Economist's View

The Fed Cuts the Target Rate to 2%

The Fed decided to cut rates to 2%. Here's the statement:

Press Release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.

Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco.

More later (in a conference on financial innovation as I write this), but quickly note the intent to pause, though that depends upon what future incoming data tell them about inflation and output. Also note that only four banks submitted requests to lower the discount rate indicating some disagreement over today's policy move.

Update: More here.

Slow First Quarter GDP Growth

The BEA announced today that growth in the first quarter is estimated to be .6%, though that figure could be (and probably will be) revised later.

There is a lot of discussion  about whether this means we can say the economy is in a recession or not (Hamilton, Ritholtz, Krugman). Call it want you want - some people use the term growth recession to describe the current situation - but whatever we call it, a growth rate of .6% is slow (see Krugman's comments on employment as well).

The report was better than many people expected, but this isn't good news:

The U.S. economy didn't slump in the first quarter as some had feared it would, but its weak climb was the product of a likely unintended inventory buildup.

This isn't good news either:

Nonresidential fixed investment contributed -0.3%; a small factor in the total, but a development that worries Calculated Risk.

And a warning that there can be considerable lags in the adjustment process:

Four mega-dangers international financial markets face, by Dennis J Snower, Vox EU: Day after day new, alarming news emerges from the world’s financial markets, and day after day the public is surprised by how bad it is. But instead of wringing our hands, let’s ask ourselves an important, unconventional question: What is more surprising: that financial markets have turned from bad to worse, or that we continue to be surprised by each successive piece of adverse news?

Brad DeLong: McCain and the Decline of US

Brad DeLong says America will be much poorer if John McCain is elected president:

McCain and the decline of US, by J Bradford DeLong, Project Syndicate: Back in 1981, America’s Republican Party gave up all belief that the government’s budget ought to be balanced. The idea took hold that tax cuts should be undertaken all the time, at every opportunity, because reducing taxes supposedly raised revenue. ...

John McCain – who once criticised George W Bush’s tax cuts as imprudent and refused to vote for them – has succumbed to this potion. He appears to be proposing further tax cuts that promise to cost the US Treasury some $300bn a year, to “offset” them with cuts in earmarked spending accounted for at $3bn a year, and somehow to balance the budget.

We know the consequences: McCain’s fiscal policy is likely to be standard Republican fiscal policy – and since 1981, standard Republican fiscal policy has increased the ratio of gross federal debt to GDP by nearly 2% per year. By contrast, a typical post-WWII Democratic administration has reduced the debt-to-GDP ratio by more than 1% per year. This is one of the issues at stake in this year’s presidential election.

Policies that ignore the level of government debt lead to the currency’s collapse, depression (due to the resulting disruption of the sectoral division of labour), and high inflation – perhaps hyperinflation. Often, the guilty blame the economic catastrophe on the sinister manipulations of foreigners like the “gnomes of Zurich” or the IMF. The US is far from that point. But even in the shorter run – over the next two presidential terms, say – the costs of a high deficit and rapid debt growth would be substantial.

A growing debt-to-GDP ratio would ... crowd out investment, as resources that would otherwise go to fund productive investment instead support private or public consumption.

Since 1981, the US has been lucky in that inflows of capital from abroad financed the growth of government debt. At some point, this will stop, and increases in deficits will trigger capital flight from the US.

Suppose that over the next eight years larger deficits trigger neither extra capital inflows nor capital outflows, and suppose that a lower-investment America is a poorer America, with a gross social return on investment of 15% per year.

By 2016, America’s productive potential would be smaller by an amount that would reduce real GDP by 3.6%..., or roughly $3,000 per worker. In a poorer America, fewer businesses would find it worthwhile to entice ... workers ... into the labor force, and perhaps 500,000 net jobs would disappear.

In getting from here to there over the next eight years, a higher-debt America would see productivity growth slow by perhaps a third of a percentage point per year. Average unemployment would then ... rise... The gross correlations between productivity growth and average unemployment found in the 1970’s, 1980’s, 1990’s, and 2000’s would increase the economy’s natural rate of unemployment by about one-fifth of a percentage point, costing an additional 500,000 jobs.

And a higher-debt America is one in which savers and lenders would have a justified greater fear that the government would resort to inflation in order to repudiate part of its outstanding debt.

The Federal Reserve would then have to fight inflation – putting upward pressure on unemployment – in order to reassure savers and lenders of its willingness to guard price stability. There are not even crude gross correlation-based estimates of the size of this effect, but economists believe that it is very real. Would it cost a negligible number of jobs? A quarter-million? A million?

Add it all up, and you can reckon on an America that in 2016 that will be much poorer if McCain rather than Barack Obama or Hillary Rodham Clinton is elected president. ... [U]nder McCain, the wedge between public spending and taxes would be larger, Americans would feel richer, and they would spend more at the expense of “posterity” eight years down the road. Ronald Reagan might have approved. After all, as he put it: “Why should I do anything for posterity? What has posterity ever done for me?” Or was that Groucho Marx?

"What to Do About Gas Prices?"

Jonah Gelbach emails that he has signed on to post periodically at Economists for Obama:

What to Do About Gas Prices?, by Jonah Gelbach: As an economist, as a person who worries about climate change, and as someone who believes the Democratic Party's electoral success is very important, if only to spare us more of the damage that the GOP has done over the last quarter-century of its hammer lock on federal policy, I find political discussion of gas taxes to be extremely frustrating to watch.

Democratic politicians regularly use high gas prices as a club with which to beat Republicans. I understand that politicians use the issues they think will work. And the nexus between oil company profits and GOP officials whose policies have been awful for most people in the bottom four quintiles of the income distribution (and probably plenty in the top one) has got to be pretty tough for Democratic candidates and officials to resist.

But the fact of the matter is that gas prices should be high. They should be high for the very simple and now very obvious reason that the pressure on the world's climate needs to be reduced. Our country's foolish policy of keeping gas prices low while providing implicit (and sometimes explicit) subsidies to the vehicles that get the worst mileage should have ended many years ago. Demand-side pressure on gas prices is finally pushing gas prices into the range they should have been for many years.

But that last paragraph tells only part of the story. One effect of the low-gas price policies we've pursued for so long is that it's induced many people to buy very fuel-inefficient cars and trucks. These are the people who are getting nailed hardest in the wallets by today's high gas prices, and I don't blame them for being upset. If you drive a vehicle that gets 18 miles per gallon for 12,000 miles a year, then you use about 670 gallons of gas a year. Even a $1.00 per gallon increase in the price of gas over a period of one year alone therefore translates into more than the stimulus tax rebate that a single person with sufficient income will receive over the next month. A married couple each of whom drives such a car 12,000 miles a year will receive a smaller rebate than the one-year cost of a $1 per gallon gas price hike.

By any reasonable standard, the increase in gas prices translates into real money for a huge number of people in this country, especially under current economic conditions.

But since the reason this is true is that American consumers have been induced to buy inefficient gas guzzlers, with serious environmental consequences, policies that would reduce the price of gas should be the last thing we consider. (On this score, the gas tax holiday that Sens. McCain and Clinton have proposed at least has the virtue that it would likely do very little, leading to at most a very small change in the price of gas; McCain's proposal would add to the deficit by increasing windfall profits of oil companies, while Clinton at least has proposed a new windfall profits tax to undo her proposal's provision of windfall profits.)

So what to do?

Random Notes

A few quick notes from the Milken Institute Global Conference:

"The president would not understand dynamic evolutionary stochastic processes," From "A Discussion with Nobel Laureates in Economics," Gary Becker, Edmund Phelps, Myron Scholes, and Michael Spence, Moderator: Michael Milken.

As I was riding down the elevator this morning, the car stopped and Muhammad Yunus got on. I said hi. He said hi back.

In a lunchtime quiz, 45% of the people in the audience thought the very first Nobel prize in economics went to Hayek.

When Steve Forbes used the words "flat tax," some people in the audience began applauding. The also applauded every time he used the phrase "tax cut."

The session "Harnessing Growth to Break Poverty's Grip on the Developing World," with Ricardo Hausmann, Myron Scholes, and Maria Eitel, and moderated by Michael Spence, was very good. Part of it was about monkeys in trees. Maria Eitel, president of the Nike foundation, was also very persuasive in arguing for more aid to women. Currently, only about a nickel of every development dollar is devoted to improving the economic prospects for women in developing countries, but there can be huge payoffs from investment in this area (Michael Spence consulted on this work). The political and social problems surrounding investment in women were also interesting. Essentially, even though there are large long-term benefits to helping women, it is in nobody's short-term interest to take women out of their traditional role in the family and community where they provide water, firewood, food for the family, care for sick family members, are expected to provide insurance for the family by dropping out of school if the family needs help, and so on. The key has been to stop trying to attack this as a political or social issue, and instead show families that it is in their economic interest to allow their daughters to attend school, marry later, etc., and then use targeted aid programs that create the correct incentives (e.g. micro loans that provide more help to the family than the daughter can, and are only available if the daughter is in school).

The session "State of the State of Wall Street: Creating Opportunity Out of Chaos," with Bennett Goodman, Senior Managing Partner, GSO Capital Partners LP; Kenneth Griffin, Founder, President and CEO, Citadel Investment Group LLC; Kenneth Moelis, CEO, Moelis & Company; Charles Ward III, President, Lazard Ltd.; Chairman, Lazard Asset Management Group; Peter Weinberg, Partner, Perella Weinberg Partners; Moderator: Paul Calello, CEO, Investment Bank, Credit Suisse was interesting. The panelists clearly understand that some sort of increased regulation of the financial sector will be forthcoming, but they are very worried about the form that regulation will take (and issued the usual threats, e.g. we'll move to other countries). It was clear they plan to be proactive in trying to shape the regulatory changes. They were very supportive of the Fed's bailout of Bear Stearns and changes to the discount window (no surprise there), though one panelist who ran a hedge fund did complain about not having access to the newly designed discount window while other firms did. They were very grateful that sovereign wealth funds were available to provide needed capital, and they were much more optimistic about economic prospects on Main street where they believe there is only a minor contraction and chance of a quick recovery, than about the prospects on Wall street, where they see a depression and a much more drawn out process of recovery.

Update: The elevator keeps messing with me. I was waiting to go down for the dinner thing, the door opens, it's crowded, so I wave it off. But some guy says no, there's room, get on, and people scrunch to make space. I look up and it's Michael Milken. It's the Beverly Hilton, he's paying for the room, my dinner, etc., so I did what I was told and got on the elevator. I did say thanks. Weird.

As for the panels during dinner, I discovered that I don't like Bill Bennett any more in person than I do on TV. Jerry Brown was better, CNN's Bill Schneider was more entertaining than I expected, though from an entertainment perspective John cleese in the earlier panel was better yet. Nobody said anything particularly surprising, except, perhaps, the begrudging (and somewhat backhanded) respect Bennett gave to Clinton for her toughness and perseverance. Still, the consensus was it would be McCain versus Obama, and that the identity each carries into the election will be the determining factor (e.g. McCain as feeble old man or tough war hero, and the extent that Obama will continue to be identified with Wright, elitism, Ayers, etc. - Brown was more optimistic than Bennett that these issues would fade over time).

I have more business cards than I can ever remember having at one time. I didn't bring any (because I've never bothered to get any), so when I'm given one I just take it and say thanks. I always feel kind of awkward at that moment. Then again, I can't put faces with the cards I've been given, so maybe being a big business card dork actually helps with the longer-term memory imprinting.

Because I'm a blogger, they gave me a press pass. That's kind of cool I guess, or so I thought at first, but it doesn't give you any extra privileges except a separate work area I had no use for. It's like a cat bell that tells people you might report on what they say, and that makes some of them reluctant to answer questions. It took me awhile to realize that.

links for 2008-04-30

• Gas tax follies - Paul Krugman Blog
• Bair Seeks Government Loans to Aid Homeowners - WSJ Economics Blog
• Treasury considers new ways for Fed to use powers - FT
• Why Are Workers Unhappy, With Only 5.1% Unemployed? - Jeff Frankel
• What to Do About the Oil Crisis - Robert Reich
• Noble Eagles, Nasty Pigeons, Biased Humans - New York Times
• Curse of the Clintons - Thomas Palley
• From Chief Prosecutor To Critic at Guantanamo - washingtonpost.com
• What to Do About Gas Prices? - Jonah Gelbach
• Shortages Threaten Farmers’ Key Tool: Fertilizer - New York Times
• Dumb as We Wanna Be - Thomas Friedman

Brad DeLong: Twenty First-Century Banking

Brad DeLong on the moral hazard implications of recent Fed policy moves:

Twenty First-Century Central Banking, by Brad DeLong: The problem of dealing with moral hazard in twenty first-century central banking has taken an interesting twist. Twice in the past decade the Federal Reserve has intervened in cases in which specific institutions ... that the Federal Reserve ... has concluded are too big to be allowed to fail through standard processes. The two institutions are the hedge fund Long Term Capital Management--LTCM--in 1998, and the bank Bear-Stearns in 2008.

In 1998 LTCM had suffered major losses on a mark-to-current-market basis (although its long-term prospects in the event of global financial recovery from the crisis looked correspondingly good), and appeared both illiquid and--if forced to liquidate its positions at then-current values...--insolvent. Alan Greenspan and Peter Fisher at the New York Fed gathered all of the Federal Reserve's major creditors in a room, told them that they had a problem, and told them that they should solve it: that systemic risk would be created by an LTCM bankruptcy and liquidation and that the Fed did not want to go there. The creditors agreed to cooperate and split both the liability and the upside (with the exception of Bear Stearns, that declined)... The ... equity of LTCM's principals and investors was confiscated--to the dismay of LTCM's principals and investors, some of whom believe that they would have been able to get a much better split of the upside had they been allowed to play their creditors off against each other.

In 2008 Bear Stearns had suffered major losses on a mark-to-current-market basis (although its long-term prospects in the event of global financial recovery from the crisis looked correspondingly good), and appeared both illiquid and--if forced to liquidate its positions at then-current values...--insolvent. Ben Bernanke and Tim Geithner at the New York Fed declared that systemic risk would be created by a Bear Stearns bankruptcy and liquidation, that the Fed did not want to go there, and that the only deal they would fund and support would be a deal that sold Bear Stearns to J.P. MorganChase at $2 (later raised to $10) a share, and the Federal Reserve kicked into the deal a put on Bear Stearns assets that one might speculate had a full-information liquid-market value of perhaps $3 billion. Various speakers for principals and investors in Bear Stearns protested that this effective confiscation of their equity value was unfair and inappropriate...

We now have two precedents. If the Federal Reserve judges that a major financial institution:

• is too big to fail in that its failure will generate systemic risk
• has followed portfolio strategies that have produced inappropriate and excessive leverage
• requires immediate action

then the Federal Reserve will intervene to structure and support a deal that leaves principals and investors in the offending systemic risk-creating institution with effectively zero entity. Counterparties will be rescued. Principals and investors will not--even if normal more lengthy legal and bargaining processes would give principals and investors a share of the equity value on the table.

This is not the arms-length equal-treatment impersonal-rule-of-law ideal to which a government should aspire. This does, however, seem to get the incentives about right. ...

These two precedents suggest that the Federal Reserve is evolving a case-law-of-twenty-first-financial-crisis that is somewhat different: in a crisis the lender-of-last-resort will always show up, but investors and principals in individual institutions that need to be specially rescued will discover that the lender of last resort is not their friend.

Econoblogger Panel

I am at the Milken Global Conference where I participated in a panel on "econoblogging" (though most of the people on the panel were more orientated toward finance issues than economics).

Calculated Risk attended the session:

Conference Comment, by Calculated Risk: I enjoyed attending the Milken conference yesterday. Thanks to Jennifer Manfre’ of the Milken Institute for arranging a press pass.

I attended a couple of sessions on topics that I know little about (like Urbanization in India and China), and they were awesome. IMO this type of conference has two strengths: 1) you meet a number of interesting people, and 2) the sessions provide a great introduction to a variety of topics.

However when I was familiar with the topic (like "Real Estate: Where is the Bottom?"), I was disappointed with the depth of the analysis. Hopefully Tanta will have a chance to listen to the audio of "The Future of the Mortgage Market: Where Do We Go From Here?" - but I suspect she will be disappointed too.

On a personal note, it was great to finally meet several bloggers: Professor Mark Thoma of Economist's View, Felix Salmon of Market Movers, Yves Smith of Naked Capitalism, and Paul Kedrosky of Infectious Greed.

Mark and I are "internet friends" - we've corresponded for over 3 years - and it was fun to finally meet face to face. We seemed like old friends ... the internet is awesome!

The econblogger session was well attended. Personally I thought the moderator asked several wrong questions - and he kept focusing on the credibility of the bloggers and rumors being spread on the internet, as opposed to focusing on experts in specific fields bringing more in-depth analysis to a subject than a newspaper. The moderator worked previously at the WSJ, and he seemed to think blogs were a competing product to newspapers. Professor Thoma argued persuasively that blogs are complementary to newspapers and when written well (think Tanta!), provide more in-depth analysis on specific subjects.

I can't watch it, partly because I don't think I expressed myself very well (I never think I do...), but there is a video of the session here (Also, Felix says "If you're having trouble with the sound, it kicks in properly around the 8 minute mark").

"The Collapse of Monetarism and the Irrelevance of the New Monetary Consensus"

It would be safe to say that Jamie Galbraith's view of modern monetary theory differs from mine:

The Collapse of Monetarism and the Irrelevance of the New Monetary Consensus, by James K. Galbraith: Twenty-five years ago, on a brilliant winter day at Alta, I stepped off the top of the Sugarloaf lift and heard a familiar voice asking for directions. It was William F. Buckley, jr. I pulled off my hat and skied over to say hello. Buckley greeted me, then turned to a small man at his side, wrapped in a quilted green parka, matching green stocking cap, and wrap-around sunglasses in the punk style. “Of course,” he said, “you know Milton Friedman.”

Five months ago, I received from Professor Delemeester the invitation to deliver this lecture. My first act was to notify Buckley, already then quite ill. I warned that he couldn’t publish on it or the invitation might be revoked. The email came back instantly, full of exclamation points, block caps and misspellings. “Congratulations! What a wonderful opportunity to REPENT!”

My other close encounter with Milton Friedman came around eighteen years ago, when he invited me to debate the themes of “Free to Choose” for an updated release of that late-seventies television series. Looking at it recently on the Internet after so many years, my main impression is that this format did not show Friedman at his best. Unlike Buckley on television he would simplify and condescend, and this left him vulnerable to easy lines of attack. When I suggested that his program plainly drew no distinctions between the big government of communist China and the big government of the United States, he had no reply. It was true: that’s what he thought. If this were all there was to Friedman, he would not be worth talking about and you would not have endowed this lecture.

Truly I come to bury Milton, not to praise him. But I would like to do so on the terrain that he favored, where he was strong, and over which he ruled for many decades. This is monetary policy, monetarism, the natural rate of unemployment and the priority of fighting inflation over fighting unemployment. It is here that Friedman had his largest practical impact and also his greatest intellectual success. It was on this battleground that he beat out the entire Keynesian establishment of the 1960s, stuck as they were on a stable Phillips Curve. It was here that he set the stage for the counter-revolution that has dominated academic macroeconomics for a generation, and that – far more important – also dominated and continues to influence the way in which most people think about monetary policy and the fight against inflation.

What was monetarism?

Democrats and Health Care

Jacob Hacker on the Clinton and Obama health plans:

Are You Confused Yet?, by Jacob S. Hacker, Commentary, NY Times: Polls show that health care ranks near the top of voters’ concerns, especially among Democrats. ... And yet, voters must be awfully confused about where the Democrats stand on health care. ...

So what’s the main story: (1) a basic Democratic consensus about what should be done, or (2) a widening policy divide fueled by presidential ambitions? The answer is (1), but unfortunately, the reality of (2) is increasingly upstaging this welcome development. And, unfortunately, this unnecessary and self-defeating conflict could ultimately derail efforts at reform, confusing and turning off the very voters Democrats need to woo.

To see the basic consensus, we need to go back to its immediate source: John Edwards’s campaign proposal. Mr. Edwards’s plan, released in early 2008, had ... a requirement that employers either cover their workers or help pay to cover those workers through a public framework (an approach known as “play-or-pay”). The second core element ... would give workers whose employers didn’t provide secure coverage a choice of public or private insurance. The third core element was a requirement that everyone have coverage (a so-called “individual mandate”). ...

.The cornerstone of both candidates’ plans ... is the play-or-pay requirement: employers cover their workers, or their workers are automatically enrolled in a single insurance pool to which employers are required to make contributions. (Both candidates have said they would exempt small businesses from this requirement, which could pose a big hurdle to universal coverage, since most of the uninsured work for small firms.)

Done correctly ... a play-or-pay requirement makes covering people much less complicated. The more than 90 percent of non-elderly Americans (and more than 80 percent of the uninsured) who live in a family in which someone works would be enrolled automatically... Many of those missed are already covered through public programs, and aggressive outreach could reach those who still remain without coverage. Thus, Mr. Obama’s plan could well cover almost everyone even without the individual mandate.

But, of course, that hasn’t stopped the individual coverage requirement from becoming a flashpoint of disagreement. Hillary Clinton has savaged Barack Obama for leaving out an alleged 15 million Americans — an oft-repeated estimate, the precision of which belies the huge uncertainty about how an individual mandate would be enforced and how many people it would actually cover. ...

For his part, Mr. Obama has repeatedly charged that Mrs. Clinton will force some people to buy unaffordable coverage, an incendiary charge. ... But Senators Obama and Clinton’s proposals are so similar it’s hard to see how Mr. Obama can suggest that everyone will voluntarily sign up under his plan while Mrs. Clinton’s will impose unbearable costs on middle-income folks.

The truth is that the overall costs of the two plans, their essential structure, and their overarching logic are all but identical. Neither would force people to give up employment-based plans they’re happy with. Both would give people without coverage from their employer a menu of different plans, including a predictable, simple and attractive public plan modeled after Medicare. And both could cover all or virtually all Americans for a relatively modest cost. ...

But unfortunately, the fierce debate has pushed both candidates toward rigid positions and extreme pronouncements, elevating a modest disagreement into a confusing melee. .... Meanwhile, John McCain ... has gotten a free ride.

The overheated attacks serve neither Democratic candidate. Rather than impugning each other, they should be saying how they would ensure affordability and enrollment. Mrs. Clinton took an important step in this direction by committing to a limit on how much Americans will have to pay for insurance. Mr. Obama should make a similar commitment, and make clear he will automatically enroll employees and their dependents through the workforce...

Most important, Senators Clinton and Obama should be talking less about how they would cover the uninsured as an isolated group and more about how they would provide health security to all Americans, ensuring that everyone has affordable coverage that doesn’t disappear if they are laid off or change jobs. That’s, after all, what matters to most voters... Senators Obama and Clinton have a health care prescription for these folks that’s much more attractive than John McCain’s skimpy tax credits for coverage — if only they would speak about it in clear, simple and attractive terms.

While their plans may be very close overall, there may be a key difference - their willingness to make implementation of a health care plan a top priority after taking office.

links for 2008-04-29

• Muzzling the Watchdog - New York Times
• Partisan Cities - The Bellows
• The war against Iraqi women - Project Syndicate
• The Econobloggers Panel - Felix Salmon
• Monetary Policy: Misplaced Worries - Economic Investigations
• The lifecycle of regions - Vox EU

Trade Policy and Market Power

A colleague, Bruce Blonigen, says we should pay more attention to the anti-trust implications of trade policy, something that is almost always ignored in trade policy discussions:

Market power and the (non-)application of competition laws to trade policies, by Bruce Blonigen, Vox EU: The main premise of antitrust (or competition) laws is to proscribe practices that allow firms to limit competition in the marketplace. As is well known, limiting competition allows firms to raise prices above their marginal costs (something we call market power). Market power creates profits for firms, but the profits are more than offset by losses in consumer surplus. This translates into net (or deadweight) losses for society, and such losses are, obviously, something to be avoided.

The problems associated with market power are generally well recognised by the public when the topic of discussion is domestic competition and anti-trust policies. However, when the topic is trade policy, public discussion of how it might affect market power is often confused or nonexistent. For example, one virtually never hears any worry about the potential anti-competitive effects from applying traditional forms of trade policies, such as import tariffs and quotas.

Paul Krugman: Bush Made Permanent

The Pander Bear Express:

Bush Made Permanent, by Paul Krugman, Commentary, NY Times: As the designated political heir of a deeply unpopular president — according to Gallup, President Bush has the highest disapproval rating recorded in 70 years of polling — John McCain should have little hope of winning in November. In fact, however, current polls show him roughly tied with either Democrat.

In part this may reflect the Democrats’ problems. For the most part, however, it probably reflects the perception, eagerly propagated by Mr. McCain’s many admirers in the news media, that he’s very different from Mr. Bush — a responsible guy, a straight talker.

But is this perception at all true? During the 2000 campaign people said much the same thing about Mr. Bush; those of us who looked hard at his policy proposals, especially on taxes, saw the shape of things to come.

And a look at what Mr. McCain says about taxes shows the same combination of irresponsibility and double-talk that, back in 2000, foreshadowed the character of the Bush administration. ...

According to the nonpartisan Tax Policy Center, the overall effect of the McCain tax plan would ... reduce federal revenue by more than $5 trillion over 10 years. That’s ... enough to pose big problems for the government’s solvency.

But before I get to that, let’s look at what I found truly revealing: the McCain campaign’s response to the Tax Policy Center’s assessment. The response, written by Douglas Holtz-Eakin,... former head of the Congressional Budget Office, criticizes the center for adopting “unrealistic Congressional budgeting conventions.” What’s that about?

Well, Congress “scores” tax legislation by comparing estimates of the revenue that would be collected if the legislation passed with estimates of the revenue that would be collected under current law. In this case that means comparing the McCain plan with what would happen if the Bush tax cuts expired on schedule.

Mr. Holtz-Eakin wants the McCain plan compared, instead, with “current policy” — which he says means maintaining tax rates at today’s levels.

But here’s the thing: ...the Bush administration engaged in a game of deception. It put an expiration date on the tax cuts, which it never intended to honor,... to hide those tax cuts’ true cost. ... Mr. Holtz-Eakin is saying, in effect, “We’re not engaged in any new irresponsibility — we’re just perpetuating the Bush administration’s irresponsibility. That doesn’t count.”

It’s the sort of fiscal double-talk that has been a Bush administration hallmark. ...

And Mr. McCain has said nothing realistic about how he would close the giant budget gap his tax cuts would produce — a gap so large that eliminating it would require cutting Social Security benefits by three-quarters, eliminating Medicare, or something equivalently drastic. Talking, as Mr. Holtz-Eakin does, about fighting waste and reforming procurement doesn’t cut it.

Now, Mr. McCain isn’t unique in making promises he has no way to pay for — the same can be said, to some extent, of the Democratic candidates. But Mr. McCain’s plan is far more irresponsible... Mr. McCain’s budget talk simply doesn’t make sense.

So what are Mr. McCain’s real intentions?

If truth be told, the McCain tax plan doesn’t seem to embody any coherent policy agenda. Instead, it looks like a giant exercise in pandering — an attempt to mollify the G.O.P.’s right wing, and never mind if it makes any sense.

The impression that Mr. McCain’s tax talk is all about pandering is reinforced by his proposal for a summer gas tax holiday — a measure that would, in fact, do little to help consumers, although it would boost oil industry profits.

More and more, Mr. McCain sounds like a man who will say anything to become president.

Fading Power at the Fed?

In many popular models of the economy, monetary policy works by exploiting the existence of prices that cannot adjust quickly in response to shocks. If all prices are perfectly flexible so that all markets clear at all points in time, and there are no other problems, then monetary policy has no effect on real variables such as output, and this is true in virtually all reasonable models of the economy.

When prices aren't perfectly flexible, when they adjust sluggishly, inflation can impose costs on some agents in the economy. For example, when wages are fixed, an increase in the price level lowers the purchasing power labor income. The same thing happens to people on fixed incomes, e.g. retirement payments.

But economic agents do not stand by idly while shocks to the price level impose costs on them. Wages can be indexed for inflation, and often have been since the 1970s. Fixed income payments can become unfixed with cost of living adjustments that keep their real values constant. If fixed interest rates on loan contracts are causing unanticipated redistribution of income from lenders to borrowers, then create variable interest rate contracts that move with the inflation rate and offer insurance against this problem. Is committing to prices in catalog's that are printed months in advance a problem? Exploit technology and put the prices online where they can be easily adjusted. Whenever agents experience large costs from inflexible prices, they do what they can to increase their flexibility.

So I wonder if monetary policy will slowly run out of rigidities to exploit as, one by one, agents who have been hurt by price rigidities use technology or other means to to overcome them (and this is also true for other types of market imperfections, e.g. incomplete information).

Should we worry that monetary policy may lose effectiveness over time? Not if our models are correct. In fact, this would be desirable. If all prices are perfectly flexible, markets will behave optimally on their own and there would be no need for the Fed to intervene to stabilize the economy. Presumably, there would also be less chance for error when entire markets rather than a vote of twelve people determines the course of the economy.

Of course, as the current crisis shows, price rigidities aren't the only possible problem the economy can have, so there would still be a role for the Fed to play, but I do wonder if the power of monetary policy to impact the economy will diminish over time.

"America Needs to Make a New Case for Trade"

Larry Summers says that if we want people to support free trade, we are going to have to explain why it is in their interests to do so:

America needs to make a new case for trade, by Lawrence Summers, Commentary, Financial Times: ...Since the end of the second world war, American economic policy has supported an integrated global economy, stimulating development in poor countries... Yet America’s commitment to internationalist economic policy is ever more in doubt. ...

To [the trade sceptic] the conventional wisdom has a well developed response, with four standard elements. First, the sceptic ... is educated around the many benefits of trade, not just for exporters but also for consumers and the economy more generally.

Second, the sceptic is assured that ... trade ... is not just good classical economics that reaps the gains available from comparative advantage – it is also good mercantilism. This is because the US already has low trade barriers, which it will typically not need to reduce as much as its trading partner. Sometimes the argument is added that we are in competition with other major economic powers and will be at a disadvantage if a developing country has a free-trade agreement with them but not us.

Third, the sceptic is also told that most of the observed increases in income inequality in the American economy are due to new technology rather than increased trade...

Fourth, it is acknowledged that while trade agreements are good for the economy overall, not everyone wins. And so it is increasingly recognised that they must be complemented by more ambitious efforts to reduce income inequality and income insecurity. ...

All of these points have the very considerable virtue of being correct economic arguments. Taken together, they make a compelling case...

But I suspect that the policy debate ... will need to confront a deeper and broader issue: the gnawing suspicion of many that the very object of internationalist economic policy – the growing prosperity of the global economy – may not be in their interests. ...

When other countries develop, American producers benefit from having larger markets to sell into but are challenged by more formidable competition. Which effect predominates cannot be judged a priori. But there are reasons to think that economic success abroad will be more problematic for American workers in the future.

First, developing countries increasingly export goods ... that the US produces on a significant scale, putting pressure on wages. ... Second, the growth of countries such as China raises competition for energy and environmental resources, raising the price for Americans.

Third and most fundamentally, growth in the global economy encourages the development of stateless elites whose allegiance is to global economic success and their own prosperity rather than the interests of the nation where they are headquartered. ...

Even as globalisation increases inequality and insecurity, it is constantly and often legitimately invoked as an argument against the viability of progressive taxation, support for labour unions, strong regulation and substantial production of public goods that mitigate its adverse impacts.

In a world where Americans can legitimately doubt whether the success of the global economy is good for them, it will be increasingly difficult to mobilise support for economic internationalism. The focus must shift ... to designing an internationalism that more successfully aligns the interests of working people and the middle class in rich countries...

"The Cost of Rising Inequality"

If the gains from economic growth since 19779 had been shared equally instead of flowing disproportionately toward the top of the income distribution, how would more income would the bottom 80% of the distribution have had?:

The Cost of Rising Inequality, by Lane Kenworthy: Income inequality in the U.S. has increased sharply in the past generation. Those who worry about this development do so partly on grounds of fairness and partly because inequality may have adverse effects on politics, health, and crime. Sometimes overlooked is a more immediate cost: slow income growth for a large chunk of the population.

The following chart shows average inflation-adjusted incomes in 1979 and 2005 for various groups of households: the bottom 20%, the lower-middle 20%, the middle 20%, the upper-middle 20%, the next 10%, the next 9%, and the top 1%. The incomes include government transfers and subtract taxes. The data, from the Congressional Budget Office (here), are the best available for this purpose.

The average income among all households rose at a rate of 1.5% per year over these two and a half decades. But as the chart makes plain, much of that increase went to households at the top of the distribution, especially those at the very top. Households in the bottom three quintiles experienced very slow income growth — 0.2% per year for the poorest quintile, 0.6% for the next, and 0.7% for the middle.

What would 2005 incomes have looked like if income growth had been proportionate rather than heavily skewed in favor of the top — in other words, if all incomes had increased at a pace of 1.5% per year? The dashed line in the next chart shows the answer. To make it easier to see the effect, I include only the bottom 80% of households here. All of them would have been a good bit better off.

It’s often said that progressives focus too much on the distribution of income and don’t pay enough attention to absolute income levels. In fact, its impact on absolute incomes is one of the chief reasons to be concerned about rising inequality.

links for 2008-04-28

• Did the CBOT Strongarm Bob Rubin? - Felix Salmon
• (Vertical) transporation and urban from - Richard Green
• Nobel Laurelates on the Economy - The Big Picture
• Loan Industry Fighting rules on Mortgages - New York Times
• Sunset in America - TNR
• Blogonomics: Going Pro - Felix Salmon
• Let's Think Long and Hard about Extending Those Bush Tax Cuts - Econbrowser

"Freer Trade Could Fill the World’s Rice Bowl"

Tyler Cowen says if Milton Friedman had the authority to set trade policy, we wouldn't have to worry so much about food crises:

Freer Trade Could Fill the World’s Rice Bowl, by Tyler Cowen, Economic View, NY Times: Rising food prices mean hunger for millions and also political unrest... Yes, more expensive energy and bad weather are partly at fault, but the real question is why adjustment hasn’t been easier. A big problem is that the world doesn’t have enough trade in foodstuffs.

The damage that trade restrictions cause is probably most evident in the case of rice. Although rice is the major foodstuff for about half of the world, it is highly protected and regulated. Only about 5 to 7 percent of the world’s rice production is traded across borders; that’s unusually low for an agricultural commodity. ...

The more telling figure is that over the next year, international trade in rice is expected to decline more than 3 percent, when it should be expanding. The decline is attributable mainly to recent restrictions on rice exports...

At first glance, this seems understandable, because a country may not wish to send valuable foodstuffs abroad in a time of need. Nonetheless, the longer-run incentives are counterproductive. ... Restrictions on the rice trade run the risk of making shortages and high prices permanent. ...

The reality is that many of today’s commodity shortages, including that for oil, occur because ever more production and trade take place in relatively inefficient and inflexible countries. We’re accustomed to the response times of Silicon Valley, but when it comes to commodities production, many of the relevant institutions abroad have only one foot in the modern age. In other words, the world’s commodities table is very far from flat.

Many poor countries ... could be growing much more rice than they do now. The major culprits include corruption in the rice supply chain, poorly conceived irrigation systems, terrible or even nonexistent roads, insecure property rights, ill-considered land reforms, and price controls on rice. ...

Of course, wealthy countries are partly at fault, too. Japan, South Korea and Taiwan all protect their native rice farmers; you’ll even see rice being grown in Spain and Italy, aided by European Union subsidies and protectionism. The United States spends billions subsidizing domestic rice farmers.

In the short run, these domestic rice producers mean less demand pressure on the world market, which might seem like a good thing. But, again, the longer-term effects are pernicious.

Low-cost rice production in countries like Thailand isn’t geared to meeting higher foreign demand, as it would be in a freer market. When more rice is needed, capacity is limited and the grains are slow in coming. And the protected rice from wealthy countries is simply too expensive to alleviate hunger in very poor countries.

Lately, it’s become fashionable to assert that, in this time of financial market turmoil, the market-oriented teachings of Milton Friedman belong more to the past than to the future. The sadder truth is that when it comes to food production — arguably the most important of all human activities — Mr. Friedman’s free-trade ideas still haven’t seen the light of day.

Update: Dani Rodrik comments, "The "free trade reduces prices" fallacy yet again."

 

"The Enlightened Preferences Hypothesis"

Will Democrats be in a "self-inflicted state of confusion" when they vote this fall? Andrew Gelman says there's no need to worry about that:

What would Rosenstone say?, by Andrew Gelman: I can understand Paul Krugman's frustration over the level of discourse in the Democratic primary election campaign, but I don't know of any evidence to support the implicit claim in his last sentence: "unless Democrats can get past this self-inflicted state of confusion, there’s a very good chance that they’ll snatch defeat from the jaws of victory this fall." I pretty much take the general view of political scientists that general election outcomes are pretty much determined by fundamentals--that the voters will get the information needed to realize roughly where Obama (or Clinton) and McCain stand on the key issues and vote accordingly. (See here and here for our evidence, including the picture below.) ...

Here's a bit more from the first link:

As most political scientists know,  [using the Rosenstone model,] the outcome of the American presidential election can be predicted within a few percentage points (in the popular vote), based on information available months before the election. Thus, the general campaign for president seems irrelevant to the outcome (except in very close elections), despite all the media coverage of campaign strategy. However, it is also well known that the pre-election opinion polls can vary wildly over the campaign, and this variation is generally attributed to events in the campaign. How can campaign events affect people's opinions on whom they plan to vote for, and yet not affect the outcome of the election? For that matter, why do voters consistently increase their support for a candidate during his nominating convention, even though the conventions are almost entirely predictable events whose effects can be rationally forecast? In this exploratory study, we consider several intuitively appealing, but ultimately wrong, resolutions to this puzzle and discuss our current understanding of what causes opinion polls to fluctuate while reaching a predictable outcome. ... We show that responses to pollsters during the campaign are not generally informed or even, in a sense we describe, 'rational'. In contrast, voters decide, based on their enlightened preferences, as formed by the information they have learned during the campaign, as well as basic political cues such as ideology and party identification, which candidate to support eventually. We cannot prove this conclusion, but we do show that it is consistent with the aggregate forecasts and individual-level opinion poll responses. Based on the enlightened preferences hypothesis, we conclude that the news media have an important effect on the outcome of presidential elections - not through misleading advertisements, sound bites, or spin doctors, but rather by conveying candidates' positions on important issues.

In the paper, the authors say that the results go against their prior beliefs. That describes my reaction as well.

What Have You Done for Me lately?

Will Republicans experience a "rare instance of economic accountability" in the next election? Larry Bartels thinks they might:

Inequalities, by Larry M. Bartels, Commentary, NY Times: The past three decades have seen a momentous shift: The rich became vastly richer while working-class wages stagnated. Economists say 80 percent of net income gains since 1980 went to people in the top 1 percent of the income distribution, boosting their share of total income to levels unseen since before the Great Depression.

Despite the historic magnitude of this shift, inequality has thus far had little traction as a political issue. Many Americans seem to accept the conservative view that escalating inequality reflects “free market” forces immune to amelioration through public policy. ...[This] assertion, however, is strongly contradicted by the historical record. ...

According to my analysis,... real incomes of middle-class families grew more than twice as fast under Democratic presidents as they did under Republican presidents. Even more remarkable, the real incomes of working-poor families ... grew six times as fast when Democrats held the White House. Only the incomes of affluent families were relatively impervious to partisan politics, growing robustly under Democrats and Republicans alike.

The cumulative effect of these partisan differences is enormous. ... If middle-class and poor people do so much better under Democratic presidents than under Republican presidents, why do so many of them vote for Republicans? One popular answer, advanced by Thomas Frank and others, is that they are alienated by Democratic liberalism on cultural issues like abortion, gay marriage and gender roles. This does not appear to be the case. ...

A better explanation for Republican electoral successes may be that while most voters ... do vote with their economic interests in mind, they construe those interests in a curiously myopic way. Their choices at the polls are strongly influenced by election-year income growth but only weakly related to economic performance earlier in the president’s term. And while Republicans have presided over dismal income growth for middle-class and poor families in most years, they have, remarkably enough, produced robust growth in election years.

Why have Republican administrations typically presided over strong election-year growth? The pattern probably reflects the fact that presidents have more clout early in their terms... Republicans have often used that clout to rein in inflation and social spending, producing or prolonging economic contractions that then wear off by the time of the next election. New or newly re-elected Democrats, for their part, have frequently stimulated the economy and expanded employment, producing economic booms that raise all boats in their second and third years but trail off as the next election approaches. As a result, even working-poor families have experienced stronger income growth under Republicans (1.8 percent) than under Democrats (1 percent) in election years.

This year looks unusual in this respect, with slow growth likely despite the infusion of substantial tax rebates from an election-year stimulus plan. If that slow growth produces a Republican defeat in November, it will be a rare instance of economic accountability for a party with a long history of delivering meager income gains for most American families.

No matter how much it might help Democrats, I'm not hoping for a recession. But if problems must occur, accountability would be nice.

"Don't Blame All Borrowers"

Robert Frank argues that as we decide who is responsible for the housing crisis, we shouldn't place too much blame on families who overextended themselves. They were, for the most part, trying to avoid sending their children to inferior schools:

Don't Blame All Borrowers, by Robert H. Frank, Commentary, Washington Post: ...Over 9 million mortgages are "under water," meaning that more is owed on them than the home is worth. As foreclosures mount, ... Congress is debating loan guarantees that would help homeowners renegotiate mortgages in default. In his initial response to the proposed legislation, Sen. John McCain argued that "it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers."

Many share McCain's concern. But while Congress clearly should not rescue borrowers who lied about their incomes or tried to get rich by flipping condos, such borrowers were at most a minor factor in this crisis. Primary responsibility rests squarely on regulators who permitted the liberal credit terms that created the housing bubble.

Hints of how things began to go awry appeared in ... a 2003 book in which Elizabeth Warren and Amelia Warren Tyagi posed this intriguing question: Why could families easily meet their financial obligations in the 1950s and 1960s, when only one parent worked outside the home, yet have great difficulty today, when two-income families are the norm? The answer, they suggest, is that the second incomes fueled a bidding war for housing in better neighborhoods.

It's easy to see why. .... Because the labor market has grown more competitive,... [i]t is no surprise that two-income families would choose to spend much of their extra income on better education. And because the best schools are in the most expensive neighborhoods, the imperative was clear: ... you must purchase the most expensive house you can afford.

But what works for any individual family does not work for society as a whole. ... When we all bid for houses in better school districts, we merely bid up the prices of those houses.

In the 1950s, ... strict credit limits held the bidding in check. Lenders typically required down payments of 20 percent or more and would not issue loans for more than three times a borrower's annual income.

In a well-intentioned, but ultimately misguided, move to help more families enter the housing market, borrowing restrictions were relaxed during the intervening decades...

The result was a painful dilemma for any family... [I]f a family stood by while others exploited more liberal credit terms, it would consign its children to below-average schools. Even financially conservative families might have reluctantly concluded that their best option was to borrow up.

Those who condemn them see a different picture. They see undisciplined families overcome by their lust for cathedral ceilings and granite countertops, families that need to be taught a lesson.

Yet millions of families got into financial trouble simply because they understood that ... the best jobs go to graduates from the best colleges... The financial deregulation that enabled them to bid ever larger amounts for houses in the best school districts essentially guaranteed a housing bubble that would leave millions of families dangerously overextended.

Congress should not bail out speculators and fraudulent borrowers. But neither should it be too quick to condemn families that borrowed what the lending system offered rather than send their children to inferior schools.

links for 2008-04-27

• McCain the destroyer - Paul Krugman Blog
• Comparing responses to the credit crunch - Worthwhile Canadian Initiative
• Did Robert Rubin Jeopardize Financial Stability? - Dean Baker
• Coase again - The G Spot
• Where Was the Wise Man? - New York Times
• The IMF's dwindling fortunes - Los Angeles Times
• Bowling 1, Health Care 0 - Elizabeth Edwards - New York Times
• The New Economics of Hunger - washingtonpost.com

"The Changing Housing Cycle and Its Implications for Monetary Policy"

The authors argue that as mortgage markets develop, it becomes easier for problems in these markets to spillover to the rest of the economy. Because of the increased vulnerability of the economy to mortgage market problems, monetary policy should be more aggressive in countries where mortgage markets are well-developed:

The changing housing cycle and its implications for monetary policy, by Roberto Cardarelli, Tommaso Monacelli, Alessandro Rebucci, and Luca Sala, Vox EU: After several years of rapid price increases, house price growth has decelerated in many advanced economies, and in a few of them – the United Stated and Ireland – house prices have fallen during the past year (Figure 1). Real residential investment has also slowed in several countries, including the United States, Australia, and, especially, Ireland, where it has fallen by about 3 percentage points of GDP since its peak four years ago.

Figure 1

Although few people would disagree that such developments may have important implications for the level of economic activity, considerable uncertainty still exists about the link between the housing sector and the business cycle. In particular, there are varying estimates of the extent to which house price fluctuations affect consumer spending and the dynamics of residential investment. Moreover, the prospect of a sharp boom-bust cycle in the housing sector in several advanced economies has reignited the debate on how monetary policy should respond to developments in the housing sector.

Taking a Toll

In the past, I've wondered if policies that allow a certain segment of the population to "buy out" of constraints designed to reduce carbon emissions, traffic congestion, etc. will find much popular support. This is an objection to the imposition of toll roads in LA along those lines, i.e. based upon the notion of fairness:

Diamond lanes for the rich, by Tim Rutten, Commentary, LA Times: ...When the Metropolitan Transportation Authority voted Thursday to convert carpool lanes to toll routes on as many as three Los Angeles freeways, ... Mayor Antonio Villaraigosa called the move "a great opportunity to think outside the box," and added: "Part of the reason Los Angeles has not been able to grapple with gridlock is because we've been unable to make the tough decisions."

Right. It takes unconventional and courageous thinking to come up with a plan that clears a highway lane for the well-off, while the middle class and working poor are left to inhale each other's $5-a-gallon exhaust fumes... making the daily lives of the hundreds of thousands of moderate-income commuters ... even more intolerable...

The worst thing about this ill-considered decision to allocate freedom of movement according to income is that it represents local public policy made for the worst of all possible reasons -- simply because there's federal money available to do it. ...

Federal transportation authorities have lately become enamored of imposing congestion pricing through toll roads, and have been offering the states funds to experiment with the concept. .... As a consequence, existing carpool lanes on ... will be converted to toll routes, with the highest charges levied at peak commuting times.

Carpool lanes are a sensible and equitable way to encourage responsible behavior. People who choose to ride to work with other people or those who purchase low-emission, high-mileage vehicles have the opportunity to travel more conveniently while reducing congestion, pollution and fuel consumption.

Note the word choose.

Congestion pricing will reduce traffic as well, but it will do so by allocating a precious resource by income. In California, we long have used everybody's tax money -- mainly from gasoline purchases -- to build and maintain roads.

Moreover, in Southern California, the middle class and working poor have no choice but to use the freeways to get back and forth to work and school because, decade after decade, public officials have encouraged urban sprawl while neglecting public transit. For most commuters today, the highway is the only way. ...

Now the MTA proposes to address the all-too-real problem of gridlock on the cheap -- and on the backs of working people.

Since when was that "a hard decision"?

It's the sort of thinking that will make Los Angeles and Southern California the sort of place [Michael] Harrington described in "The Other America" -- one where "life is lived in common, but not in community."

Economics analysis tells us that using a Pigouvian tax (or its equivalent) to solve these types of problems has desirable properties, and we can use the revenue from the tax to give rebates to lower income households so as to offset the losses from higher prices, tolls, etc., (see here). But when should you trade optimal for feasible?

For example, the connection between rebates given, say, once a year on tax forms and the frequent payment of the tolls, higher gas prices, etc., may not be direct enough to offset the perception of unfairness. If the connection is weak, or when equity considerations are important for some other reason, there may be something to the idea that, from a political point of view, non-price allocation mechanisms might be easier to implement, though I suppose the political difficulty depends upon the degree to which those who are most affected by price based allocation mechanisms - moderate and low income households - have a voice in the political process.

"Shocking Short-Sightedness"

This probably isn't the best time for the administration to be proposing reduced support for agricultural research:

Stem Rust Never Sleeps, by Norman E. Borlaug, Commentary, NY Times: With food prices soaring ... and shortages threatening hunger and political chaos, the time could not be worse for an epidemic of stem rust in the world’s wheat crops. Yet millions of wheat farmers, small and large, face this spreading and deadly crop infection.

The looming catastrophe can be avoided if the world’s wheat scientists pull together to develop a new generation of stem-rust-resistant varieties of wheat. ... This will require a commitment from many nations, especially the United States, which has lately neglected its role as a leader in agricultural science.

Stem rust, the most feared of all wheat diseases, can turn a healthy crop of wheat into a tangled mass of stems that produce little or no grain. The fungus .... has caused major famines since the beginning of history. ...

During the 1950s, I and other scientists ... developed high-yielding wheat varieties that were resistant to stem rust and other diseases. ... Indeed, with this work, global food supplies rapidly increased and prices dropped. ... Today, wheat provides about 20 percent of the food calories for the world’s people. ...

The new strains of stem rust, called Ug99 because they were discovered in Uganda in 1999, are much more dangerous than those that, 50 years ago, destroyed as much as 20 percent of the American wheat crop. ...

The Bush administration was initially quick to grasp Ug99’s threat to American wheat production. ... But more recently, the administration has begun reversing direction. The State Department is recommending ending American support for the international agricultural research centers that helped start the Green Revolution, including all money for wheat research. And significant financial cuts have been proposed for important research centers, including the Department of Agriculture’s essential rust research laboratory in St. Paul.

This shocking short-sightedness goes against the interests not only of American wheat farmers and consumers but of all humanity. It is tantamount to the United States abandoning its pledge to help halve world hunger by 2015.

If millions of small-scale farmers see their wheat crops wiped out for want of new disease-resistant varieties, the problem will not be confined to any one country. Rust spores move long distances in the jet streams and know no political boundaries. Widespread failures in global wheat production will push the prices of all foods higher, causing new misery for the world’s poor. ...

Before it is too late, America must rebuild, not destroy, the collaborative systems of international agricultural research that were so effective in starting the Green Revolution.

"Money for Influence" at the IMF?

Hector Torres asks if the failure of the IMF "to press the United States to redress the mortgage-market vulnerabilities" is due to its governance structure:

Could IMF Have Prevented This Crisis?, by Hector R. Torres, Alternate executive director at the IMF, Project Syndicate: Until recently, the International Monetary Fund's main job was lending to countries with balance-of-payment problems. Today, however, emerging countries increasingly prefer to "self-insure" by accumulating reserves (and sharing them through regional pooling arrangements).

As a result, the fund must change, reinforcing its supervisory role and its capacity to oversee members' compliance with their obligation to contribute to financial stability. So its failure to press the United States to redress the mortgage-market vulnerabilities that precipitated the current financial crisis indicates that much remains to be done.

Indeed, in its 2006 annual review of the U.S. economy, the IMF was extraordinarily benign in its assessment of the risks posed by the relaxation of lending standards in the U.S. mortgage market. ...

The IMF began to take notice only in April 2007, when the problem was already erupting, but there was still no sense of urgency. ...

Why has the fund's surveillance of the U.S. economy been so ineffective?

Suppose that the vulnerabilities piling up in the U.S. mortgage market ― right under the IMF's Washington-headquartered nose ― had taken place in a developing country. It is, frankly, inconceivable that the fund would have failed so miserably in detecting them. The IMF has been criticized for burdening borrowers with unnecessary and sometimes perverse lending conditions, but its highly qualified staff has not been shy in blowing the whistle when it perceived domestic vulnerabilities in other countries. So why didn't they scrutinize the U.S. economy with equal zeal?

The answer may be found in the IMF's governance structure. Currently, the distribution of power within the IMF follows the logic of its lending role. The more money a country puts in, the more influence it has. This may be prompting the fund to turn a blind eye to the economic vulnerabilities of its most influential members ― precisely those whose domestic policies have large, systemic implications.

This ''money-for-influence" model of governance indirectly impairs the IMF's capacity to criticize the economies of its most important members (let alone police compliance with their obligations). In any event, if its staff's criticism ever becomes too candid, these countries can always use their leverage to water down the public communiques issued by the IMF's board.

The fund can help to prevent future crisis of this kind, but only if it first prevents undue influence on its capacity to scrutinize, and if necessary, criticizes influential countries' policies and regulations. This requires a different governance structure in which power is more evenly distributed, so that the IMF can effectively exercise surveillance where it should, not just where it can.

links for 2008-04-26

• Movable Feast Carries a Pollution Price Tag - New York Times
• Health insurance for Amy, Beth and Cindy - Los Angeles Times
• How the mortgage industry nurtured deceit - Slate Magazine
• Inflation Is on the Rise, Fed Should Stand Pat - John M. Berry
• 12 questions for Robert Reich : More Business - The Rocky Mountain News
• Response on Coase Theorem - Megan McArdle
• Blogging goes professional - Megan McArdle
• Seven Questions: The Silent Tsunami (Food Crisis) - Foreign Policy
• It is going to be awhile before the economy recovers - Richard Green
• Tests Confirm T. Rex Kinship With Birds - New York Times

Paul Krugman: Self-Inflicted Confusion

Why is the Democratic race dragging on for so long?:

Self-Inflicted Confusion, by Paul Krugman, Commentary, NY Times: After Barack Obama’s defeat in Pennsylvania, David Axelrod, his campaign manager, brushed it off: “Nothing has changed tonight in the basic physics of this race.”

He may well be right — but what a comedown. ... This wasn’t the way things were supposed to play out. Mr. Obama ... still can’t seem to win over large blocs of Democratic voters, especially among the white working class.

As a result, he keeps losing big states. And general election polls suggest that he might well lose to John McCain. What’s gone wrong?

According to many Obama supporters, it’s all Hillary’s fault. If she hadn’t launched all those vile, negative attacks...— if she had just gone away — his aura would be intact, and his mission of unifying America still on track.

But how negative has the Clinton campaign been, really? ... The attacks ... have been badminton compared with the hardball Republicans will play this fall. If the relatively mild ... Democratic fight has been enough to knock Mr. Obama off his pedestal, what hope did he ever have of staying on it through the general election?

Let me offer an alternative suggestion: maybe his transformational campaign isn’t winning over working-class voters because transformation isn’t what they’re looking for.

From the beginning, I wondered what Mr. Obama’s ... talk of a new politics ... would mean to families troubled by lagging wages, insecure jobs and fear of losing health coverage. The answer, from Ohio and Pennsylvania, seems pretty clear: not much. Mrs. Clinton has been able to stay in the race ... largely because her no-nonsense style, her obvious interest in the wonkish details of policy, resonate with many voters in a way that Mr. Obama’s eloquence does not.

Yes,... there are lots of policy proposals on the Obama campaign’s Web site. But addressing the real concerns of working Americans isn’t the campaign’s central theme.

Tellingly, the Obama campaign has put far more energy into attacking Mrs. Clinton’s health care proposals than ... into promoting ... universal coverage.

During the closing days of the Pennsylvania primary fight, the Obama campaign ran a TV ad repeating the dishonest charge that the Clinton plan would force people to buy health insurance they can’t afford. It was as negative as any ad that Mrs. Clinton has run — but perhaps more important, it was fear-mongering aimed at people who don’t think they need insurance, rather than reassurance for families who are trying to get coverage or are afraid of losing it.

No wonder, then, that older Democrats continue to favor Mrs. Clinton.

The question Democrats ... should be asking themselves is this: now that the magic has dissipated, what is the campaign about? More generally, what are the Democrats for in this election?

That should be an easy question to answer. Democrats can justly portray themselves as the party of economic security, the party that created Social Security and Medicare and defended those programs against Republican attacks — and the party that can bring assured health coverage to all Americans.

They can also portray themselves as the party of prosperity: the contrast between the Clinton economy and the Bush economy is the best free advertisement that Democrats have had since Herbert Hoover.

But the message that Democrats are ready to continue and build on a grand tradition doesn’t mesh well with claims to be bringing a “new politics” and rhetoric that places blame for our current state equally on both parties.

And unless Democrats can get past this self-inflicted state of confusion, there’s a very good chance that they’ll snatch defeat from the jaws of victory this fall.

"The Financial Crisis: An Interview with George Soros"

A few passages from a much longer interview:

The Financial Crisis: An Interview with George Soros, NYRB: The following is an edited and expanded version of an interview with George Soros ... by Judy Woodruff...

Judy Woodruff: You write in your new book, The New Paradigm for Financial Markets,[1] that "we are in the midst of a financial crisis the likes of which we haven't seen since the Great Depression." Was this crisis avoidable?

George Soros: I think it was, but it would have required recognition that the system, as it currently operates, is built on false premises. Unfortunately, we have an idea of market fundamentalism, which is now the dominant ideology, holding that markets are self-correcting; and this is false because it's generally the intervention of the authorities that saves the markets when they get into trouble.

Since 1980, we have had about five or six crises... Each time, it's the authorities that bail out the market, or organize companies to do so. ... But somehow this idea that markets tend to equilibrium and that deviations are random has gained acceptance and all of these fancy instruments for investment have been built on them. ... The large potential risks of such investments are not being acknowledged.

Woodruff: How can so many smart people not realize this?

Soros: In my new book I put forward a general theory of reflexivity, emphasizing how important misconceptions are in shaping history. So it's not really unusual; it's just that we don't recognize the misconceptions.

Woodruff: ...You said it would have been avoidable if people had understood what's wrong with the current system. Who should have recognized that?

Soros: The authorities, the regulators—the Federal Reserve and the Treasury—really failed to see what was happening. ...

Woodruff: The chairman of the Fed, Mr. Bernanke? His predecessor, Mr. Greenspan?

Soros: All of the above. But I don't hold them personally responsible because you have a whole establishment involved. The economics profession has developed theories of "random walks" and "rational expectations" that are supposed to account for market movements. That's what you learn in college. Now, when you come into the market, you tend to forget it because you realize that that's not how the markets work. But nevertheless, it's in some way the basis of your thinking.

Woodruff: How much worse do you anticipate things will get?

Soros: Well, you see, as my theory argues, ... it very much depends on how the authorities are going to respond... But the situation is definitely much worse than is currently recognized. ...

Woodruff: So how long will this last?

Soros: Well, it depends on when the authorities wake up, because you need to reduce the number of foreclosures. ... You need to arrest the decline in house prices, but you also need to prevent human suffering and social disruption because it's going to be very, very severe. ...

Woodruff: You said the Federal Reserve had to step in to engineer the buyout by J.P. Morgan of Bear Stearns to prevent a much bigger catastrophe. ... Is this an unhealthy amount of risk that the Fed has taken on?

Soros: This is their job, whether unhealthy or not; I don't think it's actually so severe. But that is their job, to save the system when it is in danger. However, because that is their job, it ought to be their job also to prevent asset bubbles from developing. And that task has not been recognized. ...

Woodruff: What of your book and the philosophy that comes of it?

Soros: In human affairs, as distinguished from natural science, I argue that our understanding is imperfect. And our imperfect understanding introduces an element of uncertainty that's not there in natural phenomena. So therefore you can't predict human affairs in the same way as you can natural phenomena. And we have to come to terms with the implication of our own misunderstandings, that it's very hard to make decisions when you know you may be wrong. You have to learn to recognize that we in fact may be wrong. And, even worse than that, it's almost inevitable that all of our constructs will have some kind of a flaw in them. So when it comes to currencies, no currency system is perfect.

So you have to recognize that all of our constructions are imperfect. We have to improve them. But just because something is imperfect, the opposite is not perfect. So because of the failures of socialism, communism, we have come to believe in market fundamentalism, that markets are perfect; everything will be taken care of by markets. And markets are not perfect. And this time we have to recognize that, because we are facing a very serious economic disruption.

Now, we should not go back to a very highly regulated economy because the regulators are imperfect. They're only human and what is worse, they are bureaucratic. So you have to find the right kind of balance between allowing the markets to do their work, while recognizing that they are imperfect. You need authorities that keep the market under scrutiny and some degree of control. That's the message that I'm trying to get across.

"Food Prices: The Need for Insurance"

Esther Duflo says it's time to "make the international financial services actually work for the poor" by providing insurance against volatility in food prices:

Food prices: The need for insurance, by Esther Duflo, Vox EU: Throughout last week, violent riots in Haiti – provoked by Haitians’ fury over the increased price of basic foodstuffs – brought the issue of agricultural prices to the forefront. Other incidents occurred in Indonesia, Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen. Several large rice producers (e.g. Vietnam, India, Egypt) put severe limits on rice exports.

After being stable for several decades, foodstuff prices began to rise again in 2005, and in 2007, their increase was phenomenal. From March 2007 to March 2008, the average world price for corn increased 30%; for rice, it increased 74%; for soybeans, 87%; and for wheat, 130% (the BBC has a nice summary of what is happening to food prices).

High prices Several reasons explain the upward trend in prices, including the demand for biofuels (which consume a significant part of the corn produced worldwide), and the growth and enrichment of the world population (particularly the increased demand for meat in China – paradoxically, it takes more grain to produce a calorie in meat form than it does to produce a calorie in grain form).

Several short-term factors also help to explain the recent price peak.

links for 2008-04-25

• Concrete examples don't help students learn math - EurekAlert
• Frank pushes for mortgage intervention - FT
• Bagehot's Lessons for the Fed - WSJ.com
• The cost of food: facts and figures - BBC
• Someone is wrong on the internet again (Coase Theorem) - The G Spot
• A better economic boost - Los Angeles Times
• Inflation Is on the Rise, Fed Should Stand Pat - John Berry

"How Much Do We Understand about the Modern Recession?"

One story you can tell about recessions is that the presence of wage and price stickiness throws relative prices off their optimal paths, and this sends false signals to markets and causing resource misallocations -- some sectors have too many resources flow into them, others not enough. At some point, however, these misallocations correct themselves and as resources become unemployed and move from the sectors where they were in oversupply (e.g. out of housing) and into sectors where they were underutilized, a process that takes time, a recession occurs. But this statement by Robert Hall has me wondering about those stories:

How Much Do We Understand about the Modern Recession?, by Robert Hall: ...One of the most important facts about the modern recession is at all sectors of the labor market slacken at the same time. ... Abraham and Katz (1986) were the first to recognize the significance of this feature of the economy, which rules out theories of recession that rest on reallocation from shrinking to expanding sectors. If unemployment in a recession were the natural, efficient result of reallocation of workers from shrinking to growing sectors, the growing sectors would open their doors wide to absorb the flow of workers leaving the shrinking sectors. Vacancies would be high in the growing sectors and low in the shrinking ones. The facts ... refute that view... Some force made all sectors cut back... Later I will discuss the idea that sticky prices and wages could explain these facts. I find that they could, but that the traditional way of thinking about stickiness is theoretically unsatisfying...

Here's part of the later discussion:

The primary defect with this class of explanations is their failure to meet the Abraham- Katz standard. If housing fell because of financial constraints, but all other sectors were unaffected, it is hard to see why all the other sectors’ labor markets turned so slack. The focus of the tech collapse was even narrower. Why didn’t the winning sectors expand to absorb the workers released by the single losing sector in each of the two modern recessions?

A traditional answer to this question is that the wage-price system fails to send the right signals to consumers, workers, and firms to expand the unaffected sectors. One view is that real wages are sticky and remain too high to yield firms high enough profits to expand. Another is that prices are sticky and remain too high given the central bank’s policy rule to result in full employment—the central bank keeps the interest rate too high for the expansion to occur. Recent models combine both views. Christiano, Eichenbaum and Evans (2005) is a leading example of modern research in this vein.

Sticky wages and prices are not a full explanation, however. They seem to be a fact without a deep rationalization. A sticky wage that keeps employment below a mutually desirable level creates an opportunity for a worker and an employer to make a Pareto improvement for themselves by adjusting employment upward. What happens to the wage is immaterial here—what matters is the increase in employment. The same holds when a sticky price keeps the quantity traded below its efficient level. The traditional sticky-price literature has not come to grips with the obvious tools that employers, workers, sellers, and customers possess to overcome inefficiently low employment or sales. The literature lacks a coherent theory of disequilibrium. Departures from equilibrium are an assertion, not a derived conclusion from fundamentals. Traditional sticky-wage and -price theory has a strong descriptive claim but not a strong theoretical underpinning.

"Economic Conditions and Religiosity"

Andrew Gelman discusses a paper that finds a link between religiosity and the state of the economy:

Praying for a Recession: The Business Cycle and Protestant Religiosity in the United States In Economics, by Andrew Gelman: In the course of commenting on our article on religion, income, and voting, David Beckworth links to this interesting paper on religiosity and the business cycle:

Mainline Protestant denominations--which tend to have higher income earners--do well in terms of growth during economic booms while evangelical Protestants denominations--which tend to have lower income earners--actually struggle. (During economic downturns the outcomes are reversed--evangelicals Protestant denominations thrive.) In general, I [Beckworth] find mainline Protestants to have a strong procyclical component to their religiosity while evangelicals have a strong countercyclical component. These findings can be explained by again appealing to the labor-leisure choice explained by economic theory.

David Beckworth follows up:

Economic Conditions and Religiosity, by David Beckworth: Andrew Gelman graciously takes note of my research on the business cycle and religiosity over at Statistical Modeling, Causal Inference, and Social Science. One of his blog readers emailed me and requested I explain more thoroughly how macroeconomic shocks could affect religiosity. Below is an excerpt from a forthcoming article where I attempt to explain the relationship in less technical terms :

The first thing economic theory says is that the cost of being religious can change over the business cycle. During an economic boom individuals may find increased opportunities for higher earnings. The potential for higher earnings, in turn, make time-intensive religious activities like church attendance costly for these individuals. Consider, for example, a Southern Baptist from a low-income family being offered the opportunity of getting overtime pay to work at a retail store on Sunday morning. For this Southern Baptist, going to church suddenly becomes a lot more costly and thus, increases the likelihood of him opting for work instead of church. On the other hand, during an economic downturn, time-intensive religious activities become less costly as opportunities for earnings decline. Here, the overtime opportunity for the Southern Baptist disappears and church attendance suddenly becomes more affordable. This idea that higher earnings lead individuals to substitute out of leisure activities, like going to church, into more work and vice versa is called the substitution effect. It implies there should be a countercyclical component to religiosity.

There are, however, two countervailing forces against the substitution effect. The first one is called the income effect and says that the higher earnings also mean individuals can work fewer hours than before and still get the same pay. They, therefore, have more time for leisure activities, like church attendance, without a loss of income. Consider, for example, an Episcopalian whose consulting business was able to increase its fees because of the increased demand for its services during an economic boom. The Episcopalian can now afford to take on fewer consulting projects, without a loss of income, and enjoy more time at church. During an economic downturn, however, the consulting fees would drop. The Episcopalian would now have to work more hours to maintain his income, leaving less time for church. The second countervailing force is something called the wealth effect. The wealth effect says that as individuals’ wealth increases from valuations gains in their homes, stocks, and other assets they have less need to save and thus less need to work. In turn, there should be more time for church attendance and vice versa. Imagine now that the Episcopalian had a large amount of funds in the stock market during a stock market boom. His wealth would increase dramatically and make leisure activities like church attendance more affordable. Both of these effects imply there could be a procyclical component to religious activities.

Economic theory is generally silent on which of these effects dominates the decision to work. Research has shown, however, that evangelicals Protestants typically fall into a lower socioeconomic grouping than mainline Protestants (Pyle, 2006). This suggests that the substitution effect should be more important for evangelical Protestants. In other words, since evangelical Protestants are starting from a lower income level, like the Southern Baptist above, they should be eager to take advantage of higher earning opportunities, whereas mainline Protestants, like the Episcopal above, who already have relatively high income levels may see less need to do so. Moreover, mainline Protestants have more wealth and should therefore be more sensitive to the wealth effect compared to their poorer evangelical Protestant brethren. A priori, then, the changing cost of being religious perspective points to evangelical Protestants being more countercyclical in their religiosity than mainline Protestants.

The second thing economic theory had to say about this issue is that individuals generally desire to have a steady stream of housing, clothes, food, and other consumption over the business cycle. During a recession individuals may become unemployed or find their earnings fall. To prevent these developments from being disruptive, individuals may turn to churches for consumption needs such as shelter and groceries. Individuals may also turn to churches for less tangible consumption needs such as a sense of certainty and divine guidance in a job search. Such a response implies there should be a countercyclical component to religiosity. Note, however, that the wealthier mainline Protestants are in far less need of churches to provide consumption for them. In addition, mainline Protestant denominations often place less emphasis on absolute truths than evangelical ones and, as a result, are not able to create the same sense of certainty or appeal to an all powerful, job-providing God. Individuals, therefore, may choose to join an evangelical Protestant denomination rather a mainline one during a recession.[1] Consequently, the consumption smoothing ability of churches also points to a stronger countercyclical component for evangelical Protestants.

[1] Conversely, these same individuals may find a mainline Protestant denomination more appealing than an evangelical one during an economic upturn when the need for certainty and employment are less pressing concerns.

Child Labour: Lessons from the Industrial Revolution

A characterization of child labor during the Industrial Revolution, and how it helps us to understand the forces behind the use of child labor today:

Child labour: lessons from the Industrial Revolution, by Jane Humphries, Vox EU: Societies have long sought to eliminate child labour. Yet two hundred years after the first Factories Act and despite a level of prosperity that our forefathers would have deemed unimaginable, there are an estimated 186 million child labourers worldwide –5.7 million in forced labour, 1.8 million in prostitution and 0.3 million soldiers.[1] In designing policy to mitigate this persistent problem, it is vital to have a theoretical and empirical understanding of child labour and its consequences. Well-meaning but poorly conceived interventions could cause more harm than good. Perhaps the past provides some lessons.

In a new study, I use the reminiscences of 617 working-class men who lived through the Industrial Revolution to provide insight.[2] Drawn from economically and demographically representative families, the memoirs contain rich detail on early employment. Children were motivated to work by various mechanisms, some operating through family ties and some through incentives like improved status and small subventions from their own earnings. Violence was sometimes used to drive children and was more likely where the incentives of piece rates, competition for jobs and the threat of dismissal were irrelevant.

"Reinventing Energy"

Jeffrey Sachs summarizes some of the ways we can respond to higher energy prices:

Reinventing energy, by Jeffrey D. Sachs, Project Syndicate: The world economy is being battered by sharply higher energy prices. ... No quick fix exists... Higher prices reflect basic conditions of supply and demand. The world economy – especially China, India and elsewhere in Asia – has been growing rapidly, leading to a steep increase in global demand for energy... Yet global supplies of oil, natural gas and coal can’t keep up easily...

In order for developing countries to continue enjoying rapid economic growth and for rich nations to avoid a slump, it is necessary to develop new energy technologies. Three objectives should be targeted: low-cost alternatives to fossil fuels, greater energy efficiency, and reducing carbon dioxide emissions.

Will There Be Another Rate Cut Next Week?

Greg Ip says:

The Federal Reserve is likely to cut its short-term interest rate by a quarter of a percentage point next week -- but then may be ready for a breather. ... If it does cut rates, the Fed could signal in the statement accompanying the decision an inclination to pause and assess the impact of its cuts ...

And, in his most recent Fed watch, Tim Duy says:

I suspect the cessation of rate cuts is near at hand. The Fed will likely pull the trigger on another 25bp at the next FOMC meeting, and send a signal that they intend to pause soon.

links for 2008-04-24

• How Robust Was the 2001-2007 Economic Expansion? - CBPP
• What if we could run history twice? - Cognition and Language Lab
• Human brain appears 'hard-wired' for hierarchy - EurekAlert
• We must break the male cartel in the workplace - FT
• Singing the Praises of the Bumblebee - New York Times
• Animated Bambi Debate Arouses Pastoral Passions - New York Times
• Triple-A Failure - New York Times
• Interference at the EPA - UCS

Guns

[I wrote this many days ago, but I’ve been afraid to post it. As the title says, it’s about guns.]

---

I can't remember the first time I went hunting with my dad. Hunting was just something my dad always did, just like his dad, and his dad before that, and he let me tag along as soon as I was able to keep up.

Hunting wasn’t all we did. On weekends in my family, you went hunting, you went fishing for salmon, steelhead, trout, bass, whatever you could catch, things like that. Sometimes, we'd camp way up in the mountains in the Sierras, you could only get there by four wheel drive, and we'd pan for gold on a claim we had. I think now of the environmental damage we must have done using a ventura to vacuum up the bottom of the stream, run it through rockers, then pan what was left - the stream would get muddy and cloudy as far as you could see downstream - though the trout fishing didn't seem to diminish much. We still have little bottles of gold and a few quartz nuggets from those days. My dad and brother also rode dirt bikes, as my do several cousins and uncles, and my brother was a ranked rider until he hit something in a race in the desert several years ago, punctured a lung, broke some bones, and he decided (was told by his wife) that was enough of that. It wasn’t his first accident. I rode bikes a few times, but never saw the attraction so I left that to others in the family. My brother was a defensive lineman at Oregon State University (about the time Marcus Allen played for USC, they played against each other), and seems to have a much greater tolerance for tearing himself up physically than I do, so that probably explains the difference in tastes. One of my uncles raced hydroplanes, but, like my brother his racing came to an end after he got married and had a family. He didn’t have an accident like my brother did, but my aunt saw one too many accidents with other boats, one deadly, and that was the end of that. So he bought a ski boat instead and that was another thing we did a lot.

But back to hunting. I can't think of a single male relative who doesn't hunt now, or who hasn't hunted in the past. They all had hunting dogs as well. My grandfather had a shepherd of some sort, gray and white, and you didn't dare use the word "chicken" in the dog's presence as he would go nuts thinking you were taking him pheasant hunting. But apparently he couldn't hold a candle to the dog before that, good old "Bo," who could literally herd pheasants your way as you hunted, fetched ducks, loved kids, etc. We had a pointer, a Brittany spaniel, and my dad and I spent many weekends taking her out when she was young, training her how to hunt (e.g. stopping her from bolting after the birds at first scent). People invested a lot in their dogs, and boasts of who had the best hunting dog were heard frequently, it was a point of pride. I’m still amazed at the way pointers work and they way they can hold a bird. I still like watching them work a field.

As we hunted, and at other times, my dad and my grandfather would tell me stories about how many ducks and geese there were in the good old days, before their numbers started to decline (the mascot at my dad's high school in Yuba City was a "honker," still is as far as I know). There’s a certain something in their voices as they talk about it, awe, a sense of loss, I don’t know what really, but they made it seem like something you wish you had seen. Two of my relatives are really into duck hunting. One's family has been in the area I grew up in since it was settled, or nearly so. He's a rice farmer mainly, though he grows lots of other things too, walnuts, Lima beans, wheat, and I don't know what else, whatever he thinks will be profitable, and he has always done quite well. He's a member of an exclusive duck club in the Butte basin adjoining his property; it’s a club where it's hard to get a membership except by heredity. The club only allows hunting twice a week - the rest of the time the ducks are left alone. When I lived there long ago, there were a few movie stars that were members, Robert Stack and George Kennedy come to mind, so it wasn’t impossible to get a membership as an outsider, but it wasn't easy (both had filmed movies there – the town is in California but looks very southern, particularly the courthouse, so the movie studios used the town to shoot movies with southern scenes and that's how both of them found it – they used to show up at the golf course where I worked picking up range balls so I could play for free and that was always kind of fun.).

My uncle and cousin had extensive knowledge of ducks, I was always surprised by how much they knew. They'd see a duck flying pretty far away and could tell you if it was a wood duck, pintail, teal, widgeon, etc. When they hunted, they were pretty picky and would only shoot certain types, letting the others go. If you ever get the chance, crawl up on ducks that are settling for the night, when there are thousands and thousands together and they roll like a wave. The sound is incredible, and if you can get close without them knowing, it's an opportunity you should take. It’s something to see (but please, for those of you who know what I'm talking about, leave the shoestrings in the truck...).

People I grew up with were just as crazy about hunting as people in my family. In high school, we'd party until early into the morning, then a lot of my classmates would get up before dawn, go to the blind, set out the decoys if they weren't out already, then sit there in the cold, rain, and fog waiting for ducks and geese to fly by so they could call them in with their duck calls (even I know some of the different calls you use to try to lure them in). I went to the parties, no doubt about that, but left the early morning duck hunting for others. They seemed to think it was great fun, but I could never ever see why. I went a few times with my dad or relatives when I was young, but declined invitations as soon as I was old enough to realize I could say no. People where I grew up were pretty crazy about ducks and talk of duck hunting dominated a lot of conversation, both within my family, and among my friends. Not all of them were into it, but enough, and everyone had some sort of acquaintance with it. A lot of them refilled shotgun shells as well, you don’t buy shells if you hunt as much as they do, you buy the powder, wadding, casings if needed, firing pins, etc. and assemble them yourself with the aid of a machine. Some people in my family had these setups, and though we didn’t have one. But I still know how to refill shells just from helping friends and I could always use their machines. One thing for sure, we were never short of gunpowder (and that wasn’t always a good thing, but that’s another story).

I followed the usual progression: Lots of exposure to guns, my own BB gun at age seven or eight, gun lessons and a shotgun by age 12. One thing, though, that I want to emphasize is how much respect for guns and gun safety was drilled into my head from day one. There were things you did, things you didn’t do, and it started from the very first time you tagged along just to watch. I won’t even try to detail all the rules, but anyone who knows them also knows that Vice-President Cheney did not have this kind of training (don’t know why I would expect someone with his background to have had it, he plays like he’s one of the hunting types, but wearing the costume doesn’t give the knowledge you get growing up in this environment). If he had the proper training and respect for guns, the accident would not have happened. When you are hunting, you don’t swing past the line. Never, ever, ever, ever. You don’t do it, and it’s not okay to do it just this once even if it’s the best opportunity you ever had in all your days hunting. You walk in a line, you stay in the line – it’s dangerous to fall behind or get out in front so you keep everyone in sight and make sure you are in formation – and you only shoot in front of the line. When a bird takes flight and crosses the line, you let it go. Period. There are rules, and you depend upon everyone following them to the letter.

One time I took my BB gun to my grandfather’s. I wasn’t allowed to shoot it in town where we lived, and never did, not even once, but my grandfather lived out in the country, there wasn’t another house for miles, so we were allowed to shoot there (but only BB guns, not 22s). During the visit, I was shooting cans or something with my older cousin, and we broke one of the rules. Somehow, my grandfather found out about it and my cousin and I were told we could not shoot our BB guns there anymore. I was probably 9 or 10 at the time and I was crushed to have disappointed my grandfather, absolutely crushed. I can still remember how bad I felt. I was eventually allowed to shoot there again, but not for quite awhile, and it made a huge impression on me. I don’t think I ever consciously broke a gun rule after that. In my family, and it was no different among the people I knew, if you broke the rules, even once, they never asked you to go hunting again. They might let someone like Cheney tag along, but he wouldn’t be allowed to bring a gun, not with his history. The rules covered all sorts of things. As an example, if anyone in my family ever saw me intentionally shoot something that I didn’t intend to take home, take the time to clean, and eat, they would never hunt with me again (I absolutely hated the cleaning part, that alone was enough to stop me from wanting to hunt as I got older, setting aside the entrails -please - ever try to pluck a snow goose?). If you shot a dove out of a tree instead of in flight, that was considered to be unfair and you’d be ostracized. As I said, there were rules, and you followed them.

I think I saw a handgun once or twice growing up, but rarely. On those few occasions, the person handling the gun didn’t seem very careful to me, and it made me nervous (you check to see if a gun is loaded every time you pick it up, no exceptions, even if you set it down fairly recently, and it started with failure to do that simple safety check). I just wanted it put away. Shotguns, 22s, rifles for deer or elk hunting, those were mostly what you saw (and rifles were rare too, it was mostly shotguns). We didn’t much worry about protecting ourselves, that’s not what the guns were for. We probably locked our doors, but we didn’t have to, it was pretty safe, everyone knew when there was a stranger in the neighborhood. And though the guns weren’t kept for that purpose, anyone contemplating breaking into a house knew, or should have known, that most people had a shotgun and their house and people who knew how to use it. And use it well. There was just no need for handguns.

I understand the problems handguns cause in big cities. Well, as much as I can understand from having lived in one for three and a half years. Other than that I’ve lived in mid-size cities or small towns in rural surroundings. I read somewhere recently that rural voters are one of the key elements in the race between Clinton and Obama. If so, and this isn’t news to anyone, they need to tread lightly on the gun issue. To people who grew up like I did, guns aren’t just something that are used for hunting, they’re a symbol of a way of life. Sadly, an uncle of mine passed away recently and not long after I was presented by my father, rather ceremoniously in its own way, with a gun that had belonged to my grandfather and had passed through my uncle’s hands. I took it – I still have the 20 gauge one I got when I was twelve years old, and another old 12 gauge Winchester (another of my grandfather’s guns I was given when he passed away). I had to take the guns, even if I wanted to get rid of them I couldn’t do it while my dad was still alive, and even then I’d give them to my brother or someone else in the family – there’s no shortage of options. I don’t even have 12-gauge shells any more I don’t think, but the guns themselves have a long family history and I will likely pass them along to my kids someday, or to their kids, who knows. I have another gun that belonged to my grandfather’s dad’s, a really old pump, my dad called it a riot gun, and for all I know it’s worth something. But I’ve never checked and don’t plan to. It too will stay within the family.

Maybe if I’d spent more time in a big city and observed first-hand the troubles that handguns can cause I’d feel different about the whole gun issue, but anything that might force me to have to register the guns I have, give them up, anything approximating that I would resist. I can remember seeing my grandfather wearing his vest and hat, carrying that Winchester hunting pheasants in sugar beet fields, the wheat and rice stubble, riding with him in his pickup as a kid on the way there with the dog hanging out the window itching to get started. Those are wonderful memories, and having the guns is somehow connected back to all of that, to my family history, to time as a kid with my dad, grandfather, uncles, and cousins. It recalls a way of life I no longer live, but it will always be with me. I can’t exactly explain how guns fit into all that, but I know that they do.

I don’t know if this helps any of you understand the gun issue better or not, I hope it does. It’s not just a bunch of bozos in funny hats drinking beer and shooting stuff just to kill it (beer is not allowed). I have let the tradition die, I didn’t teach my sons or daughter how to hunt, or even how to shoot guns. I can take a shotgun apart, every single piece, clean it, and put it back together, and could from a very young age, but my kids don’t know how to do that and probably never will. I feel kind of bad about that, about not passing certain traditions and knowledge along, and I wonder what the guns will mean to them when they get them. They probably won’t mean much, not in the way they have meaning to me, they don’t connect to memories of time with family and friends, or to a way of life. They’ll be something they remember from my house, if they even remember at all since they are hidden away out of sight. Maybe somebody will make a few bucks someday selling them once there’s little meaning left. I guess it’s okay that I didn’t pass the gun thing along, maybe losing cultural connections to a way of life that involves guns isn’t so bad, though I have to admit part of me wonders if I shouldn’t have done more. I guess I want them to have the same memories I have, the same connections to me that I have to my dad, and the outdoor-type image has some attractiveness I suppose. I don’t know. There’s something about getting up early, trudging in the cold through wet fields until you and the dogs are dead tired, often coming up empty-handed but somehow that didn’t matter, generations of family together sharing stories from the past, and creating new ones to be told in the future. Because of all this, I think, I resist restrictions on guns. I guess it’s my history but I can’t logically explain why I resist more control over guns other than what I’ve said above. I don’t have any problem with some restrictions, e.g. waiting periods, bans on certain types of guns, and I don’t have much use for handguns, so restrictions on those don’t bother me too much, but I would have trouble with an outright ban on all handguns. And, sorry, but I’m not giving up my shotguns. I’m not about to register them with anyone or tell the government that I have them, and the government is not welcome to come into my house and see if they are there (I guess they could read this). I know there are no plans to do this, that’s not a real worry, but there are surely limits on what I would be in favor of.

I have no emotional connection to the problems guns create in major cities. I see it on the news, read about it, but it’s not real. Where I live now, there’s not a single area of town I wouldn’t walk in, unarmed, alone, any time of the night or day, and this is an urban area of around 200,000 people. The small town I grew up in is even safer. The fear that I suppose exists for a lot of people about guns doesn’t affect me or the people around me. The gun issue is far from the most important thing for us to worry about, and there is very little for a politician to gain by taking on the gun issue if rural votes are important for winning. I don’t have any particular message to deliver, and I don’t mean to preach, I don’t even think I’m very logical on policy issues where guns are concerned so I won’t offer any. I just wanted to write down a few of my experiences, explain how guns are connected to my past, hoping it might help people see this issue through other eyes.

Sign of the Times

They looked at me kind of funny when I started taking close up pictures of their sign:

Andrew Leonard:

Japan's unwanted low-fat diet, Salon:  A drastic shortage of butter in Japan is providing the hook for some gloomy stories about the future of food in one of the richest nations of the world. Forget about Haiti or Kazakhstan -- Japan, too, is experiencing a food crisis.

From Australia's The Age:

While soaring food prices have triggered rioting among the starving millions of the third world, in wealthy Japan they have forced a pampered population to contemplate the shocking possibility of a long-term -- perhaps permanent -- reduction in the quality and quantity of its food.

From The Times:

Japan, its leading food importers say, will inevitably take a step backwards in the food it eats. "The time will come," says Akio Shibata, ... one of Japan's foremost experts on food supply, "when the Japanese people will realize that they will not have the quality, taste and prices of food they are used to."

The basic story line is familiar: a global surge in grain prices and animal feed... But there's an important twist. Just two years ago, a vast milk surplus in Japan forced local dairy farmers to literally pour raw milk down the drain and kill off excess dairy cows. According to the Asahi Shimbun, domestic production accounted for 86 percent of Japan's butter as recently as 2006, but after the painful resolution of the glut, butter production plunged.

The problem: You can pour milk down the drain in an instant, and kill off your herd of cows in a blink of eye. But you can't reverse the process so quickly. Building up a productive dairy herd takes years. The laws of supply and demand work slowly with food...

The combination of high oil and food prices and a burgeoning world population has everyone wondering whether humanity has finally reached the limits-to-growth end of the line. And sure, we must grant the possibility that the long, steady decline in the price of basic foodstuffs that has been a fact of post World War II life may have come to an abrupt end. But it's also true that a massive reconfiguration of the planet's productive capacity to produce desirable agricultural commodities, in response to current high prices, will take years to accomplish.

Kerry Howley:

Let Them Eat Carbs, by Kerry Howley: Wow:

“If part of our problem is that the Chinese are going to eat meat and you’ve got to have corn and soybeans to feed the Chinese their meat, then why isn’t it just as legitimate for the Chinese to go back and eat rice as it is for us to change our policy on corn to ethanol?” [Sen. Charles] Grassley asked in a conference call with reporters.

Not that this makes any sense economically, but it’s good to know that in Grassley’s calculus billions of people going without protein = some Iowans letting go of their ethanol subsidies.

The LA Times:

Rice in short supply at Costco, Sam's Club, LA Times: Worried about rising prices worldwide, customers have been stocking up, prompting Sam's Club to limit sales to no more than four bags. Costco is considering a similar move.
The global run on rice has hit U.S. shores but appears limited to big-box warehouse stores. Customers concerned about rising rice prices have been cleaning out the shelves at Wal-Mart Stores Inc.'s Sam's Club and Costco Wholesale Corp. stores.

Maybe things have changed since I left the rice country in Northern California, but let me make a few comments about rice in particular:

1. There are two varieties of rice, long grain and short grain (I'll include medium grain in here, as most people call it). They are produced in different geographic areas.

2. Short grain is grown in California and is mostly exported (e.g. Calrose is a popular variety in many areas of the world, though Koreans and Japanese turn their noses up at it - so substitution across varieties isn't always easy). Long grain is grown elsewhere, Louisiana used to grow a lot, but I haven't kept up. I think Louisiana does produce some short/medium grain as well. Long grain is largely consumed domestically.

3. So it's the demand for short grain rice that affects poorer countries much more than the demand for long grain (I think?). Is there a significant source of demand for short grain within the US? It turns out that there is, and one part of it is from beer producers  (A quick search gives figures in the range of 10% - 20% of total rice production in the US used in beer, but that includes all varieties of rice, so the percentage of just short grain would be higher). For example, Budweiser is vertically integrated and owns some of the bigger rice dryers in California. My mom worked in one owned by Budweiser for many years, and her job was to route rice by truck, train, ship, etc. from the dryer to its destination. A lot of it went through the Port of Sacramento.

4. Rice is also used in pet food. I don't have the figures in terms of how much is used, but I do know it is enough to have put upward price pressure on brewer's rice, so it's enough to matter.

5. The point is that is if want to reduce the demand for rice, perhaps our first efforts shouldn't be to convince people to give up eating long grain at meals, that won't help much, instead we need to look for ways to reduce the demand from industrial sources such as beer and pet food production to help keep down the price of short grain (pet food can substitute using other cereals if they are cheaper, but it's much harder for beer producers since substitution of other grains changes the flavor, so a reduction in overall demand for beer is the only way to bring this about).

[It's been a long time since I lived among rice farmers, and I'm doing this from memory. I think the general outline is correct, but if you know more about this, or can provide more precise details, please do.]

Note: Some of the statements above are being refined in comments, e.g. Arkansas is the number one producer of long grain and exports quite a bit.

"The Paradox of Disappearing European Unemployment"

In the US, official unemployment statistics have been relatively low, yet people report dissatisfaction with the state of the economy. In Europe, something similar has happened. Unemployment has fallen over the last decade, yet there is considerable public dissatisfaction with the situation in labor markets. Tito Boeri tries to explain why, and the reasons seem similar to what has happened in the US. Labor markets are becoming more risky, but wages have not risen enough to compensate workers for the additional risk that they face:

The paradox of disappearing European unemployment, by Tito Boeri, Vox EU: An old European dream has come true, but it looks more and more like a nightmare.

The dream was written on the stone of the Treaty, signed in Rome on March 25, 1957: “The Community shall have as its task (…) to promote throughout the Community (…) a high degree of convergence of economic performance, a high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States.”

A European dream came true… In the last ten years European unemployment has fallen to a level not seen for over twenty-five years. There are currently almost 4 million fewer people unemployed in the EU15 than in 1996. Long-term unemployment almost halved: Europe is no longer a place where half of all job seekers have been on the dole for more than twelve months, as was the case in the mid-1990s.

The disappearance of mass unemployment in Europe is not the by-product of falling participation to the labour market; it is the average employment rate in the EU15 that has increased by more than six percent over the last ten years. This is the only area in which Europe is getting closer to the ambitious Lisbon targets. Nor there are more discouraged workers crossing the pourous borders between participation and non-participation to the labour market: there was no increase in the number of non-employed persons who decided to stop searching for another job as they realized that there were no vacancies for them.

It was mainly the countries with initially the largest unemployment rates that succeeded in reducing unemployment the most. The cross-sectional dispersion in unemployment rates across regions of the EU15 (Nuts II) also declined considerably as a result of both less cross country and less within country variation in unemployment rates. This looks like a major step towards achieving the social cohesion pursued by European Governments at least since the 1957 Rome Treaty. European regions are less and less different in terms of labour market conditions.

.... but it is turning into a nightmare European Governments, however, are not capitalizing on these labour market success stories. Governments and coalitions ruling while millions of jobs were created have not been reconfirmed in office. Berlusconi’s 2001-6 Government succeeded in creating 1.3 million jobs in five years, far more than promised in the 2001 electoral campaign. This did not prevent the collapse of his popularity and the defeat at the next elections. Prodi’s 2006-8 Government had a very short life, in spite of creating more than 400,000 jobs in less than 2 years. Aznar lost in 2004 after halving Spanish unemployment and creating almost 5 million jobs during his mandate.

Public opinion polls also find rising dissatisfaction with working conditions, notably in those countries having experienced the strongest unemployment declines.

Why? Why is a European dream turning into a European nightmare?

McCain's Budget Plan

Douglas Holtz-Eakin, John McCain's top economic advisor, says not to worry about the fact that John McCain's budget plan is out of balance by hundreds of billions of dollars, they have a plan to increase revenues and take care of the problem:

As Mr. McCain’s plan currently stands, The Economist magazine concluded that it “will not come anywhere close to paying for the tax cuts.” Most telling, I spoke over the past week with several other economists who admire Mr. McCain and have advised him over the years. None would defend his current fiscal package (or be quoted).

Mr. Holtz-Eakin says the mistake that people are making is treating the McCain platform as if it were a finished piece of work. “It’s April,” he said. “We have until November.” The campaign will later unveil “base broadeners” in the corporate tax code — that is, loopholes it will eliminate — that will pay for the faster investment write-offs, for example.

If you weren't paying a tax before, but you are paying a tax now because McCain broadened the base, that's a new tax. Isn't it? It's a new tax for somebody, even if taxes are lowered elsewhere. Wonder what happened to:

Republican John McCain says there will be no new taxes during his administration if he is elected president.

"No new taxes," the likely GOP presidential nominee said during a taped interview broadcast Sunday.

O.K., in a technical sense, it's a tax shift, a tax cut one place, and a tax increase in another, and some shifts are desirable, others aren't. But does anyone doubt that Republicans would call this proposal a new tax if it came from Democrats? Cue the deep, scary voice: "Democrats have a plan to impose new taxes to pay for their wasteful spending. Instead of making the hard decisions and cutting spending, they want to take money out of your pockets -- they want to raise taxes on businesses, and that costs jobs and lowers economic growth. Republicans understand that, as times get tougher, Washington shouldn't be imposing new taxes that make it harder for people to keep afloat in this economy."

Here's more from the article:

Weighing a McCain Economist, by David Leonhardt, NY Times: When Douglas Holtz-Eakin took over in 2003 as the director of the Congressional Budget Office ... he walked right into a firestorm.

For years, Republicans had been pushing the budget office to change the way it estimated the cost of a tax cut. Rather than looking only at the revenue lost, they argued, the office should also consider how tax cuts would change behavior. With lower tax rates, businesses would invest more, workers would work more — and the government would thus get a tax windfall. This, in a nutshell, is supply-side economics. ...

Mr. Holtz-Eakin ... did indeed begin using dynamic analysis... Yet he used it as it should be used. What the budget office found, as study after study has shown, was that any new revenue that tax cuts brought in paled in comparison with their cost. This is why the deficit jumped under the last two tax-cutting presidents (Ronald Reagan and George W. Bush) and fell under the last two tax-raising presidents (George H. W. Bush and Bill Clinton).

As Mr. Holtz-Eakin told Congress in 2003, a dynamic analysis of the White House’s tax and spending proposals made essentially no difference. ...

Today, Mr. Holtz-Eakin again finds himself in a firestorm. He is the top economic adviser to John McCain’s presidential campaign, and some fiscal conservatives have begun wondering what happened to ... the John McCain who was a fiscal conservative...

“We’ve been taking some hits,” Mr. Holtz-Eakin acknowledged.

Last week, Senator McCain laid out his economic vision... He talked about wasteful spending, but the newest, most detailed part of the speech dealt with a package of tax cuts that would cost about $300 billion a year. They would come on top of $350 billion a year in Bush tax cuts that Mr. McCain wants to make permanent. To put these numbers in perspective, the Iraq war has been costing roughly $200 billion a year. ...

To deal with the deficit, Mr. McCain has said that he will get tough on year-to-year spending, both in military programs and domestic ones. Then he will try to remake Medicare and Medicaid...

The problem is that the campaign has been far, far more detailed about its tax cuts ... than its spending cuts... Mr. McCain has proposed the elimination of the alternative minimum tax (at a cost of $60 billion a year), new child tax deductions ($65 billion), a corporate tax cut ($100 billion) and faster write-offs for corporate investments in new equipment ($50 billion to $75 billion). ...

It’s easy to imagine how Mr. McCain could be laying the groundwork to run as a true fiscal conservative, now that he has locked up the Republican nomination. He could present himself as the one candidate who believes that the nation can afford neither Mr. Bush’s endless tax cuts nor the Democrats’ big new government programs. He has the perfect adviser to help him make that case.

But it’s not the case he’s making, at least not yet. Instead, when you add up the numbers that have been released so far, you’re left wondering...

I have a question. At first, John McCain was promising to balance the budget his first year in office, he said it was straight talk, so I guess he meant it. But then he said he really didn't mean it, now it's at the end of his second year [Update: I can't read, apparently - a year is not a term]:

Sen. McCain has backed off his earlier promise to eliminate the budget deficit by the end of his first term and now says it may take two terms.

Here's the question. If we are heading into or already in an economic recession, what kind of economic plan is it to cut spending and/or raise taxes by hundreds and hundreds of billions of dollars? How is that supposed to help the economy recover from its troubles? He can talk about short-term economic stimulus packages all the wants, but if he plans to balance the budget over a two year time-frame, with some of that surely coming in the first year, the talk of short-term stimulus is meaningless. The economy is not stimulated when spending is cut or new taxes are imposed, and that's what he says he plans to do. [continuing the update, the question, then, is whether he will increase the deficit his first year to stimulate the economy. If he does, it won't be on the spending side, he plans a one year moratorium on new spending which is a cut in real terms. And the talk of base broadeners, etc., is a way of denying that they plan to increase the deficit through tax cuts, though that denial is part of the reason the plan is not viewed as being credible.]

Of course, his promises aren't possible even in the best of times. He won't be able to cut as much from government programs as he says he will, and he claims he won't raise taxes. I can't think of any credible analyst who thinks his plan comes anywhere close to adding up. But he says it anyway, with his supposed straight talk, in the face of a potential recession, and nobody seems to mind, nobody seems willing to think hard about what this says about his character. After all, it's just the economy, it's not something important like only eating half your waffle.

Update: More from pgl and Brendan Nyhan.

Update: The Economist's blog, Free Exchange, adds:

Now, it's possible that Mr McCain thinks his critics are wrong, and that supply-side orthodoxy holding that tax cuts always raise revenues is correct. Whether or not this is what Mr McCain thinks, it's absolutely what he says. Brendan Nyhan has collected a long list of statements to this effect.

Of course, as Mark Thoma points out, now might not be the best time to seek a balanced budget. By the time Mr McCain gets around to crafting his first budget, economic conditions may be quite a bit different, but for now, at least, a package of tax increases and spending cuts is not what the economy needs.

Whatever is going on inside Mr McCain's head, it would be very helpful if he could begin elucidating one clear message, so that the public can weigh it against alternative proposals. As things stand, with the candidate preaching supply-side voo-doo to partisan audiences while his economic advisor maintains that it's all an election ploy or an episode of "misspeak," it's impossible to determine how good or bad an economic leader he might be.

And pity the economic advisor, whose official role is now seemingly to tell the world that his candidate is lying to get elected, and all will be well once he's safely ensconced in the oval office.

I wish I'd made the last point in reference to the character issue.

Commodity Prices and the Fed

Jim Hamilton answers questions about his believe that the Federal Reserve is partly responsible for recent increases in commodity prices:

Commodities and the Fed: answering the skeptics, by Jim Hamilton: Judging from some of the reactions across the blogosphere (not to mention any number of our own dear readers), maybe I should take another stab at clarifying why I see the hand of the Federal Reserve in the most recent movements in oil and commodity prices. ...

Stagnating oil production in the face of strong demand has everything to do with the broad run-up in oil prices since 2001.... My claim that the Federal Reserve has now also started to contribute to the most recent oil price increases is very specific to what we've observed since January of this year, as I clarified when I first raised this issue February 28:

Although I have been skeptical of Jeff Frankel's story that low interest rates were the primary cause of the broad movements in commodity prices over the last several years, it is very plausible to me as one explanation of what we've seen happen over the last two months.

And here's what I said on March 28:

I have long argued that the broad increase in commodity prices over the last five years has primarily been driven by strong global demand. But I am equally persuaded that the phenomenal increase ([1], [2]) in the price of virtually every storable commodity in January and February cannot be due to those same forces. This was a period when the economic news was getting bleaker by the day, eventually persuading many of us that a recession has likely started. To argue that January and February's news instead signaled booming commodity demand strains credulity.

...Some weeks back Paul [Krugman] noted that, if commodity speculation is playing a role in price moves, we should be seeing inventory accumulation. He appealed to a diagram such as the one below, which depicts the supply and demand curve in the absence of any inventory changes or speculation. Krugman noted that if speculation succeeded in driving the price above the fundamentals equilibrium price P0, it would produce a gap between supply and demand, and would have to show up as inventory accumulation.

But where, Paul asked, is the current evidence of that inventory accumulation? On Sunday, he answered his own question with [a] graph of metals inventories...

I agree with Paul and the others above that speculation was not the primary factor prior to January, and I draw the same conclusion they do from the historical graph. But in terms of interpreting the trends over the last few months, let me just note that the very short run supply and demand curves for most of these commodities are extremely steep-- there is practically no way to bring more copper to the market over the next few weeks unless you are bringing it out of storage somewhere. And if those curves are extremely steep, the magnitude of the inventory change you'd expect would be quite small. Particularly since it could show up anywhere in the chain from production to consumption, I don't think there's a strong presumption you could find evidence of it in the available data.

No matter what your favorite explanation might be-- whether speculation or fundamentals of supply or demand-- any coherent theory says these shifts should show up somewhere in quantities produced, consumed, or stored. But given the very low short-run supply and demand elasticities and the quality of available data, hoping to find confirmation or refutation of that theory on the basis of the quantity data may be asking too much. I believe we have to rely on something else to persuade us. And the main thing that makes me doubt the demand-based story is the fact that the latest surge in commodity prices-- that since January-- came at a time when every indicator of which I'm aware pointed to slower rather than faster real economic growth. ...

Free Exchange ... ends up with the following conclusion:

I predict that if the Fed did surprise by holding the rate steady, oil might crash--all the way back to $100 per barrel.

Again, that's not so different from my own views. Except that I'd add that $100 a barrel would be a welcome development at the moment. If it's within the Fed's power to achieve that, the opportunity should be seized with enthusiasm.

The Effect of Mergers on Consumer Prices

Have antitrust authorities been too lenient where mergers are concerned?:

The effect of mergers on consumer prices: evidence from five selected case studies, by Orley Ashenfelter and Daniel Hosken, Vox EU: More than a thousand merger requests are filed with U.S. antitrust authorities each year, but only a small number of these transactions are blocked or modified because of concerns that they might result in higher, anticompetitive consumer prices. Recent examples of highly debated proposed mergers include the combination of Delta and Northwest airlines and Microsoft’s bid for Yahoo!. Although very significant public and private resources are devoted to the administrative review of the potential anticompetitive effects of mergers before they are approved, there has been surprisingly little evaluation of whether the mergers that have been permitted are actually anticompetitive. Absent this information, it is impossible to determine whether government policies are either too stringent or too restrained or to make rational adjustments to these policies.

More generally, the value and effectiveness of antitrust policy itself is the subject of intense debate that must rely on very little factual information. Crandall and Winston (2003), for example, argue that antitrust policy has not been beneficial for consumers, while Baker (2003) argues to the contrary.

links for 2008-04-23

• The Shape of America’s Recession - Nouriel Roubini
• Have Wages Kept Up With Productivity Growth? - Zubin Jelveh
• The paradox of disappearing European unemployment - Vox EU
• LIBOR Becomes a Bit More Accurate, Crisis Becomes a Bit Worse - Jeff Frankel
• Government Seeks to Buy Student Loans - New York Times
• Daniel Gilbert, Happiness Researcher - New York Times
• Commodities and the Fed: answering the skeptics - Econbrowser

"I’m Sure Those Stupid Economists Have Never Thought of That!"

Paul Krugman explains why he is not as optimistic as as others that "human ingenuity and technological progress will solve all our problems":

Limits to growth and related stuff, by Paul Krugman: I’ve been getting some correspondence asking me where today’s resource concerns fit with the old “Limits to growth” stuff that received a lot of publicity 30+ years ago. Actually, there’s a bit of a backstory there.

In 1973-4, my junior and senior years in college, I was Bill Nordhaus’s research assistant, working on energy issues. (This is the same Bill Nordhaus who warned back in 2002 that the cost of the Iraq war would probably be a lot higher than the Bushies were letting on.) I spent much of the summer of 1973, in particular, in Yale’s wonderful geology library — though the real import of what I learned there didn’t sink in for a while, as I’ll explain in a bit.

Applauding Failure

What's the best thing Bush tried to do, but couldn't?

The Best Thing that Didn't Happen During The Bush Administration, by Robert Reich: The best thing to have occurred during the Bush administration is something that did not happen. We did not privatize Social Security.

Had we done so, boomers facing retirement over the next few years would be even worse off than they are today. Now they’re struggling with pension plans worth less than they counted on, and home values that are tanking. At least they can rely on a monthly Social Security check.

But had we privatized, they’d be totally reliant on the stock market. And look what’s happened to the market: Compared to stock values ten years ago, the S&P 500 has risen a little over 1 percent a year, adjusted for inflation. Even Treasury bonds have done better. Go back nine years and there’s been no gain at all. Go back eight years and the market has been off an average of 1.4 percent a year.

Yes, I know, it’s been a rough time. First the tech bubble bursting, then 9/11, then Enron, then the housing bubble bursting, then the credit crunch. But that’s my point. We can’t necessarily rely on the stock market. ...

Sure, the stock market has done well over the past half century. But there have been decades like the 1970s and this one, so far, where it’s been a disaster. That’s why we have Social Security – so that if your timing is bad and you get caught in a downdraft, you still have something to fall back on in retirement.

If we had privatized, you’d have had nothing to fall back on. You’d crash.

I'm pretty happy the whole permanent Republican majority thing didn't work out so well either.

Budgetary Bait and Switch

Bruce Bartlett and I disagree about the size of government. He would starve the beast, I would want it healthy and thriving, but I have no disagreement with his view of the general lack of character Republicans have displayed on the budget issue:

The GOP's bait-and-switch tax strategy, by Bruce Bartlett, Commentary, LA Times:  It is an article of faith among Republicans that tax cuts are the cure for every problem the economy faces, and that tax increases are the equivalent of economic poison. Any hint by Democrats that the current administration's tax cuts should be revisited in light of changing economic or fiscal conditions is met with charges that they are proposing the largest tax increase in history.

The truth is that President Bush's tax cuts didn't do much good for the economy; they were mostly giveaways to GOP political constituencies and were little different conceptually from pork-barrel spending...

The fact is that the massive tax increase Republicans claim the Democrats are proposing is entirely the result of the GOP's ... policies. Rather than expend the effort to make their tax cuts permanent in the first place, they attached expiration dates to every major provision. ... The alleged tax increase that would result is simply a consequence of the tax system returning to what it was before 2001...

In other words, no one is proposing new taxes... It is simply a matter of allowing the law that Republicans enacted to follow the course that they chose in the first place.

Republicans respond that they ... didn't have the votes to enact permanent tax cuts, so it was temporary cuts or nothing. This is not true. They could have made them permanent, but that would have required bipartisanship and more political capital than Republicans were willing to spend. So they took the easy way out, figuring that Democrats wouldn't dare oppose extending the tax cuts when the time came, lest they be accused of favoring a vast tax increase.

But this isn't even the worst of the Republican dishonesty. That goes to projections from the Congressional Budget Office showing a sharp reduction in budget deficits after 2010. But these lower deficits result largely from the expiration of the tax cuts and the higher revenues that would result. Thus, Republicans are trying to ... blame Democrats for advocating higher taxes while implicitly using those higher taxes to make future deficits smaller.

This sort of political game may be fun for Republicans who think that they have boxed Democrats into a corner. But this game has had real economic consequences. Because the tax cuts are not permanent, their economic impact has been severely diminished. All economists know that permanent tax changes have far more effect than temporary ones because people won't change their behavior significantly unless they have some assurance that the tax regime will be in effect for the long term. ...

There is little doubt that the economy would have been stronger with permanent tax cuts. But that would have meant fewer tax cuts and thus fewer opportunities to buy votes. It also would have forced Republicans to deal with the true budgetary consequences of their actions. ...

Tax policy is an important campaign issue, and it would be good to get agreement on the post-2010 tax code as soon as possible. Current law makes it impossible to plan for the future with regard to taxes. Whatever is done should be done permanently to the greatest extent possible.

He believes tax cuts promote economic growth to a much larger degree than I do, but there is some common ground. He wants taxes to be efficient, i.e. to promote maximum growth given the size of government that taxes must support, and I do too. Thus, to the extent that we can make the tax code more efficient through budget neutral tax changes without compromising equity, we shouldn't resist doing so. A budget neutral shift in taxes can promote economic growth in the same way that a tax cut does if the shift eliminates or substantially reduces economic distortions, though as I noted above tax changes are not the first place I would look if enhanced growth was the goal.

What this means is that instead of letting all the Bush tax cuts expire, there is the possibility of retaining some of the existing tax cuts while enacting new ones to replace them so that the revenue implications are the same, but the economic and equity properties are the same or better. However, given that this would be played as Democrats enacting new taxes, the politics that are involved make such a shift in taxes unlikely even though it would bring about the very thing Republicans claim they want, higher economic growth. I think Bruce Bartlett is honest in his belief that permanently lowering taxes has a significant effect on economic growth and that this belief corresponds to his small government philosophy, my difference on this issue is over the magnitude of the growth effect relative to what you must give up in terms of key government programs when taxes are cut. But for many Republicans, it seems as though the growth argument is merely an excuse to attain their real goal, smaller government, and their support of pretty much any tax cut that is proposed is evidence that growth is not the primary concern. Paul Krugman puts it this way:

Since the 1970's, conservatives have used two theories to justify cutting taxes. One theory, supply-side economics, has always been hokum for the yokels. Conservative insiders adopted the supply-siders as mascots because they were useful to the cause, but never took them seriously. The insiders' theory - what we might call the true tax-cut theory - was memorably described by David Stockman, Ronald Reagan's budget director, as "starving the beast." ... Starve-the-beasters believe that budget deficits will lead to spending cuts that will eventually achieve their true aim: shrinking the government's role back to what it was under Calvin Coolidge.

And when taxes have been cut recently, who has benefited most from what is "little different conceptually from pork-barrel spending" is worth thinking about as well.

Tax Progressivity and Inequality

Is reduced progressivity of taxes responsible for the rise in inequality in recent decades?

Tax Progressivity and the Rise in Inequality, by Lane Kenworthy: Income inequality in the United States has increased sharply since the 1970s. How much of this is due to reduced tax progressivity?

A key element of the rise in inequality has been the dramatic jump in incomes among the top 1% of the population. According to calculations from IRS data by Thomas Piketty and Emmanuel Saez (available here), this group’s share of total income more than doubled during the 1980s and 1990s.

This is due in part to the fact that in recent decades taxes have done less to reduce the top 1%’s income share. The following chart shows the pretax and posttax income share of this group from 1960 to 2001, according to the Piketty-Saez calculations. Between 1960 and 1979, its posttax income share was 70% of its pretax share. In the period from 1980 to 2001 that increased to 84%.

(Note: The Piketty-Saez data end in 2001, so they don’t reflect the Bush tax cuts. Calculations by the Congressional Budget Office suggest that from 2002 to 2005 the top 1%’s posttax income share was 85% of its pretax share, very similar to what the Picketty-Saez data indicate for 1980-2001. I don’t use the CBO data here because they go back only to 1979.)

What effect has this had on inequality?

The chart makes clear that most of the rise in the top 1%’s posttax income share is due to the increase in its pretax share rather than to changes in tax progressivity. The next chart offers another way to see this. The solid line in the chart shows the top 1%’s share of after-tax income since 1960. The dashed line shows what the top 1%’s share of income would have been had taxes reduced it to the same degree as in the 1960s and 1970s. It’s lower, but not massively so. Changes in taxation have mattered, but they have not been the main reason for the rise in the top 1%’s income share.

If reducing inequality is an aim of the next administration, increasing the progressivity of our tax system would surely help. But this is only one piece of the puzzle.

"Puzzled"

Menzie Chinn is puzzled by a certain politician's proposal to stimulate the economy:

Puzzled, by Menzie Chinn: I have been puzzled by the proposal for a tax holiday for gasoline purchases running from Memorial to Labor day (see [0], [1], [2]), with the objective of spurring the economy. First, the Federal tax is quite low, either in real or in relative terms. Second, the benefits that would accrue to consumers are probably pretty small, under reasonable assumptions.

Going to the first point... As one can readily verify, in inflation adjusted terms, the tax has been eroded over time to levels not seen since the early 1990's. This is true regardless whether one deflates by the CPI-all or the CPI-ex. energy and food.

In relative terms, the total Federal tax has been shrinking as a share of gasoline prices, as gasoline prices have headed north (March = $3.293, all grades, inclusive of taxes). As of March 2008, the Federal tax accounted for 0.056% of that price. ...

So this is the measure to jump start the economy? I think this measure would give relief to somebody. But I also think it's a pretty blunt instrument by which to provide assistance...

Now, I'm not a microeconomist by training. Nor do I play one on TV. But it seems to me that if the supply of gasoline is price inelastic, and the demand is similarly price inelastic, then the incidence of the current Federal gas tax must be about evenly balanced. A tax holiday is then a holiday to both consumers and producers. ...

The proposed gas tax holiday was for a short duration of months. In this case, the short run price elasticity of supply is near zero, and the demand elasticity is plausibly near zero as well.

Assume both supply and demand are equally price inelastic, and this means the incidence of the Federal tax is about 50-50. Eliminating the gasoline tax for a short duration gives a windfall to both consumers and producers, of about equal proportion. (By the way, this conclusion is not true of state gasoline taxes; see Chouinard and Perloff (2004)). Now, giving a windfall to refiners and providers of feedstock for gasoline production might be a worthy goal, but I don't believe that was the stated goal. If those corporations get a windfall then either it gets stored away to be spent on investment in a new refinery or addition to an old refinery sometime in the future, or it leaks out to overseas oil producers.

Oh, and by the way, to the extent the lower price spurs gasoline consumption, this should increase the petroleum and petroleum products component of U.S. imports, and thence putting further upward pressure on the price of oil...

links for 2008-04-22

• Parsing Paulson - James Surowiecki
• Are Markets Leading or Lagging Indicators ? - The Big Picture
• Malthus is in the air - Andrew Leonard
• America ponders the depth of its downturn - FT
• Chocolate bar shown to lower cholesterol - EurekAlert
• Lizards Rapidly Evolve After Introduction to Island - National Geographic
• Presidential Candidates Make Foolish Tax - John M. Berry
• The homeownership ideology - Dean Baker
• Life expectancy no longer improving for large segment of pop. - EurekAlert
• The long, hard slog to Oregon- OregonLive.com
• Price Volatility Adds to Worry on U.S. Farms - New York Times
• Expressing Our Individuality - New York Times
• The Body in Depth - New York Times
• The Joe Lunch Bucket strategy - Los Angeles Times
• Academic Freedom: Some Propositions - Crooked Timber
• The Harford-Ariely debate continues, by video - FT