« November 2005 |
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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 Mark Thoma on Wednesday, December 21, 2005 at 01:05 AM in Academic Papers, Economics, Unemployment |
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
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
Posted by Mark Thoma on Wednesday, December 21, 2005 at 12:16 AM in Economics, Politics, Universities |
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 Mark Thoma on Tuesday, December 20, 2005 at 05:18 PM in Economics, Politics, Press |
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 Mark Thoma on Tuesday, December 20, 2005 at 03:19 PM in Economics, Unemployment |
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 Mark Thoma on Tuesday, December 20, 2005 at 01:38 AM in Economics, Health Care, Politics, Press |
Princeton colleague Alan Blinder has good things to say about Ben Bernanke's
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 Mark Thoma on Tuesday, December 20, 2005 at 12:25 AM in Economics, Monetary Policy |
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
'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
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 Mark Thoma on Tuesday, December 20, 2005 at 12:18 AM in Budget Deficit, Economics, Taxes |
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 Mark Thoma on Tuesday, December 20, 2005 at 12:12 AM in Economics, Financial System |
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 Mark Thoma on Monday, December 19, 2005 at 12:32 PM in Economics, Income Distribution, Unemployment |
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 Mark Thoma on Monday, December 19, 2005 at 12:21 AM in Economics, Politics |
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 Mark Thoma on Monday, December 19, 2005 at 12:18 AM in Economics, Methodology |
Here's an overview of recent U.S. data from the
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
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 Mark Thoma on Monday, December 19, 2005 at 12:15 AM in Economics, Monetary Policy |
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
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 Mark Thoma on Sunday, December 18, 2005 at 12:20 PM in Academic Papers, Economics, International Finance, Monetary Policy |
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 Mark Thoma on Sunday, December 18, 2005 at 03:13 AM in Iraq and Afghanistan, Politics |
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
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
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
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
Author's e-mail: email@example.com
Posted by Mark Thoma on Sunday, December 18, 2005 at 01:42 AM in Economics, Income Distribution, Social Security, Unemployment |
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:
- “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.
- “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.
- “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.
- “Manhattan,” by Woody Allen. It came out when I was in college, and seeing it
repeatedly took too many hours away from studying.
- “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.
- “Ella Fitzgerald Sings Cole Porter.” My favorite album—now CD—of all time.
- “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.
- “Six Feet Under.” The best television show of recent years. Sadly, its great
run has ended.
- “The Nurture Assumption,” by Judith Rich Harris. A fascinating discussion of
the psychology of why children turn out as they do.
- “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 Mark Thoma on Sunday, December 18, 2005 at 01:21 AM in Economics |
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
[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 Mark Thoma on Sunday, December 18, 2005 at 12:33 AM in Economics, Health Care, Taxes |
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 Mark Thoma on Saturday, December 17, 2005 at 03:08 PM in Economics, Iraq and Afghanistan, Terrorism |
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 Mark Thoma on Saturday, December 17, 2005 at 12:24 PM in Iraq and Afghanistan, Politics |
Wikipedia has received some
bad press lately. This Scientific American Observations cites a survey by
Nature showing that Wikipedia compares favorable with Encyclopaedia Britannica:
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 Mark Thoma on Saturday, December 17, 2005 at 12:57 AM in Economics, Market Failure, Technology |
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
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
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 Mark Thoma on Saturday, December 17, 2005 at 12:39 AM in Economics, Press |
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
Competition and trade in the U.S. auto parts sector
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)
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)
Higher education and economic growth: A conference report
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 Mark Thoma on Saturday, December 17, 2005 at 12:24 AM in Economics, Financial System, International Trade, Monetary Policy, Universities |
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 Mark Thoma on Friday, December 16, 2005 at 05:12 PM in Academic Papers, Economics, Monetary Policy |
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
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 Mark Thoma on Friday, December 16, 2005 at 12:16 AM in Economics, Health Care |
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 Mark Thoma on Friday, December 16, 2005 at 12:15 AM in Economics, Fed Speeches |
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 Mark Thoma on Thursday, December 15, 2005 at 12:06 PM in Economics, Income Distribution, Technology |
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
Liebman of Harvard University and
Maya MacGuineas of the New America Foundation, I am pleased to announce
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
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
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
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 Mark Thoma on Thursday, December 15, 2005 at 01:24 AM in Economics, Politics, Social Security |
Hal Varian offers an explanation for why companies finance investment out of
retained earnings more often than many financial models suggest they should:
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
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.
to free version of paper,
Journal of Finance Version]
Posted by Mark Thoma on Thursday, December 15, 2005 at 12:33 AM in Academic Papers, Economics |
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
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 Mark Thoma on Thursday, December 15, 2005 at 12:15 AM in Economics, Monetary Policy |
James Stock points to an
interesting graph of the relationship between productivity growth and unemployment:
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 Mark Thoma on Wednesday, December 14, 2005 at 12:09 PM in Economics, Technology, Unemployment |
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
Posted by Mark Thoma on Wednesday, December 14, 2005 at 01:45 AM in Economics, Unemployment |
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:
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 Mark Thoma on Wednesday, December 14, 2005 at 12:32 AM in Economics, International Trade, Taxes |
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 Mark Thoma on Tuesday, December 13, 2005 at 11:31 AM in Economics, Monetary Policy |
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
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 Mark Thoma on Tuesday, December 13, 2005 at 10:24 AM in China, Economics |
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
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 Mark Thoma on Tuesday, December 13, 2005 at 12:33 AM in Economics, International Trade |
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
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 Mark Thoma on Tuesday, December 13, 2005 at 12:26 AM in Economics, Oil, Politics |
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:
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
Posted by Mark Thoma on Tuesday, December 13, 2005 at 12:24 AM in Budget Deficit, Economics, Policy, Taxes |
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
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 Mark Thoma on Monday, December 12, 2005 at 12:28 PM in Budget Deficit, Economics, Taxes |
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:
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
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
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 Mark Thoma on Monday, December 12, 2005 at 12:11 AM in Economics, Unemployment |
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:
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
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 Mark Thoma on Monday, December 12, 2005 at 12:09 AM in Economics, Universities |
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:
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
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 Mark Thoma on Monday, December 12, 2005 at 12:06 AM in Economics, International Trade, Press |
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 Mark Thoma on Sunday, December 11, 2005 at 12:37 PM in Economics, Press |
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 Mark Thoma on Sunday, December 11, 2005 at 12:57 AM in Economics, Health Care |
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 Mark Thoma on Saturday, December 10, 2005 at 05:02 PM in Economics, Monetary Policy |
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
Posted by Mark Thoma on Saturday, December 10, 2005 at 12:26 PM in Economics, Regulation |
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 Mark Thoma on Saturday, December 10, 2005 at 12:24 PM in Economics, Social Security |
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 Mark Thoma on Saturday, December 10, 2005 at 10:17 AM in Miscellaneous |
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 Mark Thoma on Saturday, December 10, 2005 at 12:36 AM in Economics, Monetary Policy |