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Sunday, August 31, 2008

"The Race between Education and Technology"

There has been considerable debate in economics about the source of growing inequality. Is it from skill-based technological change, changes in union power, globalization, immigration, changes in tax rates favoring those at the top, changes in the minimum wage, or what? But no matter what the source of recent trends in inequality is, education is still important. You will do much better on average with more education than with less, education can help to offset inequality, education helps to ensure equal opportunity, and I believe that emphasis on education is required if we are going to compete successfully in the global marketplace.

Here's David Warsh:

Looking Forward, Economic Principles: Bull markets, it is said, like to climb a wall of worry. It is the same with political campaigns. In the wake of the Democratic National Convention, many stories are being written ... that Barack Obama just might lose the election. ...

Never mind what the polls and pundits are saying now. Barring something completely unexpected, Obama is going to be elected president in November. ... (I can’t prove this, obviously. You’ll just have to trust me for now.)

The really interesting question is what might Obama realistically hope to accomplish? He has made rising inequality the centerpiece of his campaign. But inequality cannot be redressed strictly, or even mainly, through taxation. What else is there? ...

As it happens, a provocative diagnosis ... has just appeared, offering a deep and durable metaphor with which to frame the problem, and an appealing new Rx with which to address it.

The Race between Education and Technology, by Claudia Goldin and Lawrence Katz, argues that it is American education that has fallen behind in its attempt to equip citizens to fit in smoothly with the new division of labor. ...

There’s no doubt that inequality in the United States has increased dramatically since the late 1970s... Indeed, by 2005, the degree of inequality in the United States had reached levels not seen since before 1940... That was the beginning of the gradual evening-out of income between 1940 and 1980 known today among economists as The Great Compression of wages.

So what has caused the new inequality?

At first glance, the authors are concerned with knocking down an interpretation that has gained currency in recent years – that the advent of computers is sufficient to explain what happened. Clearly computerization is part of the story, the authors say. So are international trade, immigration and the decline in unionization. But dwelling on the demand for new skills is only half the equation. The other half is supply. And if the “supply of skills” increases apace, in the form of well-educated workers, there need be no increasing inequality.

Exhibit A, say Goldin and Katz, are the first few decades of the twentieth century. That’s the period when electricity was widely adopted in manufacturing, when many new goods and services were introduced, when various “black-box” technologies emerged for manufacturing everything from paper to cigarettes. Technology raced ahead, requiring greater knowledge, skill and flexibility on the part of nearly all workers. Yet earnings inequality fell, for decades.

Why? Because, say the authors, a pool of skilled workers was available thanks to another new invention – the American high school.

The “high school movement,” as it became known, is dated to 1910... All over America, the authors write, independent school districts raised taxes, hired teachers, built schools, designed curricula and enrolled students. “Americans were keenly aware that they were involved in a historic achievement and knew, as well, that they were setting America on a course far different from that being followed elsewhere in the world.”

What happened to set those events in motion? The origins of the high school movement grew out of the experience of growing inequality of 1870s and 1880s, the authors say, in the decades after the Civil War, when new technology, big business, waves of immigration combined to conjure visions of a looming war between the rich and the poor. Bitter strikes and riots were hallmarks of the times. College was still mainly for clergy and lawyers... In 1888, Edward Bellamy published Looking Backward, a utopian vision of an egalitarian future of benevolent socialism whose power stemmed from its stinging indictment of the present day.

Parents in those days recognized the extent to which those who possessed some extra education were getting ahead. Increasing numbers sacrificed to send their children (mostly their sons) to a somewhat shadowy precursor of the high school, the academy. A few of the earliest examples of these institutions still survive as exclusive “prep” schools... Nearly all of them charged tuition.

It was the obvious success of the academies, coupled with a gradual thickening of demand for better-educated workers, that gave rise to the high school movement. Goldin and Katz take pains to enumerate and elucidate six characteristic “virtues” of the educational system that developed in the US after its revolution, as it gave rise to system of universal primary public education...

These would include:

1.) lots of decentralization and competition, thanks to a tradition of local control (districts as small as a township could go into the high school business, even if other nearby districts declined);

2.) public ownership of schools, financed mainly by property taxes;

3.) universal schooling, open to all and free (not until the 1950s would the legacy of slavery be tackled in this regard);

4.) separation of church and state;

5.) gender neutrality, with girls educated to about the same extent as boys;

6.) an open and forgiving system, far less forbidding than the systems of France and Germany, where rigorous examinations were required to advance.

The remarkable thing is that the invention of the high school required almost no top-down authority from the federal government, or even from the states... “An ameliorative policy,” write Goldin and Katz, “in the form of the high school movement, was embraced by thousands of individual school districts, in one of the grandest grassroots movement in US history. ...

And then (for reasons about which the authors are not nearly so clear) the US education system somehow did it all again, extending “the right to a good education” ... to mean college, in the years after World War II. The GI Bill in 1944 ... and the National Defense Education Act in 1958 broadened considerably the opportunity to attend college. State support for education grew. And a steady stream of graduates poured forth – until about 1980.

But at that point, the growth in the educated American work forced slowed down. The high school graduation rate crested at around 78 percent in 1970 and has been flat ever since. The growth in average educational attainment, which averaged about a year of extra schooling per decade from 1930 until 1980, gained less than one year in the quarter century after 1980.

Again, why? ... [T]he authors say, that the “virtues” of the American educational system have turned against themselves in some degree. Decentralization led to much greater experimentation in the nineteenth century, but the logic of supporting schools almost solely through property taxation has led to much greater inequality in per-pupil expenditure among rich and poor districts than in the past. ... Today’s proposals for reform include many that run counter to traditional ideals: vouchers, charter schools, public funding for church-based schools, and “high-stakes testing with real consequences.” Yet the widespread bottom-up nature of these break-away institutes, charter and magnet schools, are reminiscent of the distant (and little remembered) outlines of the grassroots academy movement.

What now? Goldin and Katz offer three broad recommendations. Improve the operation of the schools themselves, so that students are better prepared by the time they are ready for college. Make financial aid more generous for college students once they arrive. Above all, spend more heavily on better pre-school interventions such as Head Start, since of the few things on which almost all expert economists can agree is that investments in early childhood education (and prenatal healthcare) pay off at a significantly higher rate than any other measure to reduce inequality. Couple these programs with some increased aid to workers at the bottom of the wage scale in the form of more generous Earned Income Tax Credits, payroll tax relief and better access to health insurance, and it would go a long way towards ameliorating the present situation.

So that’s the task for Barack Obama, assuming he is elected — to find ways to “increase the stock of educated Americans,” or, to put it slightly differently, to make sure that almost every young American goes to an appropriate school. What’s wanted is not some lofty top-down No Child Left Behind rhetoric, but rather a considerable welling-up from the bottom, furthered in this day and age by federal dollars, such that schools once again become places of hope for poor people, not boredom and fear. It has happened before, say Goldin and Katz. Perhaps it can happen again.

    Posted by on Sunday, August 31, 2008 at 06:39 PM in Economics | Permalink  TrackBack (0)  Comments (29)


    "The Ferraro Factor"

    The National Review, August 10, 1984. This all sounds very familiar:

    II. The Ferraro Factor Walter Mondale had to do something to halt the hemorrhaging in the polls that had been taking place since he sewed up the nomination. Geraldine Ferraro appears to have accomplished this, at least for the time being. Walter Mondale, perhaps for the first time in his political career, has done something interesting, and everyone has paused to assess it.

    Continue reading ""The Ferraro Factor"" »

      Posted by on Sunday, August 31, 2008 at 03:15 PM in Politics | Permalink  TrackBack (0)  Comments (63)


      "The Death of the Credit Card Economy"

      Consumer credit is drying up. If consumption begins to fall because of it, what will replace it, investment, government spending, net exports -- or nothing? With credit markets as they are, investment is unlikely to pick up the slack and may fall itself, and a sustained fiscal policy response seems unlikely (and monetary policy is already doing all it can to breathe new life into financial markets). That leaves net exports. So far, so good, but how much burden can it carry?:

      The Death of the Credit Card Economy, by Daniel Gross: The most revolutionary notion in commerce today is one of the oldest. If you want to buy something, you may actually have to pay for it. We are reverting from a "borrow and buy" economy to the "cash and carry" model of our grandparents. ...

      Students returning to college are finding that student loans have vanished. Retailers who freely extended credit to any customer with a pulse are deploying bean counters armed with sophisticated software to sniff out potential deadbeats. And when higher rates and fees don't deter their borrowers, credit-card companies resort to slashing credit lines. "We predicted there would be some degree of spillover from the mortgage meltdown," said Curtis Arnold, founder of CardRatings.com. "But the credit line reductions by big credit card companies in the last six months have been fairly unprecedented."

      This shock to the system may further damage the already-fragile psychology of the consumer. Writing a check or deducting the price of a pair of shoes directly from your bank account packs a much more potent emotional punch than charging ... on your American Express platinum card. ...

      The availability of credit also changes the calculus people use to determine what they can afford. Blowing $6,000 on a week in Tuscany might be tough to swing if you have to pay for it all next month. Convince yourself it's a once-in-a-lifetime experience that you can pay for over three years, and it becomes a bargain. With credit, Saturday night means dinner and a movie. When you pay cash and have a fixed budget, it's dinner or a movie.

      The tightening of credit is forcing more people to confront these uncomfortable choices. ... In effect, the lack of credit makes things seem more expensive to consumers...

        Posted by on Sunday, August 31, 2008 at 12:42 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (58)


        "The Perverse Effects of Term Limits"

        Do executive term limits increase the likelihood of inter-state conflicts? According to this research, the answer is yes:

        Democracy and accountability: The perverse effects of term limits, by Paola Conconi, Nicolas Sahuguet, and Maurizio Zanardi, Vox EU: Economists have studied in depth how alternative forms of government can lead to systematic differences in outcomes (see Persson and Tabellini, 2004). Autocracies differ from democracies in their economic and political performances. In democracies, political leaders are accountable to the electorate, since periodic elections make it possible to reward or punish them for their actions at the voting booth. In autocracies, leaders escape this general scrutiny and usually rely on a military apparatus or on the support from key groups to sustain their rule.

        However, this classification is too broad and does not do justice to the complexity and diversity of political regimes. As Tim Besley and Masa Kudamatsu argued last year on Vox, autocracies in which the leaders are subject to the control of key supporting groups have better economic performances than regimes in which such discipline is missing. This observation underlines the importance of checks and balances in providing incentives to guide the behaviour of political leaders. Conversely, if the fundamental principle common to all democracies is that the power resides in the people, there are a wide variety of democratic regimes. From presidential to parliamentary systems, with all possible shades in between, each democracy has its particularities that lead to large differences in leaders’ accountability.

        Continue reading ""The Perverse Effects of Term Limits"" »

          Posted by on Sunday, August 31, 2008 at 12:33 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (9)


          links for 2008-08-31

            Posted by on Sunday, August 31, 2008 at 12:24 AM in Links | Permalink  TrackBack (0)  Comments (38)


            Saturday, August 30, 2008

            The Great Partisan Growth and Inequality Divides

            Alan Blinder has a question for you:

            Is History Siding With Obama’s Economic Plan?, by Alan S. Blinder, Economic View, NY Times: Clearly, there are major differences between the economic policies of Senators Barack Obama and John McCain. Mr. McCain wants more tax cuts for the rich; Mr. Obama wants tax cuts for the poor and middle class. The two men also disagree on health care, energy and many other topics. ...

            Many Americans ... are [un]aware of two important facts about the post-World War II era, both of which are brilliantly delineated in ... “Unequal Democracy,” by Larry M. Bartels.... Understanding them might help voters see what could be at stake, economically speaking, in November.

            I call the first fact the Great Partisan Growth Divide. Simply put, the United States economy has grown faster, on average, under Democratic presidents than under Republicans.

            The stark contrast between the whiz-bang Clinton years and the dreary Bush years is familiar because it is so recent. But while it is extreme, it is not atypical. Data for the whole period from 1948 to 2007, ... show average annual growth of real gross national product of 1.64 percent per capita under Republican presidents versus 2.78 percent under Democrats.

            That 1.14-point difference, if maintained for eight years, would yield 9.33 percent more income per person, which is a lot more than almost anyone can expect from a tax cut.

            Such a large historical gap in economic performance between the two parties is rather surprising, because presidents have limited leverage over the nation’s economy. ... But statistical regularities, like facts, are stubborn things. You bet against them at your peril.

            The second big historical fact, which might be called the Great Partisan Inequality Divide, is the focus of Professor Bartels’s work.

            It is well known that income inequality in the United States has been on the rise for about 30 years now... But Professor Bartels unearths a stunning statistical regularity: Over the entire 60-year period, income inequality trended substantially upward under Republican presidents but slightly downward under Democrats, thus accounting for the widening income gaps over all. ...

            The accompanying table, which is adapted from the book, ... shows that when Democrats were in the White House, lower-income families experienced slightly faster income growth than higher-income families — which means that incomes were equalizing. In stark contrast, it also shows much faster income growth for the better-off when Republicans were in the White House — thus widening the gap in income.

            The table also shows that families at the 95th percentile fared almost as well under Republican presidents as under Democrats (1.90 percent growth per year, versus 2.12 percent), giving them little stake, economically, in election outcomes. But the stakes were enormous for the less well-to-do. ...

            The sources of such large differences make for a slightly complicated story. In the early part of the period — say, the pre-Reagan years — the Great Partisan Growth Divide accounted for most of the Great Partisan Inequality divide, because the poor do relatively better in a high-growth economy.

            Beginning with the Reagan presidency, however, growth differences are smaller and tax and transfer policies have played a larger role. We know, for example, that Republicans have typically favored large tax cuts for upper-income groups while Democrats have opposed them. In addition, Democrats have been more willing to raise the minimum wage, and Republicans have been more hostile toward unions.

            The two Great Partisan Divides combine to suggest that, if history is a guide, an Obama victory in November would lead to faster economic growth with less inequality, while a McCain victory would lead to slower economic growth with more inequality. Which part of the Obama menu don’t you like?

            Here is a summary on this topic I did for the 2006 election in a WSJ econoblog with Justin Wolfers:

            Mark Thoma writes: In the last 30 years, a considerable amount of work has been devoted to an area of economics known as "political business cycles." Researchers in this area look at the relationship between electoral outcomes -- the outcome of elections and the economic policies of the party in power -- and the subsequent performance of the economy.

            Broadly stated, there are two kinds of research on political business cycles. One type watches how the parties that win elections -- or are in control -- affect the performance of the economy. (For an overview of seminal work in this area see this paper by Allan Drazen. Also, see more recent papers here, here and here.)

            The other class of research looks at the question from the opposite side. These researchers study how the performance of the economy helps decide which party wins an election. (For a good grounding in this type of work, see some important papers here and here.)

            Here are some large research findings as summed up by Drazen:

            • Inflation -- In the U.S., there is evidence of a post-electoral increase in inflation prior to 1979, but no evidence thereafter.

            • Monetary Policy -- There is evidence of a pre-electoral increase in money growth rates from 1960 to 1980, but none thereafter. Money growth, or the percentage change in money supply, is an important measure of monetary policy prior to 1980, when the Fed started to focus on the federal-funds rate as the main monetary policy tool. There is no evidence for the U.S. of an electoral cycle in the federal-funds rate.

            • Spending on Programs -- There is evidence of pre-electoral increases in government transfers (such as food stamps, Social Security and other cash payments) and other fiscal policy spending. This appears strongest before 1980.

            • Output -- There is a clear partisan effect on economic activity, with real GDP being significantly higher under Democrats than Republicans in the first half of their terms. There is no significant pre-electoral increase in aggregate economic activity, meaning there is no evidence for pre-election manipulation of the economy.

            Drazen also summarizes empirical work on the second kind of research, focusing on how the performance of the economy helps to determine who wins an election. Aggregate economic conditions before an election, specifically per capita output or income growth (and to a lesser extent inflation), have a significant effect on voting patterns.

            A robust finding in the political business cycle literature is the last item on the first list, stating that output tends to be higher in the first half of Democratic administrations. If this is true, then it might be expected that the stock market performs better when Democrats are in power. Evidence in favor of this hypothesis comes from this 2003 paper by Pedro Santa-Clara and Rossen Valkanov, "The Presidential Puzzle: Political Cycles and the Stock Market." In the paper, the authors look at excess returns, i.e. returns over and above the returns on Treasury bills, using data from 1927 through 1998. Their estimates show that returns are, on average, 9% higher when Democrats are in power. (See this chart of returns by political party from University of California, Berkeley professor Hal Varian's description of the paper). They note that much of the difference in returns arises from smaller firms performing much better under Democratic administrations.

            Precisely why this is the case is difficult to answer. And the paper doesn't come to any strong conclusions about the driving force behind the difference in returns. Nor does it explain why the difference persists, though it does rule out a few plausible reasons for these findings. Whatever the reason for the difference in returns, the evidence suggests that returns are distinctly higher under Democratic administrations. Therefore, if you are an investor, you may want to hope for the continued reemergence of the political left and for a Democrat to win the next presidential election. ...

              Posted by on Saturday, August 30, 2008 at 03:33 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (55)


              "What's Wrong with This Hurricane?"

              At the moment, the expected path for Hurricane Gustav threatens the Gulf Coast. Is the Bush administration ready?:

              What's wrong with this Hurricane?, by Moira Whelan: I just noticed that the daily brief customarily done in advance of a hurricane is ... being given by NORTHCOM. So what does this tell us and why does it matter? It tells us that things are as broken as they were before Katrina.

              The military, like EPA, Commerce, or anyone else, is only involved in emergency management to the point that they are requested to do so by the governor or the FEMA director (who acts on behalf of the President).

              When it comes to disasters, the governor is always in charge. At any point, he or she can call in their state’s National Guard, and/or ask other governors for their help... If a governor is worried things are getting out of control, they ask the President to provide help through FEMA... FEMA is then in charge of coordinating the resources of the federal government to support the governor and the state. In a sense, when FEMA is working properly—as it did under Clinton—when the FEMA director tells another Federal agency to do something, it’s as if the President is calling. The government agency is expected to deliver and cut through red tape to make things happen and happen fast.

              There is no allowance or legal authority for the Department of Defense to take any sort of control or command in this scenario. In a hurricane, DoD, like Human Services, Transportation, etc, all work for FEMA and the governor of the impacted state.

              This is done for a very specific and important reason: here in America, we believe that governors should have control over their own states. The federal government needs to be there to help, but they absolutely do not move in and take over. We also do not believe that the military should ever forcibly operate inside the United States unless they are under civilian control.

              With NORTHCOM taking the lead on briefing the public, it’s clear the Bush Administration wants to send the message that everything is under control. Instead, to those that do this for a living, the message is clear that everything is absolutely and completely broken.

              Perhaps the state governments need help. Perhaps FEMA is not up to the job. Perhaps the Bush Administration simply wants a uniform on camera, and this way of doing things is preferable to things happening the way that they should (a process, by the way, that WORKED before Bush screwed it up).

              NORTHCOM taking the lead in public relations is a clear indication that nothing has been fixed in DHS and FEMA since Katrina. As a result, there is no confidence in FEMA’s ability to respond to this hurricane. With NORTHCOM at the helm, the Bush Administration either doesn’t care if, or doesn’t want, the systems to work. ...

              The bottom line is that things will not work the way they should with NORTHCOM in charge. Governors don’t take orders from Generals. No one else in government takes orders from DoD. No one in emergency management even knows what NORTHCOM does, except come in and issue “orders” to a bunch of civilians who don't work for them.

              I hope for the sake of the people on the Gulf Coast that the hundreds of civilians who want to do right by them prevail over the system that the Bush Administration has failed to fix. ...

                Posted by on Saturday, August 30, 2008 at 10:53 AM in Economics, Social Insurance | Permalink  TrackBack (1)  Comments (16)


                "Troubling Timing" and "Uncomfortable Questions"

                The 'morality tale':

                Hepatitis B and missing women: The rise and decline of a finding, by Stephan Klasen, Vox EU: In late 2005, a paper by Emily Oster, published in the Journal of Political Economy (JPE), claimed that the reason that China (and to some degree South Asian countries) had large female deficits was not gender differences in mortality (pre-and post-birth) – as argued by Amartya Sen and others for years – but the fact that higher prevalence of Hepatitis B carriers there led to naturally higher sex ratios at birth. Around 45% to 70% of the alleged 100 million victims of anti-female discrimination were missing due to this biological relationship. In China it was more than 75%.

                The finding made waves. It not only stirred debate in academic circles but was also promoted by Robert Barro in Business Week and Steven Levitt in Slate. The intense academic debate produced at least seven further papers on the subject published in the American Economic Review, the Population and Development Review, and several working papers still in the review process. Most of them criticised particular aspects of the arguments advanced by Oster, with her replying to some of these criticisms.

                A few months ago, Emily Oster posted a new paper on her web site with the title “Hepatitis B does not explain male-biased sex ratio in China” where she reports that there is in fact no link between Hepatitis B carrier status and the sex ratio at birth in China (Chen and Oster, 2008). This amounted to a complete retraction of the earlier claim. The details and arguments are summarised in my companion column on Vox and are also available in Klasen (2008). As I just told the story, there is nothing particularly unusual about it – in fact, it could appear as a shining example that the academic community is able to weed out erroneous empirical claims through further research. Moreover, Emily Oster should be commended for not only invariably responding to the many criticisms of her work, but also for undertaking new research to examine these criticisms and then retracting her claim as soon as that research made her original claims untenable.

                Troubling timing

                But closer inspection of the details and timing of the events leave some open and rather uncomfortable questions.

                Continue reading ""Troubling Timing" and "Uncomfortable Questions"" »

                  Posted by on Saturday, August 30, 2008 at 12:33 AM in Economics | Permalink  TrackBack (0)  Comments (15)


                  links for 2008-08-30

                    Posted by on Saturday, August 30, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (40)


                    Friday, August 29, 2008

                    Tax Cuts and Government Investment

                    Richard Serlin:

                    A dollar spent on tax cuts costs more than a dollar over the long run, a lot more., by Richard Serlin: With regard to ... "The Whole Analysis Sounds Pretty Fishy":

                    So the the right wing propaganda tank, Tax Foundation, claims that tax cuts recover up to 40% of their costs through so-called dynamic effects, while Bush's own Treasury Department estimated less than 10%.

                    Even if it actually were 40%, are tax cuts a good idea, especially tax cuts going predominantly to the rich and extremely rich? They're still costing the government 60% that can't go to many extremely high social return projects that the free market won't undertake due to market imperfections that are well established and proven in economics (real, scientific, academic economics, not screaming talk show host, propaganda tank economics), like externalities, asymmetric information, impracticalities of patenting, large economies of scale and monopoly issues, the zero marginal cost of information and ideas, the inability to price discriminate well, and many more available in any university introductory and intermediate economics texts.

                    Suppose we consider continuing Republican policies and spending another 1 trillion on tax cuts for the rich. Even if 40% were recovered (and in the long run, as opposed to just looking at short run effects, the dynamic effects go in the opposite direction -- a dollar in tax cuts ends up costing a lot more than a dollar in government revenue if that means a dollar, or even 60 cents, less in investment in high return government projects.).

                    The vast majority of the tax cuts, it has been shown, will eventually be spent on consumption items of little long run investment value -- leaving little to show or to grow. If instead, even just 60% of that 1 trillion were spent by the government on extremely high social return investments like infrastructure, education, basic scientific and medical research, alternative energy, etc., then 10 or 20 years from now that 600 billion could result in many trillions, or even tens of trillions more in national wealth, as opposed to having the whole 1 trillion spent on rapidly depreciating Ferraris and yachts, and ultra luxury vacations and other things for the rich that have little or no productive value.

                    In the long run, a dollar spent on tax cuts for the rich, instead of badly needed social investment puts us one more step closer to losing our status as the most wealthy and modern nation, and over the long run, like any other decision to increase frivolous consumption at the expense of high return investment, it costs us a lot more than a dollar, not less.

                    He has a follow-up post here.

                      Posted by on Friday, August 29, 2008 at 08:19 PM in Economics, Fiscal Policy, Taxes | Permalink  TrackBack (0)  Comments (30)


                      "Big Misconceptions about Small Business and Taxes"

                      Would allowing the Bush tax cuts to expire harm small businesses?:

                      Big Misconceptions about Small Business and Taxes, by Chye-Ching Huang and James R. Horney, CBPP: Supporters of various tax benefits for high-income households often claim that failure to maintain them would have an undue effect on many small businesses.  ... 

                      This paper analyzes these claims.  It likely overestimates the number of small businesses adversely affected by changes to the top two marginal tax rates, the estate tax, and loopholes available to hedge-fund managers because it: (1) adopts an extremely generous definition of “small business” ... and (2) does not consider many valuable tax breaks that small businesses and small-business owners enjoy...  Yet it still finds that the claims typically made about small businesses and taxes are highly exaggerated, misleading, or false.

                        Posted by on Friday, August 29, 2008 at 03:42 PM in Economics, Taxes | Permalink  TrackBack (0)  Comments (13)


                        Paul Krugman: Feeling No Pain

                        The first step in fixing problems is to acknowledge they exist:

                        Feeling No Pain, by Paul Krugman, Commentary, NY Times: My first reaction to Bill Clinton’s convention speech was sheer professional jealousy: nobody, but nobody, has his ability to translate economic wonkery into plain, forceful English. ...

                        My second reaction was that in Mr. Clinton’s speech ... one heard the fundamental difference between the two parties. Democrats ... believe that working Americans are getting a raw deal; Republicans, despite occasional attempts to sound sympathetic, basically believe that people have nothing to complain about.

                        As it happens, the numbers support the Democrats. ...

                        [A recent] Census report gives a snapshot of the economic status of American families in 2007 — that is, before the financial crisis started dragging the economy down.... It’s a given that 2008 will look much worse, so last year was as good as it will get in the Bush years. Yet working-age Americans had significantly lower median income in 2007 than they did in 2000. ... Meanwhile, poverty was up, and health insurance — especially the employment-based insurance on which most middle-class Americans depend — was down.

                        But Republicans, very much including John McCain and his advisers, don’t believe there’s a problem.

                        Former Senator Phil Gramm made headlines, and stepped down as co-chairman of the McCain campaign, after he described America as a “nation of whiners.” ... Mr. Gramm, by all accounts, remains a key economic adviser to Mr. McCain.

                        Last week John Goodman, an influential figure in Republican health care circles, explained that we shouldn’t worry about the growing number of Americans without health insurance, because there’s no such thing as being uninsured. After all, you can always get treatment at an emergency room. And Mr. Goodman — he’s ... often described as the “father of health savings accounts,” a central feature of the Bush administration’s health policy — wants the next president to issue an executive order prohibiting the Census Bureau from classifying anyone as uninsured. “Voilà!” he says. “Problem solved.”

                        The truth, of course, is that visiting the emergency room ... is no substitute for regular care. Furthermore,... a hospital ... will also bill you — and the bill won’t be waived unless you’re destitute. As a result, uninsured working Americans avoid visiting emergency rooms ... because they’re terrified by the potential cost: medical expenses are one of the prime causes of personal bankruptcy. ...

                        [I]t’s a good bet that Mr. McCain’s inner circle shares Mr. Goodman’s views. You see, Mr. Goodman’s assertion that lack of health insurance is no problem precisely echoed what President Bush said a year ago: “I mean, people have access to health care in America. After all, you just go to an emergency room.” That’s because both men — like Mr. Gramm — were just saying in public what modern Republicans say when they talk to each other. Despite attempts to feign sympathy, the leaders of today’s G.O.P. fundamentally feel that Americans complaining about their economic and health care difficulties are, well, just a bunch of whiners.

                        And that, ultimately, even more than their policy proposals, is what defines the difference between the parties.

                        It’s true that elected Democrats are often too cautious — and too beholden to major donors — to be as progressive as the party’s activists would like. But even in the face of a Republican Congress, Mr. Clinton succeeded in pushing forward policies, like the State Children’s Health Insurance Program, that did a lot to help working families.

                        And what one sees on the other side is a total lack of empathy for and understanding of the problems working Americans face. Mr. Clinton, famously, felt our pain. Republicans, manifestly, don’t. And it’s hard to fix a problem if you don’t even think it exists.

                          Posted by on Friday, August 29, 2008 at 12:42 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (75)


                          "The Way We Gentrify Now"

                          Edward Glaeser reviews Derek Hyra's "The New Urban Renewal: The Economic Transformation of Harlem and Bronzeville":

                          The Way We Gentrify Now: Derek Hyra's 'New Urban Renewal', by Edward Glaeser, Book Review, NY Sun: ...For decades, Republicans and Democrats with presidential aspirations have repeatedly made commitments to bring back troubled places, such as Detroit and upstate New York. Local leaders have long justified expensive projects, such as monorails and sports stadiums, with claims that they can bring economic vitality to depressed areas.

                          But ... it is rarely good policy. ... If firms are more productive in New York City or Silicon Valley, then why is it sensible to bribe companies to move ... to a less economically productive region of the country?

                          Not only do place-based policies fail to make the economy more productive, they may also fail to improve the lives of people who actually live in the impacted area — the putative beneficiaries of the policy initiative. ... In some cases, subsidizing an area can hurt the citizens in that area, raising the cost of living and pushing up rents.

                          Continue reading ""The Way We Gentrify Now"" »

                            Posted by on Friday, August 29, 2008 at 12:33 AM in Economics | Permalink  TrackBack (0)  Comments (13)


                            "The Growth Future – India and China"

                            Arvind Subramanian says when it comes to sustaining economic growth, China is likely to do better than India:

                            The growth future – India and China, by Arvind Subramanian, Vox EU: Can China and India sustain their current growth rates? A traditional answer to this question is conditional: yes, provided they continue to implement policy reforms. But historical experience allows a less guarded answer. There are few examples of countries that have grown as strongly and for such long periods as India and China have – 6% and 10%, respectively, for nearly three decades – and then suffered a sharp slowdown or collapse. If history is a reliable guide, then barring major upheavals, economic growth looks likely to continue in both countries until some threshold level of prosperity is attained.

                            But why does growth beget more growth? One mechanism is simply that growth signals the fact of profitable economic opportunities, which encourages investors to rush in, first in response to these opportunities but then in response to each other – this is growth as a confidence trick – creating a virtuous circle. If countries are relatively poor, if their markets are large, and if their policy framework is basically sensible – all of which are true of China and India – the chances of the growth-begetting-growth dynamic taking hold are high.

                            But in addition to the signalling effect, growth may itself cause changes which have in turn a growth-reinforcing effect – a kind of positive feedback loop. A good example is education. For long, development economists bemoaned the poor levels of educational attainment in India, directing their critique at the government’s failure to supply better education. But economic growth changed the education picture dramatically. It increased the returns to, and hence the demand for, education. And if government supply remained weak, consumers simply turned to the private sector to meet their demand for education. Improvements in educational attainment over the last 15 years are attributable in part to more rapid growth.

                            An important question then is whether India and China can take the positive feedback loop for granted, especially in relation to two key determinants of long-run growth: state capacity or effectiveness and the private sector’s entrepreneurial capacity. In other words, is it inevitable that over time growth will itself improve the quality of private entrepreneurship and public institutions? Consider each in turn.

                            Continue reading ""The Growth Future – India and China"" »

                              Posted by on Friday, August 29, 2008 at 12:15 AM in China, Economics, India | Permalink  TrackBack (0)  Comments (18)


                              The Market What?

                              I am apparently the victim of an insidious force and desperately in need of an exorcism.

                                Posted by on Friday, August 29, 2008 at 12:15 AM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (22)


                                links for 2008-08-29

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


                                  Thursday, August 28, 2008

                                  How Much Day-to-Day Variation Should We Expect in the Gallup Poll?

                                  Here's something that might help you to understand what Brad DeLong is talking about when he discusses the expected variation in the daily Gallup poll results (he follows up here). I'll just do one or two of the calculations to show how it's done, it's easy to take it from there.

                                  Continue reading "How Much Day-to-Day Variation Should We Expect in the Gallup Poll?" »

                                    Posted by on Thursday, August 28, 2008 at 05:31 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (2)


                                    GDP Growth Revised Upward

                                    Reactions to today's announcement that second quarter GDP growth has been revised upward from 1.9 percent to 3.3 percent:

                                    A booming economy?, by Andrew Leonard: The Department of Commerce has revised its figures for second quarter GDP growth rate to 3.3 percent, up from the previously reported 1.9 percent, and a significant rise from the first quarter's 0.9 percent growth rate. 3.3 percent GDP growth rates are not normally associated with recessions.

                                    One early reaction:

                                    "Ha ha ha. And if you believe that data, I also have a bridge for sale in Brooklyn." -- The Big Picture.

                                    The Economist's Free Exchange sheds a little more light:

                                    It's a big flashy number, but it probably doesn't mean all that much. The first second-quarter GDP revision is in, and the 1.9 percent growth rate has been pushed up to an incomprehensible 3.3 percent. Quarterly growth was due almost entirely to exports, without which the economy would have been roughly flat. Bad news, since the dollar is rising and the rest of the world is tightening the purse strings.

                                    As noted here when the Commerce Department released its first guess at the quarterly GDP numbers, "Trade, in other words, is the current American lifeline."

                                    Bloomberg:

                                    The smallest trade deficit in eight years was the biggest contributor to growth last quarter. The trade gap narrowed to a $376.6 billion annual pace and added 3.1 percentage points to growth, the most since 1980.

                                    But free-trade fans shouldn't expect the new numbers to change any hearts and minds, in, say, Ohio. The total number of Americans receiving unemployment benefits reached a five-year high of 3.4 million. According to Calculated Risk, "By this measure, the economy is clearly in recession."

                                    Dean Baker focuses on what it means for manufacturing:

                                    Machinery Leads Rise in Durable Goods Orders, Beat the Press: There was a more rapid rise in durable goods orders in July than most economists had predicted. While this rise received considerable attention, and seems to have sparked a rally in financial markets, the media largely overlooked the 4.6 percent increase in orders for machinery, which was one of the largest sources of the increase.

                                    Machinery has seen the strongest growth in orders this year, with an 11.0 percent increase year-to-date compared with 2007. (Primary metals has had a somewhat larger rise, but this is likely due in large part to higher prices.) The machinery orders are presumably associated with an increase in manufacturing capacity. Increased demand for manufacturing is in turn likely the result of the improved competitiveness of the United States due to the fall of the dollar.

                                    ...It appears that the declining dollar is having the predicted effect on manufacturing, which is the best hope for a sustained recovery from the current downturn.

                                    Real Time Economics at the WSJ says not so fast:

                                    Don’t Turn Off Recession Siren Yet, Real Time Economics: Although revised second quarter gross domestic product figures released Thursday suggest the U.S. is nowhere near a recession and may even have grown faster than its noninflationary potential, an alternate measure the Federal Reserve looks at shows significant weakness.

                                    GDP swelled 3.3% at an annual rate in the second quarter, ... meaning the economy grew at more than a 2% annual rate during the first half of the year — a time when many economists, including Federal Reserve staff, thought it would shrink.

                                    But the forecasts of a shrinking economy may not be so far off the mark after all. Gross domestic income, which Fed officials have in the past highlighted as perhaps a better measure than GDP, advanced just 1.9% at an annual rate last quarter after contracting the two previous quarters. Thursday’s report is the first to show first quarter GDI in the red. ...

                                    GDP is a consumption-based measure, adding up consumer, business and other spending and investment as well as net exports. GDI is income-based, adding up things like personal income and corporate profits. ...

                                    In theory, the two should equal each other, but they don’t always. ... The difference between GDI and GDP is more than just academic.

                                    In a Fed paper released last year, Fed economist Jeremy Nalewaik wrote that “real-time GDI has done a substantially better job recognizing the start of the last several recessions than has real-time GDP.”

                                    Fed officials have even taken notice. ...[I]t seems likely that Fed officials will ... take 3%-plus GDP growth with a big grain of salt.

                                    And there are other signs that support this view. From yesterday's WSJ:

                                    Worker Confidence Sinks To '01 Recession Level, WSJ/AP: American workers' confidence in the job market is as low as it was during the 2001 recession, according to a new survey.

                                    When asked whether this is a bad time to find a quality job, 65% said it was, matching the level of the 2001 recession, according to the survey by Rutgers University ... released Thursday.

                                    With unemployment at 5.7%, the highest level since 2004, and with weekly unemployment claims hitting a six-year high earlier this month, workers are worried about everything from their weekly hours to their total pay. ...

                                    The survey found one-third of workers said they often don't have enough money to make ends meet.

                                    About one-third of respondents say the amount they owe on credit cards exceeds their retirement savings; another 3% say their credit-card debt would cancel out their retirement account...

                                    Only half of respondents said they are working the number of hours they want to work and a third say there has been a change in the number of hours they work in the past three months. Eighteen percent were working more hours, and 14% worked fewer.

                                    I don't think the picture is completely clear yet, the signs from labor markets are much weaker than the GDP revision suggests. Even after today's revision, which won't be the last revision for this data point in the GDP series, the view is still pretty cloudy.

                                    Update: Menzie Chinn adds "Why Does It Feel Like a Recession?":

                                    It's clear that the amount that we're expending on (from consumers, businesses, and government) is barely growing... So the factories may be humming, but that's because exports are up, thereby illustrating how much continued growth in GDP depends upon the trends in the rest of the world.

                                    Figure 4 illustrates why... It's because the prices for what we produce have diverged in a significant way from the prices for what we consume.

                                    To me, this last outcome is not a surprise [3] (pdf). When a country consumes much more than it produces, then at some point, it has to repay some of the debt incurred. Repaying involves producing more than consuming. We're not even at that point yet -- we're merely moving toward producing more than we're consuming. How much longer the process will continue, and how far (i.e., will we actually run a trade surplus in the foreseeable future?) depends on a lot of things, including the desirability of American assets, and hence how much foreigners want to lend to us. ...

                                      Posted by on Thursday, August 28, 2008 at 12:51 PM in Economics | Permalink  TrackBack (0)  Comments (24)


                                      Why Do We Use Core Inflation?

                                      There is a lot of confusion over the Fed's use of core inflation as part of its policy making process. One reason for confusion is that we using a single measure to summarize three different definitions of the term "core inflation" based upon how it is used.

                                      Continue reading "Why Do We Use Core Inflation?" »

                                        Posted by on Thursday, August 28, 2008 at 02:07 AM in Economics, Inflation, Monetary Policy | Permalink  TrackBack (0)  Comments (40)


                                        links for 2008-08-28

                                          Posted by on Thursday, August 28, 2008 at 12:15 AM in Links | Permalink  TrackBack (0)  Comments (11)


                                          Wednesday, August 27, 2008

                                          Income Based Affirmative Action

                                          Robert Reich says it's time to link affirmative action programs to family income:

                                          Robert Reich, Marketplace: Here's an idea Democrats probably won't endorse but should: Affirmative action based on family income.

                                          The latest data from the Census tell us that inequality keeps growing. ...

                                          At the same time, it's become harder for lower-income people to move upward. With wider inequality, the distance poor kids -- whatever their color -- has to climb to reach the upper-middle class is much longer. And the loss of millions of manufacturing jobs has removed many rungs in the middle of the income ladder, making that climb even harder.

                                          In the new economy, education and connections mean more. Increasingly, lower-income people without adequate education and connections are competing for a smaller and smaller slice of the economic pie.

                                          If there was ever a good time to offer affirmative action based on family income -- giving kids from lower income families extra consideration in college admissions, for example -- it's now.

                                          Despite the fact that one of the great social achievements of the last quarter century is the emergence of a black middle and professional class, people of color are still over-represented among the poor and working class. The advantage of income-based affirmative action is it would address many of the same issues as race-based affirmative action, but it would also address the needs of low-income whites. ... Demagogues would have a harder time using race to stoke the fires of economic resentment.

                                          Finally, income-based affirmative action would lead to more economic diversity on our college campuses. And more economic diversity is a key to reversing America's trend toward widening inequality.

                                          Income-based affirmative action makes sense. Democrats, as well as Republicans, should consider it.

                                            Posted by on Wednesday, August 27, 2008 at 07:29 PM in Economics, Policy, Social Insurance | Permalink  TrackBack (1)  Comments (36)


                                            The Ground Game

                                            I have been hearing today from several people not to worry, that Obama has a much better "ground game" going than McCain, especially in rural America, and that's what will make the difference when the votes are tallied in November. Here's one point of view along these lines [update: see also "Obama's campaign manager says his ground operations will triumph over John McCain's attack ads"]:

                                            I agree with Yepsen that rural and small-town voters are a critical swing bloc... I recommend ManfromMiddletown's piece explaining why "rural voters are the key to the kingdom." ...

                                            Let's examine what Barack Obama and John McCain are doing to reach Americans who do not live in major metropolitan areas.

                                            Continue reading "The Ground Game" »

                                              Posted by on Wednesday, August 27, 2008 at 05:22 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (101)


                                              "The Whole Analysis Sounds Pretty Fishy"

                                              An Economist for Obama says some sources of information should not be trusted:

                                              Tax Foundation is NOT a Credible Source, Economists for Obama: As I explained here, it is a right-wing think tank, part of the billionaire-funded Republican propaganda machine. Here's another post describing some of the misinformation they produce.

                                              Greg Mankiw today links to a brief from the Tax Foundation which tries to claim that tax cuts recover up to 40% of their costs through so-called dynamic effects. Although this is still a long, long way from McCain's deluded claim that tax cuts pay for themselves, it is a much bigger effect than Bush's own Treasury Department estimated (less than 10%). This is an effort to argue that McCain's tax proposal wouldn't create deficits quite as massive as the Tax Policy Center's analysis shows.

                                              Where does the TF figure come from? From yet-to-be-published research, which conveniently makes it impossible to fully critique it. It says it is based on a "large sample of tax returns filed by the same taxpayers between 1998 and 2005 and "examined the change in taxpayers' taxable income as reported on their tax forms and the change in their tax rates, after controlling for a variety of non-tax factors." Immediately, one can see the econometric issues, starting with what is the right lag structure and what is the right set of covariates? The whole analysis sounds pretty fishy. If the data is as juicy as it sounds, why didn't the authors just estimate the direct behavioral effects of the 2001 tax changes, treating them as a natural experiment? The fact that they did not makes me suspect that they massaged the analysis to get the results they wanted. Without seeing the paper, I can only speculate.

                                              My big question is, where on Earth did they get such great data? I have never heard of a publicly available panel data on tax returns, although admittedly, this is not my research area. Will this data be released to other researchers so that they can try to replicate the analysis and examine how fragile the results are? (This has become the research standard for major journals.) I am going to hazard a guess that the researchers will say that the data is confidential, so that we'll just have to trust them. But the Tax Foundation doesn't deserve that kind of trust from anyone, Greg Mankiw included.

                                              Update: The author of the post, in comments:

                                              I want to point out that one of the author's took strong issue with the post in comments on our blog and offered to send me the paper (which I hope to get soon). So I may revise my opinion of the paper and even retract my criticisms after further reflection!

                                              But I stand by the fundamental point that outfits like the Tax Foundation don't get the benefit of the doubt when publicizing results based on unpublished research.

                                                Posted by on Wednesday, August 27, 2008 at 05:04 PM in Economics, Taxes | Permalink  TrackBack (0)  Comments (12)


                                                Wishful Thinking

                                                Yesterday, after the latest data on housing prices were released, there were many analysts saying we might be nearing the bottom of the housing cycle. I have a guest post at The Big Picture on whether housing is anywhere near bottom.

                                                The bottom line is:

                                                Are we near the bottom? Is the end near? I wish I could answer yes, but I think we have a ways to go yet. Paul Krugman says:

                                                When will it all end? The answer is, probably not until 2010 or later.

                                                I'm hoping it won't be that long, but so far the crisis has unfolded in an almost eerily slow fashion - sort of like watching a train wreck in slow motion and being unable to do anything about it - and there's no reason to think that will change.

                                                Update: Here's more on yesterday's price data from Dean Baker:

                                                Two Items Missing in Coverage of the June Case-Shiller Data, Beat the Press: The coverage of the release of the June Case-Shiller housing prices indices overlooked two important items in the data. First, an examination of the tiered indices (these show separately the movement of house prices in each city for cheapest third of houses, the middle third, and upper third) indicates a sharp divergence within many markets. In several of the former bubble markets higher end home prices appear to be stabilizing, while prices for homes in the bottom tier continue to fall rapidly. ...

                                                Ultimately, there must be some spillover in the sense that if the cheapest homes fall far enough, people looking to buy more high-end homes might instead opt for a cheaper one and then invest in major renovations. But the divergence that is showing up in the data at present is striking.

                                                The other important point to note in connection with house prices is that inflation has picked up so that house prices would be falling rapidly in real terms, even if nominal house prices were flat. ... The bubble can be deflated either by a fall in nominal house prices or through inflation. There are important distributional implications for which route the collapse follows (borrowers will be helped by inflation, while lenders will be hurt), but either route can restore house prices to their long-term trend level.

                                                Update: On Dean Baker's point about segmentation in the market and stabilization at the high end, a different perspective from Calculated Risk:

                                                [P]rices are now falling for luxury homes too:

                                                [E]ven luxury homes are now showing weakness. ... That "prestige homes" index found that in the second quarter this year, values on many such houses in San Diego dropped 2 percent from the first quarter and 7.8 percent from second quarter 2007. The average price among those homes has fallen to $2.02 million, from a peak of $2.19 million in the second quarter 2007.

                                                No area is immune. The housing bust is now moving up the price chain.

                                                Update: Free Exchange adds:

                                                Bottom feeders, Free Exchange: In A guest post at Barry Ritholtz' Big Picture site, Mark Thoma gives it to us straight on the latest housing news. First, he says, lots of people have been calling a bottom since, well, since the top. Second, that wrongness doesn't obviate the fact that prices will cease falling eventually, at which point bottom callers will become correct and doubters incorrect. Third, based on prices and inventories, we don't have the support we need to call a bottom, yet.

                                                Hard to argue with any of that. ... I would not counsel optimism at the moment.

                                                But I will argue that optimism isn't an absurd state of mind. Looking at Case-Shiller home price data for the past year, and for 2008 in particular, we unquestionably see prices leveling off in recent months. For almost half of the markets involved, prices in 2008 have essentially been flat. ...

                                                These moves may not portend an imminent recovery, but there are reasons to suspect that a recovery, once underway, will have a firm foundation. Potential homebuyers..., at present, ... generally see no reason to buy because the expectation is that prices will continue to fall. Why purchase now at $200,000 what you can get in two months at $190,000?

                                                If it begins to seem that further declines are not a sure thing, however, those buyers will rush in..., the rush at the bargains will solidify the bottom, and potentially lead to a substantial upward revision in some markets.

                                                The other critical point is in credit markets. As long as prices continue to fall, the full extent of the losses banks can expect is unclear. As such, banks will jealously guard their assets so as not to be caught undercapitalised by markets looking for blood. An apprent price bottom should begin to fix this problem. ... The combination of new credit with buyer interest should lay the groundwork for stabilisation. ...

                                                And the other issue is this: once the credit crisis is resolved, housing needn't be a national issue anymore. Supply did not overshoot equally in all markets. When better borrowing conditions return, tight markets should quickly decouple from loose ones. That won't mean an end to pain for many, but it will mean an end to the national housing depression.

                                                The question, of course, is when. I'm not foolish enough to guess. But there are reasons to find encouragement in the latest price data.

                                                Update: From Richard Serlin:

                                                Housing prices can't Drop too much. The Good far outweighs the bad.: In response to Mark Thoma's post today...:

                                                "Are we near the bottom? Is the end near? I wish I could answer yes"

                                                Mark, please think very carefully about this. Do you really wish housing prices would stop falling? Do you really think it would be better to have housing be more expensive? Do you really think the costs of lower housing prices outweigh the benefits? Do you really think it's better to preserve the wealth of a minority of wealthier homeowners and investors, at the expense of the middle class and poor, who are really hurt by high home prices? I know most of the middle class own homes, but they can't benefit from higher home prices unless they move to a smaller or otherwise less desirable home. Their children, on the other hand, can be devastated by high home prices. ...

                                                Lowering of housing prices, over the long run, does immensely more good than bad. It's a great thing. They can't go too low. What if they went to 1 cent for the average home? That would be bad? Over the long run that would make almost all families and individuals immensely more financially secure, to have just a trivial mortgage or rent payment. The lower the better for housing prices. The good this does far far outweighs the bad. For more details, I have a brief paper regarding this.

                                                  Posted by on Wednesday, August 27, 2008 at 10:44 AM in Economics, Housing, Weblogs | Permalink  TrackBack (0)  Comments (26)


                                                  links for 2008-08-27

                                                    Posted by on Wednesday, August 27, 2008 at 12:42 AM in Links | Permalink  TrackBack (0)  Comments (40)


                                                    The Most Attractive of Them All?

                                                    One explanation for the persistence of the current account deficit is that US assets are "unusually attractive." Are they?:

                                                    Are US assets special in the eyes of global investors?, by Steven B. Kamin, Vox EU: In principle, we would expect a mature industrial economy such as the US, with high incomes and large accumulated endowments of capital, to be running a current account surplus, exporting capital to much less developed regions of the world such as China or Malaysia. Not so.

                                                    In practice, the US has been spending far more on imported goods and services than it earns, financing a shortfall of some 5% of GDP with substantial borrowings from foreigners around the globe. A small cottage industry has emerged within the international economics profession to explain this apparent anomaly. Economists have put forward a wide range of explanations:

                                                    • US budget deficits;
                                                    • the collapse of US private saving;
                                                    • rising oil prices;
                                                    • the boom in US productivity growth;
                                                    • lingering effects of the Asian financial crisis; and
                                                    • persistent intervention by many developing economies to keep their currencies competitive.

                                                    US assets as unusually attractive

                                                    In the past several years, a new explanation has been enjoying increasing prominence.

                                                    Continue reading "The Most Attractive of Them All?" »

                                                      Posted by on Wednesday, August 27, 2008 at 12:33 AM in Economics, Financial System, International Finance | Permalink  TrackBack (0)  Comments (4)


                                                      "Unsmearing the Smear"

                                                      Free Exchange looks at a report on "How unscrupulous campaign strategists are taking advantage of a quirk in our brains – and what reporters can do to stop helping them":

                                                      Unsmearing the smear, Free Exchange, The Econmist: An interesting behavioural look at the world of political mud-slinging... It helpfully begins:

                                                      According to a recent Pew Research Center survey, Americans increasingly get their news from multiple sources. More than one-third use Internet-based sources such as Web sites, blogs, and even social networking sites. Only a minority rely entirely on traditional sources, including print, radio, television, and cable news. The survey did not include chain e-mail, which has fed rumors... This proliferation of sources creates competitive pressure on journalists to bend their standards in order to get a story quickly.

                                                      It's always good to see blogging given a clear edge over crazy, ungrammatical emails typed in multi-coloured fonts. The piece continues:

                                                      Our brains tend to remember facts that accord with our worldview, and discount statements that contradict it. ...

                                                      The human brain also does not save information permanently, as do computer drives and printed pages. Recent research suggests that every time the brain recalls a piece of information, it is "written" down again and often modified in the process. Along the way, the fact is gradually separated from its original context. For example, most people don't remember how they know that the capital of Massachusetts is Boston.

                                                      This is actually quite a serious point. Repetition in any context strengthens memory. Incredibly it also creates its own aura of credibility:

                                                      In another Stanford study, students were exposed repeatedly to the unsubstantiated claim that Coca-Cola is an effective paint thinner. Those who read the statement five times were nearly one-third more likely than those who read it only twice to attribute it to Consumer Reports (rather than the National Enquirer), giving it a gloss of credibility. Thus the classic opening line "I think I read somewhere," or even reference to a specific source, is often used to support falsehoods. Similarly, psychologist Daniel Gilbert and his colleagues have shown that if people are distracted from thinking critically, they default to automatically accepting statements as true.

                                                      A week or so ago, Mark Thoma responded to a piece on "Libertarian Paternalism" by noting that he didn't like feeling like he was being manipulated. It's interesting to me that even if we assume that journalists are impartial actors, there is an asymmetry in the presentation of information, since the smearers are presumably well aware of these findings and using them to their advantage. We are being manipulated.

                                                      So here is the question: should journalists actively study behavioural economics in an effort to adjust their coverage such that the effect of the coverage will be something closer to factual truth? Either the media aims to be deliberately manipulative in an effort to produce better content, or the media will abet the manipulations of others, by predictably being not manipulative. Which is preferable?

                                                      Let me add the following from the article as an example of how journalists might use this in their reports:

                                                      Continue reading ""Unsmearing the Smear"" »

                                                        Posted by on Wednesday, August 27, 2008 at 12:24 AM in Economics, Politics, Press | Permalink  TrackBack (0)  Comments (11)


                                                        Tuesday, August 26, 2008

                                                        New Census Data on Poverty, Income, and Health Insurance

                                                        Here's a round up or reactions to the Poverty, Income, and health Insurance Report released today by the Census Bureau:

                                                        Statement by Robert Greenstein on the New New Census Bureau Data on Poverty, Income, and Health Insurance, CBPP: ...[T]he new Census data are disquieting. Though 2007 was the sixth (and likely the final) year of an economic expansion, poverty was significantly higher, the median income of non-elderly households significantly lower, and the number and percentage of Americans who are uninsured substantially greater than in 2001 — even though the economy was in recession that year.

                                                        This is unprecedented. Never before on record has poverty been higher and median income for working-age households lower at the end of a multi-year economic expansion than at the beginning. The new data add to the mounting evidence that the gains from the 2001-2007 expansion were concentrated among high-income Americans. ...

                                                        In addition, the number of children living in poverty jumped by 500,000 to 13.3 million, and the child poverty rate climbed from 17.4 percent in 2006 to 18.0 percent in 2007. There was some welcome news on child health insurance – the number of children lacking health insurance declined in 2007, but it remained 400,000 above the number of children who lacked insurance three years earlier, in 2004.

                                                        The data also show that employer-based health coverage — and private health coverage in general — continued to erode in 2007, and that all of the improvement in health care coverage in 2007 was due to more Americans obtaining coverage through government health insurance programs, principally Medicare and Medicaid.

                                                        Data for 2008 Expected to Be Unfavorable The data for 2007 are of particular concern given that the economy is now in a slowdown, and poverty is almost certainly higher now — and incomes lower — than in 2007. ... This suggests that significant pain may lie ahead for many Americans. ...

                                                        Paul Krugman summarizes the significance of the implications of the Census data:

                                                        About that Bush Boom …, by Paul Krugman: The 2007 income, poverty and health insurance numbers are out. As far as I can tell on a first read, there’s nothing deeply surprising. Still, they represent a landmark — and not in a good way.

                                                        The key point is that 2007 was the end of an economic expansion — whether or not the NBER declares a recession, the employment situation, which is what matters to most people, has deteriorated sharply this year. So 2007 was as good as it got in this cycle. Yet median household income was lower than in 2000, while both the poverty rate and the percentage of Americans without health insurance were higher.

                                                        In short, the economic policies we’ve been following just aren’t working.

                                                        Is the bad economic news all Bush’s fault? No, of course not — but remember, the key argument of the right has always been that tax cuts and deregulation would produce good news, a rising tide that raised all boats. Boy, has that not happened.

                                                        But remember, we’re just a nation of whiners.

                                                        Michael Mandel notes the bad news for recent college graduates:

                                                        No Income Gain for Young College Grads, by Michael Mandel: The latest income distribution numbers are out from the Census Bureau. ...

                                                        For my part, I’m back to my regular business of being concerned with young college grads—the ones who don’t have advanced degrees. Basically, the last numbers show almost no change between 2006 and 2007 (as the chart below shows). Young college grads still have not made back their losses from the earlier part of the decade. ...

                                                        Jared Bernstein at the EPI echoes the above:

                                                        Income Picture, by Jared Bernstein: [See also..., Overall health insurance coverage rises, but masks decline in private coverage.] ...While last year’s overall income gains are good news, the longer-range view is quite different. The Census figures show that the economic cycle that began in 2000 and ended late last year was one of the weakest on record for working families, despite strong overall economic growth during the same period (see Table 1 and Figure 1). ...

                                                        Looking at the full cycle across economic peak years—a more useful measure in evaluating economic performance—reveals that household income was no higher in 2007 than in 2000, the previous peak. Given rising joblessness and declining real wages, next year’s numbers will certainly be worse. ...

                                                        ... The economy of course expanded in the 2000s, but that growth clearly failed to reach most households, a dynamic that implicates growing income inequality. ...

                                                        Next, Brad DeLong

                                                        Barack Obama on the Income-Poverty-Health Release, by Brad DeLong: Statement From Senator Obama on the Census Income, Health Insurance and Poverty Numbers

                                                        Today’s news confirms what America’s struggling families already know – that over the past seven years our economy has moved backwards. We have now lived through first so-called economic ‘expansion’ on record where typical families saw their incomes fall, and working-age households lost more than $2,000 from their paychecks. Another 816,000 Americans fell into poverty in 2007 – including nearly 500,000 children – bringing the total increase in Americans in poverty under President Bush to 5.7 million. And on Bush’s watch, an additional 7.2 million Americans have fallen into the ranks of the uninsured. This is the failed record of George Bush’s economic policies that Senator McCain has called ‘great progress.’ While Senator McCain is promising four more years of the failed Bush economic policies, my economic plan will restore bottom up economic growth that benefits all Americans by cutting taxes for working Americans, providing affordable, accessible health care for all, and investing in new energy, education and infrastructure so we can create millions of good jobs here in America,” said Senator Barack Obama.

                                                        Highlights from the Census report:

                                                        • Between 2000 and 2007, median income for working age households fell by $2,176. When elderly households are included, median income declined by $324 over the same period. This is the first economic expansion on record where typical households have seen their incomes decline. Under the Clinton Administration, median household income increased by $6,200.
                                                        • African American household income fell by $1,804 between 2000 and 2007; Hispanic household income fell by $1,256 over the same period...
                                                        • An additional 816,000 Americans fell into poverty in 2007, bringing the total increase in Americans in poverty under President Bush to 5.7 million.
                                                        • 500,000 children fell into poverty in 2007. There are 1.7 million more children living in poverty than in 2000.
                                                        • Between 2000 and 2007, an additional 7.2 million Americans have fallen into the ranks of the uninsured. This is the largest increase in the number of people without health insurance of any Presidential Administration on record.
                                                        • The share of Americans with private health coverage fell from 67.9% in 2006 to 67.5% in 2007. This share has fallen every year that President Bush has been in office, declining a total of 5 percentage points since 2000.
                                                        • 940,000 African Americans have lost health insurance since 2000, along with 3 million Hispanics

                                                        Mathew Yglesias emphasized the importance of the public sector as a health insurance backstop:

                                                        Public Sector to the Rescue, by Mathew Yglesias: Today’s Census numbers show a slight downtick in the proportion of Americans who lack health insurance. This, Jonathan Cohn notes, despite a continued decline in the number of people with private sector health insurance. “The reason the overall numbers look good is rising enrollment in public insurance programs, particularly Medicaid.” He also notes that when you peer into the numbers, the state with the largest overall two-year increase in health insurance rates is Massachusetts, which has adopted the most aggressive health care reform agenda of any state and serves as a kinda sorta model for what progressive reform at the federal level — especially something authored by Ted Kennedy — might look like.

                                                        And, finally, one more from Brad DeLong

                                                        Income and Poverty Over the 2000-2007 Business Cycle, by Brad DeLong: 2000-2007: the first business cycle during which median household income in America falls from peak to peak. ...

                                                        http://www.census.gov/prod/2008pubs/p60-235.pdf

                                                        It's not all George W. Bush's fault, but I can think of a number of things he did to hurt and not a damned thing he did to help. ...

                                                          Posted by on Tuesday, August 26, 2008 at 12:06 PM in Economics, Health Care, Social Insurance | Permalink  TrackBack (0)  Comments (94)


                                                          "Schools, Skills, and Synapses"

                                                          James Heckman argues that we need to devote more resources to enriching the lives of young, disadvantaged children:

                                                          Schools, skills, and synapses, by James J. Heckman, Vox EU: America has a growing skills problem. One consequence of this skills problem is rising inequality and polarization of society. A greater fraction of young Americans are graduating from college. At the same time, a greater fraction are dropping out of high school. Trends in the production of skills from American high schools coupled with a growing influx of unskilled immigrants have produced an increasing proportion of low-skilled workers in the US workforce. More than 20% of American workers cannot understand the instructions written in a medical prescription. A further consequence of the skills problem is a slowdown in growth of productivity of the workforce.

                                                          The origin of this skills problem lies in the decline of the family in American society. Dysfunctional families retard the formation of the abilities needed for successful performance in modern society.

                                                          The importance of cognitive and noncognitive abilities

                                                          American public policy currently focuses on cognitive test scores or “smarts.” Yet an emerging literature shows that much more than smarts is required for success in life. Motivation, sociability, the ability to work with others, the ability to focus on tasks, self-regulation, self-esteem, time preference, health, and mental health all matter. In an earlier time, these traits were part of what was called “character.” A substantial body of research shows that earnings, employment, labour force experience, college attendance, teenage pregnancy, participation in risky activities, compliance with health protocols, and participation in crime are all strongly affected by non-cognitive as well as cognitive abilities. Heckman, Stixrud and Urzua (2006) show that in many dimensions of social performance, noncognitive traits are as important, or more important, than cognitive traits in predicting success.

                                                          Continue reading ""Schools, Skills, and Synapses"" »

                                                            Posted by on Tuesday, August 26, 2008 at 02:16 AM in Economics | Permalink  TrackBack (0)  Comments (112)


                                                            Development Authoritarianism

                                                            Is the world having an "authoritarian moment"?:

                                                            What does this authoritarian moment mean for developing countries?, by Pranab Bardhan, Commentary, Financial Times: As the petro-authoritarianism of Russia flexes its muscles and the economic prowess of China struts in Olympic glory, developing countries ... might start rethinking the lectures on democracy and development they have heard all these years from the West. ...

                                                            The Chinese case in particular is reviving a ... myth of how ... development authoritarianism delivers much more than democracy. This is also backed by the memory of impressive economic performance of other East Asian authoritarian regimes (like those in South Korea and Taiwan...). The lingering hope of democrats had been that as the middle classes prosper in these regimes, they then demand, and in the latter two cases got, the movement toward political democracy.

                                                            But... Authoritarianism is neither necessary nor sufficient for economic development. That it is not necessary is illustrated ... by scattered cases of recent development success: Costa Rica, Botswana, and now India. That it is not sufficient is amply evident from disastrous authoritarian regimes in Africa and elsewhere. ...

                                                            [I]t is worth reiterating the several advantages of democracy from the point of view of development. Democracies are better able to avoid catastrophic mistakes, (such as China’s ... massive mayhem in the ... Cultural Revolution), and have greater healing powers after difficult times. Democracies also experience more intense pressure to share the benefits of development among the people, thus making it sustainable, and provide more scope for popular movements against industrial fallout such as environmental degradation. In addition, they are better able to mitigate social inequalities ... that act as barriers to social and economic mobility and to the full development of individual potential. Finally, democratic open societies provide a better environment for nurturing the development of information and related technologies, a matter of some importance in the current knowledge-driven global economy. ...

                                                            All that said,... democracy can also hinder development in a number of ways. Competitive populism– short-run pandering and handouts to win elections– may hurt long-run investment, particularly in physical infrastructure... Finally, democracy’s slow decision-making processes can be costly in a world of fast-changing markets and technology.

                                                            The hopes of democrats relying on the middle classes in authoritarian regimes have not always borne fruit. Latin American or South European history has been replete with many episodes of middle classes hailing a supreme caudillo. The police state in China shows no signs of loosening its grip soon... Most people in the Chinese middle class are complicit in this in the name of preserving social stability, as long as opportunities for money-making and wallowing in nationalist pride keep on thriving.

                                                            So markets and capitalism will not do their political cleansing job automatically. On the contrary, markets often sharpen inequality, and the resultant structures of political power, buttressed by corporate plutocrats and all-powerful lobbies, may even hijack or corrupt the democratic political process, a phenomenon not unknown in some industrial democracies. Thus both for democracy and development, other social forces and movements for civil and economic rights for the common people have to be pro-active and eternally vigilant.

                                                            Industrial policy is, essentially, economic authoritarianism. Is it the industrial policy component of the more general authoritarianism in place in many countries that helps with development? If so, couldn't it work just as well, maybe even better, in a democracy?

                                                            (Also see, "Is the Washington Consensus Dead? Growth, Openness, and the Great Liberalization, 1970s-2000s" [open link].)

                                                              Posted by on Tuesday, August 26, 2008 at 02:07 AM in Development, Economics | Permalink  TrackBack (0)  Comments (25)


                                                              links for 2008-08-26

                                                                Posted by on Tuesday, August 26, 2008 at 12:33 AM in Links | Permalink  TrackBack (0)  Comments (36)


                                                                Monday, August 25, 2008

                                                                The Nobel Laureate Meetings at Lindau

                                                                [Update: The link to these videos expired and now requires a password. Unfortunately, I don't know what it is.]

                                                                Videos from the recent gathering of Nobel Laureates:

                                                                • Stiglitz: The Global Financial Crisis: Lessons for Policy and Implications for Economic Theory
                                                                • Myerson: Leadership, Trust, and Power: Dynamic Moral Hazard in High Office
                                                                • Solow: Low-wage Work in Europe and America
                                                                • Nash: Ideal Money and Asymptotically Ideal Money
                                                                • Granger: Evaluation of Global Econometric Models
                                                                • Kydland: From Dynamic Inconsistency to Models with People
                                                                • McFadden: The Human Side of Mechanism Design
                                                                • Fogel: Forecasting Changes in the Cost of Health Care: 2000-2040
                                                                • Aumann: Rule Rationality vs. Act Rationality
                                                                • Phelps: The Good Life Needs an Economy of Dynamism
                                                                • Scholes: The Role of Liquidity and Risk Transfer Services in the Economy
                                                                • Yunus: Social Business is the Solution
                                                                • Panel Discussion: “Systemic Risks in Financial Markets”, Profs. Scholes, Stiglitz, Yunus and McFadden

                                                                  Posted by on Monday, August 25, 2008 at 05:04 PM in Economics, Video | Permalink  TrackBack (0)  Comments (4)


                                                                  Paul Krugman: Accentuate the Negative

                                                                  Barack Obama begins to counterattack Country Club Republican John McCain, and not a moment too soon:

                                                                  Accentuate the Negative, by Paul Krugman, Commentary, NY Times: So the Obama campaign has turned to the politics of personal destruction, attempting to make a campaign issue out of John McCain’s inability to remember how many houses he has. And the turn comes not a moment too soon.

                                                                  Over the past month or so many Democrats have had the sick feeling that once again their candidate brought a knife to a gunfight. Barack Obama’s campaign, inexplicably, was unprepared for the inevitable Republican attack on the candidate’s character. By the middle of last week, Mr. Obama’s once formidable lead ... had virtually evaporated.

                                                                  Mr. Obama’s waning advantage brought back bad memories of the 2004 campaign, whose key lesson was that there are no limits to the form G.O.P. character attacks can take.

                                                                  You might think, for example,... that a party committed to tax cuts for the rich, a party that routinely castigates those who engage in “class warfare,” would shy away from attacking a Democrat for his wealth. But raw class envy played an important role in the attacks on Mr. Kerry, whom Rush Limbaugh described repeatedly as a “gigolo” with a “sugar daddy wife,” and G.O.P. supporters don’t seem to have experienced any cognitive dissonance.

                                                                  It was predictable, then, that Mr. Obama would find himself on the receiving end of an all-out character attack, much of it nonsensical: he’s un-American because he vacations in Hawaii, where his grandmother lives? It was also predictable that responding by repeating what a great guy the candidate is, or denouncing the attacks as unfair, would be ineffective.

                                                                  So now the Obama campaign has responded with its own character attack.

                                                                  Is it fair to attack Mr. McCain for having too many houses? In an ideal world, politicians would be judged by their actions, not by their wealth or lack thereof. ... But in the world we actually live in, pro-corporate, inequality-increasing Republicans argue that you should vote for them because they’re regular guys you’d like to have a beer with, while Democrats who want to raise taxes on top earners, expand health care and raise the minimum wage are snooty elitists.

                                                                  And in that world, stripping away the regular-guy facade — pointing out that everything Rush Limbaugh said about Mr. Kerry applies equally to Mr. McCain, that Mr. McCain lives in a material world few Americans can imagine — is only fair. Yes, Mr. Obama vacations in Hawaii — and Cindy McCain says that “In Arizona, the only way to get around the state is by small private plane.”

                                                                  The ... Obama counterattack has the G.O.P. worried. ...[T]he McCain campaign, after initially mumbling something about how Mr. Obama eats arugula, quickly resorted to its all-purpose answer: you can’t criticize the candidate because he’s a former P.O.W. ... Assuming that the Obama campaign isn’t scared off by the P.O.W. thing, can it really win in an exchange of character attacks? Probably not — but it doesn’t have to.

                                                                  The central fact of this year’s election is that voters are fed up with Republican rule. The only way Mr. McCain can win ... is if it becomes a contest of personalities rather than parties — and if his campaign can instill in voters the perception that Mr. Obama is a suspicious character while Mr. McCain is a fine, upstanding gentleman.

                                                                  The Obama campaign, on the other hand, doesn’t need to convince voters either that he’s the awesomest candidate ever or that Mr. McCain is a villain. All it has to do is tarnish Mr. McCain’s image enough so that voters see this as a race between a Democrat and a Republican. And that’s a race the Democrat will easily win.

                                                                    Posted by on Monday, August 25, 2008 at 12:33 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (106)


                                                                    Summers: The Global Consensus on Trade is Unravelling

                                                                    Larry Summers says international economic policy is receiving too little attention in the presidential election. The success of the next administration and the fate of the US economy may depend upon the next administration's abilities abilities in this area:

                                                                    The global consensus on trade is unravelling, by Lawrence Summers, Commentary, Financial Times: ...US international economic policy is receiving less attention in this presidential election year than usual. ... That is unfortunate. The next administration faces the prospect of having to make the most consequential international economic policy choices in a generation at a time when the confidence ... in free markets is being increasingly questioned.

                                                                    The current distribution of regional economic power is unlike anything that was predicted even a decade ago. The rise of the developing world ... is ... a ... surprise... [W]ith almost all the industrial world in or near recession, much of the momentum in the global economy is coming from countries with authoritarian governments that are pursuing economic strategies directed towards wealth accumulation and building up geopolitical strength rather than improving living standards for their populations. China, where household consumption has now fallen below 40 per cent of its gross domestic product – which must be some kind of peacetime record – is the most extreme example. Similar tendencies, however, can be seen in other parts of Asia, Russia and other oil exporting countries. ...

                                                                    For all the disagreements over the past decades, there has been a shared premise behind international economic policy discussions – the goal of increased economic integration, the spread of market institutions and more rapid growth for all nations. While companies may compete, the premise has been that nations co-operate to build a stronger economy in the interests of all.

                                                                    It is no longer clear that this premise remains valid. Nations are increasingly preoccupied with their relative economic standing, not the living standards of citizens. Issues of strategic leverage and vulnerability now play a bigger role in economic policy discussions.

                                                                    At the same time, it is unclear which underlying driver of global growth will replace the one in place for the past decade – the US as importer of last resort. Global growth has depended on US growth, which has depended on the US consumer; and the US consumer has depended on rising asset values first of stocks and more recently of real estate. With falling house prices and a challenged financial system, US consumer spending is falling. The US is no longer in a position to be a net source of demand for the rest of the world. ... Already, Europe and Japan are in or are very close to being in recession.

                                                                    The current global policy debate is a cacophony. It is all very well to advocate increased US saving and a cut in the US current account deficit but the process for bringing it about will mean less US demand for foreign products. That will put pressure on jobs and output growth in other countries if no countervailing measures are put in place. Conversely, the return of a stronger dollar without other policy changes will raise US demand for exports but at the price of cutting demand for domestically produced goods and compounding the recession.

                                                                    These problems ... may not be at the top of anyone’s agenda right now. But the success of the next administration could depend on its ability to engage with a wider range of global economic stakeholders, on a broader agenda, at a time when disagreements are increasing not just about means but also about ultimate ends.

                                                                      Posted by on Monday, August 25, 2008 at 12:24 AM in Economics, International Finance, International Trade, Politics | Permalink  TrackBack (0)  Comments (37)


                                                                      links for 2008-08-25

                                                                        Posted by on Monday, August 25, 2008 at 12:06 AM in Links | Permalink  TrackBack (0)  Comments (16)


                                                                        Sunday, August 24, 2008

                                                                        A Political Surge?

                                                                        David Warsh:

                                                                        The Wall Street Journal reported last week that US and Iraq negotiators have agreed on a timetable for American withdrawal from Iraq.

                                                                        US forces are to withdraw from Iraqi cities by June, 2009, and from the country altogether in 2011 according to the plan. Unnamed US officials familiar with the talks told WSJ reporters Gina Chon and Yochi J. Dreazen that President George W. Bush was “almost certain to accept the agreement,” but that the pact probably would not be formally signed for at least a few more weeks.”

                                                                        The usual interpretation of events is that a desperate last-ditch attempt by the American army to bring Iraq under control succeeded. Dexter Filkins, the veteran Iraq correspondent of The New York Times, expressed this consensus view last week:

                                                                        The arrival of the 30,000 extra soldiers, deployed to Baghdad’s neighborhoods around the clock, allowed the American to exploit a series of momentous developments that had begun to unfold at roughly the same time: the splintering of Moktada al-Sadr’s militia, the Mahdi Army; the growing competence of the Iraqi Army; and, most important, the about-face by leaders of the country’s Sunni minority, who suddenly stopped opposing the Americans and joined with them against Al Qaeda in Mesopotamia and other local extremist groups. The surge, clearly, has worked for now.

                                                                        It is, however, equally possible that the decisive events took place in Washington in the first months of 2007, when newly-elected Speaker of the House of Representatives Nancy Pelosi (D-Cal.) won a series of hard-fought legislative battles which made clear that the new Democratic majority in the House of Representatives would not continue to fund the American presence in Iraqi indefinitely – or even much longer. The Bush administration countered with its plan for a short-lived surge.

                                                                        The leadership of various Iraqi factions read the newspapers. Those “momentous developments” there thus may have stemmed as much from the recognition that the US Congressional majority that came to power following the mid-term election of 2006 would soon end, no matter what, the remarkable American misadventure in Iraq, as from those “extra boots on the ground” and the more generals leading them.

                                                                        Political expectations are as rational as economic ones.

                                                                        [Another part of the same post discusses a new book on global warming by William Nordhaus, A Question of Balance.]

                                                                          Posted by on Sunday, August 24, 2008 at 07:02 PM in Economics, Iraq and Afghanistan, Politics | Permalink  TrackBack (0)  Comments (11)


                                                                          Statutory versus Effective Tax Rates

                                                                          Greg Mankiw posts this graph from the Tax Foundation:

                                                                          But it's not clear why he would post a graph showing statutory rather than effective tax rates, and why he would post a graph that combines the data in a way that just happens to exaggerate differences between the US and other countries. As Paul Krugman says:

                                                                          The Tax Foundation is not a reliable source

                                                                          and he links to this evidence detailing why the graph is misleading. As he explains:

                                                                          What they don’t make clear is that:

                                                                          1. The graph shows the “statutory” tax rate, which is the maximum rate a corporation can pay in principle. But because corporate tax rules allow all kinds of deductions and exclusions, the statutory rate is a poor guide to the actual disincentives the corporate tax creates.

                                                                          2. Even more important, while they don’t explain how they calculate the “average” tax rate, the fact that their own data show that all the big economies have tax rates above 30%, while their graph shows an average rate of about 27%, seems to indicated that they’re showing us an unweighted average — that is, one that makes small economies like Ireland and Greece seem as important as big economies like Japan and Germany. And whaddya know, corporate taxes in big economies tend to be similar to those in the United States, a point made by the Congressional Budget Office in the study from which the chart above is drawn. (Yes Germany cut rates this year. Big deal.)

                                                                          And, as Linda Beale notes:

                                                                          [T]he US is actually a corporate tax haven, with the lowest effective corporate tax rates of almost all the countries that participate in the OECD. That's a little fact that the Tax Foundation apparently doesn't want the American public to understand, since all its hype is in terms of statutory rates and not in terms of effective tax rates.

                                                                            Posted by on Sunday, August 24, 2008 at 04:32 PM in Economics, Taxes | Permalink  TrackBack (0)  Comments (28)


                                                                            Commodity Price Movements in the Short-Run and Long-Run

                                                                            This is mostly principles of microeconomics material, but I think it's a useful reminder about what to expect in commodity markets when there is a permanent increase in demand.

                                                                            Here is a typical model of the short-run and long-run response to an outward shift in the demand curve:

                                                                            Continue reading "Commodity Price Movements in the Short-Run and Long-Run" »

                                                                              Posted by on Sunday, August 24, 2008 at 01:26 PM in Economics | Permalink  TrackBack (0)  Comments (11)


                                                                              links for 2008-08-24

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


                                                                                Saturday, August 23, 2008

                                                                                The Little Dutch Boy

                                                                                Alan Blinder explains:

                                                                                A Misguided Federal Reserve, or One That Saved the Day?, by Sudeep Reddy, WSJ Economics Blog:  The most controversial presentation at the Kansas City Fed’s annual symposium came from ... Willem Buiter. ...

                                                                                Mr. Buiter slams the Federal Reserve, European Central Bank and Bank of England for what he says was a mishandling of the financial crisis and monetary policy over the past year. He gives the worst markets to the Fed...

                                                                                Few participants at the Jackson Hole event appeared to support Mr. Buiter’s view. Even those displeased with some specific Fed actions probably back the Fed’s overall approach: trying to tackle the financial crisis to prevent much deeper trouble in the wider economy.

                                                                                Assigned the task of critiquing the paper was Alan Blinder, the former Fed vice chairman, who gave high marks to the central bank. Mr. Blinder brought his point home to the crowd with a tale of a little Dutch boy (Mr. Buiter was born in the Netherlands), entertaining the crowd of international central bankers, academics and Wall Street economists:

                                                                                One day a little Dutch boy was walking home when he noticed a small leak in a dike that protected the people in the surrounding town. He started to stick his finger in the hole, but then he remembered his moral hazard lesson. “The companies that built this dike did a terrible job,” the boy said. “They don’t deserve a bailout. And doing that would just encourage more shoddy construction. Besides, the dumb people who live here should never have built their homes on a floodplain.” The boy continued on his way home. Before he arrived, the dike burst and everyone for miles around drowned, including the little Dutch boy.

                                                                                Mr. Blinder continued: “You might have heard an alternative version of this story circulating around the Fed.”

                                                                                In this kindler, gentler version, the little Dutch boy, somewhat desperate and very worried about the horrors of the flood, stuck his finger in the dike and held it there until help arrived. … It was painful. The little Dutch boy would much rather have been somewhere else. But he did it anyway. And all the foolish people who live behind the dike were saved from the error of their ways.

                                                                                  Posted by on Saturday, August 23, 2008 at 05:04 PM in Economics, Market Failure, Monetary Policy | Permalink  TrackBack (0)  Comments (33)


                                                                                  "Finding the Mess behind the Mess"

                                                                                  Tyler Cowen:

                                                                                  Finding the Mess Behind the Mess, by Tyler Cowen, Commentary, NY Times: A bursting real estate bubble set off the Japanese recession of the 1990s, which deepened as ailing banks languished. It took Japan’s economy more than a decade to resume steady, noticeable growth.

                                                                                  Will this happen to the United States? Probably not, but we may face a protracted process of recovery, stretching longer than the two or so years usually required to climb out of recession. ...

                                                                                  What should policy makers do? One path that is likely to prove counterproductive is further fiscal stimulus in the form of tax rebates. Such stimulus can raise consumer spending and bolster the economy in the short run, but it works — if it works at all — only by pushing consumers to spend rather than to save. It merely postpones needed adjustments by providing a grab bag of goodies at exactly the wrong time.

                                                                                  Excessive bank regulation is another danger. To be sure, the regulatory structure for financial institutions failed in the current crisis, and change is in order. But we shouldn’t reform in a way that will discourage bank lending and weaken the tie between savings and investment. Banks are already allergic to very risky mortgages — probably excessively so — and we shouldn’t overreact by punishing them for past mistakes.

                                                                                  In other words, regulatory reform needs to be forward-looking rather than focused on penance..., it’s not obvious that we will succeed in this task.

                                                                                  Emerging from the current slowdown isn’t just a matter of political will or smart central banking. If the recipe for success requires smooth adjustment into new growth sectors, more savings from disposable income, cleaning up the housing mess, well-functioning energy markets, and more effective financial intermediation — all in the right combinations and in the right sequences — neither the government nor the Federal Reserve can control this process. The Fed can add regulatory and monetary clarity, but there isn’t any magic bullet. Beware of anyone who tells you there is.

                                                                                  The Japanese failed to break out of their recession quickly because they didn’t promptly close down or clean up their problem banks. So far, the Fed and other regulators show no signs of making this mistake; they have been vigilant in resolving crises as they occur. But that’s not enough to guarantee a successful transition. The American economy will be tested for its deftness — and the test will be difficult precisely because there isn’t a single enemy on which to focus.

                                                                                  Have you ever tried to undo a bunch of tangled wires or cords? If you don’t pull on the right wires in the right order, the mess becomes worse. If you pull too hard, the whole thing can break. But if your first pulls are good ones, the untangling becomes easier with each move.

                                                                                  That’s like our economy’s situation today. If we expect too much too quickly, we’ll make matters worse. But there is a way out of the mess... Be careful, and start pulling.

                                                                                    Posted by on Saturday, August 23, 2008 at 04:59 PM in Economics, Policy | Permalink  TrackBack (0)  Comments (14)


                                                                                    "The Fruits of Their Labors"

                                                                                    Economists take theoretical results into the field:

                                                                                    The Fruits of Their Labors, by Tim Harford, Slate: For many business owners, getting the most out of staff is a perennial problem. In the case of fruit farmers, perhaps perennial is the wrong word: Workers show up for the summer harvest only...

                                                                                    Tough work for the fruit-pickers, the business is also a headache for the owner, who must offer a pay scheme that both satisfies minimum-wage laws and motivates workers... The owner of a large British fruit-farm business, "Farmer Smith," ... discovered that the connection between pay and performance was ... an area where economists were scratching around for solid evidence.

                                                                                    And so an unlikely alliance was formed between Farmer Smith and economists Oriana Bandiera, Iwan Barankay, and Imran Rasul. The economists would design and administer pay schemes, and in exchange..., Farmer Smith would let them treat his business as a gigantic laboratory...

                                                                                    The owner had been paying a piece rate ... but also needed to ensure that whether pickers spent the day on a bountiful field or a sparse one, their wages didn't fall below the legal hourly minimum. Farmer Smith tried to adjust the piece rate each day so that it was always adequate but never generous: The more the work force picked, the lower the piece rate. But his workers were outwitting him by keeping an eye on each other, making sure nobody picked too quickly, and thus collectively slowing down and cranking up the piece rate.

                                                                                    Bandiera and her colleagues proposed a different way of adjusting the piece rate: Managers would test-pick the field to see how difficult it was and set the rate accordingly, thus preventing the workers from engaging in a collective go-slow. ... The economists measured the result. ... The new pay scheme increased productivity ... by about 50 percent.

                                                                                    The next summer, the researchers turned their attention to incentives for low-level managers, who would also be temporary immigrant workers ... responsible for on-the-spot decisions such as which workers were assigned to which row. The researchers found that managers tended to do their friends favors by assigning them the easiest rows. This ... was unproductive since the most efficient assignment for fruit picking is for the best workers to get the best rows. The researchers responded by linking managers' pay to the daily harvest. The result was that managers started favoring the best workers rather than their own friends, and productivity rose by another 20 percent.

                                                                                    Small wonder that the economists were invited back for another summer. They proposed a "tournament" scheme in which workers were allowed to sort themselves into teams. Initially, friends tended to group themselves together, but as the economists began to publish league tables and then hand out prizes to the most productive teams, ... workers prioritized money over social ties ... to ally themselves with the most productive co-workers who would accept them. In practice, that meant that the fastest workers clustered together, and again, productivity soared—by yet another 20 percent. ...

                                                                                    Bandiera and her colleagues have now stopped the experiments, in the belief that there is nothing more to be gained... The owner does not seem to agree: He's hired a consultant to keep on hatching new performance pay schemes.

                                                                                    Do you view this as economists helping owners exploit labor by finding schemes that trick them into working harder? The welfare of workers as a group should be higher after the changes.

                                                                                      Posted by on Saturday, August 23, 2008 at 02:43 PM in Economics | Permalink  TrackBack (0)  Comments (58)


                                                                                      Social Security and the Budget

                                                                                      Somebody should reassure this poor woman that there is absolutely nothing for her to worry about:

                                                                                      Answers, not IOUs, for Social Security, by David Lazarus, Consumer Confidential. LA Times: Whatever happened to Social Security?

                                                                                      As the Democrats prepare to convene this week in Denver, and the Republicans gear up for their get-together in St. Paul, Minn...., precious little has been said about an issue that touches virtually every American family and, for a brief spell a few years ago, dominated the political agenda.

                                                                                      West Los Angeles resident Marilyn Taylor, 78, is typical of many seniors in relying on Social Security for a significant portion of her income. She told me she received about $1,100 a month from Uncle Sam, which covered about a third of her expenses.

                                                                                      These days, Taylor wonders whether she'll keep receiving her full Social Security payments. ...

                                                                                      That's a pretty misleading introduction to a Social Security story unless your intention is to create undue fear about the program's solvency. The article cites some scary sounding numbers, but that's because the totals are accumulated over so many years. Here's some perspective (which is missing from the article):

                                                                                      If Congress makes permanent the 2001 and 2003 tax cuts without paying for them, the cost over the next 75 years will be about three times the size of the Social Security shortfall over this period.

                                                                                      It's acceleration in health care costs, not Social Security, that is the biggest budget problem going forward.

                                                                                      Since we're on the topic of Social Security and entitlements more generally, Diane Rogers responds to Glenn Hubbard's recent WSJ editorial criticizing Barack Obama's approach to Social Security:

                                                                                      We Can’t Entitle Our Way Out of Paying Taxes, by economistmom: Thursday’s Wall Street Journal contained an opinion column by Glenn Hubbard, arguing that ”We Can’t Tax Our Way Out of the Entitlement Crisis.” Glenn, whom I worked closely with as his resident tax-policy antagonist at the Council of Economic Advisers for the first 100 days of the Bush Administration (my being a staff holdover from the Clinton Administration CEA), uses the column to criticize what seems to be Senator Obama’s tax-heavy approach to entitlement reform (or at least Social Security reform). ...

                                                                                      Continue reading "Social Security and the Budget" »

                                                                                        Posted by on Saturday, August 23, 2008 at 02:34 PM in Economics, Social Security | Permalink  TrackBack (0)  Comments (71)


                                                                                        links for 2008-08-23

                                                                                          Posted by on Saturday, August 23, 2008 at 12:24 AM in Links | Permalink  TrackBack (0)  Comments (9)


                                                                                          FRBSF: Regional Variation in the Potential Economic Effects of Climate Change

                                                                                          How much variation will there be in the effects of global warming across regions within the US? This summarizes research on expected geographic variation in agriculture and health effects, and then looks in more detail at how ski areas will be affected by global warming of 2 degrees (C):

                                                                                          Regional Variation in the Potential Economic Effects of Climate Change, by Van Butsic, Ellen Hanak, and Rob Valletta, FRBSF Economic Letter: Extensive scientific evidence suggests that the worldwide climate has been warming in recent decades and is likely to continue doing so (IPCC 2007). The possible contribution of human activity has produced considerable debate about appropriate responses by governments, businesses, and individuals to "mitigate" (limit) the extent of global warming by reducing greenhouse gas emissions, a primary source of which is fossil fuels. A key element in this debate is the magnitude of the net economic costs associated with potential climate change.

                                                                                          One area of considerable uncertainty in regard to the economic effects of climate change is the likely differential impact of global warming across geographic regions. In this Economic Letter, we provide a partial overview of recent research that examines such geographic variation in the economic impact of climate warming in North America. Not surprisingly, this research suggests that the adverse effects will be greatest in locations where the existing climate is warm, although some regions and sectors may benefit from a warmer climate.

                                                                                          Continue reading "FRBSF: Regional Variation in the Potential Economic Effects of Climate Change" »

                                                                                            Posted by on Saturday, August 23, 2008 at 12:06 AM in Economics, Environment | Permalink  TrackBack (0)  Comments (0)


                                                                                            Friday, August 22, 2008

                                                                                            Obama-Biden

                                                                                            I was really hoping it wouldn't be Biden. This is going to take the wind out of the sails for me.

                                                                                              Posted by on Friday, August 22, 2008 at 10:25 PM in Politics | Permalink  TrackBack (0)  Comments (61)


                                                                                              "Doctors vs Economists"

                                                                                              Chris Dillow says this "not to demean doctors, but to elevate economists":

                                                                                              Doctors vs economists, Stumbling and Mumbling: The BBC are offering two series glorifying the medical profession: Superdoctors, which presents the “cutting edge” of medicine, and Blood and Guts, Michael Mosley’s whiggish view of the history of surgery “from butchery to brilliance.”

                                                                                              Which raises a question. Why do doctors  get such great publicity and acclaim when economists don’t?

                                                                                              For all its excellence, the medical profession still leaves a lot to be desired. Medical errors kill tens of thousands a year; doctors still have little idea how to treat many complaints such as gout, the common cold, backache or many degenerative diseases; and their treatment of the mentally ill is still often atrocious.

                                                                                              And yet, for all this, doctors get much less obloquy than we economists get for our frequent failures to forecast recession - even though our errors are less costly than doctors’.  Why is this? Here are some possibilities:

                                                                                              1. Survivorship bias. A man who’s been cured by a doctor lives to tell everyone. A man who’s been killed by one stays quiet. Economists’ “victims” - those stupid enough to believe forecasts- don’t keep schtum.
                                                                                              2. Publication bias. New medical research is often presented as an exciting breakthrough. Economic research rarely lends itself to such glowing headlines.
                                                                                              3. The fight against nature. If doctors are unable to cure disease, this is seen not as a failure of their intellect, but rather as testament to the force of hostility of nature, against which they are heroically battling. What people fail to see is that economic forecasting is also a fight against a powerful force - the existence of free will. The reason for this is simple; economic activity next year is a function of the choices people will make then. But because they have free will, we cannot predict these choices. In this light, what’s astonishing is not that forecasts are wrong, but that they are ever right at all.
                                                                                              4. Selective judgment. Economists get judged, wholly wrongly, on their weakest activity - economic forecasting - whereas doctors get judged on their strongest.
                                                                                              5. Our greater antecedents. Economics has progressed in all sorts of ways. We know now, for example, that protectionism is generally a bad idea; that inflation targeting is a better monetary framework than fixed exchange rates; that countries can’t get rich merely by heavy capital investment, and so on. And yet it’s harder to present the history of economics as pure progress, as Michael Mosley does for surgery. One reason for this, perhaps, is that the great economists of the past were genuinely brilliant whereas their medical contemporaries were quacks, charlatans and butchers.  At the same time as Paul Samuelson was  creating foundations of the economics we learn today, Walter Freeman was hammering ice-picks into people - and he was regarded as a pioneer at the time. And let’s not even consider Adam Smith’s medical contemporaries.

                                                                                              Now, I say all this not to demean doctors, but to elevate economists. Our profession - at its best - should not be regarded as in anyway inferior to the natural sciences.

                                                                                                Posted by on Friday, August 22, 2008 at 04:05 PM in Economics, Science | Permalink  TrackBack (0)  Comments (55)


                                                                                                Paul Krugman: Now That's Rich

                                                                                                Will Barack Obama raise taxes on the middle class? Nope:

                                                                                                Now That’s Rich, by Paul Krugman, Commentary, NY Times: ...Barack Obama wants to put tax rates on higher-income Americans more or less back to what they were under Bill Clinton; John McCain ... says that means raising taxes on the middle class. ...

                                                                                                When we think about the middle class, we tend to think of Americans whose lives are decent but not luxurious: they have houses, cars and health insurance, but they still worry about making ends meet, especially when the time comes to send the kids to college.

                                                                                                Meanwhile, when we think about the rich, we tend to think about the handful of people who are really, really rich — people with servants, people with so much money that, like Mr. McCain, they don’t know how many houses they own. (Remember how Republicans jeered at John Kerry for being too rich?)...

                                                                                                [T]o imply that everyone except the poor belongs to one of these two categories: either you’re clearly rich, or you’re an ordinary member of the middle class ...[is] just wrong.

                                                                                                In his entertaining book “Richistan,” Robert Frank ... declares that the rich aren’t just different from you and me, they live in a different, parallel country. But that country is divided into levels, and only the inhabitants of upper Richistan live like aristocrats; the inhabitants of middle Richistan lead ample but not gilded lives; and lower Richistanis live in McMansions, drive around in S.U.V.’s, and are likely to think of themselves as “affluent” rather than rich.

                                                                                                Even these arguably not-rich, however, live in a different financial universe from ... ordinary members of the middle class: they have lots of disposable income after paying for the essentials, and they don’t lose sleep over expenses, like insurance co-pays and tuition bills, that can seem daunting to many working American families.

                                                                                                Which brings us to the dispute about tax policy.

                                                                                                Mr. McCain wants to preserve almost all the Bush tax cuts, and add to them by cutting taxes on corporations. Mr. Obama wants to roll back the ... cuts in tax rates on the top two income brackets and ... on income from dividends and capital gains — and use some of that money to reduce taxes lower down the scale.

                                                                                                According to ... the nonpartisan Tax Policy Center, those Obama tax increases would fall overwhelmingly on people with incomes of more than $200,000 a year. Are such people rich? Well, maybe not: some of those Mr. Obama proposes taxing are only denizens of lower Richistan, although the really big tax increases would fall on upper Richistan. But one thing’s for sure: Mr. Obama isn’t planning to raise taxes on the middle class, by any reasonable definition — even that of the Bush administration. ...

                                                                                                [I]n May, the Treasury Department — which used to do serious tax studies, but these days just churns out Bush administration propaganda — released a report purporting to show, by looking at the tax bills of four hypothetical families, how the middle and working class would be hurt if the Bush tax cuts aren’t made permanent. ...

                                                                                                It turns out that Treasury’s hypothetical families got all their gains from the so-called middle-class provisions of the Bush tax cuts: the Child Tax Credit, the reduced tax bracket for lower incomes and marriage penalty relief. ... In other words, the Bush administration itself implicitly defines the middle class as ... people making too little to end up paying additional taxes under the Obama plan.

                                                                                                Of course, all the evidence in the world won’t stop Republicans from claiming, as they always do, that Democrats are going to impose a crippling tax burden on ordinary hard-working Americans. But it just ain’t so.

                                                                                                  Posted by on Friday, August 22, 2008 at 12:42 AM in Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (57)


                                                                                                  "The State of Macro"

                                                                                                  Exactly three years ago, I wrote:

                                                                                                  There is currently a movement within the economics profession to do just this type of synthesis [of real business cycle and new Keynesian models]. Real business cycle models, i.e. supply-side models, are adequate models of the long-run but do not explain demand side short-run economic fluctuations very well. Because of this, they are limited in their applicability. Models with wage and price rigidities, New Keynesian models, do have the ability to explain such short-run fluctuations but pay scant attention to long-run issues. Combining these two models, a real business cycle model for the long-run and a New Keynesian model of wage and price rigidity for the short-run, is a promising avenue for explaining macroeconomic fluctuations.

                                                                                                  Olivier Blanchard explores this idea in more detail in "The State of Macro." Here's a bit of the paper (I can't find an open link - Update: open link - click on "choose download location" at top of page):

                                                                                                  The State of Macro, by Olivier J. Blanchard, NBER Working Paper No. 14259, August 2008: The editors of this new Journal asked me to write about "The Future of Macroeconomics". ...

                                                                                                  I shall focus on only part of macro, namely fluctuations. I shall leave aside work on growth, where much action and much progress have taken place; this is not a value judgment, just a reflection of comparative advantage.[1] I shall also make no attempt to be either encyclopedic, balanced, or detached. ... In short, this is not a handbook chapter, but rather the development of a theme.

                                                                                                  The theme is that, after the explosion (in both the positive and negative meaning of the word) of the field in the 1970s, there has been enormous progress and substantial convergence. For a while - too long a while - the field looked like a battlefield. Researchers split in different directions, mostly ignoring each other, or else engaging in bitter fights and controversies. Over time however, largely because facts have a way of not going away, a largely shared vision both of fluctuations and of methodology has emerged. Not everything is fine. Like all revolutions, this one has come with the destruction of some knowledge, and suffers from extremism, herding, and fashion. But none of this is deadly. The state of macro is good.[2]

                                                                                                  The paper is organized in four sections. The first sets the stage with a brief review of the past. The second argues that there has been broad convergence in vision, with the third looking at it in more detail. The fourth focuses on convergence in methodology, and the current challenges. ...

                                                                                                  1 A Brief Review of the Past

                                                                                                  When they launched the "rational expectations revolution", Lucas and Sargent (1978) did not mince words:

                                                                                                  Continue reading ""The State of Macro"" »

                                                                                                    Posted by on Friday, August 22, 2008 at 12:33 AM in Economics, Macroeconomics | Permalink  TrackBack (0)  Comments (15)


                                                                                                    "More Speculation about Those Oil Speculators"

                                                                                                    A Washington Post article claiming that one firm, Vitrol, "at one point in July,... held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange" reinforced the beliefs of those who claim that unregulated speculation is behind the recent swings in commodity prices.

                                                                                                    Jim Hamilton throws cold water on this idea. He has other objections to the article, but here's the one relating to the 11 percent figure that has received so much attention:

                                                                                                    More speculation about those oil speculators, econbrowser: I normally leave it to folks like Dean Baker to beat up on the press. But I can't resist shining a bright light on today's story about oil speculators in the Washington Post, which has also been discussed by Mark Thoma and Tyler Cowen. ...

                                                                                                    What ... does [David Cho] dig up? The article continues:

                                                                                                    Even more surprising to the commodities markets was the massive size of Vitol's portfolio-- at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange.

                                                                                                    That does sound like a lot, though enough details are left out to make me wonder what is actually being claimed here. Surely Cho doesn't literally mean "all the oil contracts," i.e., light sweet, Brent, heating oil, gasoline, and so on. If light sweet alone, are we talking about just futures, or futures plus options? Or is Cho possibly referring just to one very specific contract, such as the August CL futures contract? And were these positions held outright by Vitol or purchased on behalf of its clients?

                                                                                                    Cho gets more quantitative a few paragraphs down:

                                                                                                    By June 6, for instance, Vitol had acquired a huge holding in oil contracts, betting prices would rise. The contracts were equal to 57.7 million barrels of oil-- about three times the amount the United States consumes daily.

                                                                                                    Again I'd like to know if we're including options somehow in this number. But more importantly, the claim that you can compare the number of notional barrels of oil implied by a futures contract if it were held to settlement with the number of physical barrels that the U.S. consumes repeats the egregious error committed by Michael Masters in his Senate testimony this May. You can't compare the outstanding NYMEX open interest with U.S. daily petroleum consumption numbers directly because they are measured in different units. Open interest is a stock-- it is measured in number of outstanding contracts at a particular point in time. Consumption is a flow-- it is measured in barrels per unit of time. You can't measure how many barrels of oil the U.S. consumes without specifying a time unit. We consume about 20 million barrels per day, or 14,000 barrels per minute, or 7.3 billion barrels per year. With which of these 3 numbers are we supposed to compare 57 million? Fifty-seven million sounds like a lot more than 14,000, and a lot less than 7.3 billion. You can make 57 million sound as big or as small compared with U.S. consumption as you want, because there's an arbitrary time interval associated with consumption that is not associated with open interest. If you want the futures volume to sound big, you compare open interest with daily consumption, as Masters and Cho both do.

                                                                                                    Cho was trying the best he could to convince us that unregulated speculation was the cause of this summer's spike in oil prices.

                                                                                                    But instead he convinces me that he really couldn't find much of a case.

                                                                                                      Posted by on Friday, August 22, 2008 at 12:24 AM in Economics, Oil, Press | Permalink  TrackBack (0)  Comments (6)