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Wednesday, December 21, 2005

Trends in Long-Term Employment

Has average job tenure declined over time?:

The More Things Change, The More They Stay the Same: Trends in Long-term Employment in the United States, 1969-2002, by Ann Huff Stevens, NBER WP 11878, December 2005: Abstract This study considers whether there has been a decline in the attachment of workers and firms in the United States over the past several decades. Specifically, it compares snapshots of job tenure taken at the end of workers' careers from 1969 to 2002, using data from the Retirement History Survey, the National Longitudinal Survey of Older Men, and the Health and Retirement Study. The primary finding is one of stability in the prevalence of long-term employment relationships for men in the United States. In 1969, average tenure in the longest job for males aged 58-62 was 21.9 years. In 2002, the comparable figure was 21.4 years. Just over half of men ending their careers in 1969 had been with a single employer for at least 20 years; the same is true in 2002. This finding is robust to adjustments for minor differences in question details across data sources and for educational and retirement age changes over this time period.

From the beginning of the paper:

A great deal of attention has been paid in recent years to the issues of job stability and job security in the United States. Many studies have attempted to determine whether there has been deterioration in the prevalence of long-term, stable employment relationships in the United States during the period from roughly the mid-1970s to the present. Most of these studies have found either (1) no robust evidence of significant changes in various measures of job tenure, job stability or job security or (2) indications of relatively small increases in job turnover, particularly during the early 1990s. In contrast to the findings of these studies, there remains a powerful conventional wisdom that the U.S. has experienced widespread, substantial declines in expected job security or stability. ... Further, when asked directly, workers themselves appear to be more worried than in previous years about the risk of separating from their employers. (Schmidt, 2000). There is, however, a striking lack of solid empirical evidence to support these claims. Even in cases where careful studies have shown some decline in job tenure or increased turnover, the question remains whether the magnitude of documented changes can justify claims of major shifts in employment relationships often found in the popular press.

There is other research, e.g. see here, showing that measures of insecurity such as the variance of income have risen in recent years. Thus, even if these results hold up to further scrutiny, they do not prove that worker's perception of increasing economic insecurity is illusory.

    Posted by on Wednesday, December 21, 2005 at 01:05 AM in Academic Papers, Economics, Unemployment | Permalink  TrackBack (0)  Comments (24) 


    Why Have University Presidents Fallen Silent?

    The question in this editorial from The Christian Science Monitor is why university presidents don't speak out as often or as loudly as they once did. My experience suggests that the answer given, that university presidents now devote much of their time to fundraising is part of it, and I agree that fundraising has come to dominate their efforts far more than in the past. But I don't think lack of time is the major factor. Because fundraising has become so important, speaking out can offend potential donors and is therefore best avoided in the interests of the university. Even at the Department level, we've had donors threaten to pull donations due to editorials that were written by Department members and that makes Department members think twice before taking public positions that might be controversial, particularly since travel, visiting speakers, and other research activities have become increasingly dependent upon donated money. Better not to rock the boat. As universities become more dependent upon the private sector for funding, the ability to speak freely on important issues is reduced:

    Where are the voices of college presidents?, by John Merrow, CS Monitor: Here's a quiz for you. Name the presidents of any three of America's 4,000-plus colleges and universities. Odds are most readers flunked that quiz, but it wouldn't be fair to take points off anyone's grade. How could the public know the names of higher education leaders, who are largely silent on the great issues of the day? Today's presidents only get noticed if they say something outrageous (Harvard's Lawrence Summers's comments about women and science), live too lavishly (former American University President Benjamin Ladner), or make millions (Lynn University's Donald Ross).

    It hasn't always been this way. Father Theodore Hesburgh of Notre Dame ... declared, "Anyone who refuses to speak out off campus does not deserve to be listened to on campus." Many 20th-century university presidents also served as ambassadors and heads of major national commissions. Think Clark Kerr of the University of California, Jill Kerr Conway of Smith, Kingman Brewster of Yale, and Robert Hutchins and Edward Levi of the University of Chicago. Reporters knew to call them for opinions on the burning issues of the day.

    I spent much of the past three years reporting about higher education and didn't find their modern-day equivalents. Presidents I met said they devoted much of their time to fundraising, often to build dormitories with wi-fi, athletic facilities with climbing walls, and stadiums with luxury boxes. The Chronicle of Higher Education recently released its own survey of university presidents, and its results confirm that observation. Five of the six most pressing issues have to do with money, and the sixth - retaining students - is only marginally related to teaching and learning.

    Perhaps because of their preoccupation with dollars, today's college presidents are not educating the rest of us on issues that matter. Take the issue of intelligent design. Only three university presidents have spoken out against treating intelligent design as science. ... [T]he overwhelming silence on this topic, among others, shows just how far higher education has slipped from its pedestal. Greater leadership in public debate on critical issues is what's needed to stop academia's declining prestige, not a fixation on the bottom dollar.

      Posted by on Wednesday, December 21, 2005 at 12:16 AM in Economics, Politics, Universities | Permalink  TrackBack (0)  Comments (11) 


      Tuesday, December 20, 2005

      More From Krugman's Money Talks: Think Tank Conspiracy

      More from Paul Krugman's Money Talks on the response to his column on the purchase of opinion pieces from think tanks:

      Think Tank Transparency, Paul Krugman, Money Talks, NY Times: More reader response to Paul Krugman's Dec. 19 column, "Tankers on the Take": Janie Black Dog, Washington - Buying opinion pieces is just a tiny part of the unethical activities of these so-called think tanks. Every morning, they put on free breakfasts for members of congress and high up political appointees in the executive branch. Every evening there's wine and cheese and a little speech, which probably enhances the position of one of the tank's funders or their predetermined position on any subject. These so-called briefings, no doubt paid for by drug companies, oil pipeline companies, and perhaps foreign governments, give the know-nothing politicals the sound-bites they need to talk to the press and each other. Who pays for the croissants and fresh strawberries? I don't really know, but I can guess its the likes of Jack Abramoff and other K-Street lobbyists, who are also there, rubbing shoulders with the people who vote on legislation and make regulatory policy in a nice, safe environment, free of public scrutiny.

      These cozy little tete-a-tetes are not transparent. Their guest lists are not available under the Freedom of Information Act. And .... the public and the press ... aren't there to watch what goes on. Remember what happened to Vice President Chaney when he met with oil execs ... in a government building? Everyone demanded to know who was present. Well, now he or his minions goes to a private think tank his wife works for one or used to and he doesn't have to worry... This is a great way to get alternative advice from people who you already agree with, rather than depending on the advice given by individuals who are paid by the U.S. government and not the oil and drug firms, or from bona fide experts who actually do research, rather than write popularized books and talk on CNN. ... There is a lot more to the cozy relationship between think tanks and their funders than a couple of cash and carry op-ed pieces. Their activities need to be exposed to the light. Think tanks are the handmaidens of K-Street lobbyists, not independent scholars as they would have us believe.

        Posted by on Tuesday, December 20, 2005 at 05:18 PM in Economics, Politics, Press | Permalink  TrackBack (0)  Comments (7) 


        Cyclical and Long-Term Labor Force Participation Rate Changes by Gender, Age, and Education

        There's been a lot of interest in labor force participation rates and in explaining why they are declining relative to historical, though there has been some increase recently. The Dallas Fed takes a look at this issue and separates changes in participation into cyclical and long-term factors for individuals grouped by gender, age, and education. Note that tables 1 and 2 referenced in the text were too big to include:

        Opting Out of Work: What’s Behind the Decline in Labor Force Participation?, by Helen McEwen, Pia Orrenius, and Mark Wynne, Federal Reserve Bank of Dallas, Southwest Economy, Issue 6, November/December 2005: The labor force participation rate ... has been declining in the United States in recent years. ... Barring other changes, a decline in the share of the population that is economically active translates into a lower rate of economic growth. Another worry is whether more-vulnerable groups are participating disproportionately in the decline. For middle- and high-income families, less attachment to the labor force may simply reflect a change in priorities or increasing wealth and may not have adverse consequences. For low-income families ... dropping out of the labor force can bring about financial distress, lower future earnings and a greater dependence on welfare programs. ...  We focus on how gender, age and education groups have fared in the recent past and discuss the role of cyclical variation versus long-term trends in participation among these groups.

        Continue reading "Cyclical and Long-Term Labor Force Participation Rate Changes by Gender, Age, and Education" »

          Posted by on Tuesday, December 20, 2005 at 03:19 PM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (4) 


          Krugman's Money Talks: Looking for Dirty Democrats

          Paul Krugman responds to questions about political balance in his column about lobbyist Jack Abramoff's payments to members of right-wing think tanks for writing editorials helpful to some of Abramoff's clients. Krugman points out that an a priori presumption that both sides are equally guilty of any transgression and therefore that any criticism of one side must be matched by criticism of the other is "just silly":

          Paul Krugman, Money Talks: Looking for Dirty Democrats, Readers respond to Paul Krugman's Dec. 19 column, "Tankers on the Take":

          Art Quillo, Laguna Niguel, Calif.: If ... there isn't any Democratic equivalent of Jack Abramoff — that's what the public deserves to be told. The final sentence of that paragraph should have read: And if there is equivalent activity on the Democratic side, it should be thoroughly exposed as well.

          W.D. Stanley, Burke, Va.: There is no doubt that it is a very questionable practice for a lobbyist to pay money to a member of any institute to have that person write an op-ed article ... But I do object to the very blatant suggestion that such practices are confined to persons inclined toward the right or conservative inclination. Surely you must also recognize that such practices occur in left wing institutes and think tanks as well — not to mention public and private universities where, although cash may not change hands, other items of value such as appointments, tenure and access certainly are conferred upon those who elect to expend time and energy writing op-eds about issues those audiences favor and value. While you may call it a slime attack to point out such matters, simple measures of fairness suggest you should point your sanctimony towards the equally abysmal, and very common practices, that happen not only in Washington but in universities all over this country

          Paul Krugman: By all means, let's expose whatever is out there. But I'd be really surprised if there's anything equivalent. ... There's no reason to believe that Democrats and/or liberals are any less susceptible to monetary temptation than conservatives and Republicans. There is, however, every reason to believe that the opportunities for sin have been much smaller. First of all, there has only been one period over the last 25 years — the first two years of the Clinton administration — when Republicans didn't control at least one house of Congress or the White House. And even then, Democrats weren't a disciplined party. So Democrats have always been subject to checks and balances. Republicans, by contrast, have had complete, disciplined control of all three branches for five years. ..[P]eople with an interest in corrupting the process had very little interest in corrupting Democrats, but a lot of interest in corrupting Republicans. Second, the think tanks that get heard in the media are overwhelmingly conservative — aside from Brookings, it's hard to find a liberal think tank that gets air time. And Brookings is a very loose organization, with a real diversity of views, not at all like Heritage or Cato. ... there's probably nobody worth corrupting. Am I confident that no liberal commentator was ever paid to boost some cause? No. But it's just silly to approach this matter with the presumption that there must be equal sin on both sides. As a structural matter, that's highly unlikely.

          And here's a follow up to his columns on health care:

          Paul Krugman, Money Talks: One Reader's Inside View of the Crisis in Health Care: Cathy Creed, Roeland Park, Kan.: I deeply appreciate your editorials regarding health care. I am an R.N. working with Chronic Kidney Disease patients, many of whom are on dialysis. I would guess that about 75 percent of the patients that end up on dialysis are there due to either non-compliance or poor access to primary health care. I always wonder if Americans have any idea how expensive chronically ill kidney patients become once they are on dialysis. CKD/dialysis is one of those few diagnoses that is covered by Medicare at any age. Let me give you a good example of how affordable insurance, access to primary care and drug assistance could have prevented one of our younger patients from ending up on dialysis for the rest of his life: Jose (not his real name), age 31, was working in construction and received health insurance from his wife's employer. He ... has diabetes type II since age 18, and hypertension ... His wife was laid off and so he stopped buying his antihypertensive medication and decreased his oral diabetes medication. Within 18 months of losing his insurance coverage he was in full blown acute renal failure. He is now on dialysis three times per week at a cost of about $500 per treatment paid for by Medicare. As you can imagine there are many other costs associated with his renal failure, due to the multiple co-morbidities of kidney disease and diabetes. And of course it is very difficult for him to work now ... It would have been so much cheaper to provide this young man with affordable medication. ...

            Posted by on Tuesday, December 20, 2005 at 01:38 AM in Economics, Health Care, Politics, Press | Permalink  TrackBack (0)  Comments (4) 


            Blinder on Bernanke

            Princeton colleague Alan Blinder has good things to say about Ben Bernanke's personal traits:

            Fed chief heir-apparent cuts the carbs, gets used to suits, by Ryan James Kim, The Princeton Packet, 12/13/2005: ...Ben Bernanke ... and longtime [Princeton] colleague Alan Blinder often weighed the costs and benefits of the Atkins diet together. "I've been on — and I'm still on — the low-fat diet, and Ben was on the high-fat, (low-carb) diet," said Professor Blinder... "We used to quip to one another that one of us was probably killing himself, but we didn't know which one it was." Professor Blinder painted a more personal picture of the man who may become one of the world's most powerful and influential on the economic scene. ... They were colleagues at the university until this past July, when Professor Bernanke resigned from the university after taking a three-year voluntary leave. "I was one of the people who were the most enthusiastic about getting Bernanke to come to Princeton" in 1985, Professor Blinder said. "I knew of his work and thought it was spectacularly good."

            During Professor Bernanke's time as a professor, he was more likely to pick up a backpack than a briefcase. And rather than sporting the cool navy tie, pressed-collared shirt, and pitch-black suit he wore last month at his nomination announcement, Professor Blinder remembered Professor Bernanke wearing more casual clothing. A "prototypical" outfit would include a pair of khaki pants, a polo shirt and comfortable brown-leather shoes or sneakers, he recalled. Now, "he's taken to suits, which he never wore here," Professor Blinder said. "In fact, I don't think he owned a suit before he went to Washington. I certainly never saw him in one."

            Professor Bernanke's clothing preferences as a professor fit with Professor Blinder's description of a soft-spoken man with a "wry, sardonic sense of humor." "He's not a domineering personality. He's not the sort of person that, when you sit around the table, feels obligated to dominate the conversation," Professor Blinder said. Especially "when it comes to jokes, Ben is much more of a one-liner, apropos of what's going on. Slips in a one-liner that makes you smile, often ironic."

            Laid back or not, Professor Bernanke did a terrific job as the chairman of Princeton's economics department, said Professor Blinder, a position he himself held in the late-1980s. "Many people have said to me ... that being department chair is the worst position in a university's hierarchy ... and being the chairman of the economics department is the worst position of all the chairmanships," he said. "I don't have the firsthand experience with the rest of (the other chairmanships), but it's basically believable. There's a tremendous aggravation and a tremendous amount of work in this job."

            But, he said, Professor Bernanke "is unflappable — never loses his temper or, if he does, he keeps it to himself, never visibly. (He) seems to let aggravating things roll off his back, better than most people can, and accomplished a great deal as chairman." Speaking to Professor Bernanke's potential at the Fed, Professor Blinder said he is confident that Professor Bernanke would continue to keep it out of politics. He said that despite recent media coverage harping on Professor Bernanke's inflation-targeting opinion differing from those of retiring Chairman Alan Greenspan, no earth-shattering policy changes are in store. "He's not the sort of person who walks in a room and sees a poker game in progress and tips over the table and knocks all the cards on the floor, saying, 'Well, let's start over again.' It's not his way," Professor Blinder said. "I'm sure he'll not do that at the Fed."

              Posted by on Tuesday, December 20, 2005 at 12:25 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1) 


              Prescott: 'Stop Messing With Federal Tax Rates'

              Edward Prescott, senior monetary adviser at the Federal Reserve Bank of Minneapolis, professor of economics at Arizona State University, and a Nobel laureate in economics gives the standard line on capital gains and dividend taxes:

              'Stop Messing With Federal Tax Rates', by Edward C. Prescott, WSJ Commentary: ...That our current tax system is complicated and burdensome and absorbs unnecessary amounts of our limited resources is well accepted by most everyone, and this issue was a primary concern of the Advisory Panel on Federal Tax Reform ... This problem deserves to be seriously addressed, but we could take a big step in the right direction if we just stop messing with federal tax rates. Maybe Congress should take a cue from the Federal Reserve, which learned a long time ago that oversteering with its policy wreaks havoc... Just as the Federal Reserve has made it clear that it will strive to maintain low inflation, which has allowed businesses and consumers to invest and plan accordingly, Congress should establish good tax rates and walk away. The people will take it from there.

              So what are good tax rates? It's useful to begin with ... a simple principle: Taxes distort behavior. ... Good tax rates... need be high enough to generate sufficient revenues, but not so high that they choke off growth and, perversely, decrease tax revenues. This, of course, is the tricky part, and brings us to the task at hand: Should Congress extend the 15% rate on capital gains and dividends? Wrong question. Should Congress make the 15% rate permanent? Yes. ... These taxes are particularly cumbersome because they hit a market economy right in its ... entrepreneurial and risk-taking spirit. What makes this country's economy so vibrant is its participants' willingness to take chances, innovate, acquire financing, hire new people and break old molds. Every increase in capital gains taxes and dividends is a direct tax on this vitality. ...

              But shouldn't we worry about federal deficits? Isn't it true that we need to raise the capital gains and dividends rate to capture more revenue and thus help close the widening deficit maw? The plain fact is that last fiscal year the debt-to-GDP ratio (broadly defined) went up only 0.2%. If the forecasted deficits over the next five years are correct, it will begin declining. Tax revenues will rise as economic activity continues to grow -- indeed, this has been the case in 2005. Besides, to raise tax rates and thereby dampen economic activity seems a perverse way to improve our economic situation, including our level of tax receipts -- 15% of something is better than 20% of nothing. ... Let's not fall back into old patterns of oversteering and overtaxing. Let's not keep trying to trick our citizens into accepting one tax one day, and another tax the next. Let's not try to tax our way to prosperity...

              I can go along with the idea that dividend and capital gains taxes are distortionary, and that highly uncertain tax rates make the distortions worse. There's evidence to support that position. But solutions to the deficit problem on the revenue side that do not involve dividend and capital gains taxes do not necessarily have the same properties. Prescott's argument does not imply that the only solutions to the budget problem are to cut programs or try and grow our way out of it.

              Update: Brad DeLong, Daniel Gross, and MaxSpeak all come down hard on Prescott, and I have no quarrel with that. My point was different. I think you lose the argument if you start from the premise that the degree a tax distorts is off the table. We can argue over this evidence, I don't think it's completely solid or etched in stone or anything, but my read is that these two taxes in particular, dividend and capital gains, do produce large distortions in capital markets, more so when they are changed frequently, and arguing against that evidence may not be the best strategy to pursue. But this does not mean that all taxes produce large distortions - by replacing one tax with another there are potential gains to be made without sacrificing revenue or progressivity. I want to emphasize that I am not buying into the idea that these tax cuts will pay for themselves. I hope I've made that point abundantly clear over the last few months. I was pointing out that Prescott's argument that these taxes distort markets should not compel us to throw up our arms and say we cannot replace the capital gains and dividend taxes with another source of revenue.

                Posted by on Tuesday, December 20, 2005 at 12:18 AM in Budget Deficit, Economics, Taxes | Permalink  TrackBack (0)  Comments (14) 


                Deposit Insurance Ceiling Likely To Increase

                Congress passed legislation to increase Federal Deposit Insurance from its current value of $100,000, but not fast enough for smaller banks who view the limit as a competitive disadvantage. Larger banks counter with the claim that they have paid more than their share into the insurance fund:

                Bill Lifts Ceiling On U.S. Insurance Of Bank Accounts, by Michael Schroeder, WSJ: After years of lobbying, bankers won an increase in federal deposit insurance for retirement accounts as well as regular savings accounts. But smaller banks were disappointed because they had sought more deposit protection. The legislation will raise federal deposit insurance levels on retirement accounts to $250,000 from $100,000 and will gradually increase insurance ceilings on regular savings accounts from the current level of $100,000. The measure passed the House ... and the Senate ... It is expected to be sent to President Bush for his signature soon.

                The final bill doesn't boost insurance as much as many lawmakers or community bankers wanted. The current limit of $100,000 for each basic deposit account will remain until April 1, 2010. At that time, the Federal Deposit Insurance Corp. will have the option of raising the ceiling by $10,000 and every five years thereafter based on inflation. Insurance covering retirement accounts will also be pegged to inflation. ... Community banks had lobbied for an immediate increase in the insurance on deposit accounts to $130,000, arguing that it would help them keep customers from taking their business to bigger interstate institutions. But ... most changes in the FDIC overhaul, the first in two decades, would benefit major banks, which have complained that they had been forced to pay more than their fair share into the bank-insurance fund. ...

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


                  Monday, December 19, 2005

                  The Economic Tide

                  Gene Sperling follows up on his commentary on policies to increase economic prosperity:

                  Outlook: The Economic Tide, Washington Post: President John F. Kennedy popularized the phrase "a rising tide lifts all boats." But these days, the economic tide is rising while a lot of boats are running aground, Gene Sperling says in ... Sunday's Outlook section. The unspoken American economic compact -- promising a measure of economic security and advancement in return for hard work and study -- is in danger of being shredded, he adds. In his article, Sperling looks at why the expanding economy isn't spreading the wealth to all Americans and talks about how the nation ... might respond. Gene Sperling ... will be online Monday, Dec. 19, ... to discuss his Sunday Outlook piece...

                  Continue reading "The Economic Tide" »

                    Posted by on Monday, December 19, 2005 at 12:32 PM in Economics, Income Distribution, Unemployment | Permalink  TrackBack (0)  Comments (3) 


                    Paul Krugman: Tanks on the Take

                    Paul Krugman has more on a story noted here Saturday in Cato Senior Scholar Resigns Over Lobbyist Payments:

                    Tankers on the Take, by Paul Krugman, NY Times: Not long ago Peter Ferrara, a senior policy adviser at the Institute for Policy Innovation, seemed on the verge of becoming a conservative icon. Before the Bush administration's sales pitch for Social Security privatization fell flat, admiring articles about the Bush plan's genesis often gave Mr. Ferrara credit for starting the privatization movement back in 1979. Now Mr. Ferrara has become a different sort of icon. BusinessWeek Online reports that both Mr. Ferrara and Doug Bandow, a senior fellow at the Cato Institute, were paid by the ubiquitous Jack Abramoff to write "op-ed articles favorable to the positions of some of Abramoff's clients."

                    Now, I never had any illusions about intellectual integrity in the world of right-wing think tanks. It has been clear for a long time that so-called analysts at many of these think tanks are, in effect, paid to support selected policies and politicians. But it never occurred to me that the pay-for-play schemes were so blatant. In fact, most deals ... probably aren't that blatant. For the most part, people employed by right-wing think tanks don't have to be specifically paid to support certain positions, because they understand that supporting those positions comes with the job...

                    But it turns out that implicit deals ... are sometimes, perhaps often, supplemented with explicit payments for punditry. In return for Abramoff checks, Mr. Bandow and Mr. Ferrara wrote op-ed articles about such unlikely subjects as the entrepreneurial spirit of the Mississippi Choctaws and the free-market glories of the Northern Mariana Islands. ...

                    Mr. Bandow has confessed to a "lapse of judgment" and resigned from Cato. But neither Mr. Ferrara nor his employer believe that he did anything wrong. The president of Mr. Ferrara's institute told BusinessWeek Online that "I have a sense that there are a lot of people at think tanks who have similar arrangements." Alas, he's probably right. Let's hope that journalists ... track down those people with "similar arrangements," and that as they do, they don't fall into two ever-present temptations.

                    First, if the latest pay-for-punditry story starts to get traction, the usual suspects will claim that liberal think tanks and opinion writers are also on the take. (I'm getting my raincoat ready for the slime attack on my own ethics...) Reporters and editors will be tempted to give equal time to these accusations, however weak the evidence, in an effort to appear "balanced." They should resist the temptation. If ... there isn't any Democratic equivalent of Jack Abramoff - that's what the public deserves to be told.

                    Second, there will be the temptation to ... treat Mr. Abramoff as a rogue, unrepresentative actor. In fact ... Mr. Abramoff wasn't off on his own. He wasn't even a lobbyist in the traditional sense; he's better described as a bag man, running a slush fund for Tom DeLay and other Republican leaders. The point is that there really isn't much difference between Mr. Abramoff's paying Mr. Ferrara to praise the sweatshops of the Marianas and the Department of Education's paying Armstrong Williams to praise No Child Left Behind. In both cases, the ultimate paymaster was the Republican political machine.

                    And inquiring minds want to know: Who else is on the take? Or has the culture of corruption spread so far that the question is, Who isn't?

                    Previous (12/16) column: Paul Krugman: Drugs, Devices, and Doctors
                    Next (12/23) column: Paul Krugman: The Tax-Cut Zombies

                    Updates: Krugman follow up in Money Talks, Full column, Second Money Talks follow up]

                      Posted by on Monday, December 19, 2005 at 12:21 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (16) 


                      Prior Knowledge

                      Q. Do we really have to learn all that Bayesian stuff?

                      A. Yep. I'm not all that happy about it either. Bayesian Methods in Macroeconometrics by Frank Schorfheide prepared for the forthcoming edition of the New Palgrave Dictionary of Economics and Law is a good place to start. Thanks to New Economist for the pointer. This paper by Lubik and Schorfheide is a good example of a recent application. If you need a kick in the posterior to get going, let me know.

                        Posted by on Monday, December 19, 2005 at 12:18 AM in Economics, Methodology | Permalink  TrackBack (0)  Comments (2) 


                        A Nice Benchmark to Rest On

                        Here's an overview of recent U.S. data from the Financial Times:

                        The tightening of the federal funds rate begins in 2004 and is followed by a gentle decline in core inflation several months later. A substantial lag between the onset of tightening and the response of inflation is consistent with estimates such as Christiano and Eichenbaum where the peak effect on inflation is estimated to take around two years to unfold. Output effects also occur with a substantial lag according to these estimates. Because of this, the decision to continue raising the target federal funds rate or to pause must be forward looking. Given the lags in response to policy, and because of hints of recent trends in the data, more and more I am coming to the position that the time has come to pause and assess how the economy will react to the tightening that has occurred to date before proceeding further, particularly if the core inflation numbers continue to show improvement. I can go along with 4.50%, but after that, unless the numbers change and inflation is a clear worry, I begin to join the chorus of those nervous about over tightening.

                          Posted by on Monday, December 19, 2005 at 12:15 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (8) 


                          Sunday, December 18, 2005

                          Feldstein: Monetary Policy in a Changing International Environment

                          How much tightening by the Fed will be enough? It depends upon the degree of segmentation in international capital markets. Martin Feldstein argues that the decline in the linkage between domestic saving and domestic investment noted by Alan Greenspan and John Helliwell, an indication of more integrated global capital markets, does not hold up for larger countries when the estimates are weighted by GDP share. This brings about uncertainty as to the degree of global integration, uncertainty that confounds monetary policy. If OECD capital flows are responsive to U.S. policy changes due to integrated markets, and if Asian countries pursue a fixed exchange rate policy, a larger the change in the federal funds rate is required to bring about the desired degree of slowing or stimulus to the economy:

                          Monetary Policy in a Changing International Environment: The Role of Global Capital Flows, by Martin Feldstein, NBER WP 11856, December 2005,  [Open link]: Abstract The Feldstein-Horioka study of 1980 found that OECD countries with high saving rates had high investment rates and vice versa, contrary to the traditional theory of global capital market integration. This capital market segmentation view, which has been verified in various studies..., has important implications for tax and monetary policy. More recently, Alan Greenspan and John Helliwell have shown that the link between domestic saving and domestic investment became substantially weaker after the mid-1990s. The research reported in the current paper suggests that this is true of the smaller OECD countries but not of the larger ones. When observations are weighted by each country's GDP, the savings-investment link (i.e., the savings retention coefficient) remains relatively high. ... Implications for Monetary Policy ...[W]ith this uncertainty about the current nature and the future persistence of international capital flows, it is important to ask how this ... might affect monetary policy. Consider first the response of monetary policy to excess demand. If the Federal Reserve perceives that demand pressures will produce inflation rates above its desired range, it will tighten monetary policy by raising the federal funds rate... How far it has to raise rates ... depends on how other financial variables – particularly long term interest rates and exchange rates – respond to the increase in the federal funds rate. In a ... highly segmented global capital market, the rise in the federal funds rate would cause longer term real rates to rise as well. ... But if OECD capital flows to the U.S. were highly elastic with respect to the U.S. long-term interest rate and if the Asian governments maintained the exchange values of their currencies relative to the dollar, the ... response ... of the long-term interest rate to the higher federal funds rate would be very limited. ... The net impact ... would be to make any given rise in the federal funds rate less contractionary. To achieve any desired reduction in demand and therefore in inflation, the Federal Reserve would have to raise the federal funds rate more than would be needed if global capital markets were more segmented. Now consider the opposite problem that the Federal Reserve could face: a slowing of aggregate demand ... [I]f long-term capital is very mobile among the OECD countries while the Asian countries prevent their currencies from rising against the dollar, these channels of influence would not work. ... The Federal Reserve would have to reduce the short-rate further than it would if long-rates and the dollar responded.

                          Robert Mundell taught us many years ago that, in a world of flexible exchange rates and integrated capital markets, an easy money policy would not lower interest rates but would nevertheless be expansionary by lowering the value of the currency. In contrast, with a fixed exchange rate, monetary policy is ineffective but fiscal policy can raise or lower aggregate demand. We may now be facing something of a hybrid situation in which the dollar is flexible against the euro and some other non-Asian currencies but not against the Chinese yuan and other Asian currencies. A reduction of the federal funds rate would have relatively little expansionary impact on longer term rates if funds would flow out to the euro area. ... In such a context, monetary policy would be relatively weak, suggesting that reductions in the federal funds rate would have to be greater to have a significant impact and that expansionary fiscal policy would be more effective than it would be if all currencies were flexible.

                          At this stage, we don’t know how much the previously segmented OECD capital market has become integrated. Has there been a general decline in capital market segmentation or is it limited to the smaller countries, as the estimates that I have presented suggest? Nor do we know how much of the capital flow to the U.S. is from Asian governments that will continue to pursue essentially fixed exchange rate policies, forcing any shift of the dollar to focus on the exchange rates with the euro and other non-Asian currencies. There is no doubt however that the current uncertainty about these potential changes in the international economic environment has complicated the task of monetary policy.

                          One solution to this uncertainty, one we seemed to have embarked upon, is to start tightening and see what happens. My reading of the response to the tightening so far, which has not had a large impact on long-term rates, favors the integrated capital markets view.

                            Posted by on Sunday, December 18, 2005 at 12:20 PM in Academic Papers, Economics, International Finance, Monetary Policy | Permalink  TrackBack (0)  Comments (3) 


                            Extraordinary Rendition

                            From comments to this post:

                            Even on an issue as seemingly "obvious" ... as the torture issue, I think the Bush administration .. is making some sort of case for its position. Take on that case and show us why it's wrong.

                            Here's my response (see here and here for reports of another case). As this article notes, Khaled El-Masri, a German citizen born in Lebanon, was a car salesman before he was detained in December 2003:

                            America kidnapped me, by Khaled El-Masri, LA Times: The U.S. policy of "extraordinary rendition" has a human face, and it is mine. I am still recovering from an experience that was completely beyond the pale, outside the bounds of any legal framework and unacceptable in any civilized society. Because I believe in the American system of justice, I sued George Tenet, the former CIA director, last week. What happened to me should never be allowed to happen again.

                            Continue reading "Extraordinary Rendition" »

                              Posted by on Sunday, December 18, 2005 at 03:13 AM in Iraq and Afghanistan, Politics | Permalink  TrackBack (0)  Comments (12) 


                              Sinking Boats

                              How do we bring economic prosperity to all? Gene Sperling, head of the National Economic Council under President Bill Clinton, has ideas and arguments for policies to meet the globalization challenge, many of which have been promoted here as well:

                              How to Refloat These Boats, by Gene Sperling, Washington Post: No Democratic sound bite is quoted more often by Republican tax-cut advocates than President John F. Kennedy's line that "A rising tide lifts all boats." It might come as a surprise, then, that Kennedy first used the line in a speech ... after congressional approval of a giant dam project. His point was to justify greater spending on infrastructure, and there is not a single example in his presidential papers of his using the metaphor specifically to promote tax cuts. ... The tide of the American economy is still rising, but it is lifting fewer boats. Faced with international competition, technological advances and the outsourcing of jobs, managers and college graduates, as well as workers, are increasingly worried that their boats may be capsized by the fierce waves of globalization ... Many fear that jobs will flow only to those with the very highest skills and those whose physical presence is required -- such as barbers, construction workers, food service providers -- while large numbers of middle-class jobs will be lost or relegated to lower status (and pay). In other words, the rising tide will lift some boats, but others will run aground.

                              Our ability to address this question is hampered by an impoverished debate between a "sky is falling" camp, which believes it is possible to save the middle class by turning back the tide of globalization, and a "don't worry, be happy" camp, which assumes that any government response ... will be counterproductive. Both perspectives miss the mark. While members of the "sky is falling" camp are right to advocate stronger labor standards in low-wage countries and enforcement of the rules for fair trade, it is naive to think that these measures would significantly reduce the dislocating effects of technology and global competition. ... Throughout history, there have been dire predictions that stiffer competition would lead to the demise of the middle class ... But these fears have never been realized. Still, such figures and historical facts hardly support a don't-worry-be-happy approach. ... China and India represent a level of competition unlike anything [previously]. ... and thanks to the revolution of information technology, hundreds of millions of their citizens have entered the global workforce, competing on an unprecedented scale...

                              As China, India and other developing countries move up the skills ladder, job losses in the United States have begun to shred an unspoken economic compact. Generations of Americans have accepted that the right combination of education, hard work, integrity and risk-taking is a one-way ticket to economic security and a better life for their children. ... In the 1990s, when job turnover surged due to global competition, President Bill Clinton was able to assure people that our economic compact was not broken -- it simply had to be updated to include a college degree, lifelong learning and technological literacy. Recently, however, not just factory workers, but software engineers, travel agents, law clerks and even radiologists are watching their jobs move overseas. ... The exodus of highly skilled jobs has undermined faith in our economic compact ... it shakes the assumption that hard work and education guarantee upward mobility... Workers receiving pink slips who lament that "I played by the rules, I did everything I was supposed to do" seem to me to be expressing their belief that the unwritten economic covenant they had relied upon is broken.

                              Even with solid economic growth in recent years, there is evidence to back up these sentiments. Inflation-adjusted ... wages have actually declined since the recession ended in November 2001 ... Moreover, when U.S. workers suffer setbacks -- a health crisis or job loss -- the decline in their economic well-being is far steeper than it used to be. ... A higher education degree has become a less reliable insurance policy against such economic setbacks. ... Should we as a society simply acknowledge that America's economic compact is largely a thing of the past? I don't think so. ... We ... should be able to agree on:

                              Reducing the health care burden on employers. Encouraging companies to outsource their jobs to rural and urban parts of this country... (One consultant who advises firms on how to cut legal costs uses the phrase "Banga-tucky" to get them to look at Kentucky as the Bangalore of inexpensive legal work.) Replacing our fragmented and confusing programs for people who have lost their jobs with a simple, unified system ... Benefits should include health insurance while they're between jobs and wage insurance ... Giving workers more help before they lose jobs, by creating "flexible education accounts" with tax credits for education and training.

                              This may sound like another wonky policy list, but the idea behind the approach is essential. We must recognize both the limits and responsibilities of government. And that means a government that does things it can do -- boosting health and education -- and does not try to do the things it can't do, such as stopping globalization. One thing no government can do is to accurately pinpoint the middle-class opportunities that will replace the ones flowing to India, China and Mexico. Only 15 years ago, some analysts forecast that work as a travel agent would be one of the fast-growing job categories; it's down 38 percent since then. And no one predicted the number of jobs that would be associated with the Internet.

                              It is precisely because we lack a road map that it is so crucial to strengthen public investments in research and education, which have traditionally laid the foundation for discovering and exploiting previously unimaginable jobs and industries. ... Funding such efforts, while restoring fiscal discipline, would require a bipartisan fiscal deal that would both repeal tax cuts for the most fortunate and slow entitlement growth. Neither the undoing of trade agreements nor further cutting of the capital gains tax rate will ensure that we remain a nation able to fulfill its unwritten economic compact, and where all boats, not just the yachts, rise with the tide.
                              Author's e-mail: gsperling@americanprogress.org

                                Posted by on Sunday, December 18, 2005 at 01:42 AM in Economics, Income Distribution, Social Security, Unemployment | Permalink  TrackBack (0)  Comments (20) 


                                Greg Mankiw's Top Ten List

                                It's the time of year when best of lists begin to appear:

                                TOP (EC) 10 By N. GREGORY MANKIW: Here are some of my favorite books, plays, movies, etc., roughly in the order in which I first experienced them:

                                1. “Charlotte’s Web,” by E.B. White. I loved this book when I read it as a child, and I loved it when I read it to my own children.
                                2. “The Music Man.” This is one of my favorite musicals, in part because as a child I had as small role in a summer-stock production.
                                3. “Foundation Trilogy, by Isaac Asimov.” I was mesmerized by this science fiction classic when I read it in high school. I was drawn to Asimov’s fictional field of psychohistory, which now reminds me a lot of economics.
                                4. “Manhattan,” by Woody Allen. It came out when I was in college, and seeing it repeatedly took too many hours away from studying.
                                5. “Capitalism and Freedom,” by Milton Friedman. This is the best book ever written by an economist for the general public. If you want to hear the case for a political philosophy based on free markets and limited government, read this.
                                6. “Ella Fitzgerald Sings Cole Porter.” My favorite album—now CD—of all time.
                                7. “Les Miserables.” I have never read the book, but I love the musical. I have seen it about half a dozen times, and I look forward to seeing it again when it comes to Boston in a few months.
                                8. “Six Feet Under.” The best television show of recent years. Sadly, its great run has ended.
                                9. “The Nurture Assumption,” by Judith Rich Harris. A fascinating discussion of the psychology of why children turn out as they do.
                                10. “To Gillian on Her 37th Birthday.” This is my favorite bad movie. I know it’s bad because I have never met anyone else who likes it. Maybe it appeals to me because it is about a neurotic college professor cavorting on a Nantucket beach with Michelle Pfeiffer. Everybody’s gotta have a dream.

                                  Posted by on Sunday, December 18, 2005 at 01:21 AM in Economics | Permalink  TrackBack (0)  Comments (6) 


                                  Universal Health Care: Economics Easier Than the Politics

                                  Here's a proposal for health care reform that provides increased coverage by eliminating the tax break for employer provided health insurance. While the economics may work, the same cannot be said about the politics:

                                  Health Care for All, Just a (Big) Step Away, by Eduardo Porter, NY Times, Economic View: You may find it shameful that some 45 million Americans lack health insurance. Well, by reallocating money already devoted to health insurance, the government could go along way toward solving the problem. But you may not like the solution. Next year, the federal government expects to provide about $130 billion for Americans to buy health insurance. ... about 11 percent of all federal income tax revenue... Nonetheless, this financing remains under the political radar because it is provided indirectly - ... as a tax break that allows workers to receive health insurance coverage from their employers without having to pay income taxes on whatever it costs. ...

                                  Although subsidizing health insurance may seem a ... positive contribution to the goal of universal coverage, it is among the most inefficient spending in the nation's fiscal arsenal. "If you had $150 billion to play with, you could come very close to universal coverage," said David Cutler, an economics professor at Harvard. ... According to President Bush's advisory panel on tax reform, about half of the tax break ... accrues to families making more than $75,000 a year. More than a quarter goes to families making over $100,000. These families would surely hate to lose the subsidy. ... On a typical family policy costing $11,500 a year, that is equivalent to some $4,000. ...

                                  [T]he fiscal incentive isn't helping many of the people who need it most. ... In addition to going to the wrong people, the subsidy ... promotes wasteful medical spending, encouraging the wealthy to buy more insurance and to use more health services than they need... And it may bolster premiums across the board. ... As part of a series of proposals to rejigger the tax code, the president's tax panel ... suggested capping the total ... pretax dollars at an amount equal to the average health insurance premium ... some $11,500 for a family.

                                  But if the objective is to expand health care coverage, a bolder option is available: focusing the bulk of the money on the bottom end of the income distribution. Added to what is already spent on Medicaid, this ... would be roughly enough to make health insurance free for people earning up to three times the poverty level... said Jonathan Gruber, an economics professor at the Massachusetts Institute of Technology... To make insurance universal, ... some mechanism would be needed to pool groups of people and to avoid leaving higher-risk people to face enormous insurance costs. ... And to make it universal, a mandate would be needed to make people buy it.

                                  This isn't communism. The changes could happen under a public health care system ... But the new regime could be run privately as well... The government could give tightly focused tax credits so that lower-income people could buy health insurance on the market. And it could organize pools ... Regina E. Herzlinger, a professor of business administration at Harvard Business School, notes that the Swiss have such a system .... This, she said, gives the Swiss top-notch health services, universal health insurance and a medical bill that tops out at 10 percent of the nation's output, compared with 15 percent in the United States. ...

                                  This health care revolution, however, is unlikely to catch on ... anytime soon. For starters, losing the tax break ... would be tremendously disruptive for the millions of Americans who get their insurance through their jobs. Perhaps most important, it would force higher-income families to buy health care without the tax break; that idea is probably as politically suicidal as abolishing the mortgage tax deduction. "I don't think anybody would dispute the economics," Mr. Gruber said. "I think the dispute would be over the politics."

                                    Posted by on Sunday, December 18, 2005 at 12:33 AM in Economics, Health Care, Taxes | Permalink  TrackBack (0)  Comments (14) 


                                    Saturday, December 17, 2005

                                    Alan Krueger: Civil Liberties and Terrorism

                                    Princeton University economist Alan Krueger finds an interesting connection between civil liberties and terrorism that undercuts the idea the economic conditions are the driving force behind terrorist acts:

                                    Murdercide, by Michael Shermer, SciAm Skeptic: ... The belief that suicide bombers [murdercide] are poor, uneducated, disaffected or disturbed is contradicted by science. Marc Sageman, a forensic psychiatrist at the Foreign Policy Research Institute, found in a study of 400 Al Qaeda members that three quarters of his sample came from the upper or middle class. Moreover, he noted, “the vast majority—90 percent— came from caring, intact families. Sixty-three percent had gone to college, as compared with the 5–6 percent that’s usual for the third world. These are the best and brightest of their societies in many ways.” Nor were they sans employment and familial duties. “Far from having no family or job responsibilities, 73 percent were married and the vast majority had children. . . . Three quarters were professionals or semiprofessionals. They are engineers, architects and civil engineers, mostly scientists. Very few humanities are represented, and quite surprisingly very few had any background in religion.” ...

                                    [A] necessary condition for suicide is habituation to the fear about the pain involved in the act. How do terrorist organizations infuse this condition in their recruits? One way is through psychological reinforcement. ...[T]he celebration and commemoration of suicide bombings that began in the 1980s changed a culture into one that idolizes martyrdom and its hero. Today murderciders appear in posters like star athletes. Another method of control is “group dynamics.” Says Sageman: “The prospective terrorists joined the jihad through preexisting social bonds with people who were already terrorists or had decided to join as a group. In 65 percent of the cases, preexisting friendship bonds played an important role in this process.” Those personal connections help to override the natural inclination to avoid self immolation. “The suicide bombers in Spain are another perfect example. Seven terrorists sharing an apartment and one saying, ‘Tonight we’re all going to go, guys.’ You can’t betray your friends, and so you go along. Individually, they probably would not have done it.”

                                    One method to attenuate murdercide, then, is to target dangerous groups that influence individuals, such as Al Qaeda. Another method, says Princeton University economist Alan B. Krueger, is to increase the civil liberties of the countries that breed terrorist groups. In an analysis of State Department data on terrorism, Krueger discovered that “countries like Saudi Arabia and Bahrain, which have spawned relatively many terrorists, are economically well off yet lacking in civil liberties. Poor countries with a tradition of protecting civil liberties are unlikely to spawn suicide terrorists. Evidently, the freedom to assemble and protest peacefully without interference from the government goes a long way to providing an alternative to terrorism.” ...

                                      Posted by on Saturday, December 17, 2005 at 03:08 PM in Economics, Iraq and Afghanistan, Terrorism | Permalink  TrackBack (0)  Comments (7) 


                                      A Break in Our Regular Programming

                                      Here's Molly Ivins wishing for more civility in politics -- and realizing the cost of civility may be her sanity:

                                      Another mission accomplished, by Molly Ivins, Creator's Syndicate: As one on the liberal side of the chorus of moaners about the decline of civility in politics, I feel a certain responsibility when earnest, spaniel-eyed conservatives like David Brooks peer at us hopefully and say, "Well, yes, there was certainly a lot of misinformation about WMD before the war in Iraq, but ... you don't think they, he, actually lied, do you?" Draw I deep the breath of patience. ... "Of course not actually lie, per se, in the strict sense" -- and then I listen to another speech about Iraq by either the president or the vice president and find myself screaming, "Dammit, when will they quit lying?" I realize this is not helping the cause of civility. On the other hand, sanity has its claims, as well.

                                      I have been listening with great attention to the series of speeches Present Bush has lately given on his newly revealed "Plan for Victory." Of course I was pleased to learn we have a plan for a victory, which consists, it turns out, of announcing: "We cannot and will not leave Iraq until victory is achieved. ... We will settle for nothing less than complete victory. ... We will never accept anything less than complete victory." Unfortunately, the White House claims it produced this once supposedly secret plan in 2003, when it is actually a public-relations paper written less than six months ago, which is pretty much the way things go credibility-wise these days. ...

                                      Bush claimed in his Naval Academy speech that 80 Iraqi army and police battalions are fighting alongside American units, while another 40 are taking the lead in fighting. But last summer, military leaders told Congress that three of the 115 Iraqi battalions are capable of fighting without U.S. help, and in October Gen. George Casey, the American commander in Iraq, lowered that to one. ... I mean, we can define "complete victory" down as far as Bush wants, as far as I'm concerned, but this ain't exactly facing reality.

                                      So as not to completely abandon my colleagues still yearning for civility, it is only fair to point out that Bush and even Cheney are making some progress. For one thing, they now acknowledge reconstruction is not going entirely smoothly.... Also, Bush now acknowledges we are fighting more than just terrorists. In fact, most of the people we're fighting are themselves Iraqis who don't like us being there. The fact that their government has asked us to leave is still politely passed over. ... The number of attacks on American and Iraqi troops per day, rather a clear indicator, simply grows steadily worse. Rep. Jack Murtha ... says insurgent incidents over the past year have increased from 150 per week to over 700 per week. Bush's claims on reconstruction are likewise mind-boggling. It's not "fits and starts" -- there are rampant overcharges, corruption, lack of oversight -- it is a zoo. ...

                                      One night in mid-September, George W. stood in New Orleans' Jackson Square... He promised help for housing, education and job training: "The work that has begun in the Gulf Coast region will be one of the largest reconstruction efforts the world has ever seen. ... I also offer this pledge of the American people: Throughout the area hit by the hurricane, we will do what it takes, we will stay as long as it takes to help citizens rebuild their communities and their lives."

                                      Hey, you know, another mission accomplished.

                                      I've tried to maintain civility and not to be overly political here, and I've bitten my tongue more than once. But recent events leave me doing the equivalent of screaming "Dammit, when will they quit lying?" to which I now add Dammit, when will they quit spying? And the dammits about torture being an issue at all continue as well. Why is there even any question about that? I hate being put into this position. I can't even trust that an independent press corps exists anymore, not with all the recent revelations of how the administration is intertwined, tit for tat, with the reporters at major news agencies. I'd rather stick to economics, but with the latest reports I feel I have to speak up - our rights, our freedom, and the integrity of our government are too important to stay silent. Years ago, I never dreamed I'd be asking myself the questions about our government I ask today. I just hope it's not to late to find the answers and fix it.

                                        Posted by on Saturday, December 17, 2005 at 12:24 PM in Iraq and Afghanistan, Politics | Permalink  TrackBack (1)  Comments (11) 


                                        Wikipedia or Britannica?

                                        Wikipedia has received some bad press lately. This Scientific American Observations cites a survey by Nature showing that Wikipedia compares favorable with Encyclopaedia Britannica:

                                        Wiki This, SciAm Observations: Wikipedia is not wrong. At least not much more so than Encyclopaedia Britannica according to a random survey of scientific topics by Nature. The enterprising editors there drew up a list of 50 topics--from a prehistoric tool-making tradition known as the Acheulean to West Nile virus--and sent out the entries from Wikipedia and Britannica to independent experts. ... The survey found that Wikipedia averaged around four inaccuracies per entry, whereas the heavyweight Britannica averaged three. Of course, in some cases, Britannica trounced Wikipedia--just eight errors for the Brits on Mendeleev compared to 19 for the online upstart... But in a number of instances Wikipedia had fewer errors than Britannica: entries on the basic chemistry of the aldol reaction, physics great Paul Dirac, and epitaxy, a process for layering single crystal films in computer-chip making, for instance. And in entries on astrophysicist (and Nobel laureate) Subrahmanyan Chandrasekhar, lipids (or fats) and quarks, Wiki garnered a perfect score compared to multiple errors for Britannica.

                                        This points up one of the strengths of Wikipedia: immediate review. If you find any error in a Wikipedia entry, no matter how small, you can immediately correct it. For example, John Siegenthaler, who touched off the current consternation concerning Wikipedia's accuracy when he found his own entry implicated him in the assassination of Robert Kennedy, could simply have corrected the entry himself. ... New facts can be incorporated almost as soon as they are known: for example, dentist Martin Nweeia only yesterday revealed at a conference that the narwhal's unique tusk is actually a sensory organ. That fact is already incorporated into the Wikipedia entry. Can Britannica do the same? And anyone with an Internet connection can gain access to Wikipedia's 4 million or so entries in a multiplicity of languages, with more added everyday. You must pay for that pleasure at Britannica, with some exceptions.

                                        In short, Wikipedia is the kind of peer-reviewed, information sharing that the scientifically-minded should enthusiastically support, no matter what its early quirks and flaws. But so far, according to Nature's survey of 1,000 or so authors only 10 percent update it even though more than 70 percent are aware of it. Do your part, the encyclopedia--and possibly the scientist--of tomorrow depend on it.

                                        Economists aren't too fond of certain four letter words, for example the f-word .... free .... as in free lunch .... comes to mind. Part of the price of the Wikipedia lunch is to participate in updating the entries, but since the payment is voluntary, most don't pay. I should do my part and update entries, but I've been "free" riding while waiting to see if others will do it first.

                                          Posted by on Saturday, December 17, 2005 at 12:57 AM in Economics, Market Failure, Technology | Permalink  TrackBack (0)  Comments (3) 


                                          Cato Senior Scholar Resigns Over Lobbyist Payments

                                          With the revelation of domestic spying today in the NY Times, this story about Doug Bandow of Cato who was paid to write favorable articles might get lost amid all the scandals. Peter Ferrara is also mentioned:

                                          Columnist Resigns His Post, Admitting Lobbyist Paid Him, by Anne E. Kornblut and Philip Shenon, NY Times (WaPo): A senior scholar at the Cato Institute ... has resigned after revelations that he took payments from the lobbyist Jack Abramoff in exchange for writing columns favorable to his clients. ... Doug Bandow, who wrote a column for the Copley News Service in addition to serving as a Cato fellow, acknowledged ... he had taken money from Mr. Abramoff after he was confronted about the payments by a reporter from BusinessWeek Online. ...

                                          Mr. Bandow did not take government money, but the source of his payments - around $2,000 an article - is no less controversial. His sometime sponsor, Mr. Abramoff, is at the center of a far-reaching criminal corruption investigation involving several members of Congress, with prosecutors examining whether he sought to bribe lawmakers in exchange for legislative help. A second scholar, Peter Ferrara, of the Institute for Policy Innovation, acknowledged in the same BusinessWeek Online piece that he had also taken money from Mr. Abramoff in exchange for writing certain opinion articles. But Mr. Ferrara did not apologize for doing so. "I do that all the time," Mr. Ferrara was quoted as saying. ...

                                          At Cato and similar institutions, adjunct scholars are not always prohibited from accepting outside consulting roles. But at Cato, ... and at the American Enterprise Institute ... rules require scholars to make public all their affiliations ... In one column in 2001, Mr. Bandow extolled the free-market system ... saying that fighting terrorism was no excuse for "economic meddling" - the same position that Mr. Abramoff was being paid to advance. ... In an earlier column, in 1997, Mr. Bandow defended the gambling enterprise of the Choctaws. "There's certainly no evidence that Indian gambling operations harm the local community," he wrote. Mr. Abramoff ... is suspected of misleading the tribes about the way he used tens of millions of dollars in payments. ...

                                            Posted by on Saturday, December 17, 2005 at 12:39 AM in Economics, Press | Permalink  TrackBack (0)  Comments (5) 


                                            FedStuff: Santomero to Step Down, Auto Parts, Education, and ATMs

                                            From the Philadelphia Fed web site:

                                            Philadelphia Fed President to Leave Bank Next Year: Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, announced that he will leave his position as president effective March 31, 2006 . Dr. Santomero has headed the Philadelphia Fed for nearly six years, and is completing his year as a voting member of the Federal Open Market Committee. “... The president’s choice of Ben Bernanke is an excellent one, and the Federal Reserve is in good hands. However, if I am to move on to one more new career, now is the opportune time to make the transition,” Santomero said. ...

                                            And, as Bloomberg notes, Sanotmero was an advocate of explicit inflation targeting so his departure may change the degree of support for moving in this direction depending, of course, on the views of his replacement, and he is also relatively hawkish on inflation:

                                            Santomero, Philadelphia Fed Bank President, to Step Down on March 31, Bloomberg: Federal Reserve Bank of Philadelphia President Anthony Santomero will leave his job March 31 ... The departure means Ben S. Bernanke ... will lose an ally in his effort to set a specific U.S. inflation target. ... "Santomero was an important supporter of inflation targeting,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi in New York. ... Santomero stressed the need for the Fed to raise rates to contain inflation in speeches this year. "It is incumbent upon the Fed to make every effort to keep these price pressures well- contained,'' he said in June remarks in Washington. ... "He took a consistently hard stance against inflation,'' said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. ... Of the 12 regional Fed presidents, Santomero is among the six who support creating some form of a numerical description of the Fed's low-inflation mandate. Bernanke backs the idea ...


                                            From the Chicago Fed:

                                            Chicago Fed Letter A newsletter featuring an essay on economic policy issues of regional or national interest. January 2006

                                            Chicago Fed Letter

                                            Competition and trade in the U.S. auto parts sector by Thomas H. Klier and James M. Rubenstein: Exports of U.S. made auto parts have stalled in recent years, while import levels of auto parts have continued to increase. The authors detail the magnitude and destination of U.S. imports and exports of specific auto parts in order to assess the challenges facing U.S. parts suppliers. (PDF,106KB)

                                            Chicago Fed Letter

                                            Higher education and economic growth by Richard H. Mattoon: The future of higher education and its relationship to economic growth were the focus of a one-day conference at the Chicago Fed on November 2, 2005. Cosponsored by the bank, the Committee on Institutional Cooperation, and the Midwestern Higher Education Compact, the event brought together over 100 academic, business, and government leaders. (PDF,48KB)

                                            Chicago Fed Letter

                                            Higher education and economic growth: A conference report by Richard H. Mattoon: This is an expanded summary of the conference on higher education that was held at the Federal Reserve Bank of Chicago on November 2, 2005. This edition is only available online. (PDF,69KB)


                                            From the San Francisco Fed:

                                            FRBSF Economic Letter

                                            Bank ATMs and ATM Surcharges This Letter reports on recent research into the proliferation of ATMs and the pricing schemes that accompany them, which sheds some light on how banks compete against each other in the current environment.
                                            — Gautam Gowrisankaran & John Krainer, Economic Letter 2005-36 (December 16)

                                              Posted by on Saturday, December 17, 2005 at 12:24 AM in Economics, Financial System, International Trade, Monetary Policy, Universities | Permalink  TrackBack (0)  Comments (3) 


                                              Friday, December 16, 2005

                                              Are Monthly Data Releases Informative?

                                              The CPI report for November shows a .6% decline in the CPI due to falling energy prices, but core inflation is up .2 % which is the same as the previous month's increase (good discussion here). Monthly data are very noisy and subject to large revisions, so much so that it is possible that the noise in these data exceeds the signal making the data more confusing than helpful. How informative are monthly data releases for forecasting current quarter GDP and inflation? This paper finds that the "information matters in the sense that the precision of the signal increases ... as new data are released":

                                              Nowcasting GDP and Inflation: The Real-Time Informational Content of Macroeconomic Data Releases, by Domenico Giannone, ECARES and European Central Bank, Lucrezia Reichlin, European Central Bank and CEPR, David Small, Board of Governors, Federal Reserve, September 2005: Abstract This paper formalizes the process of updating the nowcast and forecast on output and inflation as new releases of data become available. The marginal contribution of a particular release for the value of the signal and its precision is evaluated by computing "news" on the basis of an evolving conditioning information set. The marginal contribution is then split into what is due to timeliness of information and what is due to economic content. We find that the Federal Reserve Bank of Philadelphia surveys have a large marginal impact on the nowcast of both inflation variables and real variables and this effect is larger than that of the Employment Report. When we control for timeliness of the releases, the effect of hard data becomes sizeable. Prices and quantities affect the precision of the estimates of inflation while GDP is only affected by real variables and interest rates. [SSRN link, CEPR link]

                                                Posted by on Friday, December 16, 2005 at 05:12 PM in Academic Papers, Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1) 


                                                Paul Krugman: Drugs, Devices, and Doctors

                                                Paul Krugman looks at the conflict of interest due to financial connections between medical companies, medical researchers, and health care providers:

                                                Drugs, Devices and Doctors, by Paul Krugman, NY Times: Merck, the pharmaceutical giant, is under siege. ... Merck stands accused of playing down evidence that Vioxx, a best-selling painkiller until it was withdrawn..., increases the risk of heart attacks. The most recent accusation of obscuring the evidence came from The New England Journal of Medicine, which discovered that the authors of a Merck-supported paper ... had removed data unfavorable to Vioxx. ... Dr. Eric Topol, a famed cardiologist at the Cleveland Clinic, has been warning about the dangers of Vioxx since 2001. In videotaped testimony at a recent federal Vioxx trial ..., he accused Merck of scientific misconduct...

                                                Two days after that testimony, according to Dr. Topol, he was told ...[his] position of chief academic officer ... had been abolished. A [Cleveland] clinic spokeswoman denied that the abrupt elimination of this post had any link to his Vioxx testimony. A few days later, The Wall Street Journal reported on a web of financial connections between the Cleveland Clinic, its chief executive and AtriCure, a company selling a medical device used in a surgical procedure promoted by the clinic. Dr. Topol ... was "among those who questioned the ties," the newspaper said.

                                                O.K., it's sounding complicated. ... The past quarter-century has seen the emergence of a vast medical-industrial complex, in which doctors, hospitals and research institutions have deep financial links with drug companies and equipment makers. Conflicts of interest aren't the exception - they're the norm.

                                                The economic logic of the medical-industrial complex is straightforward. Prescription drugs and high-technology medical devices account for a growing share of medical spending. Both are ... expensive to develop but relatively cheap to make. So the profit from each additional unit sold is large, giving their makers a strong incentive to ... persuade doctors and hospitals to choose their products. The tools of persuasion go beyond hiring cheerleaders as sales representatives. There are also financial inducements, sometimes disguised, sometimes blatant. A few months ago, Reed Abelson of The New York Times reported on a practice in which device makers give surgeons who are in a position to choose their products ... lucrative consulting contracts...

                                                Above all, the line between medical researcher and medical entrepreneur has been blurred. In her book "The Truth About the Drug Companies," Marcia Angell, a former editor of The New England Journal of Medicine, writes that small companies founded by university researchers now "ring the major academic research institutions ... hoping for lucrative deals with big drug companies." Usually, she says, "both academic researchers and their institutions own equity" in these companies, giving them a strong incentive to make the big drug companies happy.

                                                The ... whiff of corruption in our medical system isn't emanating from a few bad apples. The whole system of incentives encourages doctors and researchers to serve the interests of the medical industry. The good news is that things don't have to be that way. Economic trends gave rise to the medical-industrial complex, but only because those trends interacted with bad policies, which can be fixed. In future columns I'll talk about how serious health reform can reduce the conflicts of interest that taint our current system.

                                                Previous (12/12) column: Paul Krugman: Wal-Mart's Excuse
                                                Next (12/19) column: Paul Krugman: Tanks on the Take

                                                [Update: Full column here.]

                                                  Posted by on Friday, December 16, 2005 at 12:16 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (18) 


                                                  In Trade We Trust

                                                  Alan Greenspan sounds a familiar tune on the virtues of free markets. Here, he stresses the importance of implicit contracts in making free markets work. Trust, he says, is a key element in commerce and it is reemerging as an important asset in the global economy as we discover that government alone cannot provide the guarantees that are necessary to ensure integrity in business relationships. Only the market, by punishing the stock values of companies who commit business and financial transgressions, can serve this function:

                                                  Remarks by Chairman Alan Greenspan, Acceptance of honorary degree, New York University, New York, New York, December 14, 2005: ...I have had a front-row seat in observing the exceptional growth in world living standards. With all that exposure, it was inevitable that I would gain some useful insights into the role of open and competitive markets in engendering the wealth of nations. ... On average, world standards of living are rising, in large part because of the widening embrace of competitive free markets, especially by populous and growing China and India. ... Open and free markets ... rest not only on voluntary exchange but also on a necessary condition of voluntary exchange: trust in the word of those with whom we do business. To be sure, all market economies require a rule of law to function--laws of contracts, protection of property rights, ... Yet, if even a small fraction of legally binding transactions required adjudication, our court systems would be swamped and immobilized.

                                                  In ... virtually all our transactions, ... we rely on the word of those with whom we do business. If we could not do so, goods and services could not be exchanged efficiently. The trillions of dollars of assets that are priced and traded daily in our financial markets before legal confirmation illustrates the critical role of trust. ... Commerce is inhibited if we cannot trust ... commitments. ... This necessary condition for commerce was particularly evident in freewheeling nineteenth-century America, where reputation and trust became valued assets. Throughout much of that century, laissez-faire reigned ..., and caveat emptor was the prevailing prescription for... trading... A reputation for honest dealing was thus particularly valued. ... To be sure, the history of world business is strewn with Fisks, Goulds, and numerous others treading on, or over, the edge of legality. But they were a distinct minority. ...

                                                  Over the past half-century, societies have ... partially substituted government financial guarantees and implied certifications of integrity for business reputation. As a consequence, the value of trust so prominent in the nineteenth century seemed by the 1990s to be less necessary. Most analysts believe that the world is better off as a consequence of these governmental protections. But corporate scandals in the United States and elsewhere have clearly shown that the plethora of laws of the past century have not eliminated the less-savory side of human behavior.

                                                  We should not be surprised, then, to see a reemergence ... of the value placed by markets on trust and personal reputation in business practice. After the recent revelations of corporate malfeasance, the market punished the stock prices of those corporations whose behavior had cast doubt on the reliability of their reputations. There may be no better antidote for business and financial transgression. ... Our system works fundamentally on trust and individual fair dealing. We need only look around today’s world to appreciate the value of these traits and the consequences of their absence. While market economies have achieved much in this regard, more remains to be done.

                                                  Prejudice ... is unworthy of a society built on individual merit. A free-market capitalist system cannot operate effectively unless all participants in the economy have the opportunity to achieve their best. If we succeed in opening up opportunities to everyone, the affluence within our borders will almost surely become more equally distributed. ...

                                                    Posted by on Friday, December 16, 2005 at 12:15 AM in Economics, Fed Speeches | Permalink  TrackBack (0)  Comments (5) 


                                                    Thursday, December 15, 2005

                                                    Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income

                                                    Quoting, "...only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth ... because half of the income gains went to the top 10 percent of the income distribution, leaving little left over for the bottom 90 percent":

                                                    Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income, by Ian Dew-Becker and Robert J. Gordon, NBER WP 11842, December 2005: Abstract A basic tenet of economic science is that productivity growth is the source of growth in real income per capita. But our results raise doubts by creating a direct link between macro productivity growth and the micro evolution of the income distribution. We show that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth. Growth in median real wage and salary income barely grew at all while average wage and salary income kept pace with productivity growth, because half of the income gains went to the top 10 percent of the income distribution, leaving little left over for the bottom 90 percent. Half of this inequality effect is attributable to gains of the 90th percentile over the 10th percentile; the other half is due to increased skewness within the top 10 percent.

                                                    In addition to its micro analysis, this paper also asks whether faster productivity growth reduces inflation, raises nominal wage growth, or raises profits. We find that an acceleration or deceleration of the productivity growth trend alters the inflation rate by at least one-for-one in the opposite direction. This paper revives research on wage adjustment and produces ... model of price and wage adjustment that explains movements of labor's share of income.

                                                    What caused rising income inequality? Economists have placed too much emphasis on "skill-biased technical change" and too little attention to the sources of increased skewness at the very top, within the top 1 percent of the income distribution. We distinguish two complementary explanations, the "economics of superstars," i.e., the pure rents earned by sports and entertainment stars, and the escalating compensation premia of CEOs and other top corporate officers. These sources of divergence at the top, combined with the role of deunionization, immigration, and free trade in pushing down incomes at the bottom, have led to the wide divergence between the growth rates of productivity, average compensation, and median compensation. [open links: Brookings, Author web site]

                                                      Posted by on Thursday, December 15, 2005 at 12:06 PM in Economics, Income Distribution, Technology | Permalink  TrackBack (0)  Comments (23) 


                                                      Vox Baby: Nonpartisan Social Security Reform Plan

                                                      Andrew Samwick, in a post at his blog Vox Baby, has what is billed as a Nonpartisan Social Security Reform Plan. Here's the plan, followed by some questions that came to mind while reading through it:

                                                      Vox Baby: Nonpartisan Social Security Reform Plan: Along with Jeff Liebman of Harvard University and Maya MacGuineas of the New America Foundation, I am pleased to announce the "Nonpartisan Social Security Reform Plan." Jeff was a Special Assistant to President Clinton's National Economic Council, where he worked on Social Security, and Maya was a Social Security adviser to Senator McCain's 2000 presidential campaign. Combined with my experience on the staff of the CEA in the Bush administration, we cover the political spectrum of recent years.

                                                      We've all spent plenty of time worrying about the looming fiscal crisis associated with the demographic shift toward an aging population, of which Social Security is the tip of the iceberg. Push finally came to shove, and we bound ourselves together via months of conference calls, and this is the plan that emerged. It's not what any one of us would have come up with on our own, but those sorts of plans never become legislation anyway.

                                                      What is unique about the plan is that it is designed around the broad areas of likely compromise across the political landscape on how to restore solvency to the system. What makes the plan important is that the Office of the Chief Actuary has evaluated it and certified that it would "easily satisfy the criteria for attaining sustainable solvency."

                                                      The plan contains four primary elements: a gradual reduction in future benefits; an increase in the payroll tax cap; an increase in the retirement age; and the establishment of personal retirement accounts. The plan puts great emphasis on fiscal responsibility – there are no transfers from general revenues to achieve sustainable solvency. Specifically:

                                                      1) Pay-as-you-go benefits would be gradually reduced to keep the costs of the traditional system to what can be afforded by the 12.4 percent payroll tax. The cuts are structured such that cuts are larger for high earners than for low earners.

                                                      2) The plan would establish mandatory personal retirement accounts (PRA) in the amount of 3 percent of taxable payroll. The accounts would be funded by a combination of diverting 1.5 percent of taxable payroll from the Social Security trust fund and requiring workers to contribute an additional 1.5 percent of payroll into their PRAs.

                                                      3) The funds diverted from the trust fund would be replaced, once the Social Security surplus was not adequate, by raising the cap on earnings subject to the Social Security payroll tax so that 90 percent of earnings were taxed. Workers would receive no incremental benefits for paying these additional taxes.

                                                      4) The plan would gradually increase the normal retirement age (currently scheduled to reach 67 in 2017) to 68 and the earliest age at which retirees could collect Social Security benefits from its current 62 to 65. People would be able to tap into their PRA assets beginning at age 62.

                                                      5) In order to minimize risks and administrative costs, accounts would be tightly regulated and full annuitization of account balances would be required.

                                                      6) Total replacement rates from the remaining traditional benefits and the new PRAs are comparable for most workers to those promised but currently underfunded in present law.

                                                        I invite your comments and questions on the plan, and I will be blogging more about the plan in the days and weeks to come. It was a fascinating experiment--we were trying to walk the very thin line between compromising our principles, which serves no one, and the principle of compromise, which is essential to moving public policy forward. It is a plan that respects political differences but not entrenched political interests. We believe that we have staked out the center of the political spectrum--the challenge now is to capture enough of the people just left and right of center to build the necessary coalition to see it through.

                                                      I've undoubtedly missed some things, but here are a few questions and reactions to the proposal:

                                                      1. I would like to see a more thorough discussion of the degree of the problem we face. It seems as though this has been talked to death, and in many ways it has. But for the most part we have seen just one or two sets of estimates on solvency. There is a good deal of uncertainty surrounding these numbers, the models used, estimates of trends, and so on, and there is reason to believe that the productivity numbers in particular are overly pessimistic. But lots of smart people say there is a problem to worry about, so let's move on to the proposed solutions.

                                                      2. With respect to raising the retirement age, is it true that people are more capable, healthier, more able to do physical labor than in the past? Are they healthier at age 68 than they used to be, or do they just live longer because the last years have been extended through medical advances? What will be done for all those who do physical labor their whole lives and come to age 62 or 65 and simply cannot go on? Is it equitable to treat them the same as someone who does far less demanding labor? In any case, what of those who cannot work at their current employment until age 68 and cannot find employment elsewhere that pays the bills? I’m not sure we fully understand the implications of extending the retirement age on the distribution of benefits, etc.

                                                      3. Will tilting the benefits further cause an erosion of political support for the program in the future? This is a big worry. Will it increasingly be seen, because of the differential benefits by income class, as an income transfer program rather than a social insurance program and a program to help overcome market failures in retirement insurance markets? If the higher income groups benefit less, will they next ask why they don’t pay less? Raising the cap to 90% tilts the process even further. Is it possible to protect against an erosion of support in the future because of these changes?

                                                      4. Why not hold the risk from participating in financial markets centrally? What is gained by distributing the risk to individuals through personal accounts, especially those on the margin? Is it a philosophical objection to using the trust fund to purchase private sector assets? What are the costs of reducing individual risk by investing the funds centrally rather than individually, particularly since individual choice will be so limited to prevent excessive risk taking?

                                                      5. Finally, even if I believe there is a problem, and even if this proposal is written to overcome the biggest concerns, I do not have a lot of faith in the existing congress and I’m hesitant to open the reform door even a crack. I think of it like a car with funny noises that may have “long-run structural” problems. There are some people I would trust completely to get under the hood, diagnose the problem, and fix it. They would do what was needed, and nothing more. There are other people, however, who would love to get under the hood, who may even listen for funny noises to try and convince you to let them tinker (and if they are also dishonest, maybe even squirt a little oil here and there secretly to help make the case). But I wouldn’t let them anywhere near the car. Most of the time, they would do more harm than good, rip out the whole engine when a smaller repair is all that is needed, or add unnecessary repairs to the bill. It’s risky, but in such cases I’d rather try and make it, funny noises and all, down the road to the next repair shop where I have a little more faith in the outcome. For me, that is the biggest problem with signing on to anything at the present time.

                                                      Andrew, Jeff, and Maya would appreciate hearing your comments on this proposal. Me too.

                                                        Posted by on Thursday, December 15, 2005 at 01:24 AM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (42) 


                                                        Lake Internal-funds-be-gone: Where All The Investments Are Above Average

                                                        Hal Varian offers an explanation for why companies finance investment out of retained earnings more often than many financial models suggest they should:

                                                        What Can We Learn From How a Manager Invests His Own Money?, by Hal R. Varian, Economic Scene, NY Times: In the simplest textbook model of financial markets, companies pay cash dividends each year to their shareholders, who can then invest this money ... [in] its most profitable use. In reality, companies often retain earnings and invest them internally rather than distribute profits to their shareholders. Such behavior is generally considered detrimental for shareholders since it forces them to reinvest in the same company... Furthermore, these retained earnings can seriously distort corporate investment decisions. If a good investment arises that is too large to be financed out of existing cash reserves, companies may pass it up ... On the flip side, internal investments that are not particularly profitable may be financed just because there is a lot of cash on hand.

                                                        Why do companies retain earnings, if they reduce shareholder choice and lead to investment distortions? According to one theory, managers are overly sensitive to cash on hand because their interests are not fully aligned with shareholders. They would rather use retained earnings to buy corporate jets or walnut desks than pay more dividends. An alternative explanation rests on ... access to information: corporate insiders understand investment opportunities available to them better than the stock market, so they prefer to invest using internal funds rather than pay the higher financing costs associated with the stock or bond markets.

                                                        In the December 2005 issue of The Journal of Finance, Ulrike M. Malmendier of Stanford Business School and Geoffrey Tate of the Wharton School offer a new and provocative explanation ... They argue that this behavior is partly explained by the personality characteristics of the chief executive. The title says it all: "C.E.O. Overconfidence and Corporate Investment." Their explanation begins with the Lake Wobegon effect: we all tend to think that we are above average. ... Successful business executives are particularly susceptible to this affliction. An overconfident chief executive may well believe that he can value investments better than financial markets and thus decide that retaining and investing earnings is better for the shareholders than letting them invest the money themselves. Alternatively, whenever he does not have cash at hand, ... [b]eing overconfident, he feels that his company and his investment plans are undervalued by investors and bankers and, hence, finds that raising the equity or the debt to finance the project is too expensive.

                                                        One way to see whether executives may be overconfident in corporate investments is to look at their behavior in their personal investments. Top executives often receive large grants of options and stock as compensation. Having all your eggs in one basket is quite risky, and prudent investors diversify as soon as it makes economic sense. The authors determine a sensible policy for ... a chief executive and then identify those who depart from such a policy as "overconfident." They tend to be chief executives who exercise their options much later than would seem reasonable and hold more company stock than appears prudent.

                                                        The question is whether these executives ... also appear to be overconfident with respect to the corporate investments they control. ... They found ...[that] chief executives who appear to be overconfident in their personal investment practices seem to be particularly sensitive to cash flows in their corporate investment decisions. The authors also examine how other personal characteristics ... affect corporate investment decisions. Those with engineering or science backgrounds tend to be more sensitive to cash flow in making investments than those with a financial background. The chief executives who grew up in the Great Depression seem to be particularly influenced by cash on hand, perhaps because they developed a distrust of financial markets and a predilection for self-sufficiency.... A chief executive who sells shares may be signaling prudent investment behavior rather than pessimism about future prospects. Examining how a chief executive manages his own money may well signal how he will manage yours.

                                                        [Link to free version of paper, Journal of Finance Version]

                                                          Posted by on Thursday, December 15, 2005 at 12:33 AM in Academic Papers, Economics | Permalink  TrackBack (0)  Comments (11) 


                                                          The Use of Monetary Aggregates as a Guide to Policy

                                                          Otmar Issing of the European Central Bank’s executive board makes the case for using monetary aggregates as part of the monetary policy framework:

                                                          Monetary analysis is essential, not old-fashioned, by Otmar Issing, Financial Times: ...Can any central bank afford to ignore ... monetary developments in formulating monetary policy? ... the answer is “no”. It is time to move on from the misguided question of whether analysis of monetary and credit data should play a role in monetary policymaking. ... The European Central Bank ... approach reflects the need for an encompassing assessment of the risks to price stability by cross-checking the indications coming from the economic analysis with those stemming from the monetary analysis. We have ...  found that monetary analysis is pivotal in understanding the medium- to longer-term outlook for price stability. Using monetary developments to cross-check the economic analysis ... is crucial... Monetary analysis goes beyond focusing exclusively on developments in one particular aggregate – M3 in our case – to encompass a rich assessment of other measures of liquidity, as well as credit and financial flows and asset prices.

                                                          Developing such a rich monetary analysis ... creates communication challenges. ... [T]he ECB has always been transparent about the complexities involved. In our communication..., we strive to offer clear – but not simplistic – messages about the conclusions drawn from the monetary analysis... Confronting such challenges has produced [two] substantial rewards. ... First, our monetary analysis has delivered important signals about ... future price developments, especially at the medium to longer horizons most relevant for monetary policy decisions. Since 1999, the properties of money as an indicator of inflation ... compare very favourably with alternative frameworks.... Of course, the period of comparison is still relatively short.... Definitive conclusions cannot yet be drawn. ...

                                                          Second, the monetary analysis has provided a framework within which to identify, discuss and communicate in a timely way the growing challenges posed by financial imbalances and inflated asset prices. It has become widely recognised that, with consumer price inflation well anchored, overly accommodative monetary policies may lead to asset price inflation. ... Further research in this area is needed ... Nonetheless, taking seriously monetary analysis in a broad sense is an important step in this regard.

                                                          The ECB’s monetary analysis ... helps to lengthen the horizon of the policymaking discussion and provides a framework for considering asset price and financial imbalances. Indeed, other central banks are considering using a cross-check based on money, credit and asset market developments in their policy frameworks... We are told that assigning an important role to monetary analysis is old-fashioned. ... When price developments are benign, monetary analysis is likely to fall out of fashion. However, we should not wait for inflation to revive before recognising the importance of monetary developments for monetary policymaking.

                                                          I am not fully convinced. Monetary aggregates are difficult to measure due in part to the difficulty rapid financial innovation poses for defining consistent aggregates through time. Because of this, aggregates have the potential to give false readings, and they are certainly no replacement for other measures. But if it can be shown that aggregates provide useful information, I am certainly open-minded.

                                                            Posted by on Thursday, December 15, 2005 at 12:15 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1) 


                                                            Wednesday, December 14, 2005

                                                            Productivity Growth and Unemployment

                                                            James Stock points to an interesting graph of the relationship between productivity growth and unemployment:

                                                            See an intriguing graph of the univariate trends in the rates of unemployment and productivity growth in the U.S., 1960 – 2000 (univariate trends computed using a low pass filter; source is “Prices, Wages and the U.S. NAIRU in the 1990s,” Ch. 1 in The Roaring Nineties, A. Krueger and R. Solow (eds.), Russell Sage Foundation/The Century Fund: New York (2001), 3 – 60 (with D. Staiger and M. Watson).

                                                              Posted by on Wednesday, December 14, 2005 at 12:09 PM in Economics, Technology, Unemployment | Permalink  TrackBack (0)  Comments (9) 


                                                              Paul Krugman: Costco versus Wal-Mart

                                                              Paul Krugman is asked about the comparison between Costco and Wal-Mart:

                                                              Putting Pressure on Wal-Mart, by Paul Krugman, Money Talks: David Gross, Palo Alto, Calif.: I agree with you completely ["Big Box Balderdash"]. In addition, you could cite Costco, as a comparison, as a competing high-volume, deep-discount retailer which pays its employees well, with good benefits. In addition, its social posture is excellent, and quite unique in corporate America...

                                                              Paul Krugman: I didn't have space to get into comparisons between Wal-Mart and other big box employers. The contrast with Costco ... is telling. There is ... a counter-argument from Wal-Mart's defenders. Costco caters to a much higher-income clientele ..., so that Costco's customers may place a higher value on the intangible benefits ... from a workforce that is relatively content, and also more experienced because of lower turnover. It's probably true, given the relatively low income of its customers, ... that Wal-Mart's most profitable strategy is the one it has chosen: low wages, high turnover, and low prices at the expense of service.

                                                              But there are tradeoffs: if Wal-Mart were pressured into paying its workers better, the cost to the company would be much less than the added wages, because of all the factors that make treating workers decently profitable for Costco. What this means is that the corporate profitability case for low wages at Wal-Mart is true, but less compelling than ... the raw numbers might suggest. The message I take from this is that a pressure campaign against Wal-Mart has a good chance of succeeding. If public pressure makes a low-wage policy less attractive, Wal-Mart might well be persuaded to shift toward a more Costco-like wage structure.

                                                                Posted by on Wednesday, December 14, 2005 at 01:45 AM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (29) 


                                                                Using Monetary Policy to Balance Inflation and Output Risks

                                                                  Posted by on Wednesday, December 14, 2005 at 01:27 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (4) 


                                                                  The Dallas Fed Does Henry George

                                                                  This Dallas Fed Economic Insight discusses the life and ideas of Henry George, a strong advocate of free trade and the single tax on land:

                                                                  Henry George: Antiprotectionist Giant of American Economics, Economic Insights, Federal Reserve Bank of Dallas: Americans are again confronted, both domestically and internationally, with the clash of protectionist and free trade sentiment. ... Americans are torn between enjoying the benefits of globalization, with its increased consumer choices and lower prices, and worrying about the costs to the nation that some claim come with global free trade. There is nothing new about this clash of ideas ... they have been vigorously debated before, most notably during the late 19th century. In the center of that debate was one of this nation’s most famous economists—Henry George. Today, few Americans recognize his name, yet his Progress and Poverty is the best-selling economics book ever written and outsold all English-language books save the Bible in the late 1890s. He touched off a worldwide movement for major tax reform... Who was George? Why was he so influential? And what did he have to say about protectionism that we might profit from today? We offer this short biographical piece to answer these questions. — Richard W. Fisher President Federal Reserve Bank of Dallas

                                                                  Henry George: Antiprotectionist Giant of American Economics

                                                                  Today’s policy discussions are often argued as if the issue under consideration is unique to our time. Because we often forget—or never knew—the relevant history, we can fail to see that almost every policy argument has historical precedent. ... Although many believe them unique to our day, antiglobalization—with its concomitant protectionist sentiments—salts human history. Mercantilist doctrine, which is protectionist, dates to mid-17th century Europe. As international trade grew, so, too, did the demand for government intervention to protect domestic manufactures by discouraging imports and subsidizing exports. ... For over a century, the American government raised the majority of its tax revenue through the imposition of import tariffs. But protectionist economic policy has always had critics, one of the most thoroughgoing of whom was Henry George.

                                                                  Continue reading "The Dallas Fed Does Henry George" »

                                                                    Posted by on Wednesday, December 14, 2005 at 12:32 AM in Economics, International Trade, Taxes | Permalink  TrackBack (0)  Comments (3) 


                                                                    Tuesday, December 13, 2005

                                                                    Rates Up 1/4 as Expected, Accommodative Gone, Measured Stays But is Reworded

                                                                    The Fed has changed the language as many, but not all, expected. The press release after today's FOMC meeting drops the word accommodative in reference to policy, but the statement "further measured policy firming is likely" remains, though this is a change in wording from the previous statement allowing for more flexibility in response to changing conditions

                                                                    My view prior to today's meeting was that if the Fed left both the measured and accommodative language in the press release, that meant they were willing to let financial markets lock into the expectation of one or two more rate increases. The implication would be that there was very little incoming data could do to alter the Fed's intent to tighten further, though of course if the situation changed dramatically they would reconsider.

                                                                    By changing the language as they have, the Fed is signaling that further rate increases are very likely, but not certain. Strong growth and inflation worries showing up in incoming data will continue to bring about further tightening, but any signal that growth is abating or that inflation is firmly under control will give the Fed reason to pause and reconsider whether further increases are warranted. For now, they see solid growth, low core inflation, and long-term expectations that are contained and feel that further increases are likely necessary to balance the risks of price stability and falling growth. That is, currently they see the risk of inflation as higher than the risk of falling growth and feel a further rate hike is needed to bring these risks into balance. It will be interesting to see to what degree FedSpeak is used to set expectations as data arrive. In the following, the equivalent passages from the November 1 press release after the last FOMC meeting are in italics [Today's release, November 1 release]:

                                                                    For immediate release

                                                                    The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-1/4 percent.

                                                                    The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4 percent.

                                                                    Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.

                                                                    Elevated energy prices and hurricane-related disruptions in economic activity have temporarily depressed output and employment. However, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity that will likely be augmented by planned rebuilding in the hurricane-affected areas. The cumulative rise in energy and other costs has the potential to add to inflation pressures; however, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.

                                                                    The Committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

                                                                    The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

                                                                    [Note: no substantive changes] Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.

                                                                    Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.

                                                                    [Note: no substantive changes] In a related action, the Board of Governors unanimously approved a 25-basis point increase in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

                                                                    In a related action, the Board of Governors unanimously approved a 25-basis point increase in the discount rate to 5 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

                                                                    For more: NY Times, Washington Post, Bloomberg, Wall Street Journal, CNN/Money, Fed Breaks Pattern, Signals Replace Promises: John M. Berry, Bloomberg, Fed Wraps Holiday Statement in Shade of Neutral: Caroline Baum, Bloomberg

                                                                    Blogs: William Polley, The Big Picture, The Big Picture: Economists React in WSJ (cites this blog)

                                                                      Posted by on Tuesday, December 13, 2005 at 11:31 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (6) 


                                                                      Chinese Government Struggles with Protests over Property Rights

                                                                      There is growing social unrest in many parts of China, something highlighted by the government's recent deadly response to a protest over confiscation of land, a common trouble area. As the article notes, the protests are a sign that average citizens in China are increasingly aware of and willing to protect property and other rights. The Chinese government is looking for a way to respond effectively to the growing unrest and, encouragingly, there are some signs that violent responses by officials will be avoided:

                                                                      As the economy booms, so does unrest, The Economist: It is hard to know what is most remarkable: the protest, the crackdown or the government response. A demonstration in a coastal settlement in a relatively rich province of southern China last week turned violent. Residents in Dongzhou took up spears, knives, pipe-bombs, petrol bombs and sticks of dynamite, first threatening to blow up a local power generation plant and then defying paramilitary police sent to impose order. The police, in gathering darkness and “in alarm”, responded by shooting dead at least three protesters and wounding several others. ... Reports gathered by journalists ... suggest that, in fact, many more were killed, perhaps 20 ... including bystanders. ...Amnesty International ... says this is the first time demonstrators in China have been killed by police fire since 1989 ... in Tiananmen Square...

                                                                      Though protests are increasingly common in China, the violence in Dongzhou was uncommon. Rarer still was the reaction of the authorities. Rather than deny the police crackdown ... the government of Guangdong province at the weekend criticised the “wrong actions” of the commander... Civilian officials then detained him, an extraordinary response which suggests high-level concern that the incident was badly mishandled... There is every reason to expect more uprisings as China’s economy continues to boom. The farmers and fishermen who took part in the protest last week are not China’s poorest... Many of the homes in their settlement ... are modern and in good condition ... But locals are enraged that land was confiscated for use in a $700m development project to supply electricity to Shanwei, and little compensation was offered. This suggests ordinary Chinese are increasingly aware of their property rights and willing to defy authorities to protect them...

                                                                      How China’s government handles such protests is now a burning question. ... Hardliners believe in tough measures, such as banning internet material that incites “illegal demonstrations” and deploying newly trained anti-riot and counter-terrorist units. These last two have been combined into a new “special police” force that is supposed to tackle any demonstration that turns “highly confrontational”. But if the ham-fisted performance at Dongzhou is a sign of it in action, there is reason to look for other responses. ... [W]here ... the root problem is access to land, officials could do more to respond to the grievances ... by ensuring that property rights are better respected. Tackling corruption would help too. Too often, compensation offered for confiscated land is pocketed by ... officials. ...

                                                                      There are some signs that the government will not rely merely on repressive measures. The weekend arrest of the military officer responsible in Dongzhou was surprising and welcome. That suggests the highest authorities in the country ... who sits atop the China’s civilian, military and Communist party structures, have become involved and disapprove of the police violence. That journalists have been able to put together a picture of what happened in Dongzhou also reflects a limited freedom that did not exist a decade ago ... With many more protests to come, the calls for rights are sure to grow louder.

                                                                      Signs that the government is striving to find less heavy-handed responses are encouraging.  Measures such as more generous compensation, reducing corruption, and so on may reduce the problem, but hard feelings over land confiscation will never be entirely avoided. One wonders how hard officials work to avoid confiscating land for public projects and perhaps this is another area it could improve. A government used to asserting its authority without regard to individual rights may not think to try to find solutions that avoid such conflicts when planning projects if it requires additional effort or cost. Recognition that the government must work to avoid conflicts where possible at the planning stage could also help.

                                                                      Update: For more see Gino, The Useless Tree and The China Digital Times.

                                                                        Posted by on Tuesday, December 13, 2005 at 10:24 AM in China, Economics | Permalink  TrackBack (0)  Comments (7) 


                                                                        Stiglitz and Charlton: The Doha Trade Talks and Developing Countries

                                                                        Joseph Stiglitz, winner of the Nobel Prize in economics in 2001 and chief economist and senior vice-president of the World Bank 1996-2001, and Andrew Charlton of the London School of Economics write about the failure of a deal proposed to save the Doha trade talks to include measures to address poverty in developing countries. While the deal may be politically astute, it misses the point:

                                                                        The Doha round is missing the point on poor countries, by Joseph Stiglitz and Andrew Charlton, Commentary, Financial times: ...[A] vast chorus of world leaders have warned that the possible failure of the Doha trade talks would be a ... lost opportunity to alleviate poverty in developing countries. However, as the parameters of a possible deal are hammered out ..., we should remember that the content of the agreement matters more than the agreement itself. As it stands, the Doha round is rushing headlong ... towards a conclusion that would do very little for the poorest countries.

                                                                        The current log-jam centres on the European Union’s offer to reduce its agricultural tariffs on condition that developing countries agree to open their manufacturing and services sectors. ... Unfortunately this ... deal is ... wrongheaded ... For one thing, it is misleading to present European agricultural liberalisation as a concession to the developing countries. The Common Agricultural Policy is an unsustainable system that ... has been on the brink of collapsing under its own weight. ... it is surely too much ... to ask them to offer concessions in return. Second, it is inappropriate for the largest and richest countries to be demanding a quid pro quo from the poorest. The developing countries are in no position to bargain with the superpowers. ... [The] deal is also based on the assumption that poor countries should satisfy themselves with being agricultural suppliers to rich nations. It asks developing countries to expose their manufacturing industries to competition from more advanced and larger economies, potentially throwing those workers into unemployment, and it asks them to forgo attempts to promote their own service sector industries. ...

                                                                        [M]any of the poorest countries actually have very little to gain from agricultural reform in the short run. ... most of the poorest nations are net food importers. Reductions in subsidies will increase the price they pay for imported commodities... Also, most ... are beneficiaries of special schemes granting them free market access to European and US markets. ... so tariff reductions would only benefit their competitors’ exports at their expense. ... There is much that could be done by the World Trade Organisation to promote development ... But few of those things are included in the emerging agenda. ...

                                                                        There is much that could be done to reduce tariffs on industrial goods. The structure of rich countries’ tariffs is heavily biased against the goods exported by poor countries, particularly labour-intensive industrial goods and processed foods. ... There is also much that could be done to increase the mobility of workers. ... Finally, the Doha round needs to get serious about “aid for trade”. In recent years the EU and US have slashed tariffs to the poorest countries under special schemes granting them free market access. Yet ... we have witnessed almost no increase in the volume of exports from beneficiary countries. This experience belies the rhetoric of politicians who espouse the virtues of trade over aid. Market access is not enough. Without assistance to overcome gaps in infrastructure, boost product quality and connect to international supply chains, tariff cuts have little effect on trade from the poorest nations. In Doha in 2001, the developing countries were promised a “development round”, one that would redress the imbalances of the past and create opportunities for the future. But what has emerged since then clearly does not deserve that epithet. ...

                                                                          Posted by on Tuesday, December 13, 2005 at 12:33 AM in Economics, International Trade | Permalink  TrackBack (0)  Comments (13) 


                                                                          It's the Price of Gas, Stupid!

                                                                          Paul Krugman is asked how Bush's poll numbers for his handling of the economy can be rising if people are dissatisfied with the economy's performance:

                                                                          How's Bush Doing? Just Check the Price of Gas, Paul Krugman, Money Talks: Ronald Hernandez, Saint Amant, La.: ... if the economy is doing so poorly for the average Mary or Joe, then why are the latest polls consistently showing that more and more people are feeling better about it? ... And, oh yes, I am from the Katrina area and am well aware of how the Bush machine is working on its latest portrait. They are in the process of painting a picture of unpreparedness and incompetence within Louisiana's state and local governments in reaction to the worst natural disaster ever in the United States.

                                                                          Paul Krugman: The latest polls do show some improvement in peoples' perception of the economy, although it's still strongly negative. But there's no mystery there: it's all about gasoline prices. It turns out that there's a stunningly close relationship between short-term movements in Bush's approval rating and changes in the price of gasoline. You can see it for yourself at an interesting web site, Professor Pollkatz's Pool of Polls. (The site is very anti-Bush but provides interesting data analysis whatever your politics.) In fact, given the fall in gas prices back to pre-Katrina levels, the surprising thing is how little of a boost Bush and his economic performance ratings have received.

                                                                            Posted by on Tuesday, December 13, 2005 at 12:26 AM in Economics, Oil, Politics | Permalink  TrackBack (0)  Comments (2) 


                                                                            Our Decaying Infrastructure

                                                                            Given that one of the authors is Warren Rudman, a Republican, this call for increased spending on infrastructure is surprising:

                                                                            It's Time to Rebuild America A Plan for Spending More -- and Wisely -- on Our Decaying Infrastructure, by Felix G. Rohatyn and Warren Rudman, Washington Post: Two recent, very different events ... serve as startling examples of our unwillingness to support needed public investment... On the Gulf Coast, the failure to invest adequately in the levees of New Orleans and to prepare for or manage the resulting disaster was obvious to the world. On the Pacific Coast, in the state of Washington... [t]he region's infrastructure had been outstripped by growth. But the new governor, Christine Gregoire, had the courage to impose a phased-in motor fuels tax to repair the state's dilapidated and congested roads and bridges. Her opposition tried to repeal the legislation with a ballot initiative, but thanks in part to the support of the state's most powerful business leaders, voters stood by her and supported the tax...

                                                                            In many parts of the country, the population has outgrown its infrastructure. The resulting decline in quality of life is having a direct effect on the region's corporations as well as on its residents. Private investment has led U.S. economic growth for two centuries, but it could not have done so without a series of complementary public investments in canals, railroads, roads, the airspace system, water projects, public transportation, public schools and the like, which improve business productivity and our standard of living while generating significant increases in private-sector employment. But these investments have been badly neglected in recent years. ...

                                                                            Americans may not want "big government," but they want as much government as is necessary to be safe and secure. Today state and local governments spend at least three times as much on infrastructure as the federal government does. In the 1960s the shares for both were even. Even so, increases in state spending have not been enough to check the decline in many of our public assets. ... There will no doubt be opposition to solving this problem. Advocates of "small government" will characteristically oppose government's performing its valid, historical role. ... The nation's infrastructure [is in] crisis ... A federal role is needed to fix it, but that role must be reconceived, redrawn and refinanced. Success will improve our quality of life, our standard of living and our competitiveness. That will require government big enough and smart enough to be effective...

                                                                            Remember who Warren Rudman is? He's Mr. Deficit Reduction:

                                                                            The Gramm-Hollings Deficit Reduction Act, passed in 1985 by the United States Senate: Senators Ernest Hollings ..., Warren Rudman ... and Phil Gramm ... were the chief sponsors. The Act was aimed at cutting the budget deficit, at the time the largest in history. Its official name was the Balanced Budget and Emergency Deficit Control Act of 1985. It required Congress to compensate tax cuts or spending with other revenue, and also provided for automatic spending cuts if Congress and the President failed to do so. This provision was found unconstitutional ... and a reworked version of the bill passed; however, it failed to prevent large budget deficits.

                                                                            I agree with the call for more spending on infrastructure, it's needed. But, while there is a proposal in the article to provide federal financing, how the new infrastructure spending would be paid for is not addressed directly. Politics could easily turn this need into yet another excuse to cut taxes and social programs.

                                                                              Posted by on Tuesday, December 13, 2005 at 12:24 AM in Budget Deficit, Economics, Policy, Taxes | Permalink  TrackBack (1)  Comments (6) 


                                                                              Monday, December 12, 2005

                                                                              Tax Cuts, Output Cycles, and Growth

                                                                              There is a lot of confusion about the effects of tax cuts, and much of the confusion is due to a failure to distinguish between two types of macroeconomic policy, stabilization policy and growth policy. To start, here's a graph of a hypothetical economy. The natural rate of output, Y*, follows an upward trend over time, and the trend has some variability in it (the degree of variability in Y* is a source of debate). The Y* line is the underlying trend of full employment output, not actual output. Actual output cycles around trend and is show as Y in the diagram (this line will be blue in the second graph to help distinguish it from other lines):

                                                                              Now, let there be a tax cut at the point in time indicated in the following two graphs. Tax cuts have the potential to do two things. First, as shown in this diagram, a tax cut can stimulate a lagging economy helping it to recover faster:

                                                                              In this diagram, after the tax cut, which stimulates the economy due to the deficit spending it causes, output rises faster. Thus, the data would show increasing output growth and rising tax collections. But these tax cuts do not "pay for themselves" in the sense that there is no change in the long-run growth rate of output, i.e. the underlying rate of growth in tax collections is unchanged. For that to happen, the trend rate of growth must change as shown in the next diagram:

                                                                              Here, the tax cut has changed the rate of economic growth and thus will cause tax collections to grow faster as well. Most of the pro-growth people have this in mind when they think about tax cuts.

                                                                              Which does the evidence suggests occurs after a tax cut? We're pretty sure tax cuts have the first type of effect of attenuating cycles, but the evidence that tax cuts affect the underlying growth rate is much more tenuous. And when you go further and ask if growth changes enough to pay for the tax cuts, the evidence is even thinner.

                                                                              Anyone who says based upon a few months of data that they know which of the two scenarios is unfolding, an attenuation of cycles or a change in growth, is not telling you a straight story. Just because growth is higher and tax collections go up does not mean the second story is true. We don't know yet, and we won't know until a lot more data are available. Historically, there is reason to favor the first scenario - typically the effects are through deficit spending and the attenuation of cycles, not a change in the underlying trend rate of growth, but it is a possibility so it cannot be ruled out as implausible, and the two effects are not necessarily mutually exclusive.

                                                                              If you remain unconvinced, think of it this way. Suppose the last month or two, or even the last few years, have been warmer than normal. Is this a change in the trend temperature (T*), i.e. is it global warming? Or is it just abnormally warm for other reasons, just a cycle producing higher than normal temperatures? There's really no way to tell - it takes a long series of temperatures to sort it out. The effects of tax cuts are no different. But what we do know from the data we have favors the first scenario.

                                                                                Posted by on Monday, December 12, 2005 at 12:28 PM in Budget Deficit, Economics, Taxes | Permalink  TrackBack (0)  Comments (13) 


                                                                                Paul Krugman: Wal-Mart's Excuse

                                                                                Paul Krugman looks at Wal-Mart's attempts to improve its public image by claiming it is an engine of job growth and finds the arguments worthy of one of those end of year "worst of" lists:

                                                                                Big Box Balderdash, by Paul Krugman, NY Times:  I think I've just seen the worst economic argument of 2005. ... The argument came in the course of the latest exchange between Wal-Mart and its critics. A union-supported group, Wake Up Wal-Mart, has released a TV ad accusing Wal-Mart of violating religious values, backed by a letter from religious leaders attacking the retail giant for paying low wages and offering poor benefits. The letter declares that "Jesus would not embrace Wal-Mart's values of greed and profits at any cost." You may think that this particular campaign - which has, inevitably, been dubbed "Where would Jesus shop?" - is a bit over the top. But it's clear why those concerned about the state of American workers focus their criticism on Wal-Mart. The company isn't just America's largest private employer. It's also a symbol of the state of our economy, which delivers rising G.D.P. but stagnant or falling living standards for working Americans. ... So how did Wal-Mart respond to this latest critique?

                                                                                Wal-Mart can claim, with considerable justice, that its business practices make America as a whole richer. The fact is that ... its low prices aren't solely or even mainly the result of the low wages it pays. Wal-Mart has been able to reduce prices largely because it has brought genuine technological and organizational innovation to the retail business. It's harder for Wal-Mart to defend its pay and benefits policies. Still, the company could try to argue that ... it cannot defy the iron laws of supply and demand, which force it to pay low wages. (I disagree, but that's a subject for another column.) But instead of resting its case on these honest or at least defensible answers to criticism, Wal-Mart has decided to insult our intelligence by claiming to be, of all things, an engine of job creation. ...[T]he assertion that Wal-Mart "creates 100,000 jobs a year" is now the core of the company's public relations strategy. ...

                                                                                But adding 100,000 people to Wal-Mart's work force doesn't mean adding 100,000 jobs to the economy. On the contrary, there's every reason to believe that as Wal-Mart expands, it destroys at least as many jobs as it creates, and drives down workers' wages in the process. Think about what happens when Wal-Mart opens a store ... The new store takes sales away from stores that are already in the area; these stores lay off workers or even go out of business. Because Wal-Mart's big-box stores employ fewer workers per dollar of sales than the smaller stores they replace, overall retail employment surely goes down, not up... And if the jobs lost come from employers who pay more generously than Wal-Mart does, overall wages will fall...

                                                                                This isn't just speculation on my part. A recent study by David Neumark of the University of California at Irvine and two associates at the Public Policy Institute of California, "The Effects of Wal-Mart on Local Labor Markets," uses sophisticated statistical analysis to estimate the effects on jobs and wages as Wal-Mart spread out from its original center in Arkansas. The authors find that retail employment did, indeed, fall when Wal-Mart arrived in a new county. It's not clear ... whether overall employment ... rose or fell ... But it's clear that average wages fell: "residents of local labor markets," the study reports, "earn less following the opening of Wal-Mart stores." So Wal-Mart has chosen to defend itself with a really poor argument. If that's the best the company can come up with, it's going to keep losing the public relations war with its critics. Maybe it should consider an alternative strategy, such as paying higher wages.

                                                                                Agreed. Here's a link to the study (NBER, Open link). Update: Full column here.

                                                                                Previous (12/9) column: Paul Krugman: The Promiser in Chief
                                                                                Next (12/16) column: Paul Krugman: Drugs, Devices, and Doctors

                                                                                  Posted by on Monday, December 12, 2005 at 12:11 AM in Economics, Unemployment | Permalink  TrackBack (1)  Comments (17) 


                                                                                  No Lender Left Behind

                                                                                  Let's transfer a bunch of money from the government to lenders as part of a student loan program and when evidence of something potentially better for students comes along that might reduce these transfers, hide it:

                                                                                  Robbing Joe College to Pay Sallie Mae, by Anya Kamenetz, commentary, NY Times: ... The federal student aid system fails students, but it does a great job of delivering profits to private lenders... When it created the loan program, Congress assumed that banks would not lend to young people without extensive guarantees and incentives. So they guaranteed a certain rate of return on student loans, made up their losses on defaulters, created a secondary market for student loans by chartering ... Sallie Mae ... Student lending has grown into a highly profitable and low-default market, yet these special privileges persist. Sallie Mae, the private company that makes, buys and sells the most student loans, boasted the second-highest return on revenue in the 2005 Fortune 500.

                                                                                  Sallie Mae also happens to be the largest contributor, by far, to members of the House Education Committee. ...[T]he committee chairman alone, John Boehner of Ohio, received $172,000 ... in 2003 and 2004. It's thus no surprise that lawmakers are apt to protect lenders and not students. ...But ... why not cut off subsidies to banks and give that money to needy students? One way to do that is to expand a program ... in which the government makes loans directly. A recent Government Accountability Office report showed that direct loans cost the government one-fifth as much ... Mr. Boehner, however, kept the report under wraps for 30 days, and it was released just hours before the House committee vote. ... [T]he aid program could save $60 billion over the next decade by switching entirely to direct loans - enough for almost a 50 percent increase in Pell Grant money.

                                                                                  A group of students has also proposed a National Tuition Endowment, which would preserve an estimated $30 billion for need-based grants by cutting loan subsidies and finally closing an infamous loophole that has lenders collecting 9.5 percent interest from the government on certain loans. Yet Mr. Boehner is heading in a different direction. He told an audience of commercial student lenders earlier this month that "I've got enough rabbits up my sleeve" to make them happier with the bill. ...

                                                                                  There was a recent rule change allowing student loans to be collected from Social Security payments. If personal irresponsibility causes an individual to default on a student loan, and if fiscal irresponsibility causes the government to renege and reduce Social Security, health care, or other obligations by the same amount, what then? Shall we just call it even? More seriously, as the article notes in a part that was cut, a recent bill cut 14 billion from the student loan program over the next six years. The justification given was that it came from corporate subsidies, not loans. Two things, first, that shows how large the excess profits to lenders have been, and second, why not use the money gleaned from the rule change to increase the amount available for grants and loans? It's needed.

                                                                                    Posted by on Monday, December 12, 2005 at 12:09 AM in Economics, Universities | Permalink  TrackBack (0)  Comments (5) 


                                                                                    Fair and Balanced

                                                                                    Posting this commentary from Pat Buchanan does not mean I agree with it. Really. I'm pretty surprised at myself to be posting something from him since I disagree so strongly with most of his positions, including the one expressed below. But even though I'm part of the group he is telling off, I decided to post it since it voices arguments against free trade I hear a lot and because it continues the series of posts on GM. As I've expressed here before in other contexts, I think the policies he advocates hurt rather than help workers in the long-run:

                                                                                    Who Killed General Motors?, by Pat Buchanan, Creators Syndicate: Willys built the jeeps that carried Ike's armies across Europe. Ford built the Sherman tanks. Packard made the engines for JFK's PT boat ... Chevrolet built the engines for the Flying Boxcar, Buick for the B-24 Liberator, Oldsmobile for the B-25 Mitchell   Col. "Jimmy" Doolittle flew in his "Thirty Seconds Over Tokyo" raid in 1942. ... But no company matched the contributions to victory of General Motors, the greatest company of them all. Now, most of those companies with the legendary names -- Packard, Hudson, Studebaker, Nash, Oldsmobile -- are gone. Of the "Big Three" that survive, Chrysler is German-owned, and Ford and GM are bleeding... Delphi, the auto-parts supplier for GM, just declared bankruptcy. Thanksgiving week ... GM announced the closing of nine more American plants and the dismissal of 30,000 more workers.

                                                                                    Many reasons are given for the decline of the U.S. auto industry. The Volkswagen "Beetle" that invaded America in the late 1950s, the Toyotas and Hondas that followed, the Korean Kias coming in today .... But there is a more basic reason for America's industrial decline. A sea change has taken place in the mindset of our elites. The economic patriotism of Hamilton and Henry Clay, of Lincoln and T.R. and, yes, of the Robber Barons of the Gilded Age, who forged America into the mightiest industrial machine the world had ever seen, is dead. To the economic patriots of the Old Republic, trade policy was to be designed to benefit, first, the American worker. They wanted American families to have the highest standard of living on earth and U.S. industry to be superior to that of any and all nations. If this meant favoring American manufacturers with privileged access to U.S. markets and keeping foreign goods out with high tariffs, so be it.

                                                                                    But... Economic patriotism is dead. ... If it's good for the Global Economy, it must be good for America. Theirs is a quasi-religious faith in that same free-trade ideology for which Hamilton, Clay, Lincoln and T.R. had only spitting contempt. And like Marxists who refuse to question their dogmas, despite manifest signs of failure, our free-traders believe that everything that is happening to America has to be happening for the best. That U.S. manufacturing that once employed a third of our labor force now employs perhaps 10 percent does not matter. That the most self-sufficient nation in history, which produced 96 percent of all that it consumed, now depends on foreigners for a fourth of its steel, half its autos and machine tools, two-thirds of its textiles and apparel, ... etc. does not matter. That tens of thousands of foreign workers are brought in each year ... to take high-tech jobs, that U.S. factories are shut down ... while opening in China, that professional work is being outsourced to India, that we borrow $2 billion a day to finance consumption of foreign goods -- none of this matters. The nation does not matter. ... For we are all now in a Global Economy.

                                                                                    And so, as the jobs and skills of U.S. manufacturing workers disappear, ... and the government goes deeper into debt to cover rising social costs corporations used to carry, other countries quietly observe. Fifty years ago, a trade deficit of 6 percent of GDP, a hemorrhaging of manufacturing jobs and a growing dependence on foreign nations for ... vital necessities ... would have been taken as signs of the decline and fall of a great nation. Our elites tell us ... we have entered a new era of interdependence, where democracy and free markets will flourish and usher us all into a golden age -- and we Americans will lead the way. If they are right, we are Cassandras. If they are wrong, they are fools who sold out the greatest country in all history for a mess of potage.

                                                                                    Besides disagreeing with the economics, I don't agree with his premise that the goal of the Robber Barons and their ilk was to have "...trade policy ... be designed to benefit, first, the American worker. They wanted American families to have the highest standard of living on earth..." and they put high tariffs in place to accomplish that goal.

                                                                                    I get the feeling Pat wishes he had grown up in the same building as Lucy, Ricky, Ethyl, and Fred with his parents June and Ward, his best friend Opie, his faithful dog Lassie, and that the world had never changed from his idyllic recollection. Oh wait, I forgot that Ricky Ricardo was a Cuban who took the job of  some American guy by singing at the Tropicana. Never mind.

                                                                                      Posted by on Monday, December 12, 2005 at 12:06 AM in Economics, International Trade, Press | Permalink  TrackBack (0)  Comments (31) 


                                                                                      Sunday, December 11, 2005

                                                                                      All the News That's Fit to Post

                                                                                      It's hard to argue that delivering a freshly printed newspaper to the homes of subscribers, which requires a small army of delivery staff, a massive daily printing operation, and so on, is more efficient than sending stories electronically by posting them on websites. And once you start writing with hyperlinks and other enhancements available only electronically, you miss them when writing on paper. I'm sure everyone is aware of the advantages available with online news stories, and some disadvantages as well such as sometimes posting stories before they are fully vetted in the race to go online first.

                                                                                      Still, there's something about a newspaper and I will miss the local paper once it's gone. Finding a business model that works for online news sites has been a challenge, so perhaps there's some life left in newspapers, but it's hard to imagine them surviving long-term:

                                                                                      San Francisco Chronicle Struggles as Internet Siphons Readers, Ads, by Joseph Menn, LA Times: When Jeffrey Zalles needed a new cashier for his coin laundry in the South of Market district, his help-wanted ad in the San Francisco Chronicle brought just four responses. So Zalles posted a notice on Craigslist, a San Francisco-based network of websites that specialize in classified advertising. His cyber-ad drew 400 applicants. Zalles found his cashier and hasn't relied on the Chronicle since, advertising instead on the Internet and the city's array of free papers. The venerable Chronicle is struggling, and defections by Zalles and other advertisers are a big reason. Classified ads are a big source of income for the Chronicle and the newspaper business as a whole... What's more, the Chronicle's circulation is plunging. The paper reported last month that sales fell 16% during the six-month period ended in September — by far the biggest drop among the nation's 20 largest newspapers. ...

                                                                                      The Chronicle's woes are being closely watched around the country as the newspaper finds itself on the front lines of the battle between old and new media. As more consumers get their news from electronic sources and advertising follows them, analysts warn that newspapers elsewhere — already losing an average of more than 2% of their subscribers yearly — might join the Chronicle in a steepening fall. ... The Chronicle's decline can't be blamed solely on the Internet. Other factors include tough competition from other Bay Area papers and a cosmopolitan audience that reads national publications such as the New York Times. ... Outsiders attribute a large part of the loss to the decline in classified advertising. "Newspaper finances are a three-legged stool: classifieds, display advertising and circulation," said Scott Rosenberg, a former writer at San Francisco's Examiner, who left a decade ago to co-found Salon. "The classified leg has been kicked out, so the stool falls." A study last year said Craigslist alone had by then cost Bay Area papers as much as $65 million in help-wanted ads.

                                                                                      As for the drop in circulation, Chronicle Publisher Frank Vega said that nearly all of it was deliberate, as the company curtailed deeply discounted copies and other money-losing efforts. Like other papers, the Chronicle is cutting circulation gimmicks such as "sponsored copies," in which a supermarket or other big advertiser underwrites freebies in a given neighborhood so that every home receives its ads. ...  The overall weekday circulation of 392,000 is a far cry from the 1990 peak of 566,020, and that cumulative 31% drop is more than double the roughly 15% decline industrywide. ...

                                                                                      Bronstein, who ran the Examiner for Hearst before becoming Chronicle editor five years ago, plans online experiments such as running commentary or other reports from private citizens on his paper's SFGate.com website. ... SFGate drew 3.9 million users in October, according to Nielsen/NetRatings, about even with the site of the twice-as-large Los Angeles Times and trailing only the New York Times, USA Today and Washington Post among newspaper websites. Monthly readership at newspaper sites overall is up 11% in the last year to 39 million. ... Chronicle Publisher Vega, installed this year after leading the combined operations of two Detroit papers, said he wanted to increase SFGate's revenue by charging readers for whatever they value most. "What's our franchise? I've got to figure what that is," Vega said.

                                                                                      Many papers have tried similar experiments but retreated after readers defected. The Los Angeles Times tried charging nonsubscribers for entertainment features from August 2003 to May 2005. The New York Times recently began charging nonsubscribers for access to its archives and columnists, and a better-than-expected 135,000 of them have signed up. ... "I hate to read the obits because half of those people are our subscribers," Vega said. "But I think newspapers, if they're run properly, still have a lot of legs."

                                                                                        Posted by on Sunday, December 11, 2005 at 12:37 PM in Economics, Press | Permalink  TrackBack (0)  Comments (4) 


                                                                                        Promises, Promises... Governments Will Be Forced to Value and Report Future Retirement Benefits

                                                                                        Corporations aren't the only ones who promised more retirement benefits than they could deliver. There is a new accounting rule requiring government bodies tally up and develop a plan for meeting all of their future retirement obligations, something most have not done. Many won't be able to meet their promises:

                                                                                        The Next Retirement Time Bomb by Milt Freudenheim and Mary Williams Walsh, NY Times: Since 1983, the city of Duluth, Minn., has been promising free lifetime health care to all of its retired workers, their spouses and their children up to age 26. No one really knew how much it would cost. Three years ago, the city decided to find out. ... The total came to about $178 million, or more than double the city's operating budget. And the bill was growing. ... Mayor Herb Bergson [said]. "We can't pay for it," ...

                                                                                        Thousands of government bodies, including states, cities, towns, school districts and water authorities, are in for the same kind of shock in the next year or so. For years, governments have been promising generous medical benefits to millions of schoolteachers, firefighters and other employees when they retire, yet experts say that virtually none of these governments have kept track of the mounting price tag. The usual practice is to budget for health care a year at a time, and to leave the rest for the future. ... [N]ow the accounting rulemaker for the public sector, the Governmental Accounting Standards Board, says it is time for every government to ... come to grips with the total value of its promises, and to report it to their taxpayers and bondholders. The board has issued a new accounting rule that will take effect in less than two years. It has not yet drawn much attention ..., but it threatens to propel radical cutbacks for government retirees and to open the way for powerful economic and social repercussions. ... "It's not going to be pretty, and it's not the fault of the workers," said Mayor Bergson ...

                                                                                        In Duluth, Mayor Bergson said the city actually offered free retiree health care as a cost-cutting measure back in 1983. At the time, Duluth was trying to get rid of another ballooning obligation to city workers: the value of unused sick leave and vacation days. ... Compared with the big obligations the city had to book for that unused time, substituting free retiree health care seemed cheap. "Basically, they traded one problem for another," Mayor Bergson said. ... Frederick H. Nesbitt, executive director of the National Conference on Public Employee Retirement Systems, an advocacy group in Washington. Mr. Nesbitt pointed out that when the accounting rulemakers began requiring a similar change in financial reporting for companies in the 1990's, it was followed by a sharp decline in the retiree medical benefits provided by corporate America. Today, only one in 20 companies still offers retiree benefits.... The rate for large companies is less than one in three, down from more than 40 percent before the private-sector accounting change...

                                                                                        Max B. Sawicky, an economist at the Economic Policy Institute, a liberal research group in Washington, called the new requirement "another straw on the camel's back" for state and local governments already straining under their budget burdens. ... Attempts to balance the competing interests of retirees, active workers and taxpayers are building tension. Ross Eisenbrey, a former Clinton administration official who is now at the Economic Policy Institute... The problem is that people have counted on those benefits, and many have accepted lower salaries in exchange for better retirement benefits, said Teresa Ghilarducci, an economics professor at the University of Notre Dame. If they are close to retirement, ... it may well be too late for them to make up for the loss with their own savings. ...

                                                                                          Posted by on Sunday, December 11, 2005 at 12:57 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (20) 


                                                                                          Saturday, December 10, 2005

                                                                                          The Ex-Post Real Federal Funds Rate and Inflation

                                                                                          This is the ex-post real federal funds rate along with the core inflation rate. The real rate is calculated as the effective federal funds rate minus the year over year core inflation rate for the CPI:

                                                                                          Notice the policy response of the real federal funds rate in the early 1970s as it falls rapidly in response to deteriorating economic conditions brought about by oil price shocks. That didn't work out so well.

                                                                                            Posted by on Saturday, December 10, 2005 at 05:02 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (11) 


                                                                                            Hair of the Dog

                                                                                            Think credit card companies would be reluctant to offer credit to people who recently filed for bankruptcy?:

                                                                                            Credit Card Offers Stacking Up at Homes of the Newly Bankrupt, by Timothy Egan, NY Times: ...If it seems odd ... that banks would want to lend money to the newly bankrupt, it is no mystery to the financial community, which charges some of the highest interest rates to these newly available customers. Under the new [bankruptcy] law, ... they may be even more attractive because it makes it harder for them to escape new credit card debt and extends to eight years from six the time before which they could liquidate their debts through bankruptcy again. "The theory is that people who have just declared bankruptcy are a good credit risk because their old debts are clean and now they won't be able to get a new discharge for eight years," said John D. Penn, president of the American Bankruptcy Institute... Credit card companies have long solicited bankrupt people, on a calculated risk that income from the higher interest rates and late fees paid by those who are trying to get their credit back will outweigh the losses from those who fail to make payments altogether. ... But the new law makes for an even better gamble for lenders... Bankers defend the practice of soliciting the newly bankrupt, saying it gives them a chance to build a new credit history. ... The credit card offers ... higher interest rates - 23 percent or more, which is typical for offers to the newly bankrupt... The study found that a third of low- and middle-income American households reported using credit cards for basic living expenses - rent, groceries and utilities - in any 4 of the last 12 months. ... "The people I'm seeing right now, they're mostly middle or lower middle class," said Jack Burtch, a bankruptcy lawyer in Washington State. "In a good many of the cases, credit cards are what got them into trouble. And I don't see how credit cards will get them out of it."

                                                                                            The incentives on both sides seem to encourage risky behavior, and I don't like seeing people on the edge given the opportunity to alleviate difficulties in the short-run by turning to easy, but high interest rate credit. But it's a free country, they're adults, and if people want to sign up for credit cards after bankruptcy, and if banks are willing, should the government stop them? So long as losses from failure to pay are confined to the borrower and lender and do not spill over as an externality to third parties, I see no reason to step in. But I would hope the risks and terms of such contracts, including the legal remedies that encourage firms to offer this risky credit, are absolutely clear to borrowers.

                                                                                              Posted by on Saturday, December 10, 2005 at 12:26 PM in Economics, Regulation | Permalink  TrackBack (0)  Comments (10) 


                                                                                              Happy to Help

                                                                                              The theme of this article is that boomers are feeling confident about their retirement years. But the amount of family resources currently devoted to the care of parents and children in their twenties caught my attention as well:

                                                                                              Boomers' Burdens: Their Kids, Parents 'Sandwich' Demands Aside, Study Finds, the Generation Is Comfortable, by Darryl Fears, Washington Post: As they step closer to old age, baby boomers ... say they are reaching deeper into their pockets to care for elderly parents and offspring in their twenties who are struggling to launch their own lives... and a larger percentage than in the past are helping their parents and their adult children financially.

                                                                                              According to the study, ... More than half -- 55 percent -- said that they either "expect to live comfortably" in retirement or will be able to "meet expenses with a little left over," the study found. But before they reach that point, they will pay great sums of money to help parents through one of the most vulnerable phases of their lives, and children who have jobs but do not earn enough to cover student loans, rents, mortgages or even car insurance. ... [I]n general, baby boomers feel comfortable enough to take on a substantial amount of family responsibility. Well over half of the respondents in the Pew study said an elderly parent is living with them, and 66 percent said they paid for a child to attend college. Nearly three-quarters of boomers -- 71 percent -- have at least one living parent, the study found, up from 60 percent of people in the 41-59 age range in 1989. In addition to having a living parent, 83 percent of boomers have at least one child. ...

                                                                                              The government is not the only one providing economic and social security. I wouldn't have guessed that over half of the respondents would have an elderly parent living with them, particularly since only 71% have a living parent. That doesn't exactly conjure up the image of carefree retirees living it up on their Social Security checks from the government (average monthly benefit = $955).

                                                                                                Posted by on Saturday, December 10, 2005 at 12:24 PM in Economics, Social Security | Permalink  TrackBack (0)  Comments (5) 


                                                                                                Can You Track Me Now?

                                                                                                I've been trying to stick mainly to economics, but what the heck, it's the weekend. I knew cellphone calls could be tracked from cell records, but it hadn't occurred to me that they can track a phone's position even when it's not in use:

                                                                                                Live Tracking of Mobile Phones Prompts Court Fights on Privacy, by Matt Richtel, NY Times: Most Americans carry cellphones, but many may not know that government agencies can track their movements through the signals emanating from the handset... as a tool for easily and secretly monitoring the movements of suspects... But this kind of surveillance - which investigators have been able to conduct with easily obtained court orders - has now come under tougher legal scrutiny. In the last four months, three federal judges have denied prosecutors the right to get cellphone tracking information ... without first showing "probable cause" to believe that a crime has been or is being committed. That is the same standard applied to requests for search warrants. ... Cellular operators ... know, within about 300 yards, the location of their subscribers whenever a phone is turned on. Even if the phone is not in use it is communicating with cellphone tower sites, and the wireless provider keeps track of the phone's position as it travels. The operators have said that they turn over location information when presented with a court order to do so.

                                                                                                Prosecutors ... argue that the relevant standard is found in a 1994 amendment to the 1986 Stored Communications Act, a law that governs some aspects of cellphone surveillance. The standard calls for the government to show "specific and articulable facts" that demonstrate that the records sought are "relevant and material to an ongoing investigation" - a standard lower than the probable-cause hurdle. The magistrate judges, however, ruled that surveillance by cellphone - because it acts like an electronic tracking device that can follow people into ... personal spaces - must meet the same high legal standard required to obtain a search warrant to enter private places. ...

                                                                                                This may not be the best example, but I worry that, in the name of safety and security, our personal freedom and privacy is slowly being eroded away and once we lose each piece, we will never get them back. Never. The main argument I hear when I raise this is something like "Why should I care, I have nothing to hide, and it will catch the bad guys. That makes me more, not less free." I usually try to explain why they should care, and often get a look that says "Crime-loving liberal idiot." I am going to keep trying though because I think this is important, hence the post. [Update: Related.]

                                                                                                  Posted by on Saturday, December 10, 2005 at 10:17 AM in Miscellaneous | Permalink  TrackBack (0)  Comments (6) 


                                                                                                  Guess Who's Coming to Town?


                                                                                                  Source

                                                                                                    Posted by on Saturday, December 10, 2005 at 01:49 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (8) 


                                                                                                    Data Revisions and Monetary Policy

                                                                                                    Each year in July there is a substantial revision of previously released BEA data. Last July, the upward revision in the price data was substantial. This FRBSF Economic Letter describes the data revision process using July 2005 as an example and suggests ways to cope with the data revision problem. The preponderance of upward revisions in recent years shown in the graphs also gives an indication of how policymakers might view recent headline releases of PCE data which, as the article notes, is the preferred measure of inflation for some policymakers:

                                                                                                    FRBSF Economic Letter, Shifting Data: A Challenge for Monetary Policymakers, John Fernald & Stephanie Wang: A familiar old saw about ... monetary policy is that it's like trying to drive a car while looking only in the rearview mirror. The idea is that policymakers are trying to steer a course that will keep the economy close to full employment with low, stable inflation, while their only knowledge of the road ahead is based on data about the past. As if this situation weren't challenging enough, the rearview mirror sometimes gives a distorted reflection, in the sense that the data policymakers see at any one point in time are often later revised. ...

                                                                                                    The Bureau of Economic Analysis (BEA) produces the national income and product accounts ... In establishing a schedule of data releases, the BEA can face some tension between timeliness and accuracy. Often the initial releases are based on highly incomplete or even nonexistent source data; later releases incorporate more complete source data, some of which ... are available only annually or even less often. Hence, over time, the BEA may revise earlier estimates to incorporate new source data and improved methodologies. ... Some revisions are larger than others. The most important are the annual revisions each July, when the BEA revises the most recent three years of national income and product data, and the so-called comprehensive or benchmark revisions, which occur about every five years and which may involve more major changes, for example, in definitions, classifications, or presentation.


                                                                                                    The July 2005 annual revision In the July 2005 annual revision, the BEA revised its estimates of inflation and GDP for the period 2002-2004. Most notably, the growth rate of core PCE price inflation for 2004 was revised upward by about 0.6 percentage point from a rate of 1.6% to 2.2% ... Panel A of Figure 1 plots the 12-month change in core PCE price inflation, both before and after the annual revision. Panel B plots the 3-month change, which shows that, despite the large upward revision to recent history, inflation in the second quarter of 2005 had receded somewhat from its earlier peaks.

                                                                                                    The bulk of the revisions to core PCE inflation occurred in its so-called nonmarket component. ... A good example of a nonmarket component is a financial service that commercial banks provide consumers, such as access to an ATM network. Bank depositors often do not pay direct fees for a service like this, so there is no observable transaction price. ... The majority of the July 2005 revisions in the nonmarket component occurred in two categories: "services furnished without payment by financial intermediaries except life insurance carriers" and "medical care and hospitalization insurance." ... In both cases, the revisions reflected newly available source data that indicated that the preliminary BEA estimates were inaccurate. ...

                                                                                                    Implications for policy in 2004 When the Federal Open Market Committee met in May 2004, the BEA's best estimate of core PCE inflation was around 1-1/2%. ... The revised figures indicate that core PCE inflation was nearly 2-3/4% in the first quarter of 2004. How might the revised information have changed the course of policy? One way to answer this question is to invoke the Taylor rule. The FOMC does not set policy according to this rule, but the Taylor rule has served as a popular rule-of-thumb for how the Federal Reserve might set its target ... Normally, the Taylor rule is specified in terms of overall inflation, not core inflation. Conceptually, however, since core inflation was running higher than the Committee thought, this suggests that there was a larger positive "inflation gap" than the Committee perceived. The Taylor rule recommends responding to inflation more than one-for-one. Hence, other things equal, given that inflation was running higher than originally thought, it would have recommended a substantially higher setting for the federal funds rate.

                                                                                                    Yogi Berra once said, "It's hard to make predictions, especially about the future." But it's also hard to predict how our views of the past will change as statistical agencies get new data ... How can policymakers mitigate the problems caused by inherently imperfect data? In assessing underlying inflationary trends, policymakers can look at a broader range of inflation indicators as well as at empirical relationships that might help predict inflation. This is the case even if policymakers care about an inflation gap defined narrowly in terms of core PCE inflation. The problem of data uncertainty is, of course, not limited to inflation. Policymakers also need ... timely and accurate measures of the output gap ... or the neutral rate of interest ..., two other key components for implementing a Taylor-type rule. These concerns again suggest looking broadly at indicators of the economy, in line with Greenspan's (2005) recommendation that policymakers seek to interpret "the full range of economic and financial data."

                                                                                                      Posted by on Saturday, December 10, 2005 at 12:36 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1)