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Friday, February 29, 2008

Paul Krugman: Trade and Wages, Reconsidered

Paul Krugman posted a link to a very preliminary draft of a paper he is writing on the relationship between trade and wages. Here is the introduction and concluding paragraph:

Trade and Wages, Reconsidered, by Paul Krugman, February 2008: This is a very preliminary draft for the spring meeting of the Brookings Panel on Economic Activity. Comments welcome.

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.

Krugt1

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 developments.

Krugf1

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.[1] 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 countries.

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.

    Posted by on Friday, February 29, 2008 at 07:29 PM in Economics, Income Distribution, International Trade | Permalink  TrackBack (0)  Comments (55)


    Hillary Clinton and NAFTA

    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 Mexico.

    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.

      Posted by on Friday, February 29, 2008 at 06:17 PM in Economics, International Trade, Social Insurance | Permalink  TrackBack (0)  Comments (30)


      Mortgaging the Nest Egg

      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 Studies (pdf 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.

      See more discussion here, here, and here.

      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 the population.

      Update: Megan McArdle follows up with comments on forced saving as a solution to this problem.

        Posted by on Friday, February 29, 2008 at 02:21 AM in Economics, Saving, Social Security | Permalink  TrackBack (0)  Comments (103)


        Why Bubbles Occur

        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, well, mammoth.

        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.

          Posted by on Friday, February 29, 2008 at 01:29 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (30)


          Free to Choose: A Debate between Milton Friedman, Jamie Galbraith, and David Brooks

          Jamie Galbraith debates Milton Friedman and David Brooks. Arnold Schwarzenegger also makes an appearance at the beginning. The debate begins about halfway through the video (from 1990):

            Posted by on Friday, February 29, 2008 at 12:56 AM in Economics, Video | Permalink  TrackBack (0)  Comments (49)


            Multilateralising Regionalism: The WTO’s Next Challenge

            Richard Baldwin says it's time for the WTO to "adjust to the new realities of regionalism" (more on regionalsim):

            Multilateralising 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.

            Continue reading "Multilateralising Regionalism: The WTO’s Next Challenge" »

              Posted by on Friday, February 29, 2008 at 12:27 AM in Economics, International Trade | Permalink  TrackBack (0)  Comments (3)


              links for 2008-02-29

                Posted by on Friday, February 29, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (11)


                Thursday, February 28, 2008

                Recessions and Democratic Change in Sub-Saharan Africa

                Do recessions cause democracies?:

                Recessions open a window of opportunity for democratic change in sub-Saharan Africa, by Antonio Ciccone, Vox EU: Four out of five Sub-Saharan African countries were autocracies in 1980, but twenty-five years later there were more democracies than autocracies. One cannot help wondering why some countries became democracies while others didn’t. What factors trigger democratic change?

                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 points.

                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.

                References

                Acemoglu, D. and J. Robinson (2006). Economic Origins of Dictatorship and democracy. New York, Cambridge University Press.

                Brückner, M. and A. Ciccone (2008). “Rain and the Democratic Window of Opportunity,” February, CEPR Discussion Paper 6691.

                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?

                  Posted by on Thursday, February 28, 2008 at 05:40 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (10)


                  Fed Watch: This Train Doesn’t Stop

                  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 offered by Vice 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 intended effects.

                  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 inflation pressures.

                  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:

                  Continue reading "Fed Watch: This Train Doesn’t Stop" »

                    Posted by on Thursday, February 28, 2008 at 12:57 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (0)  Comments (42)


                    NAFTA Isn't the Problem in Ohio

                    Brad DeLong provides a follow-up to the "Reactionary, Populist, Xenophobic and Just Plain Silly" Roundup:

                    Stagnant Wages and Ohio: NAFTA Isn't the Problem: An excellent column by David Leonhardt:

                    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.

                    This is from a previous post:

                    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 available.
                    • 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 judicial process.
                    • 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.

                      Posted by on Thursday, February 28, 2008 at 12:48 AM in Economics, International Trade, Social Insurance | Permalink  TrackBack (0)  Comments (98)


                      links for 2008-02-28

                        Posted by on Thursday, February 28, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (15)


                        Wednesday, February 27, 2008

                        "Does Stabilizing Inflation Contribute to Stabilizing Economic Activity?"

                        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?

                        Continue reading ""Does Stabilizing Inflation Contribute to Stabilizing Economic Activity?"" »

                          Posted by on Wednesday, February 27, 2008 at 05:06 PM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (30)


                          New Chart, for Descartes

                          This is from Lee Arnold who says:

                          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.

                            Posted by on Wednesday, February 27, 2008 at 02:54 PM in Video | Permalink  TrackBack (0)  Comments (21)


                            Bernanke's Testimony before the House Financial Services Committee

                            Here's a video of Ben Bernanke's testimony this morning before the House Financial Services Committee and a link to a text version of his prepared testimony (video expires in 15 days):


                            Discussion: Bloomberg, NY Times, Financial Times, WSJ Blog. Each highlights Bernanke's indication that the Fed is prepared, if it is needed, to cut rates further.

                              Posted by on Wednesday, February 27, 2008 at 11:35 AM in Economics, Monetary Policy, Video | Permalink  TrackBack (0)  Comments (11)


                              "Reactionary, Populist, Xenophobic and Just Plain Silly" Roundup

                              This column, "The dangerous protectionism of Barack Obama," drew several responses. First, Greg Mankiw:

                              "reactionary, populist, xenophobic and just plain silly": That's how economists Willem Buiter and Anne Sibert describe the Patriot Employer Act.

                              Free Exchange:

                              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.

                              Felix Salmon:

                              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. ...

                              Andrew Leonard:

                              "The 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 silly."

                              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 Romney...

                              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 electioneering. ...

                              Barack Obama is playing to win. This may dismay some economists. Maybe they should try winning an election in the American Midwest in 2008.

                                Posted by on Wednesday, February 27, 2008 at 02:45 AM in Economics, International Trade, Policy | Permalink  TrackBack (0)  Comments (69)


                                How Principled Is It?

                                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. ...

                                 

                                  Posted by on Wednesday, February 27, 2008 at 02:43 AM in Economics, Housing, Policy | Permalink  TrackBack (0)  Comments (4)


                                  "Deterrence Effects of Prohibitions and Remedies in Mergers"

                                  Does merger policy deter undesirable merger outcomes?:

                                  Competition policy at work: Deterrence effects of prohibitions and remedies in mergers, by Pedro Pita Barros, Joseph A. Clougherty, and Jo Seldeslachts, Vox EU: Evaluations of merger policy usually ask whether the correct decision was made in actual merger cases. Yet by only considering the direct effects of merger policy, these studies may simply be detecting the ‘tip of the iceberg’ with regard to policy implications. Active merger enforcement can also deter firms from engaging in merger behaviour and/or from engaging in certain types of mergers – the ‘what lies beneath’ element of merger policy. Moreover, deterrence effects may be even more important than the direct effects of actual merger investigations.

                                  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.

                                  Continue reading ""Deterrence Effects of Prohibitions and Remedies in Mergers"" »

                                    Posted by on Wednesday, February 27, 2008 at 02:39 AM in Economics, Market Failure, Policy, Regulation | Permalink  TrackBack (0)  Comments (1)


                                    links for 2008-02-27

                                      Posted by on Wednesday, February 27, 2008 at 12:26 AM in Links | Permalink  TrackBack (0)  Comments (27)


                                      Tuesday, February 26, 2008

                                      "A Mandate Isn't Mandatory"

                                      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?:

                                      A mandate isn't mandatory, by Jacob S. Hacker, Commentary, LA Times: ...As a health policy expert, ... I advised both Clinton and Obama on healthcare... In the context of a broad overhaul, I think an individual mandate is valuable, and I'm disappointed by some of Obama's attacks on the idea.

                                      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 improvement.

                                      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 healthcare.

                                      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.

                                        Posted by on Tuesday, February 26, 2008 at 02:48 AM in Economics, Health Care, Policy, Politics | Permalink  TrackBack (0)  Comments (106)


                                        Credit is Due

                                        Creditcard
                                        "The Plastic Revolution"               
                                         

                                          Posted by on Tuesday, February 26, 2008 at 12:34 AM in Economics, Financial System | Permalink  TrackBack (1)  Comments (22)


                                          "Accounting For the Bond-Yield Conundrum"

                                          Tao Wu of the Dallas Fed on what has come to be known as "the conundrum":

                                          Accounting 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 recent experience.”

                                          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 actions.

                                          Continue reading ""Accounting For the Bond-Yield Conundrum"" »

                                            Posted by on Tuesday, February 26, 2008 at 12:31 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (15)


                                            Could Sonar Help the Whale Watching Industry Too?

                                            We should bomb migratory bird nesting sites because that makes the surviving members of the species really valuable:

                                            Teh awesome, by Henry: Hilzoy, rejoicing the departure of the truly odious William J Haynes II, provides this mind-squirbling story from Haynes’ earlier career.

                                            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)” ...

                                              Posted by on Tuesday, February 26, 2008 at 12:24 AM in Economics | Permalink  TrackBack (0)  Comments (6)


                                              links for 2008-02-26

                                                Posted by on Tuesday, February 26, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (30)


                                                Monday, February 25, 2008

                                                Promoting Economic Mobility

                                                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:

                                                Promoting Mobility, by Lane Kenworthy: Opportunity for upward mobility is key to the American dream. What does our government do to assist it?

                                                A recent report (pdf) by the Economic 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 much.

                                                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. Moreover, homeownership discourages 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. ...

                                                3. Encourage lifelong learning. ...

                                                4. Make college more affordable. ...

                                                5. Universal health care. ...

                                                6. Expand the Earned Income Tax Credit. ...

                                                7. Wage insurance. ...

                                                8. Boost income maintenance. ...

                                                9. Job placement assistance and public employment as a last resort. ... [...read Lane's discussion of the nine mobility policies...]

                                                With respect to the income maintenance proposal, Stephen Gordon uses a set of graphs derived from a simulated macroeconomic model to analyze a guaranteed income proposal for Canada:

                                                On the political economy of a basic income, by Stephen Gordon: The idea of a basic income - it's generally referred to as a Guaranteed Annual Income in Canada - has been floated again. My initial reaction was that this is such a good idea that it's hard to figure out why we don't have it already.

                                                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.

                                                The gory details are below the fold. ...

                                                It's hard to argue against equal opportunity, an important factor in economic mobility and in reducing economic inequality, but we are a long way from that ideal.

                                                  Posted by on Monday, February 25, 2008 at 02:22 PM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (39)


                                                  "Mr. Kristol"

                                                  Dani Rodrik has been waiting for this chance:

                                                  Mr Kristol, you get a C in economics, by Dani Rodrik: There! I said it, and I feel better already.  I have waited a really long time to do this, and ... Bill Kristol finally gave me an opportunity with his column in today's New York Times. ...

                                                  [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:

                                                  We must curb international flows of capital, by Dani Rodrik and Arvind Subramanian, Commentary, Financial Times: First large downhill flows of capital – from rich countries to poor countries – led to the Latin American debt crisis of the early 1980s. In the 1990s similar flows begat the Asian financial crisis.

                                                  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.

                                                  Continue reading ""Mr. Kristol"" »

                                                    Posted by on Monday, February 25, 2008 at 11:18 AM in Economics, Income Distribution, Productivity | Permalink  TrackBack (0)  Comments (31)


                                                    Paul Krugman: Capitalism's Mysterious Triumph

                                                    This is something Paul Krugman wrote about how capitalism defeated communism, "the basic problem was not technical, but moral":

                                                    Capitalism's 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?

                                                    Continue reading "Paul Krugman: Capitalism's Mysterious Triumph" »

                                                      Posted by on Monday, February 25, 2008 at 01:00 AM in Economics | Permalink  TrackBack (0)  Comments (114)


                                                      links for 2008-02-25

                                                        Posted by on Monday, February 25, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (1)


                                                        Sunday, February 24, 2008

                                                        Do Elections Matter for Economic Policy?

                                                        Kevin Grier says, reluctantly, that the blogospheric acclaim for Tyler Cowen's argument that elections are unimportant for economic policy may not have been warranted:

                                                        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 working majority?

                                                        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.

                                                          Posted by on Sunday, February 24, 2008 at 03:33 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (15)


                                                          Preventing Foreclosures

                                                          Larry Summers offers another solution to avoid the macroeconomic risks associated with mounting home foreclosures. Rather than direct government intervention (as Alan Blinder advocates), he proposes changes in bankruptcy law to facilitate settlements between borrowers and lenders:

                                                          Prevent US foreclosures, by Lawrence Summers, Commentary, Financial Times: The American economic outlook remains highly uncertain. But macro­economic policy is now properly aligned... To the extent conditions ... permit, monetary and fiscal policy are appropriately poised to provide further stimulus.

                                                          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 bases.

                                                          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 system.

                                                          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 today.

                                                          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 proposal 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.

                                                            Posted by on Sunday, February 24, 2008 at 01:20 PM in Economics, Financial System, Housing | Permalink  TrackBack (0)  Comments (34)


                                                            Not Again!

                                                            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.

                                                              Posted by on Sunday, February 24, 2008 at 11:04 AM in Politics | Permalink  TrackBack (0)  Comments (34)


                                                              Health Insurance Markets

                                                              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) Information transparency:...

                                                              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. ...

                                                                Posted by on Sunday, February 24, 2008 at 03:03 AM in Economics, Health Care, Market Failure | Permalink  TrackBack (0)  Comments (45)


                                                                links for 2008-02-24

                                                                  Posted by on Sunday, February 24, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (2)


                                                                  Saturday, February 23, 2008

                                                                  "From the New Deal, a Way Out of a Mess"

                                                                  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 $750 billion.)

                                                                  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.

                                                                    Posted by on Saturday, February 23, 2008 at 04:20 PM in Economics, Housing, Policy, Social Insurance | Permalink  TrackBack (0)  Comments (149)


                                                                    Blowing in the Wind

                                                                    What do you think of wind power?:

                                                                    Move Over, Oil, There’s Money in Texas Wind, by Clifford Krauss, NY Times: ...Texas, once the oil capital of North America, is rapidly turning into the capital of wind power. After breakneck growth the last three years, Texas has reached the point that more than 3 percent of its electricity ... comes from wind turbines.

                                                                    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.” ...

                                                                      Posted by on Saturday, February 23, 2008 at 02:51 AM in Economics, Environment | Permalink  TrackBack (0)  Comments (35)


                                                                      Concessions on Movie Ticket Pricing?

                                                                      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 doors.

                                                                      "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 Hartmann. ...

                                                                        Posted by on Saturday, February 23, 2008 at 12:47 AM in Economics | Permalink  TrackBack (0)  Comments (9)


                                                                        links for 2008-02-23

                                                                          Posted by on Saturday, February 23, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (3)


                                                                          Friday, February 22, 2008

                                                                          Sachs: We Need Global Cooperation to Promote Clean Energy Technology

                                                                          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 dangerous...

                                                                          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 sustainable development.

                                                                          Global cooperation would be good, but I'd settle for my own government doing more to encourage technological development in this area.

                                                                            Posted by on Friday, February 22, 2008 at 01:57 PM in Economics, Environment | Permalink  TrackBack (0)  Comments (40)


                                                                            Paul Krugman: Don’t Rerun That ’70s Show

                                                                            Is the next administration ready to deal with an economy that may be headed for a prolonged period of weakness?:

                                                                            Don’t Rerun That ’70s Show, by Paul Krugman, Commentary, NY Times: Will the next president be the second coming of Jimmy Carter? Given Thursday’s economic headlines, full of dire warnings about the return of 1970s-style stagflation, you might think so...

                                                                            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 digits...

                                                                            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 effectiveness?

                                                                            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.

                                                                              Posted by on Friday, February 22, 2008 at 12:35 AM in Economics, Policy, Politics | Permalink  TrackBack (0)  Comments (122)


                                                                              links for 2008-02-22

                                                                                Posted by on Friday, February 22, 2008 at 12:27 AM in Links | Permalink  TrackBack (0)  Comments (11)


                                                                                Thursday, February 21, 2008

                                                                                Law and Order

                                                                                Fix a price. Go to jail?:

                                                                                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 prosecutors. ...

                                                                                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 confess.

                                                                                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.

                                                                                  Posted by on Thursday, February 21, 2008 at 08:19 PM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (13)


                                                                                  NAFTA

                                                                                  Continuing with the discussion on illegal immigration and economic development in Mexico, Froma Harrop says to quit bashing NAFTa:

                                                                                  NAFTA Gets a Bum Rap, by Froma Harrop, Commentary, RCP: "NAFTA bad" has become Democratic shorthand to explain the misery spreading through America's industrial heartland. ...

                                                                                  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 advantage.

                                                                                  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 help. ...

                                                                                  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?

                                                                                    Posted by on Thursday, February 21, 2008 at 10:33 AM in Development, Economics, International Trade | Permalink  TrackBack (0)  Comments (47)


                                                                                    Elitist Fools and Hopeless Blowhards

                                                                                    A failed attempt to change Lou Dobbs mind on immigration:

                                                                                    Broken Borders and Dover Sole: My Lunch With Lou Dobbs, by Lawrence Downes, Commentary, NY Times: So I was having lunch ... with Lou Dobbs..., locked in disagreement over who cared more about working people, him or me.

                                                                                    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 scoundrelly. ...

                                                                                    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 already here.

                                                                                    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 Minutemen.

                                                                                    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 midst.

                                                                                    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):

                                                                                    Obama: "Work with Mexico: Obama believes we need to do more to promote economic development in Mexico to decrease illegal immigration."

                                                                                    Clinton: 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.

                                                                                      Posted by on Thursday, February 21, 2008 at 12:55 AM in Economics | Permalink  TrackBack (0)  Comments (173)


                                                                                      links for 2008-02-21

                                                                                        Posted by on Thursday, February 21, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (10)


                                                                                        Wednesday, February 20, 2008

                                                                                        Self-Selection, Conservatives, and Left-Leaning Universities

                                                                                        Do conservatives self-select out of academic careers?:

                                                                                        Do Conservatives Self-select Away from Academic Careers?, Lee Sigelman, The Monkey Cage: Academicians in this country, especially those in the social sciences and humanities, are disproportionately left of center, or at least centrist, politically, rather than conservative. That finding has cropped up in so many surveys over the years that I won’t even bother to cite sources. Let’s just take it as a fact and go from there.

                                                                                        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 here. ...

                                                                                        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:

                                                                                        University creates a position to promote conservative thought, by David Accomazzo, Longmont Times-Call: The College of Arts and Sciences at the University of Colorado has approved an academic position specializing in conservative thought to foster ideological 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 advisory board.

                                                                                        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, Hilliard said.

                                                                                        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 conservative.”

                                                                                        [A letter to the editor from my pre-blogging days. I'd write it a bit different today, but not much.]

                                                                                          Posted by on Wednesday, February 20, 2008 at 01:32 PM in Economics, Universities | Permalink  TrackBack (1)  Comments (50)


                                                                                          Taxing Copyrights?

                                                                                          Should copyrights be taxed so that socially valuable work with little economic value is forced into the public domain?:

                                                                                          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 arts."

                                                                                          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.

                                                                                            Posted by on Wednesday, February 20, 2008 at 02:58 AM in Economics, Regulation | Permalink  TrackBack (1)  Comments (103)


                                                                                            Martin Feldstein: We Can Only Hope

                                                                                            Martin Feldstein says the Federal Reserve bears much of the responsibility for the current situation in financial markets:

                                                                                            Our 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.

                                                                                              Posted by on Wednesday, February 20, 2008 at 12:33 AM in Economics, Monetary Policy, Regulation | Permalink  TrackBack (0)  Comments (22)


                                                                                              Better Than Nothing

                                                                                              Paul Krugman has a quote from Keynes on fiscal stimulus packages that are less than perfect:

                                                                                              Bush is right about something, by Paul Krugman: Hate to say this, but he’s right when he says

                                                                                              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. It's 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.

                                                                                                Posted by on Wednesday, February 20, 2008 at 12:24 AM in Economics, Fiscal Policy | Permalink  TrackBack (0)  Comments (13)


                                                                                                Will the Fed Disappoint Financial Markets?

                                                                                                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 basis-point cut.

                                                                                                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.

                                                                                                  Posted by on Wednesday, February 20, 2008 at 12:15 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (8)


                                                                                                  links for 2008-02-20

                                                                                                    Posted by on Wednesday, February 20, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (22)


                                                                                                    Tuesday, February 19, 2008

                                                                                                    Friends: Why is Social Interaction Declining?

                                                                                                    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 institutions.

                                                                                                    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.

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                                                                                                      Posted by on Tuesday, February 19, 2008 at 04:45 PM in Economics | Permalink  TrackBack (0)  Comments (64)