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Wednesday, October 19, 2005

Demand for Bartlett's Book Shifts Outward

How to increase the demand for a book you don't like:

D'day Rushes Book of Canned Bushie, by Rachel Deahl, PW Daily: Sometimes getting your pink slip can be a good thing. That's the case with Bruce Bartlett, a now-former senior fellow at the conservative Dallas-based think tank National Center for Policy Analysis. Bartlett, an ardent Bush supporter in 2000 who was also a member of the George H.W. Bush Treasury department, was given his walking papers on Monday after his boss ... John C. Goodman read the manuscript of his upcoming book, The Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. After The New York Times reported the news of Bartlett's firing, Doubleday ... quickly bumped the book's release date from April 4 to February 28... [and] upped the book's print run from 30,000 copies to 50,000. Nicole Dewey, associate director of publicity at Doubleday, says her "phone rang off the hook" ... with calls from all the major papers and talk shows. ... that is clearly enough, in Doubleday's eyes, to bring in quite a few more book sales.

Is an attempt to undermine his credibility the next step?

    Posted by on Wednesday, October 19, 2005 at 03:11 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (11) 


    Speeches by Fed Governor Kohn and Cleveland Fed President Pianalto (Update 2: Fisher and GeithnerToo)

    I hope to do more on these later, but I thought I'd let you know about two more speeches from Federal Reserve officials adding to the chorus  of voices (e.g. here and here yesterday, here the day before) calling for a continuation of measured increases in the target value of the federal funds rate:

    The Economic Outlook, by Fed Governor Donald L. Kohn ...In sum, I see risks on both sides of my expectations that the growth of economic activity will slow modestly on balance over the next year or so, leaving the economy producing at about its sustainable potential. But unless activity slows unexpectedly, and after the rise in retail energy prices, the risks may be skewed a little toward the upside on inflation. ... Obviously, we are considerably closer to where policy needs to be than we were sixteen months ago, but we are not yet at a point where we can stop and watch the economy evolve for a while. ... How far we go will depend on the evolution of economic activity and prices...

    Economic Conditions and Monetary Policy, by Sandra Pianalto, President, Cleveland Fed ...Katrina and Rita did not change the broad contours of my forecast for continued economic growth and lower inflation into 2006. So, to me, the plan of continuing to remove the remaining amount of policy accommodation still looks like a sound one. We have already removed a substantial amount of that accommodation, and it is fair to ask how much further we might have to go. ... The answer ... depends on how economic conditions unfold.... Monetary policymaking requires managing risks. That means having a plan that is flexible enough to take into account sudden surprises and changing conditions. While I may be uncertain about which path the economy will take, ... Removing the remaining monetary policy accommodation puts us in the strongest possible position to react as evolving economic conditions require...

    The message from the speeches is transparent - unless incoming data alter the picture substantially, rates will continue to rise.

    Update: One more from Dallas Fed president Richard Fisher. He also discusses gobalization.  Given the recent discussion here on this topic (here and here), I hope to summarize his remarks later.

    Globalization and Texas, by Richard Fisher, President, Dallas Fed: My recent soundings ... have caused my brow to furrow, reflecting concerns about the drag on growth by Hurricanes Katrina and Rita and the increases in energy prices. Several questions arise. How permanent are these influences? ... Will energy and associated costs work their way into core inflation? ... I must give an honest answer. ... I really don’t know... we must listen carefully to the anecdotal evidence... Price stability is a necessary condition for achieving maximum sustainable economic growth. Central bankers have always... recoiled from inflation. ... Here the Fed watchers who read entrails might take note: I am fully confident that the Fed will continue to do its part by containing inflationary expectations and pressures. ... You will note that the operative phrase ... was “inflation expectations.” A key to containing them is the conduct of the FOMC. For my part, as a member of the FOMC, I will not waver from advocating policy that discourages expectations of higher core inflation...

    Update: There was yet another speech today, this one by Timothy Geithner, President of the New York Fed.  However, this talk did not address the future course of monetary policy.  Instead, the focus is on global imbalances and how they will be resolved. This would also be good to present more fully later:

    U.S. and the Global Economy, by Timothy F. Geithner, President, New York Fed: For global growth to be sustained at a reasonably strong pace during this period of adjustment, the desirable increase in U.S. savings and the necessary slowing in U.S. domestic demand growth relative to growth of U.S. output would have to be complemented by stronger domestic demand growth outside the United States, absorbing a larger share of national savings. Exchange rate regimes, where they are currently closely tied to the dollar, will have to become more flexible, allowing exchange rates to adjust in response to changing fundamentals. The global nature of these requirements does not imply that the United States can put the principal burden for adjustment on others... the U.S. economy is in many ways in a relatively favorable position to manage through the risks in the adjustment process ahead. ... But we face a number of difficult long-term challenges as a nation—in our fiscal position, in how well we equip our citizens to prosper in a more competitive world and in our ability to sustain political support for the policies, including our relatively open trade policy, that have been an important source of the improvement in U.S. prosperity...

      Posted by on Wednesday, October 19, 2005 at 12:32 PM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (1) 


      The Future of American Manufacturing

      This commentary by Robert Samuelson, while acknowledging the difficulty it causes for individuals, essentially applauds the troubles Delphi is having as a means of eliminating the "contracts that turned the companies into mini-welfare states" and returning to competitive, market-based principles, which means lower wages. Only then, he believes, will manufacturing in the U.S. have a chance to compete. But even with lower wages the future is not certain. For U.S. manufacturers to become competitive, he believes China must revalue its currency:

      Do American Manufacturers Have a Future?, by Robert J. Samuelson, The Washington Post (WSJ version, WaPo version here) The question posed by the bankruptcy filing of Delphi Corp. -- the largest U.S. auto parts company -- is whether manufacturing in America has a future. Manufacturing employment now accounts for only one in nine U.S. jobs, down from one in three in 1950. ... the decline reflects higher efficiency -- making more things with fewer people. ... [L]lately, the news about manufacturing has seemed particularly dismal. Since mid-2000, three million jobs have vanished. .... Delphi's bankruptcy suggests that the U.S. auto-industrial complex faces another wrenching shakeout. ... The entire industry is caught in a cost-price squeeze. It needs price "incentives" to sell vehicles. ... High labor costs are ... a huge problem...

      Since 1948, the UAW and GM, Ford and Chrysler have crafted contracts ... providing above-average hourly wages..., rich benefits and strong job security. For example, laid-off UAW workers essentially get full salary and benefits indefinitely. But the limited competition of the protected market has given way -- now automakers vie with imports and firms with non-unionized U.S. plants. Now comes the reckoning. ... According to the UAW, Delphi is seeking deep cuts in both wages ... and total labor costs including fringes ... "If we do this right, Delphi will remain one of the world's leading global automotive suppliers," said chief executive Steve Miller. "Yes, with a smaller U.S. manufacturing footprint. … If we do it badly, Delphi may be broken up into small pieces, and America will have lost some of its precious industrial treasures." GM, Ford and Chrysler are also headed toward bankruptcy unless they curb labor and "legacy" costs, he predicted. ... The fate of American manufacturing lies largely in American hands. Of course, some labor-intensive production will go abroad. But in many industries, job losses and cost cutting -- though devastating to individuals -- can sustain production and restore profitability. The American steel industry now produces more than in the 1980s, though it has lost two-thirds of its jobs. ... But one giant unknown clouds everything: China. Until now, its booming U.S. exports have mostly displaced exports from other countries. As China modernizes ... this could change dramatically. The combination of low wages, a huge market and an artificially low currency confers staggering competitive advantages. ... Unless the currency rises substantially, the United States could lose many industries that, by all other economic logic, it shouldn't. Therein lies the real threat of extinction or something close to it.

      With respect to China, it is not at all certain that revaluation will help U.S. manufacturers for reasons expressed by Joseph Stiglitz:

      Much of China’s recent gains in textile sales … came at the expense of other developing countries. America will once again be buying from them, and so total imports will be little changed...

      So stripping labor down to its barest bones may impose lots of costs on the labor side of the equation with little in the way of higher manufacturing employment to show for it. And in any case, do we want to specialize in low wage manufacturing jobs with wages dictated by world competitive pressures, or perhaps higher wage manufacturing jobs sustained through protectionism? Or might we transition to something better? I don't think we have a clear sense of where our economic ship is headed or even, perhaps, how to steer the ship through policy choices. What will be our competitive absolute/comparative advantages in the emerging global economy?

        Posted by on Wednesday, October 19, 2005 at 12:39 AM in Economics, International Trade, Unemployment | Permalink  TrackBack (0)  Comments (56) 


        The Effect of Communism on Preferences

        Communism causes a taste for redistribution and for state intervention according to this NBER paper by Alesina and Fuchs-Schuendeln. But it eventually goes away:

        Good bye Lenin (or not?): The Effect of Communism on People's Preferences, by Alberto Alesina, Nichola Fuchs Schuendeln, NBER WP 11700, October 2005: Abstract Preferences for redistribution, as well as the generosities of welfare states, differ significantly across countries. In this paper, we test whether there exists a feedback process of the economic regime on individual preferences. We exploit the "experiment" of German separation and reunification to establish exogeneity of the economic system. From 1945 to 1990, East Germans lived under a Communist regime with heavy state intervention and extensive redistribution. We find that, after German reunification, East Germans are more in favor of redistribution and state intervention than West Germans, even after controlling for economic incentives. This effect is especially strong for older cohorts, who lived under Communism for a longer time period. We further find that East Germans' preferences converge towards those of West Germans. We calculate that it will take one to two generations for preferences to converge completely.  [Free version on author web site, here too.]

          Posted by on Wednesday, October 19, 2005 at 12:33 AM in Economics | Permalink  TrackBack (1)  Comments (1) 


          Federal Reserve Vice Chairman Roger W. Ferguson on the Economic Outlook for the U.S.

          Having said in this post that San Francisco Fed president Janet Yellen had spoken more directly in her speech than others have since the last FOMC meeting regarding the future course of monetary policy, this speech from Vice Chairman Roger Ferguson is at least as direct and comes to much the same conclusion. His bottom line, "For now, I believe that our policy of removing monetary accommodation at a "measured" pace is most likely to promote our broader objectives of price stability and maximum sustainable economic growth," though he is clear to say that the rate changes in the future will be highly dependent upon incoming data and that the main risk in the future are the same as those identified by Yellen, high energy prices and a slowdown in housing, and he also points to the risk of slower business investment:

          Economic Outlook for the United States, Federal Reserve Vice Chairman Roger W. Ferguson: I appreciate the opportunity to speak to you today about the outlook for the U. S. economy. ... To jump right to the bottom line, I believe that the outlook for the economy remains solid despite the devastating blows delivered to the Gulf Coast by Hurricanes Katrina and Rita. ... Before the hurricanes, ... the outlook was relatively benign: continued moderate economic growth accompanied by little change in the underlying pace of core inflation. There were, of course, risks in this forecast. The cumulative impact of the rise in energy prices on inflation and activity ... was clearly one concern. So too was the ongoing rise in home prices and the possibility that this phenomenon is unsustainable. ... I do not think that a significant and widespread drop in home prices is the most likely outcome, but the situation will require careful monitoring in the months ahead. A further risk is the apparent deceleration in business spending on new equipment and software (E&S). ... Are businesses becoming more reluctant to invest?...

          I'd now like to turn to the economic effects of Hurricanes Katrina and Rita. ... At this point, it seems likely that the hurricanes had, at most, a small effect on the supply side of the economy. ... The hurricanes have, however, adversely affected the outlook for inflation. ... Consumer energy prices are projected to rise substantially in the second half of this year, and some spillover into the prices of non-energy goods and services looks likely as well. ... In general, economists believe persistent changes in relative prices have a larger effect on economic activity than do temporary changes. ... A large, long-lasting increase in the relative price of energy will affect inflation for a time. ... The behavior of inflation expectations is the key ... If expectations for long-run inflation become unanchored ... the possibility of a wage-price spiral increases...

          The reaction of the business sector to permanently higher energy prices is more complicated. ... ... firms tend, where possible, to substitute capital and labor for energy consumption. In the 1970s and 1980s, such substitution greatly reduced the amount of energy consumed ... I'd expect to see a similar response to the latest price run-up in the years ahead. ... Studies have shown that adjustments by households and businesses in response to higher energy prices reduce the long-run level of potential output in the economy. This reduction mainly reflects the tendency of production to become more labor intensive ... In essence, labor productivity grows more slowly after an energy price shock and that effect lowers the trajectory for potential output... What does all of this mean for the conduct of monetary policy? In my view, it reinforces the need for policy to continue to be dependent on the incoming data on output and prices and on our forecasts for how those variables will evolve over time. ... it is also important to recognize that the measurement of economic activity in the immediate aftermath of the hurricanes may give an incomplete picture. Since it began withdrawing monetary accommodation in June 2004, the FOMC has repeatedly stated that its future policy actions will be governed by the expected performance of the economy. ... For now, I believe that our policy of removing monetary accommodation at a "measured" pace is most likely to promote our broader objectives of price stability and maximum sustainable economic growth.

            Posted by on Wednesday, October 19, 2005 at 12:30 AM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (1) 


            Tuesday, October 18, 2005

            San Francisco Fed President Yellen with an Update on the U.S. Economy

            Of all the speeches since the last FOMC meeting, this speech from Janet Yellen has the most detail regarding her views on the state of the economy and the future course of monetary policy. The bottom line is that unless incoming data change the picture of the economy, rates will continue to increase. Those who are interested solely in her view of where rates are headed in the future may want to jump to the last paragraph or two:

            Update on the U.S. Economy, Janet Yellen: ...I'll start by addressing some major developments in the U.S. economy relating to employment and output growth. I'll review the recent past and indicate my sense of the economy's likely path going forward, focusing particularly on risks I see relating to energy and the housing sector. Next I'll turn to the inflation picture. Finally, I'll conclude with some thoughts on the course of monetary policy in the U.S.

            The part of the speech that follows this introduction repeats remarks she has made before on using fiscal policy rather than monetary policy to address the consequences of the hurricane, so I will not repeat them. The problem is that the lags in monetary policy are too long to be of much help and monetary policy cannot be directed at a particular region.  I will also add that while monetary policy can increase or decrease aggregate demand, it cannot produce oil or refineries, it cannot replace lost supply. Returning to the speech, Yellen next discusses her view of the strength of the economy and two risks to output growth in the future, higher energy costs and a fall in housing prices:

            Continue reading "San Francisco Fed President Yellen with an Update on the U.S. Economy " »

              Posted by on Tuesday, October 18, 2005 at 05:24 PM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 


              Google's Search Gives Publishers Seizures

              This editorial appearing in the WSJ is from Eric Schmidt, CEO of Google. It's about the lawsuit to stop Google from indexing copyrighted books for their search engine. I'm not a lawyer so I won't pretend to fully understand all the legal issues involved, but I don't see the problem. The economic harm seems small or non-existent compared to the public and private benefits. I hope this happens, it would be great:

              Books of Revelation, by Eric Schmidt, Wall Street Journal: Imagine sitting at your computer and, in less than a second, searching the full text of every book ever written. Imagine an historian being able to instantly find every book that mentions the Battle of Algiers. Imagine a high school student in Bangladesh discovering an out-of-print author held only in a library in Ann Arbor. Imagine one giant electronic card catalog that makes all the world's books discoverable with just a few keystrokes by anyone, anywhere, anytime. That's the vision behind Google Print, a program we introduced last fall ... Recently, some members of the publishing industry who believe this program violates copyright law have been fighting to stop it. We respectfully disagree with their conclusions, on both the meaning of the law and the spirit of a program which, in fact, will enhance the value of each copyright. Here's why. Google's job is to help people find information. Google Print's job is to make it easier for people to find books. ... For many books, these results will, like an ordinary card catalog, contain basic bibliographic information and, at most, a few lines of text where your search terms appear. We show more than this basic information only if a book is in the public domain, or if the copyright owner has explicitly allowed it by adding this title to the Publisher Program... Any copyright holder can easily exclude their titles from Google Print -- no lawsuit is required.

              This policy is entirely in keeping with our main Web search engine. ... we copy and index all the Web sites we find. If we didn't, a useful search engine would be impossible... Only by physically scanning and indexing every word of the extraordinary collections of our partner libraries at Michigan, Stanford, Oxford, the New York Public Library and Harvard can we make all ... titles discoverable with the level of comprehensiveness that will make Google Print a world-changing resource. But just as any Web site owner who doesn't want to be included in our main search index is welcome to exclude pages from his site, copyright-holders are free to send us a list of titles that they don't want included in the Google Print index. For some, this isn't enough. ... [W]e believe ... that the use we make of books we scan ... is consistent with the Copyright Act, whose "fair use" ... allows a wide range of activity ... all without copyright-holder permission. Even those critics who understand that copyright law is not absolute argue that making a full copy of a given work, even just to index it, can never constitute fair use. ... The aim of the Copyright Act is to protect and enhance the value of creative works in order to encourage more of them ... We find it difficult to believe that authors will stop writing books because Google Print makes them easier to find, or that publishers will stop selling books because Google Print might increase their sales. Indeed, some of Google Print's primary beneficiaries will be publishers and authors themselves. ... Imagine the cultural impact of putting tens of millions of previously inaccessible volumes into one vast index ... searchable by anyone, rich and poor, urban and rural, First World and Third, en toute langue ... entirely for free. How many users will find, and then buy, books they never could have discovered any other way? How many out-of-print and backlist titles will find new and renewed sales life? How many future authors will make a living ... solely because the Internet has made it so much easier for a scattered audience to find them? This egalitarianism of information dispersal is precisely what the Web is best at; precisely what leads to powerful new business models for the creative community; precisely what copyright law is ultimately intended to support; and, together with our partners, precisely what we hope, and expect, to accomplish with Google Print.

              Resistance to Google is futile. The books will be assimilated.

                Posted by on Tuesday, October 18, 2005 at 01:17 AM in Economics, Policy | Permalink  TrackBack (0)  Comments (7) 


                Snow Falls Silent in China

                Unless China acts on revaluation after this trip by administration officials, and that looks unlikely, manufacturers will not view this trip as a success and calls for protectionist measures by congress will likely intensify:

                Snow Shifts His Demands on China By Edmund L. Andrews, NY Times: For two years, Treasury Secretary John W. Snow has pushed and prodded China to let its currency float more freely. On Monday, he declared his satisfaction and changed the subject. After a week of meetings from Shanghai to Beijing, Mr. Snow buried his specific demands for the yuan beneath a broader call for China to overhaul its system of banking and investment. ... "We are here to encourage the progress, to support the progress," he said on Monday. "Moving toward a truly flexible exchange rate regime requires quite a large number of steps," he added. "We recognize that will take some time." That was a far cry from what American manufacturers had wanted ... Mr. Snow all but ruled out the possibility that he would accuse China of currency manipulation when he reports to Congress in early November. ...  If Mr. Snow's week showed anything, it was that American officials have learned the limitations of pressuring Chinese leaders from outside.

                Update: Interestingly, this editorial from the Wall Street Journal endorses the creation of social insurance programs in China (see Brad Setser for more on this) and China's efforts to intervene in currency markets and maintain a stable yuan:

                Kibitzers in Beijing, Editorial, Wall Street Journal: It requires some audacity to tell another country how to run economic policy, but at least a high-level American delegation in Beijing is giving China some good advice, along with the bad, for a change. Although still fronting for protectionists in the U.S. Congress, Treasury Secretary John Snow and his entourage have become more constructive. To be sure, the administration still shows little sign of embracing the benefits that a stable yuan continue to bring, for both China and the global economy. ... Treasury Undersecretary for International Affairs Tim Adams told us that the currency issue was just one issue in a "three-pronged approach." The administration is now pushing China to ... focus more on domestic consumption and allow foreign companies help develop a more sophisticated financial-services industry. As Mr. Adams notes, the two goals are closely linked. A key factor behind China's high savings rate is the need to set aside funds to finance health care and retirement in the absence of an effective social security or private pension system. Developing financial instruments that allow Chinese to insure against these risks ... would obviate the need for such a high level of precautionary savings. ... China is remarkable among developing countries for its openness, in terms of both exports and imports and, however its economy develops in future, a stable yuan will continue to offer immense benefits not just to China but to its global trading partners. Mr. Snow's recognition that there are other issues besides China's currency is a step in the right direction. Perhaps in time it will allow Washington's yuan fixation to quietly fade into the background.

                  Posted by on Tuesday, October 18, 2005 at 01:03 AM in China, Economics, International Finance, International Trade | Permalink  TrackBack (0)  Comments (12) 


                  Alan Greenspan on Energy

                  Alan Greenspan discusses oil and energy in this speech given in Japan. The speech covers the days of John D. Rockefeller and Standard oil to the present day, and speculates into the future. He believes the recent rise in oil prices will slow the economy, but with the flexibility and adaptability that market systems provide, and the changes the economy has undergone in response to high oil prices in the past, the rise in oil prices should prove far less costly in terms of both output losses and higher inflation than in the 1970s. As always, he expresses his great faith in free markets as the best solution to economic problems:

                  Energy, by Alan Greenspan: Even before the devastating hurricanes of August and September 2005, world oil markets had been subject to a degree of strain not experienced for a generation. Increased demand and lagging additions to productive capacity had eliminated a significant amount of the slack in world oil markets ... Although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on. In the United States, Japan, and elsewhere, the effect on growth would have been greater had oil not declined in importance as an input to world economic activity since the 1970s. How did we arrive at a state ... so fragile that weather, not to mention individual acts of sabotage or local insurrection, could have a significant impact on economic growth? ... The history of the world petroleum industry is one of a rapidly growing industry seeking the stable prices that have been seen by producers as essential to the expansion of the market. In the early twentieth century, pricing power was firmly in the hands of Americans, predominately John D. Rockefeller and Standard Oil. ...  Rockefeller had endeavored with some success to stabilize those prices by gaining control ... of nine-tenths of U.S. refining capacity. But even after the breakup of the Standard Oil monopoly in 1911, pricing power remained with the United States ... Indeed, as late as 1952, crude oil production in the United States ... still accounted for more than half of the world total. ... Of course, concentrated control in the hands of a few producers over any resource can pose potential problems. ...[T]hat historical role ended in 1971, when excess crude oil capacity in the United States was finally absorbed by rising world demand. At that point, the marginal pricing of oil ... abruptly shifted to a few large Middle East producers ... To capitalize on their newly acquired pricing power, many ... in the Middle East, nationalized their oil companies. But the full magnitude of the pricing power of the nationalized oil companies became evident only in the aftermath of the oil embargo of 1973. ...[and the] ...  further surge in oil prices that accompanied the Iranian Revolution in 1979... The higher prices of the 1970s abruptly ended the extraordinary growth of U.S. and world consumption of oil and the increased intensity of its use ... In the United States, between 1945 and 1973, consumption of petroleum products rose at a startling average annual rate of 4-1/2 percent, well in excess of growth of our real GDP. However, between 1973 and 2004, oil consumption grew ... at only 1/2 percent per year... Much of the decline in the ratio of oil use to real GDP in the United States has resulted from growth in the proportion of GDP composed of services, high-tech goods, and other presumably less oil-intensive industries. Additionally, part of the decline in this ratio is due to improved energy conservation ... These trends have been ongoing but have likely intensified of late with the sharp, recent increases in oil prices... [T]he story since 1973 has been as much about the power of markets as it has been about power over markets. ... The failure of oil prices to rise as projected in the late 1970s is a testament to the power of markets and the technologies they foster. Today, the average price of crude oil ... is still in real terms below the price peak of February 1981. Moreover, since oil use ... is only two-thirds as important an input into world GDP as it was three decades ago, the effect of the current surge in oil prices, though noticeable, is likely to prove significantly less consequential to economic growth and inflation than the surge in the 1970s...

                  [T]he opportunities for profitable exploration and development in the industrial economies are dwindling, and the international oil companies are currently largely prohibited, restricted, or face considerable political risk in investing in OPEC and other developing countries. In such a highly profitable market..., one would have expected a far greater surge of oil investments. ... But because of the geographic concentration of proved reserves, much of the investment in crude oil productive capacity required to meet demand, without prices rising unduly, will need to be undertaken by national oil companies in OPEC and other developing economies. Although investment is rising, ... many governments perceive that the benefits of investing in additional capacity to meet rising world oil demand are limited. ... Unless those policies, political institutions, and attitudes change, it is difficult to envision adequate reinvestment into the oil facilities of these economies. Besides feared shortfalls in crude oil capacity, the status of world refining capacity has become worrisome as well. ... A continuation of this trend would soon make lack of refining capacity the binding constraint on growth in oil use. This may already be happening in certain grades... [T]he expansion and the modernization of world refineries are lagging. For example, no new refinery has been built in the United States since 1976. ... Much will depend on the response of demand to price over the longer run. If history is any guide, should higher prices persist, energy use over time will continue to decline relative to GDP. ... With real energy prices again on the rise, more-rapid decreases in the intensity of energy use in the years ahead seem virtually inevitable. Long-term demand elasticities over the past three decades have proved noticeably higher than those evident in the short term...

                  Altering the magnitude and manner of energy consumption will significantly affect the path of the global economy over the long term. ... We cannot judge with certainty how technological possibilities will play out in the future, but we can say with some assurance that developments in energy markets will remain central in determining the longer-run health of our nations' economies. The experience of the past fifty years ... affirms that market forces play a key role in conserving scarce energy resources, directing those resources to their most highly valued uses. However, the availability of adequate productive capacity will also be driven by nonmarket influences and by other policy considerations. To be sure, energy issues present policymakers with difficult tradeoffs to consider. The concentration of oil reserves in politically volatile areas of the world is an ongoing concern. But ...one hopes ... that ... does not distort or stifle the meaningful functioning of our markets. Barring political impediments to the operation of markets, the same price signals that are so critical for balancing energy supply and demand in the short run also signal profit opportunities for long-term supply expansion. Moreover, they stimulate the research and development that will unlock new approaches to energy production and use that we can now only barely envision. Improving technology and ongoing shifts in the structure of economic activity are reducing the energy intensity of industrial countries ... If history is any guide, oil will eventually be overtaken by less-costly alternatives well before conventional oil reserves run out. Indeed, oil displaced coal despite still vast untapped reserves of coal, and coal displaced wood ... New technologies to more fully exploit existing conventional oil reserves will emerge in the years ahead. ... We will begin the transition to the next major sources of energy, perhaps before midcentury, as production from conventional oil reservoirs ... is projected to peak. In fact, the development and application of new sources of energy, especially nonconventional sources of oil, is already in train. Nonetheless, the transition will take time. We, and the rest of the world, doubtless will have to live with the geopolitical and other uncertainties of the oil markets for some time to come.

                    Posted by on Tuesday, October 18, 2005 at 12:15 AM in Economics, Fed Speeches, Oil | Permalink  TrackBack (0)  Comments (4) 


                    Monday, October 17, 2005

                    Philadelphia Fed President Santomero with an Insider's Look at Monetary Policy

                    This is another (very) long post on monetary policy derived from a speech by Anthony Santomero, president of the Philadelphia Fed, who gives an insider's perspective on monetary policy. Many of you will not be interested in reading this in its entirety, so I will excerpt the part I believe may be of the most interest, his confidence that the transition to a new Fed chair will be smooth, and place it up front. For those who do continue reading the remarks describe, much as this speech did several years back, what goes on behind close doors at FOMC meetings. In addition, it describes some of the challenges facing monetary policy that will be inherited by Alan Greenspan's replacement. However, even though there are challenges, Santomero is confident that the transition to a new chair will proceed smoothly.  Here's that part of the speech:

                    I am confident that the passing of the torch from Chairman Greenspan to his successor will be smooth and seamless. For one thing, while processes may change, the Fed’s mission will not. Our dual mandate of fostering full employment and a stable price environment remains firmly in place. For another, ... In addition to the Chairman, the policy process also includes the other six members of the Board of Governors and the 12 Reserve Bank Presidents. All ... participate in the discussions, and contribute... The result is a dynamic mix of keen insight and intellect, of economic analysis and interpretation, and of stewardship and policymaking from some of the best economic minds in our nation. ... Media reports ... cite widespread concern over large fiscal budget and international trade deficits, ... growing inflationary pressures, and ever-present political uncertainties. They lament the passing of the baton from Alan Greenspan... A leading Wall Street economist recently called him “the world’s most revered central banker” and credited him with “...saving the world from financial collapse.” When I read this quote, I had a strong sense of déjà vu. I remember when Paul Volcker left the Fed. A New York Times article expressed a similar concern, saying: “The markets had incredible confidence in Paul. Investors saw him as the one guy with the knowledge, guts and skill to stop inflation and hold the system together… Indeed, some economists are saying that one reason there is growing fear of an economic catastrophe is that the Reagan administration let Volcker go, replacing him with the less-experienced and less-well-known Alan Greenspan.” In short, despite the challenges posed by any transition, I have no doubt that the Federal Reserve will continue to grow and evolve under its new leadership...

                    I agree. Now, on to the description of the FOMC policy setting procedure.

                    Continue reading "Philadelphia Fed President Santomero with an Insider's Look at Monetary Policy" »

                      Posted by on Monday, October 17, 2005 at 04:40 PM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (4) 


                      Banking Reform in China

                      Following up on this post describing advice the U.S. is giving China, Weijian Shan of Newbridge Capital analyses the Chinese banking system, the banking reforms in progress, and the need for further widespread reform in this commentary from the Wall Street Journal:

                      Will China's Banking Reform Succeed? By Weijian Shan, Wall Street Journal: ...more than two years ago, China's newly appointed governor of the central bank, Zhou Xiaochuan, told a business audience that China would take a "gradualist" approach to reforming its banking system. Many thought the governor meant China was in no hurry to fix its banks. Since then, however, China has injected more than $60 billion to recapitalize four of its five largest banks and has transferred some $200 billion worth of nonperforming loans out of these banks ... almost twice as much as Korea spent to restructure its banks during the 1997-98 financial crisis. ... A healthy banking system ... is necessary for China to sustain its economic growth. ... In spite of its rapid growth ... the Chinese economy remains inefficient and wasteful. ... These inefficiencies have not yet slowed down the economic expansion because the growth fueled by the country's extraordinarily high savings rate ... As the savings are channeled into investments by banks, the inefficiencies and wastefulness simply turn into bad loans. ... To continue to grow, China needs to clean up its banking system and force its banks to kick the habit of underwriting bad loans. A strong banking system will ensure more efficient allocation and use of scarce resources, allowing the economy to grow on the basis of improved productivity, as opposed to increased input. Chinese leaders' resolve to reform the nation's banking system shows that they understand what it takes to sustain economic growth. They are wise and far-sighted enough to take painful measures without waiting until the going gets tough. Whereas many other countries regard foreign capital as the last resort or a necessary devil in solving a banking crisis, China is in the enviable position of having sufficient [foreign-exchange reserves] to clean up its banks without foreign help. ...

                      China wants foreign investors not so much for their capital, but for the expertise they bring in. As such, China is prepared to be generous. ... Foreign investors may be only minority shareholders. But it is whether they are treated as necessary devils or welcome angels that will make the difference between the success and failure of China's banking reform. Chinese banking officials do not wish foreign investors to simply take a ride. They want them to contribute to changing how banking business is conducted in China. Chinese banking reform does not just redress the balance sheet, it involves systemic change. ... the most significant step is China's effort to push its banks to adopt good corporate governance. Almost all the national banks have been, or are in the process of being, transformed into joint stock companies with boards whose independent directors must represent a third of the total. ... This subjects them to greater transparency, tighter supervision and close scrutiny by overseas regulators and public shareholders. While what China has accomplished thus far in its banking reform is impressive, Chinese banking still has a long way to go to meet international best practices. ... More broadly, it will take time for Chinese banks to build a real credit culture in which lending decisions are made on the basis of the credit worthiness of the borrower and risk analysis, regardless of relationships and government policies. In hindsight, a "gradualist" approach means one step at a time, although the pace of change is anything but slow. ... The rest of the journey will be very tough. Still, there is good reason to believe that China will get there eventually, given the vision and resolve its leadership has shown in banking reform so far.

                        Posted by on Monday, October 17, 2005 at 03:12 AM in China, Economics, Financial System, International Finance | Permalink  TrackBack (1)  Comments (10) 


                        Cutting the Budget at the Center of House Agenda

                        This is not the solution to the budget problem I was hoping for. Balancing the budget on the backs of the poor, particularly when the weight has been shifted due to tax cuts, is not my notion of an equitable change in the tax burden. If cuts are to be made, there must be a better place to start than with items like health care for the poor:

                        House GOP Leaders Set to Cut Spending Leadership Shake-Up Spurred Policy Shift, by Jonathan Weisman, Washington Post: House Republican leaders have moved from balking at big cuts in Medicaid and other programs to embracing them, driven by pent-up anger from fiscal conservatives concerned about runaway spending and the leadership's own weakening hold on power. Beginning this week, the House GOP lawmakers will take steps to cut as much as $50 billion from the fiscal 2006 budget for health care for the poor, food stamps and farm supports, as well as considering across-the-board cuts in other programs. Only last month, then-House Majority Leader Tom DeLay (Tex.) ... told a packed room of reporters on Sept. 13 that 11 years of Republican rule had already pared down the federal budget "pretty good." ... But faced with a revolt among many conservatives sharply critical of him for resisting spending cuts, DeLay three weeks later told a closed meeting of the House Republican Conference, "I failed you," according to a number of House members and GOP aides. Then, in a nod to the most hard-core conservatives, DeLay volunteered, "You guys filled a void in the leadership." The abrupt shift reflects a changed political dynamic in the House in which a faction of fiscal conservatives -- known as the Republican Study Committee, or RSC -- has gained the upper hand because of DeLay's criminal indictment in Texas, widespread criticism of the Republicans' handling of Hurricane Katrina, and uncertainty over the future of the leadership, according to lawmakers and aides. Now, cutting the budget -- which only months ago seemed far from possible -- is at the center of the agenda in the House. ... But Republicans could be taking a big risk by cutting Medicaid programs while their standing in the polls has plummeted and Democrats gear up for a fight. "We have seen a sea change in the budget policies of House Republicans," said Thomas S. Kahn, the Democratic staff director of the House Budget Committee. "Clearly, the RSC's influence over their budget policies is in the ascendancy."...

                        The rest of the article contains an interesting account of the politics in the background. With respect to the budget cuts to items like health care for the poor, food stamps, and farm supports, I expect a political firestorm, but a faint voice reminds me to not to be so sure. Outrage is spread pretty thin these days.

                        [Update: Please read Brad DeLong's post about this story here. Even given Brad's comments about this not being anything new, save for 3 billion, the focus of the discussion in congress and the potential change in power within congress is still of concern because it indicates where future deficit reduction efforts will be focused.]

                          Posted by on Monday, October 17, 2005 at 01:34 AM in Budget Deficit, Economics, Politics | Permalink  TrackBack (0)  Comments (3) 


                          Paul Krugman: The Big Squeeze

                          This is something we should all be worried about. The world is changing, and changing fast. Competition at the global level is becoming more intense and there is no end in sight anytime soon. Are we as a nation ready? Paul Krugman is worried about the effect global competition is having on ordinary Americans. What type of bellwether is the recent bankruptcy of Delphi? What does it tell us about the future for the working class in the United States? Will protectionism rear its ugly head as a solution to labor's emerging problems?

                          The Big Squeeze, by Paul Krugman, NY Times: ...There are a lot of questions about how Delphi and the auto industry in general reached this point. ... But Delphi's bankruptcy is a much bigger deal than your ordinary case of corporate failure and bad, self-dealing management. If Delphi slashes wages and defaults on its pension obligations, the rest of the auto industry may well be tempted - or forced - to do the same. And that will mark the end of the era in which ordinary working Americans could be part of the middle class. There was a time when the American economy offered lots of good jobs - jobs that didn't make workers rich but did give them middle-class incomes. The best of these good jobs were at America's great manufacturing companies, especially in the auto industry.

                          As Krugman notes, while America has grown wealthier since 1970, wages have barely kept up with inflation.  And as noted recently in the media and elsewhere (e.g. see here), and by Krugman as well, since 2004 the median real income of full-time male workers declined by over 2%.  That's of concern:

                          So what are we going to do about it? During the 1990's optimists argued that better education and worker training could restore the economy's ability to create good jobs. Mr. Miller of Delphi picked up that argument as part of his public relations campaign for wage cuts: "The world pays knowledge workers far more than it pays manual, industrial workers," he said. "And that's what's sweeping over here." But that's a very 1999 sort of answer. During the technology bubble, it was easy to believe that "knowledge workers" were guaranteed good jobs. But when the bubble burst, they turned out to be as vulnerable to downsizing and layoffs as assembly-line workers. And many of the high-paid jobs that vanished when the technology bubble burst have never come back, partly because they have been outsourced to India and other rising economies. Today, some of us like to stress the depressing effect of the dysfunctional American health care system on wages. A large part of the problem facing the auto industry and other employers ... is the cost of providing health insurance.... If we had a Canadian-style system ... the big squeeze might be averted, at least for a while. One more reason to be angry with auto executives is that they never threw their support behind national health care in this country, even though such a system is clearly in their companies' interest. What if neither education nor health care reform is enough to end the wage squeeze? That's the possibility that makes free-trade liberals like me very nervous, because at that point protectionism enters the picture. When corporate executives say that they have to cut wages to meet foreign competition, workers have every right to ask why we don't cut the foreign competition instead. I hope we don't have to go there. But denial is not an option. America's working middle class has been eroding for a generation, and it may be about to wash away completely. Something must be done.

                          I am not ready to give up on education and infrastructure development as a means of getting the U.S. ready to withstand competition in the future. Are we developing and supporting our educational resources and infrastructure so as to be competitive in the emerging global economy? Or are we squandering the opportunity by running up huge budget deficits for other purposes leaving few resources to use to withstand the competitive onslaught that will inevitably come at us?  Looking at this chart, and having seen many like it, I am not convinced we have invested in ways that allow the type of educational access for the middle class available in the 1960s and 1970s.  Until we've given this a good faith effort, and its hard to say we have when per student support for higher education, and education more generally, has been falling for decades, I can't yet write education off as a viable strategy.  Yes, we need to reign in health care costs, etc. that will help too, but let's not abandon knowledge and infrastructure in the process. As the world develops, we will have an comparative advantage in something and that is what we will produce - we won't outsource our comparative advantage. I would prefer it be jobs with the highest possible marginal product and compensation for all our workers.

                            Posted by on Monday, October 17, 2005 at 12:34 AM in Economics, International Trade, Unemployment, Universities | Permalink  TrackBack (0)  Comments (57) 


                            Sunday, October 16, 2005

                            Inflation Adjusted Tuition and Fees Since 1975

                            This is a follow up to this post.  I decided to use data I know fairly well to illustrate how tuition and fees have changed in the last thirty years, so I used data for the University of Oregon rather than national averages, but these trends are common across states.  These figures are adjusted for inflation using the CPI. The nominal tuition and fee statistics are here, and the  price deflator used is here (1982-84=100, e.g. the nominal value for 2004-05 is $5,670).

                            Inflation Adjusted Tuition and Fees

                            Time periods when the disinvestment in higher education has been the most rapid, around 1981, 1991, and 2001, are evident in the graph.

                              Posted by on Sunday, October 16, 2005 at 10:21 AM in Economics, Oregon, Politics, Universities | Permalink  TrackBack (0)  Comments (3) 


                              A Recipe for Product Differentiation

                              This is from a site dedicated to product differentiation through branding. It even does BrandSpeak:

                              Branding, The Myth of Authenticity, by Alicia Clegg, brandchannel.com (also in BusinessWeek Online): What do brands like Häagen Dazs, Baileys Original Irish Cream, Bombay Sapphire and Kerrygold all have in common? Each stretches the myth behind the brand to promote heritage and authenticity. Somewhere in my handbag there's a bar of chocolate with mysterious links to ancient Mayans. I'm going to eat it with a mug of coffee from the "volcanic slopes and Caribbean mountains of Guatemala." ... Working the link between place of origin and product quality is the oldest trick in the brand book. It milks our thirst for mythology and plays mercilessly on our superstitious hope that special places have the power to revitalise and transform. But just how deep does the connection have to be for the magic to cast its spell? ... delve a little deeper and it quickly becomes apparent that the cut-off that divides spoofs from the genuine article is far from precise. At one end of the spectrum are the tricksters; brands like Häagen Dazs ... which brazenly trades on the ice-cool sophistication implied, but never quite claimed, by its phony Scandinavian-sounding name. At the other extreme are genuine nobility, fine wines..., single estate teas and waters prized for their local mineral properties. Somewhere in the middle are brands that mingle fact and fiction in an imaginative fusion of make-believe and authenticity. Which approach suits the brand-savvy world of the post-modern consumer ... do brands that take poetic liberties with our fancy set themselves up for a fall?

                              Baileys Original Irish Cream is a classic example of a brand that climbs high on the back of a provenance blending fact with fiction. Launched in 1974, Baileys is the world's top selling liqueur brand. In each and every country, the idea that sells Baileys is its Irishness. "It's hugely important," says Baileys' external affairs director Peter O'Connor. ... But is Baileys Irish? So far as the ingredients go, Baileys is what it says: Irish. ... But the Celtic motifs on the label surely hint at a more ancient past than Baileys can legitimately lay claim to in its thirty-plus years of business. ... Its identity is a sham, a colorful invention cooked up by a multinational drinks group, in a London office overlooking the Bailey hotel. And the signature? "There's no Mr or Mrs Bailey," admits O'Connor. "... The R.A. Bailey was a way of ... getting across that the product comes from Ireland." ... Strong design and good judgment have helped Baileys make the most of its assumed identity. The packaging ... has strong Irish associations, but the allusions are made sparingly ... The bottle's retro look has been carefully managed too...

                              Beverage specialist Clipper is a master of imaginative suggestion. On its classic teas range, the company displays artworks loosely associated with the product's place of origin. The English breakfast blend shows a carved sandstone relief from sixth century Northern India; the Assam tea is represented by a jeweled turban pin from the Mughal dynasty. ... The links between modern classics and the cultures to which they lay claim are sometimes very loose indeed. Premium gin Bombay Sapphire is a good example of this. Launched in 1987, the brand is allegedly made from a long-lost recipe dating back to 1761. The brand's main pulling point ... is its design-led square blue bottle depicting Queen Victoria, Empress of India. But how many of ... its "heritage cues," have a basis in fact? Not many. ... the brand has no links with the famous jewel, nor with Victoria, beyond the hijacked allusions. ... Yet curiously, none of this takes away from Bombay's appeal. What counts is that the fusion of ideas works stylistically, elevating it into something more interesting than just another gin brand. ... Brands that aspire to be contemporary classics have to work on many levels. First and foremost, the product needs ... some special quality that sets it apart. But having a "story" to tell, something that fixes a brand's identity in people's imagination and gets across what it stands for is crucially important too. Whether the story is made up, or rooted in fact, is beside the point. Like a fable in folklore, what matters is that the brand's mythology has the power to intrigue and to draw people in.

                                Posted by on Sunday, October 16, 2005 at 12:47 AM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (2) 


                                Thanks for the Suggestion

                                If someone tells me I need a haircut, I won't get one for a week or two so that when I do, they won't think it had anything to do with their comment. Once, my neighbor mentioned my lawn was getting a bit long.  It got pretty ugly before I finally mowed it. I think China reacts to suggestions from the U.S. in the same way:

                                U.S. Offers Details of Plan for Open Markets in China By Edmund L. Andrews, NY Times: The Bush administration is expected to present China's political leaders on Sunday with a sweeping plan to overhaul China's financial markets and open the country to foreign banks, investment firms and insurance companies. ... The plan ... calls for China to speed up the privatization of state-owned companies, including banks; to develop a Chicago-style futures market for currency trading; to establish an independent credit-rating agency; and to crack down on bailouts for banks left holding bad loans. "What we tried to do is take a quantum leap in sophistication and scope," said Timothy D. Adams, undersecretary for international affairs at the Treasury Department. "It gives you a picture of the truly complex nature of what we are trying to do." Though many of the ideas are familiar, and often supported by Chinese leaders in principle, the list reflects an increased effort to lecture China about internal financial issues. That could backfire. Chinese leaders invariably bristle at pressure from American officials, and they could view the new American "priorities" as an unwelcome intrusion. The new tack comes as Treasury Secretary John W. Snow continues to show little progress on the volatile economic dispute with China over exchange rates...

                                  Posted by on Sunday, October 16, 2005 at 12:36 AM in China, Economics, International Finance, International Trade, Politics | Permalink  TrackBack (0)  Comments (8) 


                                  The Privatization of Public Universities

                                  This article on falling state support for higher education describes my experience fairly well:

                                  At Public Universities, Warnings of Privatization By Sam Dillon, NY Times: Taxpayer support for public universities, measured per student, has plunged more precipitously since 2001 than at any time in two decades, and several university presidents are calling the decline a de facto privatization of the institutions that played a crucial role in the creation of the American middle class. Graham Spanier, president of Pennsylvania State University, said this year that skyrocketing tuition was a result of what he called "public higher education's slow slide toward privatization." ... The share of all public universities' revenues deriving from state and local taxes declined to 64 percent in 2004 from 74 percent in 1991. At many flagship universities, the percentages are far smaller. About 25 percent of the University of Illinois's budget comes from the state. Michigan finances about 18 percent of Ann Arbor's revenues. The taxpayer share of revenues at the University of Virginia is about 8 percent. "At those levels, we have to ask what it means to be a public institution," said Katharine C. Lyall, an economist and president emeritus of the University of Wisconsin. "America is rapidly privatizing its public colleges and universities, whose mission used to be to serve the public good. But if private donors and corporations are providing much of a university's budget, then they will set the agenda, perhaps in ways the public likes and perhaps not. Public control is slipping away."

                                  Around here, you see examples of this everywhere. We are now building much of the infrastructure on campus using donor money rather than state support. Many faculty now come to us as endowed chairs funded from private sources. At the University of Oregon the percentage of state support is 13%, down from 32% in 1990 and the share of that from tuition, i.e. out of student's pockets, has risen substantially during that time. And if you include all the fees that have been shifted onto students that are billed separately from tuition, their share has risen even more:

                                  ...the future of hundreds of universities and colleges has become a subject of anxious debate nationwide. At stake are institutions that carry out much of the country's public-interest research and educate nearly 80 percent of all college students, and whose scientific and technological innovation has been crucial to America's economic dominance. ...The average in-state tuition nationwide for students attending four-year public colleges increased 36 percent from 2000-01 through 2004-05, according to the College Board, while consumer prices over all rose about 11 percent. The Morrill Act of 1862 granted federal land to states to finance the creation of public universities, and one of their core missions ever since has been to provide services that promote the well-being of communities and states. Today, educators using the term "privatization" say universities are being forced to abandon this social compact. In the process, many major public universities are looking more like private ones.

                                  Since the state isn't supporting us to any significant degree, we have been trying to get out from under many of the state's restrictions. That part is a lot harder. That 13 cents on the dollar purchases a lot of restrictions on what we are allowed to do as an institution. One thing we asked the state to do was to allow us to set our own tuition rates, or at least set them different from other schools in the state. We were allowed some, but not full flexibility. We are not alone in these types of requests:

                                  For instance, the University of Virginia and other public universities in the state responded to years of dwindling financing by asking Virginia's General Assembly to extend their autonomy and to reaffirm the university governing boards' authority to raise tuition. ... Two years ago, Miami University of Ohio became the first public institution to adopt the tuition model used by private colleges, eliminating the differential between in-state and out-of-state residents. Across the nation, educators said, public anger is rising not only about tuition but about the increasing numbers of faculty members who focus on research rather than on teaching undergraduates, and about the time that university presidents spend hobnobbing with billionaires. University administrators say all three phenomena are related to the transformation of revenues. As private donations and federal grants make up a larger proportion of universities' revenue, more professors are paid mainly to conduct research. And as state financing drops, more building projects depend on private philanthropy. At the University of Wisconsin at Madison, Grainger Hall, which houses the business school, was financed largely by donations from David W. Grainger, chairman of W. W. Grainger Inc., the business-to-business distributor; from his wife; and from the Grainger Foundation. The school of pharmacy is in the new Rennebohm Hall, named after Oscar Rennebohm, whose drugstore chain amassed a fortune. The Rennebohm Foundation financed the building. "Wisconsin people see all the construction on campus and don't understand why the university is complaining about budget cuts," Dr. Lyall said. "We have this apparent incongruity of building growth at a time when resources for teaching in those buildings are shrinking."

                                  And this point is important too:

                                  But flagship universities are less vulnerable to financing declines than are hundreds of state-run four-year colleges that do not offer doctoral programs or conduct significant research, said David Ward, president of the American Council on Education, the nation's largest association of universities and colleges. The flagships can replace some state revenues with federal grants and private donations, but the four-year colleges cannot ...

                                  As we shift more and more costs onto students, as we go out of our way to attract students who provide more net revenue, as we accept more and more money with small seemingly insignificant strings attached, we should look very carefully at the students that are excluded in the process and at how it potentially diverts us from our core mission.

                                    Posted by on Sunday, October 16, 2005 at 12:15 AM in Economics, Universities | Permalink  TrackBack (0)  Comments (18) 


                                    Saturday, October 15, 2005

                                    New Law Induces Big Increase in Bankruptcy Filings

                                    The new bankruptcy law that takes effect on Monday law makes it more difficult and more costly for households to eliminate burdensome debt.  Bankruptcy and changes in bankruptcy law involve both human and economic costs, and there are important equity considerations to worry about as well. But as a passing note, the change in the law is going to make it much harder to asses the extent to which households are feeling the strain of the credit load they've assumed in recent years in the event of a slowdown in housing or economic activity more generally.  For example, even now, how much of the recent increase in bankruptcies over their normal level can be attributed to an increase in households with credit problems, and how much is due to households filing earlier than normal to avoid the stricter law? What should be defined as the normal level of bankruptcy after the change in the law to measure the actual numbers against given the number of people who file early and the change in filing behavior the new law will induce? This will make it harder to determine if households are beginning to face increased difficulties:

                                    A Rush to Beat Bankruptcy Deadline Filings Spike on Last Weekday Before Tougher Law Takes Effect, by Terence O'Hara, Washington Post: ...bankruptcy court clerk offices around the region and the country yesterday overflowed with filers beating the deadline before tougher new bankruptcy rules take effect Monday. ... Charles Miller, division manager of the Alexandria court clerk's office, said ..."We were surprised by how well prepared the filers were in general," ... "They had done their homework. They just waited until the last minute." The line of filers stretched out of the clerk's office waiting room in the late afternoon. "It was wild ... at least wild for us," Miller said. The rush to file under existing bankruptcy rules was caused by passage this year of the Bankruptcy Abuse Prevention and Consumer Protection Act , which takes effect at midnight Sunday night. The law, long pushed by banks and consumer lending companies, is the most extensive change in the U.S. bankruptcy code in decades. It makes it harder for individual filers to erase debts by, among other things, requiring filers to go through credit counseling. Higher-income filers in many cases will be forced into Chapter 13 bankruptcies, which require repayment of a least a portion of debt. ... "The biggest change is that it increases dead-weight transaction cost of doing a bankruptcy," said Robert Weed, one of the most active bankruptcy lawyers in the Alexandria court. The new law has been a boon, at least temporarily, to Weed and other bankruptcy lawyers. ... He started turning away clients three weeks ago and had a goal of getting all his clients filed by Thursday. ... courts in New York City, Denver and other jurisdictions reported lines stretching out into streets. In Denver, 300 people were lined up to file by mid-morning. ... Burlingame, Calif.-based Lundquist Consulting Inc., which compiles bankruptcy statistics, said it expected 200,000 bankruptcy filings this week, far and away a weekly record. Typically, there are about 30,000 filings in a week...

                                    Debtors Throng to Bankruptcy as Clock Ticks, By Eric Dash, NY Times: ...Through Oct. 8, consumers had filed more than 1.47 million bankruptcy petitions, a 19.4 percent increase over the same period in 2004, according to Lundquist Consulting, a company in Burlingame, Calif., that compiles bankruptcy statistics. Almost 103,000 petitions were filed in the first three days of this week alone. ... "We have never seen anything like this," said Barbara J. May, a consumer bankruptcy lawyer in St. Paul. "We knew it would be an upswing, but this is pandemonium."

                                    Graphic from NY Times Showing the Change in Bankruptcies

                                      Posted by on Saturday, October 15, 2005 at 12:45 AM in Economics, Housing, Policy | Permalink  TrackBack (0)  Comments (3) 


                                      Foundering Theory

                                      From fifty years ago in Scientific American:

                                      NOVEMBER 1955 FOUNDERING THEORY—The size and peculiar shape of the Pacific trenches stir our sense of wonder. What implacable forces could have caused such large-scale distortions of the sea floor? And what is the significance of the fact that they lie along the Pacific ‘ring of fire’—the zone of active volcanoes that encircles the vast ocean? Speculating from what we know, we may imagine that forces deep within the earth cause a foundering of the sea floor, forming a V-shaped trench. The depth stabilizes at about 35,000 feet, but crustal material, including sediments, may continue to be dragged downward into the earth. This is suggested by the fact that the deepest trenches contain virtually no sediments, although they are natural sediment traps.

                                      One hundred years ago, this appeared:

                                      NOVEMBER 1905 TORPEDO MISS—...it cannot be denied that the torpedo has, at times, been greatly overrated. Indeed, the experience of the recent war seems to prove that only under exceptional and very favorable conditions can the torpedo get in its blow. In the fleet engagements on the high seas it seems to have exercised very little, if any, influence upon battle formations. Consequently, we think it unlikely that torpedo tubes will be fitted into future warships.

                                        Posted by on Saturday, October 15, 2005 at 12:35 AM in Science | Permalink  TrackBack (0)  Comments (1) 


                                        St. Louis Fed President Poole Describes the Fed's Monetary Policy Rule

                                        William Poole, president of the St. Louis Fed, gave a speech today at the Cato Institute. Here are quotes from his remarks after the speech as reported by Bloomberg followed by the speech itself. Poole believes that Fed predictability is an important factor in macroeconomic stabilization. In his speech, he describes in detail the rule the Fed follows in setting monetary policy. He says the rule is too complicated to represent through a simple mathematical equation, but it is still a rule.  His goal in analyzing and describing the Fed's current monetary policy rule is to enhance the transparency and predictability of Fed behavior and in the process promote further macroeconomic stabilization:

                                        Fed Successor Should Keep Predictability, Poole Says, Bloomberg: Federal Reserve Chairman Alan Greenspan's successor should maintain his policy of ''consistent and predictable'' moves in the benchmark U.S. interest rate, St. Louis Fed President William Poole said. ... ''We should be hopeful that consistent and predictable Fed policy is likely to continue into the future.'' ... Poole didn't comment on the near-term outlook for interest rates or the economy. The ''highly predictable'' nature of Fed policy in recent years will ''be seen as one of the hallmarks of the Greenspan era,'' said Poole ... On Sept. 20, the Federal Open Market Committee voted to raise the benchmark U.S. interest rate to 3.75 percent and repeated a statement that suggests the rate will continue to rise at a ''measured'' pace. ... ''In due time, the language is going to change,'' Poole said today ... ''What we want to do is make sure we do not have expectations build'' for inflation, Poole told reporters... ''What we are trying to do is to prevent increases, which we have seen from energy, from passing through'' to core inflation and ''becoming a generalized inflation problem.'' ... ''Policy actions should be unpredictable only in response to events that are themselves unpredictable. The response function itself should be as predictable as possible.'' While the Fed can strive to keep inflation at a certain level when averaged over a period of several years, it would be a ''losing game'' to try to eliminate short-term fluctuations, Poole said ... Going after short-term fluctuations ''may have important side effects on financial markets, and indeed employment and output, that are undesirable,'' he said. ''What you need is a central bank framework that produces a high degree of certainty about the average inflation rate over a span of a couple of years, and then you let the market handle all the short-run stuff.'' Fed actions won't affect the rising prices of natural gas, Poole said. ... ''Monetary policy is not going to be able to help restore natural gas production in the Gulf of Mexico,'' Poole said...

                                        Here's the speech itself.  I cut a bit, then added the graphs to the text to avoid having them on a separate page as in the original, so this post is relatively long.  But for those interested in the nuts and bolts of monetary policy and how to interpret Fed actions, it's worth it.  For example, at a recent meeting several regional banks did not propose increases in the discount rate.  Poole discusses how to interpret such events, how to interpret what's written up in press releases and minutes, what the Fed considers in setting the target federal funds rate, and so on. The footnotes and references are in the original linked document:

                                        The Fed's Monetary Policy Rule, by William Poole, president, St. Louis Fed: ...I’ve chosen a title designed to be provocative, for I suspect that few consider current Federal Reserve policy as characterized by a monetary rule. My logic is this: There is now a large body of evidence, which I’ll review shortly, that Fed policy has been highly predictable over the past decade or so. If the market can predict the Fed’s policy actions, then it must be the case that Fed policy follows a rule, or policy regularity, of some sort. My purpose is to explore the nature of that rule... Before digging into specifics, consider what the “rules versus discretion” debate is about. Advocates of discretion, as I interpret them, are primarily arguing against a formal policy rule, and certainly against a legislated rule. They believe that policy will be more effective if characterized by “discretion.” Discretion surely cannot mean that policy is haphazard, capricious, random or unpredictable. ... My view has evolved over time to this general position: Monetary economists have not yet developed a formal rule that is likely to have better operating properties than the Fed’s current practice. It is highly desirable that policy practice be formalized to the maximum possible extent. ... monetary economists should embark on a program of continuous improvement and enhanced precision of the Fed’s monetary rule. It is possible to say a lot about the systematic characteristics of current Fed practice, even though I do not know how to write down the current practice in an equation. It is in this sense that I’ll be describing the Fed’s policy rule. And given that, as far as I know, there is no other effort to state in one place the main characteristics of the Fed’s policy rule, I’m sure that subsequent work will refine and correct the way I characterize the rule...

                                        Continue reading "St. Louis Fed President Poole Describes the Fed's Monetary Policy Rule" »

                                          Posted by on Saturday, October 15, 2005 at 12:24 AM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (2) 


                                          Friday, October 14, 2005

                                          The Houston Chronicle on Dallas Fed President Richard Fisher

                                          Here's the Houston Chronicle on Dallas Fed president Richard Fisher.  It looks like the fun will continue:

                                          No Shrinking Violet, by Jessica Holzer, Houston Chronicle: No one could accuse Richard Fisher of being a dull, old central banker — at least not after his splashy debut as president of the Dallas Federal Reserve Bank. Barely two months on the job he started in April, he managed to spark a rally in the stock market, send bond yields tumbling, and make financial headlines from Frankfurt to Taipei. Fisher, who gets to vote on the Federal Open Market Committee, which sets rates for the Fed, predicted on CNBC that the Fed was in its "eighth inning" of rate hikes — meaning that it would lift rates one more time before declaring its tightening job done — though he added that there could be "extra innings." Back in Washington, Fed officials were stunned. The remarks prompted a Fed spokeswoman to announce tersely that Fisher did not speak for the committee. Fisher admits that he took some heat for his remarks, but he wasn't chastened for long. In a speech last week, Fisher roiled markets again, though less so this time, with yet another metaphor. The Fed, he said, can't "let the inflation virus infect the blood supply and poison the system." The episodes are testament to the power of the FOMC members and the way the media and the financial markets hang on their every word. But they are also telling about Fisher, a former Dallas fund manager and Democratic candidate for the Senate who, according to friends, is smart, ambitious and no shrinking violet. ...

                                          Fisher's button-down résumé is in sharp contrast to his colorful upbringing. His Australian father was abandoned on the streets at the age of six. His mother came from a family of bankrupt Norwegian whalers living in South Africa. The two met, according to Fisher, after his father made his way to South Africa, probably as a stowaway, at age 19. Fisher grew up poor in Tijuana, Mexico, where his parents settled after they were denied entry to the U.S. According to Fisher, his mother crossed the border to California to give birth to him in 1949. "If you grew up like I did, you never had comfort knowing where the next meal was coming from and you never want to live like that again," he said. After the family moved to the U.S., Fisher began a startling rise, helped by scholarships to a prep school in New Jersey and the U.S. Naval Academy.

                                          During his second year at the academy, a visiting professor from Harvard recruited him to that university as a transfer student. To pay the tuition, Fisher held down three jobs — at a bicycle shop and as a short-order cook and a researcher for a professor — and also rented out his room on the weekends to amorous couples. Of his college days, Fisher said, "Obviously, I didn't have a lot of dates and I didn't have a lot of fun, but I am very grateful to Harvard." Lucky for Fisher, the Dallas Fed has a history of outspoken presidents and his comfort in the spotlight was one of his selling points. "We knew that Richard would be a strong voice," said Malcolm Gillis, a member of the Dallas Fed's board and the former president of Rice University. Some say that Fisher will have higher ambitions after his service at the Fed. Given his efforts to keep up his ties with politicians on both sides of the aisle, Fisher does not seem likely to turn up his nose at a prestigious appointment. "Richard will always make a mark because he's an important player," said Al From, the CEO of the Democratic Leadership Council, the centrist Democratic group that Fisher helped to found in the late 1980s. "But I suspect it will always be in non-elective politics."

                                            Posted by on Friday, October 14, 2005 at 09:30 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (2) 


                                            Which Regions Would Be Hurt Most from a Housing Slump?

                                            BusinessWeek Online looks at which areas of the country are most vulnerable to a slowdown in housing:

                                            Where A Slump Would Hurt Most, BusinessWeek Online: ...If the housing market turns south, where is the economic damage likely to be the greatest? ... the greatest economic impact may not come where prices slide the most. Instead, the regions that see the most pain probably will be those where homebuilding has been a major source of new jobs. A decline in housing could accelerate job losses in the entire local economy ... The most vulnerable spots, according to a new analysis by BusinessWeek, include the Riverside-San Bernardino (Calif.) region -- the so-called Inland Empire east of Los Angeles -- San Diego, Phoenix, and Las Vegas. In each of these areas new jobs in construction accounted for over 20% of total payroll growth in the past year, vs. a national average of 10%. This measure counts more than just housing construction. ... In the East, regions that depend heavily on construction employment for growth include Tampa-St. Petersburg and greater Baltimore. In Newark, N.J., and in the nearby wealthy New Jersey surburbs of New York, rising construction employment is partially masking a decrease in other kinds of jobs. ... Surprisingly, some of the areas that have seen the biggest runup in housing prices aren't overly vulnerable to a homebuilding slide. ... Construction in these coastal cities has been constrained by severe zoning restrictions, along with a shortage of open land. ... Other regions would also come through a housing downturn relatively unscathed. Most Texas cities, for instance, are doubly insulated from a downturn. Housing price hikes been moderate, and construction is a small part of payroll growth ... Contrast that with housing's role as an engine of growth in Southern California's Riverside and San Bernardino counties, which stretch east to the Arizona and Nevada borders. Thanks to inland prices that are far cheaper than those along the coast ... construction is hopping. Subdivisions are being erected by the score in former citrus groves and dairy farms. ... While construction by itself accounts for 33% of new jobs in Riverside and San Bernardino, that share reaches 39% when jobs in lending, real estate commissions, renting, and leasing are included. And it's not just roofers and real estate agents who are finding work plentiful. Also raking it in are small businesses catering to the trend, such as Taylor's Appliance in Riverside. The family-run retailer has added 16 new employees in the past five years, bringing the total to 48... Regions that are heavily dependent on housing for employment growth will suffer more than most when a downturn comes. ... Falling home values are no fun anywhere. But if you want to know which metro areas will really take it on the chin when prices stall out, look for the ones whose jobs depend on it.

                                              Posted by on Friday, October 14, 2005 at 02:06 AM in Economics, Housing, Unemployment | Permalink  TrackBack (0)  Comments (12) 


                                              The Economic Benefits of Vaccination Programs in Poor Countries

                                              A new study reported in The Economist provides estimates of the economic benefits of vaccination programs in poor countries.  The study includes important indirect economic benefits of vaccination in its estimates that are missing from previous studies:

                                              A drop of pure gold, The Economist (free link): What good is vaccination? Obviously it is good for the person receiving the vaccine ... More subtly, it can be good for an entire population since, if enough of its members are vaccinated, even those who are not will receive a measure of protection. ... But in the case of many vaccines, there are non-medical benefits, too, in the form of costs avoided and the generation of income that would otherwise have been lost. ... Quantifying these more general benefits is hard. But a pair of researchers from Harvard University has just tried. David Bloom and David Canning, together with Mark Weston, an independent policy consultant, have looked at two vaccination programmes and attempted to calculate the wider benefits. Their conclusions have just been published in World Economics. Dr Bloom and Dr Canning believed that previous attempts to quantify the non-medical benefits of vaccination had ... failed to take account of recent work on the effects of health on incomes. For their study, they and Mr Weston identified how vaccination ... might increase wealth. The first benefit was that healthy children are more likely to attend school and better able to learn. The second was that healthy workers are more productive. Both of these seem fairly obvious. Two other benefits are less so... One is that good health promotes savings and investment. This is because healthy people both expect to live longer (which gives them an incentive to save) and actually do live longer (which gives them more time to save). The other is that good health—and, particularly, expectations about the good health of one's offspring—promotes the so-called demographic transition from large to small families that usually accompanies economic development. None of these factors, the researchers thought, had been properly taken account of in previous estimates of the cost-effectiveness of vaccination. To demonstrate that ... one of their ideas was correct, they turned to the Philippines. Here, a study called the Cebu Longitudinal Health and Nutrition Survey has been going on since 1983. It follows the lives of Filipina mothers and those of their children born in 1983 and 1984. ... The three researchers ... found a statistically significant difference in the language and IQ scores between otherwise comparable vaccinated and unvaccinated children. In both cases, those of the unvaccinated were lower. Since it is known from other studies that these scores are good predictors of adult income, the researchers concluded that childhood vaccination would have significant economic benefits. In order to predict those benefits, they turned to a vaccination campaign that is just beginning. The Global Alliance for Vaccines and Immunisation (GAVI) is a collaboration of governments, international organisations, vaccine-makers and charities. ... the researchers used data from previous vaccination programmes to estimate both the reduction in mortality and the improvement in the health of the living that might be expected to flow from the new GAVI programme. Then they combined these estimates with existing data about the economic effects of health improvement ... in poor countries... on future income. Using standard accounting methods ... they calculate that the new GAVI programme can be expected to generate an immediate rate of return of 12.4%, rising to 18% by the end of the programme. And that does not include any benefits that might come from the demographic transition. The dispassionate economic case for vaccination, therefore, looks at least as strong as the compassionate medical one. If the figures ... are right, it truly is an investment for the future.

                                              Here's a link to the article (subscription) in World Economics.

                                                Posted by on Friday, October 14, 2005 at 12:42 AM in Economics, Health Care | Permalink  TrackBack (1)  Comments (3) 


                                                Paul Krugman: Questions of Character

                                                This is only a small part of the original, but I think it captures the essence of what Paul Krugman says in his latest column discussing the failure of the media in their role as journalists:

                                                Questions of Character, by Paul Krugman, Commentry, NY Times: ...[M]any ... in the news media ... claim, at least implicitly, to be experts at discerning character - and their judgments play a large ... role in our political life. The 2000 election would have ended in a ... victory for Al Gore if many reporters hadn't taken a dislike to Mr. Gore, while portraying Mr. Bush as an honest, likable guy. ... So it's important to ask why those judgments are often so wrong. ... A large part of the answer is that the news business places great weight on "up close and personal" interviews with important people,... But such interviews are rarely revealing. ... most people ... are pretty bad at using personal impressions to judge character. Psychologists find ... that most people do little better than chance in distinguishing liars from truth-tellers. More broadly, the big problem ... is that there ...[is] ... no way for a reporter to be proved wrong. If a reporter tells you about the steely resolve of a politician who turns out ... unwilling to make hard choices, you've been misled, but not in a way that requires a formal correction. And that makes it all too easy for coverage to be shaped by what reporters feel they can safely say, rather than what they actually ... know. Now that Mr. Bush's approval ratings are in the 30's, we're hearing about his ... bad temper, about how aides are afraid to tell him bad news. Does anyone think that journalists ... just discovered these personal characteristics? ... Those who wrote puff pieces about Mr. Bush ... have been rewarded with career-boosting access. Those who raised questions about his character found themselves under personal attack ... Only now, with Mr. Bush in ... trouble, has the structure of rewards shifted. So what's the answer? ... What we really need is political journalism based less on perceptions of personalities and more on actual facts. ... Think ... how different the world would be today if, during the 2000 campaign, reporting had focused on the candidates' fiscal policies instead of their wardrobes.

                                                Let's come at this from both sides. Bruce Bartlett recently made similar points:

                                                Brad DeLong: Why Oh Why Can't We Have a Better Press Corps? (Cable News Department):   Bruce Bartlett is not a happy camper. He's also completely right on this:

                                                Poynter Online - Forums: From Bruce Bartlett, senior fellow, National Center for Policy Analysis: Once again, I just got off the phone with a booker for one of the cable news channels who wanted me to play the role of the knee-jerk Bush supporter and I had to decline. Although I am a conservative who generally supports Republican policies and generally opposes those that come from Democrats, I am uncomfortable being locked into that position. I also don’t think it makes for very good television. I understand that news shows want to show both sides -- or perhaps I should say two sides -- to controversial issues, lest they appear biased towards one position. But why must this always take the form of a debate? Why can’t they interview a person with one position separately and then interview someone else with another position in another segment? Wouldn’t this be a better way of achieving balance than by always having a debate? It’s hard enough to make one’s point in sound-bite form without being distracted by the debating tactics of one’s opponent. And, unfortunately, everyone is now trained to know that when one has the camera and microphone they are pretty much free to say what they like, even if it is totally off topic and even untrue. On one occasion, my opponent called me a liar on air at the end of the segment, so that I could not respond. Afterwards, off camera, he conceded that I was right. But no one watching the exchange ever knew that.... The fact is -- and everyone knows this -- that few issues are black-and-white. There are always nuances that are impossible to discuss in a debate format. But the debate format creates the illusion that there is always a simple answer to every complex problem and encourages average television viewers to assume that those of us in the Washington policymaking community are all idiots totally beholden to our party, without a lick of common sense or integrity...

                                                  Posted by on Friday, October 14, 2005 at 12:36 AM in Politics, Press | Permalink  TrackBack (0)  Comments (12) 


                                                  Lawrence Lindsey: No Need for Inflation Target

                                                  Former Fed governor Lawrence Lindsey, director of the White House National Economic Council from 2001 through 2002, is a "viable" candidate to replace Greenspan as Fed chair. Today, he said he does not favor an explicit inflation target because it would be difficult to agree on a target, the target would change, and setting a target would do little to enhance the Fed's credibility. In addition, he makes some interesting comments about a debate within the Fed over which measure of inflation to use should an inflation target be adopted, core inflation or overall inflation, and argues that since monetary policy is partly to blame for high aggregate demand and hence for high energy prices, overall inflation rather than core inflation is the appropriate target. Finally, he believes the announcement of a new chair will come just after the December 13 FOMC meeting:

                                                  No need for US price target - ex-Bush aide Lindsey, by Tim Ahmann, Reuters: An inflation target would do little to improve U.S. monetary policy since the Federal Reserve's anti-inflation credentials are solid, former White House economic adviser Lawrence Lindsey said on Thursday. Lindsey, considered a potential candidate to succeed Fed chief Alan Greenspan ..., also said deciding on an appropriate target would be a nettlesome issue, since the inflation measure most important to Fed policy could change with economic circumstances. "It's not clear, assuming you have a reasonable degree of credibility to begin with, that you gain much by saying at the end of 2006 this index will be such and such. I don't see where the gain is," Lindsey told a forum hosted by the American Enterprise Institute, where he is a visiting scholar. Lindsey ... said a debate was under way at the Fed over what an appropriate inflation gauge might be should the central bank decide that stating a goal for desired inflation was desirable. "Where you see the debate is core (inflation) over not core," he said, referring to inflation measures that strip out food and energy prices, largely because they are often viewed as volatile, ... Lindsey ... said stripping out energy prices made sense in the past when thinking about underlying inflation and interest rates, since their volatility usually reflected problems with supply, rather than strong demand. But he said the current situation was different. "What we have now is not a supply shock that's driving energy but a demand shock, which is arguably, at least in part, related to monetary policy," he said. "If that's true, excluding energy from your measure of inflation would probably be a mistake."...

                                                  Sources close to the White House have said Lindsey, who was Bush's top economic adviser during the 2000 presidential campaign and a key architect of Bush's tax cuts, is one the candidates who has a shot at taking the Fed's helm when Greenspan departs. ... Lindsey ...  said he thought Bush would wait until after the Fed's Dec. 13 policy-setting meeting to announce a Fed nominee so as not to undercut Greenspan's authority. ... Some analysts think a mid-December announcement would leave little time for Congress to approve a successor before Jan. 31. Lindsey, however, said six weeks would leave ample time for a nominee to be approved. Lindsey also said he thought Bush would move to fill two other vacancies on the Fed's board in concert with his decision on who should replace Greenspan...

                                                  My views on this are quoted here by New Economist in his discussion of the The Economist's endorsement of Kohn.  With respect to the two most recently discussed candidates, I favor Kohn over Lindsey. [Update:  See Brad DeLong on Kohn here.]

                                                    Posted by on Friday, October 14, 2005 at 12:08 AM in Economics, Monetary Policy, Politics | Permalink  TrackBack (0)  Comments (3) 


                                                    Thursday, October 13, 2005

                                                    Financial Times: The Danger of Rewriting Chapter 11

                                                    This is an interesting perspective on bankruptcy law. The quotes, "How irresponsible of a company that goes into Chapter 11 to be in dire financial straits at the time" and "...managers in Chapter 11 ... can get richer by persuading the hourly-paid workers to become poorer" set the tone:

                                                    John Gapper: The danger of rewriting Chapter 11, Financial Times: Steve Miller, chief executive of Delphi, was in New York this Monday to explain why he was putting the Michigan automotive parts supplier into Chapter 11 bankruptcy. “We are broke,” he said, holding his hands in the air. “I am sorry to be the one delivering that message.” Mr Miller did not look very sorry. In fact, he seemed like someone whose bargaining position with his employees had just become a lot stronger. Instead of having to wheedle unions into accepting cuts in pay and benefits for Delphi’s 34,000 hourly-paid US workers, he can threaten them with the company defaulting on its defined-benefit pension plan. Nor is Delphi broke. It may have lost $600m (€499m) in the first half of the year, but it has plenty of cash to tide it through the two years that it could be in Chapter 11. ... As Mr Miller also observed, Delphi’s bankruptcy is “well-financed, well-organised and well-planned”. He disdainfully compared Delphi’s approach with the “disgrace and embarrassment” of Collins & Aikman, a parts supplier that went bankrupt in May amid a liquidity crisis and asked customers to pay more to maintain production. How irresponsible of a company that goes into Chapter 11 to be in dire financial straits at the time.

                                                    Organised labour, meet organised capital. Chapter 11 of the Bankruptcy Code used to be regarded as a bizarre US arrangement allowing a troubled company’s managers to stay at the helm and restructure instead of being kicked out by the creditors. Eastern Airlines went into Chapter 11 in 1989 and remained there for two years losing money before collapsing. These days, ... Chapter 11 has become a device for reasserting management fiat over workers with the backing of bankers. Financiers have forced steel industry employees who were used to being highly paid to accept lower wages and fewer benefits. Delphi’s Chapter 11 filing suggests Detroit’s workers and retirees are next in line. ... David Skeel, a University of Pennsylvania law professor, says ... managers are given very large financial incentives to act rapidly and to take tough decisions. Delphi, like most Chapter 11 filers, had negotiated so-called “debtor in possession” (Dip) finance from Wall Street before it went to court. ... The covenants on such loans tend to be structured to give managers sufficient time to negotiate a restructuring but to discourage them from hanging around.

                                                    Even more pertinently, managers in Chapter 11 cases have their eyes on the prize of cash and equity bonuses if they can work the company into shape speedily without it having to be broken up. Delphi plans to award up to $87m in bonuses and 10 per cent of equity in a new company to its 600 most senior managers. They can get richer by persuading the hourly-paid workers to become poorer. Thus Chapter 11, which used to enable the managers of companies in difficulty to avoid both their creditors and hard decisions, has become fearsomely effective. ... All of this carries a price. They say you should not visit a sausage factory if you like eating sausages and in this case the ingredients being ground up for profits are health and (perhaps) pension rights. It does not take a union activist to be disturbed by the prospect of Delphi workers losing benefits that they dedicated their lives to gaining by working there. The stark contrast between workers’ losses and managers’ gains was one reason for changes to Chapter 11 in the bankruptcy reforms that come into effect next week. The new law bars companies from paying managers Chapter 11 bonuses and limits the time during which they have the sole right to propose a restructuring plan. ... Like many political interventions..., the reason for the changes is understandable but the danger of unintended consequences is considerable. The law reduces both the carrots given to managers and the sticks they can wield without putting much in their place. If managers have less incentive to sort out the financial problems of US rust-belt industries, who will take on the job? There is little sign of Washington doing so. Efforts to reform ... the Pension Benefit Guaranty Corporation – the federal safety net for underfunded schemes – are now stuck in Congress. Politicians tend to be happier handing out subsidies to companies than imposing rules that will upset potential voters. ... The spectacle of Delphi’s “well-financed, well-organised and well-planned” Chapter 11 filing is strange but it at least promises action. The alternative is to let the industry’s problems fester and its companies drift into, well, bankruptcy.

                                                    A lot about this article surprises me. For instance, it seems to say that Delphi is not in serious trouble and bankruptcy is a being used as a way to restructure and to force labor to accept lower wages and reduced benefits. I don't see how creating a financial incentive for managers to lower wages and benefits necessarily improves efficiency instead of creating a distortion.

                                                      Posted by on Thursday, October 13, 2005 at 01:50 AM in Economics, Health Care, Income Distribution, Regulation, Unemployment | Permalink  TrackBack (0)  Comments (17) 


                                                      Will Wealth Redistribution in China Make Currency Reform Easier?

                                                      This article from The Economist argues that China's recent commitment to redressing income inequality will make it easier for them to revalue their currency, but the article does not express confidence this will happen anytime soon due to China's worry that change of any type could bring about economic instability and result in political turmoil:

                                                      China contemplates change, The Economist: ...China’s leaders may finally be readying themselves for a change in the mercantilist, growth-at-any-cost model that has prevailed for decades. The Communist Party leaders’ annual meeting on economic policy ended on Tuesday with word of a strategic shift: from now on, there will be more emphasis on redressing the inequality and social disruption that market reforms have left in their wake. The most immediate worry for China’s leaders is social unrest. Last year, the government documented more than 70,000 demonstrations, attended by some 3m protesters. ... It needs the export sector to continue booming, in order to absorb surplus labour from the countryside and moribund state-owned companies. But it is aware that the rapid growth of recent years has opened fractures that could grow even wider. If China can heal some of those rifts with a greater focus on rescuing those left behind by the new prosperity, this may in turn take some of the pressure off the government to subsidise export workers through currency management. It may also help China to develop domestic demand that can take up the slack when America’s appetite for cheap goods falters...

                                                      But though details are sketchy, it seems improbable that China’s move towards more balanced economic growth will be anything like the kind of radical leap that foreign observers would like. There are some brands of wealth redistribution that would make foreign investors very jittery, such as higher taxes. Hu Jintao, China’s president, is still consolidating power; even if he had a radical vision of a China less dependent on the cravings of the American consumer, it would have to wait until his command of the party was firmer. More importantly, it would have to wait until Chinese consumers became sufficiently confident in the social safety-net and the provision of affordable health care and education that they were willing to save less and spend more. ... And though the rising tide of China’s economy undoubtedly has the power to lift all boats, there are worrying rigidities in the system, caused by the under-development of its financial system and the fact that economic reform has not been accompanied by political reform. Officials rightly fret that further economic changes could undermine the stability of the party’s rule. Amid all the talk of addressing the wealth gap, the party’s plenum reiterated a commitment to rapid growth by restating a goal of raising China’s GDP to double its 2000 level by 2010...

                                                        Posted by on Thursday, October 13, 2005 at 12:57 AM in China, Economics, Income Distribution, International Finance | Permalink  TrackBack (1)  Comments (0) 


                                                        The Dallas Fed: Has the Housing Boom Increased Mortgage Risk?

                                                        I was hoping to find a copy of the remarks by Richard Fisher from his speech today, but the speech is not posted at the Dallas Fed site. Given his occasional proclivity to speak from the cuff and shake markets, I had high hopes.  But I found this article instead and it is a worthy substitute.  This post is fairly long, but I wanted to include all of the article's analytics.  I did take out the footnotes, but left  the footnote references in the text.  They are in the original linked document.

                                                        The paper asks the question, "Has the Housing Boom Increased Mortgage Risk?"  and finds that concern is warranted.

                                                        Continue reading "The Dallas Fed: Has the Housing Boom Increased Mortgage Risk?" »

                                                          Posted by on Thursday, October 13, 2005 at 12:30 AM in Economics, Housing, Market Failure | Permalink  TrackBack (1)  Comments (1) 


                                                          Wednesday, October 12, 2005

                                                          Fed Governor Olson on the Fiscal Outlook for the U.S. Economy

                                                          Continuing the roundup of recent remarks by Fed officials here, here, and here, Fed Governor Olson discusses his concern about the fiscal outlook for the U.S. economy, and the outlook for monetary policy and the economy.

                                                          Continue reading "Fed Governor Olson on the Fiscal Outlook for the U.S. Economy" »

                                                            Posted by on Wednesday, October 12, 2005 at 01:40 PM in Budget Deficit, Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (1) 


                                                            Fed Governor Bies on Regulatory Responses to Credit Risk and Discrimination in Mortgage Markets

                                                            Continuing the remarks by Fed officials from Greenspan and Kohn, Federal Reserve Governor Susan Bies also discusses monetary policy, particularly regulation.

                                                            Continue reading "Fed Governor Bies on Regulatory Responses to Credit Risk and Discrimination in Mortgage Markets" »

                                                              Posted by on Wednesday, October 12, 2005 at 10:46 AM in Economics, Fed Speeches, Housing, Monetary Policy, Regulation | Permalink  TrackBack (0)  Comments (6) 


                                                              Fed Governor Kohn on How Globalization Affects Inflation and Monetary Policy

                                                              In addition to Greenspan's remarks today noted here, Fed governor Donald Kohn, discusses globalization, inflation, and monetary policy in a speech given yesterday.

                                                              Continue reading "Fed Governor Kohn on How Globalization Affects Inflation and Monetary Policy" »

                                                                Posted by on Wednesday, October 12, 2005 at 10:11 AM in Economics, Fed Speeches, Inflation, Monetary Policy | Permalink  TrackBack (0)  Comments (1) 


                                                                Greenspan on the Virtues of Free Markets and Information Technology

                                                                There are several speeches today by monetary officials.  Let's start at the top with remarks by Alan Greenspan.

                                                                Continue reading "Greenspan on the Virtues of Free Markets and Information Technology" »

                                                                  Posted by on Wednesday, October 12, 2005 at 08:59 AM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (5) 


                                                                  Can China Risk Revaluation?

                                                                  Here's the view of Qu Hongbin, chief China economist for the Hongkong and Shanghai Banking Corporation who says China can't revalue its currency even if it wants to:

                                                                  China can't move further on the yuan, by Qu Hongbin, Commentary, International Herald Tribune: John Snow, the U.S. treasury secretary, visits Beijing this week to talk about what China can do to help cut a U.S. current-account deficit ... For months, the United States pressed China to revalue... the yuan, and China finally responded on July 21 ... This has involved, so far, a revaluation of about 2.4 percent against the U.S. dollar. When he arrived in Shanghai on Tuesday, Snow called for more. But China can't deliver, whether it wants to or not. ... The total value of Chinese exports is huge ... and set to be even higher this year. ... That has many in the United States worried that China is using a cheap currency to undermine U.S. competitiveness, while increasing U.S. indebtedness and its current-account deficit. This view assumes that China's exports come from China. But it's not so simple. ... official figures suggest that the value of imported components is as much as 80 percent of the total value of the processed exports. A Japanese-owned factory in China making notebook computers ... will buy Intel chips from the United States, screens from South Korea and other components from its parent in Japan for final assembly and processing. The finished product has a total value of perhaps $1,000, which is recorded as an export from China to the United States. But the imported parts and components may represent up to 80 percent of the computer's value. This distorts China's export value immensely. Looked at from a value-added point of view, China's level of exports wouldn't be at all exceptional. How China trades with the rest of the world can only be determined by its comparative advantage - its abundant labor supply. With at least 200 million surplus rural workers hitting the urban job market, ... China is well positioned to participate in the labor-intensive stages of production for almost all industries. ... The bottom line is that China is effectively exporting labor services ... The value added in China - about 20 percent once double accounting has been stripped out - represents the cost of labor. Maintaining this channel to expand the export of labor services is crucial to sustaining China's development, which centers on shifting rural surplus labor into industrial and tertiary sectors. Given the sheer size of its surplus labor force, China has no choice but to expand the export of its labor services to create jobs. There's only one conclusion: Continuing to bolster labor-intensive production and exports is the only viable means for China to absorb its surplus labor and improve rural living standards. To do so, China must keep the yuan's effective exchange rate competitive for the foreseeable future.

                                                                    Posted by on Wednesday, October 12, 2005 at 03:50 AM in China, Economics, International Trade | Permalink  TrackBack (0)  Comments (5) 


                                                                    Snow Throws Cold Water on Katrina Bond Bailout

                                                                    In Louisiana and Mississippi there will be default on municipal bonds if federal or state authorities do not step in to help. However, the cities are being told not to expect help from the federal government. The question is whether hurricane damage of this type is a social risk to be borne collectively as with other consequences of the disaster, or an individual risk borne solely by those involved in the transaction. The article claims that if there is default it won't spillover to other cities and will not affect the ability of non-defaulting cities to issue bonds in the future.  Even so, if it is more difficult for cities that default doesn't the potential harm extend beyond the investors holding the municipal bonds that are in default - aren't all the residents of the cities affected?  Or is that just part of the risk of living in a city and approving a bond issue at the ballot box?  I'm not convinced this is a social risk that requires the federal government to intervene with a bailout or a guarantee. Are there good arguments against that position?:

                                                                    Katrina Bond Bailout No Sure Thing, Snow Reminds Us, by Joe Mysak, Bloomberg: Everyone who thinks the federal government is going to bail out municipalities that can't make their debt service payments because of Hurricane Katrina have another thing coming. The White House opposes guaranteeing state and local debt, Treasury Secretary John Snow told the Senate Finance Committee last week. ... This means the Bush administration opposes a federal guarantee of new bonds, as well as the billions of dollars in bonds sold by Louisiana and Mississippi localities. And this means that, unless the state governments somehow come to the rescue, bondholders can expect defaults in MuniLand. Even if half of the bonds that default are insured, ... This is a big problem .. Investors haven't had this kind of scare since the Great Depression, which means, for most of them, never. They have come to depend on municipal bonds  ... Some of them ... even ... only buy general obligations -- those that ... promise to increase taxes to whatever level is needed to repay debt. That cold comfort may not help the bondholders very much if those tax bases have been destroyed, or if most or all of the taxpayers have moved away. In the days following this disaster, ... Somehow, many of those in the market came to believe that Congress would include bondholders in the federal largess they are throwing at the problem. Now, it seems, the sudden socialization of credit risk in the municipal market is not a foregone conclusion. A lot can still happen ... but the argument being made by the market for a bailout is ... Widespread defaults by Gulf Coast issuers will, 1) make it impossible for issuers in those states to borrow money, and 2) raise borrowing costs for all municipalities. This argument is open to debate...Even if issuers in Louisiana and Mississippi default, there is no evidence that other issuers in those states will have a hard time selling their bonds, let alone issuers in other states. There's another argument to be made against a federal bailout, and it isn't so subtle. Consider the constituency. Almost from the beginning, commentators have said Katrina, or the government's response to it, was all about race and class. You can make the argument that helping municipalities pay debt service bails them out. More people are likely to see it as a bailout of bondholders -- a very small, elite club. ... These weren't the people taking refuge at the Superdome or the Convention Center in New Orleans.

                                                                      Posted by on Wednesday, October 12, 2005 at 01:11 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (4) 


                                                                      Financial Times: Do Not Fear the Rise of Science in Asia

                                                                      If someone discovers the cure for a disease you have, or invents something that saves you considerable time or money, will you care if they live in Asia?:

                                                                      Do not fear the rise of world-class science in Asia, by Charles Leadbeater and James Wilsdon, Commentary, Financial Times: On the edge of Bangalore, at the home of Biocon, one of India’s most successful biotechnology companies, men and women in white coats wander through manicured gardens. There are 1,400 employees on Biocon’s campus and more than 60 per cent have a higher degree. They cost roughly one- tenth of their equivalents in Munich or Cambridge, they speak flawless English and they are available 24 hours a day at the end of a high-speed data line. Das Goutham, one of Biocon’s heads of research, is bullish about India’s potential as a hub for research and development: “Look, if only 5 per cent of Indians were like us, we could have a scientific labour force the size of the entire UK population.” Even with a discount for hyperbole, he has a point. We used to know where new scientific ideas would come from: the top universities and research laboratories of large manufacturing companies based in Europe or the US... All that is changing fast. As globalisation moves up a gear, ... Countries such as China, India and South Korea are fast becoming world-class centres for research, particularly in emerging fields such as stem cell biology and nanotechnology. ... China’s spending on R&D has trebled in seven years ... India now pumps out 260,000 engineers a year and its number of engineering colleges is due to double to 1,000 by 2010. Quantity does not necessarily equal quality, but the Indian Institutes of Technology are ranked among the world’s best universities... There is a tendency among politicians to see these growing scientific capabilities as a threat ... But retreating into a scientific version of protectionism is not an option. More innovation in Asia does not mean less in Europe. Alongside new sources of competition, there will also be new opportunities for collaboration ... We need to develop better mechanisms for orchestrating R&D across international networks and supporting scientists ... to collaborate with their counterparts in Asia...

                                                                        Posted by on Wednesday, October 12, 2005 at 01:05 AM in China, Economics, Universities | Permalink  TrackBack (0)  Comments (2) 


                                                                        Tax Panel Seeks to Limit Mortgage Interest and Healthcare Deductions

                                                                        The president's tax reform panel is seeking to limit the mortgage interest rate deduction, as first noted here, and to limit employer provided healthcare deductions. I want to encourage this because it will be entertaining to watch congress try and actually implement this proposal:

                                                                        Tax panel seeks cap on break for homeowners, by Christopher Swann, Financial Times: The president's panel on tax reform is pushing for a cap on the mortgage interest tax deduction, long considered one of the country's untouchable tax breaks. The loophole, which along with other tax breaks for homeownership costs the US Treasury about $100bn (€83bn, £57bn) a year in lost revenue, disproportionately benefits wealthier Americans. George W. Bush had instructed the panel ... to take account of “the importance of homeownership and charity in American society”, a statement that led some to suggest that tampering with existing generous incentives for property ownership would be taboo. But in the final weeks of its deliberations it is leaning towards curbing the tax privileges of higher-end homeowners. The committee ... has been searching for ways to plug a hole in government finances that would be left by the abolition of the Alternative Minimum Tax... This has led them to look at housing and healthcare, the two most costly deductions. Jim Poterba, an economics professor at MIT and a member of the panel, said there was only shaky evidence that the existing system encouraged homeownership and a strong case that it led to overinvestment in residential property to the detriment of other investments. ... Charles Rossotti, senior adviser to the Carlyle Group ... and a member of the panel, says the system tends to encourage the construction of bigger houses rather than an increase in the number of people who own their home. The panel is now considering where to recommend capping the tax deduction. Given wide regional variations in US home prices, it said, it would consider caps based at a certain level above local median prices. However, it warned that any abrupt move to curb tax benefits for housing could be disruptive and unfair. Prof Poterba suggested that it could even consider leaving intact the existing tax structure for the life of existing mortgages. The panel was almost unanimous in arguing that the existing tax structure for healthcare also needed to be overhauled. Individuals are not currently taxed at all on employer-provided healthcare coverage, which has created the single largest tax loophole in the US code, costing the Treasury $125bn a year. That may have contributed to runaway price rises in the healthcare system, the panel said, with some companies offering employees costly insurance plans in part because of their tax-privileged status.

                                                                        Here are a couple of things I don't quite understand.  If the deduction is eliminated on new mortgages only, not on existing mortgages, and it is capped, how much revenue can it bring in over, say, the next five to ten years?  Without a fairly low ceiling, I'm skeptical it will provide much of the needed AMT offset.  Also, the main argument seems to be that the taxes are distortionary and provide no benefits to compensate.  If so, why cap the deduction?  Shouldn't it be eliminated entirely?  And a point of clarification, saying there is shaky evidence that the mortgage deduction provides benefits simply says the data aren't clear on this point.  It does not say that there aren't any benefits.

                                                                        Yes, taxes and tax deductions are generally distortionary.  They may kick me out of the economist's club for not railing against a market inefficiency, but I hope they'll allow me this one.  Somehow having too much healthcare and too many houses that are too roomy (got kids?), or both, doesn't bother me too much, though if the mortgage interest deduction is capped at a high enough level, it will bother me less (just above my house value is perfect). There are other places to look besides healthcare and housing to solve the deficit problem and most any tax you examine can be pegged with the distortionary label.  It appears the main reason they are targeting these two deductions is simply because they are the two largest potential pools of money, not because they are the source of the large distortions in the economy.

                                                                          Posted by on Wednesday, October 12, 2005 at 12:41 AM in Budget Deficit, Economics, Health Care, Housing, Taxes | Permalink  TrackBack (1)  Comments (12) 


                                                                          FOMC Meeting Minutes Released

                                                                          The minutes from the September 20, 2005 FOMC meeting were released as William Polley discusses here.  As you read through the minutes, note: (1) The committee is worried, backed up by some evidence, that inflation expectations are increasing.  That is always a primary concern. (2) The committee makes strong statements regarding fiscal policy. (3) The committee states that policy remains accommodative and further rate increases are probably required to remove the accomodation at a mesured pace. William Polley says, "When I read that, I get the picture that "measured pace" really has come to mean 1/4 point until further notice. So it doesn't leave much doubt as to the next meeting's outcome." (4) They discussed pausing, but felt doing so would  potentially mislead about the committee's view on the strength of the economy and potentially send misleading signals regarding their commitment to price stability. (5) Fed governor Olson dissented, as discussed here when the press release was issued after the meeting on September 20. (6) The fact that only seven of twelve regional banks asked for an increase in the discount rate in their largely symbolic requests led many to speculate that there may have been some dissent in the meeting prior to most signing on to the decision to raise rates (e.g. see here).  However, there is not much dissent noted in the minutes. (7) The committee discusses changing the "measured pace" language in future meetings since much of the policy accomodation has already been removed, a signal the Fed sees the light at the end of the rate increase tunnel:

                                                                          Minutes of the Federal Open Market Committee, September 20, 2005: The information reviewed at this meeting suggested that, before the landfall of Hurricane Katrina on the Gulf Coast, expansion of economic activity had been solid ... While business investment appeared to be losing some momentum, labor markets continued to improve, and increases in core CPI and PCE prices were modest after notable increases earlier in the year. Only limited data bearing on the likely economic effects of the hurricane were available. Oil and gasoline prices, however, were on the rise, spiking to record levels in the days immediately following the hurricane.  ... Core consumer price inflation remained benign in July and August. However, the surge in energy prices considerably boosted overall consumer price inflation over those months. Gasoline prices in particular rose steeply in August, and survey data pointed to a larger increase in early September. Producer price inflation was subdued. One survey of households in early September indicated that near-term inflation expectations jumped and that longer-term inflation expectations edged higher...

                                                                          Continue reading "FOMC Meeting Minutes Released" »

                                                                            Posted by on Wednesday, October 12, 2005 at 12:12 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1) 


                                                                            Physics and the The Scientific Method

                                                                            There's a pretty good discussion of this problem here:

                                                                            Physics strings us along, By Margaret Wertheim, Commentary, LA Times: There has been much talk of late about the scientific method, which usually takes place in the context of distinguishing science from other "less rational" practices, such as religion and magic. But in recent years science itself has been showing increasingly magical tendencies. In the field of theoretical physics, it is now common practice to talk about other dimensions of reality, entire landscapes of universes for which there is no empirical evidence whatever. ...The extra dimensions of string theory and the other universes they might entail have never been observed and, in principle, they may not be observable, at least not directly. At present they are pure fictions. String theory is so fecund in its descriptive power that one physicist has estimated there may be as many as 10 to the power of 100 different versions of its equations! Each one articulates a different set of possible universes and, at present, there is no way of determining if our universe matches any of them. Once upon a time, the sine qua non of scientific practice was supposed to be empirical verification. Experimental evidence was the core principle of Francis Bacon's much-vaunted "scientific method." In truth, the picture has always been more complex. Science is also an engine of the imagination, leading our minds beyond ... what is to ... what might be. Nowhere is the speculative dimension of science more prominent than theoretical physics, which has given us such magical possibilities as time machines made from spinning black holes, wormholes that become portals to the far ends of the universe and the "parallel worlds" of quantum mechanics, which, in theory, make every possible version of history a realized physical fact. The stories that theoretical physicists tell us are written in the language of mathematics, but for all its formal rigor, the science has become in effect a form of speculative literature. Unchained by the fetters of verification, string theorists are free to dream, articulating through their equations vast imagined domains in which almost anything that is mathematically possible is deemed to be happening "somewhere."

                                                                            In the link above, Not Even Wrong states:

                                                                            As I’ve explained in detail on other occasions, the simple fact of the matter is that string theory does not make any predictions, unless one adopts a definition of the word “prediction” different than that conventional among scientists. A scientific prediction is one that tells you specifically what the results of a given experiment will be. If the results of the experiment come out differently, the theory is wrong. String theory can’t do this, since it is not a well-defined theory, but rather a research program that some people hope will one day lead to a well-defined theory capable of making predictions.

                                                                              Posted by on Wednesday, October 12, 2005 at 12:10 AM in Science | Permalink  TrackBack (0)  Comments (0) 


                                                                              Tuesday, October 11, 2005

                                                                              Bloomberg Assesses Feldstein's Assets and Liabilities

                                                                              Bloomberg discusses Martin Feldstein's qualifications and the factors that work for and against his chances of becoming the next Fed chair:

                                                                              Harvard's Feldstein May Have Best Credentials, Biggest Liabilities for Fed, Bloomberg: Harvard University economist Martin Feldstein may have the best credentials to succeed Alan Greenspan as Federal Reserve chairman. He may also have the biggest liabilities. The 65-year-old Feldstein, a free-market Republican who served as President Ronald Reagan's top White House economist from 1982 to 1984, is one of a handful of economists Wall Street considers suitable to replace Greenspan, 79, whose term at the Fed expires Jan. 31. ... At the same time, Feldstein's prospects may be harmed by his association with American International Group Inc., a scandal- plagued insurance company where he has been a director for 17 years, as well as a reputation for not being politically astute. ''Marty has something of a tin ear for politics, and that would be a problem in the Fed chairman's job,'' says William Niskanen, who ... is now chairman of the Cato Institute ... Economists say Feldstein's reputation for independence, probity and analytical thinking make him an ideal choice to head the central bank. For most of the last three decades, he has headed the National Bureau of Economic Research ... and he has earned a worldwide reputation as an expert on public finance. A Feldstein appointment might not be so welcomed within the Republican Party. During the Reagan years, he angered supply-side economists by dismissing their claims that soaring budget deficits didn't matter. He publicly argued with then-Treasury Secretary Donald T. Regan, who said tax cuts would spur enough new economic growth to close the budget gap. At one point, Feldstein even advocated a so-called ''stand-by tax'' -- anathema in an administration bent on tax-cutting --to help reduce the budget deficit if it got out of hand.

                                                                              The biggest impediment to his nomination may be his connection to New York-based AIG, the world's largest insurance company. AIG faces a securities fraud lawsuit ... and is being investigated by federal authorities in a scandal that forced the ouster of its longtime chief executive, Maurice ``Hank'' Greenberg... ''I can't imagine that Feldstein is directly involved, but if there were any reasonable prospect of his being called to testify, with some presumption of culpability on the part of the board, that would be a problem,'' says Thomas Mann, a senior political analyst at Brookings Institution. Feldstein also serves on the board of HCA Inc., the biggest U.S. hospital chain, which is involved in a Securities and Exchange Commission investigation into whether U.S. Senate Majority Leader Bill Frist received insider information before selling his stock in the company.

                                                                              Feldstein's views on monetary policy and interest rates are spelled out in a series of papers he wrote for NBER. ...he agrees with Greenspan's ''risk- management'' approach of adjusting policy to counter risks to the economy. He ... opposes numerical inflation and growth targets, warning they could backfire and hurt the Fed's credibility. ... he wrote in 2003. ''An inflation target might actually weaken the credibility of a central bank'' if it ''cannot or does not achieve the target value or range, especially if this failure to deliver persists for several years.'' At the same time, Feldstein criticized Greenspan's stewardship of the central bank during the early 1990s, saying the Fed didn't act aggressively enough to increase the supply of money when it became clear the economy was stagnating. ... Feldstein hasn't said whether, if appointed, he'd continue Greenspan's habit of commenting on the federal budget, a practice that occasionally drew criticism from Greenspan-watchers who said he should have confined his opinions to interest rate policy...

                                                                              Lawrence Lindsey, a Fed governor from 1991 to 1997 ... describes Feldstein as a quiet, hard-driving man with a well-deserved reputation for integrity. He works long hours, frequently traveling to NBER conferences around the world. ... Feldstein forged early ties with the Bush camp. When then- Texas Governor Bush was running for president, Feldstein was part of the economic team that hammered out his plans for budget- and tax-cutting programs and influenced Bush's proposals for overhauling the Social Security system. ''He's certainly been very supportive of the president's fiscal policy and tax program,'' says Lindsey. Lindsey says Feldstein ... would run a ''collegial'' board of governors. ''He would want to have a high- level discussion,'' Lindsey says. At the same time, Lindsey says, Feldstein ''would be a tough guy to argue against'' because ''he's very capable'' and can defend his positions vigorously.

                                                                              Feldstein's political skills may have sharpened since his Reagan White House days. ... Moreover, Greenspan himself wasn't always as politically savvy as he is now. During his term as President Gerald Ford's chief economic adviser in the mid-1970s, Greenspan sparked headlines around the world by telling a welfare-rights advocate that stockbrokers, not welfare mothers, had been hurt most by the 1973 recession...

                                                                                Posted by on Tuesday, October 11, 2005 at 01:45 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (5) 


                                                                                Should Fannie and Freddie Be Forced to Go on a Diet?

                                                                                There has been a lot of talk about reforming Fannie and Freddie Mae.  Here's a commentary from the WSJ by Armando Falcon, director of Office of Federal Housing Enterprise Oversight from 1999 until May of this year on this issue.  He contends that regulators must be given the power to regulate the size of these institutions:

                                                                                Adult Supervision, by Armando Falcon Jr., Commentary, WSJ: Over the past several years, corporate America has been rocked by major scandals... Whether it was Enron, Adelphia or WorldCom, Congress wasted no time examining and strengthening the oversight functions and regulatory authority of various federal agencies, including passage of the wide-ranging Sarbanes-Oxley Act. To date, there remains one glaring exception. In the past two years, accounting failures at Fannie Mae and Freddie Mac, known as Government Sponsored Enterprises (GSEs), have led to the largest financial restatements in history -- totaling more than $20 billion -- dwarfing the combined restatements of both Enron and WorldCom. In recent days, news reports indicate the financial misconduct could be wider and deeper than has emerged thus far. Left undetected and unchecked, the web of misconduct ... might have ... caused serious disruptions to our financial system. The likely collateral damage was presciently spelled out in a report on systemic risk that their regulator, the Office of Federal Housing Enterprise Oversight (Ofheo) issued in 2003. Yet  ... two and a half years after Freddie Mac's scandal unfolded, legislation to strengthen regulation remains mired in gridlock. One of the key areas of disagreement is the appropriateness and size of the mortgage portfolios these enterprises retain. ... The fact is that they have grown 12-fold in 14 years for one reason: to generate additional profits for the GSEs. That is nonjudgmental, just a fact. ... Currently, there are no real limits on the size of the portfolios. Ofheo's statutory mandate [does] not to limit their amount. However, Fed Chairman Greenspan and other economic leaders have repeatedly warned policy makers that they should be concerned...

                                                                                Smaller, mission-focused portfolios would better serve everyone, even shareholders. If well managed, they are capable of a fair return to investors and a strong return to the public interest. ... Legislation should give the regulator discretion to manage the size of the portfolios, but be clear as to the regulator's mandate. The mandates in the Senate and House bills are very different ... The Senate bill would direct regulators to design and implement an orderly reduction in the enterprises portfolios without harm to affordable housing efforts. But the House bill ... permits the enterprises to maintain portfolios of any size as long as safety and soundness considerations are met. The House bill should be amended to put the proper mandate in place.

                                                                                ...Fannie Mae and Freddie Mac have constructed their portfolio risk-management strategies around hedging techniques that remain untested by adverse market conditions. Even assuming the companies employ the very best risk-management practices, prudence demands that we have the strongest regulatory structure in place to deal with the fallout if they just get it wrong. ...The growth of the portfolios held by these two GSEs has coincided with a strong economy, except for a mild recession in 2001 that left the housing sector unaffected largely because interest rates fell to historic lows. However, long-term interest rates are more likely to begin an upward trend that may cool off the housing market. ... Freddie Mac and Fannie Mae play an important role in our housing finance system and I support their public mission. The key is to ensure they are truly focused on this mission in a safe and effective manner. If this public-private arrangement is to work, the enterprises must have a fully empowered regulator and get back to serving the public interest, not the ambitions of management.

                                                                                When the WSJ is calling for more, not less government regulation, it catches your attention.

                                                                                  Posted by on Tuesday, October 11, 2005 at 01:20 AM in Economics, Financial System, Regulation | Permalink  TrackBack (0)  Comments (12) 


                                                                                  Greenspan and Snow Go to China

                                                                                  Treasury Secretary Snow is leading a delegation that includes Federal Reserve Chair Alan Greenspan to China to push for currency reform: 

                                                                                  Results sought in China currency reform, By Martin Crutsinger, AP: ...The Bush administration is fielding its top economic team for the Oct. 16-17 meetings in Beijing; Treasury Secretary John Snow leads the delegation, backed by Federal Reserve Chairman Alan Greenspan. The presence of Greenspan has raised hopes among U.S. manufacturers that what could have been just a routine consultive meeting of the U.S.-China Joint Economic Commission will produce more tangible results in the area of most concern -- currency values. ... The first step occurred on July 21 when China announced that it was breaking a decade-long fixed link between the Chinese yuan and the U.S. dollar. ... Optimists hoped for greater moves in the weeks and months to come. But it has not played out that way with the yuan little changed since its July move. American manufacturers contend that the yuan is undervalued ... That makes Chinese goods cheaper in the United States and American products more expensive in China and is a major reason for the trade gap, manufacturers believe. Congress has reacted to the gap with calls for ... 27.5 percent tariffs on all Chinese imports unless Beijing takes more steps to allow its currency to rise in value against the dollar. ... The administration is hoping that the prospect of across-the-board tariffs will prompt China to allow greater appreciation of the yuan...

                                                                                  Is it appropriate for the Federal Reserve Chair to lobby foreign governments on behalf of the administration?  There are competing short-run interests. Krugman says it well:

                                                                                  Here's what I think will happen if and when China changes its currency policy, and those cheap loans are no longer available. U.S. interest rates will rise; the housing bubble will probably burst; construction employment and consumer spending will both fall; falling home prices may lead to a wave of bankruptcies. And we'll suddenly wonder why anyone thought financing the budget deficit was easy... I'm not saying we should try to maintain the status quo. Addictions must be broken, and the sooner the better. After all, one of these days China will stop buying dollars of its own accord. And the housing bubble will eventually burst whatever we do. Besides, in the long run, ending our dependence on foreign dollar purchases will give us a healthier economy. In particular, a rise in the yuan and other Asian currencies will eventually make U.S. manufacturing, which has lost three million jobs since 2000, more competitive. But the negative effects of a change in Chinese currency policy will probably be immediate, while the positive effects may take years to materialize. And as far as I can tell, nobody in a position of power is thinking about how we'll deal with the consequences if China actually gives in to U.S. demands, and lets the yuan rise.

                                                                                  I would have no problem with Greenspan's pressure on China if it were clearly linked to monetary policy concerns, but that has not been done.  Instead it appears the Fed Chair is making a trip to serve a political purpose on behalf of the administration and to serve the short-run interests of one group, business, over the interests of other groups (though Stiglitz says benefits to business may be small). I don't think that is a proper role for the Fed Chair or the Fed more generally, but then again, there is the idea that the Fed Chair is intended to be the one conduit of political influence on the Board of Governors.  Still, to me, this is too close for comfort to the line that maintains the Fed's independence, a line that should never be crossed - but perhaps I'm being too strict.

                                                                                    Posted by on Tuesday, October 11, 2005 at 12:34 AM in Economics, International Finance, Monetary Policy, Politics | Permalink  TrackBack (2)  Comments (7) 


                                                                                    Guy de Jonquières: Asia's Missing Investment

                                                                                    Asia has plenty of saving. So why is investment so low?   For Guy de Jonquirères, the answer lies with excessive regulation and weak competition:

                                                                                    Asia’s missing investment, by Guy de Jonquières, Financial Times: International investors ... cannot get enough of the great Asian growth story. ... Yet Asian companies appear curiously reticent about joining the party. Eight years after Asia’s financial crisis and with solid growth forecast ... one would expect businesses to be making big capital outlays ... However, with the exception of China, they have not done so. ... Whatever the reason for the caution, it is not lack of funds. ... private sector saving..., according to the latest available data, is higher than before the crisis. ... Some critics blame Asia for generating excessive current account surpluses by saving too much. However, the International Monetary Fund argues in a recent report that the real culprit is an “investment drought”(Asia Pacific Regional Outlook, September 2005). ...[Why have] they ... held back. ... One reason could be the shift of manufacturing to China ... However, studies have found little evidence that China has diverted foreign direct investment away from its neighbours. Another theory is that official data exaggerate companies’ financial strength by ignoring many smaller ones that are still struggling ... Equally, an overhang of unsold property, built before the crisis, may have delayed a recovery in construction. But not all countries experienced property bubbles during the 1990s. Finally, business confidence may have been dampened since the crisis by setbacks such as the severe acute respiratory syndrome scare, the 2001 US growth slowdown and cyclical downturns in the global electronics industry. But all this is conjecture. The IMF confesses it is puzzled. Private economists are also stumped.

                                                                                    Most, nonetheless, still believe investment will recover. There are some positive signs. ... But more investment is not necessarily better: witness China’s vast glut of manufacturing capacity. If the rest of Asia simply reverts to its old habit of investing for export-led growth, it will further depress product prices and fuel western protectionism. To be sustainable, its growth must be based on stronger domestic demand. But ... except in China and India, households are already saving less and borrowing more, so cannot be expected to boost consumption much further. As for governments, ... their finances allow only limited room prudently to increase spending. There is another option. Much of Asia is crying out for better transport, healthcare, education, power and water. The World Bank and the Asian Development Bank say $1,000bn needs to be spent on infrastructure. Governments cannot provide it all. But more imaginative approaches to privatisation could help fill the gap and create new opportunities for private investment. They might also reduce scope for corruption ... Second, there is huge untapped potential to boost wealth creation by stimulating domestic markets. The prime candidates are services, which in much of Asia are shackled by weak competition and over-regulation. Setting them free would yield big productivity and efficiency gains....[S]uch reforms will be essential ... if Asia is to keep growing. Its past development has relied heavily on harnessing abundant cheap labour and capital to producing for export markets. ... How Asia solves its investment puzzle will be critical to shaping its future development. When the region’s next investment wave arrives, it should be judged not just by its weight but by its quality.

                                                                                    While excessive government regulation and intervention is certainly to be avoided, I think there is more to recovery from the investment drought than "imaginative approaches to privatisation" and "Setting them free." For those interested in more on this issue, see [1], [2], [3], [4], [5], and [6].

                                                                                      Posted by on Tuesday, October 11, 2005 at 12:17 AM in China, Economics, Saving | Permalink  TrackBack (0)  Comments (5) 


                                                                                      How Big is a Galaxy?

                                                                                      There is more than one discipline with unsettled theoretical models. Those darn data can be so inconvenient:

                                                                                      Milky Way: Larger, Weirder?, Discover: Galaxies are large, but many of them-including the Milky Way-are much larger than suspected. Astronomers at the Keck observatory in Hawaii have found that the Andromeda galaxy-our closest galactic neighbor, 2.2 million light-years away and a familiar sight in the evening sky-is three times bigger than previously thought. Spectrographic analysis shows that 3,000 stars, once believed to be separate from Andromeda, move in lockstep with that galaxy's rotation, as part of its outer disk. "It was completely unexpected says Caltech astrophysicist Scott Chapman... In a related finding, new images from the Gemini South telescope in Chile exposed another giant disk around NGC 300, a far less massive galaxy that resembles our own but is 6 million light-years away. Using Gemini's high-end optics, Joss Bland-Hawthorn of the Anglo-Australian Observatory and astronomer Ken Freeman of the Australian National University counted the brightest stars on the galaxy's fringes. The census shows that, like Andromeda, NGC 300 boasts a broad disk-in this case one that effectively doubles the galaxy's size. The new measurements mean that astronomers must rethink how galaxies are formed. "The one thing that is clear is that all the models of galaxy formation do not predict such large spinning disks," says Chapman. These models typically assume that galaxies were created by gases clumped together by gravity. Since the gases thin out away from the core, star concentration should ease rapidly, and galaxies should exhibit sharp edges. But the stars appear to be obeying unknown rules, tapering off evenly...

                                                                                      [I can't resist this stuff. Apologies there isn't a link - it was typed from the magazine.]

                                                                                        Posted by on Tuesday, October 11, 2005 at 12:06 AM in Science | Permalink  TrackBack (0)  Comments (6) 


                                                                                        Monday, October 10, 2005

                                                                                        Fed Watch: Clearly Hawkish Signals

                                                                                        Here's the latest Fed Watch from Tim Duy:

                                                                                        This is something of an abbreviated piece today – I need to focus my attention on final preparations for the Second Annual Oregon Economic Forum. And, truth be told, Fed policy makers are taking some of the fun out of the game at this point with their clear warnings on inflation. Indeed, even “Mr. Eighth Inning,” Dallas Fed President Richard Fisher, who I had previously dubbed a dove, has delivered a series of market rattling comments. David Altig’s compilation of blogs from Mark Thoma and William Polley, among others, provides a great overview of this increasingly hawkish language that appears to point to only one thing – more rate hikes in the coming months. Indeed, this is the theme picked up in this morning’s Wall Street Journal. And incoming data and anecdotal evidence remain supportive of that path.

                                                                                        Probably the most important piece of data to arrive last week was the September labor report, which came in well above expectations with a 35,000 dip in payroll. As far as the Fed will see this report, I think David Altig hits the nail right on the head – it is somewhat of an uphill battle to paint the report in a bad light, especially considering some early guesstimates pointed to a payroll slide of 500,000. Simply put, the labor report will only be supportive of the Fed’s contention that the impact of Katrina and Rita on the demand side of the economy is minimal and locally contained. Consequently, the Fed will focus on the supply side impacts and their arch nemesis, the inflation beast.

                                                                                        What about the continuing troubles in the automotive and airline industries? Over the weekend, we saw the not-unexpected bankruptcy filing of the auto parts maker Delphi  (WSJ subscription). Will this rattle Fed officials? Doubtful. As I have argued before, this is part and parcel of the ongoing saga of the US auto industry – an industry whose profits depend upon a vehicle type fewer people want to purchase. Moreover, the industry’s labor woes are legendary. According to the WSJ, the UAW contract with Delphi provides workers with a wage-benefit package of $65 per hour, not exactly competitive internally, let alone internationally. Similarly, airlines are also caught in a structural straightjacket. High labor costs, high fuel costs, and relentless competition all conspire to force an ongoing shakeout in the industry, which some analysts believe will not be complete until an airline actually disappears and takes some capacity with it.

                                                                                        The short story is that Greenspan & Co. are not likely to take their anecdotal clues from industries suffering from structural problems. They will look instead for corporate leaders with wide-ranging activities that are cyclical in nature, which brings me to an article Mark Thoma flagged from yesterday’s New York Times, “ Have Recessions Absolutely, Positively Become Less Painful.” Mark takes issue with the sense of overconfidence regarding management of business cycles, a point I agree with. But my attention was draw to the following section:

                                                                                        No company embodies this change, for better and worse, quite like FedEx. When Alan Greenspan, the Federal Reserve chairman, sees Frederick W. Smith, FedEx's chief executive, during halftime of Washington Redskins games, Mr. Greenspan uses the company's vast reach to check in on the economy.

                                                                                        "He always asks, 'We still O.K.?' " said Mr. Smith, a part-owner of the team whose stadium suite abuts the one Mr. Greenspan uses.

                                                                                        More formally, Federal Reserve staff members rely on FedEx and the nearly six million packages it delivers every day for real-time data that helps set interest rate policy.

                                                                                        If this is so, then Greenspan can’t be happy with what he is hearing, especially with FedEx announcing a 5.5% increase in shipping rates  (WSJ subscription), the highest increase in at least nine years. FedEx is clearly confident enough about the outlook to pass on rising fuel costs to consumers. And it’s not just FedEx that’s raising prices – the Wall Street Journal reported that railroad customers are expecting a 5.6% rate hike in the next six months. It is also widely expected that UPS will join the party as well. These are the kinds of price increases that feed their way into virtually every business in the country. The Fed will worry that other firms in other industries will decide that they too should pass on higher costs to customers. Worry enough that they will want to nip it in the bud.

                                                                                        As a side note, notice that FedEx CEO Smith revealed Greenspan’s conversations to a reporter, just a few weeks after French Finance Minister Breton did the same. And the New York Times writes a story on the importance of FedEx to Fed staffers just a few days after FedEx announces a large price hike? Probably just coincidences, all of them – but I don’t like it when the coincidences start to pile up.

                                                                                        In short, worries about demand will not resonate with Fed officials who see enough goods being shipped around the country that freight companies can push through higher prices. In fact, these are the kinds of stories that leave a central banker sleepless at night, because, as Fisher so clearly stated, “any central banker worth his or her salt is genetically unable to tolerate inflation.” The Fedspeak suggests that other officials agree, loudly and clearly, on this point.

                                                                                        [All Fed Watch posts.]

                                                                                          Posted by on Monday, October 10, 2005 at 12:12 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (0)  Comments (11) 


                                                                                          Paul Krugman: Will Bush Deliver?

                                                                                          How will Bush pay for the post Hurricane Katrina reconstruction effort? Tax increases? Budget cuts? Hope the Fed prints money? Push it off to the future? Krugman starts his latest column by wondering if we're asking the right question. He is not sure there will be a large bill to pay after all because he doubts the administration will deliver the help it said it would give:

                                                                                          Will Bush Deliver?, by Paul Krugman, NY Times: ...Bear with me while I make the case for doubting whether Mr. Bush will make good on his promise. First, Mr. Bush already has a record of trying to renege on pledges to a stricken city. After 9/11 he made big promises to New York. But as soon as his bullhorn moment was past, officials began trying to wriggle out of his pledge. ... It's not clear how much federal help the city has actually received. With that precedent in mind, consider this: Congress has just gone on recess. By the time it returns, seven weeks will have passed since the levees broke. And the administration has spent much of that time blocking efforts to aid Katrina's victims.

                                                                                          In the news lately, though not prominently enough for Krugman's taste, is the fight over a bipartisan bill to extend Medicaid coverage to all low-income hurricane victims, some of whom can't afford the medicine they need. Since this is a fight the White House has led, Krugman wonders:

                                                                                          Since the administration is already nickel-and-diming Katrina's victims, it's a good bet that it will do the same with reconstruction - that is, if reconstruction ever gets started. ... what's striking to me is that there are no visible signs that the administration has even begun developing a plan. ... And as far as we can tell, nobody is in charge.

                                                                                          I remember hearing that Karl Rove would lead the reconstruction effort. Is anybody in charge of this drifting ship?:

                                                                                          Last month The New York Times reported that Karl Rove had been placed in charge of post-Katrina reconstruction. But last week ... the White House press secretary denied that Mr. Rove ... was ever running reconstruction. So who is in charge? "The president," said Mr. McClellan.

                                                                                          With the president in charge, Krugman expects nothing but foot-dragging on post-Katrina reconstruction. But isn't that politically risky? How can a strategy of reneging on promises pay political dividends?

                                                                                          I've been reading "Off Center," an important new book by Jacob Hacker and Paul Pierson, political scientists at Yale and Berkeley respectively. ... One of their "new rules for radicals" is "Don't just do something, stand there." Frontal assaults on popular government programs tend to fail, as Mr. Bush learned in his hapless attempt to sell Social Security privatization.

                                                                                          So foot-dragging, acting like you are addressing important problems while actually stalling as much as possible is politically effective? Hmmm. Maybe an example would help:

                                                                                          For example, the public strongly supports a higher minimum wage, but conservatives have nonetheless managed to cut that wage in real terms by not raising it in the face of inflation. Right now, the public strongly supports a major reconstruction effort, so that's what Mr. Bush had to promise. But as the TV cameras focus on other places and other issues, will the administration pay a heavy political price for a reconstruction that starts slowly and gradually peters out? The New York experience suggests that it won't.

                                                                                          I see. But suppose I'm not convinced that the administration is this clever. Are there any other explanations?

                                                                                          Of course, I may be overanalyzing. Maybe the administration isn't deliberately dragging its feet on reconstruction. Maybe its lack of movement, like its immobility in the days after Katrina struck, reflects nothing more than out-of-touch leadership and a lack of competent people.

                                                                                            Posted by on Monday, October 10, 2005 at 12:11 AM in Economics, Politics | Permalink  TrackBack (1)  Comments (6) 


                                                                                            US Offers to Cut Farm Subsidies

                                                                                            In my last post on administration suggestions that farm subsidies are on the table, considerable skepticism is expressed in comments over the suggestion that farm subsidies will be cut because of the difficult politics involved. Today, there is further discussion from the administration along these lines. Is this an example of the game Krugman discusses, lots of lip service with no real action to back it up, or is this a serious intention?:

                                                                                            US trade chief offers to cut farm subsidies,  by Alan Beattie, Financial Times: The US will on Monday offer to end farm export subsidies in five years and slash its domestic subsidies by more than half, in an attempt to revive the flagging Doha round of trade talks. ... Agriculture, one of the most protected areas of world trade, is a sticking point in the negotiations, with the European Union and US at odds about cuts in tariffs and subsidies. ... Writing in the Financial Times, Rob Portman, US trade representative, offers to eliminate farm export subsidies by 2010, the date demanded by the Group of 20 developing countries and some European leaders, including Tony Blair... Mr Portman also agrees to cut those domestic farm subsidies believed to distort world trade by 60 per cent, higher than the 55 per cent reduction the EU was demanding... Bob Stallman, president of the American Farm Bureau, recently said the US should not go beyond 50 per cent. The US also suggests halving a ceiling agreed last year on those farm subsidies regarded as less distorting of trade. This cut, though it meets a demand from development campaigners such as Oxfam, would still allow the US to retain its controversial “counter-cyclical payments”, which compensate farmers for low prices. “The US offer is conditional on other countries reciprocating with meaningful market access commitments and subsidy cuts of their own,” Mr Portman says. The US proposals are designed to put the ball back into the EU's court by offering cuts in domestic farm support and ending export subsidies a key demand of Peter Mandelson, Mr Portman's European counterpart. But Dominique Bussereau, the French agriculture minister, has gained the signatures of 13 of the EU's 25 member states, including Italy, Ireland and Spain, on a memorandum insisting that Brussels trade negotiators consult with them before offering any farming concessions in the Doha talks. His memorandum, seen by the FT, says: “The task is not to negotiate a date for the elimination of our export subsidies, but a period of implementation for what is a conditional concession.” It is likely to dismay Brussels trade negotiators, who assumed they had a clear mandate last year when the EU offered to phase out farm export credits. ... In return for subsidy cuts, Mr Portman also repeated a proposal for substantial cuts in agricultural tariffs, which will require big cuts from the EU and Japan.

                                                                                            I will be surprised if substantial action is taken on this front, particularly given the statement that reciprocal action by other countries will be required and the resistance by France and others to such proposals. And on the notion of "counter-cyclical prices," see PGL at Angry Bear.

                                                                                              Posted by on Monday, October 10, 2005 at 12:10 AM in Budget Deficit, Economics, International Trade | Permalink  TrackBack (0)  Comments (2) 


                                                                                              Are Dollars Lying on the Used Book Table?

                                                                                              Jeff Hayes of the market research firm InfoTrends says used bookstores do not try to get the best price they can for their textbooks:

                                                                                              In the Used-Book Market, Textbooks Rule, by Alex Mindlin, NY Times: Textbooks dominate the offline used-book market, according to a study ... by the Book Industry Study Group... The study found that educational books made up 93 percent of all used-book sales in brick-and-mortar bookstores in 2004... Textbooks are more expensive than other used books, said Jeff Hayes, director of market research for InfoTrends... Besides being more expensive, used textbooks also sell in volume; they are about 70 percent more common on bookstore shelves than other used books. "Many of them try to give the student as good a price as they can," Mr. Hayes said. "They're not trying to maximize their profit."

                                                                                              I have a feeling most students would disagree. Is InfoTrends saying that a low margin, high volume sales strategy is inconsistent with profit maximization?

                                                                                                Posted by on Monday, October 10, 2005 at 12:09 AM in Economics, Press | Permalink  TrackBack (0)  Comments (7) 


                                                                                                Sunday, October 09, 2005

                                                                                                Robert Samuelson Wonders How Long Wealth Based Consumption Can Continue

                                                                                                I think these are good points:

                                                                                                So Long to the Wealth Effect?, by Robert J. Samuelson, Newsweek: Ours is a wealth-driven era, when huge increases in home values and (before that) stock prices make people feel richer and cause them to buy more. ... You can imagine this "wealth effect" as a powerful afterburner that's boosted the economy for roughly 20 years. ...[T]he ... story may be whether the afterburner is flaming out. Just recently, Federal Reserve chairman Alan Greenspan gave a speech suggesting precisely that. Greenspan disclosed the results of a study he had done with Fed staff economist James Kennedy. The study estimated the amount of cash that homeowners have extracted from rising housing prices (those prices are up 53 percent over five years, according to government figures). Homeowners could convert higher real-estate values into cash in three ways ... By estimating all three sources, Greenspan and Kennedy reached annual grand totals, shown on the table below. ... The housing money is extra, on top of personal income.

                                                                                                Greenspan and Kennedy Estimates
                                                                                                
                                                                                                YEAR  | EQUITY EXTRACTED | % OF DISPOSABLE
                                                                                                2000  |     $204 bil.    |      2.8%      
                                                                                                2001  |     $262 bil.    |      3.5%      
                                                                                                2002  |     $398 bil.    |      5.1%      
                                                                                                2003  |     $439 bil.    |      5.4%      
                                                                                                2004  |     $599 bil.    |      6.9%      

                                                                                                Whoa! Consumers had a lot more to spend than ordinary income, almost $600 billion more in 2004. How much of that was actually spent (as opposed to being put into bank deposits, stocks or mutual funds) is unclear. Consumer surveys cited by Greenspan suggest perhaps two thirds, a big chunk of it on remodeling. The economy has depended heavily on all this extra cash. And, before the housing bonanza, there was the stock boom. ... Economists figure that consumers spend between 2 percent and 3 percent of their extra stock-market wealth. That's also a lot of purchasing power. No one has fully explained what caused these immense wealth gains. My own oft-stated belief is that lower inflation is the main cause, because it gradually reduced interest rates. ... But there are many other possible explanations, including financial speculation. Whatever the root causes, the result has been a marathon shopping orgy. ... Could the wealth effect now subside? For stocks, it already has. ... Greenspan has warned that the rapid run-up in home prices won't go on forever. ... Growth in consumer spending would then presumably slow, he said. This need not be a disaster. On paper, the economy could compensate in many ways: more exports and fewer imports (much U.S. consumer spending went to imports); stronger business investment; extra government spending for hurricane rebuilding. ... The fading of America's wealth effect, should it occur, might be ... dull and benign. But there are grimmer possibilities. One is that many adverse forces are now converging: higher energy prices, higher interest rates and debt payments, higher inflation, falling wealth gains. ... For two decades, free-spending American consumers have anchored the U.S. and world economies. If they no longer play that role, it's an open and worrisome question of who will.

                                                                                                The potential solutions to the global and domestic imbalance problems have been discussed extensively here and elsewhere, so I won't try and recount them all again, but one way to summarize them is that with smart monetary and fiscal policy and gradual adjustment in the U.S. and elsewhere, we have a chance of a soft landing.  But if current policies continue, the chance of a more difficult adjustment period will rise.

                                                                                                  Posted by on Sunday, October 9, 2005 at 01:57 AM in Economics, Housing, Press | Permalink  TrackBack (1)  Comments (9) 


                                                                                                  Time to Pony Up to the Truth

                                                                                                  Peter Ferrara wishes that personal accounts alone would address solvency.  He wishes the president had chosen a better staff, but doesn't blame the president for their failings.  He wishes people would embrace GROW accounts.  He wishes Social Security legislation would pass soon.  But he forgot something.  He should wish that everyone get their own pony too!

                                                                                                  Hopes amid the stumbling, by Peter Ferrara, Commentary Washington Times: President Bush conceded Tuesday what has long been obvious ... His Social Security reform efforts have stalled out. Personal accounts for Social Security, however, are still alive and kicking on the Hill, and can still pass within the next few months. Mr. Bush to me is a brave and endearing figure of high character, who has been poorly served by others on many fronts. That is the case in his Social Security reform failure too. ... Despite the president's better instincts, his staff misled him back into this swamp of failure... the staff sold the president the canard Democrats would support personal accounts in return for his support of price-indexing Social Security benefits... As should have been expected, the Democrats have uniformly opposed such price indexing. ... The staff's price indexing debacle was the equivalent to suggesting the president could get Democrats to support sweeping tax cuts if he would only embrace cutting food stamps and public housing. Earlier this year, the president was even sent out to argue for personal accounts, while ridiculously mouthing the proposition the accounts would not solve Social Security's problems. To address long-term solvency, the president put "on the table" large reductions in future promised benefits, delayed retirement age -- and even tax increases. The staff had sold the president another scandalous canard here ... All is not lost, however. Support for the GROW accounts legislation surges in Congress, to stop the current annual raid on the Social Security surplus for other government spending. ... This proposal is political dynamite because it combines the extremely popular idea of ending the raid on the Social Security trust funds with the still quite popular personal accounts, without any tax increases or benefit cuts...

                                                                                                    Posted by on Sunday, October 9, 2005 at 12:49 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (6) 


                                                                                                    The Role of Government in the Recovery from Natural Disasters

                                                                                                    Lessons from the past show that government has an important role to play in helping cities and people recover from natural disasters:

                                                                                                    Blueprints From Cities That Rose From Their Ashes, by Anna Bernasek, NY Times: ...A major disaster, like Hurricane Katrina, acts as an involuntary experiment on the economic system. ... The results can be revealing. In the case of a disaster that levels a city, it's quite clear what the city looked like just beforehand, so we can judge its recovery by how quickly and thoroughly it returns to normal. ... the pace of recovery can vary greatly from city to city, and those differences can shed light on how to accelerate recovery from future disasters. What's more, urban disasters may provide clues to ... how to organize an economy, maximizing prosperity by getting the right mix of government and private involvement. Start with two success stories ... Galveston, Tex., and San Francisco. The hurricane that hit Galveston in 1900 killed perhaps 10,000 people ... and destroyed 8,000 buildings. By 1907, Galveston had largely recovered ... In 1906, most of San Francisco survived the initial earthquake only to be leveled in an inferno that raged unchecked. Some 28,000 buildings were destroyed... and 3,000 people were killed. But in just three years, 25,000 new buildings lined the streets, and by 1911, San Francisco had substantially recovered. So what made those two recoveries possible? In both cases, government money made up only a portion of the total losses. By far the main work of rebuilding was done by private individuals. But government at all levels - national, state and local - played a main role in re-establishing the confidence of the entrepreneurs, investors and ordinary citizens that is a prerequisite for economic growth. It achieved this in three ways.

                                                                                                    First, government ensured public safety ... The city of Galveston, for example, decided to build a sea wall to protect residents from future storms. ... And ... the entire grade of the city was raised 1 to 15 feet above its previous level. In San Francisco, the federal and local governments worked together to secure the city against earthquake and fire. ... Second, all levels of government reacted promptly and vigorously in each case, taking decisive and tangible steps that provided an essential public reassurance to traumatized citizens. Immediate government spending provided employment to suddenly homeless and jobless citizens, priming the pump of the local economies as they fought to regain their stroke. Two days after the earthquake in San Francisco, while the fires were still smoldering, Congress took action toward rebuilding all the public buildings that had been destroyed. That provided work for many who had their lost jobs. ... Local government acted swiftly, too. ... plans for rebuilding were rejected ... in favor of even faster progress. Third, government focused on ... providing not only essential public safety but also a level playing field. In Galveston, civic leaders undertook anti-corruption reforms that became a model for cities elsewhere. ... In San Francisco, public officials pursued the goal of fairness in other ways. Leaders ... put great pressure on companies that had been refusing to pay fire insurance claims. The companies contended that the damages were due to earthquake, a risk not covered under typical fire policies. In the end, most claims were paid ... although some insurance companies went under...

                                                                                                    Even in the most horrific circumstances, cities can come back. ... after the atomic bomb attack of 1945 ... after about 30 years, the city had in many ways recovered. It took that long because the Japanese government was overwhelmed - 66 cities had been bombed during the war - and essentially bankrupt. "The recovery of Japan's cities was almost all a private initiative," Professor Weinstein said [a specialist on Japan in the economics department at Columbia University]. "There just wasn't money around for the government to rebuild Japan." Divining the right mix of government and private activity lies at the very heart of economic policymaking. What disasters show us is the difference between arrangements that work and those that don't. San Francisco recovered in only five years. Nearly a hundred years later, shouldn't we try to do better in New Orleans?

                                                                                                    [Galveston is described here and San Francisco here and here.]

                                                                                                      Posted by on Sunday, October 9, 2005 at 12:15 AM in Economics | Permalink  TrackBack (0)  Comments (3)