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Instead of all the drivel about offshore drilling from Republicans, this is
what we need - technological solutions as described below. We aren't going to solve our energy problems, or even make a noticeable dent in them, by allowing offshore drilling. That's a ruse to capture votes. The solution lies in alternatives and conservation, and if the claims made below are correct, this looks like a big step in the development of solar power:
discovery' from MIT primed to unleash solar revolution, Anne Trafton, News
Office: In a revolutionary leap that could transform solar power from a
marginal, boutique alternative into a mainstream energy source, MIT researchers
have overcome a major barrier to large-scale solar power: storing energy for use
when the sun doesn't shine.
Until now, solar power has been a daytime-only energy source, because storing
extra solar energy for later use is prohibitively expensive and grossly
inefficient. With today's announcement, MIT researchers have hit upon a simple,
inexpensive, highly efficient process for storing solar energy.
Requiring nothing but abundant, non-toxic natural materials, this discovery
could unlock the most potent, carbon-free energy source of all: the sun. "This
is the nirvana of what we've been talking about for years," said MIT's Daniel
Nocera ... senior author of a paper describing the work in the July 31 issue of
Science. "Solar power has always been a limited, far-off solution. Now we can
seriously think about solar power as unlimited and soon."
Inspired by the photosynthesis performed by plants, Nocera and Matthew Kanan,
a postdoctoral fellow in Nocera's lab, have developed an unprecedented process
that will allow the sun's energy to be used to split water into hydrogen and
oxygen gases. Later, the oxygen and hydrogen may be recombined inside a fuel
cell, creating carbon-free electricity to power your house or your electric car,
day or night.
Continue reading "A Solar Power Revolution?" »
Posted by Mark Thoma on Thursday, July 31, 2008 at 01:35 PM in Economics, Environment, Oil |
David Beckworth on evidence for The Big Push theory of economic development, the idea that "publicly coordinated investment can break the underdevelopment
trap by helping economies overcome deficiencies in private incentives that
prevent firms from adopting modern production techniques and achieving scale
recent debate over using infrastructure spending as a means of stimulating
the economy, the long-run supply-side effects of stimulating the economy through
spending on infrastructure are noteworthy:
The 'Big Push' and Economic Devlopment in the American South, by David Beckworth:
One of the great stories from 20th century U.S. economic history is the great
economic rebound of the American South. From the close of the Civil War up
through World War II, this region’s economy had been relatively undeveloped and
isolated from the rest of the country. This eighty-year period of economic
backwardness in the South stood in stark contrast to the economic gains
elsewhere in the country that made the United States the leading industrial
power of the world by the early 20th century. Something radically changed,
though, in the 1930s and 1940s that broke the South free from its poverty trap.
From this period on, the South began modernizing and by 1980 it had converged
with the rest of the U.S. economy. But why the sudden break in the 1930-1940
period? A new paper by
Jaime Ros, and
Jason E. Taylor provides a
fascinating answer: the economic rebound of American South was the result of a
'Big Push' from large public capital investments during the Great Depression and
World War II.
A novel contribution of this paper is that it appears to provide a real-world
example of the 'Big Push' theory. Never heard of the 'Big Push' theory? Well,
here is how the authors describe it:
Continue reading ""The 'Big Push' and Economic Development in the American South"" »
Posted by Mark Thoma on Thursday, July 31, 2008 at 11:07 AM in Academic Papers, Economics, Fiscal Policy |
Why has unemployment remained relatively low even though the economy is
A Hidden Toll on Employment: Cut to Part Time, by Peter S. Goodman, NY Times:
...On the surface, the job market is weak but hardly desperate. Layoffs remain
less frequent than in many economic downturns, and the unemployment rate is a
relatively modest 5.5 percent. But that figure masks the strains of those who
are losing hours or working part time because they cannot find full-time work —
a stealth force that is eroding American spending power.
All told, people the government classifies as working part time involuntarily
— predominantly those who have lost hours or cannot find full-time work —
swelled to 5.3 million last month, a jump of greater than 1 million over the
These workers now amount to 3.7 percent of all those employed, up from 3
percent a year ago, and the highest level since 1995.
“This increase is startling,” said Steve Hipple, an economist at the Labor
The loss of hours has been affecting men in particular — and Hispanic men
more so. ... Some 28 percent of the jobs affected were in construction, 14
percent in retail and 13 percent in professional and business services...
“The unemployment rate is giving you a misleading impression of some of the
adjustments that are taking place,” said John E. Silvia, chief economist of
Wachovia in Charlotte. “Hours cut is a big deal. People still have a job, but
they are losing income.”
Many experts see the swift cutback in hours as a precursor of a more painful
chapter to come: broader layoffs. Some struggling companies are holding on to
workers and cutting shifts while hoping to ride out hard times. If business does
not improve, more extreme measures could follow.
“The change in working hours is the canary in the coal mine,” said Susan J.
Lambert of the University of Chicago,... an expert in low-wage employment.
“First you see hours get short, and eventually more people will get laid off.”
The growing ranks of involuntary part-timers reflect the sophisticated
fashion through which many American employers have come to manage their
payrolls, say experts.
In decades past, when business soured, companies tended to resort to mass
layoffs, hiring people back when better times returned. But as high technology
came to permeate American business, companies have grown reluctant to shed
workers. Even the lowest-wage positions in retail, fast food, banking or
manufacturing require computer skills and a grasp of a company’s systems.
Several months of training may be needed to get a new employee up to speed.
“Companies today would rather not go through the process of dumping someone
and hiring them back,” said Dean Baker, co-director of the Center for Economic
and Policy Research in Washington. “Firms are going to short shifts rather than
just laying people off.” ...
And it works just the opposite way on the other side when GDP begins to
recover. At first, firms will increase hours rather than employment. Firms won't
invest in new workers until they are sure that the economy is improving, and
that doesn't happen with just a single month or a single quarters worth of
improved data. It takes a time for enough data to accumulate to convince firms
that business really has taken a turn for the better, that what they are seeing
is not just a temporary blip, and that it is worthwhile to pay the costs of
hiring and training new workers.
This provides one potential explanation for why employment growth has been
sluggish in the recovery period after the last two recessions, both of which
occurred after the revolution in digital technology. To the extent that
technology has increased training costs over time, the delay in the recovery in
employment would be even longer. With higher training costs, firms would need to
be even more certain that things have improved, i.e. they would need to wait for
and analyze more data than before to be convinced that it's worthwhile to pay
the cost of investing in new workers, and that increases the delay between the
uptick in GDP and the uptick in employment (and to the extent that technology
can substitute for labor, the employment response could be even more sluggish
Posted by Mark Thoma on Thursday, July 31, 2008 at 02:07 AM in Economics, Unemployment |
Posted by Mark Thoma on Thursday, July 31, 2008 at 12:06 AM in Links |
Robert Reich on what not to take to the beach:
Robert Reich, Marketplace: Ordinarily, I'd never recommend you take a book
by an economist to the beach. I wouldn't even recommend you take an economist to
the beach. ...
An example of an economist at the beach? Robert Reich again:
Hazard, by Robert Reich: One day while sitting on a beach last summer I
overheard a father tussle with his young son about whether the child was old
enough to take out a small sailboat. The father finally relented. "Go ahead, but
I’m not gonna save you," he said, picking up his newspaper. A while later, the
sailboat tipped over and the child began yelling for help, but father didn’t
budge. When the kid sounded desperate I put down my book, walked over to the
man, and delicately told him his son was in trouble. "That’s okay," he said.
"That boy’s gonna learn a lesson he’ll never forget." I walked down the beach to
notify a lifeguard, who promptly went into action.
Letting children bear the consequences of their risky behavior -- what some
parents call "tough love" -- is equally applicable adults, and conservatives
have made something of a fetish out of it. A few weeks ago, as George W.
announced a paltry plan to help out a few of the millions of homeowners who got
caught in the sub-prime loan mess, he reiterated the credo: "It’s not
government’s job to bail out ... those who made the decision to buy a home they
knew they could not afford."
It’s true that people tend to be less cautious when they know they’ll be bailed
out. Economists call this "moral hazard." But even when they’re being reasonably
careful, people cannot always assess risks accurately...
When it comes to risky behavior in the market, America has a double standard.
We’re told that economic risk-taking as the key to entrepreneurial success, but
when big entrepreneurs take big risks that fail it’s amazing how often they get
bailed out. Indeed, the history of modern American business is littered with
federal bailouts, loan guarantees, and no-questions-asked reorganizations. ...
CEOs get away with stupid mistakes all the time. .... But... If you’re an
average American who gets canned from his job, even through no fault of your
own, you probably won’t even get unemployment insurance (only 40 percent of
job-losers qualify...). Conservatives tell us that unemployment insurance
reduces their incentive to find a new job quickly. In other words, moral hazard.
Some CEOs use bankruptcy as a means of getting out from under pesky labor
contracts they might have "known they could not afford" when they agreed to them
(Northwest Airlines most recently, for example). Others use it as a cushion
against bad bets. Donald ("you’re fired!") Trump’s casino empire has gone into
bankruptcy twice -- most recently, last November, when it listed $1.3 billion of
liabilities and $1.5 million of assets -- with no apparent diminution of the
Donald’s passion for risky, if not foolish, endeavor. After all, his personal
fortune is protected behind a wall of limited liability, and he collects a nice
salary from his casinos regardless. But if you’re an ordinary person who has
fallen on hard times, just try declaring bankruptcy to wipe the slate clean. A
new law governing personal bankruptcy makes that route harder than ever. Its
sponsors argued -- you guessed it -- moral hazard.
Bush’s "ownership society" has proven a cruel farce for poor people who tried to
become home owners, and his minuscule response to their plight just another
example of how conservatives use moral hazard to push their social-Darwinist
morality. The little guys get tough love. The big guys get forgiveness.
Economists see economics in everything. If you take them to the beach, or pretty much anywhere else, you're just going to have to put up with that.
Robert Reich is going on vacation again, and he notes:
The Myth of Summer Vacation, by Robert Reich: I'm about to take a few weeks
off. If you are, too, we're in the minority. A Conference Board poll last April
found fewer than 40 percent of Americans planning a summer vacation.
Of course, for most Americans, there's not much summer vacation to begin
with. The average American employee gets a total of 14 days off each year. If
you want to take a few of them around Thanksgiving, between Christmas and New
Years, and maybe when the kids are home on spring break, summer vacation is
already practically gone.
Those 14 days, by the way, are the fewest vacation days in any advanced
economy. The average French worker gets 37 days off annually; In Britain, it's
And even when we take those 14 days, we don't always get paid for them. The
Bureau of Labor Statistics tells us 1 out of 4 workers gets no paid vacation
days at all. Every other advanced nation -- and even lots of developing nations
-- mandate them.
On top of all this comes the current economic squeeze. That figure of 40
percent of Americans planning a summer vacation is the lowest in 30 years.
Not incidentally, consumer confidence in the economy is the lowest it's been
in 28 years. In other words, there's a correlation between the small number of
Americans taking a vacation this summer and this very bad economy.
It's not that we're too busy to vacation. Just the opposite: There's not
enough work go around. Which means we don't dare leave work, lest we lose us a
customer who might just happen to want us when we're gone. Or we could even lose
the job, because employees on vacation might seem expendable to an employer
looking for a way to cut costs.
Despite all this, you need a summer vacation. I do, too. ...
Should the government require firms to offer paid vacation after some period
of time, say after a year of employment? If so, how much?
Posted by Mark Thoma on Wednesday, July 30, 2008 at 05:40 PM in Economics |
The NY Times blog
discusses Not The One's new ad:
Do Mr. McCain’s strategists actually think they can win the White House by
whining incessantly about how popular their opponent is? What sort of message is
“Vote for McCain. Nobody Likes Him.”
The WSJ's Washington Wire gives this interpretation:
Continue reading "Whistles Along The Low Road Express?" »
Posted by Mark Thoma on Wednesday, July 30, 2008 at 03:06 PM in Politics |
Kenneth Rogoff says we need to raise interest rates to prevent inflation, to quit trying to stimulate the economy with fiscal policy, and allow financial institutions to fail:
The world cannot grow its way out of this slowdown, by Kenneth Rogoff, Financial
Times: As the global economic crisis hits its one year anniversary, it is
time to re-examine not just the strategies for dealing with it, but also the
diagnosis underlying those strategies. Is it not now clear that the main
macroeconomic challenges facing the world today are an excess demand for
commodities and an excess supply of financial services? If so, then it is time
to stop pump-priming aggregate demand while blocking consolidation and
restructuring of the financial system.
The huge spike in global commodity price inflation is prima facie evidence
that the global economy is still growing too fast. ...
Absent a significant global recession..., it will probably take a couple
years of sub-trend growth to rebalance commodity supply and demand at trend
price levels (perhaps $75 per barrel in the case of oil...) In the meantime, if
all regions attempt to maintain high growth through macroeconomic stimulus, the
main result is going to be higher commodity prices and ultimately a bigger crash
in the not-too-distant future.
In the light of the experience of the 1970s, it is surprising how many
leading policymakers and economic pundits believe that policy should aim to keep
pushing demand up. In the US, the growth imperative has rationalised aggressive
tax rebates, steep interest rate cuts and an ever-widening bail-out net for
financial institutions. The Chinese leadership, after having briefly flirted
with prioritising inflation..., has resumed putting growth as the clear number
one priority. Most other emerging markets have followed a broadly similar
approach. ... Of the major regions, only ... the European Central Bank has
resisted joining the stimulus party... But even the ECB is coming under
increasing ... pressure as Europe’s growth decelerates.
Individual countries may see some short-term growth benefit to US-style
macroeconomic stimulus... But if all regions try expanding demand, even the
short-term benefit will be minimal. Commodity constraints will limit the real
output response globally, and most of the excess demand will spill over into
Some central bankers argue that there is nothing to worry about as long as
wage growth remains tame. ... But as goods prices rise, wage pressures will
eventually follow. ...
What of the ever deepening financial crisis as a rationale for expansionary
global macroeconomic policy? ... Inflation stabilisation cannot be indefinitely
compromised to support bail-out activities. However convenient it may be to ...
bail out homeowners and financial institutions, the gain has to be weighed
against the long-run cost of re-anchoring inflation expectations later on. Nor
is it obvious that the taxpayer should absorb continually rising contingent
For a myriad reasons, both technical and political, financial market
regulation is never going to be stringent enough in booms. That is why it is
important to be tougher in busts, so that investors and company executives have
cause to pay serious attention to risks. If poorly run financial institutions
are not allowed to close their doors during recessions, when exactly are they
going to be allowed to fail? ...
[T]he need to introduce more banking discipline is yet another reason why the
policymakers must refrain from excessively expansionary macroeconomic policy ...
and accept the slowdown... For most central banks, this means significantly
raising interest rates to combat inflation. For Treasuries, this means
maintaining fiscal discipline rather than giving in to the temptation of tax
rebates and fuel subsidies. In policymaker’s zealous attempts to avoid a plain
vanilla supply shock recession, they are taking excessive risks with inflation
and budget discipline that may ultimately lead to a much greater and more
Where I differ is on the risk of inflation over the longer run - I am more
Mark Gertler's view - and on the fragility of the financial system.
Inflation is a concern, but raising interest rates too fast risks throwing the
financial sector into a tailspin, and that would bring the economy down with it,
and that's a risk I'd rather not take. We need to keep an eye out for signs that
inflation is becoming embedded and self-reinforcing, but we need to be even more
concerned about a domino effect taking hold in the financial sector. That danger
is not yet over.
As for fiscal policy, first, I am not worried about one shot increases in
spending creating the continuous increases in demand needed to fuel a long-run
here for a summary of the estimated effects of the stimulus on GDP). However, beyond that,
it's important to remember that our problems are not just from high world demand
causing high commodity prices. If that was the only problem we face - it this was just a "plain
vanilla supply shock recession" - I'd be inclined to agree. But we are also having a financial crisis and that requires a
different response (and makes our policy needs different from countries that are
not having a mortgage meltdown - our problem isn't plain vanilla). The evaporation of credit represents a shock to
demand, and unless that demand is replaced
during the period when financial markets are recovering, we will have lower
output and employment growth than we are able to sustain.
Update: Paul Krugman:
The Rogoff doctrine, by Paul Krugman: Ken Rogoff is one of the world’s best
macroeconomists, so I take whatever he says seriously. But — you know that’s the
kind of statement that is followed by a “but” — I’m having a hard time
demands for a world slowdown.
Ken tells us that
The huge spike in global commodity price inflation is prima facie evidence
that the global economy is still growing too fast.
And then he calls for
a couple of years of sub-trend growth to rebalance commodity supply and
demand at trend price levels
Um, why? Basically, the world is employing rapidly growing amounts of labor
and capital, but faces limited supplies of oil and other resources. Naturally
enough, the relative prices of those resources have risen — which is the way
markets are supposed to work. Since when does economic analysis say that the way
to deal with limited supplies of one resource is to reduce employment of other
resources, so that the relative price of the limited resource returns to
Presumably there’s some implicit argument in the background about why a sharp
rise in the relative price of oil is more damaging than leaving labor and
capital underemployed. But that argument isn’t there in Ken’s recent pieces.
I agree that
Dollar bloc countries have slavishly mimicked expansionary US monetary policy
and that’s a real issue: the Fed is pursuing very loose policy to deal with a
US financial crisis, and that’s inflationary in countries that are pegged to the
dollar without facing our problems. But that’s an argument for breaking up
Bretton Woods II; it’s not an argument for tighter Fed policy.
Since this is coming from Ken Rogoff, I assume that there’s some deeper
analysis here. But I can’t infer it from the articles I’ve read. Please, sir,
can I have some more?
Posted by Mark Thoma on Wednesday, July 30, 2008 at 12:33 AM in Economics, Financial System, Fiscal Policy, Monetary Policy |
A call for more competition in the market for broadband connections to
information and entertainment services:
OPEC 2.0, by Tim Wu, Commentary, NY Times: Americans today spend almost as
much on bandwidth — the capacity to move information — as we do on energy. A
family of four likely spends several hundred dollars a month on cellphones,
cable television and Internet connections, which is about what we spend on gas
and heating oil.
Just as the industrial revolution depended on oil and other energy sources,
the information revolution is fueled by bandwidth. If we aren’t careful, we’re
going to repeat the history of the oil industry by creating a bandwidth cartel.
... That’s why, as with energy, we need to develop alternative sources of
Wired connections to the home ... are the major way that Americans move
information. In the United States and in most of the world, a monopoly or
duopoly controls the pipes that supply homes with information. These companies
[are] primarily phone and cable companies...
But just as with oil, there are alternatives. ... Encouraging competition...
Continue reading "Bandwidth Competition" »
Posted by Mark Thoma on Wednesday, July 30, 2008 at 12:15 AM in Economics, Market Failure, Regulation, Technology |
Posted by Mark Thoma on Wednesday, July 30, 2008 at 12:06 AM in Links |
This column concludes that recent increases in gas prices are due to stagnant oil supplies
and growing global demand from emerging Asian economies, not speculation, and that these factors are likely to keep gas prices relatively high in the future:
Why does gasoline cost
so much?, by Lutz Kilian, Vox EU: At the end of 2007, both gasoline and
crude oil prices (adjusted for inflation) were at levels last seen in 1981 and
they continued to climb throughout much of 2008. While Europe has been cushioned
in part from these developments, as the dollar depreciated against the euro, the
fundamental forces that drove up US gasoline prices have done the same in
With retail gasoline prices in the US persistently above $4 per gallon, the
determinants of gasoline prices is no longer an esoteric topic best left to
industry insiders. The debate has moved into the mainstream. Congressional
committees as well as media pundits have advanced explanations and proposed
policy changes to stem or reverse the increase in gasoline prices.
Why did this surge occur? To answer this, it is important to distinguish
- the price of gasoline and other motor fuels, and
- the price of crude oil in global markets.
A distinction often ignored in discussions of higher energy prices. In a
column, Francesco Lippi discussed the price of crude. My column focuses on
the US gasoline market, which is an interesting case for understanding the
underlying market forces because of the availability of high quality data for
Continue reading ""Why Does Gasoline Cost So Much?"" »
Posted by Mark Thoma on Tuesday, July 29, 2008 at 07:29 PM in Economics, Oil |
Arnold Kling [Update: Arnold's response to this post]:
Don't Understand Mark Thoma, by Arnold Kling:
But focusing on the immediate problems brought about by tax cuts and military
spending should not divert us from the more formidable problem of solving the
escalating health cost problem. If Obama wins and tries to institute some form
of universal care, it will be opposed as a budget breaker (and for other
reasons), but I think universal care will help a lot in bringing down health
care cost growth.
There is health care spending paid for by the private sector. Call it P.
There is health care spending paid for by the government. Call it G.
The problem with G is that it is busting the budget. I do not understand how
reducing P and raising G represents a solution. Even if you think that
government can do health care more efficiently, you are still raising G and
making the budget problem worse.
P can grow as a percent of GDP as much as it wants to, and be as wasteful as
it wants to, without affecting the fiscal outlook. Only G affects the fiscal
What happens when you take people out of P and put them into G? You might
make people's lives better (that's a separate disagreement). You might increase
the overall efficiency of the health care system (another separate
disagreement). But you do not improve the fiscal outlook. You make it worse.
I absolutely do not see how anyone can say otherwise.
Agreed there is spending on health care in both sectors. That's why I
wrote recently that:
At some point we do have to face budget realities... [T]his ... is mainly a
problem with rising health care costs (and that will be a problem whether it's
paid for publicly or privately)
I didn't explain fully, but the answer to Arnold's question is
straightforward. Health care in the private sector is not free. Using his
notation, when I think about moving P to G, I also think about moving the
revenue stream with it (e.g. individuals would pay monthly premiums in taxes
rather than to the insurance company). Thus, if we move all of P to G, we also
move all of the revenue with it. Therefore I don't see why the budget problem has to get worse:
Even if you think that
government can do health care more efficiently, you are still raising G and
making the budget problem worse.
You are also raising T, taxes, to pay for more G (raising is the wrong word, moving the revenue stream is better). Since costs per unit fall (as he says, "You might increase
the overall efficiency of the health care system"), you could provide the same overall service with an improved budget (smaller deficit), or provide better service (e.g. expand care) with no change in the budget deficit.
Why do costs per unit fall? Because of all the administrative savings, savings from buying drugs in bulk, and the ability to manage
care (e.g. preventative measures, solving information problems that cause wasteful expenditures by doctors and consumers). Thus, if we did move all of P to G we
would be able to rebate some of the taxes, expand coverage, etc.. Even if we did
nothing but eliminate fights over who pays the bills, or eliminate the costs of screening out the unhealthy (who end up in public sector programs anyway), as we would, health costs
would fall substantially.
Continue reading "Arnold Kling Doesn't Understand" »
Posted by Mark Thoma on Tuesday, July 29, 2008 at 05:31 PM in Economics, Health Care |
Not too long ago, I posted a Vox EU article on the controversy over how large
the benefits from trade are for the U.S. Josh Bivens of the EPI is mentioned in the
article, and he would like to respond:
No time to think, liberalize!, by Josh Bivens: Hufbauer and Adler's
VoxEU piece doesn't really advance the ball much further down the field in this
debate. But, just to sum up for any interested readers: a
paper by Bradford, Hufbauer, and Grieco (BGH, henceforth) was released in
2005 that had estimates of the US gains from trade liberalization that were far,
far outside those estimated by previous research: they claimed past trade
liberalizations had added almost a trillion dollars to the US economy by 2004,
and, future liberalizations offered the promise of adding another half-trillion.
Dani Rodrik didn't
think much of it. And, after seeing these numbers used to great effect in
the political debate, I wrote a long-ish working
paper and two
briefs detailing why they
were unreliable. My over-arching critique was that their study was a literature
review that cherry-picked the research for the absolute maximum gains that could
be attributed to liberalization while ignoring any reasons (even within this
same literature) as to why these gains might be much, much smaller. In the end,
I found nothing to shake my belief (based on staid, mainstream economics) that
the real gains from liberalizations are closer to a tenth or less of what they
Continue reading ""No Time to Think, Liberalize!"" »
Posted by Mark Thoma on Tuesday, July 29, 2008 at 01:17 PM in Economics, International Trade |
Stan Collender is feeling down:
Bush Midsession Budget: Profound Sadness, by Stan Collender: It says more about me than I should probably admit, but back in 2000 I found
the prospect of paying off the national debt to be very exciting.
To me, the pledge to do that, which Bill Clinton made towards the end of his
presidency and George W. Bush made as his years in the White House were just
beginning, was absolutely thrilling. Because of the lower annual interest
payments that would result, no other change then being seriously talked about
had the potential to alter the long-term federal budget outlook as positively
That's why I found the
mid-session review of the
budget released yesterday to be so depressing. It was the official notice
that the pledge, and all the good things that would come from it, would not be
fulfilled. It was also time to admit that the budget politics, economics, and
limits of the past decade would continue...and continue...and continue.
That's just not a happy occasion for anyone but those of us who blog, write,
and talk about the budget. Business will be booming.
None of this was a surprise, of course. The prospects for paying down the
national debt firmly ended back in the first year of the Bush administration. And the close to $490 billion deficit that OMB projected for 2009 has long been
assumed or leaked.
Nevertheless, the release of the midsession review on July 28, 2008 should be
noted as the official date when the dream of a very different budget debate and
fiscal policy opportunities died.
I'll have more about the following shortly. But other observations:
The bad news absolutely is understated. The $482 billion projected fiscal
2009 deficit will actually be closer to $600 billion before the year is over.
The much-ballyhooed Bush administration pledge to cut the deficit in half was
a gimmick. There clearly was no commitment to do it more than once (that is, if
there really ever was a commitment to do it even once).
From a budget, deficit, debt, interest rate, and fiscal policy perspective,
the Bush administration is leaving the country so much worse off than it found
it that it will likely hamstring the next president and Congress in ways that
aren't yet fully understood.
Based on what we now know for sure about next year's budget, none of the
presidential candidates' promises should be taken seriously. Unless they, the
country, and those lending us money are willing to tolerate much higher nominal
deficits and a larger debt than has so far been imaginable, the next president's
options will be severely limited.
More to come.
How should Democrats respond? Recall
Brad Delong's thoughts:
[S]hould Barack Obama become president. Those of us who served in the Clinton
administration and worked hard to ... turn deficits into surpluses are keenly
aware that, after eight years of the George W. Bush administration, things look
worse than when we started back in 1993. All of our work was undone by our
successors in their quest to win the class war by making America’s income
distribution more unequal.
A chain is only as strong as its weakest link, and it seems pointless to work
to strengthen the Democratic links of the chain of fiscal advice when the
Republican links are not just weak but absent. Political advisers to future
Democratic administrations may argue that the only way to tie the Republicans’
hands and keep them from launching another wealth-polarizing offensive is to
widen the deficit enough that even they are scared of it.
They might be right. The surplus-creating fiscal policies established by
Robert Rubin and company in the Clinton administration would have been very good
for America had the Clinton administration been followed by a normal successor.
But what is the right fiscal policy for a future Democratic administration to
follow when there is no guarantee that any Republican successors will ever be
“normal” again? That’s a hard question, and I don’t know the answer.
Fear of a deficit didn't stop the Republicans from putting their agenda into
place, should Democrats take the same approach? Medicare, Social Security, and
other programs for the elderly aren't going away, not with an aging population
that will have considerable political power, so the question is how we pay for
The current budget problem is mainly from tax cuts and increases in military and domestic security expenditures, but the problem going
forward is mainly health care costs. We can't cut enough out of the budget or raise
taxes high enough to meet projections if the current health care system is unchanged, so this
comes down to one question, how do we reign in health care costs?
I don't mean that health care spending shouldn't grow as a percentage of GDP
as we get wealthier. It is quite reasonable for us to devote new income from
growth toward health care spending. But even so, current projections are that
growth in health care costs will need to be lowered to be sustainable.
the focus on getting the budget in shape in the short-run is necessary, though
we should recognize that as a percentage of GDP deficits have been much higher
in the past without disastrous consequences, so there's no need for drastic cuts
in programs to make ends meet and tax increases are probably out of the question
(and actual fat should not be eliminated from the budget,
but there's not much there). This would be easier if Republicans hadn't squandered the surplus they inherited. But focusing on the immediate problems brought
about by tax cuts and military spending should not divert us from the more
formidable problem of solving the escalating health cost problem. If Obama wins and tries to institute some form of universal care, it will be opposed as a budget breaker (and for other reasons), but I think
universal care will help a lot in bringing down health care cost growth. But whatever we do, it's time to get started.
Posted by Mark Thoma on Tuesday, July 29, 2008 at 11:43 AM in Budget Deficit, Economics, Health Care, Politics |
Daniel Gross on another GSE we haven't heard much about:
Freddie and Fannie's
Healthy Cousin, by Daniel Gross: The Federal Reserve's extraordinary efforts to help investment banks have
effectively put the taxpayer on the hook for enormous potential losses..., we
could end up paying tens or hundreds of billions...
But the actual amount of credit extended so far through these public-rescue
efforts pales in comparison with the credit that has quietly been extended to
banks in the past year—another lifeline that taxpayers could end up paying
dearly for. ... For the past
12 months, an obscure agency created by President Herbert Hoover during the
Great Depression has come to the rescue of the banking industry. It is called the Federal Home Loan Banks.
Like Fannie Mae and Freddie Mac, the FHLB (here's ... a
history, and an
overview) is a government-sponsored enterprise. But it
differs from the wounded giants in some significant ways. Instead of being owned
by public shareholders, as Fannie and Freddie are, the 12 independent regional
FHLBs are owned by their 8,100 members. Banks large and small, representing
about 80 percent of the nation's financial institutions, own shares in the FHLB
and share in the profits.
The FHLB has a simple business model.... Basically, it funnels cash from Wall
Street to banks on Main Street. Member banks present mortgages they've
issued—high-quality ones, not junky subprime ones—as collateral to the FHLB and
borrow money so they can have more cash to lend. To finance its activity, the
FHLB sells debt to big investors in the capital markets. As with Fannie and
Freddie, the FHLB benefits from a unique status. ... While the FHLB takes pains to
note that "Federal Home Loan Bank debt is not guaranteed by, nor is it the
obligation of, the U.S. government," there's an assumption afoot in the
marketplace that were the FHLB to encounter serious trouble, the government
would step in. In return for this special treatment, the FHLB provides some
vital public services. Twenty percent of its net earnings are used to help cover
interest on debt issued by the Resolution Funding Corp., which paid for the Savings & Loan
bailout. The FHLB also channels one-tenth of its profits to affordable-housing
loans and grants.
During the mortgage boom, FHLB quietly did its job and avoided many of Fannie
and Freddie's excesses. ... Subprime
holdings were minimal. And since commercial banks were able to raise capital
from Wall Street to make any kinds of loans they wanted, they didn't have all
that much need for the FHLB's services. As the chart
... shows, the number of loans extended to member banks rose modestly in the
boom years, up 7 percent in 2005 and only 3 percent in 2006. ...
But last year the mortgage house of cards began to collapse. And as Wall
Street's securitization machine, which had enabled banks to raise cash with
alacrity, broke down, banks staged their own run on the FHLB. .... Since ... the
broken-down Wall Street mortgage securitization machine was sold for scrap, FHLB
loans to member banks ...[rose] to $914 billion at the end of this June. In the
past 12 months, FHLB loans to its members have risen by 43 percent, representing
an additional $274 billion in real credit provided by the system to its member
banks. That sum dwarfs the actual amount of credit extended to investment banks
by the Fed—or by the government to Fannie and Freddie.
Does the increase in FHLB's balance sheet mean taxpayers may be on the hook
for another trillion dollars in mortgage debt? It's unlikely. FHLB has a much
better track record than Fannie and Freddie. Because it maintains high
standards, it has never suffered a credit loss on a loan extended to a member.
It doesn't spend hundreds of millions of dollars each year on executive
compensation or lobbying, as Fannie and Freddie did. And it didn't lower
standards ... as a way of increasing market share.... Seventy-six years after it was created by a president
whose administration was hostile to government intervention in markets, the FHLB
stands as an enduring and (so far) effective example of socialism among
Why does the FHLB exist at all?:
The Housing Giants in Plain View, by William R. Emmons, Mark D. Vaughan and
Timothy J. Yeager , FRB St. Louis, July 2004: ...The Federal Home Loan Bank
System was the first housing GSE. The FHLBanks were established by Congress in
1932 to advance funds against mortgage collateral. At the time, the country was
in the midst of an unprecedented wave of depositor runs. Depository institutions
faced the risk that loans would have to be liquidated at fire-sale prices to pay
off anxious depositors. The FHLBanks enabled their members, primarily savings
and loan associations and savings banks, to obtain cash quickly should
depositors come calling. This access to ready cash reduced the liquidity risk of
mortgage lending, thereby freeing FHLB members to originate more home loans.
Continue reading ""Another Quasi-Governmental Agency that's Lending Hundreds of Billions to Troubled Banks"" »
Posted by Mark Thoma on Tuesday, July 29, 2008 at 12:42 AM in Economics, Financial System, Market Failure, Regulation |
Should communities adopt "pay-as-you-throw systems" for garbage collection to
reduce the amount of garbage flowing into landfills or incinerators?:
Kicking the Cans, by Robert Tomsho, WSJ: Plymouth, Mass. -- In this historic
community ... garbage has become ... a touchy subject...
During months of debate, Mr. Quintal, chairman of the town's governing board
of selectmen, argued that people who throw out more trash should pay higher
disposal bills. "I got emails from people saying they thought I was right," he
says. "But there were just as many from those who thought I was an idiot."
Like Plymouth, more and more communities are grappling with whether to
abandon traditional garbage service and adopt so-called pay-as-you-throw
systems. With PAYT, residents are charged based on how much garbage they
generate, often by being required to buy special bags, tags or cans for their
trash. Separated recyclables like glass and cardboard are usually hauled away
free or at minimal cost. ...
PAYT represents an effort to curb garbage's impact on the ecosystem by
pressuring consumers to create less of it. But the effort to make people change
their habits has often stirred tension...
While Americans are accustomed to paying for utilities like water and
electric based on use, that's not true about garbage in most places. ...
Tampering with that notion can be tricky in communities that switch to PAYT.
Illegal dumping has cropped up in about 20% of such communities, according to a
2006 U.S. Environmental Protection Agency report. Local officials also complain
about variations of the so-called Seattle stomp (named after one of the first
PAYT cities), where homeowners try to beat the system by compacting huge amounts
of trash into a single can or bag.
There has also been a recent backlash in some locales over costs and
Supporters of PAYT say it gives residents a direct economic incentive to
recycle. Skumatz Economic Research Associates, a waste-consulting concern in
Superior, Colo., estimates that PAYT programs lead to a 17% reduction in the
flow of residential waste to incinerators and landfills... "Every analysis shows
that this is a very cost-effective thing to do," says Lisa Skumatz, the firm's
I should stop here and comment, every analysis doesn't show that, but we'll come back to the cost-effectiveness
in a moment. Continuing:
Continue reading "Trash Talk: Pay-As-You-Throw Systems" »
Posted by Mark Thoma on Tuesday, July 29, 2008 at 12:24 AM in Economics, Environment, Policy |
Posted by Mark Thoma on Tuesday, July 29, 2008 at 12:06 AM in Links |
I agree with this - the Fed should not be in a hurry to raise interest rates due to concerns about inflation. This inflation, unlike some in the past, is being driven by increases in the price of oil, food, and other commodities, it's not primarily the result of excessive increases in liquidity (money growth).
Inflation that is driven by excessive money growth needs to be controlled, and the solution is for the central bank to reduce the growth in liquidity by increasing interest rates. But inflation that is driven by changes in relative prices is different. These price changes are providing important signals to the economy about where resources are needed most and about the opportunity cost of employing them, and we don't want to mute those signals (though it is sometimes useful to attenuate the signals and smooth the adjustment). Eventually, the relative prices of these goods will increase enough to bring global growth in demand and global growth in supply back into balance, at which point prices will stabilize and so will inflation. The increase in relative prices is necessary to bring the underlying fundamentals driving supply and demand growth back into balance. As Mark Gertler says below, "the relative increase in energy and food
prices is something beyond the central bank’s control...," but once the relative price increases have occurred, inflation should subside on its own. The biggest danger to the economy is further credit market troubles, not inflation, and increasing interest rates in an attempt to stave off inflation would increase the risk lower output growth, lower employment, and prolonged stagnation in the economy:
America must not act rashly over inflation , by Mark Gertler, Commentary,
Financial Times: The startling jump in US consumer price inflation ... has
sparked concern over whether the economy is entering an inflationary spiral
similar to that of the 1970s.
Lost in most of the commentary about inflation has been a careful inspection
of its underlying mechanics. Almost all the recent increase in headline consumer
price index inflation is due to rocketing energy and food prices. Inflation
excluding energy and food is significantly lower.
The increase in the core CPI over the past year was just 2.4 per cent,
slightly above the Federal Reserve’s comfort zone of 1 to 2 per cent. The
feeding through of food and energy costs to core prices did produce an uptick
this past month. Over the coming year, however, below-capacity output growth and
softening oil and commodity prices are likely to push core inflation back
towards the comfort zone.
Why care about headline inflation versus core inflation? Simply put, a
sustained move of headline inflation to the levels of the 1970s is unlikely
without an accompanying increase in the core component. The reason is simple:
although they can be highly persistent, rapid increases in the relative prices
of energy and food cannot go on indefinitely. Once this process dies down, as
long as core inflation remains anchored, headline inflation must converge to it.
Indeed, there are signs that the forces that have pushed headline above core
inflation are beginning to reverse course. ...
Could it be that high headline inflation is unmooring inflation expectations,
leading us back to the 1970s through this painful route? Some measures of
inflation expectations are edging upwards. This needs to be taken seriously.
However, where we should expect the impact of increasing expectations to show up
is exactly in the behaviour of core prices and wages.
So far this is not happening. Not only has core inflation remained stable but
the growth in nominal unit labour costs, on which most pricing of core items is
based, also remains benign. It may very well be that the Fed’s reputation for
keeping core inflation stable has kept the expectations relevant for price- and
wage-setting in line. Also relevant is that ... wage- setters appear to
understand that, however unfortunate, the relative increase in energy and food
prices is something beyond the central bank’s control that they must live with.
Keeping inflation under control is a real concern and I do not mean to
What is required, however, is a policy response that recognises the
complexities of the inflationary process, including its global nature, and not a
simple knee-jerk reaction. From Japan in the 1990s we know that a fractured
credit system can induce prolonged stagnation, even in an advanced economy.
Given the uncertain condition of the US financial and real sectors, the goal
should be to achieve price stability in a way that continues to keep low the
possibility that this economy could suffer a similar fate.
Posted by Mark Thoma on Monday, July 28, 2008 at 02:07 PM in Economics, Inflation, Monetary Policy |
Paul Krugman says "financial regulation needs to be extended to cover a much
wider range of institutions" if we are to avoid "even bigger future disasters":
Another Temporary Fix, by Paul Krugman, Commentary, NY Times: So the big
housing bill has passed Congress. That’s good news: Fannie and Freddie had to be
rescued, and the bill’s other main provision — a special loan program to head
off foreclosures — will help some hard-pressed families. ...
But I hope nobody thinks that Congress has done all ... of what needs to be
This bill is the latest in a series of temporary fixes to the financial
system ... that have, at least so far, succeeded in staving off complete
collapse. But those fixes have done nothing to resolve the system’s underlying
flaws. In fact, they set the stage for even bigger future disasters — unless
they’re followed up with fundamental reforms.
Before I get to that, let’s be clear...: Even if this bill succeeds..., it
... will, at best, make a modest dent in ... foreclosures. And it does nothing
... for those who aren’t in danger of losing their houses but are seeing much if
not all of their net worth wiped out — a particularly bitter blow to Americans
... nearing retirement...
It’s too late to avoid that pain. But we can try to ensure that we don’t face
more and bigger crises in the future.
The back story to the current crisis is the way traditional banks — banks
with federally insured deposits, which are limited in the risks they’re allowed
to take and the amount of leverage they can take on — have been pushed aside by
unregulated financial players. We were assured by the likes of Alan Greenspan
that this was no problem: the market would enforce disciplined risk-taking, and
anyway, taxpayer funds weren’t on the line.
And then reality struck.
Far from being disciplined in their risk-taking, lenders went wild. ...
Lenders ignored ... warning signs because they were part of a system built
around ... heads I win, tails someone else loses. Mortgage originators didn’t
worry about the solvency of borrowers, because they quickly sold off the loans
they made, generally to investors who had no idea what they were buying.
Throughout the financial industry, executives received huge bonuses when they
seemed to be earning big profits, but didn’t have to give the money back when
those profits turned into even bigger losses.
And as for that business about taxpayers’ money not being at risk? Never
Meanwhile, those traditional, regulated banks played a minor role in the
lending frenzy, except to the extent that they had unregulated, “off balance
sheet” subsidiaries. The case of IndyMac — which failed because it specialized
in risky Alt-A loans while regulators looked the other way — is the exception
that proves the rule.
The moral of this story seems clear...: financial regulation needs to be
extended to cover a much wider range of institutions. Basically, the financial
framework created in the 1930s, which brought generations of relative stability,
needs to be updated to 21st-century conditions. ...
If the government is going to stand behind financial institutions, those
institutions had better be carefully regulated — because otherwise the game of
heads I win, tails you lose will be played more furiously than ever, at
Of course, proponents of expanded regulation, no matter how compelling their
arguments, will have to contend with very well-financed opposition from the
financial industry. And as Upton Sinclair pointed out, it’s hard to get a man to
understand something when his salary — or, we might add, his campaign war chest
— depends on his not understanding it.
But let’s hope that the sheer scale of this financial crisis has concentrated
enough minds to make reform possible. Otherwise, the next crisis will be even
Posted by Mark Thoma on Monday, July 28, 2008 at 12:33 AM in Economics, Financial System, Regulation |
The subtitle on this article says:
The dismal science is at last a science—and the world is the
Here are a few parts of the article, though much is omitted, which is mostly an argument about the virtues of the market system:
Not Lie, by Guy Sorman, City Journal: Though economics as a discipline arose
in Great Britain and France at the end of the eighteenth century, it has taken
two centuries to reach the threshold of scientific rationality. Previously,
intuition, opinion, and conviction enjoyed equal status in economic thought;
theories were vague, often unverifiable. Not so long ago, one could teach
economics at prestigious universities without using equations and certainly
without the complex algorithms, precise (though not infallible) mathematical
models, and computers integral to the field today.
Continue reading "Economics "is at Last a Science"" »
Posted by Mark Thoma on Monday, July 28, 2008 at 12:15 AM in Economics, Science |
Posted by Mark Thoma on Monday, July 28, 2008 at 12:06 AM in Links |
This article by Seth Borenstein of the AP generated quite a bit of subsequent
An American life worth less today, by Seth Borenstein, AP: It's not just the
American dollar that's losing value. A government agency has decided that an
American life isn't worth what it used to be.
The "value of a statistical life" is $6.9 million in today's dollars, the
Environmental Protection Agency reckoned in May — a drop of nearly $1 million
from just five years ago. ...
Some environmentalists accuse the Bush administration of changing the value
to avoid tougher rules — a charge the EPA denies. ...
Agency officials say they were just following what the science told them. ...
EPA officials say the adjustment was ... based on better economic studies. ...
As noted below, the rest of the AP article does a decent job of explaining the reasons for the change
in the value of a statistical life, but the headline "an American Life Worth Less Today," and the opening
paragraph supporting that claim is what most people heard about in the follow-up
For example, the Colbert Report weighs in here. Most of the commentary that came after the AP article ran along the lines in the Colbert Report video, i.e. that the Bush administration
has devalued life in an attempt to avoid costly regulation. I'm not known as a
defender of the Bush administration, but I don't think this characterization is
fair. Let me turn the microphone over to a colleague.
Trudy Cameron has been researching these issues for the past six years, has
served on the Science Advisory Board for the US EPA for almost a decade (until
just last year) -- first on the Environmental Economics Advisory Committee, then
on the Advisory Council for Clean Air Compliance Analysis (the committee which
monitors the EPA's in-house benefit-cost analysis of the Clean Air Act) and on the
Executive Committee. She is also the current President of the Association of
Environmental and Resource Economists (AERE), the main professional organization
in the US for environmental economists, with about 800 members. Thus, she can
speak with some authority and, after reading Borenstein article, she decided she
would like to set the record straight. Here is a shorter, less technical, newspaper version of
her response from an op-ed that appeared today:
‘Value of life’ figures help government measure risk, by Trudy Anne Cameron,
Commentary, The Register-Guard: On July 11, The Register-Guard ran a
front-page Associated Press article the lead paragraph of which trumpeted that,
“A government agency has decided that an American life isn’t worth what it used
to be.” The story and its headline could easily give readers the impression that
government agencies assign monetary values to human life in an arbitrary,
perhaps even amoral, fashion. This is not the case. ...
And here is a longer version with a bit more detail:
On July 11, on the front page, the Register-Guard ran an AP article by Seth
Borenstein entitled “In the numbers game of life, we’re cheaper than we used to
be.” The reporting on this issue was better than the misleading title, but there
are a few points which should be clarified.
The “value of a ‘statistical’ life” is not the same thing as the “worth of a
Continue reading "The Value of a Statistical Life is Not the Value of Life" »
Posted by Mark Thoma on Sunday, July 27, 2008 at 01:17 PM in Economics, Environment, Politics |
William Poole and Larry Summers discuss whether a bailout of Fannie and Freddie is needed, and
what to do with Fannie and Freddie in the future.
Continue reading "Summers and Poole on Fannie and Freddie" »
Posted by Mark Thoma on Sunday, July 27, 2008 at 01:08 PM in Economics, Housing, Policy |
Hello, by Interfluidity: Err... is this thing on? Am I back? I think I'm back. ...
The whole oil thing seems so, like, last month, although I notice there was
some kind of deadhead revival in SoCal a
couple of days ago. Some quick, crude thoughts: the whole "fundamental" vs
"speculative" debate is terribly miscast, as emphasized most recently by
Jeff Frankel (via
Mark Thoma), but also by
Tyler Cowen, and
What I liked best about the
Krugman model is that it gave us four
lines to think about, two kinds of demanders (people who want to burn oil vs
people who want to store it) and two kinds of suppliers (people who suck oil
from the ground vs people who drain their tanks). An imbalance of speculation on
futures (more longs than shorts) creates incentives for people with tanks to
fill them, potentially shoving up one of the two demand lines (the one on the
left-hand panel of the Thoma/Krugman graphs). But four lines is a lot of moving
parts. I think the really interesting line is the right-panel supply line.
Rather than "speculation" vs "fundamentals", I wonder whether discretionary oil
producers are flat-out producing as much as they are able, given the
infrastructure currently in place, and whether over the past few years they have
held back on developing capacity, or whether they are in fact eager to pump but
hitting "peak oil" limits.
Continue reading "Steve Waldman's Crude Thoughts" »
Posted by Mark Thoma on Sunday, July 27, 2008 at 09:09 AM in Economics, Financial System |
The Whiny Republicans are now turning to their stock trade, dishonesty,
particularly where the troops are concerned:
...[McCain is] willing to adopt pretty much any policy position and launch
pretty much any dishonest attack on his opponent that he thinks will help him... If that means totally fictitious ads about Obama refusing to meet
with soldiers, then fine. [via]
"Not The One" is showing how he reacts when the pressure is on - when things
aren't going his way - and it's not the way I want to see a president respond to
difficult situations. It reminds me of how the Bush administration reacts when
it is having trouble selling its policies to the public.
When things get tough, the tough start whining and lying?
Posted by Mark Thoma on Sunday, July 27, 2008 at 09:00 AM in Politics |
Posted by Mark Thoma on Sunday, July 27, 2008 at 12:30 AM in Links |
What do you think about this proposal?:
A Modest Proposal: Eco-Friendly Stimulus, by Alan S. Blinder, Economic View, NY
Times: Economists and members of Congress are now on the prowl for new ways
to stimulate spending in our dreary economy. Here’s my humble suggestion: “Cash
for Clunkers,” the best stimulus idea you’ve never heard of.
Cash for Clunkers is a generic name for a variety of programs under which the
government buys up some of the oldest, most polluting vehicles and scraps them.
If done successfully, it holds the promise of performing a remarkable public
policy trifecta — stimulating the economy, improving the environment and
reducing income inequality all at the same time. Here’s how.
Continue reading "Cash for Clunkers" »
Posted by Mark Thoma on Saturday, July 26, 2008 at 05:49 PM in Economics, Environment, Policy |
Paul De Grauwe is critical of the macroeconomic models used by central banks:
Cherished myths fall victim to economic reality, by Paul De Grauwe, Commentary,
Financial Times: ...But that is not the world of the macroeconomic models
that are now in use in central banks. The world of these models is one of
supernatural and God-like creatures for which the world has few secrets. These
creatures can perfectly compute the risks they take and estimate with great
precision how an oil price shock will affect their present and future production
and consumption plans. They may not be able to predict each shock, but they know
the probability distribution of these shocks. Thus the risk involved in
financial instruments is correctly evaluated by individuals populating these
These superbly informed individuals want the central bank to keep prices
stable so that as consumers they can optimally set their consumption plans with
minimal uncertainty, and as producers they can set prices equal to marginal
costs (plus a mark-up). If the central banks keep prices stable, these
individuals, helped by well-functioning markets, will take care of all the rest
and ensure that the outcome is the best possible one. This is a world in which
free and unfettered markets are always efficient.
This is also a world where individual agents cannot make systematic mistakes.
Their consumption and production plans are optimal. They will never build up
unsustainable debts. In the world of these macroeconomic models financial crises
should not occur. And if they do, it cannot be because of malfunctioning
markets. Governments that impose silly constraints on rational individuals are
messing things up, and central banks that do not keep their promises to maintain
price stability are the source of macroeconomic instability. ...
There is a danger that the macroeconomic models now in use in central banks
operate like a Maginot line. They have been constructed in the past as part of
the war against inflation. The central banks are prepared to fight the last war.
But are they prepared to fight the new one against financial upheavals and
recession? The macroeconomic models they have today certainly do not provide
them with the right tools to be successful.
There is quite a bit of research on
monetary policy that is devoted to the issues he is worried about, particularly the literature on adaptive learning. See
here, and some of his publications
and example from a European central bank. These ideas are also well-known and of considerable interest to
the US Fed, e.g. one example is
here, but there are many
Some of the recent
work of Chris Sims is also of interest in this regard:
...Most recently, theories that postulate deviations from the assumption of
rational, computationally unconstrained agents have drawn attention. One branch
of such thinking is in the behavioral economics literature (Laibson, 1997;
Benabou and Tirole, 2001; Gul and Pesendorfer, 2001, e.g.), another in the
learning literature (Sargent, 1993; Evans and Honkapohja, 2001, e.g.), another
in the robust control literature (Giannoni, 1999; Hansen and Sargent, 2001;
Onatski and Stock, 1999, e.g.).
This paper suggests yet another direction for deviation from the seamless
model, based on the idea that individual people have limited capacity for
processing information. That people have limited information-processing capacity
should not be controversial. It accords with ordinary experience, as do the
basic ideas of the behavioral, learning, and robust control literatures. The
limited information-processing capacity idea is particularly appealing, though,
for two reasons. It accounts for a wide range of observations with a relatively
simple single mechanism. And, by exploiting ideas from the engineering theory of
coding, it arrives at predictions that do not depend on the details of how
information is processed.
Returning to the article above criticizing macroeconomic models, the author goes on to explain why he thinks the reliance of central banks on macroeconomic models is a problem:
This intellectual framework helps to explain the single-minded focus of many
central bankers on inflation. Clearly, inflation is important and maintaining
price stability is an important task of the central bank. It is not the only
task, though. Financial stability is equally important. But this dimension is
completely absent from the macroeconomic models now in use.
Perhaps more attention to financial market instability is warranted, there's a lot of work on that currently underway, but as this overview of the learning literature makes clear, if you
drop the rational expectations assumption and assume agents must learn about their economic environment (one means of generating financial market instability), it may still be that the an aggressive response to inflation is optimal:
Expectations, Learning and Monetary Policy: An Overview of Recent Research, by
George W. Evans and Seppo Honkapohja, July 16, 2008: ...contemporaneous
Taylor-type interest-rate rules should respond to the inflation rate more than
one for one in order to ensure determinacy and stability under learning...
So central banks' focus on inflation comes solely from examination of standard macroeconomic models.
The point is that, unlike the implication in the article, central banks are
anxious to explore the implications of agents that are less than fully
informed or fully rational, how that impacts behaviors such as risk assessment, and to examine the implications of financial market
instability. They are particularly interested in how these factors impact the conduct of stabilization
policy. The models aren't perfect, and standard models do miss a lot of these
elements, but standard models are not all we have and central bankers are quite
aware of, and actively engaged in exploring the policy implications of alternative theoretical structures that can tell us more about these issues.
Posted by Mark Thoma on Saturday, July 26, 2008 at 03:06 AM in Economics, Inflation, Macroeconomics, Monetary Policy |
Posted by Mark Thoma on Saturday, July 26, 2008 at 12:33 AM in Links |
Edward Glaeser, Joseph Gyourko, and Albert Saiz construct a model of
housing bubbles that is consistent with movements in housing prices and
quantities during the two most recent housing bubbles (the current episode and
the prior episode in the 1980s). Looking at the data, they note that areas with
inelastic housing supply had large price run-ups and subsequent long, drawn out
crashes in both episodes. However, "The fact that highly elastic places had
price booms is one of the strange facts about the recent price explosion."
Because it is unprecedented, there is considerable uncertainty about how much
prices might fall in the areas where supply is elastic. However, using the model
as a guide, they find that "If these markets return to their historical norm...,
then they will experience further sharp price declines," though there is a lot
of uncertainty surrounding this prediction.
Maybe another way to think about this is that in some areas, those areas where
supply is termed inelastic, the quantity response is essentially symmetric -- housing supply moves sluggishly
whether prices are rising or falling. However, other areas could have housing
supply that responds elastically when prices are rising (though sometimes there
can be bubbles in these markets anyway - see below), but inelastically when
prices are falling. In these markets, housing comes online relatively easily
when prices are rising, but quantity responds much more sluggishly when prices
fall, and the response could be similar to the symmetrically inelastic cases.
Why might the two sets of markets have similar responses on the down-side? Think about the inelastic markets where supply cannot increase due to
geographic limitations (they use a geographic measure to sort the data). Geography limits the expansion of housing, but when there is an oversupply of housing, geography does
not prevent the supply from falling, so it must be something else that prevents
quantity adjustment and whatever it is could certainly be present in markets
where geography is not an issue (i.e. the markets that are elastic when
prices rise). If this is right, then there's reason to believe that the two sets
of markets will generate similar responses for price and quantity on the
down-side, and this would explain the finding in the paper that "elasticity was
uncorrelated with either price or quantity changes during the bust" (so long as
other factors such as regulation are similar, e.g., it's equally easy to
replace a house with a restaurant after remodeling in the two markets). This would mean that - as
predicted (with qualifications) in the paper - the elastic markets may mimic the inelastic markets and be in for
a sharp price decline.
One more note from the paper about elastic markets, "Even though elastic
housing supply mutes the price impacts of housing bubbles, the social welfare
losses of housing bubbles may be higher in more elastic areas, since there will
be more overbuilding during the bubble." Thus, it's possible for markets with sharp price adjustments to fare better in a welfare sense than markets where price changes are more muted. Here's some of the introduction from
the paper [
can anyone find an open link?] [Update: Richard Green: Mark Thoma thinks housing supply elasticities may be asymmetric ... I have reason to think
Mark is right. My 2005 paper with Mayo and
Malpezzi found evidence of this; cities that appeared inelastic included
Pittsburgh, Toledo, Albany, Buffalo and Providence. None of these cities had
upward pressure on housing production; rather, they were losing population and
the housing stock took a long time to adjust to the loss.]:
Housing Supply and Housing Bubbles,
by Edward L. Glaeser, Joseph Gyourko, and Albert Saiz, NBER WP 14193, July 2008: Introduction In the 25 years since Shiller (1981) documented that
swings in stock prices were extremely high relative to changes in dividends, a
growing body of papers has suggested that asset price movements reflect
irrational exuberance as well as fundamentals (DeLong et al., 1990; Barberis et
al., 2001). A running theme of these papers is that high transactions costs and
limits on short-selling make it more likely that prices will diverge from
fundamentals. In housing markets, transactions costs are higher and
short-selling is more difficult than in almost any other asset market (e.g.,
Linneman, 1986; Wallace and Meese, 1994; Rosenthal, 1989). Thus, we should not
be surprised that the predictability of housing price changes (Case and Shiller,
1989) and seemingly large deviations between housing prices and fundamentals
create few opportunities for arbitrage.
The extraordinary nature of the recent boom in housing markets has piqued
interest in this issue, with some claiming there was a bubble (e.g., Shiller,
2005). While nonlinearities in the discounting of rents could lead prices to
respond sharply to changes in interest rates in particular in certain markets (Himmelberg
et al., 2005), it remains difficult to explain the large changes in housing
prices over time with changes in incomes, amenities or interest rates (Glaeser
and Gyourko, 2006). It certainly is hard to know whether house prices in 1996
were too low or whether values in 2005 were too high, but it is harder still to
explain the rapid rise and fall of housing prices with a purely rational model.
However, the asset pricing literature long ago showed how difficult it is to
confirm the presence of a bubble (e.g., Flood and Hodrick, 1990). Our focus here
is not on developing such a test, but on examining the nature of bubbles, should
they exist, in housing markets.
Continue reading ""Housing Supply and Housing Bubbles" " »
Posted by Mark Thoma on Saturday, July 26, 2008 at 12:24 AM in Academic Papers, Economics, Financial System, Housing |
Jim Hamilton looks at the question of whether changes in oil prices have been
driven by fundamentals:
Oil prices and economic fundamentals,
by Jim Hamilton: Oil was selling for $123 a barrel on May 7, and that's where it closed this
week. Sounds like a calm and rational market, except for the fact that just last
week it was going for $145. ...
Which price was right, $123, $145, or something else? Before you let anybody
give you an answer to that question, try to get them to comment first on the
following two facts. (1) According to the
Energy Information Administration, China consumed 7.6 million barrels of
petroleum each day of 2007, which is 860,000 barrels/day more than in 2005. (2)
EIA also reports that the world as a whole produced 84.6 million barrels of
oil per day in 2007, which is 30 thousand barrels per day less than 2005. ...
Now, how could it be that China is burning 860,000 b/d more than it used to,
but no more is being produced? Well, it could be that there are errors in the
consumption or production numbers, and both will likely be revised. Or it could
be that we're drawing down global inventories. But the most natural inference is
that somebody else in the world must have been persuaded to reduce their
consumption of oil between 2005 and 2007 to free the barrels now being used in
China. And indeed, according to
preliminary EIA estimates, petroleum consumption in the U.S., Japan, and
those countries in Europe for which data are now available fell by 760,000 b/d
between 2005 and 2007.
Here's the framework I would propose for answering the question of how much
the price of oil should have risen since 2005-- the price of oil needed to go up
by whatever it took to persuade places like the U.S., Europe, and Japan to
reduce their consumption by the amount that China, the newly industrialized
countries, and oil-producing countries were increasing theirs.
And how big a price increase would that be, exactly? Somebody who claims to
know that would need to have more confidence in their estimate of the
price-elasticity of oil demand than I have in mine. But if your answer is that a
much smaller price increase than the one we observed would have been sufficient
to produce the requisite decline in quantity demanded, that would seem to imply
that, since price went up by much more than you believe was needed to reduce
demand, the quantity demanded must have fallen by much more than was called for.
One place that might have been expected to show up is in the form of an
accumulation of inventories. The black line in the figure below shows the
average seasonal behavior of U.S. crude oil inventories. The red line
demonstrates that current inventories are if anything below normal. On what
basis, then, could one insist that the quantity of oil consumed has fallen more
than was necessary?
OK, suppose you believed that the price increase we actually saw-- from
$42/barrel in January 2005 to $96 in December 2007-- was just the right amount
to accomplish the task of balancing global demand and supply for 2007. Should
the price have held steady from there in 2008? Figures reported by
that China imported an additional 8.97 million tons of crude and 2.96 million
tons of refined product in the first half of 2008 compared with 2007:H1, which
a 480,000 barrel/day increase. Where's that supposed to come from? A U.S.
recession, which many of us were anticipating in January, certainly would have
brought demand down. But current U.S. GDP growth
likely to come in higher than many of us had predicted earlier, meaning if
you gave one answer for the correct price of oil in January, you should be
giving a higher value for that number today. On the other hand, the data coming
in the last two weeks have raised the probability of a
Europe. If that occurs, it will bring a reduction in the quantity demanded
from those areas even if the price begins to fall. Whatever the correct price of
oil was two weeks ago, I think it's a lower value today.
What about the
response of quantity demanded to the price increases already in place? If
that proves to be substantial (and I'm of the opinion that it will), U.S.
petroleum consumption should continue to decline during 2008 even with no
further price increases and no recession. There's also been some increase in
global production this year, and
is expected. Won't that be enough to satisfy those new and thirsty Chinese
vehicles? If so, $123/barrel may be way too high a price.
But don't forget, while you're doing these calculations, you'll need to meet
Chinese demand for 2009, and 2010, and 2011.... Which, if you
project the current trend and tried to satisfy entirely by cuts in U.S.
consumption, would have us down to consuming zero barrels of oil in the United
States in about 17 years.
Is the price of oil today too high given the fundamentals? Could be. Is it
too low? Could be. But one thing I'm sure that's too high is the confidence on
the part of those who insist they know the answer.
In that case, I'm glad my last
comment on this topic was "I'm absolutely certain I could be wrong."
Posted by Mark Thoma on Saturday, July 26, 2008 at 12:15 AM in Economics, Oil |
This Economic Letter argues the Fed has not lost credibility as an inflation fighter. The
idea is to estimate a model of expectations through 2003 or 2005, i.e. to just
use data where credibility is still present, forecast inflation expectations
through the end of the sample, and compare the forecast of inflation expectation
to the actual value of inflation expectations (from surveys). If expectations are losing their anchor, then the predicted expected inflation rate should
lie below the the actual expected inflation rate since the predicted rate will
be based only upon data that came before the potential loss of credibility. I'm not sure how much weight to give this evidence since I have questions about the adequacy of the adaptive expectations model used to forecast future inflation expectations, which the authors argue is forced upon them by limited data availability:
Unanchored Expectations? Interpreting the Evidence from
Inflation Surveys, by Wayne Huang and Bharat Trehan, FRBSF Economic Letter: Recent surveys have shown that households are expecting
higher inflation in the future. These readings, coming at the same time as
surging commodity prices, have raised concerns that inflation expectations are
no longer well-anchored and that the Fed has lost credibility. Unstable
expectations could stoke higher inflation and possibly lead to a return to the
stagflation of the 1970s.
In this Economic Letter, we argue that focusing only on whether the
level of expected inflation has gone up may not be the best strategy for
determining whether there has been a loss in credibility. Instead, it may be
more useful to try to determine whether there has been a change in the way
households and firms perceive the inflation process (and consequently form
expectations about inflation). We use two surveys of inflation expectations, one
based on household respondents, and the other on professional forecasters, to
examine this issue. In neither case do we find evidence suggesting that
expectations have recently become unanchored, even though consumer expectations
of inflation have clearly gone up.
Continue reading "Are Inflation Expectations Becoming Unglued?" »
Posted by Mark Thoma on Friday, July 25, 2008 at 07:02 PM in Economics, Inflation, Monetary Policy |
Ah, good - I've been meaning to do something like this myself, but never got around to it. Jeff
Frankel sorts speculation into three types and notes that only one of the three
types, "bandwagon behavior," is worrisome. However, there's little evidence
that this type of speculation is present in commodities markets:
Commodity Prices, Again: Are Speculators to Blame, by Jeff Frankel: ...Many currently are trying to
blame speculators for the high prices of oil and other mineral and agricultural
products. Is it their fault?
Sure, speculators are important in the commodities markets, more so than they
used to be. The spot prices of oil and other mineral and agricultural products
— especially on a day-to-day basis — are determined in markets where
participants typically base their supply and demand in part on their
expectations of future increases or decreases in the price. That is
speculation. But it need not imply bubbles or destabilizing behavior.
The evidence does not support the claim that speculation has been the source
of, or has exacerbated, the price increases. Indeed, expectations of future
prices on the part of typical speculators, if anything, lagged behind
contemporaneous spot prices in this episode. Speculators have often been “net
short” (sellers) on commodities rather than “long” (buyers). In other words
they may have delayed or moderated the price increases, rather than initiating
or adding to them. One revealing piece of evidence is that commodities that
feature no futures markets have experienced as much volatility as those that
have them. Clearly speculators are the conspicuous scapegoat every time
commodity prices go high. But, historically, efforts to ban speculative futures
markets have failed to reduce volatility.
One can distinguish three
kinds of speculation in the face of rising prices. First, there is the “bearer
of bad tidings”... The news that, in the future,
increased demand will drive prices up is delivered by the speculator. Not only
would it be a miscarriage of justice to shoot the messenger, but the
speculator is actually performing a social service, by delivering the right
price signal that is needed to get real resources better in line with the future
balance between supply and demand. Without him, the subsequent price rise would
be even greater, because supply would be less. But it does not appear that
speculators played this role in the commodity boom that started earlier this
decade: as already mentioned they, if anything, lagged behind the spot price.
Second, when the price is
topping out, stabilizing speculators can sell short in anticipation of
a future decline to a lower equilibrium price. This type of speculator again
adds to the efficiency of the market, and dampens natural volatility, rather
than adding to it.
Third, in some case, when an
upward trend has been going on for a few years, speculators sometimes jump on
the bandwagon. Market participants begin simply to extrapolate past
trends and self-confirming expectations create a speculative bubble, which
carries the price well above its equilibrium. Examples of previous bubble
peaks include the dollar in 1985, the Japanese stock and real estate markets in
1990, the yen in 1995, the NASDAQ in 2000, and the housing market in 2005.
It is the third kind of
speculation, the destabilizing kind (also called bandwagon behavior or
speculative bubbles) about which politicians, pundits, and the public tends to
worry. There is little evidence that this has played a role in the run-up of
commodity prices. So far, that is. Just because the boom originated in
fundamentals does not rule out that we could still go into a speculative bubble
phase. The aforementioned bubbles each followed on trends that had originated
in fundamentals (respectively: rising US real interest rates, 1980-84; easy
money and rapid growth in Japan, 1987-89; US recession, 1990-91, and Japanese
trade surpluses; the ICT boom in the late 1990s; and easy US monetary policy
after 2001). It could happen yet in commodity markets.
Posted by Mark Thoma on Friday, July 25, 2008 at 11:07 AM in Economics |
Robert Waldmann is thinking about how to give insurance companies a long-term
stake in the health of their clients. This is an example of the type of policy I had in mind
when I said:
...preventative care ... ought to be encouraged, and one way to help with
this is ... to forge an unbreakable lifetime relationship between the insurance
company and the consumer so that expected lifetime costs are important to the
Here's Robert Waldmann's plan:
Smart cost sharing, by Robert Waldmann: Ezra Klein writes about
smart cost sharing. He wants a committee to decide reimbursement rates.
Oddly, I had another idea about smart cost sharing. Make the doctors pay for
the care and pay the doctors based on outcomes. This is based on a Cutler et al
result that very small financial incentives to doctors based on their patients'
blood pressure, glucose and cholesterol can cause big changes in those outcomes.
Continue reading "Smart Cost Sharing" »
Posted by Mark Thoma on Friday, July 25, 2008 at 12:33 AM in Economics, Health Care, Policy |
For the urban and regional economics experts - is this argument correct? Does urban development policy as administered through HUD need major restructuring? If so, can HUD be reformed, or would it be best to, as suggested below, eliminate HUD and start over?:
To Fight Poverty, Tear Down HUD, by Sudhir Venkatesh, Commentary, NY Times:
...It might be best to simply close the [Department of Housing and Urban
Development] and create a new cabinet-level commitment to urban development.
In 1965, when HUD was created, its mission was to spur growth in and around
cities. The agency provided mortgage assistance to veterans and first-time
homeowners, it built housing for the urban poor, and the Federal Housing
Administration spurred suburban expansion by recruiting developers and home
buyers to a relatively new, untested market.
Since its inception, HUD has had a fairly straightforward recipe: develop
good relations with mayors and local real estate leaders, then award grants and
underwrite loans that affirm local development priorities. ...
But in the last four decades the urban landscape has changed from discrete,
independent cities to vast, interdependent regions where people and goods move
freely..., cities have no choice but to collaborate on decisions over land use
and economic development. ... And for the first time in our nation’s history,
poverty is rising faster in suburbs than in urban cores. In this new era, HUD’s
each-city-is-a-separate-whole approach is not only too inflexible and
short-sighted, it also hinders effective regional growth.
To see why, consider HUD’s most prominent urban development program: Housing
Opportunities for People Everywhere (VI). ...
How could a program aimed at curbing inequality and helping the poor end up
creating new pockets of poverty? The answer lies partly in HUD’s myopic focus on
gentrifying urban cores. The agency ignored studies showing that former project
residents would have difficulty finding rental housing in outlying neighborhoods
and did not provide assistance for inner-ring suburbs with high rates of
foreclosures. HUD resisted calls to slow down housing demolition and to move the
poor to areas of high job growth.
By making no effort to ascertain needs and resources on a regional scale, HUD
has ended up eliminating poverty in one place while creating distressed,
low-income communities in others. If HUD had developed a broader vision, one
that tied together inner city and suburb, it could have created policies to help
both areas adjust to the modern urban landscape.
In correcting HUD’s missteps, we must first separate “housing policy” from
“urban development.” ...
Then, the development needs of our nation’s regions — wide areas like the
Northeast corridor or Southern California — could be considered anew. Block
grants could provide incentives for municipal and county governments to
collaborate. Regionalism must be embraced, even if it tests local officials who
fear losing their traditional sources of government financing. ...
Americans live ... spread out, and economic activity is no longer limited to
downtowns. Community-based initiatives — from vocational programs to rezoning
efforts to designing effective transportation corridors and recreational space —
are sorely needed but will be effective only if they tie into a broader vision
that anticipates growth on a large scale.
Even our most persistent problems of inequality will require new strategies.
A federal agency devoted to regional planning could help the Health and Human
Services Department reconfigure anti-poverty programs to aid suburban
communities that have so far gone unnoticed but are desperately in need. It
could motivate the Labor Department to develop training programs and support the
transportation needs of workers.
We need an agency that can work outside old boundaries and design a regional
approach to revitalizing cities and suburbs. Dismantling HUD would be a great
place to start.
Update: Richard Florida says "He's absolutely right."
Update: Ryan Avent says "HUD’s mission should be changed, [but] blowing it up probably isn’t necessary."
Posted by Mark Thoma on Friday, July 25, 2008 at 12:24 AM in Economics, Housing, Policy |
Posted by Mark Thoma on Friday, July 25, 2008 at 12:06 AM in Links |
Joseph Stiglitz says just say no to free lunches:
Fannie’s and Freddie’s free lunch, by Joseph Stiglitz, Commentary, Financial
Times: ...The US government is about to embark on ... a partnership, in
which the private sector takes the profits and the public sector bears the risk.
The proposed bail-out of Fannie Mae and Freddie Mac entails the socialisation of
risk – with all the long-term adverse implications for moral hazard – from an
administration supposedly committed to free-market principles.
Defenders of the bail-out argue that these institutions are too big to be
allowed to fail. If that is the case, the government had a responsibility to
regulate them so that they would not fail. No insurance company would provide
fire insurance without demanding adequate sprinklers; none would leave it to
“self-regulation”. But that is what we have done with the financial system.
Even if they are too big to fail, they are not too big to be reorganised
...[to] meet the basic tenets of what should constitute such a publicly
First, it should be fully transparent, with taxpayers knowing the risks they
Second, there should be full accountability. Those who are responsible for
the mistakes – management, shareholders and bondholders – should all bear the
consequences. Taxpayers should not be asked to pony up a penny while
shareholders are being protected.
Finally, taxpayers should be compensated for the risks they face. ...
All of these principles were violated in the Bear Stearns bail-out. ... The
same administration that failed to regulate, then seemed enthusiastic about the
Bear Stearns bail-out, is now asking the American people to write a blank cheque.
They say: “Trust us.” Yes, we can trust the administration – to give the
taxpayers another raw deal.
Something has to be done; on that everyone is agreed. We should begin with
the core of the problem, the fact that millions of Americans were made loans
beyond their ability to pay. We need to help them stay in their homes.... This
will bring clarity to the capital markets – reducing uncertainty about the size
of the hole in Fannie Mae’s and Freddie Mac’s balance sheets. ...
We should not be worried about shareholders losing their investments. In
earlier years, they were amply rewarded. The management remuneration packages
that they approved were designed to encourage excessive risk-taking. They got
what they asked for. Nor should we be worried about creditors losing their
money. Their lack of supervision fuelled the housing bubble and we are now all
paying the price. We should worry about whether there is a supply of liquidity
to the housing market, so that those who wish to buy a home can get a loan. This
proposal provides the necessary liquidity.
A basic law of economics holds that there is no such thing as a free lunch.
Those in the financial market have had a sumptuous feast and the administration
is now asking the taxpayer to pick up a part of the tab. We should simply say
Posted by Mark Thoma on Thursday, July 24, 2008 at 01:53 PM in Economics, Financial System, Housing, Regulation |
[This spends some time setting the stage by repeating past posts, if you want
to skip to the new part - a defense of the gains from globalization from Gary Hufbauer and Matthew Adler of the Peterson Institute - click
Awhile back, I issued a
In a recent speech, Federal Reserve Chairman Ben Bernanke
How important is [international trade] for the health of our economy to trade
actively with other countries? As best we can measure, it is critically
important. According to one recent study that used four approaches to measuring
the gains from trade, the increase in trade since World War II has boosted U.S.
annual incomes on the order of $10,000 per household (Bradford, Grieco, and
Hufbauer, 2006). The same study found that removing all remaining barriers to
trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household.
Other research has found similar results. ...
read Dani Rodrik if you want to know "under what conditions will trade
liberalization enhance economic performance?" ... Whatever the theory says, the
evidence in this paper and the evidence more generally is pretty clear,
globalization has large net benefits.
If you want to have this debate, fine, let's have it. But let's engage on a
professional level... If you disagree that trade benefits the US overall, what
are the problems with the econometric methodology used to produce these results
or the results in other papers coming to similar conclusions? Saying the results
must be wrong because they don't support your point is not an argument. What
specifically in the data, estimation procedures, etc., do you think is
problematic and leads to the wrong result? Are there other notable academic
papers that come to different conclusions? If so, what is the source of the
difference in the estimates? Is it the data, the estimation technique, the
theoretical assumptions, or what? Help us to understand why we should be
doubtful about the results Bernanke cited, or about the results of other papers
reaching similar conclusions.
If you dig into a paper, you can always find its weaknesses. And it's
important to do so because finding such weaknesses allows us to check to see if
correcting the problems alters the conclusions. So please, have at it, take an
honest look at the evidence and tell us why we should doubt this papers
conclusions or the conclusion that trade is beneficial more generally, and help
us to move things forward in our attempts to find the correct answers to these
important problems. My own view is that the results from the papers in this area
are very clear - trade is highly beneficial overall and it's the distribution of
benefits and costs across individuals that's at issue - but I'm very open to
well constructed arguments to the contrary....
Dani Rodrik took up the challenge:
The globalization numbers game, by Dani Rodrik: ...Mark Thoma's
post, which focuses on the
magnitude of the gains from globalization. He says "there's something important
that's generally missing from the attacks on globalization's supporters, actual
evidence." He refers to a Bernanke speech and at length to a paper which
Bernanke cites by Bradford, Grieco, and Hufbauer... The Bradford et al. study
argues that removing all remaining barriers to trade would raise U.S. incomes
anywhere from $4,000 to $12,000 per household (or 3.4-10.1% of GDP). That is a
whole chunk of change! ...
As Thoma says, we cannot dismiss "evidence" just because we disagree with it.
...[W]hile I would not quarrel with the assertion that globalization increases
the size of the pie for the U.S., I do have a big quarrel with the kind of
numbers presented by Hufbauer and company. They seem to me to be grossly
inflated. Let me take up Thoma's challenge and explain why.
Continue reading ""Why Large American Gains from Globalisation are Plausible"" »
Posted by Mark Thoma on Thursday, July 24, 2008 at 10:44 AM in Economics, International Trade |
Dani Rodrik argues that the survival of globalization will require a " new
intellectual consensus to underpin it":
The Death of
the Globalization Consensus, by Dani Rodrik, Project Syndicate: The world
economy has seen globalization collapse once already. The gold standard era –
with its free capital mobility and open trade – came to an abrupt end in 1914
and could not be resuscitated after World War I. Are we about to witness a
similar global economic breakdown?
The question is not fanciful. ... Unlike national markets, which tend to be
supported by domestic regulatory and political institutions, ...[t]here is no
global anti-trust authority, no global lender of last resort, no global
regulator, no global safety nets, and, of course, no global democracy. In other
words, global markets suffer from weak governance, and therefore from weak
Recent events have heightened the urgency with which these issues are
discussed. The presidential ... campaign ... has highlighted the frailty of the
support for open trade... The sub-prime mortgage crisis has shown how lack of
international coordination and regulation can exacerbate the inherent fragility
of financial markets. The rise in food prices has exposed the downside of
economic interdependence... Meanwhile, rising oil prices have increased
transport costs, leading analysts to wonder whether the outsourcing era is
coming to an end. ...
So if globalization is in danger, who are its real enemies? There was a time
when global elites could comfort themselves with the thought that opposition to
the world trading regime consisted of violent anarchists, self-serving
protectionists, trade unionists, and ignorant, if idealistic youth. Meanwhile,
they regarded themselves as the true progressives, because they understood that
... advancing globalization was the best remedy against poverty and insecurity.
But that self-assured attitude has all but disappeared, replaced by doubts,
questions, and skepticism. Gone also are the violent street protests and mass
movements against globalization. What makes news nowadays is the growing list of
mainstream economists who are questioning globalization’s supposedly unmitigated
So we have Paul Samuelson ... reminding his fellow economists that China’s
gains in globalization may well come at the expense of the US; Paul Krugman ...
arguing that trade with low-income countries is no longer too small to have an
effect on inequality; Alan Blinder ... worrying that international outsourcing
will cause unprecedented dislocations for the US labor force; ... and Larry
Summers, ... the Clinton administration’s “Mr. Globalization,” musing about the
dangers of a race to the bottom in national regulations and the need for
international labor standards.
While these worries hardly amount to the full frontal attack mounted by the
likes of Joseph Stiglitz ... they still constitute a remarkable turnaround in
the intellectual climate. ...
None of these intellectuals is against globalization, of course. What they
want is not to turn back globalization, but to create new institutions and
compensation mechanisms – at home or internationally – that will render
globalization more effective, fairer, and more sustainable. ...
[C]onfrontation over globalization has clearly moved well beyond the
streets... That is an important point for globalization’s cheerleaders to
understand, as they often behave as if the “other side” still consists of
protectionists and anarchists. Today, the question is no longer, “Are you for or
against globalization?” The question is, “What should the rules of globalization
The first three decades after 1945 were governed by the Bretton Woods
consensus – a shallow multilateralism that permitted policymakers to focus on
domestic social and employment needs while enabling global trade to recover and
flourish. This regime was superseded in the 1980’s and 1990’s by an agenda of
deeper liberalization and economic integration.
That model, we have learned, is unsustainable. If globalization is to
survive, it will need a new intellectual consensus to underpin it. The world
economy desperately awaits its new Keynes.
Posted by Mark Thoma on Thursday, July 24, 2008 at 01:08 AM in Economics, International Trade |
Posted by Mark Thoma on Thursday, July 24, 2008 at 12:30 AM in Links |
Chris Hayes wants to know why air travel is so lousy. A source inside the
Why Airline Travel Sux: Big Air Responds!, by Christopher Hayes: So I’ve
been on a bit of a jag about how awful flying is. I’ve flown four of the last
eight weeks and every single return trip has had some very significant problems:
three cancellations and one flight delayed long enough we would have missed our
connection. What gives?
Megan McArdle made some good points on the general topic of complaints about
air travel, which Matt added to here.
I decided to email my super secret source inside a major air carrier, and I’m
pasting in his response below, which I found pretty fascinating. The subject of
my email to him was “Why does flying suck so hard?” His response:
Actually, people have been asking me this question for the entirety of the
ten years I have worked in this business. I think the best thing I can do is to
basically give you the answer I gave ten years ago, and then take you through
the ways in which that answer has changed (or, really, gained additional layers
and nuance) as 1) the tech bubble burst, 2) 911 and aftermath 3) the current
fuel crisis happened. First off, flying today *doesn't* suck so hard. There, I
said it. Flying today, however, is often racked with numerous small frustrations
and irritations, and on occasion is a complete pain in the ass. What is the
Continue reading "Why Is Airline Service So Bad? " »
Posted by Mark Thoma on Wednesday, July 23, 2008 at 03:06 PM in Economics, Regulation |
An indication of how people respond to paying more for health care:
Tough Times Prompt Patients to Skip Care, by Benjamin Brewer, WSJ: With gas
prices hovering around $4 a gallon, my patients are cutting back on medical
A 59-year-old woman decided not to have a mammogram this year. At her age,
she should be screened for colon cancer, too, but she is holding off until she
becomes eligible for Medicare at 65. ... If she develops cancer of the colon or
breast she won't have saved anything. ...
Rising deductibles, stiff drug co-payments and increasing prices for just
about everything are forcing some hard choices about health. Care that doesn't
strike patients as critical is getting delayed. As the economy squeezes my
patients, they are showing up sicker.
A patient ... came to the office with severe pneumonia two days after
refusing to let an E.R. doctor admit him to the hospital. My patient was afraid
of the expense and all the time he would go without pay from work.
To make matters worse, he didn't fill the antibiotic prescription he was
given either. The $50 co-payment was unaffordable, he said. This is a case when
an insurer would have been better off picking up the antibiotic tab to avoid a
larger expense. But there's no easy way for a doctor to override a plan's co-pay
or to let an insurer know its rules are about to make something very expensive
When the patient came to see me, his condition had deteriorated. I persuaded
him to let me admit him to the local hospital. He was in such bad shape that he
was soon transferred to the ICU of a large medical center. His care will end up
costing tens of thousands of dollars.
It was no surprise to me to read recently that claims severity and costs for
health insurers took an unexpected jump this year. ...
As a result of lean times, accounts receivable from uninsured patients in my
practice is trending up...
Patients are still having babies at the same rate. But elective procedures,
preventive exams and compliance with prescriptions are all down.
Some of my patients are taking themselves off medications. Just last week I
encountered patients who stopped their cholesterol medication...
I noticed an uptick in patients canceling appointments and just not showing
up over the last few weeks. ...
Many of our patients travel 20 or 30 miles to see us, and I think gas prices
are affecting no-show and cancellation rates, particularly with low income
My total number of office visits is off 5% from last year. ... I'm pretty
well caught up on my daily deluge of paperwork... When things are busy, I almost
never get those things accomplished.
It occurred to me in an idle moment that I would be a lot busier if the $600
government stimulus checks had been spent on a basket of basic primary care
services. That would have paid for 130 million people to have had most of their
health needs met for a year. Instead, folks around here seem to be spending more
on $4 gas.
I think universal insurance offers the best solution to the problem of people skipping preventative measures to save themselves money in the short-run (provided, of course that the insurance covers preventative measures that are cost effective in the long-run). If people are uninsured, or are insured but must pay for preventative measures out-of-pocket, they tend to skip these important cost-saving measures. Perhaps it's due to a type of moral hazard - people believing that society will step in and provide care for life-threatening but curable illnesses - I don't know, it could be some sort of myopia, some other market failure, or an inconsistency in preferences. And insurance companies have no incentive to provide this care if they can disqualify people when they do become sick and shift the costs to the public sector, so the problem isn't necessarily on the consumer side. But whatever the cause, the solution to the health care problem should not induce people to forgo preventative care. Instead, such care ought to be encouraged, and one way to help with this is use universal insurance to forge an unbreakable lifetime relationship between the insurance company and the consumer so that expected lifetime costs are important to the insurance carrier.
Posted by Mark Thoma on Wednesday, July 23, 2008 at 01:44 PM in Economics, Health Care |
Jeffrey Sachs urges leaders to recognize that "working with the UN agencies
is in fact the only way to solve global problems":
Where are the global leaders?, by Jeffrey Sachs, Commentary, Project Syndicate:
The G8 Summit in Japan earlier this month was a painful demonstration of the
pitiful state of global cooperation.
The world is in deepening crisis. Food prices are soaring. Oil prices are at
historic highs. The leading economies are entering a recession. Climate change
negotiations are going around in circles. Aid to the poorest countries is
stagnant, despite years of promised increases. And yet in this gathering storm
it was hard to find a single real accomplishment by the world's leaders. The
world needs global solutions for global problems, but the G8 leaders clearly
cannot provide them. Because virtually all of the political leaders that went to
the summit are deeply unpopular at home, few offer any global leadership. They
are weak individually, and even weaker when they get together and display to the
world their inability to mobilize real action.
There are four deep problems.
Continue reading "Sachs: Where are the Global Leaders?" »
Posted by Mark Thoma on Wednesday, July 23, 2008 at 02:34 AM in Economics, Politics |
Robert Reich characterizes differences in the economic philosophies of Obama and McCain:
A Short Primer on McCainomics Versus Obamanomics: Top-Down or Bottom-Up, by
Robert Reich: McCain and Obama represent two fundamentally different
economic philosophies. McCain's is top-down economics; Obama's is bottom-up.
Top-down economics holds that:
Continue reading "Reich: McCainomics Versus Obamanomics" »
Posted by Mark Thoma on Wednesday, July 23, 2008 at 02:07 AM in Economics, Politics |
Gianmarco I.P. Ottaviano and Giovanni Peri on immigration and wages:
Immigration and National Wages: Clarifying the Theory and the Empirics, Gianmarco I.P. Ottaviano, Giovanni Peri. NBER WP No. 14188,
Issued in July 2008 [open link]: Abstract This paper estimates the
effects of immigration on wages of native workers at the national U.S. level.
Following Borjas (2003) we focus on national labor markets for workers of
different skills and we enrich his methodology and refine previous estimates. We
emphasize that a production function framework is needed to combine workers of
different skills in order to evaluate the competition as well as cross-skill
complementary effects of immigrants on wages. We also emphasize the importance
(and estimate the value) of the elasticity of substitution between workers with
at most a high school degree and those without one. Since the two groups turn
out to be close substitutes, this strongly dilutes the effects of competition
between immigrants and workers with no degree. We then estimate the
substitutability between natives and immigrants and we find a small but
significant degree of imperfect substitution which further decreases the
competitive effect of immigrants. Finally, we account for the short run and long
run adjustment of capital in response to immigration. Using our estimates and
Census data we find that immigration (1990-2006) had small negative effects in
the short run on native workers with no high school degree (-0.7%) and on
average wages (-0.4%) while it had small positive effects on native workers with
no high school degree (+0.3%) and on average native wages (+0.6%) in the long
run. These results are perfectly in line with the estimated aggregate
elasticities in the labor literature since Katz and Murphy (1992). We also find
a wage effect of new immigrants on previous immigrants in the order of negative
Posted by Mark Thoma on Wednesday, July 23, 2008 at 12:24 AM in Academic Papers, Economics, Immigration, Unemployment |
Posted by Mark Thoma on Wednesday, July 23, 2008 at 12:06 AM in Links |
Health savings accounts, Marginal Revolution: A few readers have written me
or asked in the comments why I am not so crazy about HSAs. From the past, read
here is an index of previous MR posts on the topic; in any case my take is
1. I favor tax-free savings (albeit with some fiscal qualifications), so you
can make a case for HSAs on this ground, noting that we do already have other
tax-free savings vehicles.
2. HSAs take one market segment -- usually a relatively wealthy and health
care-satisfied segment -- and introduce one marginal improvement of incentives.
This doesn't seem to help much in terms of lowering aggregate costs.
3. HSAs introduce greater care into any single medical expenditure by
creating a direct private opportunity cost for the spender. I am less sure it
will limit medical expenditures in general; that depends on how people frame
withdrawals, once funds are committed to an HSA account, and to what extent they
use HSAs for what would have been cash payments anyway.
4. As Paul Krugman says, "too much health insurance" is not the fundamental
problem in the health care market. (Unlike Krugman, I don't see single-payer
plans as the solution; I see the incentives of producers, combined with the fear
and unreasonableness of buyers, as the key problem on the cost side.)
Caplan on Singapore, HSAs might work much better in another setting, noting
that the other features of Singapore also might account the difference in
performance in health care systems.
6. Given #1 and #2, it is easy for me to believe that HSAs bring net social
benefit. It is much harder for me to see HSAs as "the one health care idea we
would promote if we had one shot at health care reform." The main beneficiaries
are the healthy and the wealthy, and, while I am all for helping those people,
surely that is odd, no?
7. I will profess my agnosticism on many health care policy issues, but one
of the better plans is
Jason Furman's and/or spending more on medical R&D and some public health
programs and lots of cost-lowering deregulation while in the meantime getting
expenditures and costs under control. I also recommend Arnold Kling's work.
Posted by Mark Thoma on Tuesday, July 22, 2008 at 04:23 PM in Economics, Health Care, Policy |
Infrastructure is so . . . stimulating, Megan McArdle:
Mark Thoma wants us to look at spending for stimulus, instead of tax cuts:
I agree that Fed policy alone may not be enough to get the economy back on
track, I've argued that for a long time. But tax cuts are not the only option
for stimulating the economy, government spending can also be used, and in theory
on short-run stabilization policy, a one dollar increase in government spending
has a bigger impact on GDP than a one dollar tax cut. Infrastructure is an
obvious target for spending, it's surely needed, but there are other areas that
could use help as well.
The idea that we should use emergency infrastructure spending as a stimulus is
gaining strength among liberals. ... I can
certainly vouch for the fact that many areas of American infrastructure are in
dire need of improvement.
However, ... I regret to report that the
idea of using infrastructure spending as a stimulus is a complete fantasy. This
is not your grandfather's stimulus spending. FDR could spend whacking great
sums on dams and roads and rural electrification, and hope to have an immediate
effect, because FDR was working on a multi-year depression, and in the pre-1960s
Between the environmental impact statements, public review periods, and
byzantine bidding process, the development cycle for anything more complicated
than painting a bus station is now measured in decades, not years. ...
The reason we rely mostly on monetary policy and tax cuts for stimulus is that
it is possible to rapidly implement whatever stimulus you decide on. With the
exception of a few transfer programs such as food stamps and unemployment
insurance, which are hard to funnel very large sums of money through, there is
nothing on the spending side that matches tax cuts for speed. You could
allocate the money, to be sure, but by the time it actually hit an agency
and went through the bureaucratic procedures necessary to actually spend it, the
window for effective stimulus would have passed.
We could improve matters by ripping out all of the procedural hurdles and
community review procedures we've forced on the government, and in my opinion,
that wouldn't be a bad thing. But in my opinion, this is[n't] ... likely
to be achieved...
The other thing we might consider is just not having the stimulus. It seems to
me that both monetary and fiscal stimulus at this point are trying to attack
supply shocks by goosing demand. America is going to have to get used to
consuming less oil and less cheap foreign credit some time, and maybe the best
way to do that is to let the shocks work their way through the system.
While I was thinking over a response, Free Exchange covered most of the points
I wanted to make:
An Infrastructure Stimulus, Free Exchange: Mark Thoma
writes ... [and] Megan McArdle
One initial point is that if this slump is anything like the last one (and it
then America can probably look forward to at least another year of the doldrums
before regular growth conditions return. That takes a little of the need for
immediacy out of the stimulus calculations.
I'd just add that if you go by the last two recessions,
recovery of employment has lagged behind the recovery in output, and may not
have fully recovered at all, so from that perspective, the slowdown could be even
more extended. This gives more weight to policies that have impacts over a longer time period. Back to Free Exchange:
But Ms McArdle is still right that the appropriate time-frame for an
infrastructure project, from idea to ribbon cutting, is at least a decade (in
America; China, I believe, is a different story). What's important to note is
that there are many infrastructure projects available that are quite close to
the construction stage, that have been on the books for some time and only lack
final say on funding to begin. In some cases, these projects might have already
been underway, had the economic slowdown and credit issues not constrained local
and state budgets. It's quite possible, then, that a quick injection of federal
funding for ready-to-go projects might provide the economy with a nice shot in
the arm. Given the attraction of infrastructure projects as investments
generally, this also reduces the economic downside to getting the timing wrong.
These are, after all, things that America should be doing anyway.
Continue reading "Infrastructure Spending and Stabilization Policy " »
Posted by Mark Thoma on Tuesday, July 22, 2008 at 02:34 PM in Economics, Fiscal Policy, Monetary Policy |
Which type are you?:
The Culture of Debt, by David Brooks, Commentary, NY Times: On the front
page of Sunday’s Times, Gretchen Morgenson described Diane McLeod’s spiral into
indebtedness, and now a debate has erupted over who is to blame.
Some people emphasize the predatory lenders who seduced her with
too-good-to-be-true credit lines and incomprehensible mortgage offers. Here was
a single mother made vulnerable by health problems and divorce. Working two jobs
and stressed, she found herself barraged by credit card companies offering easy
access to money. Mortgage lenders offered her credit on the basis of the
supposedly rising value of her house. These lenders had little interest in
whether she could pay off her loans. They made most of their money via initial
lending fees and then sold off the loans to third parties.
In short, these predatory companies swooped down..., took what they could and
left her careening toward bankruptcy.
Other people emphasize McLeod’s own responsibility. She is the one who took
the credit card offers knowing that debt is a promise that has to be kept. After
her divorce, she went on a shopping spree to make herself feel better. After
surgery, she sat at home watching the home shopping channels, charging thousands
Free societies depend on individual choice and responsibility, those in this
camp argue. People have to be held accountable for their indulgences or there is
no justice. ...
And yet..., there is a third position. This is the position held in
overlapping ways by liberal communitarians and conservative Burkeans.
This third position begins with the notion that people are driven by the
desire to earn the respect of their fellows. ...Decision-making — whether it’s taking out a loan or deciding whom to marry —
... is a long chain of processes, most of which happen beneath the level of
awareness. We absorb a way of perceiving the world from parents and neighbors.
We mimic the behavior around us. Only at the end of the process is there
According to this view, what happened to McLeod, and the nation’s financial
system, is part of a larger social story. America once had a culture of thrift.
But over the past decades, that unspoken code has been silently eroded.
Some of the toxins were economic. ... Some were cultural. ... Some were
moral. ... Norms changed...
McLeod and the lenders were not only shaped by deteriorating norms, they
helped degrade them. ... Each time an avid lender struck a deal with an avid
borrower, it reinforced a new definition of acceptable behavior for neighbors,
family and friends. In a community, behavior sets off ripples. ...
And now the reckoning has come. The turn in the market punishes many of those
seduced by financial temptations. ...
Meanwhile, social institutions are trying to re-right the norms. ... But the
important shifts will be private, as people and communities learn and adopt
different social standards. ... As the saying goes: People don’t change when
they see the light. They change when they feel the heat. [Brooks
discussed the same topic not too long ago.]
I'm not sure I buy the changing cultural norm story, but even if it's true,
it doesn't answer the deeper question of what caused the change in attitudes.
Why now? Brooks offers:
Some of the toxins were economic. Rising house prices gave people the
impression that they could take on more risk. Some were cultural. We entered a
period of mass luxury, in which people down the income scale expect to own
designer goods. Some were moral. Schools and other institutions used to talk the
language of sin and temptation to alert people to the seductions that could ruin
their lives. They no longer do.
But I don't find these
particularly compelling. The house price story seems to hold together, having a
valuable asset as backup would allow more debt, but in the past when
there were housing price run-ups, why didn't norms erode then, why was this
episode different? Blaming schools seems to miss the mark, and why is it
suddenly so important to keep up with the neighbors, more so than in the past?
For that reason, I prefer a technological based explanation - a change in the
availability of credit for example - but that story seems less than fully satisfactory
Has there been a cultural shift, or is it just "economic fundamentals"
(or something else entirely)? I
find myself resisting the cultural shift story and wanting, instead, to cite
factors that make the increase in debt holding by households a rational economic
choice (hence the attempt to find a technology story, credit card availability
on the internet, etc.), but if it was a cultural shift, what caused it? Is
Update: See also Tanta at Calculated Risk and Jim Sleeper at TPM Cafe.
Posted by Mark Thoma on Tuesday, July 22, 2008 at 12:33 AM in Economics, Financial System |
This research argues that India, China, and speculators are not the cause of
the food price explosion, the cause is biofuel support policies. Thus, since the
"OECD’s recent report on the economic assessment of biofuel support policies has
clearly shown that their effectiveness is disappointingly low," the conclusion is that governments
should reconsider their biofuel support policies:
What’s causing global food price inflation?, by Stefan Tangermann, Vox EU: Global food prices have exploded since early 2007, causing major social,
political, and macroeconomic disruption in many poor countries and adding to
inflationary pressure in the richer parts of the world. Concerns
about high food prices have been expressed at the highest political level,
including during the recent G8 summit on Hokkaido.
What has caused the explosion of food prices? Several culprits have been
- Newspapers have cited an internal World Bank document as having found that
75% of the price increase was due to biofuels.
- Several governments and commentators see speculation as a major driving
- A widely held view has it that rapidly growing food demand in the emerging
economies is pushing up global food prices.
Which contributions have these or other factors made to rising food prices?
Continue reading ""What’s Causing Global Food Price Inflation?" " »
Posted by Mark Thoma on Tuesday, July 22, 2008 at 12:24 AM in Economics, Oil, Policy |