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Paul Krugman explains why the Fed focuses on core rather than headline
inflation. I've made this argument a different way, but it's basically the same
argument. Boiled down, the argument is that the problem prices are the sticky
prices, not the prices like those on food and energy that are flexible, and you
want an index (core inflation) that best highlights the problem, i.e. that
includes only the problem prices and throws out the ones that can be left to
adjust on their own (I prefer measures that trim out the most volatile
prices or use other mechanisms to extract the slowly adjusting prices rather
than simply tossing out food and energy, but that's a technical point).
Here's how Krugman explains the intuition (the exact story is model
dependent, but the intuition almost always comes down to indexing the problem
prices so that they stand out, and leaving the other prices to take care of
themselves, and expectations of inflation are a key part of the story). But more important than the explanation for why the Fed focuses on
core inflation is the conclusion Krugman comes to, that the Fed shouldn't let worries about inflation interfere with stabilization of the financial sector and the broader economy:
Embedded vs. non-embedded inflation, by Paul Krugman: The big economic
debate of the moment is whether the Fed and its peers have made a terrible
mistake by focusing on staving off financial crisis while more or less ignoring
the rise of inflation. “Inflation is rising and it seems the world’s central
banks have critically misjudged the situation,” says Wolfgang Munchau in the FT.
I’ve heard even more apocalyptic views from some serious people in the last
couple of weeks. As it happens, I don’t agree. And I thought it’s worth spelling
out why — especially because many if not most of the participants in this debate
don’t explain their premises very clearly. So: when is it appropriate to get
very concerned about inflation, and when is it OK to assume that a rise in
prices is a temporary shock that will pass? The answer is that inflation becomes
a big problem if it becomes “embedded” in the economy, which makes it hard to
restore more or less stable prices. But how does inflation get embedded? [Here's
So now you've read Krugman and you are confused. I've talked about core
measures of price inflation, yet Krugman is worried about wages adjusting
sluggishly. How can the two views be reconciled? There is a larger theory that
says to include any price that adjusts slowly, whether it's an input price or an output price, in
Fed's monetary policy rule. Here's
The theory also provides important insights into the question of which
price index or indexes it is more important to stabilize. Again, the answer
depends on the nature of the nominal rigidities. If prices are adjusted more
frequently in some sectors of the economy than in others, then the
welfare-theoretic loss function puts more weight on variations in prices in the
sectors where prices are stickier... This provides a theoretical basis for
seeking to stabilize an appropriately defined measure of "core" inflation rather
than an equally weighted price index. .... Similarly, if wages are sticky as are
goods prices, as implied by many empirical ... models, then instability in the
rate of growth of a broad index of nominal wages results in distortions similar
to those created by variations in goods price inflation. If [adjustments in]
wages are staggered ..., then the welfare-theoretic loss function includes a
term proportional to the squared rate of goods price inflation and another term
proportional to the squared rate of wage inflation each period. In this case,
optimal policy involves a tradeoff between inflation stabilization, nominal wage
growth stabilization, and output-gap stabilization...
I should also add that, under some theoretical formulations, asset prices
should also be part of the Fed's monetary policy decision rule. However, for the most part, asset prices
exhibit a high degree of flexibility so little is lost from leaving those prices
out. However, as I've argued before, an exception is housing prices - they can
exhibit downward rigidity - and this is a reason to consider including housing
prices in decisions about the direction of monetary policy, something that would
cause the Fed to lean against housing price bubbles as they are inflating.
One final note. Some people will disagree that the Fed should worry about
wage inflation, i.e. they will say that the Fed moves to suppress wages whenever
workers begin to realize gains and hence works against their interests. But I think that wage inflation that exceeds productivity growth hurts
workers in the long-run. Thus, it's something to avoided.
Posted by Mark Thoma on Saturday, May 31, 2008 at 03:24 PM in Economics, Inflation, Monetary Policy |
Greg Mankiw wants a cut in the corporate income tax:
The Problem With the Corporate Tax, by N. Gregory Mankiw, Economic Scene, NY
Times: At this point in the presidential campaign, Senator John McCain is
the candidate of ideas on issues of tax policy. Too many ideas, in fact. While
some of his ideas are great, others are almost laughable. The one that has
received the most attention recently — a gas-tax holiday — falls in the second
Lost in this hubbub, however, is a bigger idea that Mr. McCain and his
economic team have put forward: a cut in the corporate tax rate, to 25 percent
from 35 percent. It is perhaps the best simple recipe for promoting long-run
growth in American living standards. ...
A cut in the corporate tax as Mr. McCain proposes would initially give a
boost to after-tax profits and stock prices, but the results would not end
there. A stronger stock market would lead to more capital investment. More
investment would lead to greater productivity. Greater productivity would lead
to higher wages for workers and lower prices for customers. Populist critics deride this train of logic as “trickle-down economics.” But it is more accurate to call it textbook economics. ...
Compared with other ways of funding the government, the corporate tax is
particularly hard on economic growth. A C.B.O. report in 2005 concluded that
the “distortions that the corporate income tax induces are large compared with
the revenues that the tax generates.” Reducing these distortions would lead to
Of course, a corporate tax cut would affect the federal budget. ... Cutting
the rate to 25 percent would seem to cost the Treasury about $100 billion a
Part of that revenue loss, however, would be recouped through other taxes.
To the extent that shareholders would benefit, they would pay higher taxes on
dividends, capital gains and withdrawals from their retirement accounts. To the
extent that workers would benefit, they would pay higher payroll and income
taxes. Increased economic growth would tend to raise tax revenue from all
Some economists think that these effects are strong enough to make a
corporate rate cut self-financing. A recent study by Alex Brill and Kevin A.
Hassett of the American Enterprise Institute, looking at countries in the
Organization for Economic Cooperation and Development, supports exactly that
conclusion. But even if that turns out to be too optimistic, both theory and
evidence make it reasonable to expect a significant discount from the sticker
price. In the end, the net budgetary cost of the tax cut might be, say, $50
billion a year.
Senator McCain wants to fill that hole in the budget by restraining
spending. If he can stop bloated legislation like the recent $300 billion farm
bill from becoming law, more power to him.
But in case that quest proves quixotic, I have a back-up plan for him:
increase the gasoline tax..., a gas-tax increase of about 40 cents a gallon
could fund a corporate rate cut, fostering economic growth and reducing a
variety of driving-related problems.
Indeed, if we increased the tax on gasoline to the level that many experts
consider optimal, we could raise enough revenue to eliminate the corporate
income tax. And the price at the pump would still be far lower in the United
States than in much of Europe.
Don’t laugh. I’m serious.
I think a 50% recovery rate on tax revenues is far too optimistic, and I'm
disappointed that Greg would even hint that the tax cut would be self-financing.
[He also discusses the distribution of the tax burden, but the 70% figure he
cites as the amount of corporate taxes paid by labor relies upon an assumption
of perfect capital mobility (and other assumptions), and he doesn't include how
the burden of paying for the corporate tax cut would be distributed, i.e. how
the gas tax or any other means of paying for the tax cut would be distributed
across households. So the analysis of the tax burden is a bit incomplete and
relies upon some fairly optimistic assumptions. I'm not opposed to either
change, but the distributional consequences need more consideration. Predictions about the
distributional consequences of policies that rely upon trickle down arguments
have not been accurate in the past, and we should be wary when they are used
to justify further cuts in taxes.]
Corporate Tax Declines and U.S. Inequality, By John Irons, April 9, 2008:
Over the last 60 years, the U.S. tax code has dramatically shifted away from
corporate taxes and toward taxes on individuals, especially through the payroll
tax, the financing backbone of Social Security and Medicare. In the 1950s, the
corporate income tax brought in, on average, one of every four dollars in
federal tax revenues. By the 2000s, however, it raised just one of every 10 tax
The shrinking share of corporate taxes was made up by an increase in payroll
taxes to fund social insurance and retirement programs. Excise and other
taxes—such as fuel taxes, phone taxes, etc.—shrank as well over the last 60
years, while the individual federal income tax rose slightly, from an average
of 43% of total federal revenue in the 1950s to 46% in the 2000s.
This shift is important because of who pays these different taxes. The
corporate income tax is significantly more progressive than other taxes. Those
with incomes in the top 20% of the income distribution (those making more than
about $86,000 a year in 2007) pay four times the average tax rate on corporate
income than the middle 20% (those making between $27,000 and $48,000); while,
for the payroll tax, those in the top 20% actually pay less than those in the
middle as a share of their income.
This shift has been one of the factors leading to the drop in average federal
tax rates for the very highest earners. Between 1960 and 2004, the average tax
rate has fallen by about 14 percentage points (from 44.4% to 30.4%) for the top
1% of earners (those making more than $435,000 in 2007), while it has increased
slightly (from 15.9% to 16.1%) for those in the middle 20%.
Without offsets, further erosion of corporate tax revenues—either through lower
statutory tax rates or through special preferences—would expand the already
wide and growing income inequality in the United States.
Stephen Gordon makes the point that the countries with larger social
insurance programs generally have lower corporate taxes than the U.S., but they
also do much more redistribution after taxes are collected so that the net tax
burden is fairly progressive even when they rely on fairly flat tax collection
mechanisms such as a value-added tax. These redistribution programs are an
important part of those systems.
Update: Brad DeLong comments on the article here.
Posted by Mark Thoma on Saturday, May 31, 2008 at 01:17 PM in Economics, Policy, Taxes |
McCain keeps asking Obama to go to Iraq with him. Even though the people
responsible for security have said they would not allow them to go to Iraq
together, and Obama has declined, I think it's a good idea. It would be a great opportunity for Obama
to straighten out McCain on all the things he has wrong about Iraq. In the past,
McCain has had Joe Lieberman around to whisper in his ear when he makes great
big mistakes. But Lieberman has his own problems and his own misperceptions, and he can't always be there, and
Barack is a much better choice if the goal is to gain a clearer understanding of
the political, economic, social, military, and other issues that make Iraq and
the greater area such a complicated and difficult problem to solve.
Let's start with an easy one. If the two of them were there today, Obama could point to
troops and say see those people in uniform? There's 155,000 of them -
more than the pre surge levels. I know you have trouble with technical stuff,
economics, that sort of thing, but this is easy John - 155,000 is a bigger
number than 130,000 so we are not back down to pre surge levels like you have
claimed. And if the numbers have changed by the time they get there, it will still be worthwhile for Obama to explain why it's important for someone wanting to be the Commander in Chief to keep track of how many soldiers we have deployed.
He could point to Mosul and say, I know you said that things are quiet there,
but on a day when there were three suicide bombings, it's probably best to
describe it some other way.
He could, and this is important for McCain to learn because he's made this
mistake more than once, set up meetings with Sunnis and Shi'as. Then, - very
slowly because as, as just noted, McCain has trouble on this one - explain how
they differ and why it's important to understand the difference.
And as a follow up to the previous point, once McCain does finally get this distinction, Obama
could point out that understanding this will help him to avoid saying it's common knowledge
that Iran is training Al Qaida when it's not true (though this is one case
where, when he said this, the ear whispering Lieberman did cause him to correct
his obvious lack of knowledge).
Speaking of Iran, though they wouldn't actually be in Iran, it's bound to
come up, and when it does it would be a great opportunity to explain to McCain
how Iran's government is structured. McCain has been confused about who leads
Iran, so once again, Barack could help McCain with this. And he could, yet again, also explain
why it's important to get this right.
If they are walking through a market under very heavy military guard, if
there's no other way to enter the area other than with armed escorts, Barack
could explain how it's probably not quite correct to say the market is safe.
And, while they are strolling through the streets of Iraq protected by hordes of military personnel who could be doing more important things than
setting up TV shots for campaigns, maybe Obama can talk about other things too,
educate McCain on the economy, explain that tax cuts don't increase revenue,
that sort of thing. It's a bit unrelated, but not completely given how poorly
the Bush administration has handled economic development issues in Iraq.
So I can see why John McCain wants Barack Obama to come along to Iraq with
him, he needs somebody with him who actually understands how the politics,
economics, relations with nearby countries, military presence, and so on affects
Iraq, he needs to hear from someone who had Iraq policy right from day one.
Why should Barack help McCain? Aren't they political opponents? Yes, but
McCain, along with the noise machine that supports whatever he says no matter
how daffy or gaffey, has been confusing the public about these
issues. There are considerable misperceptions as a result of McCain's confusion
and lack of knowledge. When Obama does win the presidency this fall, that
confusion will make it much, much harder to do what needs to be done to get
things back on the right track, so whatever he can do now to help to overcome
those misperceptions will help to pave a smoother road to the future.
So go ahead, agree to accompany McCain to Iraq, he really needs you there.
McCain has been there several times already, and his lack of
knowledge shows he really needed to take those trips, but it hasn't been enough,
he still gets key things wrong. You'd think he'd have figured it all out by now,
if he could, that he would have had someone explain it again and again until he
gets it, but maybe you can help him, and yourself, and all of us, by going
Posted by Mark Thoma on Saturday, May 31, 2008 at 12:15 PM in Economics, Iraq and Afghanistan, Politics |
Posted by Mark Thoma on Saturday, May 31, 2008 at 12:42 AM in Links |
This examines the distributional impacts of gentrification. The results may not be what you expect:
Who Gentrifies Low-Income Neighborhoods?, by Terra McKinnish, Randall Walsh,
and Kirk White NBER Working Paper No. 14036 May 2008 JEL No. J15,J60,R23 [Open
This paper uses confidential Census data, specifically
the 1990 and 2000 Census Long Form data, to study the demographic processes
underlying the gentrification of low-income urban neighborhoods during the
1990's. In contrast to previous studies, the analysis is conducted at the more
refined census-tract level with a narrower definition of gentrification and
more closely matched comparison neighborhoods. The analysis is also richly
disaggregated by demographic characteristic, uncovering differential patterns
by race, education, age and family structure that would not have emerged in the
more aggregate analysis in previous studies. The results provide no evidence of
displacement of low-income non-white households in gentrifying neighborhoods.
The bulk of the increase in average family income in gentrifying neighborhoods
is attributed to black high school graduates and white college graduates. The
disproportionate retention and income gains of the former and the
disproportionate in-migration of the latter are distinguishing characteristics
of gentrifying U.S. urban neighborhoods in the 1990's.
"Concern, and anger, over gentrification has grown in
communities across the country as housing rental and sales prices have soared
.… there are numerous reports of resident displacement from neighborhoods long
ignored that now attract higher-income households."1
-2006 Urban Institute Report
Over the past several decades, there has been substantial
gentrification of low-income neighborhoods in many U.S. urban areas. These
neighborhoods typically experience large increases in household income and
housing prices. Some laud the revitalization of decayed neighborhoods and
others criticize the displacement of low-income, often minority, households.
The distribution of benefits from neighborhood change is a
crucial policy issue. Since 1974 the U.S. Department of Housing and Urban
Development (HUD) has allocated nearly $120 Billion in Community Development
Block Grants.2 These grants, that are intended to benefit low and
moderate-income individuals by eliminating slums or blight and addressing
urgent community development needs, have been allocated to more than 1000 U.S.
cities. While public investment in neighborhood revitalization is ubiquitous,
the consequences of neighborhood gentrification for low-income and minority
individuals remain an open question.
Continue reading ""Who Gentrifies Low-Income Neighborhoods?"" »
Posted by Mark Thoma on Saturday, May 31, 2008 at 12:33 AM in Academic Papers, Economics |
Paul Krugman, "a self-described pussycat":
Maverick loads gun for new round of shots, by Ben Naparstek, Business Day:
Today, Paul Krugman doesn't seem like a maverick. A CNN poll in April found
George Bush to be the least popular American president in modern history... But
in the run-up to the Iraq invasion, Krugman was one of the few pundits in the
mainstream media to unflinchingly attack Bush. Since beginning his twice-weekly
column in The New York Times in January 2000, Krugman has relentlessly accused
Bush of lying — about the motives behind cutting taxes for the rich and
attempting to roll back social security, for example, and about weapons of mass
destruction in Iraq.
After the September 11, 2001, attacks, newspapers and magazines of the
liberal centre ricocheted to the right. As the Times, The Washington Post, New
Yorker and New Republic fell obediently in line with the Bush Administration,
Krugman's heretical columns made him a poster boy for the anti-war left and a
hate figure to neocons. "I was largely alone on the major op-ed pages," says the
mild-mannered 55-year-old Princeton economics professor. "We look back now at
2002 and say, 'Nothing really bad happened to people. We did not have a new era
of McCarthyism'. But that was very far from clear at the time. It was pretty
In the fevered climate of post-9/11 America, his outspokenness attracted
death threats. But Krugman, a self-described pussycat, ... never set out to
fight political battles. "It has been a much less easy life than I expected to
be leading at this point. I should be sitting around in well-stuffed armchairs
reflecting upon my life's research work."
When The New York Times approached Krugman to write a column in 1999, he
wrongly presumed it wouldn't be too time-consuming. The main burden would be
financial — the newspaper's conflict of interest rules prohibited him from
giving corporate talks, for which he commanded up to $50,000. With the American
political scene calm and the economy booming, Krugman expected to write about
business deals, the internet, and developing world financial crises. But the
2000 presidential election politicised him. "A funny thing was happening. The
candidate of one major party was being blatantly dishonest in what he said — at
that point about economics — and no one was calling him on it." Krugman argues
that the media give a soft ride to mendacious politicians because journalists
are trained to consider two sides of any issue.
"If Bush said that the world was flat, the headline on the news analysis
would read 'Shape of Earth: Views Differ'," he said in 2000. In "The Great
Unravelling..., Krugman explains why
many people failed to grasp the radicalism of the Bush agenda: "People who have
been accustomed to stability can't bring themselves to believe what is happening
when faced with a revolutionary power, and are therefore ineffective in opposing
He understands why journalists feared speaking up. "There really has been,
for the most part, no reward for having gotten in front of the story and
reporting what was going on. On the contrary, people who got it right have been
fired and there's no cost to having gotten it wrong. Most news outlets are owned
by large corporations. The journalists may be mostly highly educated people from
the north-east who tend to be liberal, but the ultimate decisions on the
coverage are made by people who are, on the whole, Republicans."
Whereas most Times columnists are career reporters, Krugman's academic
background means he was never socialised to follow the dominant media line. ...
Krugman maintains his independence by leading the relatively secluded life of a
university professor in New Jersey. ...
Even Krugman's admirers sometimes flinch at his savagery. "He steps over the
top," says Stiglitz, a Nobel Prize-winning economist and close acquaintance of
If the Democrats win this presidency this fall, it will be interesting to see how people react when he is writing about Democrats rather than Republicans (it already has been interesting). My view is that Krugman has been right when most everyone else was wrong, and, agree or disagree, he's earned the right to be heard.
Update: Free Exchange seems to have stumbled across the same article (it's from an Australian business publication) and comments here.
Update: Stephen Moore of the WSJ
A few weeks ago, I gave a talk about tax policy to a group of elderly people
... I reminded the audience that the estate tax is scheduled to fall from 45%
today to zero in 2010, but then rise all the way up to 55% in 2011. I joked that
what we have here is the "Throw Mama From the Train Tax."
Democrats are starting to wake up to the death-tax calamity
I'm afraid he has this wrong, he seems to just be waking up to this, but Krugman was all over this years ago - in 2001 - even using the same joke:
Reckonings; Bad Heir Day, by Paul Krugman, Commentary, NY Times, May 30, 2001:
...The Bush tax plan was always peculiar: in order to hide the true budget
impact, its authors delayed many of the biggest tax cuts until late into the
10-year planning period; repeal of the estate tax, in particular, was put off to
2010. But even that left the books insufficiently cooked, so last week the
conferees added a "sunset" clause, officially causing the whole bill to expire,
and tax rates to bounce back to 2000 levels, at the beginning of 2011.
So in the law as now written, heirs to great wealth face the following
situation: If your ailing mother passes away on Dec. 30, 2010, you inherit her
estate tax-free. But if she makes it to Jan. 1, 2011, half the estate will be
taxed away. That creates some interesting incentives. Maybe they should have
called it the Throw Momma From the Train Act of 2001.
That's by no means the only weird element in the tax bill. ...
Moore tries to blame it on Democrats, then says:
the obvious solution to a death-tax nightmare scenario in 2010 is to make the estate-tax repeal permanent.
Krugman predicted this:
In short, the tax bill is a joke. But if the administration has its way, the
joke is on us. For the bill is absurd by design. The administration, knowing
that its tax cut wouldn't fit into any responsible budget, pushed through a bill
that contains the things it wanted most -- big tax cuts for the very, very rich
-- and used whatever accounting gimmicks it could find to make the overall
budget impact seem smaller than it is. The idea is that when the absurdities
become apparent -- when mobs of angry junior vice presidents from New Jersey
start demonstrating against the A.M.T., or when elderly multimillionaires
develop a suspiciously high rate of fatal accidents -- Congress will always
respond with further tax cuts. ...
Someday, responsible politicians — or is that an oxymoron? — will have to
untangle this mess. ... But for now, it's a defensive game. The administration,
having successfully rammed through a ridiculous tax bill, will try to bamboozle
us on other matters. ...
Posted by Mark Thoma on Friday, May 30, 2008 at 09:54 AM in Economics, Press |
Is the opening paragraph serious?:
Bread and Bush-bashing, by Chris Patten, Project Syndicate: I feel a little
sorry for President Bush. Whatever his other many failings, he has a pretty good
record on aid to poor countries, particularly in healthcare. True to form, he
recently announced a big increase in US food aid -- good for the hungry poor and
good for American farmers. ...
What made me feel a little sorry for Bush was the reaction to his
announcement. Bush referred to the reasons for shortages and price hikes. He did
not dwell on the diversion of American corn from food to heavily subsidized
bio-fuels. Nor did climate change feature prominently in his argument, although
many experts suggest that this may be the cause of the droughts and floods that
have ruined wheat harvests in Australia and vegetable oil production in
Indonesia and Malaysia.
Bush pointed his finger primarily elsewhere. Food prices had responded to
growing demand. In Asia, economic growth had stimulated food consumption. The
Chinese and Indians were eating more and eating better. ...
What Bush said is of course true. ...
But many Indians are still wretchedly poor. Too many. They have a miserable
diet -- not least when compared with Bush’s Texan neighbors. Grain consumption
per head in India has remained static, and is less than one-fifth the figure for
the US, where it has been rising. I do not imagine you will find too many
vegetarians in Crawford, Texas, and the meat consumed by the average American is
way ahead of the figure for any other country. Think of all those T-bone steaks.
Bush’s partial explanation of the world food crisis, accurate as far as it
went, brought the anger of India’s media and of many politicians... According to
India’s Defense Minister, A.K. Anthony, presumably an expert on butter as well
as guns, Bush’s statement was “a cruel joke.”...
Later in the “cruel joke” week, Bush’s White House compounded the sin.
According to Bush’s press spokesman, the growth in world demand for oil -- in
Asia, for example -- was one of the causes of the high price of filling the
tanks of gas-guzzling sports utility vehicles ... at America’s pumps.
Meanwhile, the US government papered over the fact that Americans, who make
up less than 4 percent of the world’s population, own and drive 250 million of
the world’s 520 million cars. More outrage around the world at American double
Now, all this is more than the knock-about of international politics. One day
soon, Bush and Cheney will be out of office. But we will still be left with the
most difficult global issue we have ever faced: as more of us prosper, how do we
deal fairly with some of the economic and environmental consequences?
What do we do about the bottom billion in the world who remain in grinding
poverty while the rest of us live better and longer lives? How do we deal with
equity on a global scale when we cannot even deal with it country by country?
This conundrum will lie at the heart of the diplomacy next year to find a
successor to the Kyoto agreement. Can we prevent a calamitous increase in global
warming in a way that is fair,... and that does not thwart legitimate hopes for
a better life everywhere? We have never faced a more difficult political task.
Meanwhile, there is a food crisis to solve. We have already seen many
examples of how not to deal with it. Stopping food exports is stupid. If we
restrict market forces, there will be less food and higher prices. We should
also avoid the cheap political trick of holding down what we pay to poor farmers
in order to benefit poor city dwellers.
Why do governments do this? The answer is obvious: city dwellers riot; in the
countryside, people just starve. The best way to deal with the problem is to
subsidize food for the poor; we should not cut the price we pay farmers for
growing it. ...
Here's the reason I asked. This is Africa, not India, but I don't suppose the story
is any different:
Food Relief For Africa 'Insufficient,' GAO Says, by Anthony Faiola, Washington
Post: Efforts by the United States and multilateral agencies including the
World Bank to reduce hunger in sub-Saharan Africa have been "insufficient," with
foreign aid to the region failing to flow into agricultural development projects
vital to the ability of poor countries to feed themselves, according to a report
to be released this morning by the U.S. Government Accountability Office. ...
The report, a draft copy of which was obtained by The Washington Post,
additionally describes U.S. aid efforts in sub-Saharan Africa as fragmented and
misdirected. It says, for instance, that a Bush administration initiative to
"end hunger in Africa" launched in 2002 effectively amounted to a repackaging of
existing programs and came with no new funding. ...
The report comes on the heels of another released by the GAO last year
sharply criticizing U.S. food aid programs. That report called them "inherently
inefficient" because they rely on the sale of American-grown food that is costly
to transport overseas, as opposed to food purchased closer to the troubled
regions themselves. ...
Posted by Mark Thoma on Friday, May 30, 2008 at 02:43 AM in China, Development, Economics, India |
Posted by Mark Thoma on Friday, May 30, 2008 at 12:32 AM in Links |
Worries that universal health care will hurt military recruiting:
Health’s Gain May Be Army’s Loss, by Floyd Norris, Commentary, NY Times:
Call it the law of unintended consequences. When you fix one thing, it messes up
If the Democrats win the election this year, and are able to enact a health
care plan that extends adequate coverage to all Americans, the loser could be
the Army. Getting enough people to enlist could become a major problem for the
next president. ...
Government polls show that the proportion of young people who think they
might enlist is roughly half what it was in the late 1980s. The military has
responded with more recruiters and higher cash enlistment bonuses, and has met
its goals. A significant factor for many recruits, it turns out, is the
military’s generous health benefits for dependants.
Michael Massing, writing in the April 3 issue of The New York Review of
Books, tells the story of one part-time college student from Brooklyn, who was
holding down two jobs but still going into debt. “Meanwhile, he got married, his
wife got pregnant, and he had no health care. From a brother in the military, he
had learned of the Army’s many benefits, and, visiting a recruiter, he heard
about Tricare, the military’s generous health plan.” He enlisted. ... All that
could change if the push for some kind of national health insurance program were
to be successful. ...
[I]f such a program were adopted, it seems likely that the military, and
particularly the Army, would feel the immediate effect. To expand the Army, as
all the candidates say they want to do, would require some other incentive for
enlistment... In the near term, it is possible that a recession will improve the
military’s recruiting success. ...
One partial solution to the negative effect on enlistment of a health care
plan for all could be a new G.I. education benefit. Both the House and Senate
have approved such a plan... President Bush is opposed to the legislation, which
its sponsors say would cost $50 billion over 10 years, and it is far from clear
it will be enacted. ...
Senator Jim Webb, a freshman Democrat and Vietnam veteran, is the principal
Senate sponsor of the legislation. He argued — with something less than precise
data — that passage of the bill would increase enlistment by 16 percent...
Senator McCain has proposed a less costly alternative that would provide
better benefits to those who stay in the military longer. He may have a point.
Last year about three-quarters of Army volunteers who completed their first term
of enlistment, and nearly as many marines, chose not to re-enlist. ...
If we get a real health care plan for all Americans, it might require
something like the Webb bill — or a very unpopular revival of the draft — just
to keep fighting in Iraq and Afghanistan. The backers of health care legislation
do not want to hurt the Army, but that is what could happen.
discussion of this topic from not too long ago, the right way to do this is
to state the the goals we are trying to reach, then build incentives into the
polices that direct people toward those goals with as few negative
consequences as possible.
One possible goal is retention. If you want people to stay longer, deferred
compensation schemes are a way to accomplish that goal. We need to decide how
many people we want to stay for additional terms, and then set the compensation
incentives accordingly (these can be tweaked as needed, e.g. you can have
incentives for reenlistment at each decision point, or you can discourage
reenlistment after some number of terms if there is some reason to do so).
Yes, it may require that the government pay people serving in the military more,
at least those who stay longer, but that is simply what it will cost to reach
the goal, that's the price to command these resources. People who applaud the
ability of markets to value resources should understand that. If it costs too
much to induce sufficient reenlistment, i.e. if the costs of producing higher
retention rates are greater than the benefits, then it's not a very good policy
But if the goals are different, e.g. if the goal is to provide educational
benefits to make up for lost opportunities in the private sector due to service
in the military, the the policy will, of course, be different as well. When evaluating a proposed policy to, for example, increase educational benefits all of the
consequences, including the effects on retention, should be
examined. But this is part of a cost benefit calculation. If the educational
benefit - the goal of the policy - exceeds the retention cost, then it's still
And it may not be necessary to give up on the retention goal just
because you offer educational benefits, one does not have to be traded against the other. It's possible - if you are willing to pay the cost -
to offer both higher education benefits and higher deferred compensation so that
both goals are attained. More help for education is available for those who
choose to leave when their term ends, but since deferred compensation is higher
for those who reenlist, just as many stay as before. Whether it's worth it to do this is matter of comparing the costs and benefits, but increasing education benefits does not have to lower retention rates.
If national health care is enacted and that lowers the incentive to
enlist, or to reenlist, then the compensation levels will have to be adjusted to compensate,
but it doesn't have to change retention rates or the ability to provide
education benefits after people leave the military if we are willing to pay
what's needed to induce the desired behavior.
Posted by Mark Thoma on Friday, May 30, 2008 at 12:24 AM in Economics, Health Care, Universities |
Stephen P. A. Brown, Raghav Virmani, and Richard Alm of the Dallas Fed look
at why oil prices are so high, and whether the high prices are likely to continue. It's a more
optimistic view than many. Their bottom line is "Absent supply disruptions, it
will be difficult to sustain oil prices above $100 (in 2008 dollars) over the
next 10 years" (comments at
Real Time Economics and
Crude Awakening: Behind the Surge in Oil Prices, by Stephen P. A. Brown,
Raghav Virmani and Richard Alm, Economic Letter, Vol. 3, No. 5, May 2008, Federal Reserve Bank of Dallas: The first few months of 2008 saw crude oil prices breach
one barrier after another. They topped $100 a barrel for the first time on Feb.
19, then rose past $103.76 about two weeks later, surpassing the previous
inflation-adjusted peak, established in 1980. In April and early May, oil prices
pushed past $110 and then $120 a barrel and beyond.
These milestones reflect a new era in oil markets. After
the tumult of the early 1980s, prices remained relatively tame for two
decadesâin both real and nominal terms (Chart 1). This long stretch of
stability ended in 2004, when oil topped $40 a barrel for the first time, then
embarked on a steep climb that continued into this year.
Continue reading ""Crude Awakening: Behind the Surge in Oil Prices"" »
Posted by Mark Thoma on Thursday, May 29, 2008 at 04:23 PM in Economics, Oil |
There are two different topics to choose from, so let's start with the latest
news on GDP. Today, GDP growth for the first quarter was revised upward from .6%
to .9%. How does this affect the odds that we are currently in a recession? Jeff
Frankel is a member of the NBER's Business Cycle Dating Committee:
Despite Positive First Quarter, Odds of 2008 Recession Are Still Above 50%, by
Jeff Frankel: The Commerce Department this morning revised upward its
estimate of first quarter growth in real GDP to 0.9% (precisely in line with the
expectations of economic forecasters).
As a member of the
Business Cycle Dating Committee of the NBER, I am asked frequently if the
country is entering a recession, or if we have already done so. I cannot speak
for the Committee, and I am not a professional forecaster. But I can give my
views, for what they are worth.
It is hard to say that we entered a recession in the first quarter, without a
single negative growth quarter, let alone two of them. Even so, three minor
qualifications to that 0.9% remain: 1) The number will be revised again, and
could move in either direction. 2) A bit of the measured growth consisted of an
increased rate of inventory investment, which was almost certainly not desired
by firms and is likely to reverse in the 2nd quarter 3) As
Martin Feldstein has pointed out, the QI growth number is defined as the
change for the quarter as a whole relative to QIV of 2007; within QI, the
information currently available suggests that GDP fell from January to February
The reason why many suspected a QI turning point in the first place is
employment, which is virtually as important an indicator to the NBER BCDC as is
GDP. Jobs have been lost each month since January. Total hours worked is my
personal favorite, because in addition to employment it captures the length of
the workweek, which firms tend to cut before they lay off workers. This
indicator too has been falling.
And of course there are the longer run indicators that have been very
worrisome for almost a year: depressed household balance sheets, mortgage
defaults, high oil prices, low consumer confidence, etc.
The economy is a four-engine airplane flying at stall speed, skimming along
the top of the waves without yet going down. ... The big question mark is the
consumption engine. Is the long-spending American household taking a hard look
at its diminished net worth and taking steps to raise its saving rate above the
very low levels of recent years?
We are already clearly in a “growth recession.” All in all, I put the odds of
an outright recession sometime this year at greater than 50%. That number is
meant to add together: (1) the odds that it will turn out that we have already
entered reached the turning point and (2) the odds that the sharp recent
expansions in monetary and fiscal policy will succeed in postponing the
recession, but only until later in the year. Come the fall, if demand starts to
slow, I can’t see either the Fed delivering a second big dose of interest rate
cuts (as they were able to in the 2001 recession, when the dollar was strong and
inflation under control), nor the government delivering a second big dose of tax
cuts (as they could in the 2001 recession, when the budget outlook was strong
and debt under control).
Next, a different topic. Jeff Frankel defends his argument that high
commodity prices are the result of easy monetary policy:
Monetary policy and
commodity prices, by Jeffrey Frankel, Vox EU: In a speech delivered last
week, Federal Reserve Vice Chairman Donald L. Kohn addressed a theory to which I
am partial: the theory that low real interest rates have contributed to the
continued rise in prices of agricultural and mineral commodities, including oil,
over the last year. He said:
“Some observers have questioned whether the news on fundamentals affecting
supply and demand in commodities markets has been sufficient to justify the
sharp price increases in recent months. Some of these commentators have cited
the actions of the Federal Reserve in reducing interest rates as an important
consideration boosting commodity prices. To be sure, commodity prices did rise
as interest rates fell. However, for many commodities, inventories have fallen
to all-time lows, a development that casts doubt on the premise that speculative
demand boosted by low interest rates has pushed prices above levels that would
be consistent with the fundamentals of supply and demand. As interest rates in
the United States fell relative to those abroad, the dollar declined, which
could have boosted the prices of commodities commonly priced in dollars by
reducing their cost in terms of other currencies, hence raising the amount
demanded by people using those currencies. But the prices of commodities have
risen substantially in terms of all currencies, not just the dollar. In sum,
lower interest rates and the reduced foreign exchange value of the dollar may
have played a role in the rise in the prices of oil and other commodities, but
it probably has been a small one.”
(Speech at the National
Conference on Public Employee Retirement Systems, New Orleans, Louisiana, May
As real interest rates have come down over the last year,
prices have accelerated upward despite declining economic growth, as shown
in Figure 1, where the commodity price has been inverted so that one can see the
Continue reading "Two from Jeff Frankel: Whether We are Currently in a Recession and the Impact of Monetary Policy on Commodity Prices" »
Posted by Mark Thoma on Thursday, May 29, 2008 at 12:06 PM in Economics, Monetary Policy, Oil |
People in other countries used to look up to Americans, but that is changing:
Economist traces height trends, by Tom Hundley, Chicago Tribune: When John
Komlos wants to take the measure of a nation's economic well-being, he doesn't
check its gross domestic product or consumer price index. He ignores ...
unemployment figures. Instead, Komlos takes a look at how tall its people have
"Height is a very good overall indicator of how well the human organism
thrives in its socioeconomic environment," he explained.
Komlos, a professor in the economics department at the University of Munich,
Germany, has dedicated his professional life to the study of anthropometric
history—his own coinage for the academic field that studies the links between a
population's height and general well-being.
What Komlos has learned is that Americans, despite their nation's
prosperity, abundance of food and cutting-edge medical technology, stopped
getting taller in the 1950s and have now been passed by their European cousins.
"Americans were head and shoulders above Europeans in the 18th Century, and
it stayed that way for two centuries," he said. "Now it's the other way
This, according to Komlos, suggests that Europeans eat better, have better
access to health care and enjoy a more equitable distribution of national
wealth. They will almost certainly live longer than their American
Genetics determines an individual's height—whether a person is shorter or
taller than the national norm—but external factors determine a population's
While the media quickly latched onto the height rankings, Komlos and other
economists were more interested in the external factors that were causing the
startling disparity between American and European growth rates.
In the 2004 paper, Komlos fingered two likely suspects: the growing gap
between rich and poor in the U.S., and its lack of universal health care.
Although the U.S. has been the dominant economic power since the end of
World War II, its wealth has not been very evenly distributed. According to
standard measures, countries such as the Netherlands and the Scandinavian
nations are at the top of the list; the U.S. ranks near the bottom, tied with
Ghana and Turkmenistan, according to UN figures.
When income is distributed more evenly, it follows that access to health
care also is evenly and equitably distributed, Komlos said.
He noted that a high number of Americans are without health insurance (a
U.S. Census Bureau report put the figure at 47 million for 2006), meaning that
millions of American children do not get top-notch medical care during the
critical growth years. Meanwhile, the "tall" countries of the world have been
providing their citizens with cradle-to-grave health care for generations.
Komlos does not claim that his research has established a causal link
between a nation's height and its health care delivery system, only that
"height is a pretty good indicator of how well a society treats its children
and young people."
Komlos is struck by two things when he visits the U.S.: the alarming
proportion of the population that is overweight, and the shortfall in
height—especially among females.
Could America's diminished stature have something to do with its expanding
Very likely, Komlos said. "The tremendous amount of fast food consumed by
Americans ... has to have an impact," he said. ...
The latest national height data contains some good news and some bad, Komlos
The good news is that there are indications that Americans may have started
to grow again. The bad news is that this growth trend appears to be bypassing
black females. "This is an uncomfortable finding, especially at a time when
Europeans and other developed countries are not only catching up but exceeding
us," Komlos said.
Paul Krugman on the same topic. He says:
We seem to be left with two main possible explanations... One is that
America really has turned into 'Fast Food Nation.'
A broader explanation would be that contemporary America ... doesn’t take
very good care of its children. ... Whatever the full explanation..., our
relative shortness, like our low life expectancy, suggests that something is
amiss with our way of life. A critical European might say that America is a
land of harried parents and neglected children, of expensive health care that
misses those who need it most, a society that for all its wealth somehow
manages to be nasty, brutish — and short.
Update: Eric at Edge of the American West has a brief follow-up on whether this is due to immigration (it's not). Free Exchange weighs in here.
Posted by Mark Thoma on Thursday, May 29, 2008 at 02:34 AM in Economics, Health Care, Income Distribution, Social Insurance |
John Taylor thinks the Fed needs to tighten policy to reduce the pressure on
policy behind global inflation: Taylor, Reuters: Inflation is rising
globally because of an easy monetary policy, ... John Taylor said... To tackle
rising inflation, Taylor urged the world's policy-makers to talk about adopting
a global inflation target.
The creator of the so-called "Taylor rule" of monetary policy, which
stipulates that interest rates should rise by more than the increase in
inflation..., said U.S. interest rates are now below appropriate levels
indicated by the rule.
"During the past year, as global inflation has risen, global short term
interest rate targets set by central banks have not increased on average by as
much as inflation," Taylor said in a conference on monetary policy hosted by
the Bank of Japan.
The average targets have in fact declined since the credit market crisis
started in the middle of last year, largely due to sharp rate cuts by the
Federal Reserve, said Taylor, now an economics professor at Stanford
When interest rates are declining ... in the United States, other central
banks have tended to be reluctant to raise rates because that could lead to a
sharp appreciation of their own currency, he said.
"Because of concerns about exchange rates and the impact on the exports
sector, on the economy in general, central banks are not following the
principles that they come to think of as important," Taylor said.
That leads to higher commodity prices, driving inflation all around the
globe, he said.
"There is strong evidence that at least part of the increase in energy and
commodity prices is related to the global inflationary pressures and thereby,
in part, to the policy response to the financial crisis in the United States,"
The global dimension of current inflation means a global response is
"A good place to start is with discussions about some kind of global
inflation target," he said, adding that such a target does not need to be a
strict numerical target.
I'd like to hear more about what he has in mind for the mechanics of global inflation targeting, i.e. how it would be coordinated across central banks. Credibility of the promises of other members of the coalition in such an arrangement would seem to be one difficult hurdle to overcome (though not the only one), so there would have to be strong penalties for deviating from the global inflation targeting rule. But that would discourage nations from joining in the first place unless they were convinced that the extra restrictions they'd have to follow as part of the coalition would bring them benefits (such as reducing exchange rate changes brought about by a trading partner pursuing a high inflation policy) they couldn't get on their own by strict adherence to a domestic inflation target. [One minor technical point. The article says that the "'Taylor rule' of
monetary policy ... stipulates that interest rates should rise by more than the
increase in inflation...," but this is usually called the Taylor principle, not
the Taylor rule.]
Posted by Mark Thoma on Thursday, May 29, 2008 at 01:17 AM in Economics, Inflation, Monetary Policy |
When I was in high school, most of my budget went to two items, gas and beer.
At that time, the price of gas was 25 cents a gallon, and beer was $1.25 a
six-pack if I remember correctly (and I may not). So the relative price was 5 to 1, i.e. to get
five gallons of gas, you had to give up a six pack of beer.
Today, the tradeoff is a bit different. A gallon of gas is around $4.00 and
beer is over $5.00 a six-pack. I'm not sure on the price today, but say let's say it's $5.50.
So now, roughly, the relative price is 5.5 to 4, or 5 to 3.63 rather than 5 to 1
as before. Gas costs a lot more beer these days, to get five gallons today you have to give up 3.63 six packs, where before it was only one.
If someone had an allowance of $5 per week back then and purchased two
six-packs and 10 gallons of gas, then they would need $51 to purchase the
same basket of goods (or bads) today. Since this was 36 years ago, that works
out to inflation of 6.7% per year. Not quite as bad as I imagined, but still
pretty high, certainly higher than the increases in the minimum wage over that time period. Kids who
didn't drink at all, say they put all of their allowance into gas, would need $80 today
to buy the 20 gallons of gas they could get for $5 at a quarter per gallon.
That's an inflation rate of 8.0%. But an all beer kid, one who spent all $5 on
beer and didn't drive at all, would only need $22 today to get the same amount of beer. That's an inflation
rate of 4.1%.
Given the shift in relative prices, kids today should be tempted to drink more, and drive
Posted by Mark Thoma on Thursday, May 29, 2008 at 12:33 AM in Economics |
Posted by Mark Thoma on Thursday, May 29, 2008 at 12:32 AM in Links |
Dallas Fed president Richard Fisher reminds
us that bubbles are nothing new (suggested by email):
Listening to Washington Irving,
by Richard Fisher, Dallas Fed: There is nothing “unprecedented” about the situation we
find ourselves in. To illustrate the point, I want to read a passage from
Washington Irving’s 1819 essay on the Mississippi Bubble. For those of you who
think the recent housing bubble and the ensuing financial imbroglio are
“unprecedented,” listen to these words penned almost 200 years ago:
Every now and then the world is visited by one of these
delusive seasons, when the ‘credit system’…expands to full luxuriance:
everybody trusts everybody; a bad debt is a thing unheard of; the broad way to
certain and sudden wealth lies plain and open…. Banks…become so many mints to
coin words into cash; and as the supply of words is inexhaustible, it may
readily be supposed what a vast amount of promissory capital is soon in
circulation…. Nothing is heard but gigantic operations in trade; great
purchases and sales of real property, and immense sums made at every transfer.
All, to be sure, as yet exists in promise; but the believer in promises
calculates the aggregate as solid capital….
Now is the time for speculative and dreaming or
designing men. They relate their dreams and projects to the ignorant and
credulous, [and] dazzle them with golden visions…. The example of one
stimulates another; speculation rises on speculation; bubble rises on bubble….
No ‘operation’ is thought worthy of attention, that does not double or treble
the investment…. Could this delusion always last, the life of a merchant would
indeed be a golden dream; but it is as short as it is brilliant.
And to think, Washington Irving had never met a subprime
mortgage, or a CDO, a CLO, an SIV or a credit default swap...
Here's the entire essay, "The Great Mississippi Bubble" from
The Crayon Papers (it's a bit longer than usual):
The Crayon Papers, The Great Mississippi Bubble, by Washington Irving:
"A TIME OF UNEXAMPLED PROSPERITY"
In the course of a voyage from England, I once fell in with a convoy of
merchant ships bound for the West Indies. The weather was uncommonly bland; and
the ships vied with each other in spreading sail to catch a light, favoring
breeze, until their hulls were almost hidden beneath a cloud of canvas. The
breeze went down with the sun, and his last yellow rays shone upon a thousand
sails, idly flapping against the masts.
I exulted in the beauty of the scene, and augured a prosperous voyage; but
the veteran master of the ship shook his head, and pronounced this halcyon calm
a "weather-breeder." And so it proved. A storm burst forth in the night; the
sea roared and raged; and when the day broke, I beheld the late gallant convoy
scattered in every direction; some dismasted, others scudding under bare poles,
and many firing signals of distress.
I have since been occasionally reminded of this scene, by those calm, sunny
seasons in the commercial world, which are known by the name of "times of
unexampled prosperity." They are the sure weather-breeders of traffic. Every
now and then the world is visited by one of these delusive seasons, when "the
credit system," as it is called, expands to full luxuriance, everybody trusts
everybody; a bad debt is a thing unheard of; the broad way to certain and
sudden wealth lies plain and open; and men are tempted to dash forward boldly,
from the facility of borrowing.
Promissory notes, interchanged between scheming individuals, are liberally
discounted at the banks, which become so many mints to coin words into cash;
and as the supply of words is inexhaustible, it may readily be supposed what a
vast amount of promissory capital is soon in circulation. Every one now talks
in thousands; nothing is heard but gigantic operations in trade; great
purchases and sales of real property, and immense sums made at every transfer.
All, to be sure, as yet exists in promise; but the believer in promises
calculates the aggregate as solid capital, and falls back in amazement at the
amount of public wealth, the "unexampled state of public prosperity."
Now is the time for speculative and dreaming or designing men. They relate
their dreams and projects to the ignorant and credulous, dazzle them with
golden visions, and set them madding after shadows. The example of one
stimulates another; speculation rises on speculation; bubble rises on bubble;
every one helps with his breath to swell the windy superstructure, and admires
and wonders at the magnitude of the inflation he has contributed to produce.
Speculation is the romance of trade, and casts contempt upon all its sober
realities. It renders the stock-jobber a magician, and the exchange a region of
enchantment. It elevates the merchant into a kind of knight-errant, or rather a
commercial Quixote. The slow but sure gains of snug percentage become
despicable in his eyes; no "operation" is thought worthy of attention that does
not double or treble the investment. No business is worth following that does
not promise an immediate fortune. As he sits musing over his ledger, with pen
behind his ear, he is like La Mancha's hero in his study, dreaming over his
books of chivalry. His dusty counting-house fades before his eyes, or changes
into a Spanish mine; he gropes after diamonds, or dives after pearls. The
subterranean garden of Aladdin is nothing to the realms of wealth that break
upon his imagination. Could this delusion always last, the life of a merchant would indeed be a
golden dream; but it is as short as it is brilliant. Let but a doubt enter, and
the "season of unexampled prosperity" is at end. The coinage of words is
suddenly curtailed; the promissory capital begins to vanish into smoke; a panic
succeeds, and the whole superstructure, built upon credit and reared by
speculation, crumbles to the ground, leaving scarce a wreck behind:
"It is such stuff as dreams are made of."
When a man of business, therefore, hears on every side rumors of fortunes
suddenly acquired; when he finds banks liberal, and brokers busy; when he sees
adventurers flush of paper capital, and full of scheme and enterprise; when he
perceives a greater disposition to buy than to sell; when trade overflows its
accustomed channels and deluges the country; when he hears of new regions of
commercial adventure; of distant marts and distant mines, swallowing
merchandise and disgorging gold; when he finds joint-stock companies of all
kinds forming; railroads, canals, and locomotive engines, springing up on every
side; when idlers suddenly become men of business, and dash into the game of
commerce as they would into the hazards of the faro table; when he beholds the
streets glittering with new equipages, palaces conjured up by the magic of
speculation; tradesmen flushed with sudden success, and vying with each other
in ostentatious expense; in a word, when he hears the whole community joining
in the theme of "unexampled prosperity," let him look upon the whole as a
"weather-breeder," and prepare for the impending storm.
The foregoing remarks are intended merely as a prelude to a narrative I am
about to lay before the public, of one of the most memorable instances of the
infatuation of gain to be found in the whole history of commerce. I allude to
the famous Mississippi Bubble. It is a matter that has passed into a proverb,
and become a phrase in every one's mouth, yet of which not one merchant in ten
has probably a distinct idea. I have therefore thought that an authentic
account of it would be interesting and salutary, at the present moment, when we
are suffering under the effects of a severe access of the credit system, and
just recovering from one of its ruinous delusions.
Continue reading ""A Time of Unexampled Prosperity"" »
Posted by Mark Thoma on Thursday, May 29, 2008 at 12:15 AM in Economics, Financial System, Market Failure |
There's a lot being written about free trade today, e.g. see this discussion from Greg Mankiw (some of the discussion is about technological change rather than free trade, but it has the same characteristics in terms of displacing labor, Free Exchange explains how trade and technology are related here). Given these discussions, perhaps it's a good time to recall that it's not just the level and distribution of income that matters, it's also the volatility, and according to the latest estimates from Jacob Hacker and Elizabeth Jacobs, family income volatility has been rising in recent decades:
Income volatility: Another source of growing economic
insecurity, by Jacob Hacker and Elisabeth Jacobs:
There are many dimensions to the economic insecurity facing American
families today. Mid-level incomes have stagnated in real terms over the past
few years, and most recently, higher gas and food prices are taking a larger
bite out of paychecks. But one dimension of economic insecurity gets less
attention: the increase in family income volatility, or how much families'
incomes fluctuate up and down over time.
Recent analysis shows that families are facing much greater income swings than
they did a generation ago. The Chart plots the
increase in average family income volatility, showing various peaks and valleys
around an upward trend since the mid-1970s. Over the last three decades,
volatility by this measure has doubled.
Most Americans have little in the way of easily tapped wealth to tide them
over when their incomes drop. It is on the downward trips of the economic
roller coaster that jobs, houses, savings, and other things gained on the way
up get lost. No wonder Americans are worried about their economic security.
Posted by Mark Thoma on Wednesday, May 28, 2008 at 01:17 PM in Economics, International Trade, Social Insurance, Technology |
Amartya Sen analyzes the food crisis:
The Rich Get Hungrier, by Amartya Sen, Commentary, NY Times: Will the food
crisis that is menacing the lives of millions ease up — or grow worse over
time? The answer may be both. The recent rise in food prices has largely been
caused by temporary problems like drought in Australia, Ukraine and elsewhere.
Though the need for huge rescue operations is urgent, the present acute crisis
will eventually end. But underlying it is a basic problem that will only
intensify unless we recognize it and try to remedy it.
It is a tale of two peoples. In one version of the story, a country with a
lot of poor people suddenly experiences fast economic expansion, but only half
of the people share in the new prosperity. The favored ones spend a lot of
their new income on food, and unless supply expands very quickly, prices shoot
up. The rest of the poor now face higher food prices but no greater income, and
begin to starve. Tragedies like this happen repeatedly in the world. ...
There is also a high-tech version of the tale of two peoples. Agricultural
crops like corn and soybeans can be used for making ethanol for motor fuel. So
the stomachs of the hungry must also compete with fuel tanks.
Misdirected government policy plays a part here... In 2005, the United
States Congress began to require widespread use of ethanol in motor fuels. ...
Ethanol use does little to prevent global warming and environmental
deterioration, and clear-headed policy reforms could be urgently carried out,
if American politics would permit it. ...
The global food problem is not being caused by a falling trend in world
production, or for that matter in food output per person (this is often
asserted without much evidence). It is the result of accelerating demand.
However, a demand-induced problem also calls for rapid expansion in food
production, which can be done through more global cooperation. ...
What is most challenging is to find effective policies to deal with the
consequences of extremely asymmetric expansion of the global economy. Domestic
economic reforms are badly needed in many slow-growth countries, but there is
also a big need for more global cooperation and assistance. The first task is
to understand the nature of the problem.
Posted by Mark Thoma on Wednesday, May 28, 2008 at 02:07 AM in Development, Economics |
Robert Shiller says we need to move to long-term home owners' insurance:
Insuring Against Insurance, by Robert J. Shiller, Project Syndicate:
...Almost universally in the world today, homeowners’ insurance is short term.
Typically, it is renewed annually, which means that it does not cover the risk
that insurance companies will raise rates at any future renewal date.
Yet we have seen major changes recently in homeowners’ insurance rates. For
example, the average homeowner premium in Florida soared from $723 at the start
of 2002 to $1,465 in the first quarter of 2007. Such rapid increases represent
a risk that is on the same order of magnitude as many of the damage risks that
the policies are supposed to address.
In a study..., the economists Dwight Jaffee, Howard Kunreuther, and Erwann
Michel-Kerjan called for a fundamental change in policy aimed at developing
true long-term insurance (LTI) that set insurance premiums for many years.
Unless we do that, homeowners are unsure from year to year whether their
insurance policies will be canceled or that their premiums will skyrocket
unexpectedly as they have ... where there is hurricane and flood risk. As the
authors point out, for insurers to even consider a long term policy they must
have the freedom to charge premiums that reflects risk.
Continue reading "Insuring against Insurance Risk" »
Posted by Mark Thoma on Wednesday, May 28, 2008 at 12:24 AM in Economics, Regulation |
Posted by Mark Thoma on Wednesday, May 28, 2008 at 12:06 AM in Links |
This is a review of Jamie Galbraith's The Predator State from a forthcoming edition of the Journal of Economic Issues:
Review of the Predator State: How Conservatives Abandoned the Free Market
and Why Liberals Should Too, by James K. Galbraith. New York, London, Toronto,
Sydney: Free Press, 2008. (Note: review is based on Advance Uncorrected
This is political economy at its best, in the tradition of Veblen’s Theory of
the Leisure Class, or J.K. Galbraith’s The New Industrial State. The comparators
are chosen carefully, for not only is The Predator State an update, it is
equally as deserving of status as a classic. The issues are carefully examined,
the prose is delightful, the arguments appear unassailable, and the
choir—including this reviewer and presumably most of the readers of this
journal—shouts “Amen!”. But will the book be read? Can any book today capture
the attention accorded to Veblen a century ago, or to Galbraith, senior, nearly
fifty years ago? Still, one must applaud Jamie for trying. This is an amazing
The general theses can be simply stated. First, while conservatives toyed
with laissez-faire, they quickly abandoned it in all important areas of
policy-making. For them, it now serves as nothing more than an enabling myth,
used to hide the true nature of our world. Ironically, only the progressive
still takes the call for “market solutions” seriously, and this is the major
barrier to formulating sensible policy. Second, the “industrial state” has been
replaced by a predator state, a coalition of relentless opponents of the very
idea of a “public interest”, whose purpose is to master the state structure in
order to empower a high plutocracy with nothing more than vile and rapacious
goals. Finally, the “corporate republic” created by the likes of Dick Cheney is
highly unstable, a formula for national failure. Progressives must wrest control
from the reactionaries before it is too late for restoration of America as the
world’s financial anchor, technological leader, and promoter of collective
Jamie thus resurrects both the extreme pessimism of Veblen’s notion of
predation (by the conspicuously consuming leisure class in Veblen’s day, but by
the corporate elite and Cheney’s imperial court today) as well as his only
partially defined but optimistic vision of a world dominated by the engineers.
As Jamie argues, his father admired Veblen but was most influenced by the New
Deal, the mobilization during WWII, and the rise of the modern corporation that
cooperated with government and labor to create the planned economy of the
postwar period. Hence, Veblen’s opposition of the business enterprise versus the
public interest was replaced by countervailing powers that compromised a largely
acceptable truce. Jamie insists that his father’s analysis was correct, however,
it was already becoming outdated by the early 1970s as the Bretton Woods system
The free market reactionaries promised that some combination of monetarism,
supply side economics, balanced budgets, and free trade was the solution to
America’s woes. The mantra “free markets” provided an easy antidote to
“planning” that was said to constrain recovery and growth. As each conservative
policy was tried, however, it resulted in obvious and even spectacular failure.
In truth, all economies are always and everywhere planned—for the simple reason
that planning is the use of today’s resources to meet tomorrow’s needs,
something that all societies must do if they are going to survive—so the only
question is who is going to do the planning, and to whom are the benefits going
to flow? There are still a few true believers (principled conservatives that
Jamie compares to noble savages in the political wilderness), but most
conservatives realized that there is no conflict between “big government” and
“the market” as they abandoned the myth but usurped the “free market” label. All
we are left with is the liberal who embraces the myth out of fear of being
exposed as a heretic, a socialist, or a fool. Thus, the liberal pines to “make
the market work better”, never challenging the view (abandoned by all but the
most foolish conservatives) that government is the problem.
Economic freedom is reduced to the freedom to shop, including the freedom to
buy elections, and anything that interferes is a threat. “Market” means nothing
more than “nonstate”, a negation of use of policy in the public interest. Jamie
provides a careful analysis of the frontline battles on many of the most
important issues--Social Security, health care, inequality, immigration,
security after 9-11, trade and outsourcing, and global warming—showing how
“market solutions” are designed to enrich a favored oligarchy through a spoils
system administered through the state’s structure. The policy “mistakes” in Iraq
or New Orleans or at Bear-Stearns do not result from incompetence—indeed they
only appear to be failures because we apply inappropriate measures of success.
There is no common good, no public purpose, no shareholder’s interest; we are
the prey and governments as well as corporations are run by and for predators.
The “failures” enrich the proper beneficiaries even as they “prove” government
is no solution.
There is a way out, but it is not easy. Historically, regulation and
standards have required acceptance by progressive business—those firms that
recognized they would lose in races to the bottom. Today, corporate and public
policy alike are run by the most reactionary elements, well-paid rogues that
suck capacity. Wherever one finds a sector that still operates reasonably well,
one finds remnants of New Deal institutions that support, guarantee, regulate,
and leverage private activities, in spheres as diverse as higher education,
housing, pensions, healthcare, the military-industrial complex (and the
prison-industrial complex). Naturally, even these sectors are endangered as they
represent potential riches (witness subprimes, a privatization mess that Wall
Street would love to repeat with Social Security). Still, Jamie is hopeful. The
ideology of free markets is bankrupt, but the US is not. The path is clear:
re-regulation, planning, standards (including wage controls), and coming to
grips with the nation’s global responsibilities.
L. Randall Wray University of Missouri—Kansas City The reviewer is Professor
of Economics, and Senior Scholar at the Levy Economics Institute.
Posted by Mark Thoma on Tuesday, May 27, 2008 at 04:05 PM in Economics |
Which Externalities Should Be Internalized?, by David Beckworth: Robert Frank's NY Times
column on using
Pigovian taxes as an "efficient" way to deal with the negative
externalities of gas consumption ... points to an important question that has been
bugging me for some time. But first ...
Gabriel Mihalache ... points out an important assumption in Frank's
...A Pareto improvement [from imposing a Pigovian tax on gas consumption]
means that afterwards, everyone is at least as well off (subjectively) as
before and some are better off. ...
The implicit, unstated, assumption of Frank’s article is that we could
compensate the losers from the new energy policy from the gains of others.., there exist potential transfers to compensate the
losers and still leave the winners better off.
When supporters of free trade point out that the net losers from the full
opening of borders could be compensated with transfers from the net winners,
the common criticism is that those transfers are both politically and
institutionally unfeasible. There’s no mechanism we can trust that would
identify the correct transfers (from whom, to whom, how much?) and
make it in a way that’s politically acceptable.
I will unashamedly yield the same critique against Frank. He wants to seduce us
with Pareto improvements but he only tells us half the story, less that half
really… he mentions introducing the carbon tax but he remains strangely silent
on the ways he’d use to compensate the losers.
Gabriel suggests we avoid resorting to the Pareto efficiency argument and say
up front there may be net losers.
Josh Hendrickson, meanwhile, also questions the usefulness of invoking
Pareto efficiency and goes on to stress that the proper use of a Pigouvian tax
requires a Herculean ability to properly assess social costs:
The problem inherent in any such analysis is the view of societal benefit
and societal loss that is assumed to be easily calculated and dealt with
through Pigouvian taxation. The ability to identify the social cost of a
particular action is extremely difficult as each individual has his or her own
subjective valuation. The problem is communicating each of these preferences in
aggregate form to some central authority. This is a distinct problem in terms
Hayekian knowledge and a neoclassical framework (Arrow’s
Impossibility Theorem). In the absence of this ability, setting the tax
rate is extremely difficult.
In short, both of these commentators suggest we should be more humble about
our ability to (1) rigorously justify and (2) precisely implement a carbon tax.
As noted above, Frank's column also points to another important question that I
have been wrestling with for some time: exactly which externalities should be
internalized? There are so many negative externalities in society so why stop at
those created by gas consumption? Frank alludes to this in his article:
Gasoline is one of a host of goods whose production or consumption generates
costs that fall on outsiders. Noisy goods, like leaf blowers, for example, can
jolt whole neighborhoods from calm. And goods that don’t biodegrade readily,
like many plastic bags, can generate costly waste streams. The list goes on.
Okay, then, why not tax noisy leaf blowers (noise pollution) or billboards
along the highway (sight pollution) or rancorous, smelly, ugly people (noise,
sight, and smell pollution)? Conversely, should we subsidize quiet neighbors,
firms that do not advertise on highway billboards, and beautiful, well-kept
Now I am not advocating we tax or subsidize the above items. However, this list
does illustrate the fact that society does choose to correct only certain
externalities. So what is the decision criteria used in this process? Presumably
it involves equating some margins; I am just not sure which one they are though.
In closing, let me refer you to
Peter Klein who, in the context of applying a Pigouvian tax to negative
externalities, makes the following statement:
But my main beef with today’s Pigouvians is that they cherry-pick a case
here and there — taxes on gasoline, primarily — without fully pursuing the
implications of the analysis. If increasing gasoline taxes is efficient, why
stop there? What other market failures should the state be empowered to remedy?
Here’s my question, specifically:
Please name the activities you believe deserve Pigouvian subsidies. For
each activity provide the efficient subsidy amount, explain how this was
calculated, and say how the revenues should be raised.
Maybe someone has thought about this more than I have, and your comments are
welcome and encouraged, but a couple of quick reactions. It seems to me that one way societies
solve this problem is to define which externalities are actionable and which are
not through the political process, and then prohibit them by decree rather than through incentive mechanisms such as taxes. Whether you care about the noise from leaf
blowers or not, loud music, etc., so long as it's before 10 p.m., you are stuck
no matter how much it bugs you - nothing can be done. But after 10 p.m., there
are exact restrictions in terms of decibels on how loud music, etc. can be. If
someone violates that rule, police will enforce it if asked to do so. For
barking dogs, the rule is equally explicit, if it barks continuously for more
than a half hour (you are supposed to record it), it is actionable - you can
call and have animal control do something about it. Many externalities are like
this, the community decides what is and isn't acceptable, whether you like it or
not. Some externalities can be stopped, others you are stuck with (though you
can still negotiate on an individual level, but the response "there's no law
against it" is always available to the person being asked to be more
considerate). This isn't the most efficient solution, but it is practical (and
given how hard it would be to do individual calculations, it may be the best
solution available) - it defines community preferences through the political process and forces adherence to
them. This notion works at the local level - e.g. neighborhoods that enforce how
houses are painted for example - but I'm having a harder time fitting it into
national issues such as global warming, and to issues where taxes are used to discourage behavior rather than issuing blanket prohibitions. But I guess it's the same. If all
nations but one decide that polluting the atmosphere with greenhouse gases is
just fine, little can be done, it does not violate community standards. If one
country really cares about the issue but others don't, it can turn down its
music voluntarily at 10 pm to be courteous, i.e. try to fight the problem on its
own, but it's only when the majority of nations agree that it is a problem that
effective enforcement can begin. Anyway, I've pushed this far enough - thoughts?
Posted by Mark Thoma on Tuesday, May 27, 2008 at 11:07 AM in Economics, Environment, Market Failure, Policy |
I was surprised this statement by John McCain showing how out of touch he is with people who have to work for a living didn't get more notice in the media:
McCain: Out of Touch on Trade, by Seth Michaels, AFL-CIO Blog: At a speech in Florida yesterday, Sen.
made a baffling pronouncement: The rising discontent in our country is not due
to job losses, home foreclosures or the health care crisis, but rather the fact
that we aren’t passing a
bad trade deal with Colombia.
Here’s what McCain had to say at
We have made progress toward this vision by expanding the benefits of free
commerce, through ... our free trade agreements... But the progress has stalled; our longstanding bipartisan commitment to
hemispheric prosperity is crumbling. We see this most vividly in Barack
Obama’s and Hillary Clinton’s opposition to the free trade agreement with
Colombia. The failure of Congress to take up and approve this agreement is a
reminder why 80 percent of Americans think we are on the wrong track.
What country is he living in?
If Obama had made the same statement, his "elitist views" would have
been highlighted all over the airwaves and internet, we would have
heard repeatedly about how out of touch Mr. Arugula is with the working
class. But McCain says it and there's hardly a stir. Why?
If I were running Obama's campaign, I would be tempted to pull a Bill Clinton and
let it slip out that he sometimes sneaks out for fast food, has a
secret passion for big time wrestling, dreams of driving around the
track at Indie, something like that. Some foible that betrays his
Posted by Mark Thoma on Tuesday, May 27, 2008 at 09:09 AM in Economics, International Trade, Press |
[If you don't like sports analogies about the election, you'll want to skip this.]
Continue reading "Shaking Hands after the Game" »
Posted by Mark Thoma on Tuesday, May 27, 2008 at 03:24 AM in Economics, Politics |
Posted by Mark Thoma on Tuesday, May 27, 2008 at 12:06 AM in Links |
Lane Kenworthy has "surprises for the left" and "surprises for the right"
Sweden: Image and Reality
Posted by Mark Thoma on Monday, May 26, 2008 at 02:34 PM in Economics, Social Insurance |
I'd be interested in hearing other theories as to why power relationships
between men and women change as economies develop. Here's one
Women’s rights: What’s
in it for men?, by Matthias Doepke and Michèle Tertilt, Project Syndicate:
Improving women’s rights is one of the main goals of development policy; the
United Nations names “promoting gender equality and empowering women” as one of
Millennium Development Goals. As Figure 1 shows, today most rich countries
are close to the ideal of gender equality, while in the poorest countries women
have only limited rights and face widespread discrimination. What, if anything,
can development policy do to close the gap in gender equality between rich and
Continue reading "Women’s Rights: What’s in it for Men?" »
Posted by Mark Thoma on Monday, May 26, 2008 at 02:25 PM in Economics, Equity |
Martin Feldstein says to expect more rapid dollar depreciation in coming
The US dollar hits an oil slick, by Martin Feldstein, Project Syndicate [alt]:
The rapid rise in the price of oil and the sharp depreciation of the dollar are
two of the most noteworthy developments of the past year. ... To many
observers, the combination of a falling dollar and a rise in oil prices appears
to be more than a coincidence.
But what is the link between the two? Would the price of oil have increased
less if oil were priced in euros instead of dollars? Did the dollars fall cause
the price of oil to rise? And how did the rise in the price of oil affect the
dollars movement? ...
Continue reading ""The US Dollar Hits an Oil Slick"" »
Posted by Mark Thoma on Monday, May 26, 2008 at 02:16 PM in Economics, International Finance |
Will Democrats reunite for the election in November, or will "lingering
bitterness" cost them the election?:
Divided They Stand, by Paul Krugman, Commentary, NY Times: It is, in a way,
almost appropriate that the final days of the struggle for the Democratic
nomination have been marked by yet another fake Clinton scandal — the latest in
a long line that goes all the way back to Whitewater.
This one, in case you missed it, involved an interview Hillary Clinton gave
... in which she tried to make a case for her continuing campaign by pointing
out that nomination fights have often gone on into the summer. As one of her
illustrations, she mentioned that Bobby Kennedy was assassinated in June.
It wasn’t the best example.., but it’s absurd to suggest, as some Obama
supporters immediately did, that Mrs. Clinton was making some kind of dark hint
about Barack Obama’s future.
But then, it was equally absurd to portray Mrs. Clinton’s assertion that it
took L.B.J.’s political skills to turn Martin Luther King’s vision into
legislation as an example of politicizing race. Yet the claim that Mrs. Clinton
was playing the race card, which was promoted by some Obama supporters as well
as in a memo by a member of Mr. Obama’s staff, achieved wide currency.
Why does all this matter? Not for the nomination: Mr. Obama will be the
Democratic nominee. But ... many grass-roots Clinton supporters feel that she
has received unfair, even grotesque treatment. And the lingering bitterness ...
could cost Mr. Obama the White House.
To the extent that the general election is about the issues, Mr. Obama
should have no trouble winning over former Clinton supporters... But elections
always involve emotions as well as issues, and there are some ominous signs in
the polling data.
In Florida, in particular,... Pollster.com shows Mr. McCain running
substantially ahead of Mr. Obama, even as he runs significantly behind Mrs.
Clinton. Ohio also looks problematic, and Pennsylvania looks closer than it
So what should Mr. Obama and his supporters do?
Most immediately, they should realize that the continuing demonization of
Mrs. Clinton serves nobody except Mr. McCain. One more trumped-up scandal won’t
persuade the millions of voters who stuck with Mrs. Clinton ... that she really
was evil all along. But it might incline a few more of them to stay home in
Nor should Obama supporters dismiss Mrs. Clinton’s strength as a purely
Appalachian phenomenon, with the implication that Clinton voters are just a
bunch of hicks.
So what comes next?
Mrs. Clinton needs to do her part: she needs to be careful not to act as a
spoiler... But mainly it’s up to Mr. Obama to deliver the unity he has always
promised — starting with his own party.
One thing to do would be to make a gesture of respect for Democrats who
voted in good faith by recognizing Florida’s primary votes — which at this
point wouldn’t change the outcome of the nomination fight.
The only reason I can see for Obama supporters to oppose seating Florida is
that it might let Mrs. Clinton claim that she received a majority of the
popular vote. But which is more important — denying Mrs. Clinton bragging
rights, or possibly forfeiting the general election?
What about offering Mrs. Clinton the vice presidency? ... I’d do it. Adding
Mrs. Clinton to the ticket — or at least making the offer — might help heal the
wounds of an ugly primary fight.
Here’s the point: the nightmare Mr. Obama and his supporters should fear is
that in an election year in which everything favors the Democrats, he will
nonetheless manage to lose. He needs to do everything he can to make sure that
Posted by Mark Thoma on Monday, May 26, 2008 at 12:33 AM in Economics, Politics |
Posted by Mark Thoma on Monday, May 26, 2008 at 12:06 AM in Links |
On non-traditional approaches to economics:
Posted by Mark Thoma on Sunday, May 25, 2008 at 08:01 PM in Economics, Methodology |
Joe Klein is unhappy with CNN:
Lou Demagogue, by Joe Klein: ...I've got to wonder why
[CNN] allows Lou Dobbs to continue spewing false, inflammatory nonsense
under the guise of objective journalism. Here is his latest
confrontation with Paul Waldman of Media Matters about the fictional NAFTA
superhighway. Indeed, the Washington Post's Fact Checker gave the NAFTA
Superhighway myth four
Pinocchios. Now, I know that Dobbs brings in some serious ratings. And he is
certainly entitled to his own opinion. But he is not entitled to his own
facts--especially not on a network that makes a real effort to separate truth
from falsehood and represent all sides of the political debate. Shouldn't
someone be editing this swill? Doesn't CNN have a responsibility to tell its
viewers that, in this case, one of their presenters is engaged in flat-out
anti-immigrant fearmongering? Perhaps the network could employ a simple
superimposed title--THIS IS NOT TRUE...or LOU HAS JUMPED THE SHARK ON THIS
ONE--whenever Dobbs pretends that there is such a thing as the NAFTA
Superhighway. This sort of thing diminishes the credibility and hard work of the
other journalists on the network. (And no, I do not count the execrable Glenn
Beck as a journalist.)
I don't mean to include every individual in a sweeping statement, but Joe
Klein's baseline opinion of CNN appears to be higher than mine. I agree, though, that
Lou Dobbs is a downward drag from whatever starting point is assumed.
Markets find a way to work no matter how hard governments work to stop them
(see drugs), and with the difference in opportunity as large as it is between
the US and Mexico, illegal immigration will continue to be a problem. Sure, we can get tough
and reduce the flow of illegal workers, crack down on employers, put illegal
workers in jail, but for those who are still engaged in the activity it will
become more brutal, more violent, and those who make it here to work will be
subjected to much worse working conditions than they already are as people work as hard as they can to
conceal their activity. The bigger the penalties if they are caught, the more
they will be willing to do to prevent discovery and it will be the workers
trying to escape poverty who will bear the brunt of the effort to keep things
underground. I'm not saying we shouldn't enforce immigration law, but we need to recognize the consequences of intensified enforcement, and do our best to make the punishment fit the crime of trying to escape from difficult conditions at home.
The only long-term solution is for opportunity to increase in Mexico, for
Mexico to develop economically. That's the only thing that, ultimately, will
substantially reduce the flow of illegal workers without draconian measures. That means, in part, accepting that some companies will need to move to Mexico, it means building highways between the US and
Mexico, etc. The politics of such a policy aren't easy, but we have to do more to help
Mexico develop economically if we want to solve this problem - it's in the long-run interest of both countries that we do so.
Thus, this needs to be on our political agenda - what will we do to help Mexico to develop? How can we help them to help themselves? Instead of spending money building fences, why not spend it helping to create opportunity for
Mexicans in Mexico? Instead of working so hard to keep people out, why not focus more of our efforts on giving them an economic incentive to stay home? We'll all
be better off if we do that.
Posted by Mark Thoma on Sunday, May 25, 2008 at 12:24 PM in Economics, Press |
Stan Collender says it's "hard to come to any conclusion other than that the spending of taxpayer funds in Iraq bordered on, or actually was, simple and straightforward corruption," and wonders if anyone will be prosecuted for their actions:
The Bush Administration's Teapot Dome, by Stan Collender: Discussions about the federal budget ... here at CG&G, typically focus on "formulation," that is, on the process and politics of putting the budget together and getting it enacted. That's the part we all generally agree is broken, not working properly, overly politicized, and...well...you get the picture.
But this story from Friday's Washington Post, which talks about $15 billion in spending on Iraq that can't be accounted for properly, or in some cases at all, shows that the other stage of federal budgeting -- implementation -- is similarly broken, not working properly, and...well...you certainly get this picture as well.
In fact, it appears as if virtually every procedure and law designed to prevent just this type of malfeasance was circumvented.
This spending was done in the midst of a national emergency and some of the usual safeguards couldn't be followed in the interest of national security and getting the job done quickly, right?
Nonsense. The Pentagon's own inspector general confirmed that this lack of concern for procedural safeguards was blatant and commonplace. That makes it hard to come to any conclusion other than that they were ignored rather than expedited or poorly executed.
It's also hard to come to any conclusion other than that the spending of taxpayer funds in Iraq bordered on, or actually was, simple and straightforward corruption.
Given the magnitude of the spending involved, Iraq may be the Bush administration's contribution to the biggest public corruption scandals of all time like Boss Tweed in New York, James Michael Curley in Boston, and Teapot Dome.
My question is whether any one, that is, any individual, will be prosecuted for their actions. ... [L]aws and spending rules were broken by individuals and there are three reasons why they should be criminally prosecuted.
First, we need to know whether they were ordered to ignore the laws and regulations. If they were ordered to break the law, we need to know who was pulling the strings. ...
Second, these individuals almost certainly broke a variety of laws. At least one of these, the Antideficiency Act, actually calls for civil penalties and jail time...
Third, not prosecuting the individuals and instead allowing this situation to be nothing more than a political scandal will encourage others to do this again, or keep doing it...
There would have been widespread outrage and anger if this were a domestic department or agency. The fact that this was the Pentagon and the spending was related to activities in Iraq doesn't make this more acceptable.
Update: Pete Davis follows-up.
Posted by Mark Thoma on Sunday, May 25, 2008 at 08:42 AM in Economics, Politics |
Posted by Mark Thoma on Sunday, May 25, 2008 at 12:31 AM in Links |
I recently talked about relative prices as signaling mechanisms in the
economy, and how distortions in these signals relate to Fed policy (see
False Signals). Part of the discussion noted that "Market failure can also cause
distorted prices, but ... this is outside the Fed's purview, so ... that's for
another discussion." Conveniently, Robert Frank takes up this issue:
The Invisible Hand Is Shaking, by Robert Frank, Economic Scene, NY Times:
Adam Smith's modern disciples are far more enthusiastic about his celebrated
invisible-hand idea than he ever was. ...
If you believe, with Smith’s modern disciples, that unfettered pursuit of
self-interest always promotes society’s interests, you probably view all taxes
as a regrettable evil — necessary to pay for roads and national security, but
also an unwelcome drag on economic efficiency. The problem, according to this
view, is that taxes distort the price signals through which the invisible hand
guides resources to their best destinations.
Smith’s more nuanced position supports a different view of taxes. When
market prices convey accurate signals of cost and value, the invisible hand
promotes the common good. But prices often diverge from cost and value and, in
those cases, taxes can actually help steer resources toward more highly valued
The production and consumption of many ... goods ... generate costs or
benefits that fall on people besides buyers and sellers. Producing an extra
gallon of gasoline, for example, generates not just additional costs to
producers, but also pollution costs that fall on others. ...[M]arket forces
cause production to expand until the seller’s direct cost for the last unit
sold is exactly the value of that unit to the buyer. But because each gallon of
gasoline also generates external pollution costs, the total cost of that last
gallon produced is higher than its value to consumers.
The upshot is that gasoline consumption is inefficiently high ...[, a]
classic breakdown in the invisible hand when a product’s market price doesn’t
reflect all its relevant social costs and benefits. In such cases, the simplest
solution is to discourage consumption by taxing it.
Doing so would not only raise revenue to pay for public services; it would
also make the allocation of society’s resources more efficient...
Efficiency is important because any policy that enlarges the economic pie
necessarily lets everyone have a bigger slice than before. Economists opposed
suspending the gas tax because doing so would make the economic pie smaller.
Of course, when millions of voters feel the pinch of rapidly rising prices,
politicians find it hard to stand idly by. But as the late economist Abba
Lerner once remarked, the main problem confronting the poor is that they have
too little money. The best solution is not to reduce the prices they pay, but
rather to bolster their incomes — for example, by selectively reducing the
payroll tax for low-income workers or increasing the Earned Income Tax Credit. Suspending the gas tax would encourage rich and poor alike to do more ... driving. It would also promote sales of fuel-intensive vehicles.
Because the gas tax reduces waste, it actually makes more resources
available to help low-income families.
Gasoline is one of a host of goods whose production or consumption generates
costs that fall on outsiders. ... That the invisible hand often breaks down is
actually good news. After all, we need to tax something to pay for public
services. By taxing forms of consumption that generate negative side effects,
we could not only generate enough revenue to eliminate budget deficits, but
also help steer resources toward their most highly valued uses.
Because such taxes make the economy more efficient, it makes no sense to
object that they impose hardships on low-income families. Again, an efficient
policy is one that maximizes the size of the economic pie. And with a bigger
pie, it’s always possible for everyone to get a bigger slice.
With regard to the size of the pie and who gets what, this is not the only basis for arguing for income redistribution, but I think you can base redistributive policy on a market failure argument, i.e. that distribution mechanisms have failed to reward factors of production according to
their contributions to the production process. Some have received too much and others too little, and more could be done to counteract this so that we have a better chance to realize the possibility of everyone getting "a bigger slice."
Posted by Mark Thoma on Saturday, May 24, 2008 at 01:44 PM in Economics, Market Failure, Oil, Taxes |
The administration takes immigration enforcement to a new level:
270 Illegal Immigrants Sent to Prison in Federal Push, by Julia Preston, NY
Times: In temporary courtrooms at a fairgrounds here, 270 illegal
immigrants were sentenced this week to five months in prison for working at a
meatpacking plant with false documents.
The prosecutions, which ended Friday, signal a sharp escalation in the Bush
administration’s crackdown on illegal workers, with prosecutors bringing tough
federal criminal charges against most of the immigrants arrested... Until now,
unauthorized workers have generally been detained by immigration officials for
civil violations and rapidly deported. ...
The unusually swift proceedings, in which 297 immigrants pleaded guilty and
were sentenced in four days, were criticized by criminal defense lawyers, who
warned of violations of due process. ...
The illegal immigrants, most from Guatemala, filed into the courtrooms in
groups of 10, their hands and feet shackled. One by one, they entered guilty
pleas through a Spanish interpreter... Moments later, they
moved to another courtroom for sentencing. ... Most immigrants agreed to
immediate deportation after they serve five months in prison.
The hearings took place on the grounds of the National Cattle Congress in
Waterloo, in mobile trailers and in a dance hall modified with black curtains,
beginning at 8 a.m. and continuing several nights until 10. On Wednesday alone,
94 immigrants pleaded guilty and were sentenced...
The large number of criminal cases was remarkable because immigration
violations generally fall under civil statutes. Until now, relatively few
immigrants caught in raids have been charged with federal crimes like identity
theft or document fraud.
“To my knowledge, the magnitude of these indictments is completely
unprecedented,” said Juliet Stumpf, an immigration law professor... “It’s the
reliance on criminal process here as part of an immigration enforcement action
that takes this out of the ordinary, a startling intensification of the
criminalization of immigration law.” ...
Kathleen Campbell Walker, president of the American Immigration Lawyers
Association, said that intricate issues could arise in some cases, for example
where immigrants had children and spouses who were legal residents or United
States citizens. Those issues “could not be even cursorily addressed in the
time frame being forced upon these individuals and their overburdened counsel.”
Linda R. Reade, the chief judge who approved the emergency court setup, said
she was confident there had been no rush to justice. In an interview, Judge
Reade said prosecutors had organized the immigrants’ detention to make it easy
for their lawyers to meet with them. The prosecutors, she said, “have tried to
be fair in their charging.”
The immigration lawyers, Judge Reade said, “do not understand the federal
criminal process as it relates to immigration charges.”
That last part confuses me. How was the process fair if immigration lawyers
don't understand it? The Judge seems to be arguing that the process was
fair because prosecutors adjusted their charges to compensate for the fact that
immigration lawyers don't understand federal procedures. If so, I don't get
But the main question is, as George Borjas
notes, why did the administration choose to pursue this now? They haven't
hesitated to politicize the Justice Department to suit their needs, so does this
help Bush's reputation or McCain's chances of winning the election?
Update: I probably should have included this part - these issues have come up in comments:
No charges have been brought against managers or owners at Agriprocessors, but there were indications that prosecutors were also preparing a case against the company. In pleading guilty, immigrants had to agree to cooperate with any investigation.
Chaim Abrahams, a representative of Agriprocessors, said in a statement that he could not comment about specific accusations but that the company was cooperating with the government.
Aaron Rubashkin, the owner of Agriprocessors, announced Friday that he had begun a search to replace his son Sholom as the chief executive of the company. Agriprocessors is the country’s largest producer of kosher meat, sold under brands like Aaron’s Best. ... Normally it employs about 800 workers, and in recent years the majority of them have come from rural Guatemala.
Since 2004, the plant has faced repeated sanctions for environmental and worker safety violations. It was the focus of a 2006 exposé in The Jewish Daily Forward and a commission of inquiry that year by Conservative Jewish leaders.
Posted by Mark Thoma on Saturday, May 24, 2008 at 09:09 AM in Economics, Immigration, Politics |
Posted by Mark Thoma on Saturday, May 24, 2008 at 12:31 AM in Links |
more on the effects of the minimum wage:
The Effect of
Minimum Wages on Immigrants’ Employment and Earnings, by Pia M. Orrenius and
Madeline Zavodny, FRB Dallas: Abstract This study examines how
minimum wage laws affect the employment and earnings of low-skilled immigrants
and natives in the U.S. Minimum wage increases might have larger effects among
low-skilled immigrants than among natives because, on average, immigrants earn
less than natives due to lower levels of education, limited English skills, and
less social capital. Results based on data from the Current Population Survey
for the years 1994-2005 do not indicate that minimum wages have adverse
employment effects among adult immigrants or natives who did not complete high
school. However, low-skilled immigrants may have been discouraged from settling
in states that set wage floors substantially above the federal minimum.
Continue reading ""The Effect of Minimum Wages on Immigrants’ Employment and Earnings"" »
Posted by Mark Thoma on Friday, May 23, 2008 at 04:05 PM in Economics, Immigration, Unemployment |
Greg Mankiw has been pushing to eliminate the penny, so he's pleased that Barack Obama might consider it:
Barack's Best Idea Yet, by Greg Mankiw: Reported by USA Today:
Barack Obama, the presidential candidate of "change," told a town hall
meeting recently that he'd "seriously consider" eliminating the penny if
Lincoln's face could be placed on another coin.
I kind of embarrassed to admit that in all my discussions of this topic, the
social significance of removing Lincoln's image from coins in circulation never
occurred to me. I only thought about the economics (I've been a bit more resistant to the idea than a lot of people, but I leave them in the trays at the counter too).
Continue reading "The Lincoln Cent" »
Posted by Mark Thoma on Friday, May 23, 2008 at 02:07 PM in Economics |
In a money economy, each good has a price expressed in terms of dollars. But
what's important is not the price itself, what's important is relative prices,
the price of one good in terms of another. If milk has a price of $4 and
gasoline has the same price, $4, then we know that buying one gallon of gasoline
means giving up one gallon of milk. If purchasing milk is the highest valued
alternative to purchasing gasoline, then this measures the cost of the purchase.
Thus, the cost of a good is what you give up to get it, and this is measured as
a relative price.
Relative prices provide important signals to both producers and consumers. They give
consumers a means of deciding how to optimally allocate their purchases, and
they direct the flow of resources to their most profitable locations. Because of
this, it's important that price signals be as accurate as possible.
When there are sluggishly adjusting prices in an economy, accurate signaling
becomes a problem since some relative prices will slip out of alignment with
their optimal values, and this causes a misdirection of resources across
sectors. The wrong mix of goods is produced and consumed, and the outcome is
Inflation can make this worse because it accelerates the rate at which
relative prices fall out of line with optimal values. If all prices are
perfectly flexible and adjust instantaneously in response to any shock, then
inflation isn't a problem since relative prices will always be maintained at
their proper values. But if prices aren't perfectly flexible, or
there are other rigidities, then the Fed has to
worry about keeping inflation from distorting relative prices and causing
So one job of the Fed is to make sure that the price signals in the economy
are as pure as possible, and that is the point behind inflation targeting. It's
a way of trying to maximize the information content of relative prices so that
resources are directed, as much as possible, to where they would go under ideal
But think about commodity prices, oil perhaps. Is the run up in prices a true
signal of scarcity? Is the price increase accurately reflecting underlying
conditions? If so, then this is not the kind of a change in prices that the Fed
should try to mute even if there is a temporary increase in the inflation rate
because of it. It's signaling to substitute away, to bring more supply to
market, to innovate, to drive less, etc. It's a change in relative prices that
is providing an important signal to consumers and producers.
But if the increase is due to speculation, that's a different matter. In that
case, the increase in price is providing a false signal to market participants
and that distorts resource flows. Here the Fed would, if it could, want to try
to temper the increase in prices and institute other changes as needed to allow
fundamentals to take over once again.
The intense debate right now about whether the increase in oil prices and commodity prices more generally is due
to fundamentals or due to speculation that is driving prices away from
fundamentals - i.e. whether or not there's a bubble - shows how hard it is for
the Fed to identify and do something about bubbles as they are inflating. Do we
have a bubble in commodity markets or not? Is it the Fed's fault? Are prices
going up partly from fundamentals and partly from speculation? Then how much of
each? (I think some people use the word speculation when what they really mean
is that oil producers have excessive market power that allows them to increase
prices almost at will. Market failure can also cause distorted prices, but
except for financial market regulation, this is outside the Fed's purview, so,
while it's important to maintain competitive markets, that's for another
We can't always have zero (economic) profit in every market at every point in
time. In order for resources to be attracted to their best uses in a dynamic
economy, there have to be profits - there has to be a pie to fight over - and
sometimes that pie will be huge if there has been a large shock to a particular
market and there will be lots of money to be made. That's not a bubble, that's
the market doing what it's supposed to do and we don't want to get in the way of
the market's ability to move resources where they are needed the most (though
there may be reasons to slow the adjustment down at times, but that's another
discussion as well). It will look a lot like a bubble when there is a large
amount of excess supply or demand, but popping it would be a mistake.
Thus, while I certainly think would certainly be desirable for the Fed to pop
speculative bubbles, practically it will be hard to do and mistakes can be
costly. If, somehow, they are relatively certain that a bubble exists, action is warranted, but this is likely to be a rare event.
Posted by Mark Thoma on Friday, May 23, 2008 at 12:33 AM in Economics, Inflation, Market Failure, Monetary Policy |
Tax credits for investment in renewable energy projects are in danger:
Tax credits for renewables, Editorial, LA Times: You don't have to be an environmentalist, or even a believer in global
warming, to support tax credits for renewable energy ... at a time when prices
for fossil fuels are soaring. Yet congressional Republicans and the Bush
administration are willing to let existing credits expire because they don't
want to close a tax loophole for multimillionaire hedge-fund managers. ...
The House on Wednesday passed a $54-billion package of tax breaks, of which
incentives for clean energy account for a little under $20 billion. Because
generating solar, wind or geothermal power involves steep upfront expenses, the
tax credits are vital. ... Yet even though the incentives enjoy wide bipartisan
support, efforts to extend them have repeatedly failed because members of
Congress can't agree on how to pay for them.
The House bill passed 263 to 160, but that's not enough to overcome a
threatened veto from President Bush. The bill's fate in the Senate, meanwhile,
is highly uncertain given opposition from Republican leaders.
Many Republicans object to the credits because they would be offset by
postponing an obscure tax break for corporations with foreign operations that
was supposed to take effect next year, and by cracking down on hedge-fund
managers, who would no longer be able to avoid billions of dollars in taxes by
diverting money to offshore havens. Thus, while middle-class Americans are
struggling with skyrocketing energy costs, these lawmakers are standing in the
way of alternative energy sources in order to defend an unfair tax loophole for
the mega-rich. ...
The trouble with the House bill isn't that it proposes unreasonable new
taxes, it's that it doesn't go far enough -- it extends the tax credit for wind
power for just one year, far too short-term a guarantee to make investors
comfortable. Still, it's a good next step until President McCain or Obama or
Clinton brings a savvier approach to the White House.
Posted by Mark Thoma on Friday, May 23, 2008 at 12:24 AM in Economics, Environment, Taxes |
Posted by Mark Thoma on Friday, May 23, 2008 at 12:06 AM in Links |
What happens when the opportunity cost of church attendance goes up? Just
what you'd expect:
of repealing blue laws, by Sarah H. Wright, News Office: Blue laws, or
Sunday closing laws, refer to statutes that restrict certain activities on the
Christian Sabbath. By the end of the 19th century, nearly every state had at
least some law prohibiting certain activities on Sunday. The 1960s saw the
beginning of push to repeal these laws in favor of commerce, although a few
still remain on the books.
In their study, which appears in the May 2008 edition of The Quarterly
Journal of Economics, Gruber and Hungerman show what happens when religious
services must compete with shopping, hobbies and other activities.
To measure that competition, they studied the large number of states that
repealed their blue laws over the past 50 years. ...
The economists used data from the General Social Survey on religious
attendance and from the Consumer Expenditure Survey to show a very strong
reduction in religious attendance and a decline in religious contributions once
the blue laws were repealed. They found no change in other charitable activity,
To confirm their findings and to complete the economic portrait, the authors
also analyzed budget data for four major Christian denominations over the past
40 years. Church expenditures declined significantly since the repeal of the
blue laws, they found.
Gruber and Hungerman did more than track how individuals chose to allocate
their resources on Sunday once the malls were opened...
They considered the negative consequences for individuals or society from
loosening secular constraints and they found those consequences in behaviors
associated more with Saturday night than Sunday morning.
Using data from the National Longitudinal Survey of Youth (NLSY) on
consumption of alcohol and illegal drugs, the economists found that repealing
the blue laws did lead to an increase in drinking and drug use.
What's more, they found that individuals who had attended church and stopped
after the blue laws were repealed showed the greatest increase in substance
abuse, Gruber notes.
Those effects have significant economic and social implications, the authors
The study, "The Church vs. the Mall: What Happens When Religion Faces
Increased Secular Competition?" can be accessed online
Posted by Mark Thoma on Thursday, May 22, 2008 at 05:40 PM in Economics, Religion |
Awhile back, I
posted a summary of a paper by Golosov and Lucas. The paper is important
because it raises questions about the ability of New Keynesian models to explain fluctuations in
real output. As I stated at the time:
A lot of you don't believe in a
Phillips curve, but
I've argued that there is a short-run inflation-output tradeoff and I've cited
New Keynesian models along with supporting empirical evidence to reinforce that
position. But when I make that argument, you should cite this paper by Golosov
and Lucas to argue against the existence of a significant inflation-output
tradeoff. The paper argues that if there is a Phillips curve, the
inflation-output tradeoff is pretty steep, steep enough so that nominal shocks
are "nearly neutral":
And since we believe nominal shocks matter for real GDP - there is empirical evidence in support of that claim - the fact that nominal shocks (think monetary policy) aren't able to explain much of the movement in output in the class of theoretical macroeconomic models used to assess policy and learn about the economy is a problem.
As a review, here's part of the introduction and conclusion from the Golosov and Lucas
Menu Costs and Phillips Curves, by Mikhail Golosov and Robert E. Lucas Jr.,
Journal of Political Economy, 2007, vol. 115, no. 2 [open link]: I.
Introduction This paper develops a model of a monetary economy in which
firms must pay a fixed cost—a "menu cost"—in order to change nominal prices.
Menu costs are interesting to macroeconomists because they are often cited as a
microeconomic foundation for a form of "price stickiness" assumed in many New
Keynesian models. Without sticky prices these models would not exhibit the real
effects of monetary shocks—Phillips curves—that they are designed to analyze.
Under menu costs, any individual price will be constant most of the time and
then occasionally jump to a new level. Thus the center of the model will be the
firm's pricing decision to reprice or not to do so. Many New Keynesian models do
not examine this decision but instead rely on a simplifying assumption proposed
by Calvo (1983) that the waiting time between repricing dates is selected at
random from an exponential distribution: Firms choose the size of price changes
but not their timing.
As many others are, we are skeptical that the Calvo model provides a
serviceable approximation to behavior under menu costs. One reason is that
the assumption of a constant repricing rate cannot fit the fact that repricing
is more frequent in high-inflation environments. But a second, more important,
reason was discovered by Caplin and Spulber (1987), who constructed a
theoretical example of an economy with menu costs in which only a small fraction
of firms reprice yet changes in money growth are neutral. In their example,
there is a stationary distribution of firms' relative prices, and as a monetary
expansion proceeds, the firms at the low end of this distribution reprice to the
high end. The repricing rate is very low—prices are very "sticky"—but no price
stickiness can be seen at the aggregate level. The key to the example is that
the firms that change price are not selected at random but are rather those
firms whose prices are most out of line.
The Caplin and Spulber example is well designed to exhibit this selection
effect, but it is unrealistic in too many respects to be implemented
quantitatively. In this paper we capture the selection effect in a new model of
menu cost pricing, designed so that it can be realistically calibrated...
Our main finding is that even though monetary shocks have almost no impact on
the rate at which firms change prices, the shocks' real effects are dramatically
less persistent than in an otherwise comparable economy with time-dependent
price adjustment. Simulations of the model's responses to a one-time impulse of
inflation show small and transient effects on real output and employment..., in contrast to much larger and more persistent responses of
the same model with Calvo pricing. ... In the menu cost model, a positive aggregate shock induces the
lowest-priced firms to increase prices. At the same time, it offsets negative
idiosyncratic shocks, and some firms that would otherwise have decreased prices
choose to wait. As a result, the lowest-priced firms do most of the adjusting,
their adjustments are large and positive, and the economywide price level
increases quickly to reflect the aggregate shock. In the Calvo setting, in
contrast, firms get the opportunity to reprice randomly, many firms reprice even
though they were already close to their desired price, and the average response
of prices to the shock is much smaller. It takes longer for the monetary shock
to be reflected in prices, and impulse responses become more persistent. ...
VII. Conclusions ... In summary, the model we proposed and calibrated to microeconomic evidence on
U.S. pricing behavior ... does not
appear to be consistent with large real effects of monetary instability. These
results seem to us another confirmation of the insight provided by the much
simpler example of Caplin and Spulber (1987) that even when most prices remain
unchanged from one day to the next, nominal shocks can be nearly neutral...
But not so fast. The paper below develops a multi-sector "CalvoPlus Model" that maintains the
mathematical simplicity of the Calvo approach, but allows state dependent
pricing. In particular, in the standard Calvo model of price rigidity, firms are allowed to change
prices with probability a, and prices remain fixed with probability 1-a (with the parameter a
chosen based upon empirical results on the average frequency of price changes).
Essentially, with probability a the cost of changing the price in a given period is zero,
and with probability 1-a, the cost to change price is infinite. The CalvoPlus
model changes this so that with probability a, the cost of changing a price
is very low, and with probability 1-a the cost is high, but not infinite (the high-low costs vary across sectors). This
introduces an element of state dependency because if a price is far enough away
from its optimal value, it may be worthwhile to pay the high cost to change it since the benefit of
changing the price would be even larger than the cost. It introduces heterogeneity due to the multi-sector set up (the degree of non-neutrality goes up as the number of sectors is increased, and the model is calibrated so that around 75% of price changes occur in the low cost states).
However, allowing heterogeneity across sectors in the
frequency and size of price changes by itself is not enough to allow the model to generate
non-neutralities large enough to be consistent with actual fluctuations in real
GDP. Thus, the model also adds a second change, the introduction of intermediate
inputs. As the authors note, "Intuitively, in the model with intermediate
inputs, firms that change their price soon after a shock to nominal aggregate
demand choose to adjust less than they otherwise would because the prices of
many of their inputs have not yet responded to the shock." In the model, the
price of these inputs depends directly upon the price of other goods in the economy (they are "strategic complements").
Because intermediate input prices adjust sluggishly, an increase in aggregate demand of 1%
increases input costs by less than 1%, and prices do not rise by as much as they
would if intermediate inputs were not present (i.e. if input costs were completely flexible).
This extra price sluggishness results in larger real effects and doubles the
degree of non-neutrality in the model (i.e. the output movements attributable to
CalvoPlus pricing and to the presence of intermediate inputs are about equal, and total around 25% of the total variation).
Here's part of the introduction to the paper (it's been keeping me occupied
Monetary Non-Neutrality in a Multi-Sector Menu Cost Model, by
Emi Nakamura and Jon Steinsson, NBER WP 14001, May 2008: [Open
Link] 1 Introduction Much applied work in monetary economics relies on models in which nominal
rigidities are the key friction that generates monetary non-neutrality. The
workhorse models in this literature - e.g., the Calvo (1983) model and the
Taylor (1980) model - make the simplifying assumption that the timing of price
changes is independent of firms' incentives to change prices. It has been
recognized at least since Caplin and Spulber (1987) that models based on this
assumption can yield very different conclusions about monetary non-neutrality
than models in which nominal rigidities arise due to a fixed cost of changing
prices (see...). Golosov and Lucas (2007) calibrate a
menu cost model based on newly available micro-data on the frequency and size of
price changes and conclude that nominal rigidities due to menu costs yield
monetary non-neutrality that is "small and transient".
Given the importance of nominal rigidities as a source of monetary
non-neutrality in most models that analyze the transmission of monetary policy,
this conclusion poses a serious challenge for monetary economics. If
realistically modeled nominal rigidity yields monetary non-neutrality that is
small and transient, much of our understanding of the transmission of monetary
policy is called into question. It is therefore of great importance for monetary
economics to assess whether the implications of highly stylized menu cost models
hold up in a richer, more realistic setting. ...
In this paper, we ... extend a simple
benchmark menu cost model to include two features for which there exists
particularly clear empirical evidence: 1) Heterogeneity across sectors in the
frequency and size of price changes; 2) Intermediate inputs. We show that when
we subject our model to calibrated nominal shocks it generates fluctuations in
real output that can account for 26% of the U.S. business cycle. This result of
our model accords well with empirical evidence on the importance of nominal
shocks for business cycle fluctuations.
Shapiro and Watson (1988) attribute 28% of the variation in output at short
horizons to nominal shocks. In contrast, the Golosov and Lucas model generates
fluctuations of real output that can account for only roughly 2% of the U.S.
business cycle. Roughly half of the difference in monetary non-neutrality in our
model relative to the model of Golosov and Lucas (2007) is due to the
introduction of heterogeneity in the frequency of price change; the remaining
half is due to the introduction of intermediate inputs. ...
Posted by Mark Thoma on Thursday, May 22, 2008 at 12:51 PM in Academic Papers, Economics, Inflation, Unemployment |
It's interesting that there has been such a large increase in the number of
prices that are currently falling, from 16% last month to 28% this month. Is this the Phillips curve at work?:
Digging deeper into the components that comprise the CPI, we can see that
nearly 50 percent of the market basket rose at rates exceeding 3.0 percent in
April, down slightly from 55 percent last month, but in line with price changes
over the past 12 months. Also, 28 percent of the CPI components posted a
decrease in price during the month, compared to 16 percent in March and an
average of 20 percent over the past 12 months.
More on inflation (first link) and the Phillips curve (second two links):
Hmmmmm, by Bill Gross
Explaining Apparent Changes in the Phillips Curve: The Great Moderation and
Monetary Policy, Charles T. Carlstrom and Timothy S. Fuerst, Economic
Commentary, Federal Reserve Bank of Cleveland
Explaining Apparent Changes in the Phillips Curve: Trend Inflation Isn't
Constant, Charles T. Carlstrom and Timothy S. Fuerst, Economic Commentary,
Federal Reserve Bank of Cleveland
Posted by Mark Thoma on Thursday, May 22, 2008 at 11:17 AM in Economics, Inflation |
John McCain opposes the Webb and Hagel bill to update the G.I bill:
McCain Have a Vets Problem?, by Jay Newton-Small, Time: Of all the voting
groups John McCain will target this fall, none would seem like more of a sure
thing than this country's war veterans. So why is the celebrated Vietnam War
hero and POW bracing for a potentially bad week with so many men and women who
have served in uniform?
The point of contention between the two seemingly natural allies is a piece
of legislation the Senate is expected to vote on this week to update the 1944
G.I. Bill to provide expanded education assistance and opportunities to the
armed forces. The bill ... would effectively provide full tuition and housing
costs at a four-year public university for veterans who have served at least
three years of active duty. ... McCain, concerned about the estimated $4
billion annual price tag and the incentive he worries it might give people to
leave an already strapped military, has sponsored his own competing proposal.
It increases the existing monthly education benefit from around $1,100 to
$1,500 a month while adding more generous benefits for those who've served more
than 12 years.
McCain's concerns, however, don't seem to impress the vast majority of
veterans' organizations. They are feverishly lobbying him to support the Webb
and Hagel bill...
Even with the current dustup, it's hard to imagine John McCain not winning
the majority of the veterans vote in November. But the nation's 26 million
veterans are by no means a monolithic voting bloc, and any level of
disappointment with McCain could sway some undecideds. ...
Supporters of Webb and Hagel's bill dismiss McCain's concerns about the
retention issue. While the Congressional Budget Office estimates that the bill
would cause a 16% drop in re-enlistment rates across all four branches of the
military, the same study also predicts a 16% uptick in new recruits attracted
by the benefit. The bill has 58 co-sponsors, including none other than Obama —
just two shy of a veto-proof majority. It was passed last week by the House
with a comfortable veto-proof majority...
Suppose you run a firm and, subject to minimum qualifications, you will hire
anyone willing to accept the wage and retirement plan that you offer. Assume you
currently have some number of employees, and suddenly you announce that you are
going to double retirement benefits. What would happen to the number of
employees? A lot of people at or above the retirement age who are still working
would likely decide to retire, but you would also get a lot more people showing up at the door wanting to work for you. It seems to me that after full adjustment, it's likely employment would rise. This problem is just like the military changing education benefits and though the CBO says the bill would not change the number of people in the military, the new recruits would just
equal those leaving, I think the number might actually
go up here as well. But whatever the case, there's certainly a large
offset from new recruits, and reduces any retention concerns. The other
concern is the price tag, but the price tag of 4 billion is pretty modest - what
did top hedge fund managers make last year? - so that part doesn't concern me
Going back to retention, I recently heard a talk where the speaker noted in passing that firms
use deferred compensation schemes to create the incentive for their employees to retire
at a certain date, the date they want employees to retire. That is, suppose the law says you can't force someone to
retire. You can still make it economically unattractive to work past a
particular date by altering the size of the deferred compensation (retirement) package. The larger it is, the more likely it is that people will leave rather than working past the retirement date.
But the decision about when to retire is also affected by what you are
currently earning, and the more you earn, the longer you are likely to work
before retiring (I'm assuming the income effect doesn't dominate the
substitution effect). This means that if retention turns out to be a problem for
the military, i.e. if people are retiring as soon as they can (at the three year
minimum) rather than re-enlisting, a solution would be to provide a positive
incentive to stay by promising
higher wages for those who re-enlist or make it past a particular benchmark
(e.g. McCain's twelve years). This would increase the price tag
further, I don't know by how much, but I think the
military is underpaid as it is, so again, that doesn't bother me. [And if McCain is so worried about paying for
it, couldn't he just cut a few more earmarks? He seems to think that works just
fine for tax cuts costing far, far more than this bill.]
So a response to McCain's concerns about retention is to say that, according to the CBO and others, it's
unlikely he's correct about numbers falling, but just to be sure maybe we should adopt his proposal about
increasing the compensation for people who choose to stay past some number of
years. We still do the Webb and Hagel bill, but we add the additional incentive
of higher future compensation for those who choose to re-enlist. With this
change, it's hard to see how the number of people in the military would fall as a result of the bill.
Posted by Mark Thoma on Thursday, May 22, 2008 at 02:07 AM in Economics, Politics |
Posted by Mark Thoma on Thursday, May 22, 2008 at 12:06 AM in Links |
This is something I want to have in the archives - it's part of Chapter 12 of
Keynes' General Theory - but you might enjoy reading his comments about
speculation, bubbles, and other factors that impact the price of a an asset by changing the "state of confidence" (the beauty contest problem and animal spirits are part of the discussion):
John Maynard Keynes The General Theory of Employment, Interest and Money
Chapter 12. The State of Long-Term Expectation: ...In this chapter we shall
consider in more detail some of the factors which determine the prospective
yield of an asset. ...
The state of confidence, as they term it, is a matter to which practical men
always pay the closest and most anxious attention. But economists have not
analysed it carefully and have been content, as a rule, to discuss it in
general terms. ...
There is ... not much to be said about the state of confidence a priori. Our
conclusions must mainly depend upon the actual observation of markets and
business psychology. This is the reason why the ensuing digression is on a
different level of abstraction from most of this book.
For convenience of exposition we shall assume in the following discussion of
the state of confidence that there are no changes in the rate of interest; and
we shall write, throughout the following sections, as if changes in the values
of investments were solely due to changes in the expectation of their
prospective yields and not at all to changes in the rate of interest at which
these prospective yields are capitalised. The effect of changes in the rate of
interest is, however, easily superimposed on the effect of changes in the state
The outstanding fact is the extreme precariousness of the basis of knowledge
on which our estimates of prospective yield have to be made. Our knowledge of
the factors which will govern the yield of an investment some years hence is
usually very slight and often negligible. If we speak frankly, we have to admit
that our basis of knowledge for estimating the yield ten years hence ...
amounts to little and sometimes to nothing; or even five years hence. In fact,
those who seriously attempt to make any such estimate are often so much in the
minority that their behaviour does not govern the market. ...
Some of the factors which accentuate this precariousness may be briefly
Continue reading ""The State of Long-Term Expectation"" »
Posted by Mark Thoma on Wednesday, May 21, 2008 at 09:45 PM in Economics, Financial System |
How much should the well-being of people in other countries matter for
China’s Class Divide, by Daniel A. Bell, Commentary, NY Times: ...Tsinghua
is one of China’s most prestigious universities and it is known for its
politically conservative orientation. President Hu Jintao is an alumnus, and
most of my colleagues are Communist Party members, as are many of my students.
Yet the atmosphere is anything but conservative. The most popular lecturers
tend to be the ones who openly criticize contemporary China. In private,
students are quick to express frustration at Internet censorship and official
propaganda. In class, student questions are often critical to the point that I
need to introduce some “pro-government” views for balance.
Shortly after the uprisings in Tibet in March, I happened to lecture on
Locke’s idea of constitutional democracy. A student asked if the “right to
rebel” would justify the use of violence by Tibetans fighting for independence.
In the interest of class time, I had to shut off the discussion. The next week
we discussed Isaiah Berlin’s concept of freedom... Once again, I was forced
into the strange position of cutting off debate before it got out of hand.
After the Sichuan earthquake, ..., I was due to lecture on John Rawls’s
theory of justice. ... I tried hard to think
of an example that the students could grapple with.
Finally I came up with a good one (or so I thought). According to Rawls, the
state should give first consideration to the worst-off members of the
community. But which “community” matters? Do the state’s obligations extend
outside national boundaries? For example, the cyclone in Burma caused more
deaths than the Chinese earthquake. Should China help the victims of the
Burmese cyclone, even if it means less aid for the rescue mission in China?
When I finished, the class went unexpectedly silent, to the point that I
could feel a certain amount of hostility. Finally a student said that of course
the Chinese government should help the Chinese first. But why, I said? Another
student said, it’s obvious, the victims are Chinese. “But why, why?” I asked,
somewhat impatiently. Give me some reasons.
Some students spoke up. There is no global institution that could distribute
aid in accordance with Rawls’s principles of justice. The Chinese people pay
taxes to the Chinese state, so the state has special obligations to them. The
Chinese state couldn’t do much for the Burmese people even if it wanted to.
I responded that the Burmese government is truly awful, blocking aid to its
own people, and that the Chinese government could have some influence on it.
...[T]he bell rang. In the past, the ever-polite students would clap in
appreciation before leaving. This time, there was no applause.
When I got home, I realized that I had trodden on sensitive territory.
Chinese TV has been filled with scenes of death and devastation, of Chinese
soldiers wading through mud and gore to help the victims. Every conversation is
prefaced with concern about the victims. I sent an e-mail message to the class
apologizing for the “wrong-headed” example...
A student wrote back saying, “It is not a wrong-headed example; we just have
clear and strong identification.” That seems to go to the heart of what went
wrong. It’s perfectly natural to care about people closer to home, especially
in times of disaster. ...
I've wondered about this - how much to care about people inside the US versus
people in the rest of the world - when it comes to monetary and fiscal policy.
Say, for example, the US is about to go into a recession and it can save itself,
but in doing so it will make life much more difficult for developing countries.
Should policymakers do what's best for the US even if it impacts other countries
negatively, or do monetary and fiscal authorities have an obligation to consider
the interests of other people in the world when they are making policy
decisions? Shouldn't policymakers always do what's best for the US?
policymakers are supposed to represent our interests, and if we care, on
average, a lot about how our actions impact other people in the world, then
policymakers should reflect that in their policy choices - that's what's best for us. Conversely, if we
mostly care about ourselves, and the rest of the world matters little, then
policymakers should reflect those preferences too and show little regard for the potential negative impact of domestic economic policy on other people in the world (except to the extent there are negative feedbacks effects).
But I'm less
comfortable with that position. What's the argument against it, i.e. what's the argument for internalizing the negative economic externalities that hit other countries because of our policy choices even if we don't care very much about those countries?
Posted by Mark Thoma on Wednesday, May 21, 2008 at 03:42 AM in China, Economics |
I don't think there is much new here, but it's nice to see Robert Samuelson
is catching on to the consequences of decreased economic security:
Cause of Middle-Class Anxiety, by Robert Samuelson, Washington Post: We
middle-class Americans are in a funk. "The overarching economic narrative of
the 2008 campaign is the idea that life for the middle class has grown more
difficult," Paul Taylor of the Pew Research Center ... writes. ... By its
survey, more than half of Americans believe they either have not moved ahead in
the past five years (25%) or have fallen behind (31%). Pew pronounces this "the
most downbeat short-term assessment of personal progress in nearly half a
It's not that Americans have lost their optimism. About two-thirds say they
have higher living standards than their parents..., and by a 2-1 margin they
expect their children to live better than they do. But there's an underlying
disenchantment that seems to predate today's higher oil prices, falling home
values and declining employment.
"When my college-educated, gainfully employed thirty-something friends and I
get together, we talk about money," Nan Mooney writes in her new book... "We
talk about our inadequate health insurance and whether we can afford it, about
how to juggle credit card payments and crushing student loans. ... This wasn't
the life I'd expected."
Part of the deceptive sense of falling behind reflects the elastic nature of
being middle class. According to Pew, 70% of households now have two or more
cars, and a similar share has satellite or cable TV; 66% have high-speed
Internet; 42% already have flat-panel TVs. ... More students ... have debt.
Health care is expensive... One in 10 households now has a vacation home.
"Progress" keeps draining our pocketbooks. ... But today's middle-class
anxieties transcend the well-advertised "squeeze" on incomes. The deeper source
of disquiet, I think, lies elsewhere. Middle-class families value
predictability, order, and security, and these reassuring qualities have
eroded. People worry about rising living expenses; but what really upsets them
is the possibility that their incomes or fringe benefits — pensions, health,
and disability insurance — might vanish.
Paradoxically, "the lives of individual Americans have grown simultaneously
more prosperous and more precarious," Peter Gosselin writes... The share of
families suffering a 50% loss of income with a spell of unemployment rose to
almost 26% from 17%. Fear of these setbacks has also climbed up the social
ladder: not just factory workers and low-paid service employees but also
managers and engineers.
Companies downsize. Older workers exit in buyouts. Companies raise
health-insurance premiums. The reliable "defined benefit" pension ... has given
way to the riskier 401(k)... Corporate protections have weakened...
One result is that bad economic news packs greater psychological punch than
it once did, because more people identify with the victims. Change isn't just
something that happens to them; it could happen to us. People worry even if
they hold well-paying jobs.
We are losing our sense of entitlement. Under the implied social contract,
people who "played by the rules" — to use a phrase popularized by Bill Clinton
— deserved modest middle-class guarantees: a steady job, rising income, and
protection against random misfortune such as sickness, disability, job loss,
and accidents. There was a belief that diligence and responsibility were their
own rewards. ...
But the prevalence of middle-class ambitions and values creates a vexing
contradiction: The advances in living standards that Americans expect require a
flexible and competitive economy that weakens the security and stability that
Americans also expect.
But the question is how severe the tradeoff is between economic security and economic growth,
and I'm not convinced that it's as severe as implied. After the Great
Depression, and also after World War II, we had significant changes in
the level of economic security (and there were more changes in the 1960s with
the Great Society programs), but we didn't seem to sacrifice anything in terms
of economic growth, at least not as measured against other countries in the world. Now that security has eroded over the last several decades,
it's hard to see how returning to previous levels will somehow destroy our
flexibility and competitiveness, and it's not at all clear that modest steps
beyond previous levels of security would have any significant impact either,
particularly steps like universal health care (which could help businesses as well as their employees). So maybe the contradiction isn't
so vexing after all.
Posted by Mark Thoma on Wednesday, May 21, 2008 at 02:34 AM in Economics, Social Insurance |