment - but unfortunately, the
environment they are designed for is the one we evolved and lived in for the
past two million years, not the alleged civilization we created just a couple
of centuries ago. We are, all of us, hunter-gatherers lost in the big city. And
therein, say the theorists, lie the roots of many of our bad habits. Our
craving for sweets evolved in a world without ice-cream; our interest in gossip
evolved in a world without tabloids; our emotional response to music evolved in
a world without Celine Dion. And we have investment instincts designed for
hunting mammoths, not capital gains.
Imagine the situation back in what ev-psych types call the Ancestral
Adaptive Environment. Suppose that two tribes - the Clan of the Cave Bear and
its neighbor, the Clan of the Cave Bull - live in close proximity, but
traditionally follow different hunting strategies. The Cave Bears tend to hunt
rabbits - a safe strategy, since you can pretty sure of finding a rabbit every
day, but one with a limited upside, since a rabbit is only a rabbit. The Cave
Bulls, on the other hand, go after mammoths - risky, since you never know when
or if you'll find one, but potentially very rewarding, since mammoths are,
Now suppose that it turns out that for the past year or two the Cave Bulls
have been doing very well - making a killing practically every week. After this
has gone on for a while, the natural instinct of the Cave Bears is to feel
jealous, and to try to share in the good fortune by starting to act like Cave
Bulls themselves. The reason this is a natural instinct, of course, is that in
the ancestral environment it was entirely appropriate. The kinds of events that
would produce a good run of mammoths - favorable weather producing a good crop
of grass, migration patterns bringing large numbers of beasts into the district
- tended to be persistent, so it was a good idea to emulate whatever strategy
had worked in the recent past.
But now transplant our tribes into the world of modern finance, and - at
least according to finance theory - those instincts aren't appropriate at all.
Efficient markets theory tells us that all the available information about a
company is supposed to be already built into its current price, so that any
future movement is inherently unpredictable - a random walk. In particular, the
fact that people have made big capital gains in the past gives you absolutely
no reason to think they will in the future. Rational investors, according to
the theory, should treat bygones as bygones: if last year your neighbor made a
lot of money in stocks while you unfortunately stayed in cash, that's no reason
to get into stocks now. But suppose that, for whatever reason, the market goes
up month after month; your MBA-honed intellect may say "Gosh, those P/Es look
pretty unreasonable", but your prehistoric programming is shrieking "Me want
mammoth meat!" - and those instincts are hard to deny.
And those instincts can be self-reinforcing, at least for a while. After
all, whereas an increase in the number of people acting like Cave Bulls tended
to mean fewer mammoths per hunter, an increase in the number of modern bulls
tends to produce even bigger capital gains - as long as the run lasts. Any
broker can tell you that in the last few months the market has been rising,
despite mediocre earnings news, because of fresh purchases by ever more people
distraught about having missed out on previous gains and desperate to get in on
the action. Sooner or later the supply of such people will run out; then what?
OK, OK, I know that this isn't supposed to happen. Sophisticated investors
are supposed to take the long view, and arbitrage away these boom-bust cycles.
And maybe, just maybe, the market is where it is because wise and far-seeing
people have understood that the New Economy can produce growing profits
forever, and that the rise of mutual funds has eliminated the need for
old-fashioned risk premia. But my sense is that people who try to take a long
view have been driven to the edge of extinction by the sheer scale of recent
gains, and that the supposed explanations you now hear of why current prices
make sense are rationalizations rather than serious theories.
The whole situation gives me the chills. It could be that I just don't get
it, that I'm a Neanderthal too thick-skulled to understand the new era. But if
you ask me, I'd say that there's an Ice Age just over the horizon.
Richard Baldwin says it's time for the WTO to "adjust to the new realities of regionalism" (more on regionalsim):
regionalism: The WTO’s next challenge, by Richard Baldwin, Vox EU: The
world’s most important trade talks – the Doha Round – appear to be slipping
into a coma while key nations play a waiting game. What are they waiting for?
Some are waiting to see if Europe commits to unilaterally dismantling the EU’s
massively distortionary agricultural policies during its 2008/2009 review.
Others are waiting to see if the next US president is more protectionist or
more accommodating. And the major developing nations see their exports growing
at double-digit rates despite the stalemate, so what’s the rush?
But trade liberalisation is not standing still. Nations around the global
are falling over themselves to liberalise trade regionally, bilaterally and
unilaterally. The world trade system is labouring under a massive proliferation
of regional trade agreements and the problem gets worse month by month. The
resulting tangle of trade deals conspires to inject both inefficiency and
discrimination against poor countries into the multilateral system.
Most amazingly, the WTO has had next to no involvement in this important
development. The WTO – and this means the WTO membership since the institution
only does what its members want – has adopted the role of “innocent bystander”.
Key figures in world trade – negotiators, ministers, the WTO secretariat,
academics, civil society and the media – need to look beyond the Doha Round.
Doha or not, countries will continue to strike bilateral and regional deals.
Doha will do little or nothing to ‘tame the tangle’. What is needed is a WTO
Action Plan on Regionalism.
According to the economic theory of political transitions as developed by
Acemoglu and Robinson (2006), economic shocks are one important factor. They
show that democratisation becomes more likely after transitory, negative
shocks. These shocks give rise to a window of opportunity for citizens to
contest power, as the cost of fighting ruling autocratic regimes is relatively
low. When citizens reject policy changes that are easy to renege upon once the
window of opportunity closes, autocratic regimes must make democratic
concessions to avoid costly repression.
An interesting pattern emerges from the history of democratisation in
Sub-Saharan Africa over the twenty-five year period from 1980 to 2004. Pick the
five years with least and most rainfall for each Sub-Saharan African country.
It turns out that the five years where rainfall was scarcest were followed by
twice as many transitions to democracy as the five years with most rainfall.
This is true whether one uses the democracy indicator of Persson and Tabellini
(2003) or Przeworski et al. (2000). If there were no relationship between
rainfall and democratisation, there would be a similar number of transitions to
democracy following years of low and high rainfall. When the concept of
democratic transition is widened to include democratic transitions according to
Persson and Tabellini and to Przeworski et al., the five years where rainfall
was scarcest were followed by almost three times as many transitions to
democracy as the five years with most rainfall.
This historical pattern linking low rainfall and transitions to democracy
suggests that democratic change is more likely during recessions as Sub-Saharan
African economies are very dependent on rainfall. But does this conclusion hold
up under the scrutiny of regression analysis?
It seems likely that – due to history and economic circumstances – some
Sub-Saharan African countries are more likely to democratise than others,
regardless of rainfall. A careful statistical analysis must account for this.
It is also likely that there are democratisation trends affecting all of
Sub-Saharan Africa. The disappearance of the Soviet Union, for example,
triggered political changes all around the world. But the link between low
rainfall and democratic change remains significant after accounting for these
factors (Brückner and Ciccone 2008). To get an idea of the strength of this
effect: during the “average drought” – rainfall levels 50% below average – the
probability of a transition to democracy increases by around 6 percentage
How much more likely then is democratic change during an economic recession?
In our sample, a 50% drop in rainfall reduces real income per capita by around
4% relative to trend. Putting the two pieces of the puzzle – the effect of low
rainfall on income per capita and its effect on the probability of a transition
from autocracy to democracy – together yields that a drought-driven recession
that decreases income by 5% relative to trend raises the probability of
democratisation by around 7 percentage points.
Thus, the recent history of Sub-Saharan Africa provides empirical support
for the idea that economic recessions put autocratic regimes in a position
where they have no choice but to make democratic concessions.
Acemoglu, D. and J. Robinson (2006). Economic Origins of Dictatorship and
democracy. New York, Cambridge University Press.
Persson, T. and G. Tabellini (2003). The Economic Effects of Constitutions.
MIT Press, Cambridge.
Przeworski, A., M. Alvarez, J. Cheibub, and F. Limongi (2000). Democracy and
Development: Political Institutions and the Well-Being of the World, 1950-1990.
Thinking about the Great Depression and whether it fits into this framework, it seems that depressions bring about change. I'm wondering, though, does the change always go in one direction, i.e. does it always produce more democracy? Can anyone think of an example where an economic disaster caused the opposite type of change, i.e. moved away from a democracy toward something else? Russia comes to mind - as economic conditions have languished central authority has reemerged - but I'm not sure it was economic conditions that were the major impetus for change. There are lots of other cases of failed democracies, e.g. in South America, but without more digging I don't know if they were preceded by economic downturns. In any case, given that there are lots of failed democracies, it would be interesting to put these through the same methodology used above and see if there is evidence that recessions can cause countries to move away from a democratic system. My point is that I agree that economic recessions provide a strong motivation for change, I'm just not sure the change is necessarily toward democracy. But if it is true that bad economic conditions do bring about positive change, it's interesting to think through the policy implications. Should we hope for economic stagnation and misery of the masses, maybe even help to bring it about, so that democracy can emerge?
How will the Fed respond to recent evidence of heightened inflationary
pressures and slower economic growth?
This Train Doesn’t Stop, by Tim Duy: Dual mandate, but one policy tool. A choice has to be made in the short run. Focus on inflation, and hold policy relatively tight? Or focus on growth,
hoping that soft economic growth will tame inflationary pressures? The Fed
continues to choose the latter path. In truth, at this point they have no
other choice. It was unlikely that the Fed could bring a halt to this
easing cycle as long as economic data point at recessionary conditions; this was
always the danger of moving so quickly early in the cycle. And it became
unthinkable to back away from the current set of policies after Congress
followed up on Fed Chairman Ben Bernanke’s push for fiscal stimulus. The
die is cast. Look for another 50bp in March and then two more 25bp cuts at
subsequent meetings to bring the Fed Funds rate to 2%.
Bernanke’s Senate testimony left unchanged market expectations for additional
easing. The overall tone was, as expected, in line with the dour assessment
Chair Donald Kohn. The encouraging signs – low inventories, solid
balance sheets in nonfinancial corporations, solid export growth – were few,
while weakness was abundant. It read as an extended version of his
February 14th testimony. That said, there are heightened
inflation concerns. This sentence from February 14:
A critical task for the Federal Reserve over the course of this year will be
to assess whether the stance of monetary policy is properly calibrated to
foster our mandated objectives of maximum employment and price stability and,
in particular, whether the policy actions taken thus far are having their
Has evolved to:
A critical task for the Federal Reserve over the course of this year will be
to assess whether the stance of monetary policy is properly calibrated to
foster our mandated objectives of maximum employment and price stability in an
environment of downside risks to growth, stressed financial conditions, and
While not saying so outright, the new sentence implies stagflation. Not
surprising, as incoming price data are difficult to ignore, and left the Fed
revising upward their near term inflation expectations despite a downwardly
revised growth outlook:
The central tendency of the projections for core PCE inflation in 2008, at
2.0 percent to 2.2 percent, was a bit higher than in our July report, largely
because of some higher-than-expected recent readings on prices.
Still, the expectation is that inflation will moderate in the months ahead,
allowing Bernanke to succinctly define the near term path of policy:
Therefore, our policy stance must be determined in light of the medium-term
forecast for real activity and inflation as well as the risks to that forecast. Although the FOMC participants' economic projections envision an improving
economic picture, it is important to recognize that downside risks to growth
remain. The FOMC will be carefully evaluating incoming information
bearing on the economic outlook and will act in a timely manner as needed to
support growth and to provide adequate insurance against downside risks.
Insurance against downside risk + benign inflation outlook = more rate cuts. While interesting to dissect, the relevance of Bernanke’s testimony for
near-term policy was something of a forgone conclusion. Consider this:
The Politics of Trade in Ohio: Now come Mr. Obama and Mrs. Clinton... tough
talk about foreign trade... you'd have to conclude that they believe that Nafta
and other trade agreements have caused Ohio's huge economic problems.
"She says speeches don't put food on the table," Mr. Obama said in
Youngstown. "You know what? Nafta didn't put food on the table, either." Later,
he went further, claiming that Ohio's workers have "watched job after job after
job disappear because of bad trade deals like Nafta."
Mrs. Clinton's advisers, meanwhile, have been putting out the word that she
tried to persuade her husband not to support Nafta -- which liberalized trade
with Mexico and Canada -- when he was running for president....
[However, n]either candidate calls for a repeal of Nafta, or anything close
to it. Both instead want to tinker with the bureaucratic innards of the
agreement.... They call the country's trade policy a disaster, and yet their
plan to fix it starts with, um, cracking down on Mexican pollution....
The first problem with what the candidates have been saying is that Ohio's
troubles haven't really been caused by trade agreements. When Nafta took effect
on Jan. 1, 1994, Ohio had 990,000 manufacturing jobs. Two years later, it had
1.03 million. The number remained above one million for the rest of the 1990s,
before plummeting in this decade to just 775,000 today. It's hard to look at
this history and conclude Nafta is the villain. In fact, Nafta did little to
reduce tariffs on Mexican manufacturers, notes Matthew Slaughter, a Dartmouth
economist. Those tariffs were already low before the agreement was signed.
A more important cause of Ohio's jobs exodus is the rise of China, India and
the old Soviet bloc, which has brought hundreds of millions of workers into the
global economy.... [Y]our credit card's customer service center isn't in Ireland
because of a new trade deal. All this global competition has brought some big
benefits, too. Consider that cars, furniture, clothing, computers and
televisions -- which are all subject to global competition -- have become more
affordable, relative to everything else. Medical care, movie tickets and college
tuition -- all protected from such competition -- have become more expensive.
So what can be done for Ohio?
There is actually a fair amount of agreement among economists on this
question. The solution should involve more government investment in
infrastructure, the medical sciences, alternative energy and other areas that
could produce good new jobs. A more strategic approach to investment, one less
based on the whims of individual members of Congress, would also help....
Over the last week, the candidates' talk has, at times, been silly and even
inaccurate. And Ohio's problems would certainly be easier to solve if, as Luis
Proenza, president of the University of Akron put it, the candidates were "more
true to reality and less prone to invective." But the larger problem is that
Ohio's voters have good reason to be angry. For years, they have been
promised that globalization was making the United States a richer country.
They're still waiting for their share of the bounty.
I want to highlight an important distinction [Olivier] Blanchard makes
between protecting jobs and protecting workers:
...It is one thing to say that labor market institutions matter, and another
to know exactly which ones and how. Humility is needed here... Nevertheless,
even if one cannot pretend to have much confidence about the optimal overall
architecture, much has been learned... We know much more about the incentive
aspects of unemployment insurance on search intensity and unemployment
duration... We know more about the effects of decreasing social contributions on
low wages ... We know more about the effects of employment protection, ... From
both the macro evidence and this body of micro–economic work, a large
consensus—right or wrong—has emerged:
It holds that modern economies need to constantly reallocate resources,
including labor, from old to new products, from bad to good firms.
At the same time, workers value security and insurance against major adverse
professional events, job loss in particular. While there is a trade-off between
efficiency and insurance, the experience of the successful European countries
suggests it need not be very steep.
What is important in essence is to protect workers, not jobs.
This means providing unemployment insurance, generous in level, but
conditional on the willingness of the unemployed to train for and accept jobs if
This means employment protection, but in the form of financial costs to
firms to make them internalize the social costs of unemployment, including
unemployment insurance, rather than through a complex administrative and
This means dealing with the need to decrease the cost of low skilled labor
through lower social contributions paid by firms at the low wage end, and the
need to make work attractive to low skill workers through a negative income tax
rather than a minimum wage.
This consensus underlies most recent reforms or reform proposals ... These
measures are probably all desirable...
The point is, if you go along with the idea that we should
use social insurance programs to protect workers but not jobs, then this gives a means of
evaluating candidate's trade proposals that doesn't depend upon whether the changes are driven by technology, globalization, or some other shock. To what extent does a particular
proposal protect jobs and hence inhibit needed flexibility of the labor market? To
what extent do the proposals compensate for job flexibility and the insecurity that comes
along with it by protecting workers who have been displaced? Do the proposals cause firms to fully internalize the costs of their employment decisions? What types of
incentives are built into worker protection programs, i.e. do workers still
retain the incentive to seek out and accept new employment?
Workers in Ohio and elsewhere are feeling the effects of something - I think the story above is basically correct but does not place enough emphasis on technological innovation as a cause of recent labor displacing change - but debate over the cause of their troubles shouldn't delay the implementation of policies that could help now.
I have been a proponent of inflation targeting procedures. However, many people take that to mean that inflation stability should take
precedence over the stabilization of output and employment, or that we should suppress wages to prevent inflation. Here's a simulated interview with Frederic Mishkin generated from a
recent speech that tries to clear this up (see also
"Divine Coincidence is Unlikely"
and "Mankiw on "Divine Coincidence" in Monetary Policy"). There are also comments about the use of core rather than headline inflation to guide monetary policy:
MT: Thanks for agreeing to do this in the simulation. Let's start by defining what the
Fed is supposed to do. What are the Fed's goals?
FM: The ultimate purpose of a central bank should be to promote the public good
through policies that foster economic prosperity.
MT: And how is that expressed practically?
FM: Research in monetary economics describes this purpose by specifying monetary
policy objectives in terms of stabilizing both inflation and economic activity.
Indeed, this specification of monetary policy objectives is exactly what is
suggested by the dual mandate that the Congress has given to the Federal Reserve
to promote both price stability and maximum employment.
MT: Let's get right to the big question. Does stabilizing inflation mean that
the Fed is less focused on stable output and employment?
FM: We might worry that, under some circumstances, the objectives of
stabilizing inflation and economic activity could conflict, particularly in the
short run. However, economic research over the past three decades suggests that
such conflicts may not, in fact, be that serious. Indeed, stabilizing inflation
and stabilizing economic activity are mutually reinforcing not only in the long
run, but in the short run as well.
MT: You mentioned
both the short-run and the long-run. Let's start with the long-run becasue
there is less controversy there. What do theory and evidence tell us about
the long-run tradeoff between inflation and unemployment?
I wonder if you would be kind enough to mention this one. It's unfinished and
I am putting it up to fish for comments. It's the first two-thirds of a synthetic piece. It's a little different than
all of the others. Essentially it's the "metaphysics of information," in the biological and
social sciences. It creates the symmetrical grammar of ecolanguage. It observes a formal distinction between matter-energy and information (most
recently Romer called that "atoms vs. bits" -- but the distinction goes back at
least to Gregory Bateson, who wrote that he got it from Jung.)
I am hoping to drum up some comments in order to polish the rewrite of the
last third -- which shows some examples, touches on institutional economics and
the very different type of systems (i.e. flow-through webs) in climate and
ecology, and ends with a simple summary.
Obama a dangerous protectionist?: Economists, the unaligned ones anyway,
have had their hands full trying to parse the probable policy choices of the
American presidential candidates. ...
With potential economic strategies unclear, observers are left to ascribe
great importance to the smallest policy signs emanating from the campaigns.
That, I have concluded, is what's behind a breathless and overstated attack on
Barack Obama at VoxEU today. Forced to read so much into so little, authors
Willem Buiter and Anne Sibert throw some of the nastiest adjectives available
to economists (xenophobic, protectionist) at a piece of legislation introduced
by the Illinois Senator.
Their piece opens on an objectionable note. The authors declare, "Senator
Barack Obama’s campaign has been long on slogans and mood music but short on
concrete proposals and policies." This is patently false and beneath Mr Buiter
and Ms Sibert, who should have stuck to an analysis of the proposed policy
itself. Mr Obama's website is home to a number of (lengthy) documents outlining
energy and health care policies, among other things. The merits of the
proposals may be debatable, but they are substantive.
Mr Buiter and Ms Sibert go on to criticise Mr Obama's proposed legislation,
the dreadfully titled Patriot Employer Act. There is much to dislike in the
bill. Essentially, it offers employers a tax credit, worth one percent of
taxable income, in exchange for adherence to a set of economic limitations.
Among them are: a minimum wage, minimum standards on retirement and health
plans, and protections for workers and headquarters based in America.
Certainly, the bill has an element of distasteful economic nationalism to it,
as well as a preference for reduced flexibility in compensation.
In short, Mr Obama deserves a slap on the wrist. He does not, in my opinion,
deserve the rhetorical pounding he receives. Why not?
This bill is much less bad than it could be, primarily because the
restrictions it contains are optional. ... In other words, optionality ensures
that firms will only adopt these measures if it's relatively cheap (and
minimally distortionary) to do so. ...
There is a case to be made that Mr Obama is the most economist-friendly
candidate out there. One would hope that he'd use his growing popularity as an
excuse to defend good but unpopular economic policies. He hasn't done that with
this Patriot Employer Act, and he deserves a dose of criticism.
But the language used at VoxEU is odd. This bill is bad, but it's not
dangerous. It's far less offensive than many of the anti-trade,
anti-immigration proposals seen elsewhere in the campaign. Politicians are
practically required to say silly and outrageous things. Economists shouldn't
volunteer to do so.
In Defense of the Patriot Employer Act: ...Obama's proposal, while hardly
at the top of any sensible economist's wish-list, is not nearly as harmful as
Buiter and Sibert make it out to be. ... I think the amount of harm the Obama
bill would cause is really rather small, and it might actually do some good for
working families. ...
dangerous protectionism of Barack Obama": Barack Obama's "Patriot Employer
Act," say Willem Buiter and Anne Sibert, two prominent U.K.-based economists,
is "idiotic legislation" -- "reactionary, populist, xenophobic, and just plain
Tell us how you really feel!
The guts of the Patriot Employer Act, which Obama introduced in the Senate
last August, would provide tax breaks for American corporations that keep their
headquarters in the U.S., maintain a certain ratio of U.S.-based employees to
foreign employees, pay a decent minimum wage and at least 60 percent of
healthcare premiums, along with a few other worker-friendly goodies. For Buiter
and Sibert, such heavy-handed government interference would be the worst kind
of economic policy, a misguided, "unenforceable" attempt to pander to organized
labor that would end up punishing workers all over the world. ...
But for Sherrod Brown, the Democratic senator of Ohio who won an upset
election in 2006 by campaigning on a strong economic populist platform (and who
has signed on as a co-sponsor of the legislation), the Patriot Employer Act
makes sound political sense. It's how you win in Ohio.
As he told Katrina Vanden Heuvel in the Nation two weeks ago, while
comparing his success in Ohio in 2006 to John Kerry's failure in 2004:
[The Patriot Employer Act] does two things.. it helps win Ohio and helps
them govern in the right way. I think you can really take the country in a
very different direction building a progressive message around that kind of
economic issue... We won 32 or 33 more counties than John Kerry did mostly in
small towns in rural Ohio where they were very responsive to a populist
progressive message. One town in particular -- this is something that just
happened -- there's a company called American Standard, they make toilets,
plumbing fixtures... They're in Tiffin, Ohio, town of 20,000. They've just
announced back around 3 months ago, the closing of the plant. It was bought by
some investors, they're moving offshore, they're honoring the union contract
as far as they have to, which is those who already have their 30 years. If you
have less than 30 you're pretty screwed... And the company that came in and
bought it was Bain Capital, Mitt Romney's firm.... These investors come in,
take millions of dollars out of the company, and you know, it's pension and
healthcare. And those are going on all over the country. And this is a town of
20,000. I carried that county, Kerry didn't. ...
(Thanks to Ben Muse's Custom House for the link.)
How the World Works is sympathetic to economists who argue in favor of
bulking up the social safety net and making investments in infrastructure and
education, rather than attempting to micromanage corporate behavior, as a way
of addressing the inequities catalyzed by trade. But if Willem Buiter ran for
political office in Ohio with a stump speech that included a lecture on how the
winners from trade outnumber the losers and how "Bill Clinton’s greatest
achievement as President was his remarkable and unstinting support for a
liberal international economic order" and therefore Ohioans need to stop
moaning about NAFTA, he would lose. He would be pummeled. Economists pride
themselves on understanding how the world is. But doesn't that imply that their
calculus include political reality? The political reality is that voters in
Ohio do not feel as if they have benefited from a liberal international
economic order. And the political reality is that the voters of Ohio may well
determine who the next president of the United States is.
It's tricky: There's a fine line between pandering and recognizing political
reality. We have good reason to distrust politicians who say whatever it is
they think will win them an election. When they are too obvious in their
weather-vane spinning, we reject them, as Republican voters rejected Mitt
But right now, that isn't happening to Barack Obama, which is either a sign
that voters believe he's sincere, or that he is just superlatively good at
Barack Obama is playing to win. This may dismay some economists. Maybe they
should try winning an election in the American Midwest in 2008.
Dean Baker on the administration's (not so) principled objection to
the Senate's Mortgage Relief Bill:
Changing Bankruptcy Rules and the Sanctity of Contracts, by Dean Baker: The
banks are very upset over the possibility that Congress may change the law to
allow bankruptcy judges to rewrite the terms of mortgage loans as they can
other loans when a person declares bankruptcy. Naturally they are pulling out
all the stops in making their case. The Washington Post
quotes a Bush administration spokesperson saying that the proposed change
"is interfering with contracts."
This is an interesting charge to come from the Bush administration... Those
old enough to remember may recall the bankruptcy reform of 2005. This bill
altered the enforcement of loans in the opposite direction, making it easier
for lenders to collect from debtors. It was applied to loans that had already
been contracted not just future debt yet to be incurred, in that sense, it
interfered with contracts.
Clearly, neither the Bush administration nor the banks, both of whom eagerly
supported the bankruptcy reform bill, have any principled objection to
interfering with contracts. Their objection seems to be based more on whom the
interference is favoring. ...
Does merger policy deter? Competition-policy authorities generally
acknowledge the existence of a deterrence effect for merger policy but have
found it difficult to quantify its importance. For instance, the influential
U.S. Federal Trade Commission (1999) divestiture study observed that the total
effect of the Commission's merger enforcement is presumably much greater than
that reflected by the actual number of mergers modified and blocked.
Furthermore, the 2001 Congressional submission by the U.S. Department of
Justice stated that ‘we have not attempted to value the deterrence effects
(...) of our successful enforcement efforts. While we believe that these
effects in most matters are very large, we are unable to approach measuring
them’. Competition-policy practitioners assume the relevance of deterrence for
merger control but little literature quantifies the existence and size of
merger policy deterrence effects.
With all the discussion of whether individual mandates should be part of
health care reform, are we are losing sight of the much bigger differences
between the health care reform policies of Democrats and Republicans?:
Still, I do not believe that the individual mandate is essential to
healthcare reform, as its supporters suggest. ... By emphasizing the individual
mandate, Clinton ... may be hurting the cause she cares so deeply about.
The cornerstone of both Clinton's and Obama's plans is the same: Employers
must provide coverage to their workers or enroll them in a new, publicly
overseen insurance pool. People in this pool could choose either a public plan
modeled after Medicare or from regulated private plans. Both candidates have
promised help for middle- and lower-income Americans, and both have said they
will cut costs through administrative streamlining, prevention and quality
So why has attention focused on the individual mandate? Partly because
candidates and their allies search for differences. But also because of the
media and political interest in the experience of Massachusetts, which
implemented an individual mandate. In Massachusetts, however, the mandate was
the core of the legislation. Employers are not required to provide good
coverage, and those that don't offer insurance only have to pay a token fine.
The problem was how to get people signed up outside of employment. Hence the
emphasis on an individual requirement.
The Obama and Clinton plans, by contrast, get most of their mileage out of
requiring that employers provide good coverage or help pay for publicly
sponsored insurance. As a result, they can sign up most people -- the 95% or so
of nonelderly Americans who have some tie to the workforce -- automatically at
their place of work.
If enrollment is automatic for virtually all Americans, the big question is
whether premiums can be kept low enough that people will want to keep the
coverage (or, in the case of Clinton's plan, won't be forced to pay too much).
This in turn depends on the generosity of federal subsidies. ... Clinton's plan
... proposes almost the same amount of new federal spending as Obama does [,
around $50 billion].
Can affordable coverage really be provided with new federal spending of
about $50 billion? Yes, if the candidates stick to their pledge of allowing
public insurance to compete with private insurance to hold down costs. ...
Thus, the mandate melee obscures what are likely to be the most important
features of Obama's and Clinton's plans: how they would enroll people, how they
would ensure premiums stay low and how they would keep costs down. Instead,
Clinton and Obama are arguing about one of the least salable aspects of reform:
forcing people to buy coverage individually. And they're fighting over
technical differences instead of taking on the starkly divergent GOP vision on
So let's have a vigorous primary fight. But let's not make small differences
appear larger than they are. Doing so misses the real issues, and perhaps the
chance to finally solve the U.S. healthcare crisis.
Perhaps there has been too much emphasis on individual mandates at the
expense of drawing the larger and more important distinctions between the Republican
and Democrat reform plans, though there is still time for that, but mandates
shouldn't be ruled out before negotiations over health care policy even begin
and it seemed like there was some danger of that occurring.
Tao Wu of the Dallas Fed on what has come to be known as "the conundrum":
For the Bond-Yield Conundrum, by Tao Wu, Economic Letter, Federal Reserve Bank
of Dallas: Long-term interest rates tend to rise as monetary policymakers
increase short-term interest rates. This relationship didn’t hold, however,
during the recent U.S. monetary policy tightening cycle. Between June 2004 and
June 2006, the Federal Open Market Committee increased the federal funds rate
17 times—going from 1 percent to 5.25 percent. Yet, long-term interest rates
declined or stayed flat until early 2006.
This divergence between short- and long-term interest
rates caught many economists, investors and central bankers by surprise. In his
Feb. 16, 2005, congressional testimony, former Federal Reserve Chairman Alan
Greenspan characterized the behavior of long-term interest rates since June
2004: “For the moment, the broadly unanticipated behavior of world bond markets
remains a conundrum. Bond price movements may be a short-term aberration, but
it will be some time before we are able to better judge the forces underlying
Since then, this conundrum has prompted a great deal
of discussion regarding both its magnitude and the factors behind it. However,
a compelling and broadly accepted explanation has yet to be reached.
The correct understanding and quantification of the
conundrum have direct implications for monetary policy, which largely impacts
economies as long-term interest rates respond to changes in central banks’
target rates. Persistent changes in the relationship between short- and
long-term interest rates will affect the timing and impact of monetary policy
In this amazing brief, Haynes argued that bombing a nesting site for
migratory birds would benefit birdwatchers, since “bird watchers get more
enjoyment spotting a rare bird than they do spotting a common one.” Moreover,
he added, the birds would benefit as well, since using their nests as a
bombing range would minimize “human intrusion”. The judge’s comment on this
novel line of argument: “there is absolutely no support in the law for the
view that environmentalists should get enjoyment out of the destruction of
natural resources because that destruction makes the remaining resources more
scarce and therefore more valuable. The Court hopes that the federal
government will refrain from making or adopting such frivolous arguments in
the future.” (pp. 27-8)” ...
Lane Kenworthy notes that most spending to enhance economic mobility does not
reach those at the very bottom of the income distribution where it might do the
most good. He has several ideas about how to change this:
report (pdf) by the
Mobility Project attempts to answer this question. The report groups federal
government spending into three broad categories: (1) expenditures aimed, at
least in part, at promoting mobility; (2) expenditures on income maintenance,
such as social security, health care, welfare, and housing support; (3)
expenditures on public goods such as defense, environment, and transportation.
As of 2006 about one fifth of federal spending — $740 billion, or 6% of GDP —
was in the mobility-promotion category. Most of this takes the form of tax
subsidies rather than direct expenditures.
The most striking of the report’s findings is how little of the federal
government’s mobility expenditure goes to those with low incomes. This chart
shows the estimated amounts that go to lower-income households (bottom two
quintiles of the income distribution) versus middle-and-upper-income households
(top three quintiles). In total, only about a quarter goes to the former group.
This seemingly-perverse distribution is not surprising. Spending decisions
aren’t made by an omniscient policy czar seeking to maximize opportunity for
upward mobility. They are a product of a political system characterized by
clashing interests, ideologies, motives, and means.
Imagine, though, that we could move money around within the broad category of
mobility-promoting expenditures — not increase spending, not take money from
other areas of the federal budget, just shift funds from one type of
(ostensibly) mobility-promoting program to another. What would help the most?
Let’s start with where to take the money from. By far the largest amount,
about $240 billion, currently goes to employer-related work subsidies for
pensions, health insurance, life insurance, and other fringe benefits. Surely
some of this money could be better spent elsewhere, but I’m not sure it would be
A better target would be the $100 billion that goes to saving and investment
incentives. The Economic Mobility Project report points out that almost all of
this goes to households in the top fifth of the income distribution, and there
is little evidence that it boosts saving.
I would favor also taking a large chunk from the roughly $160 billion
currently spent on homeownership subsidies (after the current housing downturn
abates). There is little indication that reducing or even fully removing the tax
deduction for mortgage interest and property tax payments would lower the rate
of homeownership in the United States. As the report notes, more than 80% of
this tax break goes to the top quintile of households. And homeownership rates
in several other rich countries are similar to ours despite the absence of a
homeownership subsidy. Furthermore, homeownership’s contribution to upward
mobility is ambiguous. On the one hand, it can help people accumulate assets. On
the other hand, for those with low income it can be a risky and ineffective way
of doing so, as
this piece (written long before the recent downturn) rightly emphasizes.
geographic mobility; it’s easier to pick up and move in search of better job
opportunity if you don’t have to sell your home.
What would be more effective at fostering mobility? ...
1. Universal preschool for 4-year-olds and subsidized high-quality care
for under-4s. ...
2. Improve K-12 public schooling by increasing teacher pay. ...
For some reason, there doesn't seem to much in the way of a formal modeling
exercises that work through the general equilibrium implications of a BI (I will
be happy to be corrected on this point), so I decided to set up a blog-sized
version. It turns out that although the BI is still a good idea, it's not quite
the slam-dunk I thought it was.
[H]e was my dreaded instructor long ago in two of the classes that I
took as a Harvard undergraduate. He was a doctoral student at the time in the
Government Department (no relation to the HKS)... The first course was Harvey Mansfield's political
theory course (for which Kristol served as teaching fellow), and the second was
a sophomore tutorial (a required course for government concentrators).
In each course, we had to write short papers once every couple of weeks. I
can say that my performance on these papers, which Kristol graded, was fairly
consistent. The essay on Machiavelli? Here is a C-. The essay on the
Federalist Papers? Here is a C. John Stuart Mill? Well, how about, yes you
guessed it, another C. You can say that Kristol did his best to discourage me
from pursuing a career in political science...
I remember well the very first time I saw him. It was the first meeting of
the discussion session in Mansfield's course... He walked into the classroom and his first words were:
"Hello, my name is Mr. Kristol." To underscore the point that he was that, and
not Bill or any other friendly appellations by which we students may have chosen
to address him, he went to the board and wrote "Mr. Kristol." I may have been a
poorly adjusted Turk in my first year in the U.S., but this still struck me as
odd. He was certainly the only graduate student I met in my four years as an
undergraduate who insisted on being called by his last name.
Well, Mr. Kristol's column today takes aim at Barack (and Michelle) Obama,
and does so quite unfairly in my view. ... What caught my attention was this passage:
Michelle Obama, in the course of a stump speech, remarked...: “Life for regular folks has
gotten worse over the course of my lifetime, through Republican and Democratic
administrations. It hasn’t gotten much better.”
Now in almost every empirical respect, American lives have in fact gotten
better over the last quarter-century.
Really? Look at the chart below, which comes from
Frank Levy... It shows the median compensation
since 1980 of different groups of prime-aged men, alongside productivity. ...
People like me with graduate degrees have done great. But the median
compensation (that includes fringe benefits, by the way) of high school graduate
men has declined by about 10 percent since 1980! Mr. Kristol: that
means that for a high-school graduate, the odds that his compensation would have
fallen by more than 10% is 50-50. Note that even college graduates have
not seen any income gains since around 2000. ...
What is special about the last quarter century, as Frank Levy makes clear, is
that it followed a period when productivity increases were broadly shared by
different groups in society. That is no longer the case...
So statistics aside, who do you think has a better sense of what has happened
to "regular folk" since 1980? Michelle Obama or Mr. Kristol?
Update: Different topic: Dani Rodrik and Arvind Subramanian have an article in
the Financial Times arguing that we need to limit the flow of financial capital
on international markets:
Since 2002 the flows have been uphill, from emerging markets and
oil-exporting countries to the developed world, especially the US. But the
outcome has not been very different. So, it does not seem to matter how capital
flows. That it flows in sufficiently large quantities across borders – the
celebrated phenomenon of financial globalisation – seems to spell trouble.
This is something Paul Krugman wrote about how capitalism defeated communism, "the basic problem was not technical, but moral":
Mysterious Triumph, by Paul Krugman: Recently my local public television
station has been showing a fascinating series entitled "Russia's War" - a
history, produced in Russia, of the Soviet Union's struggle in World War II. It
is not a pretty story: the producers do not hesitate to tell the full story of
Stalin's brutality, and they do not try to mask the ugliness of war with
patriotic romanticism. Yet this stark honesty in a way makes the account of the
Soviet Union's wartime achievement all the more impressive. The Soviet Union
did not win through military genius: most of its trained officers had been
purged in political witch-hunts, and while the war eventually threw up a new
set of leaders, they were competent rather than brilliant - and their advice
was often overruled by a dictator whose military judgement was usually
disastrous. Russian soldiers fought with dogged heroism - but then so did the
Germans. Why did the Russians prevail?
The answer is surprising, given the way the 20th century has actually turned
out. The Soviet triumph in World War II was, above all, a victory of
production. Despite huge losses in the first months of the war, despite mass
dislocations of population and the German occupation of many of the country's
key manufacturing centers, Soviet industry managed to build tanks, artillery,
and aircraft that were technologically a match for Germany's weapons, and to do
so at a rate that consistently exceeded anything their opponents thought was
possible. Indeed, the decisive German defeats at Stalingrad and Kursk came
about precisely because the Germans launched offensives against what they
imagined to be a weaker opponent, and were taken by surprise when
counterattacked by thousands of tanks whose existence they had never suspected.
What does this have to do with the world of [today]? Well, nowadays we take the
triumph of capitalism as something preordained by the superiority of our
economic system. After all, it now seems obvious to everyone except North Korea
and Cuba that a market economy is vastly more productive than one controlled
from the center - and the Cuban economy is imploding, while the North Koreans
are quite literally starving to death. Moreover, every time a Communist regime
collapses, it turns out that the actual state of the economy it governed was
far worse than anyone had imagined. For example, typical estimates of the GDP
of East Germany before the old regime collapsed put its real GDP per capita at
70 or 80 percent of the West German level - meaning that East Germany was
actually richer than some regions in the West. Yet after the fall of the Berlin
Wall, visiting Westerners found something that looked like a Third World
economy, with antiquated factories (and disastrous environmental problems)
producing consumer goods of ludicrously low quality (like the notorious East
German Trabant, an automobile that makes a Honda or Ford seem like a Mercedes).
We used to think that the Soviet Union had an economy about half as large as
America's, that is, bigger than Japan's; nowadays Russia seems to have less
economic power than, say, Italy. We used to think that there was a real
technological race between socialism and capitalism; nowadays the symbol of
Russian technology is the hapless Mir space station. It seems obvious to many
people in retrospect that the productive and technological triumphs that
Communists used to claim - all those heroic photgraphs of dams and posters of
muscular steelworkers - were mere propaganda; in reality, we think we have
learned, socialism is a system that just can't deliver the goods, while
capitalism is a system that can.
But one lesson of "Russia's War" is that matters are not that simple. Were
the supposed productive triumphs of the Soviet Union under Stalin merely a
hoax? Tell that to the soldiers of Germany's Army Group Center - the few who
survived. The fact is that Stalin did transform Russia into a massive
industrial power - a power tested in the most unambiguous way imaginable. And
his successors did achieve real technological triumphs - not just showy
triumphs like sending cosmonauts into orbit, but the creation of a highly
sophisticated scientific and engineering establishment. True, Russia was never
any good at producing high-quality consumer goods. But it was not always the
bumbling, incompetent system we now imagine. What this means is that the
collapse of Communism and the triumph of capitalism need more of an explanation
than the stories we usually hear. It is not enough to explain all the reasons
why a market economy is more efficient than a centrally planned one. Those
explanations are basically right - but the question is why a system that
functioned well enough to compete with capitalism in the 1940s and 50s fell
apart in the 1980s. What went wrong?
Kevin Grier says, reluctantly, that the blogospheric acclaim for Tyler Cowen's argument
that elections are unimportant for economic policy may not have been
Blowin' in the wind, by Angus: Tyler Cowen has been very very good to me.
We've been friends for 18 years. He convinced me to try traveling outside the
USA, he was the matchmaker for my marriage to Mrs. Angus... So I pretty much
try to stay on his good side.
But, in Tyler's
most recent NY Times column, he announced, to blogospheric acclaim, that
the upcoming US elections probably won't amount to a hill of beans:
This election is certainly important. But based on the historical record,
it isn’t likely to result in a major swing in economic policy.
I beg to differ.
Our current status quo is a fairly liberal / populist-ish Democratic
Majority in both houses, being held somewhat in check by a witless, right-ish,
hawk-ish President whose main weapon is the veto and a large enough minority to
block overrides. ... I am no
George Tsebelis (but
then again, who is?) but given that McCain would probably be kind of a more
sentient and honorable Bush, a President Obama, given the current Congress
(which isn't going to move to the right in the election) would make for a big
change in where the veto players are located.
I would predict potentially large changes in our trade policies, in tax
rates for business and higher earning individuals (isn't Obama in favor of
letting Bush cuts expire and also lifting the income cap on FICA taxes?), a
large increase in government "green" initiatives with our lovely ethanol policy
as a guidepost. I'd also predict a potentially large change in our security
policy and our methods of diplomacy, which to be fair Tyler also acknowledges.
Now you may like all or most of that. Cool. Vote for Barack. You may not.
Cool. Vote for McCain. But I think saying that there isn't that much at stake
here is incorrect. ...
I see real differences. I don't see McCain lifting the cap on FICA earnings.
I don't see McCain going for publicly created "green jobs". I do see both of
them "fixing" the AMT. I don't see McCain as so anti-trade as Obama.
I see parallels to 1992 when a much less liberal than Obama Bill Clinton
came into office, hiked taxes, turned Hillary loose on health care and promptly
got slapped with a Republican congress in the midterm elections.
My hopes are higher than that. One reason is the hope that, if Obama wins, he will have a
stronger coalition than Clinton. As Brad DeLong says in reference to Bill
Clinton's "working majority":
Working majority? What happened to gays in the military? The stimulus
package? The BTU tax? The 2:1 split between tax increases and spending
reductions? The inclusion in the 1993 budget of the Reich-Sperling-Blinder-Munnell
public infrastructure boosts? To go 0-5 in the spring and early summer and
then, in August, to have the president reduced to personally begging Bob Kerrey
not to destroy his presidency by voting against the budget and to have Kerrey
say that he would think about it--that there were too many tax increases and
not enough spending cuts--that's a working majority? To personally beg Marjorie
Margolies-Mezvinsky to be vote number 218 for the budget in the House when she
was one of seven--one of seven!--members of congress who had more people in her
district in the upper brackets who were going to be charged the higher tax
rates than would benefit from the expanded earned income tax credit? That's a
Sam Nunn had a working majority in the summer of 1993. The American
Petroleum Institute had a working majority. Bob Kerrey had a working majority.
Bill Clinton did not have a working majority.
If he wins, will Obama have a stronger hand than Bill Clinton had? I think so. Will he know how to play it? I think he will, but that's the question at this point.
Larry Summers offers another solution to avoid the macroeconomic risks
associated with mounting home foreclosures. Rather than direct government
Alan Blinder advocates), he proposes changes in bankruptcy law to facilitate
settlements between borrowers and lenders:
Policy towards America’s failing housing sector is in a far less
satisfactory state. All honest analysts accept that policies adopted so far ...
have had only a marginal impact on what may be the most serious crisis in
housing finance since the Depression.
It appears house prices are down by 5-10 per cent from their peak, with
derivatives markets predicting further declines of about 20 per cent. Price
falls of this magnitude are likely to mean ... more than 2m foreclosures ...
over the next two years.
Foreclosures are extremely costly. Between transaction costs that typically
run at one-third or more of a home’s value and the adverse impact on
neighbouring properties, foreclosures can easily dissipate more than the total
value of the home being repossessed. They also inflict collateral economic
damage, as reduced wealth and diminished borrowing capacity in homes reduces
consumer spending, increases credit market fragility and depresses local tax
What can public policy do? ...[W]hen the current owner is able and willing
to pay more than the lender can get by foreclosing on a house, it makes no
sense to go through with a foreclosure. Yet because of conflicts among lenders,
legal uncertainties and concerns about encouraging defaults, there are grounds
for fearing that wasteful and unnecessary foreclosures will take place on a
large scale, hurting families, communities, the economy and the financial
How can this problem be addressed? ... Direct government intervention in
mortgage markets risks creating delays, burdening taxpayers and inhibiting
necessary adjustments in house prices.
The right focus is on measures that will prevent unnecessary foreclosures by
facilitating more efficient settlements between homeowners and their creditors.
Legal changes ... to bring ... family homes into conformity with general
bankruptcy practice in two areas ... could make an important contribution.
First, remarkably, bankruptcy laws currently provide that almost every form
of property (including business property, vacation homes and those owned for
rental) except an individual’s principal residence cannot be repossessed if an
individual has a suitable court-approved bankruptcy plan. The rationale is the
prevention of costly and inefficient liquidations. It is hard to see why
similar protections should not be prudently extended to family homes.
Critics worry that such measures will dry up the supply of mortgage credit.
This is a legitimate concern and the reason why legislation should be carefully
and narrowly drafted... But it is worth noting that: some inhibition on lending
to those who seem likely to go bankrupt might be a good thing..; and moreover,
chapter 12 of the bankruptcy code ... applied these principles to family farms
... to resolve great financial distress without long-term costs in terms of
reduced farm lending – despite protestations much like those that are heard
Second, methods need to be found to enable creditors who accept a writedown
in the value of their claims to retain an interest in the future appreciation
of the homes on which they have mortgages. This is standard practice in
situations of corporate distress, where debt claims are partially replaced by
equity claims. ...[I]t would be desirable to pursue suggestions by the Office
of Thrift Supervision for so-called negative equity certificates to support
shared appreciation work-outs.
Bankruptcy reform alone could, on some estimates, avert 500,000
foreclosures... As with fiscal stimulus, rapid bipartisan co-operation between
Congress and the administration would benefit the financial system, the real
economy and millions of Americans.
One quick response to
comments on the Blinder post on recreating the Home Owners’ Loan Corporation
as a means of limiting foreclosures (Brad DeLong comments briefly on the Blinder
here). My job as a macroeconomist is not to make moral judgments about who
should be punished for their bad behavior. That's a job for someone else. My job
is to stabilize the economy and do so in a way that does not harm economic
growth over the long-run or lead to instabilities in the future due to
bad incentives arising from the stabilization attempt.
Ralph Nader cannot see past his own ego, much to the detriment of the causes
he wants to support:
Nader to Run Again,
NY Times: ...“Meet the Press” played a video clip of Mr. Obama answering a
question about a possible Nader candidacy on Friday:
You know, he had called me and I think reached out to my campaign — my
sense is is that Mr. Nader is somebody who, if you don’t listen and adopt all
of his policies, thinks you’re not substantive. He seems to have a pretty high
opinion of his own work. Now — and by the way, I have to say that,
historically, he is a singular figure in American politics and has done as
much as just about anybody on behalf of consumers. So in many ways he is a
heroic figure and I don’t mean to diminish him. But I do think there is a
sense now that if somebody is not hewing to the Ralph Nader agenda, then you
must be lacking in some way.
Mr. Nader’s constituency appears to have eroded somewhat...
Long ago, when Oregon State would visit to play basketball, the students would chant "Sit down Ralph" every time the coach, Ralph Miller, would get out of his chair. I can hear that chant very clearly right now.
Markets don't always work the way we'd like them to, and sometimes it's necessary to impose a change in the incentives faced by firms in the industry in order to steer them in the right direction:
Not-their-fault insurers, by Ezra Klein, Commentary, LA Times: 'The state's
largest for-profit health insurer is asking California physicians to look for
conditions it can use to cancel their new patients' medical coverage," said the
first line of an expose in the Los Angeles Times earlier this month. The
subject was Blue Cross' practice of enlisting doctors to help them deny the
claims of sick individuals.
What's strange, however, is that everyone acted like the insurer was doing
something wrong. ... But Blue Cross officials weren't doing anything wrong.
They were doing exactly what we've asked them to do: They were following the
incentives of the modern insurance market. ...
There's no law that says we all must have insurance or that insurance
companies must agree to cover us. Given that, it's natural that insurers ...
turn their attention to making deals with the most profitable among us and
avoiding deals (or finding ways to break contracts) with the least profitable.
So is it any surprise that they compete over which of them can be the most
sophisticated about cherry-picking the healthy from the unhealthy ... and which
is the most adept at canceling policies once they become unprofitable?
This is the competition within our insurance industry, and it is not good
for us. That can be a bit counterintuitive..., competition is thought to
benefit the consumer. But ... competition among insurers does not aid the ill.
It might if they were competing to deliver better care to the sick, rather than
trying to figure out how to avoid delivering any care to the sick at all. But
they're not. ...
It is actually against their interest for insurers to compete on giving us
the best care ... given the structure of the marketplace...
Imagine that Insurer X works with its providers to develop the best diabetes
protocols in the country. And it begins advertising this fact. What happens on
Day Two? It's flooded with individuals suffering from diabetes, or individuals
who fear they will one day be suffering from diabetes. These people ... are a
bad deal. Not only is it nearly impossible to insure them at a profit, but
pooling their costs (which is what insurers do, after all) raises premiums for
all the insurer's other customers.
Over time, that encourages healthy folks ... to quit the pool and go find a
cheaper deal with an insurer that caters to healthier individuals, which forces
the insurer to raise premiums yet again, driving out more healthy folks, which
forces it to raise premiums again, which drives out more healthy folks, and so
on. It's what industry experts call an insurance death spiral, and it ends with
the collapse of the insurer.
Given those incentives, insurers cannot be expected to compete on the basis
of better care, because if they encouraged better care, all that would happen
is they would attract worse deals. Which is why, in the current system,
insurers make things worse.
But it doesn't have to be that way. If insurers existed in a market in which
they had to compete on delivering better care, rather than competing on
developing better techniques to deny care, we'd be far better off.
Here are the principles such a market would require...1) Universality... The
system has to be universal. 2) An end to cherry-picking... Insurers should have
to offer insurance to anyone who wants it for the same price. No exceptions. 3)
Risk adjustment... At the end of the day, it has to be as profitable for an
insurer to insure a sick person as a healthy one. 4) Benefit floors... 5)
It's not impossible to imagine a scenario in which insurers actually compete
to offer better service... But none of this will happen as long as insurers
operate in a perverse market in which their incentives are to make the system,
and our care, worse. ...
Alan Blinder says it's time to bring
back the HOLC:
From the New Deal, a Way Out of a Mess, by Alan S. Blinder, Economic View, NY
Times: ...Wounded financial markets are supposed to cure themselves: asset
prices fall, bargain hunters rush in and markets return to normal. But so far,
that doesn’t seem to be happening much. Instead, house prices keep dropping,
the mortgage-foreclosure problem grows and new strains in the financial system
keep popping up like a not-very-funny version of Whack-a-Mole.
While the problems are multifaceted, I have several reasons for focusing on
just one aspect of the mess: the potential tsunami of home foreclosures. First,
it strikes home, literally. Foreclosures throw families — some of whom were
victims of deception — into the streets. ...
A second reason is that reducing the wave of foreclosures would mitigate the
closely related financial crises in home mortgages and the alphabet soup of
financial creations based on them (M.B.S., S.I.V.’s, C.D.O.’s, etc.). ...
A third reason for focusing on foreclosures is that we’ve seen this film
before. During the Depression, President Franklin D. Roosevelt and Congress
dealt with huge impending foreclosures by creating the Home Owners’ Loan
Corporation. Now, a small but growing group of academics and public figures ...
is calling for the federal government to bring back something like the HOLC.
Count me in.
The HOLC was established in June 1933 to help distressed families avert
foreclosures by replacing mortgages that were in or near default with new ones
that homeowners could afford. It did so by buying old mortgages from banks ...
and then issuing new loans to homeowners. The HOLC financed itself by borrowing
from capital markets and the Treasury.
The scale of the operation was impressive. Within two years, the HOLC
received about 1.9 million applications ... and granted just over a million new
mortgages. (Adjusting only for population growth, the corresponding mortgage
figure today would be almost 2.5 million.) Nearly one of every five mortgages
in America became owned by the HOLC. Its total lending over its lifetime
amounted to $3.5 billion — a colossal sum equal to 5 percent of a year’s gross
domestic product at the time. (The corresponding figure today would be about
As a public corporation chartered for a public purpose, the HOLC was a
patient and even lenient lender. It tried to keep delinquent borrowers on track
with debt counseling... But times were tough in the 1930s, and nearly 20
percent of the HOLC’s borrowers defaulted anyway. So the corporation eventually
acquired ownership of about 200,000 houses, nearly all of which were sold by
1944. The HOLC closed its books in 1951, or 15 years after its last 1936
mortgage was paid off, with a small profit. It was a heavy lift, but the
incredible HOLC lifted it.
Today’s lift would be far lighter. And a good thing, too, because our
government is far more timid and divided than Roosevelt’s. ...
What about the operation’s scale? Based on current estimates, ... the new
HOLC might need to borrow and lend as much as $200 billion to $400 billion. ...
Given current low interest rates, a new HOLC could borrow cheaply and should
find it easy to earn a two-percentage-point spread between borrowing and
lending rates, for a gross profit of maybe $4 billion to $8 billion a year.
What about loan losses? A 10 percent loss rate, or $20 billion to $40
billion, spread over the life of the institution, seems incredibly pessimistic.
(The original HOLC experienced a 9.6 percent loss rate during the Depression.)
So the new HOLC seems likely to turn a profit, just as the old one did. But
even if it loses a few billion, we must remember its public purpose: to help
the economy recover, not to make a buck. By comparison, the new economic
stimulus package has a price tag of $168 billion.
It is said that history never repeats itself. But sometimes there are
sequels. Now is the time to re-establish the Incredible HOLC.
Count me in too. If the government can improve the flow of resources in
financial markets by absorbing some of the risk of foreclosures through a social insurance arrangement, and do so in an way where the downside risk isn't all
that large (there's an expected profit under most scenarios), then why not?
Update: Richard Green adds:
Alan Blinder and Mark Thoma want to bring back the HOLC, by Richard Green:
...I am myself a fan of the HOLC, and have said so in articles I wrote with Susan
Wachter for Journal of Economic Perspectives
and for the Jackson Hole conference last summer, as well as a comment I just
wrote for Housing Policy Debate. Yet I
am not sure it is alone the medicine for the current crisis.
When the Home Owners Loan Corporation was invented, it was in response to an
economic tsunami that swamped lenders and homeowners. Moral hazard was not much
of an issue, as loans were stringently underwritten (typical LTVs were 50
percent at origination). But loans had short terms, and therefore were
vulnerable when people were forced to refinance in the teeth of the great
depression. The HOLC allowed for massive loan modification and helped get
incentives for borrowers and lenders aligned correctly.
Now, however, we are in the midst of a crisis that has arisen in part because
of agency problems throughout the lending chain. To bail out lenders through
some sort of HOLC setup could very well encourage excessive risk taking in the
future, which is of course problematic.
I think if we are going to go the HOLC route, it needs to be accompanied by a
regulatory structure that will prevent the sort of bad practices that led to
the current crisis going forward. As I have noted before, such regulatory
changes would require greater transparency, a requirement that everyone who
touches a mortgage be subject to federal supervision, and a requirement that
everyone who touches a mortgage have some capital at risk.
Texans are even turning tapped-out oil fields into wind farms, and no less
an oilman than Boone Pickens is getting into alternative energy.
“I have the same feelings about wind,” Mr. Pickens said in an interview, “as
I had about the best oil field I ever found.” He is planning to build the
biggest wind farm in the world, a $10 billion behemoth that could power a small
city by itself.
Wind turbines were once a marginal form of electrical generation. But amid
rising concern about greenhouse gases from coal-burning power plants, wind
power is booming. Installed wind capacity in the United States grew 45 percent
last year... It already supplies about 1 percent of American electricity,
powering the equivalent of 4.5 million homes. Environmental advocates contend
it could eventually hit 20 percent, as has already happened in Denmark. Energy
consultants say that 5 to 7 percent is a more realistic goal in this country.
Despite the attraction of wind as a nearly pollution-free power source, it
does have limitations. Though the gap is closing, electricity from wind remains
costlier than that generated from fossil fuels. Moreover, wind power is
intermittent and unpredictable, and the hottest days, when electricity is
needed most, are usually not windy.
The turbines are getting bigger and their blades can kill birds and bats.
Aesthetic and wildlife issues have led to opposition emerging around the
country, particularly in coastal areas like Cape Cod. Some opposition in Texas
has cropped up as well, including lawsuits to halt wind farms that were thought
to be eyesores or harmful to wetlands.
But the opposition has been limited, and has done little to slow the rapid
growth of wind power in Texas. ...
The quaint windmills of old have been replaced by turbines that stand as
high as 20-story buildings, with blades longer than a football field and each
capable of generating electricity for small communities. Powerful turbines are
able to capture power even when the wind is relatively weak, and they help to
lower the cost per kilowatt hour. ...
A short-term threat to the growth of wind power is the looming expiration of
federal clean-energy tax credits, which Congress has allowed to lapse several
times over the years. Advocates have called for extending those credits...
A longer-term problem is potential bottlenecks in getting wind power from
the places best equipped to produce it to the populous areas that need
electricity. The part of the United States with the highest wind potential is a
corridor stretching north from Texas through the middle of the country,
including sparsely populated states like Montana and the Dakotas. Power is
needed most in the dense cities of the coasts, but building new transmission
lines over such long distances is certain to be expensive and controversial.
“We need a national vision for transmission like we have with the national
highway system,” said Robert Gramlich, policy director for the American Wind
Energy Association. “We have to get over the hump of having a patchwork of
electric utility fiefdoms.” ...
When you go to the movies, be sure to say thank you to all the
people standing in line waiting to buy popcorn, soft drinks, and candy:
Why does popcorn
cost so much at the movies?, by Jennifer McNulty, UCSC News: Movie theaters
are notorious for charging consumers top dollar for concession items such as
popcorn, soda, and candy. ... New research from Stanford and the University of
California, Santa Cruz, suggests that there is a method to theaters'
madness--and one that in fact benefits the viewing public. ...
The findings empirically answer the age-old question of whether it’s better
to charge more for a primary product (in this case, the movie ticket) or a
secondary product (the popcorn). Putting the premium on the "frill" items, it
turns out, indeed opens up the possibility for price-sensitive people to see
films. That means more customers coming to theaters in general, and a nice
profit from those who are willing to fork it over for the Gummy Bears.
Indeed, movie exhibition houses rely on concession sales to keep their
businesses viable. Although concessions account for only about 20 percent of
gross revenues, they represent some 40 percent of theaters' profits. ...
Looking at detailed revenue data for a chain of movie theaters in Spain,
Wesley Hartmann ... and Ricard Gil ... compared concession purchases in weeks
with low and high movie attendance.
The fact that concession sales were proportionately higher during
low-attendance periods suggested the presence of "die-hard" moviegoers willing
to see any kind of film, good or bad--and willing to purchase high-priced
popcorn to boot. "The logic is that if they’re willing to pay, say, $10 for a
bad movie, they would be willing to pay even more for a good movie," said
Hartmann. "This is underscored by the fact that they do pay more, even for a
bad movie, as is seen in their concession buying. So for the times they’re in
the theater seeing good or popular movies, they’re actually getting more
quality than they would have needed to show up. That means that, essentially,
you could have charged them a higher price for the ticket."
Should theaters flirt with raising their ticket prices then? No, says
Hartmann. The die-hard group does not represent the average movie viewer. While
the film-o-philes might be willing to pay, say, $15 for a movie ticket, a
theater that tried such a pricing tactic would soon find itself closing its
"The fact that the people who show up only for good or popular movies
consume a lot less popcorn means that the total they pay is substantially less
than that of people who will come to see anything. If you want to bring more
consumers into the market, you need to keep ticket prices lower to attract
them." Theaters wisely make up the margin, he says, by transferring it to the
person willing to buy the $5 popcorn bucket.
The work of Hartmann and Gil substantiates what movie exhibitors have
intuited all along. "The argument that pricing secondary goods higher than
primary goods can benefit consumers has been circulating for decades, but until
now, no one has looked at hard data to see whether it’s true or not," says
Jeff Sachs says that if we leave development of technology to combat global
warming to the private sector, we won't get the technology we need fast enough,
if at all. What's needed is a cooperative global effort to encourage companies
to pursue technological development:
Using technology to address poverty and the environment, by Jeffrey D. Sachs,
Commentary, Project-Syndicate: ...We are used to thinking about global
cooperation in fields such as monetary policy, disease control, or nuclear
weapons proliferation. We are less accustomed to thinking of global cooperation
to promote new technologies, such as clean energy, a malaria vaccine, or
drought-resistant crops to help poor African farmers. By and large, we regard
new technologies as something to be developed by businesses for the marketplace,
not as opportunities for global problem solving.
Yet, given the enormous global pressures that we face, including vastly
unequal incomes and massive environmental damage, we must find new technological
solutions to our problems. ... Current reliance on coal, natural gas, and
petroleum, without regard for carbon-dioxide emissions, is now simply too
The National Academy of Engineering identified some possible answers. We can
harness safe nuclear energy, lower the cost of solar power, or capture and
safely store the carbon dioxide produced from burning fossil fuels. Yet the
technologies are not yet ready, and we can't simply wait for the market to
deliver them, because they require complex changes in public policy to ensure
that they are safe, reliable, and acceptable to the broad public. Moreover,
there are no market incentives in place to induce private businesses to invest
adequately in developing them.
Consider carbon capture and sequestration. The idea is that power plants and
other large fossil-fuel users should capture the carbon dioxide and pump it into
permanent underground storage sites, such as old oil fields. This will cost,
say, $30 per ton of carbon dioxide that is stored, so businesses will need an
incentive to do it. ... Likewise, new regulations will be needed to ensure
compliance with safety procedures, and to assure public support. All of this
will take time, costly investments, and lots of collaboration between scientists
and engineers in universities, government laboratories, and private businesses.
Moreover, this kind of technology will be useful only if it is widely used,
notably in China and India. This raises another challenge of technological
innovation: We will need to support the transfer of proven technologies to
poorer countries. ... Thus, technological developments should involve a
collaborative international effort from the start.
All of this will require a new global approach to problem solving. We will
need to embrace global goals and then establish scientific, engineering, and
political processes to support their achievement. We will need to give new
budgetary incentives to promote demonstration projects, and to support
technology transfer. And we will have to engage major companies in a new way,
giving them ample incentives and market rewards for success, without allowing
them to hold a monopoly on successful technologies...
I believe that this new kind of global public-private partnership on
technology development will be a major objective of international policy making
in the coming years. ...
Rich countries should fund these efforts heavily, and they should be carried
out in collaboration with poor countries and the private sector. ... This will
be an exciting time to be a scientist or engineer facing the challenges of
Global cooperation would be good, but I'd settle for my own government doing more to encourage technological development in this area.
Let’s talk ... about the Carter-era economy. Jimmy Carter’s overall
economic record was much better than most people realize —... average economic
growth ... was 3.4 percent per year, slightly higher than ... under Ronald
Reagan and far better than growth under either Bush...
But the good economic news came in the Carter administration’s
early years, while its final year was marked by rising unemployment and soaring
inflation, largely caused by a surge in oil prices.
And once again we have a weakening economy coupled with rising
inflation, again thanks in large part to a surge in oil prices.
That said, I don’t believe we’re really facing anything comparable
to 1970s stagflation. For one thing, we’re less dependent on oil... For another,
there’s no sign of the wage-price spiral that once drove inflation into double
What’s much more likely is that we’ll have an economy like that of
the early 1990s, only worse.
The first President Bush presided over the 1990-1991 recession. But
his real problem came during the alleged recovery, which was hobbled by
financial problems at ... banks ... damaged by the collapse of the late-1980s
real estate bubble, and by sluggish consumer spending, held down by high levels
of household debt.
As a result, the unemployment rate just kept rising, not reaching
its peak of 7.8 percent until June 1992...
Many economists have pointed out the parallels between the current
situation and the early 1990s: another real estate bubble, subprime playing more
or less the same role formerly played by bad loans by savings and loan
institutions, financial trouble all around.
The difference is that the problems look a lot worse this time: a
much bigger bubble, more financial distress, deeper consumer indebtedness — and
sky-high oil prices added to the mix. So if history is any guide, we should be
looking at an extended period of economic weakness, probably extending well into
2010, and quite possibly even longer.
Can the next president do anything to avoid that outcome? In terms
of straight economics, the answer is a clear yes... A serious fiscal stimulus
plan — one that emphasized public investment and aid to Americans in economic
distress rather than across-the-board tax rebates, which many people won’t spend
— could do a lot to ease the country’s economic pain.
Politically, however, it’s hard to see this happening.
If the next president is a Republican, he will be captive to the
doctrine that tax cuts are the answer to all problems, and therefore won’t seek
an effective response to the economy’s troubles.
And even if the next president is a Democrat, any serious stimulus
plan would face intense, ideologically motivated opposition in Congress. Will
the next president be prepared to fight for an effective plan? Or will we end up
with a compromise like ... Democrats agreed to this year, legislation that
assuages conservative objections at the cost of undermining the plan’s
Until recently, I thought the biggest political struggle facing the
next president was likely to be over health care reform. But right now it looks
as if the first thing ... will ... be dealing with a weak economy.
And if effective action isn’t forthcoming, the next president will
suffer the fate of Jimmy Carter, who began his administration with words of
uplift — “Let us create together a new national spirit of unity and trust” — and
ended up delivering America into the hands of the hard right.
Well-dressed thieves, The Economist: ...[N]ext month three executives, two
of them former employees of Dunlop Oil and Marine..., go on trial in Britain
for their role in a global price-fixing cartel. The three have already pleaded
guilty in America to their part in a conspiracy that carved up the market for
marine hose—used to funnel oil from tankers to storage facilities. The
defendants face jail under the terms of a plea-bargain with American
The British trial is the first under new powers granted in 2003 and reflects
a harder line against price-fixing throughout the rich world. Cartels have long
been prohibited, but many countries have recently adopted criminal sanctions.
Conspiring to rig markets is punishable by prison in Germany, France, Ireland,
Japan and Canada, as well as America and Britain. Australia is about to join
the club too. ...
What explains the clamour for harsher penalties? ... For big and
sophisticated firms, entering into an agreement to fix prices is a clear and
knowing conspiracy against consumers. And because such pacts are secret and
hard to uncover, harsher penalties are needed if the expected costs of
price-fixing are to exceed the likely benefits. In principle, a big fine might
suffice. But in practice a fine large enough to work as a deterrent would
financially cripple a company, further impairing competition and harming
innocent bystanders, such as suppliers and workers.
Sanctions against culpable executives ought to be more effective. Fining
managers, however, has some of the same problems as fining firms. Because there
is only a small chance of being caught, a penalty big enough to put off a
budding price-fixer may be many times his wealth—and hence unpayable.
There is some evidence to suggest that the personal sanctions are a more
effective deterrent than financial penalties. A survey carried out for
Britain's Office of Fair Trading (OFT) asked executives to score the deterrent
effect of five sanctions. Fines ranked fourth and private damages fifth, behind
bad publicity and being disqualified from doing business. The most feared
punishment was prison. In America trustbusters say that busted price-fixers
regularly offer to pay bigger fines to try and avoid jail.
The threat of jail also helps with the detection of cartels. Trustbusters
rely heavily on the promise of amnesties to crack price-fixing conspiracies.
Immunity for whistleblowers strikes at the heart of a cartel, because each
conspirator is aware one of the others could rat to the authorities and escape
punishment. The harsher the penalty, the greater the spur to be first to
Since penalties in America were strengthened in 2004 the caseload of
cartel-busters has increased. At the end of the past fiscal year, there were
135 pending investigations, the highest since 1992. ...
Attitudes towards white-collar crime have changed since the 1970s, when a
senior American judge sentenced cartel members to giving lunchtime lectures on
the evils of price-fixing. Today the belief that the punishment should fit the
crime is gaining ground. Cosy deals with rivals ... are larceny and should be
treated as such.
May I suggest a "time out" on bashing free trade with our Canadian and
Mexican neighbors? Life would be awfully easy if NAFTA were the problem. All
you'd have to do is pull out.
The evidence points to NAFTA being mostly good for the countries involved.
And if American factory workers want to see where their jobs have gone, they'd
do better to look east than south. Labor may be cheaper in Mexico, but it's
cheaper still in Asia. Chinese workers make about a quarter of what their
Mexican counterparts earn. ...
When China joined the World Trade Organization in 2001, Mexico lost much of
any advantage that NAFTA gave it. Hundreds of Mexican factories have since
closed and also moved to China.
But somehow the populist anger against trade tends to get trained on Latin
America. We saw all the outrage heaped on the Central American Free Trade
Agreement (CAFTA) in 2005. The combined economies of those five poor countries,
plus the Dominican Republic, roughly equaled that of New Haven, Conn.
More recently, the free-trade agreement with Peru has been denounced as "a
NAFTA-style trade deal." Peru's gross domestic economy is the size of Utah's.
Clinton and Obama, despite their campaign rhetoric, voted for the accord, and
were right to do so.
NAFTA knockers who fear sounding anti-Mexican often argue that free trade has
been bad for Mexico, as well. They offer vivid examples, such as the peasant
farmers protesting the end of tariffs on U.S. corn. Corn production is easily
mechanized and relies on abundant water. That gives U.S. farmers a competitive
But NAFTA has opened the enormous U.S. market to Mexican avocado growers --
who now call their fruit "green gold." For avocados and other produce that
requires picking by hand and therefore much farm labor, Mexicans have an
advantage. In fact, Mexican farm exports to the United States and Canada have
tripled since 1994.
Mexico's gross domestic product has doubled in the last 10 years, poverty is
down, and the march to social liberalization continues. Mexico is no longer a
very poor country -- it just seems so next to us.
Revisiting NAFTA won't fix what hurts the Ohio River Valley. A better
approach would be universal health coverage that protects laid-off workers from
total economic meltdown. A more vigorous program for job retraining would also
The sight of closed American factories -- those broken windows and
weed-covered parking lots -- sickens the soul. The inescapable reality, though,
is that the jobs that were going were going, if not to the Caribbean and Latin
America, then to Asia. Wouldn't it be in America's interests to help our
neighbors get the work?
Him: CNN host, biggest and loudest gun in the battle for tougher
immigration policies, leader of a nightly crusade to expose the misdeeds of
those he views as elitist fools and scoundrels.
Me: editorial writer whose views on immigration qualify, to Mr.
Dobbs and many others on his side of the debate, as elitist, foolish and
Among people whose immigration views I admire, Mr. Dobbs has a
reputation as a hopeless blowhard. I did not dwell on that... I was looking for something better
than an argument. I wanted to convert him.
An honest person must concede a lot when arguing immigration with
Mr. Dobbs: Yes, the borders and ports are insecure...
Yes, illegal immigration hurts some Americans, globalization causes many global
problems and big corporations love to stick it to the little guy.
My point to Mr. Dobbs was that the little-little guy — the
“illegal alien” crossing our “broken borders” — was the wrong target. His
overriding emphasis on solving globalization’s many ills by urgently sealing
the borders strikes me as populism gone astray.
First, it’s ineffective, because the country will never be
ziplocked as tightly as he wants it to be. The price of trying is too high, and
it ignores the millions who enter the country legally but overstay. Most
shamefully, it does nothing to resolve the fates of the 12 million undocumented
Second, the obsession with enforcement dovetails with the agendas
of some nasty people: the nativists for whom immigration is a simple case of
brown and white...
Third, it does too little to attack the evil corporate elites that
are Mr. Dobbs’s sworn enemy. What makes illegal immigrants so delectable to
big, bad business is their illegality — their willingness to work cheap and
under the table. So why not legalize and tax them? Assimilate the good guys, as
this country has always done, and save law enforcement for the bad ones.
The idea is to confront abusive corporate power with worker power.
If day laborers end up in our suburbs, where the money and jobs are, then give
them safe places to gather and help them work together to keep from driving
wages and working conditions down. If companies take advantage of workers,
empower the workers to fight back: as union members, legal residents, citizens.
But that’s “amnesty,” a Dobbsian expletive. It’s the opposite of
the crackdowns endorsed by him and the hard-liners he praises, like the
Mr. Dobbs listened graciously and budged not. He said he respected
immigrants, even illegal ones... He reminded me of his fondness for Cesar Chavez.
Then he repeated his immigration credo. It went like this: the
1986 immigration law was an amnesty promoted by corporate interests waging war
on the middle class. Thus the 2006 and 2007 reforms were also amnesty, pushed
by the same self-serving plutocrats. So nothing they want is worth doing — at
least not until the border is sealed.
That could be a long time. While we wait, I am going to keep
trying to convince Mr. Dobbs that a comprehensive solution — enforcement plus
assimilation — is the best expression of the populism he espouses.
Mr. Dobbs admits that mass deportation would never work, although
if you press him on what to do about the 12 million, he has no answer. He wants
to hold that question “in abeyance” until the border is sealed. I find that
oddly passive for someone so convinced of the dangers from the aliens in our
I told him that, and he smiled. The lunch was over. ...
Fences don't stop economic forces from working. I think the only viable long-run solution to the immigration problem is to reduce the economic distance between Mexico and the U.S. Obviously, we don't want to do that by reducing our income, so we need to do what we can to help Mexico develop and raise its standard of living. In that regard, I would like to hear more from the presidential candidates on how the U.S. might help to promote business and job development in Mexico. Proposing a tax credit to companies willing to invest in Mexico would be political suicide - tax breaks to U.S. companies willing to move jobs to Mexico probably wouldn't go over well - but if we are going to solve this problem we will have to realize that such investment must take place. If nobody from the outside ever locates in Mexico, if we wait for development to spontaneously erupt on its own from within, it could be a long wait with a high fence repair bill. But tax breaks are but one small part of the government's arsenal, and I would like to know what the candidates plan to do to promote economic development in Mexico. So I checked their websites to see if they say anything about this (in each case I clicked on issues, then immigration):
with Mexico: Obama believes we need to do more to promote economic development
in Mexico to decrease illegal immigration."
Doesn't explicitly say anything about development, closest statement is "greater
cross-cooperation with our neighbors."
McCain: "Recognize the importance of building strong allies in Mexico and
Latin America who reject the siren call of authoritarians like Hugo Chavez,
support freedom and democracy, and seek strong domestic economies with abundant
economic opportunities for their citizens."
I have to give this one to Obama. I have no problem with promoting free
market policies, but McCain is essentially adopting the Washington Consensus as
a development strategy and that's not what I had in mind, and it's not a strategy that has been successful. Clinton doesn't
mention development in Mexico as a means of stemming illegal immigration - I'm sure she'd give the right answer if asked but
it's not on her website - and only Obama makes the clear link between the U.S.
helping Mexico to develop and decreases in illegal immigration.
Go where? How about addressing the “Why?” question? It’s here that things
begin to get interesting.
One answer is that conservatives are discriminated against in academia. They
don’t get hired in the first place, and the fortunate few who do find academic
employment aren’t tolerated for long by their liberal colleagues. That answer is
simple, straightforward, and politically combustible. It’s the standard story
that conservatives tell and liberals dispute.
Now, however, comes quite a different answer. Based on their recent research,
Matthew Woessner and April Kelly-Woessner contend that the culprit isn’t
discrimination against conservatives, but rather self-selection on the part of
conservatives. ... Woessner and Kelly-Woessner conclude that “The personal
priorities of those on the left are more compatible with pursuing a Ph.D.” than
are the priorities of their conservative counterparts. For example, ...
conservative undergraduates are outnumbered by two to one in the social sciences
and humanities. Conservative students are more oriented toward financial
security and raising families. Accordingly, they gravitate toward more
“practical” courses of study that lead them into highly remunerative professions
like accounting and computer science. They’re also less willing to delay having
children — a common pattern in academic life, where childbirth often awaits a
favorable tenure vote.
For a chatty and not especially informative introduction to this project in
the current issue of the Chronicle of Higher Education, click
here. For a copy of the paper itself, click
In comments, Lee adds:
Richard Posner has some interesting thoughts about self-selection into or
away from academia; click
here. Among other things, he notes that members of the military are
disproportionately Republicans. Does that mean that the military discriminates
against Democrats? Maybe or maybe not, but a more plausible account would be
that liberals are less drawn to military service in the first place. Another of
his points is that liberals may be more attracted, and conservatives less so, to
the "quasi-socialistic" culture of academia. Like so much of what Posner writes,
you may like it or not, but it will make you think.
I had this ready to post a few days ago, but never actually posted it. But it
seems relevant here.
Conservatives embrace the idea of diversity on campus:
In December, the University of Colorado Foundation began raising $9 million
to create the Visiting Endowed Chair of Conservative Thought, which CU spokesman
Bronson Hilliard says could be funded as early as the 2008-09 academic year.
The chair would teach one class a semester, give speeches around Colorado,
and assist with research and coursework in the department closest to his or her
specialty, Hilliard said.
Todd Gleeson, dean of the College of Arts and Sciences, will hire an
instructor every two years to fill the temporary position. An advisory board of
donors, alumni, well-known conservative leaders and others will recommend a
candidate to the dean, Hilliard said. Officials have not yet recruited the
The university will not necessarily hire an academic, but candidates should
have a background in conservative thinking, such as former politicians,
political strategists and journalists in addition to political science scholars,
He named political strategist and pundit Bill Kristol as an example of a
qualified candidate. “It’s going to be someone with some national standing who
could teach a class,” Hilliard said.
Former Chancellor Richard Byyny said via e-mail that he proposed the idea for
the chair to a receptive political science faculty sometime between 2001 and
2003. “I did not pursue this because I am a conservative,” Byyny wrote. “I
pursued it because I thought it was the right and responsive approach (for
intellectual diversity).” ...
Uriel Nauenberg, physics professor and chairman of the Boulder Faculty
Assembly, said the chair “is a perfectly good idea to discuss as long as the
faculty are in charge of the curriculum.”
Economics department chairman and professor Nicholas Flores said he supported
the new position but thought CU also would benefit from a chair in liberal
ideology. “There should be a diversity of thought,” Flores said. “I’d like to
see something on the other side as well.”
Professor Kenneth Bickers, chairman of CU’s political science department,
supports the position and doesn’t believe the chair is necessarily political in
nature. “I don’t see it as a partisan chair,” Bickers said. “The idea behind the
chair is to expose students to a wide array of ideas that could be considered
to the editor from my pre-blogging days. I'd write it a bit different today,
but not much.]
Should copyrights be taxed so that socially valuable work with little economic value is forced into the
Copyright this, by Dallas Weaver, Commentary, LA Times: Jon Healey
correctly points out that the debate over intellectual-property theft is
complex because we are often dealing with "non-real properties." These
properties cost nearly nothing to produce, and an infinite number of people can
use the same property at the same time. And yet, we still want to treat them as
if they were "real" property.
Significantly, some of these non-real properties have major effects on human
welfare. Take, for example, the formula for "oral rehydration therapy," a
mixture of salt, sugar and water. Although it could potentially be copyrighted,
it has saved more lives in the Third World than almost anything else. The world
is lucky that this formula is in the public domain, not copyrighted and subject
to use charges that people who need it couldn't afford.
The present system treats these copyrighted works as a funny kind of real
property with no carrying costs, taxes or significant fees. Without carrying
costs, copyrights remain in force almost forever - even though, over time, the
demand for the copyrighted material can fall to almost nothing. As the demand
decreases, ... it becomes effectively unavailable to, as the Constitution puts
it, "promote the progress of science and useful arts." Witness all the
copyrighted books, scientific journals, audio works and visual works that are
out of print or otherwise unavailable because copyright law prevents the new,
low-cost methods of distribution from being utilized.
In the scientific field, this has devastating effects on the advancement of
human knowledge - which is just the opposite of the intent of copyright law.
As a member of a scientific journal's editorial board - and as a senior
citizen - I see reams of manuscripts that just reinvent the wheel. Because the
whole scientific enterprise has become so complex that non-electronic research
is effectively impossible, many young scientists don't know and can't find out
what has already been done from older, copyrighted, paper-based literature.
This results in a huge waste of resources. The same can be said for copyrights
in creative areas such as music and writing, in which older works with limited
distribution could be built upon to "promote the progress of science and useful
A solution to determining which works are in the "Mickey Mouse" category of
copyrights and which are in the more socially valuable "oral rehydration
therapy" class of work is not feasible for a government bureaucracy. However,
if all copyrights were taxed at a fixed (but significant) amount per year to
maintain the copyright..., there would be a significant carrying cost and most
of the copyrighted material would revert to "public domain" and become
available to "promote the progress of science and useful arts." As intellectual
property and copyrights become an even more significant part of our economy,
and as copyright holders ... make claims of "stealing" as though it is real
property, it should be taxed. Relative to copyrights' significance in our
economy, the amount of revenue from this source should be in the hundreds of
billions of dollars per year.
With a proper tax system, publishers like the L.A. Times or scientific
journals may maintain a copyright for only a year or so before letting the
content revert to public domain and letting Google and everyone else utilize
the material for its small, but socially significant, remaining value. The
human enterprise could continue to build on itself ... creative ... ways, with
copyrights only applying to a small subset of this enterprise.
It should also be noted that some of the most valuable and significant
intellectual property and creative works can't be copyrighted. For example,
Mickey Mouse is copyrighted, but E=MC2 could not have been. Which
was truly the more significant creative work?
I'm not so sure about this. If I have something in my house with
sentimental value - a real piece of property worth something to me but worth
nothing to anyone else - people shouldn't be able to take it just because it has
no market value. Should a song with sentimental value but no market value - it was a hit briefly 30
years ago but nobody else cares now but you - be any different? If someone takes
an apple off of my tree and it magically replaces itself instantly so that I have lost
nothing, why should I care? Why should I care if the song falls into the public
domain and someone else sings it? Isn't it the same as the apple since placing the song in the public domain
doesn't stop me from singing it?
Perhaps not. What if someone else sings
the song in public and it's terrible - it appears on YouTube, it is widely
ridiculed, and it becomes known you were the author. It seems like the creator
of the song should have some control over how the song is performed. If the
copyright was purely to protect market value, then I might be in favor of
something like this, particularly work with academic value (though I haven't thought it through completely). But I
think copyrights are more than that, they also allow for control over how works
are used, and a "significant" tax on copyright protection would force some works
to lose this type of protection.
Martin Feldstein says the Federal Reserve bears much of the responsibility
for the current situation in financial markets:
Economic Dilemma, by Martin Feldstein, Commentary, WSJ [open link]:
Although it is too soon to tell whether the United States has entered a
recession, there is mounting evidence that a recession has in fact begun. .... If a recession does occur, it could last longer and be more painful than the
past several downturns because of differences in its origin and character. The
recessions that began in 1991 and 2001 lasted only eight months from the start
of the downturn until the beginning of the recovery. Even the deeper recession
of 1981 lasted only 16 months.
But these past recessions were caused by deliberate Federal Reserve policy
aimed at reversing a rise in inflation. In those cases, the Fed increased real
interest rates until it saw the economic slowdown that it thought would move us
back toward price stability. It then reversed course, reducing interest rates
and bringing the recession to an end.
In contrast, the real interest rate in 2006 and 2007 stayed at a relatively
low level of less than 3%. A key cause of the present slowdown and potential
recession was not a tightening of monetary policy but the bursting of the
house-price bubble... The Fed therefore will not be able to end the recession
as it did previous ones by turning off a tight monetary policy.
The ... principle cause for concern today is the paralysis of the credit
markets. Credit is always key to the expansion of the economy. The collapse of
confidence in credit markets is now preventing that necessary extension of
credit. The decline of credit creation includes not only the banks but also the
bond markets, hedge funds, insurance companies and mutual funds.
Securitization, leveraged buyouts and credit insurance have also atrophied.
The dysfunctional character of the credit markets means that a Fed policy of
reducing interest rates cannot be as effective in stimulating the economy as it
has been in the past. Monetary policy may simply lack traction in the current
credit environment. ...
There is plenty of blame to go around for the current situation. The Federal
Reserve bears much of the responsibility, because of its failure to provide the
appropriate supervisory oversight for the major money center banks. The Fed's
banking examiners have complete access to all of the financial transactions of
the banks that they supervise, and should have the technical expertise to
evaluate the risks that those banks are taking. Because these banks provide
credit to the nonbank financial institutions, the Fed can also indirectly
examine what those other institutions are doing.
The Fed's bank examinations are supposed to assess the adequacy of each
bank's capital and the quality of its assets. The Fed declared that the banks
had adequate capital because it gave far too little weight to their massive off
balance-sheet positions -- the structured investment vehicles (SIVs), conduits
and credit line obligations -- that the banks have now been forced to bring
onto their balance sheets. Examiners also overstated the quality of banks'
assets, failing to allow for the potential bursting of the house price bubble.
The implication of this for Fed supervision policy is clear. The way out of
the current crisis of confidence is not. We can only hope that those who
predict nothing worse than a temporary slowdown are correct.
I think actually the spending in the war might help with jobs…because we’re buying equipment, and people are working. ...
I’d say that the sources
of the economy’s expansion from 2003 to 2007 were, in order, the housing
bubble, the war, and — very much in third place — tax cuts.
Of course, we could have gotten just as much or more stimulus by spending
$10 billion a month on actually useful stuff– think how much domestic
infrastructure could have been built or repaired for the cost of this miserable
war. But the war was what we got.
Keynes had something to say about this:
Pyramid-building, earthquakes, even wars may serve to increase wealth, if
the education of our statesmen on the principles of the classical economics
stands in the way of anything better.
It is curious how common sense, wriggling for an escape from absurd
conclusions, has been apt to reach a preference for wholly “wasteful” forms of
loan expenditure rather than for partly wasteful forms, which, because they
are not wholly wasteful, tend to be judged on strict “business” principles.
For example, unemployment relief financed by loans is more readily accepted
than the financing of improvements at a charge below the current rate of
interest; whilst the form of digging holes in the ground known as gold-mining,
which not only adds nothing whatever to the real wealth of the world but
involves the disutility of labour, is the most acceptable of all solutions.
If the Treasury were to fill old bottles with banknotes, bury them at
suitable depths in disused coalmines which are then filled up to the surface
with town rubbish, and leave it to private enterprise on well-tried principles
of laissez-faire to dig the notes up again (the right to do so being obtained,
of course, by tendering for leases of the note-bearing territory), there need
be no more unemployment and, with the help of the repercussions, the real
income of the community, and its capital wealth also, would probably become a
good deal greater than it actually is. It would, indeed, be more sensible to
build houses and the like; but if there are political and practical
difficulties in the way of this, the above would be better than nothing.
One point on the effectiveness of the current stimulus package, though this
is a bit different than the point above about wasteful spending so I'll keep it
separate. We've heard repeatedly that if people use the rebates to pay down debt, it won't
have as large an impact on consumption and output. But we should be careful.
possible to purchase goods and services on credit worth the (present value of) the $600 rebate now, then pay the credit card off once the rebate check arrives (leaving
no net change in credit). Without careful analysis of the data, i.e. just looking
at what people do with the check after it arrives in the mail, it can appear that
the impact on spending is smaller than it actually is. I'm not sure how large
this effect is - the biggest impact on consumption will occur after the checks arrive - but it's certainly possible that some people are already
spending part of the anticipated rebate, i.e. they are more likely to make a
purchase on credit now knowing the check is coming down the road. Looking only
at what happens after the checks show up in the mail will miss any change in
consumption that comes before the rebates actually arrive.
John Berry says the Fed may disappoint "investors and traders who are
convinced officials will have to do another 50 basis-point cut":
Fed Forecasts Clash With 'Downside Risks' Policy, by John M. Berry, Commentary,
Bloomberg: ''Downside risks'' have become a mantra recited by Fed Chairman
Ben S. Bernanke and his colleagues... Still, it's plain they are all
forecasting nothing worse than slow growth in the first half of the year and a
much better second half. That will be evident this afternoon when details of
the forecasts of the participants in the Federal Open Market Committee's Jan.
29-30 meeting are made public, along with the meeting's minutes.
The officials were supposed to base their forecasts on the assumption of an
''appropriate monetary policy,'' with each of them deciding what that meant. It
won't be spelled out in the forecasts, of course, but I'll bet that they really
would prefer not to keep cutting rates.
After all, consumer price inflation -- both headline and core -- is above
the level Bernanke and other officials want in the long term. And by mid-year,
growth should be accelerating again.
By then, federal payments from the new stimulus package will be flowing to
the vast majority of U.S. households at the same time more of the effect of the
225 basis points worth of interest rate cuts so far will be felt.
Only if Fed officials see strong evidence that their forecasts aren't going
to pan out -- that is, that the additional ''downside risks'' are materializing
-- would it make sense to reduce significantly their 3 percent target for the
overnight lending rate. ...
What happens in the first half of this year is pretty much baked into the
cake. If the U.S. economy is soon going to drop into a recession, as some
economists continue to insist, additional rate cuts probably can't prevent it.
One major concern is that credit supposedly is drying up because of the
continuing turmoil in some financial sectors. Certainly subprime mortgage loans
have disappeared, so has financing for leveraged buyouts and credit conditions
have tightened significantly.
On the other hand, Fed data on credit at commercial banks shows steady
increases in commercial and industrial loans, home equity borrowing and other
real estate loans including those backed by commercial property. Even interbank
lending is expanding.
Moreover, as bad as some recent economic news has been ... it still doesn't
signal recession. ...
If the forecasts being released are indeed the ''most probable,'' then the
policy makers are going to have to stop letting ''downside risks'' drive their
actions. Perhaps that will happen on March 18 with the FOMC disappointing
investors and traders who are convinced officials will have to do another 50
It wouldn't be a bad thing at all for the Fed to demonstrate that it isn't
meekly letting the market dictate its policy.
Do you seem to have fewer friends than you used to? You're normal. But why? Is
it because your work hours have increased? Is it the internet? Why do we have fewer
friends than we used to?:
The effect of hours of
work on social interaction, by Karine Lamiraud and Henry Saffer, Vox EU: Do
you know who your friends are? Have you seen them lately? Data from both the
United States and France show that some important forms of social interaction
are on the decline (Putnam 1996; Blanpain and Pan Ké Shon 1998). While
membership in social groups has remained relatively stable over time, there has
been a decline in visiting friends, neighbours, and relatives. This decline in
visiting is not simply due to friends switching to email communication and
socializing at work. Evidence of a true decline in friendship is provided by
McPherson, Smith-Lovin and Brashears (2006), who document a decline in the
reported number of close friends over the past 20 years. Understanding the
determinants of the decline in visiting has attracted interest in both the
academic literature and in the popular press. It raises concerns on both sides
of the Atlantic because social interaction is thought to have positive effects
on the mental and physical health of individuals and the efficiency of economic
Are work and friends complements or substitutes? An intuitively
plausible reason offered for the recent decline in social interaction is growth
in hours of work per capita. In particular, the increase in female labour force
participation has increased hours of work per capita, which could result in less
social interaction. However, it has also been argued that individuals who work
longer hours are more inclined to both civic engagement and visiting with
friends and neighbours. This could occur if there were an important unobserved
third factor such as ambition that affects both working hours and social
contacts. For example, an individual who is ambitious may choose to work long
hours and to participate in civic organisations and meet with friends and
neighbours more than a less ambitious individual. In this case, hours of work
and social interaction would be positively related.
The theory of household production, developed by Gary Becker (1965), provides
the basis for an empirical model of social interaction. Becker’s theory
emphasises the role of time in consumption and that time is a limited resource.
We (Saffer and Lamiraud, 2008) employ Becker’s theory to derive a demand for
social interaction. This demand function, like any other demand function, shows
that the quantity of social interaction demanded depends on its own price, the
price of other goods, income and taste. The price of social interaction is
positively related to the individual’s valuation of their non-working time. This
price is usually approximated by the individual’s wage. However, in our study,
we assume that the price of non-working time is a function of the supply and
demand for this type of time. As hours of work increase, the supply of
non-working time decreases. This raises the price of non-working time. Education
is also an empirical proxy for the price of time. Education is assumed, to
varying degrees, to increase productivity. An increase in the productivity of
time reduces the time cost of social interaction.