## Thursday, March 23, 2006

### The Relationship Between Input and Output Price Inflation

David Altig's post at macroblog on the relationship between shocks to the producer price index (PPI) and changes in the (CPI) piqued my interest:

macroblog: The February PPI -- Hot Or Not?: ...A few years back, Jonathon Weinhagen took a look at what we think we know about the relationship between producer prices and broader measures of consumer prices. If terms like "VAR", "variance decompositions", and "impulse responses" mean something to you, you may want to take a look at his article, which appeared in the November 2002 edition of the Monthly Labor Review. If that doesn't sound too interesting to you, here is what Jonathon concluded:

Several authors have investigated the causal relationship between commodity prices and consumer inflation... The common finding in the majority of these studies was that the power of commodity prices to predict CPI inflation has diminished since the 1980s...

To take a quick look at this issue, I downloaded data on real GDP, the federal funds rate, the CPI for all items, the core CPI (less food and energy), the all item PPI, the crude goods PPI, the intermediate goods PPI, and the finished goods PPI from the St. Louis Fed web site (FRED). All data except the federal funds are logged, and the PPI and CPI indices are differenced to obtain inflation rates. Real GDP enters in levels, but using differences does not change the results meaningfully.

These data are used to estimate a VAR model. For those who are unfamiliar with these models, they are general reduced form models of the form:

where L is the number of lags; 2 lags are used here. These models are able, with some assumptions about the underlying structure that aren't apparent from these equations (on that issue, this uses a Choleski decomposition and the ordering is as shown), to show how each variable in the system responds to a shock to other variables. Various definitions of the CPI (all items and core) and the PPI (all items, crude, intermediate, and finished goods) are used. Here are the results showing how the CPI variously defined responds to shocks to each of the definitions of the PPI. The horizontal axis shows the number of quarters after the shock. The graphs are called impulse response functions:

The main result, at least in this particular specification of the empirical model, is that both core and overall inflation (as measured by changes in the CPI or core CPI) are least responsive to shocks to inflation in crude materials prices. In addition, the response of core inflation to shocks to input price inflation is more persistent than the response of overall inflation. The paper David cites notes differences in the results by sample period, and the results shown here are for the entire available sample, 1957:Q1 to 2005:Q4 with allowances for lags, so sub-sample results may show differences. This does, however, agree with the basic result from the paper that shocks to input prices at earlier stages in processing, in this case crude materials, have a smaller impact on output prices than shocks to prices at later stages of production. [Update: Here are the graphs with the growth rate of output used in the model rather than the levels: graph1, graph 2. The results are very similar.]

Posted by on Thursday, March 23, 2006 at 02:16 AM in Economics, Inflation | Permalink  TrackBack (0)  Comments (6)

### Transportation Costs and Globalization

Changes in transportation technology have reduced transportation costs substantially helping to fuel the globalization process. Since digital technology is also a means of reducing transportation costs - email is cheaper and faster than air mail - globalization has been facilitated by the ability to move goods and services across borders at a reduced cost. Virginia Postrel discusses the sharp decline in international shipping costs in her last Economic Scene for the New York Times:

The Container That Changed the World By Virginia Postrel, Economic Scene, NY Times: The political showdown over a Dubai company's plan to operate terminals at six American ports briefly focused public attention on one of the most significant, yet least noticed, economic developments of the last few decades: the transformation of international shipping. Just as the computer revolutionized the flow of information, the shipping container revolutionized the flow of goods. ... By sharply cutting costs and enhancing reliability, container-based shipping enormously increased the volume of international trade and made complex supply chains possible.

"Low transport costs help make it economically sensible for a factory in China to produce Barbie dolls with Japanese hair, Taiwanese plastics and American colorants, and ship them off to eager girls all over the world," writes Marc Levinson in ... "The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger"...

50 years ago, businesses and regulators treated distribution not as a single process but as a series of distinct modes: ships, trucks and trains. Every time the transportation mode changed, somebody had to transfer physically every box or barrel. "By far the biggest expense ... was shifting the cargo from land transport to ship at the port of departure and moving it back to truck or train at the other end of the ocean voyage," writes Mr. Levinson... This "breaking bulk" could easily consume half of the total cost of shipping.

Goods often had to wait in warehouses for the next stage. Those transfers and delays made shipping slow and schedules uncertain. They also created opportunities for damage, mistakes and more than a little theft. ... Today, by contrast, "you can call one of the big international ship lines, tell them to pick up your container in Bangkok, which is not a port, and tell them to deliver it in Dallas, which is not a port, and they will make the arrangements to get it ... where it needs to be," Mr. Levinson said. ...

The idea of containerization was simple: to move trailer-size loads of goods seamlessly among trucks, trains and ships, without breaking bulk. But turning that idea into real-life business practice required many additional innovations. New equipment, from dockside cranes to the containers themselves, had to be developed. Carriers and shippers had to settle on standard container sizes. Ports had to strengthen their wharves, create connections to rail lines and highways, build places to store containers and strike new deals with their unions. ...

In the container age, any city with good port facilities, including feeder rail and truck lines, can compete with any place in the same large region. Seattle can take business from Oakland ... That heightens competition among ports. At the same time, container lines keep building larger and larger ships to drive down their cost per unit...

This is Virginia Postrel's last Economic Scene column. She has written columns under that heading for the past six years...

Moving a load of goods as a single trailer-size unit to cut costs seems to be a relatively obvious innovation, so why wasn't this implemented sooner? Dynamist.com, Virginia Postrel's web site, adds more that helps to explain this:

My column barely mentions one important part of the story--the regulatory environment. At first, containerization grew through cracks in the rigid regulatory structure of the 1960s. But today's fully integrated systems became possible only after trucking and rail were deregulated in the 1970s and maritime rates were deregulated (to very little fanfare) in 1984...

As Levinson said in our interview, "Nobody even remembers what the Interstate Commerce Commission used to do. ... This was a key federal agency. And it spent its time hearing arguments about whether this truck line ought to be able to carry cigarettes in the same trucks as it carried textiles or whether the rates that were being charged to carry pretzels were adequate. People have trouble remembering that today." ...

I'm delighted that Tyler Cowen of Marginal Revolution fame will take over my Times slot, beginning in four weeks.

Sorry to see Virginia end her Economic Scene column, but looking forward to seeing what Tyler Cowen will offer in its place.

### Rising Costs Undercut China's Competitiveness

According to this report, China's competitive edge is eroding due to rising input costs:

China’s competitiveness ‘on the decline’, by Tom Mitchell, Financial Times: The competitiveness of China’s manufacturing industries has suffered serious erosion over the past year, according to one of the world’s largest trade sourcing companies. Hong Kong-based Li & Fung group, which manages a \$7.1bn a year trading business, said price rises crept back into the Sino-US and EU supply chains last year, after at least six years of often “severe deflation”.

William Fung, Li & Fung managing director, reported an average 2-3 per cent increase in the once unbeatable China price its US and European clients were willing to pay. He pointed to a “double-digit” rise in Chinese labour costs, the revaluation of the renminbi and higher oil and energy costs for the shift. “China’s costs are all going up,” Mr Fung said. “It is no longer the most cost-effective country in the region...”

Beneficiaries of China’s rising prices have included textile and garment manufacturers in India, Bangladesh and Cambodia, ... “In Bangladesh factories are so overbooked – it’s like China used to be,” added Bruce Rockowitz ... who oversees sourcing operations on four continents. The inflationary pressure extends to all product categories ... ranging from fashion accessories and furnishings to sporting and travel goods. Li & Fung, which used to buy 90 per cent of its non-apparel products from China, has seen 25 per cent of this “hardgoods” business migrate to cheaper locations in south and southeast Asia. It sells about 70 per cent of its sourced goods in the US, and another 20 per cent in Europe...

Posted by on Thursday, March 23, 2006 at 12:06 AM in China, Economics | Permalink  TrackBack (0)  Comments (12)

## Wednesday, March 22, 2006

### Rogoff: Artificial Intelligence and Globalization

Ken Rogoff wonders if replacing people with intelligent machines, e.g. pocket economics professors complete with holographic images instead of university professors, will be a bigger factor than globalization and outsourcing in explaining changes in global job and wage patterns in coming decades:

Artificial Intelligence and Globalization, by Kenneth Rogoff, Project Syndicate: Today’s conventional wisdom is that the rise of India and China will be the single biggest factor driving global jobs and wages over the twenty-first century. High-wage workers in rich countries can expect to see their competitive advantage steadily eroded by competition from ... Asia, Latin America, and maybe even some day Africa. ... But I wonder whether ... another factor will influence our work lives even more: the exponential rise of applications of artificial intelligence.

My portal to the world of artificial intelligence is a narrow one: the ... game of chess. You may not care a whit about chess... But the stunning developments coming out of the chess world ... should still command your attention. Chess has long been the centerpiece of research in artificial intelligence. While in principle, chess is solvable, the game’s computational complexity is almost incomprehensible. It is only a slight exaggeration to say there are more possible moves in a chess game than atoms in a universe.

For most of the twentieth century, programmers were patently unsuccessful in designing chess computers that could compete with the best humans. ... The computers gradually improved, but they still seemed far inferior... Or so we thought. Then, in 1997, ... IBM’s “Deep Blue” computer stunned the world by defeating the world champion Garry Kasparov. Proud Kasparov, who was perhaps more stunned than anyone, was sure that the IBM team must have cheated... But the IBM team had not cheated. ... Since 1997, the computers have only gotten better, to the point where computer programmers no longer find beating humans a great challenge.

Only a game, you say? Perhaps, but let me tell you this: when I played professional chess 30 years ago ..., I felt I could tell a lot about someone’s personality by seeing a sampling of their games... Until a short while ago, I could certainly distinguish a computer from a human opponent. Now everything changed like lightning. The machines can now even be set to imitate famous human players – including their flaws – so well that only an expert eye (and sometimes only another computer!) can tell the difference.

More than half a century ago, the godfather of artificial intelligence, Alan Turing, argued that the brain’s function could all be reduced to mathematics and that, someday, a computer would rival human intelligence. He claimed that the ultimate proof of artificial intelligence would be met if a human interrogator were unable to figure out that he was conversing with a computer. The “Turing test” is the holy grail of artificial intelligence research. Well, for me, a chess game is a conversation of sorts. From my perspective, today’s off-the-shelf computer programs come awfully close to meeting Turing’s test. Over the course of a small number of games on the Internet, I could not easily tell the difference. ...

What’s next? I certainly don’t feel safe as an economics professor! I have no doubt that sometime later this century, one will be able to buy pocket professors – perhaps with holographic images – as easily as one can buy a pocket Kasparov chess computer today.

So let’s go back to India and China. Globalization proceeded at a rapid pace through much of the last century, and at a particularly accelerated rate during its last two decades. Yet the vast body of evidence suggests that technological changes were a much bigger driver in global wage patterns than trade. That is, technology, not trade, was the big story of the twentieth-century economy (of course, the two interact...) Are we so sure that it will be different in this century? Or will artificial intelligence replace the mantra of outsourcing and manufacturing migration? Chess players already know the answer.

### What Jobs are Safe from Offshoring?

A commentary by Harold Meyerson in the Washington Post Online asks Will Your Job Survive? and discusses the article Offshoring: The Next Industrial Revolution? by Alan Blinder in the March/April issue of Foreign Affairs. The paper looks at the types of jobs that are vulnerable to offshoring and forecasts how offshoring will affect the U.S. labor market in the future. A free draft version on the paper notes:

So let us take a fresh look at some rough numbers and try to peer into the future, albeit through the usual befogged glasses, starting with the easy cases.

• At the end of 2004, there were 14.3 million manufacturing jobs in the United States. The vast majority of these workers produce items that can be put in a box, and so virtually all of their jobs are potentially movable offshore. (...this is not to say that all of them will be offshored.)...
• About 7.6 million Americans worked in the other goods-producing sectors: construction and mining. Even though these people produce goods, not services, their jobs are not in danger of moving offshore. You can’t hammer a nail over the Internet, at least not yet.
• At year end 2004, there were 22.0 million local, state, and federal government jobs—hardly any of which are candidates for offshoring even though many of them provide just the sort of impersonal services that need not be delivered face to face. (When is the last time you saw an employee of the IRS?) In this case, I believe, politics will prevent the offshoring...
• Retail trade employed 15.6 million Americans at the end of 2004. At present, the vast majority of these service jobs are largely or partly delivered in person, or at least require physical presence (e.g., stocking the shelves). That said, Internet retailing is steadily increasing... Hence, more retail jobs will be at risk of offshoring in the future.

Those are the easy cases. But the classification so far leaves out the majority of private service jobs—some 73.6 million at the end of 2004, including my job (college teaching) and probably yours. Here’s how this extremely heterogeneous group breaks down:

### Patent Trolls are Not the Problem

This commentary from the Wall Street Journal continues the discussion in What's Wrong with Our Patent System? While there are differences in the two editorial's diagnosis of the problems with the patent system, e.g. on the importance of patent trolls in contributing to the problem, an area of agreement is that too many patents are granted and many of them are of questionable validity. A suggested solution in both cases is to increase the number of experts in the patent office, and to allow competitors the opportunity to weigh in earlier in the patent review process. In both cases the goal is the same, to reduce problems by reducing the number of bad patents that are granted:

War on 'Patent Trolls' May Be Wrong Battle, by Alan Murray, Commentary, WSJ:  In the business world, the new villains are "patent trolls." The term was coined five years ago by Peter Detkin, then head of litigation for Intel Corp., to vilify companies "that try to make a lot of money off a patent that they are not practicing and have no intention of practicing and in most cases never practiced." The trolls earned their place in the public imagination thanks to NTP Inc., whose patent lawsuit threatened ... to interrupt service to about three million BlackBerry users until it was settled this month...

Next week, the titans of technology take their antitroll crusade to Washington. On March 29, the Supreme Court will hear arguments in a case involving ... eBay Inc. ...[and] a company called MercExchange LLC, which claims to own the patent on eBay's popular "Buy It Now" process. Touted as the most important patent case to hit the U.S. high court in a decade, this one revolves around whether companies like MercExchange and NTP should be granted injunctions to shut down patent infringers. The following week, Congress ... plans hearings ... to look at, among other things, the BlackBerry fiasco and the role of trolls.

But patent trolls are getting a bad rap. For one thing, most U.S. research universities fit Mr. Detkin's definition cited above. Does anyone think Stanford University deserves less patent protection than, say, Microsoft, because it doesn't make or sell products? ... [F]ormer Microsoft chief technologist Nathan Myhrvold, ... an outcast among his tech colleagues on this topic, argues there is no reason a company should be given less protection ... simply because it chooses not to commercialize its patents. After all, Thomas Edison, who nabbed more than 1,000 patents, didn't manufacture his inventions. ... At a time when the U.S. advantage in global trade is its intellectual property, weakening patent protection ... would be a big mistake.

There is a problem in the patent world, but it isn't companies that don't commercialize their own patents. Rather, it is bad patents. These days, too many are granted, too often for "inventions" that seem to the initiated to be as obvious as air... In part, that happens because the Patent and Trademark Office is understaffed and overwhelmed. A good first step would be to beef up the patent agency. .... Second, change the patent laws to allow opponents of new patents to weigh in earlier. Right now, examiners often work in a vacuum. If patent applications were published prior to final approval and allowed to be contested ... fewer bad patents might be issued... [Update: A NY Times editorial echoes the theme.]

Posted by on Wednesday, March 22, 2006 at 12:51 AM in Economics, Policy, Regulation, Technology | Permalink  TrackBack (0)  Comments (12)

### Spinning Unpopular Wars

This is a news conference president Johnson held in November of 1967. As noted here, this was at a time when "the percentage of Americans who thought Vietnam was a mistake was closing in on 50 percent in the Gallup poll," and four months before Johnson announced he would not seek reelection:

In the midst of all the horrors of war, in guerrilla fighting in South Vietnam, we have had five elections in a period of a little over 14 months," Johnson said. ''. . . To think that here in the midst of war when the grenades are popping like firecrackers all around you, that two-thirds or three-fourths of the people would register and vote and have five elections in 13 months -- and through the democratic process select people at the local level, a constituent assembly, a house of representatives, a senate, a president, and a vice president -- that is encouraging. The fact that the population under free control has constantly risen, and that under Communist control has constantly gone down, is a very encouraging sign.

Here's president Bush in a weekly radio address from January, 2005, a time when support for Bush's handling of the war had fallen below 50%:

In the face of assassination, brutal violence and calculated intimidation, Iraqis continue to prepare for the elections and to campaign for their candidates. They know what democracy will mean for their country: a future of peace, stability, prosperity and justice for themselves and for their children. ... Tomorrow's vote will be the latest step in Iraq's journey to permanent democracy and freedom. Those elected to the transitional National Assembly will help appoint a new government that will fully and fairly represent the diversity of the Iraqi people. ... Tomorrow's election will add to the momentum of democracy. ... as they move further into the light of liberty.

Posted by on Wednesday, March 22, 2006 at 12:33 AM in Iraq and Afghanistan, Politics | Permalink  TrackBack (0)  Comments (12)

## Tuesday, March 21, 2006

### China Says U.S. Should Blame Itself

China criticizes U.S. economic policy and says the U.S. should stop blaming China for the structural problems the policy has caused:

China warns US not to make it a scapegoat, by Richard McGregor and Geoff Dyer, Financial Times:  China will take measures to meet US complaints about their bilateral trade imbalance..., but has warned the US also to take responsibility for its economic problems. Wen Jiabao, China’s premier ... promised new initiatives on issues such as abuse of intellectual property rights,.... “But it is unfair for the US to scapegoat China for the US’s own structural economic problems,” Mr Wen added...

Brad Setser: If China doesn’t like US economic policies … Maybe it should stop financing them. ... At least in my view, Chinese premier Wen's criticism of US economic policy - and US economic scape-goating -- would have a lot more credibility if China wasn't spending around \$250b a year (10% of its GDP) resisting market pressure for China's exchange rate to appreciate. Because of that policy, China ends up financing a rather significant fraction of the US fiscal deficit ... and the US current account deficit... In the process, it also masks the impact of bad US economic policies. ...

No doubt, there is plenty of blame to go around. The US isn't serious about doing anything to reduce its fiscal deficit. Just try to read the President's latest remarks. To the extent that they make any sense (see DeLong)... And President Bush has done absolutely nothing to try to assure that all parts of America benefit from globalization. Cutting taxes on dividends, estates and capital gains -- and proposing to dismantle ... social security ... is hardly a creative policy response to intensified competition from labor rich economies around the globe. Yet China's commitment to exchange rate flexibility seems every bit as thin as the Bush Administration's commitment to fiscal sanity and sharing the benefits of growth widely. ... I'll have much more on the fact that no one really wants to do anything other than talk about global imbalances later. ...

I agree with Brad, the administration should accept its share of the blame for the fiscal deficit and other misguided policies, but China's currency manipulation is part of the story too.

Posted by on Tuesday, March 21, 2006 at 07:11 PM in Budget Deficit, China, Economics, International Finance, International Trade, Politics | Permalink  TrackBack (0)  Comments (22)

### Don't Spare the Flapdoodle

Michael Hiltzik of Golden State Blog watches Medicare Administrator Mark McClellan try to sell "malarkey":

Medicare Clutches at Straws, by Michael Hiltzik, Golden State Blog: It's heartbreaking to watch a government bureaucrat try to defend the indefensible, but I went up to the Whittier Community Center this morning to watch Medicare Administrator Mark McClellan speak up for the Medicare drug program, just the same. As I expected, the experience evoked those sensations of pity and terror of which Aristotle speaks so highly in his Poetics.

As expected, McClellan didn't spare the flapdoodle. Despite mounting evidence that the drug program has been a disaster from the start--and will elicit even more voter anger when enrollees start hitting the dreaded "doughnut hole," about the time when the Congressional election campaigns kick into high gear at Labor Day--he kept claiming that surveys show that enrollees are "overwhelmingly" satisfied with the program. He told an audience of about 60 seniors that under the rules governing the policies of the private health plans administering the program, "all the plans have to cover the medicines you need." This is manifestly untrue, since within broad limits the private health plans running the program for Medicare can compile their own formularies. The "medicines you need" might be on their list, or might not. Or they might be on the lists now, and gone next month.

There was more malarkey of this type, but what about those surveys showing "overwhelming" satisfaction. When I queried McClellan, I learned this is a reference to a couple of studies done by AHIP. Who dat? It's "America's Health Insurance Plans," the Washington trade group for the private insurers who are reaping huge revenues from Medicare Part D.

Very trustworthy.

But what do the surveys actually say? Let's check. A summary is available here on the AHIP website. It indicates that as many as 40% of enrollees aren't saving money under Part D, or aren't sure. As many as 20% may be taking drugs that aren't covered. (So much for the plans covering "the medicines you need.") Up to a third aren't sure the signing up was worth the effort. Only 16% of enrollees were able to sign up online by themselves, making a mockery of Medicare's insistence that its online portal is a great boon to seniors.

My favorite part of the survey is this question:

When you hear politicians criticize the new Medicare prescription drug benefit plan, do you think they are sincerely trying to fix the plan, or just trying to score political points in an election year?

Interestingly, 40% of respondents refused to answer this question, by far the largest ratio of any question in the survey. Which proves that America's seniors recognize horse manure when they're fed it. Of course, the survey didn't ask what the respondents think of criticism of the plan by doctors, pharmacists, health care advocates, nursing home administrators, or any of the other professionals who have condemned it as a fraud and a disgrace. Are they just trying to score political points, too?

Posted by on Tuesday, March 21, 2006 at 02:28 PM in Economics, Health Care, Politics | Permalink  TrackBack (0)  Comments (2)

### Flexicurity

When asked how to help workers affected by globalization, economists often recite the stock phrase "education and retraining." But the evidence on the effectiveness of job retraining programs is mixed and it's hard to push strongly for costly job retraining programs without demonstrable benefits. One place to look for evidence of benefits from job retraining programs is Denmark. In the Danish system, workers are protected, but jobs are not. Danish workers are among the most easily laid off workers anywhere, but only one in ten workers expresses concern over job security:

For the Danish, A Job Loss Can Be Learning Experience, by Marcus Walker, WSJ: After graduating from high school, Susanne Olsen spent 10 years at the local slaughterhouse... It was arduous, unskilled work that left her ill-equipped for most other jobs. Then the slaughterhouse closed down last year, leaving 500 people without jobs... But unlike ... laid-off workers in similar circumstances elsewhere in Europe, Ms. Olsen was sure she was going to find a new job. Now she's an apprentice golf landscaper, with her salary subsidized by the state while she takes four years of training paid for by the government and her new employer...

Most of Western Europe is fighting to hold on to its traditionally strong job protections... Denmark has gone the other way. The government allows liberal hiring and firing as in the U.S. And it has imposed limits on the duration of its high unemployment benefits. But it also invests more than any other country, as a percentage of its gross domestic product, in retraining the jobless -- a combination it calls "flexicurity." Its unusual mix of the free market and big government has helped Denmark cut its unemployment rate in half, from about 10% in the early 1990s to U.S.-style levels of under 5% now. The economy has been relatively robust, growing 3.4% last year. Meanwhile, France and Germany are at or above the Danish jobless rate of a decade ago.

Even though Danes are among the most easily laid-off workers in Europe, polls show the country's workers are the most secure about their future. ... Danes change jobs more frequently than any workers in the developed world except Americans and Australians... But fewer than 10% say they're concerned about job security, compared with nearly 40% in Germany and more than 60% in Spain. Most Danes believe they can always find work... In the interim, they get security from a dole that replaces up to nine-tenths of their last wage, the highest level in Europe.

Critics say the experiment might not be easy to replicate. For one thing, Denmark is small, with just 5.4 million people. And close-knit Scandinavian countries historically have had a higher tolerance for taxes. The system isn't cheap: Denmark spends about 4.4% of its GDP every year on supporting and retraining the jobless, the most expensive labor-market policy in the world. ...

Kirsten Thomsen prepares the "bottleneck analysis" that makes Denmark's peculiar hybrid possible... Every three months, Ms. Thomsen has the ... polling firm Gallup survey employers ... on what jobs they will need in coming years, and uses the feedback to identify the next labor shortages. ... The consultants who deal directly with unemployed people use her reports in picking training courses for individuals. "In our system, we can make supply and demand match," Ms. Thomsen says.

The true test is how the system deals with low-skilled, manual laborers in declining industries. ...  Finding new work for the 500 laid off at Hjørring ... was a double challenge. Most of the workers didn't want to leave their home town. ... In addition, the meatpackers weren't qualified for new employment, says Jim Jensen, ... Despite Hjorring's spate of large-scale factory closures, new vacancies keep appearing in Denmark's flexible labor market. ... Where qualifications are lacking, the state pays for courses at vocational colleges, often sharing the cost with a new employer...

Ten months after the slaughterhouse closed, some 300 ex-workers have found new professions in addition to the 80 who got other jobs as meatpackers. Others from Hjørring are in full-time education, or chose retirement... Today, only 60 of the 500 laid-off workers from Hjørring are still on unemployment benefits.

Posted by on Tuesday, March 21, 2006 at 01:40 AM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (38)

### Fields of Expertise

Paul Krugman asks for reciprocal visiting rights into areas covered by other columnists and explains why he deserves to have them:

Fields of Expertise, by Paul Krugman, Money Talks, NYT: Bruce Bartlett has posted a reply of sorts to my March 10 column, “The Conservative Epiphany.” It’s interesting, because he admits that for a time he was deterred from speaking up about the Bush administration’s flaws because he feared, correctly, that he would be fired from his think-tank job if he did. I won’t pass personal judgment on his behavior; I often tell people that one main reason I was willing to criticize Bush when he was still very popular, and when critics were routinely smeared and accused of being unpatriotic, was that I knew that I could always go back to just being a college professor — in Europe if necessary.

But I would like to respond to one point, because lots of people who criticize me say the same thing (and I occasionally hear it from people at The Times itself): that I should have stuck to economics, my field of expertise, rather than venturing into other areas. I could point out that as far as I can tell, every other op-ed columnist at the Times writes about economics. Don’t I get reciprocal visiting rights?

Anyway, what that criticism really means is that I shouldn’t have written about the Iraq war. But the sad fact is that I got things more nearly right on Iraq than the vast majority of opinion writers at major newspapers, including commentators who are supposed to be experts on foreign policy.

I call it a sad fact because I was a skeptic and a pessimist. At a time when most commentators, even liberals, believed that the Bush administration was making an honest case for war, I suggested that the administration was exaggerating the threat. At a time when quite a few commentators, again including liberals, were enthusiastic about the idea of throwing America’s military weight around, I argued that the occupation of Iraq would be much harder than the invasion; I predicted that the Bush administration would botch the occupation and the reconstruction; and I warned that the war would weaken America’s position in the world. I wish I hadn’t been right on all these points, but I was.

Why did I get it right, when so few other commentators did? Partly because, as Mr. Bartlett suggests, I wasn’t afraid of losing my job. But mainly, I think, because I was able to apply to foreign policy the lessons about the administration’s character and competence that I had learned from covering economic policy.

Posted by on Tuesday, March 21, 2006 at 01:23 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (14)

### Fed Watch: The Perils of Calling the Top

Tim Duy with a Fed Watch:

Policymakers are gearing up for another 25bp rate hike at the end of the month – essentially a given at this point. Market participants are also pricing in another 25bp hike in May, although the odds have backed off a bit. Last week I said the mood on the FOMC appeared to be shifting to favor a pause at 5% on the Fed Funds rate. Soon thereafter, John Berry at Bloomberg argued that 5% was a more likely stopping point than 5.25% or higher. Sounded good to me. But then, while cleaning my office, I stumbled upon this piece that I wrote on May 14, 2001. This part caught my eye:

Posted by on Tuesday, March 21, 2006 at 12:18 AM in Economics, Fed Speeches, Fed Watch, International Finance, Monetary Policy | Permalink  TrackBack (0)  Comments (2)

### What's Wrong with Our Patent System?

Adam Jaffe of Brandeis University and Josh Lerner from the Harvard Business School discuss how recent changes in the patent system have caused a breakdown in its ability to protect and encourage innovation, and how to fix the problems:

Innovation and Its Discontents, by Adam Jaffe and Josh Lerner, Commentary, WSJ: The problems of the U.S. patent system are under discussion ... with an urgency not seen in decades. ... Congressional subcommittees, with good reason, have recently held hearings asking ... about developments ... in the patent system. The importance of this long-overdue focus on patents cannot be overemphasized. The past decade has seen periodic uproars over particular patents... but the wrong lessons have typically been drawn. Commentators have tended to focus on the incompetence of the USPTO in allowing "bad patents." Others have concluded that the patent system is not working with respect to a particular area of technology. ... [c]oncerns about software awards ... for instance... others have suggested that biotechnology be excluded in various ways from the patent regime.

We believe, instead, that the problems with the patent system are ... the result of two congressional changes... At the time they were described as administrative and procedural...; but taken together they have resulted in the most profound changes in U.S. patent policy and practice since 1836. One set of changes has made it easier to enforce patents, easier to get large financial awards ..., and harder for those accused of infringing patents to challenge the patents' validity; another set of changes has made patents much easier to get. The combination has created a ... combination of factors that increasingly makes the patent system a hindrance rather than a spur to innovation.

Congress set us on this road in 1982 when it created a centralized appellate court for patent cases... Its decisions ... are largely responsible for the significant strengthening of the legal potency of patents. Then, a decade later, Congress turned the USPTO into a "profit center." The office has been pushed to return "excess" revenue to the U.S. Treasury. This shift led to pressures to grant more patents, difficulties in attracting and retaining skilled examiners, and a torrent of low-quality patent grants. These include such absurdities as patents on wristwatches (paw-watches?) for dogs, a method of swinging on a swing ("invented" by a five-year-old), and peanut butter and jelly sandwiches. But they also include the patents on broad ideas related to mobile email -- virtually devoid of any details of implementation -- that have imposed a \$612 million tax on the maker and users of BlackBerries.

The combination of making patents easier to get and simultaneously more potent when enforced has led to an explosion in patent litigation. Holders of dubious patents ... established firms or "trolls" whose only business is patent enforcement -- routinely threaten firms that sell valuable products with shutdown based on alleged patent infringement. Even if the target firm believes that it does not infringe..., the cost and risk of proving this in court may be too high. Innovators may choose simply to drop the allegedly offending product, or to settle and pay ransom rather than fight. This is not a problem confined to any single industry. ...

It might be tempting to view patent law as just another area where litigation has spun out of control. But ... its effects are particularly worrisome, because a faulty patent system can have profound impact on the overall process of innovation. ...For all its deficiencies and periodic stumbles, our free-enterprise system has demonstrated a unique ability to generate new technology: ... The basis for this advance is the pursuit of profit, which forces firms to innovate. But the profit-based incentive to innovate depends fundamentally on the institutions governing ownership of the fruits of innovation. ...

The legal protection patents provide is supposed to mitigate the risks of these investments, but the flood of dubious patents that nonetheless have amplified legal force is increasing rather than mitigating the risks associated with investments in innovation. ... We believe that the incentives of the existing system induce all participants ... to invest in abusing the system rather than innovating. Reform of the system must change these incentives by (1) changing the USPTO review process...; and (2) leveling the playing field between litigants so frivolous patent holders cannot intimidate true innovators into paying protection money.

Our proposed reforms start with the recognition that much of the information needed to decide if a given application should be approved is in the hands of competitors of the applicant, rather than the USPTO. ... Most patents would never receive anything other than the most basic examinations. But for those applications that really mattered, [competing] parties would have an incentive and opportunities to bring information in their possession before the USPTO...

If bad patents with important consequences were weeded out by the USPTO, the incentive to file frivolous applications in the first place would be reduced. ... But there are always going to be mistakes, and so it is important that the court system operate efficiently to rectify those mistakes, while protecting holders of valid patents. Today, the legal playing field is significantly tilted in favor of patentees.

The reliance on jury trials is a critical problem. The evidence in a patent case can be highly technical, and the average juror has little competence to evaluate it. ... The right to a jury of one's peers is a venerated concept in Anglo-American law. But there is ample scope for judges to use pretrial rulings and reports of special "masters" commissioned by the court to resolve more of the most technical issues that determine the outcome of patent litigation. While litigation will always be uncertain, it has to be structured so that complex technical issues are addressed in a way designed to elucidate rather than obscure. ... As much as the USPTO needs to do a better job, it can only do so if the system is modified so that all parties have incentives to help with the job, and the courts provide a reliable backstop when mistakes are made.

Posted by on Tuesday, March 21, 2006 at 12:07 AM in Economics, Regulation | Permalink  TrackBack (0)  Comments (4)

## Monday, March 20, 2006

### Bernanke: The Yield Curve and Monetary Policy

Ben Bernanke discusses why long-term interest rates have remained low throughout the Fed's current tightening cycle and the implications of this for monetary policy. He notes two main explanations for low long-term rates, and he discusses why the monetary policy implications differ according to which explanation is adopted. If low long-term rates are due to a decline in the term premium, the effect is  stimulative and policy would need to be tightened. But if low long-rates are due to current or anticipated economic conditions, e.g. an anticipated slowdown in growth in the future, the implications for policy are the opposite. Tim Duy will have a Fed Watch later, so for now here's a shortened version of Bernanke's remarks:

Reflections on the Yield Curve and Monetary Policy, by Chairman Ben S. Bernanke, March 20, 2006: ...I intend to ... address an intriguing financial phenomenon: the fact that, over the past seven quarters or so, tightening monetary policy has been accompanied by long-term yields that have moved only a little on net. Why have long-term interest rates not risen more...? And what implications does this ... have for monetary policy and the economic outlook? As you will see, in my remarks I will do a better job of raising questions than of answering them. ... I will conclude that the implications for monetary policy ... are not at all clear-cut. ...

Posted by on Monday, March 20, 2006 at 06:02 PM in Economics, Fed Speeches, International Finance, Monetary Policy | Permalink  TrackBack (0)  Comments (21)

### Is Bush a Big Spender?

In an update to his column today, Paul Krugman adds more on Bush and the perception that spending on domestic programs has grown out of control during his administration:

Is Bush A Big Spender?, by Paul Krugman, Money Talks: The idea that George W. Bush has been “spending like a drunken sailor” ... is in danger of becoming one of those factoids that everybody knows to be true, regardless of the evidence. ... But the data just don’t support that claim. Most of what you need to know is in the Congressional Budget Office’s historical budget data. From Table 6 we learn that overall federal spending rose from 18.5 percent of G.D.P. in fiscal 2001 ... to 20.1 percent of G.D.P. in fiscal 2005, a rise of 1.6 percentage points. However, that somewhat understates the true spending increase, because it includes interest payments, which fell because of lower interest rates. Non-interest spending rose from 16.5 to 18.6 percent of G.D.P. — 2.1 percentage points.

But where did the money go? Table 8 gives us data on discretionary spending — spending that isn’t mandated by law. Defense and international spending rose from 3.2 to 4.3 percent of G.D.P., 1.1 percentage points. So that’s more than half the spending rise, right there. Domestic discretionary spending rose from 3.2 to 3.5 percent of G.D.P. Conservatives make a big deal about this rise, but as you can see it’s fairly small... And what you ... can infer from other C.B.O. reports, is that a significant part of the rise in domestic discretionary spending ... was really new spending on homeland security.

So increases in non-security discretionary spending were a trivial factor in the overall rise in spending as a share of G.D.P., of which well over half – say 1.2 percentage points at least - was security-related. On to health care: Table 10 tells us that combined spending on Medicare and Medicaid rose from 3.7 to 4.2 percent of G.D.P. Health care expenses for current and retired government employees also rose.

As you can see, there isn’t much left. The Bush domestic spending binge never happened.

Posted by on Monday, March 20, 2006 at 12:33 PM in Budget Deficit, Economics | Permalink  TrackBack (0)  Comments (7)

### Reconsidering the Privatization of Water Systems in Developing Countries

In his latest column, Paul Krugman says we are "looking at the failure of a movement." Part of that failure is the ideology that the marketplace is the best solution to all problems, and that many activities now performed by the public sector such as Social Security, Medicare drug benefits, forest management, disaster relief, oil supply to the military, prisons, and so on can be performed more efficiently by the private sector. As this idea is put to the test in the U.S. and around the world and government functions such as water system management are transferred to the private sector, the results are not living up to expectations:

At World Forum, Support Erodes for Private Management of Water, by Elisabeth Malkin, NY Times: For more than a decade, the idea that private companies would be able to bring water to the world's poor has been a mantra of development policies... It has not happened. In the past decade, ... private companies have managed to extend water service to just 10 million people, less than 1 percent of those who need it. Some 1.1 billion people still lack access to clean water...

The reality behind those numbers is sinking in. At the fourth World Water Forum, ... there is little talk of privatization. Instead, many people here want to return to relying on the local public utilities that still supply 90 percent of the water to those households that have it. There is a "big-time shift" in tone, said David Boys, a water policy expert ... Mr. Boys is a member of an advisory panel appointed by United Nations secretary general, Kofi Annan, that presented its recommendations at the forum, beginning with a call to strengthen local public utilities.

"The companies have lost tons of dough and tons of respect," Mr. Boys said. "They are pulling out." Nowhere has that been more evident than in Bolivia, where, in the city of El Alto, residents have been fighting a subsidiary of the French company Suez. The government is now negotiating for Suez to leave ... An uprising in the city of Cochabamba five years ago chased out a subsidiary of the United States company Bechtel after it raised rates but failed to improve service. ...

Even officials of the World Water Council, the organization that runs the forum and is heavily weighted toward multinational water companies, appear to be giving up on wholesale privatization. "Let's finance infrastructure for the 50 countries most in need and the twenty poorest megacities through a more intense donation policy," said Loïc Fauchon, president of the council, in his opening speech last week.

The debate over privatization is driving the controversy inside and outside the forum... Across town, international and local groups held an alternative forum for activists opposed to privatization, who are unconvinced that governments and organizations like the World Bank have given up on the idea. "The state does not assume its responsibilities properly," said Cuauhtémoc Abarca, a Mexico City activist. "In many cases there is a deliberate intention to show that public utilities work badly" as an excuse to privatize them. ...

One in three people in the world, 2.6 billion, does not have access to any kind of toilet or latrine, according to a United Nations report to be presented at the conference on Tuesday. Water-related diseases cause more than three million deaths a year, mostly of children younger than 5. Unicef, the United Nations children's agency, estimates that women and girls in the poorest countries and regions walk nearly four miles a day to carry water. ...

Posted by on Monday, March 20, 2006 at 01:18 AM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (19)

### Paul Krugman: Bogus Bush Bashing

Paul Krugman discusses how new conservative critics of Bush are not criticizing his policies because they were complicit in bringing those policies about. Instead, they accuse him of violating conservative principles by being a big spender, a criticism that is off base:

Bogus Bush Bashing, By Paul Krugman, Bogus W. Attacks Commentary, NY Times: "The single word most frequently associated with George W. Bush today is 'incompetent,' and close behind are two other increasingly mentioned descriptors: 'idiot' and 'liar.' " So says the Pew Research Center for the People and the Press, whose most recent poll found that only only 33 percent of the public approves of the job President Bush is doing.

Mr. Bush, of course, bears primary responsibility for the state of his presidency. But ... we're looking at the failure of a movement as well as a man. ... [M]ost of the conservatives now rushing to distance themselves from Mr. Bush still can't bring themselves to criticize his actual policies. Instead, they accuse him of policy sins — in particular, of being a big spender on domestic programs — that he has not, in fact, committed.

Before I get to the bogus issue of domestic spending, let's look at the policies the new wave of conservative Bush bashers refuses to criticize. Mr. Bush's new conservative critics don't say much about the issue that most disturbs the public, the quagmire in Iraq. That's not surprising. Commentators who acted as cheerleaders in the run-up to war, and in many cases questioned the patriotism of those of us who were skeptical, can't criticize the ... war without facing up to their own complicity in that decision. Nor, after years of insisting that things were going well in Iraq and denouncing anyone who said otherwise, is it easy for them to criticize Mr. Bush's almost surreal bungling of the war. ...

Meanwhile, the continuing allegiance of conservatives to tax cuts ... prevents them from saying anything about the real sources of the federal budget deficit, in particular Mr. Bush's unprecedented decision to cut taxes in the middle of a war. ... They can't even criticize Mr. Bush for the systematic dishonesty of his budgets. For one thing, that dishonesty has been apparent for five years. ... As Berkeley's Brad DeLong puts it ..., conservatives knew that Mr. Bush was lying about the budget, but they thought they were in on the con.

So what's left? Well, it's safe for conservatives to criticize Mr. Bush for presiding over runaway growth in domestic spending, because that implies that he betrayed his conservative supporters. There's only one problem ... it's not true. It's true that federal spending as a percentage of G.D.P. rose between 2001 and 2005. But the great bulk of this increase was accounted for by increased spending on defense and homeland security, including the costs of the Iraq war, and by rising health care costs.

Conservatives aren't criticizing Mr. Bush for his defense spending. Since the Medicare drug program didn't start until 2006, the Bush administration can't be blamed for the rise in health care costs before then. ... So where does the notion of Bush the big spender come from? ...[L]argely from Brian Riedl of the Heritage Foundation, who issued a report last fall alleging that government spending was out of control. Mr. Riedl is very good at his job ... managing to convey the false impression that soaring spending on domestic social programs is a major cause of the federal budget deficit without literally lying.

But the reason conservatives fall for the Heritage spin is that it suits their purposes. They need to repudiate George W. Bush, but they can't admit that when Mr. Bush made his key mistakes — starting an unnecessary war, and using dishonest numbers to justify tax cuts — they were cheering him on.

Continuing with the thought on tax cuts, I think the notion that Bush is a big spender also comes from tax cuts bringing about a mismatch between revenues and spending and, unable to blame that mismatch on the tax cuts themselves, conservative critics of high budget deficits resort to criticizing out of control spending.

Update: Krugman has more on the perception that Bush is a big spender is his Money Talks column.

Previous (3/13) column: Paul Krugman:  The Right's Man
Next (3/23) column: Paul Krugman: Letter to the Secretary

Posted by on Monday, March 20, 2006 at 12:15 AM in Budget Deficit, Economics, Iraq and Afghanistan, Politics, Taxes | Permalink  TrackBack (0)  Comments (15)

## Sunday, March 19, 2006

### Snow Says High CEO Compensation Justified by High Productivity

According to John Snow, CEOs and other "superstars" are paid according to the value they add to the marketplace, i.e. the market is efficiently rewarding them for their high productivity. In addition, he says most Americans are benefiting from the economic expansion:

Snow Defends President's Handling of Economy, by Greg Ip, WSJ: Confronting criticism of the Bush administration's economic record, Treasury Secretary John Snow said the widening gap between high-paid and low-paid Americans reflects a labor market efficiently rewarding more-productive people. But he insisted most Americans are benefiting from the economic expansion.

"What's been happening in the United States for about 20 years is [a] long-term trend to differentiate compensation," Mr. Snow said... "Look at the Harvard economics faculty, look at doctors over here at George Washington University...look at baseball players, look at football players. We've moved into a star system... Across virtually all professions, there have been growing gaps."

Mr. Snow said the same phenomenon explains why compensation for corporate chief executive officers has climbed so sharply. "In an aggregate sense, it reflects the marginal productivity of CEOs. Do I trust the market for CEOs to work efficiently? Yes. Until we can find a better way to compensate CEOs, I'm going to trust the marketplace."

Since the 1970s, CEO compensation has gone from 40 times to more than 300 times the average worker's salary... Mr. Snow ... said the administration intends to publicly challenge perceptions that typical workers and families haven't benefited much from the economic expansion. The extent to which the expansion has been broadly shared is "the new sort of battle line in the political arena," he said. ...

Mr. Snow distributed a fact sheet that showed after-tax income per person, adjusted for inflation, rose 8.2% from January 2001, when George W. Bush took office as president, through January 2006. The sheet also showed that per-person net worth ... rose 2.4%, unadjusted for inflation, from early 2001 to the end of 2005. "People have more money in their pocket" and in their bank accounts, he said.

Mr. Snow's case relies on averages, which can be skewed by big gains among the wealthiest. Other data suggest the typical family has seen little advance in income or net worth since Mr. Bush took office. Census Bureau data show median family income ... fell 3.6% from 2000 through 2004. Incomes for the poorest families fell even further. The only group to gain was the family at the 95th percentile -- that is, richer than 95% of all families. ...

As for net worth, a triennial Federal Reserve survey found that the net worth of the median family rose 1.5%, after inflation, from 2001 through 2004. That is far less than the 17% increase from 1995 to 1998 and the 10% increase from 1998 to 2001. ...

Robert Gordon, an economist at Northwestern University, says the past few years represent the continuation of a 35-year trend in which a growing share of all labor income goes to a small group of "superstars: professional athletes, CEOs and top corporate officers." On top of this trend, income on capital -- such as interest, dividends, rent and capital gains -- has taken a growing share of national income from labor, and it "goes mainly to a small slice of the population at the very top."

Mr. Snow said inequality at "one philosophical level...is troubling. ... We as a society have made two determinations. We're going to let more productive people have higher incomes and we're going to tax them more" through a progressive-tax system. Mr. Snow argued the administration's tax cuts have made the tax code more progressive, because the rich now pay a larger share of total individual taxes. Some scholars counter that the tax cuts still widened the gap between the after-tax incomes of rich and poor Americans. The Tax Policy Center, a joint venture of the Brookings Institution and Urban Institute think tanks, estimates that after-tax incomes of the richest 1% of taxpayers were 4.6% higher in 2005 than they would have been without the tax cuts. Incomes of the middle 20% were 2.6% higher, and incomes of the bottom 20% were 0.3% higher.

As Greg Ip notes and documents, the statistics do not support the administration's claims.

Posted by on Sunday, March 19, 2006 at 07:12 PM in Economics, Politics | Permalink  TrackBack (1)  Comments (18)

### IP and GDP

The industrial production (IP) numbers came out on Friday showing industrial production increasing .7%. I hadn't looked at how IP and GDP are related for awhile, and I wondered if there is any noticeable change in the relationship in recent years due to, say, the shift to a more service based economy. Here are the logs of the two series since 1947 (GDP is rescaled and centered through a regression of IP on GDP):

From this graph, it's hard to detect any change in the long-run relationship, but I thought I'd post it in case anyone is interested in seeing how the two series are related. Most of the time, the movements in IP are exaggerated versions of the movements in GDP.

Update: David Taylor at Dismally.com takes a look at year over year changes for the two series. Here's the graph.

Posted by on Sunday, March 19, 2006 at 06:35 PM in Economics | Permalink  TrackBack (0)  Comments (4)

### Social Justice and Global Trade

Joseph Stiglitz discusses trade liberalization and asks how to reform the global trading system to "enhance the chances that trade and globalization come closer to living up to their potential for enhancing the welfare of everyone.":

Social Justice and Global Trade, FEER, March 2006, By Joseph Stiglitz:  The history of recent trade meetings—from Seattle to Doha to Cancun to Hong Kong—shows that something is wrong with the global trading system. Behind the discontent are some facts and theories.

The facts: Current economic arrangements disadvantage the poor. Tariff levels by the advanced industrial countries against the developing countries are four times higher than against the developed countries. The last round of trade negotiations, the Uruguay Round, actually left the poorest countries worse off. While the developing countries were forced to open up their markets and eliminate subsidies, the advanced developed countries continued to subsidize agriculture and kept trade barriers against those products which are central to the economies of the developing world.

Indeed, the tariff structures are designed to make it more difficult for developing countries to move up the value added chain... As tariffs have come down, America has increasingly resorted to the use of non-tariff barriers as the new forms of protectionism. Trade agreements do not eliminate protectionist sentiments or the willingness of governments to attempt to protect producer and worker interests.

The theories: Trade liberalization leads to economic growth, benefiting all. This is the prevalent mantra. Political leaders champion liberalization. Those who oppose it are cast as behind the times, trying to roll back history. Yet the fact that so many seem to have been hurt so much by globalization seems to belie their claims. ...the details of the trade agreements—make a great deal of difference.

### Fair Enough?

When consumers pay extra for Fair Trade certified goods such as coffee, how much of the money goes to the farmers?:

Fair Prices for Farmers: Simple Idea, Complex Reality, by Jennifer Alsever, NY Times: Tim Terman always looks for the black and white certified Fair Trade logo when he buys bags of coffee ... He pays nearly twice as much — up to \$10 a pound — as he would for conventional coffee, hoping the extra dollars go to struggling farmers. That's not always the case. ... Critics say too many fair trade dollars wind up in the pockets of retailers and middlemen, including nonprofit organizations.

But organizations involved in fair trade say the benefits do trickle down. Paul Rice, chief executive of TransFair USA, which controls Fair Trade certification in the United States, said the programs sometimes eliminate as many as five middlemen — a local buyer, miller, exporter, shipper and importer — and instead allow farmers to deal directly with an American wholesaler... "When they do that, they can make dramatically higher prices, often two to three times higher." ...

Fair trade programs, which promise a "fair wage" to family farmers, have grown rapidly. Today, 35,000 retailers and restaurants nationwide ... carry products bearing the fair trade label, an increase of 60 percent in three years. Since 1999, more than 100 million pounds of certified Fair Trade coffee, cocoa, tea, rice, sugar, bananas, mangoes, pineapples and grapes have been imported... "There are now 800,000 small-scale farmers benefiting from fair trade," said Rick Peyser, director of social advocacy at Green Mountain Coffee Roasters... Still, it can be difficult for consumers to quantify the benefit they bring to farmers ... Fair Trade labels don't list the amount paid to farmers; that ... requires research...

The coffee farmer who produced the one-pound bag of coffee purchased by Mr. Terman received \$1.26, higher than the commodity rate of \$1.10. But whether Mr. Terman paid \$10 or \$6 for that fair trade coffee, the farmer gets the same \$1.26. "There is no reason why fair trade should cost astronomically more than traditional products," Nicole Chettero, a spokeswoman for TransFair USA, said. "We truly believe that the market will work itself out... As the demand and volume of Fair Trade certified products increase, retailers will naturally start to drop prices to remain competitive." ...

Each fair trade commodity has its own fair trade price, or the lowest price farmers will receive even if conventional commodity prices fall. That price is meant to allow them to cover their cost of production and improve their lives...

In some cases, the individual farmers may receive less than fair trade rules require because the money goes to cooperatives, which have their own directors who decide how much to pass on to farmers. "We did a breakdown and saw that sometimes, what they're paying farmers is only 70 cents to 80 cents a pound" for coffee instead of the entire fair trade price of \$1.26, said Christy Thorns, a buyer at Allegro Coffee... Transfair, she said, doesn't "clearly communicate that to consumers."

Allegro is among a number of coffee and tea companies setting up their own systems to work directly with farmers ... Starbucks, which bought 11.5 million pounds of fair trade coffee last year, has created a buying program called CAFE, for Coffee and Farmer Equity Practices... Starbucks requires suppliers to provide receipts showing how each party in the supply chain was paid, but it has no fixed price for the coffee. Starbucks' Web site tells consumers about the program. ...

Without fair trade, supporters say, some farmers have no access to market information and can often be duped into selling to middlemen at below-market prices or, if prices fall, can be forced to quit farming. Ms. Chettero acknowledges the fair trade system is not perfect but said it is a step toward farmers improving their lives. If not for consumers and the fair trade system, she said, "Who else is going to do it?"

### The Economic Effects of the Money Immigrants Send Home

How does the money immigrants send home each year affect economic growth and stability in their home countries?

The Check Is in the Mail, Economics, Scientific American: ...One of the most far-reaching aspects of migration often gets ignored altogether: remittances— the money and gifts that migrants send back to families and friends. Studies have chronicled what individual beneficiaries do with the largesse, but the broader effect is only dimly understood... That is finally starting to change. ...

The reason for all the attention is simple. Even though the average migrant sends back just a couple of hundred dollars a month, it adds up to serious money. The World Bank estimates that developing countries received \$167 billion last year—twice as much as they got in foreign aid. Mexico’s intake has quintupled in a decade, to \$18 billion; labor is now the country’s biggest export after oil. And that is just the amount flowing through official channels. [The caption under a picture notes "Remittances have become a huge factor in the global economy: in the Philippines’s case, they accounted for 13.5 percent of the gross domestic product in 2004 and have been growing at roughly 20 percent a year."]

To be showered with money seems like a happy arrangement for the receiving country. Yet in the 1980s remittances acquired a reputation among social scientists as “easy money” that, like an oil windfall, can rot out an economy. Case studies have found that recipients invest little of the money in farm equipment or business start-ups, preferring instead to go on shopping sprees. People grow dependent on the MoneyGram in the mail, and all that cash sloshing around pushes up inflation. Those not so lucky to have relatives abroad fall behind, worsening social inequality, and exporters’ costs rise, making it harder for them to compete in global markets.

In the 1990s, though, Durand and others argued that case studies do not track the full effect of remittances as they ripple through an economy. Even if families do not invest the money, the businesses they buy from do, so remittances can jump-start growth. In one widely cited model, \$1 of remittances boosts GDP by \$3. The infusion of money makes a real difference in places where entrepreneurs have no other access to capital. Compared with alternatives to catalyze economic development, such as government programs or foreign aid and investment, remittances are more accurately targeted to families’ needs and more likely to reach the poor.

Today the debate has settled into a “both sides are right” mode. Some towns achieve prosperity aided by remittances; others get trapped in a cycle of dependency. A number of cross-country analyses, such as one last year by economist Nikola Spatafora of the International Monetary Fund and his colleagues, have concluded that nations that rake in more remittances have a lower poverty rate—but only barely. A larger effect is to smooth out the business cycle, because migrants increase their giving during economic downturns in their homelands and scale it back during upswings...

Posted by on Sunday, March 19, 2006 at 12:32 AM in Economics | Permalink  TrackBack (0)  Comments (7)

## Saturday, March 18, 2006

### Is Employment Increasing Because Hires are Going Up, or Because Separations are Going Down?

This story from the NY Times Economic View notes there are two employment reports, the one you hear about in the press and the Job Openings and Labor Turnover Survey which gets less attention, but tells us quite a bit about why employment numbers are changing:

Another Month of Jobs Growth? Not So Fast, by Louis Uchitelle, NY Times: Once a month, the Bureau of Labor Statistics, along with the news media and a host of economists, enters into a much-trumpeted ritual ... The occasion is the employment report, in which the bureau announces how many thousands of jobs were added to the work force in the previous month — or, in hard times, how many thousands disappeared. Lately, the work force has been growing by nearly 200,000 jobs a month, on average. ... What generates all those jobs? The report doesn't really say. ...

[A] second monthly data report from the Bureau of Labor Statistics ... awkwardly titled the Job Openings and Labor Turnover Survey and referred to by its acronym, Jolts, when it is referred to at all — adds a much-needed dimension to the monthly employment number that gets all the attention.

What Jolts has been telling us lately is that employers have not really stepped up their hiring since last summer. In fact, hiring has moved along at a pretty level pace. The Jolts report shows instead that there has been a decline in what the bureau calls "separations" — meaning that fewer people are leaving their jobs each month. They aren't quitting in larger numbers..., and fewer are being laid off... This information helps to explain the employment report. It shows that employers as a group are hiring roughly the same number of people each month while fewer employees depart. That combination swells the work force...

"The work force is growing not because employers are hiring a lot of new workers to staff expanding operations," Mr. Zandi said. ... That means the news from the employment report isn't quite so positive. The work force is indeed growing... Employers are experiencing rising demand — but not enough to jump with both feet into hiring and expansion. ...

In the vast and churning American labor market, hires are bumping along at 4.7 million to 4.8 million a month. "An enormous number of people are hired, and in that sense hiring is very strong," said John Wohlford, a bureau economist ... "But the reason for the increase in total employment right now is that separations are going slowly down." They have dropped to 4.3 million, from 4.5 million early last year. ...

If you are interested in more on this topic, see Job Loss, Job Finding, and Unemployment in the U.S. Economy Over the Past Fifty Years, by Robert E. Hall. NBER WP 11678, October 2005. The paper Accounting for the Jobless Recoveries, by Paul Gomme, FRB Cleveland also looks at job finding, job loss, and voluntary separations in recessions and recoveries. The paper shows that the flat job finding numbers during the recovery is a recent phenomena, and that the decreased separation rate in a recovery is not unusual. There's a graph in the NY Times story, but these two graphs (graph 1, graph 2) from the Fed report give a better overall perspective on this issue.

Posted by on Saturday, March 18, 2006 at 02:30 PM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (9)

### Does Lack of Interoperability Threaten Competition in Online Music Sales?

France moves to promote a more competitive environment in online music sales:

French Bill Threatens To Slice Into Apple's Pie, by Laurence Frost,  Associated Press: Apple Computer Inc. faces a serious challenge in France, where lawmakers have moved to sever the umbilical cord between its iPod player and iTunes online music store -- threatening its lucrative hold on both markets. ... Thanks to the success of the iPod models -- in the United States, the players accounted for 72 percent of the portable media player market... iTunes has become the global leader in online music sales. The iPod is currently designed not to play music from rival services.

According to the latest amendments, however, copy-protection technologies like Apple's exclusive FairPlay format and Sony's ATRAC3 "must not result in the prevention of the effective application of interoperability." Companies would have to share all "information essential to the interoperability" of their copy-protection formats with any rival that requests it. If they refuse, a judge can order its delivery, on pain of fines.

The draft law could force Apple to let French iPod users buy their music from download sites other than iTunes. Owners of other music players would also be allowed to buy songs from iTunes France. "Without guaranteed interoperability, we run a major risk of captive client bases and an anticompetitive situation, with the consumer held hostage as a result,"...

Critics of the draft law say legislators have no business forcing Apple to share its proprietary format, which most customers are aware of when they choose to buy an iPod. ... "It's only by resisting interoperability that Apple is able to keep this dominant position," Dourgnon said... If the draft law goes through in its current form, experts say, Apple could be forced to withdraw from Europe's third-largest music download market -- or threaten to do so while seeking a change in the law.

"They may have to bluff initially by pulling product off the market and making everybody uncomfortable," said Roger Kay of U.S.-based research firm Endpoint Technologies Associates. But the French move could also be the start of something bigger, he added. "Apple is now becoming an important player in the digital entertainment domain," Kay said. "And it may be there that ultimately they get challenged on antitrust issues by various governments, including the U.S."

Posted by on Saturday, March 18, 2006 at 09:50 AM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (5)

### "Only in a Humpty-Dumpty World"

Even the judge appointed recently by Bush opposed the administration in this case:

Judges Overturn Bush Bid to Ease Pollution Rules, by Michael Janofsky, NY Times: A federal appeals court ... overturned a clean-air regulation issued by the Bush administration that would have let many power plants, refineries and factories avoid installing costly new pollution controls... [T]he court said the agency went too far in 2003 when it issued a separate new rule that ... would exempt most equipment changes from environmental reviews — even changes that would result in higher emissions.

With a wry footnote to Lewis Carroll's "Through the Looking Glass," the court said that "only in a Humpty-Dumpty world" could the law be read otherwise. "We decline such a world view," said their unanimous decision, written by Judge Judith W. Rogers, an appointee of President Bill Clinton. Judges David Tatel, another Clinton appointee, and Janice Rogers Brown, a recent Bush appointee, joined her... The provision of the law at issue ... governs the permits required at more than 1,300 coal-fueled power plants ... and 17,000 factories, refineries and chemical plants that spew millions of tons of pollution into the air each year... The decision is unlikely to be the last word; several circuit courts or appeals courts have ... decided related cases, and the issue may eventually reach the Supreme Court...[dual post]

Posted by on Saturday, March 18, 2006 at 01:33 AM in Economics, Environment | Permalink  TrackBack (0)  Comments (5)

### Water Fights

Water use is increasing at twice the rate of population growth:

Save a little water for tomorrow, by Kevin Watkins International Herald Tribune: One hundred years ago, William Mulholland introduced the citizens of California to ... the water grab. Charged with securing water supplies for a small, thirsty town in a desert, the baron of the Los Angeles Department of Water hit on an imaginative response. He quietly bought up water rights in the Owens Valley, 230 miles to the north, built an aquifer across the blistering Mojave Desert, and took the water to downtown Los Angeles. When local ranchers protested by dynamiting his aquifer, Mulholland declared war, responding with a massive show of armed force.

Nowadays southern Californians fight over water in courts of law. Angelenos [are]... piping in water from hundreds of miles away and draining a Colorado River so depleted that it barely reaches the sea. ...it means disputing every drop of the Colorado with Arizona. The Mulholland model represents a brutish form of what has been a global approach to water management. Want to urbanize and industrialize at breakneck speed? Then dam and divert your rivers to meet the demand. Want to expand the agricultural frontier? Then mine your aquifers and groundwaters. ...

Water is being pumped out of the aquifer on which Mexico City stands at twice the rate of replenishment. The result: the city is subsiding at the rate of about half a meter every decade... The mining of groundwaters for irrigation has lowered the water table in parts of India and Pakistan by 30 meters in the past three decades. As water goes down, the cost of pumping goes up, undermining the livelihoods of poor farmers. Meanwhile, a lethal combination of water shortages, soil salination, and waterlogging threatens the breadbaskets of both countries. In India, about one quarter of grain production is based on unsustainable groundwater use. In China, urbanization and rapid growth has ... left a water crisis of epic proportions. The Hai-Huai-Yellow river basin tells its own story. More than 80 percent of river lengths are chronically polluted...

What is driving the global water crisis? Physical availability is part of the problem. ... With water use increasing at twice the rate of population growth, the amount available per person is shrinking - especially in some of the poorest countries. Over the next 25 years, the number of people living in countries with water crises will increase from 700 million to 2.2 billion, with more than half of the populations of South Asia and sub-Saharan Africa affected. Factor in global warming, which could reduce rainfall in parts of sub-Saharan Africa by up to a quarter over the next century, and this is starting to look like a crisis in the making...

Growing scarcity means more competition. And as William Mulholland taught us all those years ago, competition without good governance can turn ugly - especially for those without power. ... The danger is that the poorest farmers with the weakest voice in water management will lose out, with devastating consequences for global poverty reduction efforts. Challenging as physical scarcity may be in some countries, the real problems in water go deeper. The 20th-century model for water management was based on a simple idea: that water is an infinitely available free resource to be exploited, dammed or diverted without reference to scarcity or sustainability.

Forty years ago, the Aral Sea covered an area the size of Belgium. Thanks to Soviet-era planners who diverted the ... rivers into cotton irrigation, it has been reduced to a couple of small, lifeless hypersaline lakes. In the United States, farmers on the High Plains are pumping water from the Ogallala aquifer ... at eight times the recharge rate. ...

Across the world, water-based ecological systems - rivers, lakes and watersheds - have been taken beyond ... ecological sustainability by policy makers who have turned a blind eye to the consequences of over- exploitation. We need a new model of water management for the 21st century. What does that mean? For starters, ... that means using it more efficiently at levels that do not destroy our environment. ... it means is that governments need to manage the private demand of different users and manage this precious resource in the public interest.

There is another, equally profound challenge. In an era of intensifying competition, we have to ensure that the world's poor do not suffer... That means strengthening the rights and the voice of the poor - and it means putting social justice at the center of water management.

Posted by on Saturday, March 18, 2006 at 12:15 AM in Economics, Environment, Policy | Permalink  TrackBack (0)  Comments (21)

### Looking for the Goalpost

I hadn't read anything from Molly Ivins in awhile, so I thought I'd head over to the Ancient, Hermetic, and Occult Order of the Shrill and see what her latest column has to say:

The fog of victory, by Molly Ivins, CNN:  President Bush has once more undertaken to explain to us "Why We Fight," which is also the title of an excellent new documentary on Iraq. According to the president, "Our goal in Iraq is victory." I personally did not find that a helpful clarification.

According to the president, we are doomed to stay in Iraq until we "leave behind a democracy that can govern itself, sustain itself and defend itself." That's not exactly getting closer every day. But, the Prez sez, "A free Iraq in the heart of the Middle East will make the American people more secure for generations to come."

So far, no good. After three years, tens of thousands of lives and \$200 billion, we have achieved chaos. As Rep. John Murtha put it, "The only people who want us in Iraq are Iran and al Qaeda." Since the revisionist myth that we went to war to promote democracy keeps seeping into rational discussion, it is worth reminding ourselves that there never were any weapons of mass destruction in Iraq.

We are inarguably facing more terrorists now than there were when we started, so the Pentagon has decided to fight what it is now calling "the Long War." Has anyone asked you about this? Me, neither. Nor has anyone asked Congress. The administration -- mostly Donald Rumsfeld -- just decided we would have a long war and declared it, and is now committing us to fight against a fuzzy ideology no one seems to be able to define.

Our problem now is that we're not fighting the people who attacked us -- they're still running around on the Afghan-Pakistan border while we battle Iraqis who don't like us occupying their country.

As of September 11, 2001, there were a few hundred people identified with al Qaeda's ideology. Even then, it was unclear the American military was the right tool for the job. Now, Rumsfeld is apparently prepared to put the full might of the U.S. military into this fight indefinitely, backed by the full panoply of ever-more expensive weapons and the whole hoorah. I don't think the people who got us into Iraq should be allowed to do this because, based on the evidence of Iraq, I don't think they have the sense God gave a duck.

On top of everything else, Rumsfeld is now circulating a grand strategy for the Long War written by Newt Gingrich. Am I the only person covering politics who ever noticed that Newt Gingrich is actually a nincompoop? When Newt bestrode the political world like a colossus (Time magazine's Man of the Year in 1995), many people took him seriously -- but he was a fool then, too. The Republicans were so thrilled to have someone on their side who had ideas, they never seemed to notice Newt's were drivel.

From orphanages to space colonies, it was all shallow but endearingly enthusiastic futurism. Gingrich was the kind of person who read a book or two on something and would then be quite afire as to how this was going to fit into some shining future. Republicans are so amnesiac, they didn't even snicker when Newt turned up recently posing as a respected party elder to give them advice on ethics. Ethics. Next, family values.

I have no idea whom this administration plans to talk into its Long War, but I'm sure they won't roll out the new campaign in August. In order to sell this, they'll have to scare us, assuming some obliging terrorists don't do it for them.

I came across this quote in a recent obituary for George Gerbner, who headed the Annenberg School for Communication for 25 years: "Fearful people are more dependent, more easily manipulated and controlled, more susceptible to deceptively simple, strong, tough measures and hard-line postures. ... They may accept and even welcome repression if it promises to relieve their insecurities."

Posted by on Saturday, March 18, 2006 at 12:06 AM in Iraq and Afghanistan, Politics | Permalink  TrackBack (0)  Comments (7)

## Friday, March 17, 2006

### Measuring Corruption

The Economist looks at some of the ways economists measure corruption:

Digging for dirt, Economics Focus, The Economist: Corruption ... is not easy to measure. Vast amounts of money flow through public hands. How much is diverted into private pockets? ... Fortunately, a growing number of economists, not least at the bank, are turning to the tricky task of quantifying corruption. ...

Some of the biggest ... were attracted to Iraq's oil-for-food programme, which ran from 1997 to early 2003. Under the scheme's original terms, Iraq sold its oil to whomever it chose... The proceeds (\$64 billion in 2000 dollars) were paid into an escrow account and spent largely on food and medicines, under UN supervision. American intelligence officials estimate that Iraq received \$230m-240m in bribes from those eager to buy its oil. Economic intelligence, as applied by Chang-Tai Hsieh and Enrico Moretti, of the University of California, Berkeley, suggests that it got far more. As they point out, Iraqi oil, such as Basra Light, is a close substitute for Arabian Light. Before UN sanctions, there was no systematic price difference between the two. But in 1997-98, Basra Light fetched \$2 a barrel less; in 2000-01, the gap was more than \$5. Bidders would be happy to offer bribes, kickbacks and political favours to secure oil this cheap. Indeed, they could pay up to \$5 billion and still break even. ... Messrs Hsieh and Moretti reckon Iraq collected \$700m-2 billion.

Although a lot of money, this is a small proportion (1-3%) of Iraq's oil revenues. Petty corruption often cuts more deeply. During Indonesia's rainy season, the dirt tracks that connect Javanese villages to their fields often become impassable. According to one estimate, every dollar spent surfacing these roads ... brings benefits worth \$3.30 over the roads' lifetime. But Indonesia suffers from widespread corruption, collusion and nepotism. Some of the World Bank money allocated to village infrastructure ends up greasing palms not smoothing gravel.

But how much? ...Ben Olken, of Harvard University, dug deep into the sand and stone to find out. He reports the gap between what a village claims it spent on a road, and what he and his engineers reckon the road really cost. They left little to guesswork. ... they surveyed quarries, labourers, truckdrivers and suppliers. ... they dug holes in the roads, taking a sample of the material that had gone into their construction. And then they built their own “test roads”... Mr Olken calculates that on average 28% of reported spending went missing, mostly because roadbuilders skimped on materials...

He reaches an unfashionable conclusion. The bank puts great store by “empowering” the poor to keep their officials honest. In Indonesia, villages must hold public hearings before they get the second and third slices of their money. ... For all its romantic appeal, monitoring by villagers suffers from a free-rider problem. If your neighbour keeps a beady eye on road spending, you can benefit from his vigilance without making an effort yourself. Why, then, should you bother? But by the same logic, why should he?

Mr Olken puts his faith in a less fashionable ally: auditors. A group of villages, chosen at random, were told that they would be audited at the end of the project. This threat reduced missing expenditures by about eight percentage points, to 20% or so. The audits are not cheap ... and auditors have been known to lapse into cosy collusion with those they scrutinise. But done properly, Mr Olken says, bean-counting is a promising way to extend the useful life of roads.

A victory for centralised accountancy over local democracy, then? Not quite. Mr Olken shows that corrupt officials care both about their chances of being caught and about the severity of the punishment... The threat of an audit weighed more heavily on village heads who were politically insecure... Detection cannot be left to the village, but punishment can be. On this point..., Kautilya, writing 2,300 years ago, offers a helpful observation: as punishment for the theft of public property by government servants, he recommended smearing the offenders with cow dung and ashes.

Posted by on Friday, March 17, 2006 at 01:09 PM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (5)

### The Economics of Capital Punishment - Part I

This discussion of the economics of capital punishment is from the Becker-Posner blog and appears in the latest issue of Economists' Voice. Richard Posner goes first:

Becker-Posner Blog: The Economics of Capital Punishment--Posner: The recent execution by the State of California of the multiple murderer Stanley "Tookie" Williams has brought renewed controversy to the practice of capital punishment... From an economic standpoint, the principal considerations in evaluating the issue of retaining capital punishment are the incremental deterrent effect of executing murderers, the rate of false positives (that is, execution of the innocent), the cost of capital punishment relative to life imprisonment without parole (the usual alternative nowadays), the utility that retributivists and the friends and family members of the murderer's victim ... derive from execution, and the disutility that fervent opponents of capital punishment, along with relatives and friends of the defendant, experience. The utility comparison seems a standoff, and I will ignore it...

Posted by on Friday, March 17, 2006 at 02:33 AM in Economics | Permalink  TrackBack (0)  Comments (13)

### The Economics of Capital Punishment - Part II

Here is Gary Becker's response to Posner's comments on capital punishment, also appearing in the Becker-Posner blog and in the latest issue of Economists' Voice:

Becker-Posner blog: More on the Economics of Capital Punishment-Becker: Posner has a good discussion of the various issues... I will concentrate my comments on deterrence, which is really the crucial issue... I support the use of capital punishment for persons convicted of murder because, and only because, I believe it deters murders. If I did not believe that, I would be opposed because revenge and the other possible motives that are mentioned and discussed by Posner, should not be a basis for public policy.

Posted by on Friday, March 17, 2006 at 02:31 AM in Economics | Permalink  TrackBack (0)  Comments (7)

### Hurricanes and Ocean Temperatures

Ocean surface temperatures have been rising over time and several studies have linked this increase to more frequent hurricanes, but not in a way that completely eliminates natural processes as an alternative explanation. This study helps to remove some of the doubt about the link between surface temperatures and hurricane frequency:

Intense Storms Tied to Rising Ocean Temperature, by Valerie Bauerlein, WSJ: A new study published yesterday in the online edition of the journal Science says rising ocean temperatures around the globe are to blame for the surge of intense hurricanes that has slammed the U.S. and other countries in recent years -- a finding likely to further roil the debate over whether human activity is triggering more-devastating storms. The study ... concluded that the sharp increase in the number of very intense hurricanes can't be attributed to a normal weather cycle or other natural explanations. ...

Scientific American has more on the analysis.

Posted by on Friday, March 17, 2006 at 01:11 AM in Science | Permalink  TrackBack (0)  Comments (1)

### macroblog: Median CPI is Not Cool

David Altig at macroblog has the inflation news, and he say it's not as rosy as many reports suggest:

macroblog: CPI -- Cool... CPI ex Food and Energy -- Cool... Median CPI -- Not So Cool: The market apparently liked today's report on consumer inflation in February, but if you feel any affection for the median CPI as a measure of core inflation, things are not as rosy as the reported numbers suggest. From the Cleveland Fed:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.5% annualized rate) in February. ... Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.1% (0.6% annualized rate) in January. The CPI less food and energy rose 0.1% (1.8% annualized rate) on a seasonally adjusted basis. Over the last 12 months, the median CPI rose 2.5%, the CPI 3.6%, and the CPI less food and energy 2.1%.

The summary table:

A look at the distribution of individual price changes (weighted by expenditure shares) reveals why the median is giving a less benign signal than the average.  Here's how things looked in January...

... and here is how they looked in February:

So, while there has been a noticeable shift away from very high rates of change toward very low rates of change, there has also been a large shift from the moderate 2-3 percent range to the less moderate 3-4 range.  Personally, I'm not feeling a lot of love for this picture.

My own view of the various pieces of incoming data is that it's possible to tell whatever story your priors support. If you believe the economy is strong, that labor markets are recovering, and that inflation is a worry, it's possible to find evidence to support that position. But if you believe the incoming data point to potential weaknesses and, given the lags in the policy process, it's time for the Fed to consider pausing, it's becoming easier to find support for that position as well.

Posted by on Friday, March 17, 2006 at 12:39 AM in Economics, Inflation | Permalink  TrackBack (0)  Comments (6)

## Thursday, March 16, 2006

### Carter Has Company

From the WSJ's Washington Wire:

Washington Wire: Bush Confronts persistent skepticism about his leadership: The president’s job approval, now 37% in a Wall Street Journal/NBC News poll, has held below 40% since October 2005. That is the longest sustained period below 40% of any president since Carter in WSJ/NBC and Gallup data. Just 11% of independents and 29% of Republicans call the Bush administration “very competent,” ... Majorities in every region call Bush’s predicament “a longer-term setback” that’s unlikely to improve.

Posted by on Thursday, March 16, 2006 at 09:18 PM in Politics | Permalink  TrackBack (0)  Comments (5)

### Primogeniture as a Source of Productivity Differences

Hal Varian recently discussed productivity differences between the U.S. and the U.K. and noted:

It appears that United States companies are much farther up the learning curve .... Professors Bloom, Sadun and Van Reenen looked at 7,500 establishments in Britain and found that in terms of value added per worker, American multinational corporations were 23 percent more productive than the average in Britain. ...

He cites differences in the use of information technology as a major factor in the productivity differences. Perhaps there's another reason as well:

London School of Economics/McKinsey study says the best way to ruin a UK family business is to give it to an eldest son, by Finfacts Team: Research published today by the Centre for Economics Performance at the London School of Economics and McKinsey the consultancy, suggests that the best way to ruin a UK family business is to give it to an eldest son. The research into the gap between the UK's productivity performance and that in the US, France and Germany found ... that half of the difference between British companies and their overseas competitors ... could be explained by the prevalence in Britain of second or later generation family-run companies. If those were removed from the analysis, British performance did not look nearly so bad.

Nick Bloom, one of the authors, urges the UK Government to scrap the 100 per cent inheritance tax relief given to large family businesses. Bloom says that if tax relief were to be capped at £1m, it would spur productivity growth, save taxpayers £250m a year and avoid entrenching poor management in Britain's boardrooms. "Can you imagine if the current England football team was picked from the sons of the team in 1966? We wouldn't win anything."...

Family firms exist across the world so why single out the UK? From our survey of manufacturing, it turns out that the UK has a high number of firms that are both family-owned and family-managed. The ... number of family-owned firms is about 30% in the UK, France and Germany and 10% in the United States. ... the majority are managed by the family in the UK and France, but not in Germany. Moreover, ... about half of all these family firms in the UK reported handing down CEO control by primogeniture – that is, to the eldest son.

Posted by on Thursday, March 16, 2006 at 06:14 PM in Economics, Technology | Permalink  TrackBack (1)  Comments (8)

### Do Workers Oppose Immigration Because They Don't Understand Economics?

Bryan Caplan at EconLog says workers oppose immigration because they don't understand economics, not because of the effect on wages and income:

EconLog: More Cool Work By Hainmueller and Hiscox, by Bryan Caplan: In "Educated Preferences: Explaining Attitudes Toward Immigration In Europe," Hainmueller and Hiscox confirm what I've been telling economists for years: Low-skilled workers are more opposed to immigration because they are less economically literate, not because they selfishly calculate that immigration is especially bad for their pocketbooks:

[P]eople with higher levels of education and occupational skills are more likely to favor immigration regardless of the skill attributes of the immigrants in question. Across Europe, higher education and higher skills mean more support for all types of immigrants. These relationships are almost identical among individuals in the labor force (i.e., those competing for jobs) and those not in the labor force.

As a professor, I work in one of the few labor markets that is almost totally open to foreign competition. How often do you think I've heard an American professor grumble that foreign Ph.D.s "Are taking our jobs!"? Try never. P.S. For more on Hainmueller and Hiscox's work, see here.

The idea that workers will be less opposed to globalization and immigration with more education was echoed recently by Mankiw:

Maybe the answer is [to] put an economics course in every high school and we’ll be OK,” said Summers, taking a jab at Mankiw who earlier suggested that introducing economic principles to Americans in high school would help people better understand globalization.

What happens when they learn that immigration or geographic expansion of labor markets through digital technology reduces wages?:

The simplest supply-demand framework implies that “an increase in supply will, other things being equal, tend to depress wage rates” (Samuelson, 1964, p. 552). ... This study ... seems to suggest that the supply-demand textbook model is correct after all: increases in labor supply do move the labor market along the demand curve and lead to lower wages for competing workers.

Posted by on Thursday, March 16, 2006 at 11:25 AM in Economics, Immigration, Income Distribution, International Trade | Permalink  TrackBack (0)  Comments (29)

### Monetary Policy and Asset Prices

Donald Kohn gave a speech on asset prices and monetary policy as part of a conference in honor of the ECB's chief economist, Otmar Issing who is retiring soon. The speech discusses a disagreement between Kohn and Issing on the role of central banks in managing asset prices:

Monetary policy and asset prices, by Donald Kohn, Fed Reserve Governor: I am honored to participate in this tribute to Otmar Issing. ... I can think of no better way to celebrate the signal contributions of this leading force in the world of monetary policymaking than to address an issue of great importance to central banks, ... the proper role of asset prices in the determination of monetary policy. Otmar and I have debated this issue on many occasions...

Posted by on Thursday, March 16, 2006 at 10:27 AM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (10)

### Who is Harmed by Polygamy?

Robert Frank looks at the economics of polygamy:

Polygamy and the Marriage Market: Who Would Have the Upper Hand?, by Robert H. Frank, Economic Scene, NY Times: ...The debut on Sunday night of "Big Love," ... about a polygamous fictional family in Salt Lake City, has touched off renewed debate... Barb, Nicki and Margene ... chose to marry Bill Henrickson, a successful businessman... Mr. Henrickson chose to marry them. Should society outlaw such arrangements because they cause unacceptable harm to others? If so, who is harmed, exactly, and how? Economic theory, it turns out, has interesting things to say about these questions.

The traditional argument against plural marriage is that it harms women, particularly younger women who may be coerced to enter such marriages. Needless to say, society should prohibit forced participation ... But mature women who freely choose plural marriage reveal a preference for that arrangement. So if plural marriage harms women, the victims must be those who prefer monogamy.

It is easy to see how some of these women may be harmed. In a monogamous world, ... Barb's first choice might have been to marry Bill, who would also have chosen to marry her. But with plural marriage permissible, Bill might prefer to marry not just Barb, but also Nicki and Margene. Barb would then have to choose between two lesser outcomes: a continued search or a plural marriage not to her liking.

Of course, ... that allowing plural marriage may eliminate attractive options for some women does not imply that it imposes unacceptable harm on women generally. Suppose ... that if polygamy were legal, 10 percent of adult men would take an average of three wives apiece and that all remaining marriages would be monogamous. ... The law of supply and demand applies no less to social relationships than to ordinary commercial transactions. With an excess supply of men in the informal market for monogamous marriage partners, the terms of exchange would shift in favor of women. Wives would change fewer diapers, and their parents might even escape paying for weddings.

What about men? Here, too, plural marriage would clearly benefit some. After all, there are surely other men like Bill Henrickson of "Big Love" who would not only prefer multiple wives, but also be able to attract them. But what about those who prefer monogamy? Permitting plural unions would, as noted, create an imbalance of men over women among monogamists. With so many formerly eligible women no longer available, the terms of exchange would turn sharply against men ... Many men would fail to marry at all.

In short, the logic of supply and demand turns the conventional wisdom about plural marriage on its head. If the arrangement harms others, the most likely victims are men, not women.

This conclusion is reinforced if we take account of the costly, and mutually offsetting, jockeying for position associated with ... "positional arms races" ... illustrated by examples from nonhuman animal species. The overwhelming majority of such species are polygynous, meaning that some males take more than one mate. Since having multiple mates is extremely advantageous in Darwinian terms, males typically battle one another ferociously for access to females. Size often decides these battles, so males tend to be considerably larger than females in polygynous species.

Some bull elephant seals, for example, are more than 20 feet long and weigh more than 6,000 pounds ..., whereas females are typically less than 12 feet long and weigh about 1,500 pounds. Natural selection favored larger males because the winners of the long and bloody battles between males often command nearly exclusive sexual access to harems of more than 50 females.

But although being bigger ... is clearly advantageous..., they are also less mobile and hence more vulnerable to sharks and other predators. Relative size, not absolute size, governs the outcomes of fights, so it would clearly be better if each male were only half as large. All fights would be resolved as before, yet all males would be less vulnerable to predators. Unfortunately, however, seals have no practical way of curtailing the arms race that makes them so big.

Permitting plural marriage in human societies would unleash competitive forces analogous to those we see in other species. With women in chronically short supply, men would face even more intense pressure than they do now to get ahead economically, to spend even longer hours honing their abs. More men would undergo cosmetic surgery. Expenditures on engagement rings would rise... Yet no matter how valiantly each man strove, the same number would be destined not to marry.

Unlike other animal species, human societies can employ the power of law to constrain such positional arms races. In addition to whatever other purposes they may serve, laws against plural marriage may function as positional arms control agreements that make life less stressful for men. And this may help explain their appeal to the predominantly male legislatures that enact them.

Posted by on Thursday, March 16, 2006 at 01:44 AM in Economics | Permalink  TrackBack (0)  Comments (19)

### Will the ECB Abandon Its Monetarist Tradition?

Change at the European Central Bank:

How the loss of an ECB pivot will be felt, by Ralph Atkins, Financial Times: ...Otmar Issing, the European Central Bank’s chief economist, who steps down in May. ... has played a pivotal role since the ECB was established in the late 1990s as the central bank of Europe’s monetary union. For the past eight years, he has guided its economic thinking and the successful switch from national currencies to a stable and strong euro. “He made it actually work,” declares Adam Posen, of the Washington-based Institute for International Economics.

So does his departure herald a big shake-up for the ECB? Do not expect a revolution – this is a central bank, after all. ... It is a moment of historical as well as economic significance. The departure of the German-born and -educated monetarist ... breaks the link between the ECB’s executive board and the once-revered Bundesbank, on which the pan-European institution is largely modelled. ... Mr Issing bequeathed to the ECB not only that institution’s gravitas and market credibility but also its approach to managing the economy.

As at the German institution, Mr Issing has been the guiding spirit behind the monetary “pillar” of the ECB’s strategy, with its focus on monetary aggregates such as M3, the broad money supply measure. The ECB’s adherence to such yardsticks puts it out of step with most other central banks...

Jean-Claude Trichet, the ECB’s president ... will be quick to reassure ... that no cracks will appear ... after Mr Issing leaves. He may also stress his own monetarist instincts and those of the ECB’s rate-setting governing council. ... Mr Trichet has little choice but to stress continuity and stability ... Any hint of changes to its “two pillar” strategy – in which the analysis of real economy variables such as gross domestic product growth is “cross-checked” against the monetary “pillar” – would risk the credibility that it has established ...

Jürgen Stark, vice-president of the Bundesbank, has already been chosen to succeed him. But the expectation in Frankfurt is that Mr Stark ... may not be handed Mr Issing’s brief in its entirety. At least part of the economics portfolio may be transferred to Lucas Papademos, the former Greek central bank governor who is the ECB’s vice-president... He is arguably more in tune with international mainstream economic thinking, in which monetary aggregates play less of a role. ...

Ideas previously considered taboo have started to creep into discussions. An important example is the concept of “output gaps” – the degree of slack in an economy, which indicates whether monetary policy is appropriate. Mr Issing regarded such ideas as too vague and dependent on unreliable data. But Mr Papademos was influential in developing the concept. ...

Some in Frankfurt expect a more mainstream economic emphasis in future... Over time, such thinking could shape policy, possibly making it appear less “hawkish” – although hardened German monetarists claim the bank is already too lax...

Posted by on Thursday, March 16, 2006 at 12:48 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (27)

### Greg Ip Says 4.75% Likely with More Possible

The Wall Street Journal's Greg Ip reports on the likely outcome of the next two monetary policy meetings after speeches today by Federal Reserve Bank presidents Yellen and Guynn:

Bernanke Is Expected To Follow Greenspan's Lead, by Greg Ip, WSJ: The Federal Reserve's first meeting under Ben Bernanke is likely to ...[be] another interest-rate increase with the door left open to more. U.S. and foreign economic growth are better than Fed officials expected a few months ago, and inflation, though steady, is at the high end of many officials' preferred range... Mr. Bernanke ... presides over his first policy meeting on March 27-28. At that meeting, the Fed is likely to boost its short-term-rate target to 4.75% from 4.5%.

Markets are counting on an increase at the March meeting and also put high odds on a boost to 5% at the May 10 meeting. Fed officials appear comfortable with those expectations, but don't have strong convictions. ... "During the past 20 months...the [Fed] was able to clearly communicate...the path of policy," Federal Reserve Bank of Atlanta President Jack Guynn said yesterday. "Our policy path over the coming period is somewhat less certain."...

Fed officials had expected the economy to grow strongly in the first half... However, growth has been a bit stronger than expected... In a speech yesterday, Federal Reserve Bank of San Francisco President Janet Yellen said unemployment at 4.8% raises the "question of whether the economy has already gone a bit beyond full employment." If so, with growth expected to exceed its long-run trend "in the first half of this year, the strain on resources could build further, intensifying inflationary pressures."

She added: "Additional inflationary pressures at this point would be particularly unwelcome, because inflation is now toward the upper end of my 'comfort zone.'" ... Still, Ms. Yellen said there are other indicators that suggest the economy still has slack in it, and she expects inflation "will remain well contained."

Mr. Guynn said the risks of weaker growth and higher inflation are "now close to being equal."...

Bloomberg has more on the speeches by San Francisco Fed president Janet Yellen (speech) and Atlanta Fed president Jack Guynn (speech). On Yellen:

"While we face a great deal of uncertainty, the economy appears to be approaching a highly desirable glide path," ... In comments similar to those she made three days ago, Yellen said she's "sensitive" to signs the Federal Reserve might "overshoot" by raising interest rates too much and is "looking for signs of the delayed effects on output and inflation"... "The most likely outcome over the next year or so is that inflation will remain contained," ... In response to questions after the speech, Yellen said she expects core inflation to move to the "center" of her preferred range and wages to remain steady. "I see growth slowing and the unemployment rate as stabilizing where it is," she said...

Posted by on Thursday, March 16, 2006 at 12:05 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0)

## Wednesday, March 15, 2006

### Why are We So Helpful? Explaining Pro-Social Behavior

This is the introduction to a working paper from the Boston Fed on the economics of pro-social behavior:

A Survey of Economic Theories and Field Evidence on Pro-Social Behavior, by Stephan Meier, Boston Fed: Introduction Standard economic theory predicts that public goods are often underprovided because individuals will free-ride on the contributions of others, as they cannot be excluded from using the public good. An enormous number of decisions can be characterized as public-good problems. To cite a few examples, people free-ride on the efforts of others to protect the environment; ... people often let others organize community events; few people donate blood because, if it is needed, they will receive blood anyway; people do not enforce social norms (for example, by stopping someone from littering in a public park) because they think that others should do it, etc. All these individual calculations result in suboptimal outcomes: too little environmental protection, ... few community events, a scarcity of blood donors, and nobody who enforces social norms...

In reality, people free-ride less often than is predicted by standard economic theory. In a number of situations, people behave not according to narrow self-interest, but rather pro-socially. For instance, ... people ... do vote even though the expected utility of voting is close to zero because of the low probability of having the decisive vote... In the political process, voters express their preferences for income redistribution in a way that goes beyond financial self interest... Under certain circumstances, people are able to prevent the overuse of a common-pool resource... And a large part of the production of open-source software is difficult to explain by relying on strict self-interested behavior...

According to standard economic theory, people should take advantage of any opportunity to exploit society or another individual-but they do not. In various situations ..., people are "rent leavers," meaning that they "do not invest in something that is unproductive for others but that would increase their own income" ... The self -interest hypothesis has also been rejected in a large number of laboratory experiments ...

As a result of these findings, ... a large number of economic theories have evolved to explain people's pro-social behavior... This paper surveys these theories. In each subsection below, one specific theory is investigated and predictions for behavior are derived. The hypotheses are then confronted with existing empirical evidence. ...

Contributions to public goods may be explained by relying on  "extended" versions of the self-interested model. People may contribute to a public good if doing so is a precondition of receiving a private good... Donors to arts organizations may gain access to special events, gala dinners, or choice seats in the opera house they support... Or, donations may be driven by a desire to signal wealth in order to increase one's prestige...

But theories based on  "extended" self-interest cannot explain the full range of pro-social behavior. Even in anonymous situations and in final rounds of interactions, when no material benefit can be expected, people often behave pro-socially. Although some economists are reluctant to accept that the self-interest hypothesis has its limits, the bulk of empirical evidence on pro-social behavior requires that theories explaining human behavior go beyond self-interest...

Posted by on Wednesday, March 15, 2006 at 02:16 PM in Economics | Permalink  TrackBack (0)  Comments (19)

### "The Forces Pushing for Global Wage Equalisation ... are Quite Weak"

Martin Wolf says high income countries should relax, the effect of globalization on the distribution of income is likely to be small. There's no reason to impose protectionist measures which would shift domestic production toward areas where Asia has a comparative advantage:

The answer to Asia’s rise is not to retreat, by Martin Wolf, Financial Times: How can the world’s rich countries compete with the rising Asian powers? ... Soon, it is alleged, the Asian giants will undercut every producer located in rich countries. ... But it is nonsense. The world is indeed suffering a huge supply shock, just as it did prior to the first world war. Then the shock was an increase in the effective supply of land, as the railway and steamship brought the “new world” into the global economy. This time, it is an expansion in the effective labour supply, which has tripled over the past two decades... (see charts).

In an integrated world economy, suggests Helmut Reisen..., equilibrium real wages in high-income countries should fall by about 15 per cent. We do not live in such a world. This is obviously true for labour, where tight controls on migration fragment the global market... average labour costs per hour in Chinese manufacturing were just \$0.60 in 2002, against \$24 in Germany (see charts). Yet Germany is still the world’s largest exporter of manufactures.

What is the impact of Asia’s entry into a world with such highly segmented pools of labour? ... What ... is the true impact of the labour supply shock? The short answer is that it generates a fall in the world relative prices of labour-intensive goods and services against those more intensive in ... resources of capital (both human and physical) and land. This has two consequences: shifts in the terms of trade, namely, changes in the relative prices of imports and exports ...; and changes in the distribution of income ... as prices of labour, capital and land adjust.

China’s terms of trade have deteriorated markedly since it opened up. Estimates suggest that prices of its exports have fallen by about 25 per cent relative to those of its imports. In this way, China’s exports make the rest of the world better off. That China has made the rest of the world better off, as a whole, does not mean it has made every single country better off. The more similar is a country’s comparative advantage to China’s the more likely it is to be a loser (and vice versa). ... For the high-income countries, Asia’s impact is mixed: it lowers the price of the goods and services they import from developing countries (which makes them better off), but raises the price of imported commodities [such as oil] (which makes them worse off). In recent years, the latter effect has outweighed the former for the US and Germany. The UK has gained, however, largely because it is self-sufficient in energy (see charts)...

For high-income countries, the bigger the gain from falling world prices of labour-intensive imports, the larger the shift in the internal distribution of income against unskilled labour. Thus the benefit also creates the challenge.

Fortunately, it should be a manageable one. The forces pushing for global wage equalisation through trade are quite weak. Nevertheless, the end result is likely to be employment of unskilled labour almost exclusively in the production of non-tradeable goods and services. But provided controls are maintained on immigration of unskilled labour, that need be no disaster. Other measures are also worth considering. Among them are lowering taxes on low-wage incomes; subsidies to the wages of unskilled workers; and support for education and training.

The world is indeed going through a huge supply shock. But for the high-income countries, the best advice is: relax. The internal redistribution of income caused by trade is likely to be modest. Above all, deliberately shifting their structure of production in the direction of Asia’s comparative advantage, through protection, would be mad...

I'm not as confident as he is that the "forces pushing for global wage equalisation through trade are quite weak" and that the "internal redistribution of income caused by trade is likely to be modest." Markets find ways to work and wage differentials such as \$.60 versus \$24 cannot persist.

### Are We All Bayesians Now?

Skepticism about the latest "breakthrough" in reducing heart disease:

A dose of realism exposes the heart of the matter, by Robert Matthews, Commentary, Financial Times: ...A study of patients with heart disease has found that high doses of a cholesterol-lowering drug known as a statin can break down the potentially fatty deposits lining the arteries. Over three-quarters of the patients showed some improvement, with the most severe cases showing the biggest reductions.

Announced ... this week, the results have been hailed as a big breakthrough ... But already some experts are trying to sound a note of caution. ... After all, over the years they have seen countless “breakthroughs” fail to go the distance. And this latest example bears worrying signs of those that fizzle... For a start, the drug was used at the highest recommended dosage – but in a trial too small to detect all but the most egregious levels of side-effects. It could yet turn out that Crestor cures one problem, only to replace it with another.

But there is another tell-tale sign... Ironically, it centres on the level of surprise that leads to such findings making the media spotlight in the first place. In the case of Crestor, even the researchers themselves admit to being stunned by the results of the trial. ... The research team leader summed up the results as “shockingly positive”. In other words, the results fly in the face of previous experience with these drugs. Considering there is no shortage of that, and that the new results come from a small trial, the smart money is on this “breakthrough” [failing].

That may sound glib, but it has its basis in sophisticated techniques for making sense of new findings. Known collectively as Bayesian methods, they allow new findings to be assessed in the light of extant knowledge – with often salutary consequences.

Take the case of anistreplase, a clot-busting drug hailed ... as a breakthrough in the treatment of heart attacks. A small trial ... suggested that ... the drug could cut death-rates by an astonishing 50 per cent. This again flew in the face of experience... Using Bayesian methods to combine that extant knowledge with the trial results, statisticians predicted the real improvement would be about 20 per cent. This has now been confirmed by much larger studies.

Despite their obvious value in making sense of new claims, Bayesian methods are still regarded by some as esoteric. The blame for this must lie with statisticians, who have done a dismal job of making these powerful techniques accessible to a much wider audience – including the business community. After all, even the least mathematical can appreciate the central message: extraordinary claims demand extraordinary evidence. And while claims of drugs reversing heart disease are certainly extraordinary, evidence extracted from a few hundred patients is anything but.

Posted by on Wednesday, March 15, 2006 at 12:09 AM in Economics, Methodology, Science | Permalink  TrackBack (0)  Comments (10)

### Industrial Demographics

Our birthrate is falling:

U.S. 'Birthrate' For New Factories Is Steadily Falling, by Timothy Aeppel, WSJ Online: The U.S. manufacturing sector is being reshaped by a low birthrate -- among factories. The number of factories in the U.S. shrank last year... Yet it isn't the shuttering of old plants that is the problem. It is the lack of new ones.

"The death rate in manufacturing isn't any higher than it has ever been," says Daniel Meckstroth... "What's really changed is that the creation of new factories has dropped so dramatically."...

This shift in industrial demographics is stirring concern about the long-term health of U.S. manufacturing. New factories not only create jobs, they also use cutting-edge technology, making them crucial to the nation's competitiveness. ... Economists point to growing import competition and an exodus of U.S. production work to low-cost countries as reasons for the birthrate slump. ...

It has become far more common for companies to pour money into upgrading existing plants to make them more productive. This helps explain how, although U.S. industrial production has recovered, the urge to build big new factories remains relatively weak... One factor that gets lost is the size of individual plants. Mr. Meckstroth believes many of the operations that are dying off are smaller companies...

### Are Women "Opting Out" of the Labor Force?

Claudia Goldin of Harvard sets the record straight:

Working It Out, by Claudia Goldin, Op-Ed, NY Times: Highly educated women are getting a bum rap from the press. There has recently been a spate of news and opinion articles telling us that these women ... are "opting out" in record numbers, choosing the comforts of home and family over careers. And because there are now 1.33 women graduating from college for every man, the best and brightest women will either have to "marry down" or, more likely, we are told, remain single. Taken together, highly educated women will have either family or career. Half of it all, rather than "having it all."

But the facts speak loudly and clearly against such suppositions. Women who graduated 25 years ago from the nation's top colleges did not "opt out" in large numbers, and today's graduates aren't likely to do so either.
To know whether a woman sacrificed career for her family, we need to know her employment status over many years. The Mellon Foundation did just that in the mid-1990's, collecting information on more than 10,000 women (and 10,000 men) who entered one of 34 highly selective colleges and universities in 1976 and graduated by 1981. We thus have detailed data about their educational, family and work histories when they were in their late 30's. That gives us enough information to figure out whether many women who graduated from top-ranked schools have left the work force. ...

Taken together, the facts — later babies, more babies, high and fairly constant employment rates, stable marriage rates — don't spell big opt-out... And they don't spell big opt-out change either. I'm not saying that all is rosy. These hard-working women still earn less than their male counterparts and they work more around the house. Given their lower earnings, it isn't surprising that some do opt out. But for the most part, female college graduates ... are career women who care for their children if they have them and work hard for their families. ... [T]he truth is that a greater fraction of college women today are mixing family life and career than ever before. Denying that fact is ignoring the facts.

Posted by on Wednesday, March 15, 2006 at 12:01 AM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (8)

## Tuesday, March 14, 2006

### Bernanke: Budget Deficit Poses a Risk, Trade Deficit Does Not

Bernanke warns about the federal budget deficit, is relatively unconcerned about the trade deficit, warns on entitlement spending, and believes a minimum wage lowers employment. Quite a bit for someone who said his remarks would not address issues beyond monetary policy:

Bernanke Says Lawmakers Should Address Budget Gap, by Brian Blackstone, WSJ:  The U.S. budget deficit poses a risk to future living standards and thus lawmakers should take "concrete steps" to improve the nation's finances, Federal Reserve Chairman Ben Bernanke said in written responses to members of the Senate Banking Committee released Tuesday.

"I am quite concerned about the intermediate to long-term federal budget outlook," Mr. Bernanke wrote to Sen. Robert Menendez (D., N.J.)... "By holding down the growth of national saving and real capital accumulation, the prospective increase in the federal budget deficit will place at risk future living standards of our country," Mr. Bernanke stated, noting the "severe pressure" demographic changes will place on future entitlement spending. Yet as was the case during his semiannual monetary policy testimony last month, Mr. Bernanke declined to comment on specific policies such as whether Congress should adopt pay-as-you-go spending rules.

In a response to a query about the 30-year Treasury bond, Mr. Bernanke stated, ... "I attribute the relatively low level of long-term interest rates generally to several factors, including a tendency in recent years for global saving to exceed the amount of potential capital investments, yielding historically normal rates of return as well as relatively low term premiums in interest rates to compensate investors for interest rate risk," Mr. Bernanke added.

"In the unlikely event that any of these factors tended to push long-term yields to levels that appeared to be incompatible with our macroeconomic objectives, the Federal Reserve would respond by adjusting the stance of monetary policy appropriately," Mr. Bernanke stated.

The Fed chairman appeared to downplay the record-large U.S. trade deficit, calling it "to an important extent, the outcome of market forces." ...  Mr. Bernanke ... stated that while U.S. external debt has been growing, "as a fraction of our nation's income it remains within international and historical norms." He added that higher U.S. national saving, "pro-growth" policies overseas and "more flexible exchange rate regimes in some countries" would help alleviate U.S. external deficits.

Asked for his thoughts on the federal minimum wage, currently \$5.15 per hour, Mr. Bernanke replied, "my own view is that an increase in the minimum wage probably does lower employment."

If I can find a copy of the letter, I'll include it in an update. Update: Greg Ip adds [WSJ copy of letter]:

Bernanke Says Lawmakers Should Address Budget Gap, by Greg Ip, WSJ: Federal Reserve Chairman Ben Bernanke told Congress he was "quite concerned" about budget deficits and urged lawmakers to act soon to bring them down. In written answers to questions from senators, Mr. Bernanke showed he is taking on his predecessor Alan Greenspan's role as a leading nag on fiscal matters.

Although the new Fed chief declined to endorse any particular way to reduce the deficit, he did suggest that Congress can't ignore the tax side of the budget. "Over time either taxes will have to be raised or the spending increases embedded in current laws will need to be scaled back, or some combination of the two," he said... he reiterated that the way the deficit is reduced represent "political judgments" on which he prefers not to comment. ...

Mr. Bernanke, who took office at the start of February, has tried to steer clear of overtly political topics... But it will be hard for Mr. Bernanke to avoid the subject of the budget deficit: Its size and expected growth ... is widely considered one of the biggest threats to U.S. financial stability. While he did express concerns about the budget deficit to Congress last month, Mr. Bernanke's latest remarks were more strongly worded.

### Trends in Retail Sales

Retail Sales are down today, and the current account deficit is up as Brad Setser expected. Here's a few pictures of the retail sales data (Kash at Angry Bear has a bit more on the retail sales and current account deficit data). I'm not a huge fan of deterministic detrending, and I'm not sure the graphs show a lot we don't know already, though some of you may spot things I missed as I hurriedly put these together. So, for those who are interested, here they are:

Posted by on Tuesday, March 14, 2006 at 11:30 AM in Economics | Permalink  TrackBack (0)  Comments (2)

### Making it in America: Social Mobility in the Immigrant Population

George Borjas looks at social mobility across generations for immigrants to the U.S.:

Making it in America: Social Mobility in the Immigrant Population, by George J. Borjas, NBER WP 12088: Abstract The ultimate impact of immigration on the United States obviously depends not only on the economic, social, political, and cultural shifts that take place ..., but also on the adjustment process experienced by the immigrant household across generations. This paper documents the evidence on social mobility in the immigrant population and summarizes some of the lessons implied by the evidence. There is significant economic "catching up" between the first and second generations, with the relative wage of the second generation being, on average, about 5 to 10 percent higher than that of the first generation. At the same time, there is a strong positive correlation between the socioeconomic outcomes experienced by ethnic groups in the immigrant generation and the outcomes experienced by their children, and a weaker correlation between the immigrants and their grandchildren. In rough terms, about half of the differences in relative economic status across ethnic groups observed in one generation persist into the next. As a result, the very large ethnic differences in economic status that characterize the current immigrant population will likely dominate discussions of American social policy for much of the 21st century.

Posted by on Tuesday, March 14, 2006 at 02:43 AM in Economics, Immigration, Income Distribution | Permalink  TrackBack (0)  Comments (20)

### Fed Watch: Moving Fast (?) Toward Inflation Targets?

Tim Duy's latest Fed Watch discusses inflation targeting and how much further the target federal funds rate will be increased:

I have read my fair share of Federal Reserve Speeches over the years, and I am accustomed to hearing hawkish sounding rhetoric to the effect of Chicago Fed President Michael Moskow in a speech last week:

Still, given that the economy is operating close to potential, we need to be careful to monitor for the emergence of any economy-wide strains on resource utilization. Such strains would have the potential to increase inflationary pressures.

Or St. Louis Fed President William Poole in a Reuter’s interview:

My sense is there is a great deal of momentum in the economy. I don't think that it is momentum of the sort that is going to run us off the rails

But every once in awhile, a something new comes along. I thought I noticed something when I first wrote about a speech by Richmond Fed President Lacker, when he said:

Posted by on Tuesday, March 14, 2006 at 01:01 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (0)  Comments (9)

### Agricultural Welfare

I'll believe it's possible to eliminate crop subsidies if and when it happens:

In Fight Against Farm Subsidies, Even Farmers Are Joining Foes, by Scott Kilman and Roger Thurow, WSJ: A movement to uproot crop subsidies, which have been worth nearly \$600 billion to U.S. farmers over the decades, is gaining ground in some unlikely places -- including down on the farm. In Iowa ... a Republican running to be state agriculture secretary is telling big farmers they should get smaller checks. Mark W. Leonard, who collects subsidies himself ... told a room full of farmers ... that federal payments spur overproduction, which depresses prices for poor growers overseas. "From a Christian standpoint, what it is doing to Africa tugs at your heartstrings," Mr. Leonard told them. ...

There is a long history of mostly failed attempts to pare farm payments. But the current anti-subsidy sentiment ... is stirring attention because it is unusually broad. Students for Social Justice at Baylor University in Texas have dumped cotton balls on the ground to protest cotton subsidies. The foundation of late Nascar legend Dale Earnhardt has teamed up with rock star Bono, ... to overhaul Western agriculture policies to boost African development. In Washington, D.C., the Alliance for Sensible Agriculture Policies is meeting to share ideas about changing the farm bill. Participants include Oxfam and Environmental Defense from the left, the National Taxpayers Union on the right and the libertarian Cato Institute. Prominent philanthropic organizations, including the William and Flora Hewlett Foundation, are financing some of this advocacy. ... Another spur to the anti-subsidy movement comes from the World Trade Organization...

The movement is tilting against one of the most deeply entrenched federal entitlements. In 1996, a Republican-led Congress passed legislation to wean farmers from subsidies over seven years. But Washington backed off as the farm economy entered one of its cyclical tailspins. The 2002 farm bill signed by President Bush is one of the most lavish ever, even as the economic cycle improved. ... There isn't any serious talk in Washington of wiping out subsidies entirely, and the powerful farm lobby has defended itself against attacks in the past. ... But now, farm leaders, federal officials and politicians are seriously discussing alternatives, such as buying farmers out from subsidy programs, incentives to encourage farmers to save during good years and paying growers for environmentally friendly practices...

The government created subsidies during the Great Depression to fight rural poverty. At the time, 25% of the U.S. population lived on farms. ... Today, farmers represent less than 1% of the population. ... The government caps annual payments to an individual farmer at \$360,000, though loopholes allow higher payments. Most subsidies go to farmers who are wealthier than the typical U.S. taxpayer. Little of it goes to poor farmers because subsides are tied to production. ... 72% of subsidy money goes to 10% of the recipients. ...

The Bush administration is in the reform camp. ... Last month, the White House Council of Economic Advisers took the unusual step of devoting a chapter in the annual "Economic Report of the President" to lambasting crop subsidies, saying they "hurt countries that could benefit from exporting these commodities to the United States." President Bush has yet to propose his own specific solutions. ...

Posted by on Tuesday, March 14, 2006 at 12:06 AM in Economics, Regulation | Permalink  TrackBack (0)  Comments (2)

## Monday, March 13, 2006

### Freedom of Standard Chinese Speech

Economists spouting off in public and criticizing the government? Who would allow that?:

Chat show economist forced off China TV, by Richard McGregor, Financial Times: China has forced one of the country's controversial economic commentators off the air, closing his top-rating programme... Lang Xianping, who is also known as Larry Lang, recorded his last programme at the end of February after being told he did not have the licence issued ... to all television comperes to certify they can speak standard Chinese.

The resort to such creative bureaucratic means to shut down the programme ... is a measure of the authorities' current eagerness to rein in public debate about sensitive economic issues. China uses such licences to ensure that standard Chinese, rather than the country's innumerable dialects, dominates the media and promotes national unity. But such rules would normally be irrelevant in the case of Mr Lang, a Taiwanese-born professor of finance in Hong Kong, who is fluent in Chinese.

Mr Lang was an almost immediate hit after he launched his business chat show on cable TV in Shanghai in 2004. But he generated controversy, unusually not by criticising the excessive state control of the economy, as many of China's pro-market economists have done, sometimes at risk to their careers. Rather, Mr Lang made his name by attacking the sale of state assets at what he said were often fire-sale prices in under-the-table deals to private entrepreneurs.

Mr Lang's tirades against the sale of state assets struck a nerve in a country increasingly concerned about the corruption involved in the rapid accumulation of wealth by some entrepreneurs in recent years. ... Many entrepreneurs attacked by Mr Lang have long attempted to have him reined in, but Shanghai television regulators had resisted such pressures until recently. ...

Posted by on Monday, March 13, 2006 at 08:04 PM in China, Economics | Permalink  TrackBack (0)  Comments (3)