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Here's a story about outsourcing surrogate motherhood that leads into a broader
point about economic freedom and relates to the emerging political debate over the minimum wage:
outsourcing business - wombs, by Sudha Ramachandran, ATimes.com: ...An
increasing number of couples are coming to India in search of cheaper fertility
treatments, donor eggs and surrogate mothers. ... For couples looking for
fertility treatment, India is an attractive destination....
In the United States, a couple would have to fork out about US$15,000 to the
surrogate mother and another $30,000 to agencies involved. In India, they can do
this on a smaller budget - the entire cost ranges between $2,500 and $5,000.
"Reproductive tourism" - as this trade is being referred to - is a booming
business. Valued at more than $450 million in India, ... it is said that the
number of cases of surrogacy has doubled over the past three years. ...
[T]he low cost of the service provided by an Indian surrogate mother is the
reason for India's emergence ...[in] the reproductive tourism business. But
there are other factors that make India attractive. One is the ... excellent
health facilities at a fraction of the cost back home. ... India scores on
another point as well - the availability of English-speaking doctors. India's laws [also] favor reproductive tourists...
It is mainly women from the lower middle class who are offering to be
surrogate mothers. They earn about $2,500, which is big money in a country where
the per capita annual income is just $500 and where about 35% of the population
lives on less than $1 a day.
On the face of it, everyone - the doctors in the business, the middlemen who
arrange the deals and the surrogate mothers - are smiling. "It's a win-win
situation," said a doctor in Mumbai.
Doctors in the reproductive-tourism business bristle when they are accused of
engaging in unethical practice or when their trade is compared to ... the trade
in kidneys. After all, both are exploitative, feeding off the poverty of the
donor/surrogate mother. But they insist that there is no exploitation, that the
surrogate mother is well looked after by the couple paying for her services. The
latter apparently ensure that she eats well when she is carrying the baby. The
doctors claim they ensure that the surrogate mothers don't bond with the baby by
constantly reminding them that the fetus in their womb is not theirs.
When asked about their feelings about having to give up the child they have
carried for so many months, surrogate mothers say they are happy that their
service has brought happiness to another couple. They say the money they earned
will enable them to ensure a better future for their own children. But dig
deeper and their emotional anguish becomes evident.
What is more, in countries like India where women are often forced to do as
ordered by husbands and in-laws, the possibility of family pressure on her to
become a surrogate mother for the sake of big money cannot be ruled out. And
then there is the social stigma attached to carrying the child of a man who is
not her husband.
But these issues do not seem to trouble those profiting from the business...
I don't want to make a moral judgment about surrogacy, instead I want to
raise the question of economic freedom. With the minimum wage debate about to
heat up, the question of whether a person is free to
refuse a wage offer when the opportunity cost is severe economic hardship is important.
We make a lot of moral judgments in our economic and social policy based upon
the idea that individuals are free to make economic choices. If they freely
choose their course of action, then it is fair to hold them accountable for their
choices. And they need to be held accountable, it is argued, so that they will
make wise decisions.
But are those in poverty free to choose? Amartya Sen's
autobiography written in association with his 1998 Nobel prize in economics
economic unfreedom, in the form of extreme poverty, can make a person a
helpless prey in the violation of other kinds of freedom
The quote is from a story from Sen's childhood:
One afternoon in Dhaka, a man came through the gate screaming pitifully and
bleeding profusely. The wounded person, who had been knifed on the back, was a
Muslim daily labourer, called Kader Mia. He had come for some work in a
neighbouring house - for a tiny reward - and had been knifed on the street by
some communal thugs in our largely Hindu area. As he was being taken to the
hospital by my father, he went on saying that his wife had told him not to go
into a hostile area during the communal riots. But he had to go out in search of
work and earning because his family had nothing to eat. The penalty of that
economic unfreedom turned out to be death...l. The experience was devastating
for me... It also alerted me to the remarkable fact that economic unfreedom, in
the form of extreme poverty, can make a person a helpless prey in the violation
of other kinds of freedom: Kader Mia need not have come to a hostile area in
search of income in those troubled times if his family could have managed
If you and your family actually faced the possibility, what would you do to avoid starving? When a person facing severe economic hardship accepts a low wage, is that
choice truly free?
Posted by Mark Thoma on Wednesday, June 21, 2006 at 12:15 PM in Economics, Income Distribution, Policy, Politics |
According to this, conservatives can't walk and chew gum at the same time:
Why Liberals Fear Global Warming More Than Conservatives Do, by Dennis Prager,
RCP: Observers of contemporary society will surely have noted that a liberal
is far more likely to fear global warming than a conservative. Why is this?
After all, if the science is as conclusive as Al Gore, Time, Newsweek, The
New York Times and virtually every other spokesman of the Left says it is,
conservatives are just as likely to be scorched and drowned and otherwise done
in by global warming as liberals will. So why aren't non-leftists nearly as
exercised as leftists are? Do conservatives handle heat better? Are libertarians
better swimmers? Do religious people love their children less?
The usual liberal responses -- to label a conservative position racist,
sexist, homophobic, xenophobic, Islamophobic or the like -- obviously don't
apply here. So, liberals would have to fall back on the one remaining
all-purpose liberal explanation: "big business." They might therefore explain
the conservative-liberal divide over global warming thus: Conservatives don't
care about global warming because they prefer corporate profits to saving the
But such an explanation could not explain the vast majority of conservatives
who are not in any way tied into the corporate world (like this writer, who has
no stocks and who, moreover, regards big business as amoral as leftists do). No,
the usual liberal dismissals of conservatives and their positions just don't
explain this particularly illuminating difference between liberals and
Here are six more likely explanations:
-- The Left is prone to hysteria. ...
Like convincing the world that WMDs exist in Iraq? That kind of hysteria?
-- The Left believes that if The New York Times and other liberal news
sources report something, it is true. If the cover of Time magazine says,
"Global Warming: Be Worried, Very Worried," liberals get worried, very
worried... It is noteworthy that liberals, one of whose mottos is "question
authority," so rarely question the authority of the mainstream media. ...
Dude, ever heard of Brad DeLong?
-- The Left believes in experts. Of course, every rational person, liberal or
conservative, trusts the expertise of experts - such as when experts in biology
explain the workings of mitochondria... But for liberals, "expert" has come to
mean ... that non-experts should defer to experts not only on matters of
knowledge, but on matters of policy, as well. ...
Yeah, I'd hate to have monetary policy, climate policy, disease control,
things like that in the hands of experts.
-- People who don't confront the greatest evils will confront far lesser
Like trying to privatize Social Security because the real problem, health
care costs, is too hard?
-- The Left is far more likely to revere, even worship, nature. A threat to
the environment is regarded by many on the Left as a threat to what is most
sacred to them ... Conservatives, more concerned with human evil, hold the very
opposite view: Islamic terror is a far graver threat than global warming.
Because you don't care about nature, you choose to make war your first
priority? That's a good argument.
-- Leftists tend to fear dying more. That is one reason they are more
exercised about our waging war against evil ... (or secondhand smoke).
Let's see if I follow your logic. The Left fears dying more. Terrorism causes
people to die. Therefore, the Left cares more about terrorism. I see now.
One day, our grandchildren may ask us what we did when Islamic fascism
threatened the free world. Some of us will say we were preoccupied with fighting
that threat wherever possible; others will be able to say they fought carbon
dioxide emissions. One of us will look bad.
One of us looks bad already. No chance of doing two things at once if you are
a conservative? Is walking and chewing gum at the same time just too darn complicated? It's fighting terror or fighting carbon, so make a choice?
This trash is an excuse to put up a link to this review of three books and a
movie on global warming by Jim Hansen, Director of the NASA Goddard Institute
for Space Studies. In the process of reviewing the books and movie, he comments
extensively on climate change. He is the scientist who has had so much trouble
with the Bush administration trying to silence him:
Republican War on Science Continues: The top climate scientist at NASA says
the Bush administration has tried to stop him from speaking out since he gave a
lecture last month calling for prompt reductions in emissions of greenhouse
gases linked to global warming. The scientist, James E. Hansen, ... said ...
that officials at NASA headquarters had ordered the public affairs staff to
review his coming lectures, papers, postings on the Goddard Web site and
requests for interviews from journalists... Dr. Hansen said that nothing in 30
years equaled the push made since early December to keep him from publicly
discussing what he says are clear-cut dangers from further delay in curbing
Krugman on the same topic. Hansen reviews: The Weather Makers: How Man Is
Changing the Climate and What It Means for Life on Earth by Tim Flannery;
Field Notes from a Catastrophe: Man, Nature, and Climate Change by Elizabeth
Kolbert; An Inconvenient Truth: The Planetary Emergency of Global Warming and
What We Can Do About It by Al Gore; and An Inconvenient Truth, a film
directed by Davis Guggenheim.
Here's a link to the review: The Threat to the Planet,
by Jim Hansen, NY Review of Books. Dr. Hansen is careful to note that
he writes, "as personal views under
the protection of the First Amendment of the United States
Posted by Mark Thoma on Wednesday, June 21, 2006 at 03:06 AM in Economics, Environment, Policy, Politics, Regulation |
Here's the third part of the series of excerpts from Harlan Ullman's book (part
part 2) with proposals to fix the "crisis in American governance." Some of
these proposals such as mandatory voting go further than I would be comfortable
with, and I'm not fully convinced this is the best roadmap to follow. But
it's interesting to contemplate how mandatory voting would change the political
A promising blueprint,
by Harlan Ullman, Commentary, Washington Times: The crisis in American governance is easy to define and difficult to fix.
... If containing the pernicious excesses of culture, crusade and
partisanship are the best or only way to improve governance, what must be done?
First, unless the public engages its government, effective action cannot follow.
Second, accountability must be returned to government and government disciplined
to act competently and for the public good.
Third, gross excesses and abuses of civil liberties that have stained America's
promise must be cleansed. Fourth, we need a strategic framework to set the
The most effective way for the public to engage government is through the ballot
box and public pressure. But only just over half of eligible Americans vote. To
engage Americans, a system of universal voting is proposed. Americans would be
required to go to the polls or submit an absentee ballot for national elections.
A vote need not be cast: however Americans must show up...
Because even fewer Americans petition their elected officials than vote, to
engage them public "town hall meetings" and national referenda on major issues
such as immigration, health care and the war on terror should be instituted. The
president should meet occasionally and directly with the public and answer or
respond to questions and ideas.
Second, accountability in government must return. Accountability means reforming
Congress and bringing it into the 21st century by reducing, streamlining and
modernizing its committee system and procedures. For both branches, a
Sarbanes-Oxley type of law is essential. ... In Congress, for example, where virtually no one
reads a bill before it is passed, members would be required to certify that they
have read and understood the legislation on which they are voting. For the
executive branch, senior officials would certify that the figures submitted in
proposed legislation were accurate and if later proved erroneous by a large
threshold, the law would be automatically revoked.
Third, the stains over the abuses against enemy combatants and our civil
liberties must be removed. ... A Code of
Conduct for fighting the global war on terror is vitally needed. Simultaneously,
the civil liberties commission proposed by the 9/11 Commission must be put in
place with officials confirmed by the Senate. The aim is to balance national
security with civil liberties, while protecting Americans by safeguarding
The book, along with complete arguments for each idea, presents other proposals.
... In thinking about the nation and what to do, Americans should recall a
relevant passage from the Declaration of Independence and take it to heart:
"Governments...deriving their just Powers from the Consent of the Governed, that
whenever any Form of Government becomes destructive of these Ends, it is the
Right of the People to alter or to abolish it and to institute new Government."
The cry is not for revolution but for restoration of our promise. The question
is whether the spirit that motivated our forefathers exists today.
Posted by Mark Thoma on Wednesday, June 21, 2006 at 01:27 AM in Economics, Politics |
Richard Freeman devises "radically economic policies" in an attempt to make open immigration, which he believes "could raise global economic well-being
considerably," more palatable to opponents:
People Flows in
Globalization, by Richard B. Freeman, NBER WP 12315, June 2006: ABSTRACT
...Despite its peripheral status in debates over globalization, the movement
of people from low income to high income countries is fundamental in global
economic development, with consequences for factor endowments, trade patterns,
and transfer of technology. In part because people flows are smaller than trade
and capital flows, the dispersion of pay for similarly skilled workers around
the world exceeds the dispersion of the prices of goods and cost of capital.
This suggests that policies that give workers in developing countries greater
access to advanced country labor markets could raise global economic well-being
considerably. The economic problem is that immigrants rather than citizens of
immigrant-receiving countries benefit most from immigration. The paper considers
"radically economic policies" such as auctioning immigration visas or charging
sizeable fees and spending the funds on current residents to increase the
economic incentive for advanced countries to accept greater immigration.
Introduction The policy debate over globalization in the
past decade has largely bypassed the international mobility of labor. Restrict
trade and cries of protectionism resound. Suggest linking labor standards to
trade and it’s protectionism in disguise. Limit capital flows and the
International Monetary Fund is on your back. But restrict people flows? That’s
just an accepted exercise of national sovereignty! During the last few decades,
when most countries reduced barriers to trade of goods and services and
liberalized financial capital markets, most also sought to limit immigration. In
this essay..., I argue that people flows are fundamental to creating a global
economy and that the interplay among immigration, capital, and trade is
essential to understanding the way globalization affects economies. I consider
ways to reduce barriers to immigration that could improve the well being of
workers around the world.
... [big snip]
More People Flows?
Governments of receiving countries have hardened their stances
against less-skilled immigrants and refugees in the past two to three decades,
possibly in response to the increased immigrant flows. ... Surveys show that the
majority of citizens in most countries believe that their country should
restrict immigration more than it does... In European Union countries with large
welfare states, the major stated economic factor underlying opposition is the
fear that immigrants will burden the welfare state... Persons who might be
adversely affected by immigrants in the labor market show modestly more negative
attitudes toward immigration than others...
However, public opinion and national policies toward immigration seems to
rest on issues well beyond gains and losses in the labor market. Some natives
worry that immigrants will present a cultural threat to their way of life and
reduce social cohesion... Another factor that determines attitudes toward
immigration is that immigrants eventually become citizens and affect politics.
In the United States, both political parties seek support from the growing
Hispanic community and tailor their policies on immigration to appeal to that
Easing Immigration Restrictions
The critical barrier to immigration is the restrictive policies of destination
countries like the United States, Canada, Australia, the European Union, and
Japan. If more persons immigrated to these countries, world GDP would rise and
the inequality of wages among countries would presumably decline. ... How might the world increase
Continue reading "Radically Economic Immigration Policy" »
Posted by Mark Thoma on Wednesday, June 21, 2006 at 12:21 AM in Economics, Immigration, Policy, Politics |
I think this is more important than some are willing to acknowledge:
Democrats' loser linguistics, by Geoffrey Nunberg, Commentary, LA Times:
Together America can do better." The Democrats' awkward new slogan may not say
much more than "Anybody would be an improvement on the current bunch of bozos,"
yet many Democrats are hoping that it will be enough to bring the party back to
life this fall. And they may be right, given the ...
administration's apparently bottomless bozosity.
But the very ungrammaticality of the Democrats' slogan reminds you that this
is a party with a chronic problem of telling a coherent story about itself,
right down to an inability to get its adverbs and subjects to agree. Until
Democrats can spell out a more explicit and compelling vision for America, it
isn't clear how the party can restore its faded luster. ...
Americans are more than twice as likely to say that the Republicans know what
they stand for. It's no wonder that the word "Republican" is statistically far
more likely than "Democrat" to attract companion terms like "mainstream," "true
believer" and "faithful." In the public mind, "Republican" names a movement...
True, most Democrats acknowledge ... they've let themselves be out-messaged in the
bumper-sticker wars. But for all the Democrats' obsession with improving their
issue-framing, the Republicans' electoral successes owe relatively little to
their snappy line of patter.
In spite of catchphrases such as "No Child Left Behind," "Healthy Forests"
and "Clear Skies," voters still give Democrats the edge on education and the
environment. The administration's incessant invocations of the "ownership
society" couldn't win broad support for privatizing Social Security. And surveys
show that rebaptizing the estate tax as the "death tax" didn't have much effect
on support for its repeal.
The right's real linguistic triumphs don't lie in its buzzwords and slogans,
but in capturing the ground-level language of politics. When we talk about
politics nowadays — and by "we," I mean just about everybody, left, right and
center — we reflexively use language that embodies the worldview of the right.
Time was, for example, that the media used "elite" chiefly for leaders of
finance, industry and the military — as the British press still does. These
days, the American press is far more likely to use it to describe "liberal"
sectors such as the media, Hollywood or academia, instead of the main
beneficiaries of the Bush tax cuts. "Elite" has become a placeholder for the
effete stereotypes the right has used to turn "liberal" into a label for
out-of-touch, latte-sipping poseurs. The phrase "working-class liberal," for
example, is virtually nonexistent nowadays, though people have no trouble
talking about "working-class conservatives" ...
It goes on. The media are far more likely to pair "values" with
"conservative" than "liberal," even as they more often describe liberals as
"unapologetic" (liberalism apparently being something people should have qualms
about owning up to). And you hear the same tone in the dominant uses of words
like "freedom," "bias," "traditional," and many others, even in the so-called
Yet when Democrats try to recapture the language of politics, it's often with
a clueless literal-mindedness. Sometimes they seem to believe that they can shed
the fatuous stereotypes simply by disavowing their own labels. Many people who
would have proudly called themselves liberal 40 years ago have abandoned the
name in favor of "progressive" — like what Ford did in 1960 when it remarketed
the tarnished Edsel line with a different grille under the name of Galaxie, in
the hope that nobody would notice it was the same car.
But "liberal" is too deeply etched in the split screens of the American media
to be discarded, and Democrats who avoid it in favor of "progressive" only
confirm the widespread suspicion that liberals aren't talking the same language
as other Americans...
Or sometimes, Democrats assume that they can neutralize the Republicans'
linguistic advantages by co-opting their terminology, insisting, for example,
that they have "values" too. But words like "values" have no particular magic in
themselves. Since the Nixon-Agnew years, "values" has worked for conservatives
because, through disciplined insistence, they've made it the label for a whole
file of narratives about liberal arrogance, declining patriotism and moral
It's only in this context that words such as "values," "liberal," and "elite"
have acquired their potent political meanings. Democrats can't recapture the
language of American politics except by weaving counter-narratives that
dramatize their own vision.
That's not a matter of concentrating on symbolic politics while slighting the
economic and social programs that brought Democrats to the ball in the first
place. From the Progressive reforms of the early 20th century to the New Deal to
the Great Society, the most ambitious social and economic programs of the past
have always rested on powerful stories that dramatized the stakes and invited
people into "a project larger than their own well-being" ..., even as they shaped the language of
political discourse in the bargain.
From Jimmy Carter and Mario Cuomo to Bill Clinton and John Edwards, most
successful Democratic politicians have been instinctive storytellers.
Conventional wisdom credits Clinton's 1992 victory to his insistence that "it's
the economy, stupid." But it wasn't just the economy — it was the way he told
it, as a story about how "people who work hard and play by the rules get the
shaft." ... Today's Democrats, if they choose to, have
equally compelling narratives of their own to tell, touching the middle class as
much as the working poor. They're stories that dramatize the increasing
disparities of wealth and the shift of the tax burden from the rich to the
middle class; insecurities over job loss, healthcare, pensions and college
education; and a government that has broken faith with the American people.
It's out of stories like those that a new political language will emerge —
perhaps with newly vivid understandings of words like "decency" and "fairness,"
and with a restoration of the neglected Rooseveltian senses of "freedom,"
encompassing economic and personal security. The words aren't important for
their own sake, but for their capacity to evoke stories that conjure up the
sense of common mission that can make "Democrat" something more than a synonym
for "none of the above."
The author of the column has also written a book Talking Right: How
Conservatives Turned Liberalism into a Tax-Raising, Latte-Drinking,
Sushi-Eating, Volvo-Driving, New York Times-Reading, Body-Piercing,
Hollywood-Loving, Left-Wing Freak Show.
A recent review of the book in The Nation says:
The Political Power of
Words, by Dean Powers, The Nation: If past elections are any indication, the
X factor in the US House and Senate races this year may simply be the English
language--the biased words that seep unchallenged into mainstream media coverage
So says Geoffrey Nunberg, a professor of linguistics at the University of
California, Berkeley... Nunberg ... takes issue with the way mainstream
media consciously or unconsciously skew political coverage by choosing words
that favor Republicans.
Right-leaning talk show hosts, pundits and columnists, the drivers of the
conservative "noise machine," have exploited real economic class divisions, and
they describe political differences in terms of consumer or lifestyle
preferences--watching NASCAR or shopping at Wal-Mart--rather than principles.
Nunberg argues that even though certain bedrock buzzwords--"values" or "elites,"
"red state" or "blue state"--are imprecise and loaded with political baggage,
journalists continue to use them.
"Since the Nixon era, the word ['values'] has been shorthand for a particular
collection of narratives about the decline of cultural standards concerning
sexuality, religion, hard work, and patriotism--anything...that's likely to make
their 'middle Americans' angry about the drift of the culture," he writes.
Nunberg writes that the color-coded map of American politics leads
commentators to pigeonhole "everything according to its place in some simplistic
scheme of classification."
The Pew Research Center published a ... report [that] describes as "inadequate" the red and blue map the media uses to
color America. "Judging by their opinions on a number of issues," the report stated, "many
Americans simply do not fit well within either the conservative or the liberal
Nunberg argues that when the MSM speak in a language culled from the echo
chambers of the right, they legitimize false constructs. That's already
The question this election year is whether mainstream media will finally get
serious about precision and clarity and capture the broad diversity of political
opinion in America--or continue to use inaccurate, color-coded imagery to
describe our political discourse.
In addition to the important point about the press being careful to avoid
language and imagery that favors one political ideology, I want to emphasize
that catchy slogans aren't enough. The idea(s) the slogan represents have to
resonate with the public, have to stand for an underlying narrative and set of
values that is compelling. It is the ideas that are important and that is the
place to start. Once those are clearly defined and told in a way that
compellingly addresses the concerns of "working-class liberals," the
slogans will take care of themselves.
Posted by Mark Thoma on Tuesday, June 20, 2006 at 12:15 PM in Economics, Politics, Press |
Conservative columnist Bruce Bartlett and others have pushed hard for the imposition of a
Value-Added Tax in the U.S. to replace other federal taxes. My own
reaction has been:
VATs are regressive, but they're an important source of revenue for highly
progressive tax-and-transfer systems, so their characteristics depend upon the
details of the implementation. However, one thing I do know, making estate tax
repeal permanent while introducing a VAT would be a nasty case of bait and
In supporting the VAT, Bartlett
This is the best strategy tax economists have ever devised for raising
revenue without investing a lot in enforcement and economic incentives. The
V.A.T. is a kind of sales tax embedded in the price of goods. ... [T]he tax is
largely self-enforcing. And because the tax is applied only to consumption, its
impact on incentives is minimal. ...
But is it self-enforcing? Since VATs continue to enter policy discussions, knowledge of how they've
worked in countries that have used them can be helpful. According to this
analysis in the Financial Times there are two main problems with the VAT in Europe where it has been widely adopted, fraud and
Evasion and exemptions erode VAT’s own value added, Financial Times: In half
a century, value added tax has taken the world by storm... But despite its
reach, some are ready to declare it an idea whose time has gone.
VAT fraud has become pervasive and, at least in Europe, the tax is at a
watershed. Can it survive in its current form? ...[I]t is in Europe that the
weaknesses are at their most glaring. This month the European Commission
launched an “in-depth debate” on whether VAT should be modified. Chas Roy-Chowdhury
of the Association of Chartered Certified Accountants says: “I think the writing
is on the wall for the VAT system.”
European VAT is in a mess for two main reasons: its vulnerability to fraud
and its complexity. Fraud, evasion and avoidance cost at least one in every 10
euros of the tax collected – roughly double that in other industrialised
countries... VAT abuse takes many forms – most commonly the reluctance of
traders in the black economy to have anything to do with the tax. But the
biggest headache is sophisticated fraud. ...
The problem lies largely in the refund process... VAT is normally
self-policing: everyone in the supply chain has an incentive to act as
tax-collectors as they offset the VAT they pay their suppliers against the VAT
they charge their customers. But in some circumstances, notably when exporting
goods – which are VAT-free under nearly all national systems – businesses can
claim refunds. ... This fraud ... has forced governments to consider drastic
remedies. ... Germany and Austria are pressing for a “reverse charge” mechanism
that would in effect turn VAT into a hybrid sales tax.
As well as the administrative hassles faced by exporters, businesses are
often left paying big VAT bills as a result of governments’ desire to exempt
certain types of goods and services, such as education, from the tax. Some
critics argue that governments should reduce, if not eliminate, exemptions and
And Germany is pressing hard for action. From a June 8 Financial Times
Germany blocks EU deal on e-commerce services, by By George Parker and Vanessa
Houlder, Financial Times: Germany yesterday claimed at a monthly Ecofin
council of European Union finance ministers that value added tax fraud was
costing it €17bn-€18bn a year and demanded that it be allowed to change its tax
rules to tackle the problem.
Peer Steinbrück, German finance minister, blocked a separate agreement on the
taxation of e-commerce services, indicating he would not budge until Berlin won
permission to adopt measures to tackle VAT fraud.
Germany and Austria, the current holder of the EU presidency, want to make
wide use of so-called "reverse" charging of VAT, a mechanism for accounting for
VAT that denies a fraudulent supplier the opportunity to pocket the tax.
Although Laszlo Kovacs, the EU tax commissioner, is sceptical about whether
the system is effective in beating fraud, he was asked to draft legislation that
would give the countries the option to use reverse charging. ...
For a tax sold as "largely self-enforcing," the finding that fraud, evasion and avoidance result in lost tax collections that are "roughly double that in other industrialised
countries" is notable. And repeating from above, if Germany and Austria prevail in their reform efforts, the ""reverse charge" mechanism ... would in effect turn VAT into a hybrid sales tax."
Posted by Mark Thoma on Tuesday, June 20, 2006 at 09:54 AM in Economics, Policy, Politics, Taxes |
There is a transcript of an interview with with John McCain in the Financial
Times. The interview is fairly long and most of it is focused on security issues
involving the war in Iraq, Iran, North Korea, China, India, North Korea, Russia,
and other countries, but many other topics are covered and there are parts about
the economy as well. Here are a few sections from the transcript including those
involving economic issues:
John McCain interview transcript, Financial Times (free): The following is a
transcript of an interview with John McCain.
...FT: There is pressure on the White House to pull troops out of Iraq
in this election year. What is the danger of that?
JMC: The danger is one that we have faced all along. That is that we
haven’t been able to control the country. The latest, of course, is that we have
to send troops into Ramadi. ... And guess where the troops came from. They came
from Kuwait, but they also had to divert some of the marines from Falluja. We
are like the little Dutch boy with his thumb in the dike.
FT: Is there any sense that your colleagues in the room this afternoon
are prepared to think about more troops, or are they looking in the other
JMC: I think most of them are looking in the other direction. ...
there is not going to be any increase, and that is why it is going to make the
outcome more dicey. I believe we must win, I believe we can win, and I believe
we will win, but I think it is still going to be very long and very difficult.
FT: You are saying there should be more troops, not a discussion about
drawing down troops because the US is stretched too thin?
JMC: But that is like saying I would also like to see a mission to
Mars. I just don’t think it is going to happen. In a way, we are getting close
to the point where the Iraqis really have to be capable..., to assume more and
more of these responsibilities. We can succeed..., but we have made the path
incredibly more difficult and frustrating because of our failures.
FT: How confident are you about the numbers Donald Rumsfeld is giving
you about the number of trained Iraqi army and police, and their capabilities?
JMC: When I hear of a major operation ... and it is successful. Then I
will believe that we have made progress. When I can land at the airport at
Baghdad and get into a vehicle, drive to the Green Zone, I will believe that we
have made progress.
FT: That is not to happen soon, is it?
JMC: Nope. That is why I keep repeating. Long, hard, difficult...
FT: Are you any happier with Secretary Rumsfeld’s leadership at the
FT: Do you think it is time for him to step down?
Continue reading "John McCain Interview" »
Posted by Mark Thoma on Tuesday, June 20, 2006 at 01:51 AM in Economics, Politics |
Continuing the recent series of posts on political polarization and its effect on
government, this is the second of three excerpts (first) appearing in the Washington Times from
the book America's Promise Restored: Preventing Culture, Crusade and
Partisanship from Wrecking Our Nation, by Harlan Ullman:
America gone bad, By Harlan Ullman, Washington Times:
How America has been put at grave risk can be understood by charting the
evolution of three facets of our society captured by the phrases "culture,"
"crusade" and "partisanship." Throughout our history, when the excesses from
each skewed our judgment, the nation fell into great danger. Failure after World
War I to make a just peace in Europe and the Vietnam debacle arose from these
excesses. When better angels prevailed, such as during and immediately following
the Second World War, the nation could be inspired to greatness.
American culture today has become coarser reflected in part by our language,
standards of social acceptability and practice of politics along with other
examples too numerous to mention. In government, a ... steady corruption
of this culture has taken place distorting and crippling good governance.
Lobbying abuses are a dismal case study in how excesses in culture have
[caused]... standards of what was once appropriate behavior [to be]... replaced by the
crassest forms of political greed rather than carrying out the public good.
Highly ideological, well-funded interest groups ... are
further symptoms of this pernicious trend. With agendas that may depart
radically from the broader common welfare, these groups grow in number and
influence and drown or crowd out much of mainstream America. Both the Republican
and Democratic parties have become polarized and more hostile and adversarial to
This is also a culture in which accountability ... in government has
virtually disappeared. No high-level heads have rolled over Iraq and the
erroneous certainty of the presence of WMD; for the unconscionable abuse of
enemy combatants in the war on terror; or for the failed response to Hurricane
Katrina. And, equally depressing, Congress's lack of oversight has produced
virtually no public outrage. Meanwhile, politics have become consumed with
continuous campaigns staffed by political operatives who find attack and
negative ads the most effective means of defending or defeating almost all
issues, from health care to confirmation of Supreme Court justices.
One result is that truth, candor and fact have become subordinated to
ideology and beliefs. "Spin" not substance rules. At the end of the day, it made
little difference whether or not Saddam Hussein had WMD. The Bush administration
was determined on war against Iraq.
Congress was not going to stand in its way. ...
The absence of truth and fact also applies to spending bills and budgets that
routinely underestimate costs and future cost escalation, usually by large
As we are relearning measured in spilled blood and treasure in Iraq, the
excessive appeal of crusades to redress social ills, crises and threats ... when pursued with a
"missionary zeal" — has put the nation at risk. We embarked on a crusade to
democratize the Middle East beginning in Iraq. But neither the public nor
Congress debated (or raised the issue in advance of) whether democratization of
that region was a good or a bad idea or even feasible.
Partisanship is part of life. But today, partisanship has become excessive
and bitter, eroding ... many of the barriers that once protected
ethical practices and reasoned judgment on both sides of the aisle. Winning has
become the goal, no matter the means... The destructive character of
partisanship is fueled by an around-the-clock media that often enflames the
poisonous political atmosphere...
How do these facets come together? Even with one party controlling Congress and
the White House, because few issues can be resolved with a majority or even a
sizable plurality of support from balancing the budget to immigration reform,
stalemate occurs. When it does not, legislation is often very diluted or badly
drafted as with the Medicare Prescription Drug Bill... The point is
that government has been overwhelmed by the challenges it faces and the
inability to make tough choices.
There is no simple way to restore America's promise and fix its government.
Since constitutional and other institutional factors are resistant to change,
surely in the near term, the only realistic target is corralling the excesses of
culture, crusade and partisanship that are crippling government. Ideas about how
to achieve this aim follow in the final installment...
Posted by Mark Thoma on Tuesday, June 20, 2006 at 12:33 AM in Economics, Politics |
Q&A 9 - Next - Open Source and Patents: UC Berkeley Professor Bronwyn H. Hall will answer readers' questions on the
relative advantages and disadvantages of open source vs. intellectual property
rights in knowledge creation, on the role of innovation management in firms and
universities, and on the implications for technology policy.
Q&A 8 - Financial Globalization
and Exchange Rates: Trinity College Dublin Professor Philip R. Lane answered readers' questions
on how the increasing integration of international financial markets affects the
relationship between exchange rates and external imbalances, and on the
implications for monetary and exchange rate policy.
Posted by Mark Thoma on Tuesday, June 20, 2006 at 12:24 AM in Economics, Miscellaneous |
Paul Krugman follows up on today's column "Class
War Politics." In the follow-up, he talks briefly about research on immigration and
political polarization he couldn't fit into the column. I'll be curious to hear reactions to his reason for being "less enthusiastic about immigration than many liberals":
Politicians Need to Go Back to Class, by paul Krugman, Money Talks, NY Times:
Readers respond to Paul Krugman's June 19 column, "Class
War Politics" ...
Lenore Scendo, New York: I think you're absolutely on target about
class warfare and the futility of going centrist to reignite bipartisanship. But
doesn't this consign our country to perpetual politics of division? After all,
the New Deal succeeded in dire times. Are you suggesting we might need to
experience a kindred upheaval before like-minded policies will again succeed?
Paul Krugman: I don't expect or hope for another depression. But think
of it this way: what happened politically in the 1930's was that the public
realized that true believers in conservative ideology just weren't able to
govern effectively. Isn't something like that happening now, in slow motion?
Mary Ellen Verdu, Salem, Va.: ...Why do so many in the working class and lower middle class
vote Republican? In Virginia ..., my liberal upper-middle class friends and I
threw up our hands as working people voted for elimination of the car tax — and
just this week, the estate tax... The same is true for other issues... As a
liberal in the progressive tradition this has bothered me for a long time...
Paul Krugman: The point, I think, is that distraction works: many
people think that conservatives represent their values, or are tough on terror.
Also, bear in mind that there's far too little news reporting on actual policy
ideas. During the 2004 election, the biggest domestic policy difference between
Bush and Kerry was on health care policy. But I surveyed two months of network
news reporting, and there wasn't a single explanation of the difference between
the Kerry and Bush plans.
Paul Krugman: A final note. For readers interested in following up on
all this, many of the McCarty et. al. charts are at
Also, because of the limits of space, I couldn't talk about an important
secondary theme in their book, the role of immigration. They argue that when
unskilled immigration is high, the effect is to create a disenfranchised class
of low-wage workers, which makes it easier for the Republican party to shift
right. And there's a strong correlation between the foreign-born share of the
population and political polarization, visible in the charts at the Web address
This political effect of immigration, much more than the effect on wages, is
the reason I'm less enthusiastic about immigration than many liberals; I fear
that immigration undermines the political foundations for a decent social safety
Here are a few of the charts from the link, the first two are on income distribution and political polarization, the last shows immigration and polarization:
Click on graphs to enlarge
Posted by Mark Thoma on Monday, June 19, 2006 at 03:42 PM in Economics, Immigration, Income Distribution, Politics |
These writers from Fred Alger Management argue that the current level of consumer debt is not a
Alive and well under a mountain of debt, by Zachary Karabelland and Dan Chung,
Commentary, Financial Times: Remember the scene in Monty Python and the Holy
Grail where two men push a wheelbarrow through a plague-afflicted village
shouting: “Bring out your dead”? A family heaves a body on to the pile,
whereupon it lifts his head and says: “But I’m not dead yet!” One man whacks him
with a cudgel and says: “Now you are.” That is the perfect metaphor for the
American consumer on the one hand and strategists, commentators and economists
on the other. They keep trying to bury the consumer under a mountain of debt,
even though he is alive and kicking.
There is an understandable cultural prejudice against debt. For most of
history, the risks outweighed the costs. If you calculated wrongly, you did not
just go bankrupt: you lost your business, home and possessions. ... Low interest
rates, securitisation and bankruptcy law have changed the nature of debt.
Our prejudice against debt no longer makes sense. In March, Federal Reserve
chairman Ben Bernanke said as much when he suggested that the substitution of
mortgage debt for credit card and automobile debt had been a rational decision
by consumers to shift leverage into lower-rate obligations. But his assessment
is at odds with attitudes on Main Street and Wall Street, especially in light of
global agitation over inflation and excess liquidity.
There is no denying that the absolute amount of consumer debt is higher than
ever. ... a total of $11,500bn. Big numbers, yes, and big numbers are
easily turned into a harbinger of crisis. But take the financial net worth of US
households (which excludes the value of homes): $26,500bn, an all-time high.
With home value included, that rises to $52,000bn – more than four-and-a-half
times household debt. ...
Even with the Fed tightening, the absolute level of rates is low by
historical standards, so low that for all the refinancing and home-equity
extraction we have seen, we can still see more. The average mortgage rate for a
15-year loan is around 6 per cent. In 2000, it was 7.72 per cent. Even though
conventional wisdom says that consumers are tapped out, they can continue to use
their homes as piggy banks. Even if rates go up another 50 basis points, it is
likely that consumers will extract hundreds of billions of dollars in cash-out
refinancing this year.
Furthermore, the amount that households must spend to service their debts is
manageable. That should be the central concern: not how much debt, but whether
it is affordable. In 2001, households spent 12.9 per cent of income to service
their debts; by the end of 2005, that had risen to nearly 14 per cent. Again,
the key issue is rates: if rates are at or near a peak, debt-financed spending
can continue. If not, we will face a credit crunch, especially since average
incomes are barely rising.
Anyone who defends current [debt] levels risks being labelled as blind not
only to structural imbalances but to the struggles faced by families who are
taking on debt to meet basic obligations such as homes, medical costs and
education. We are not making a judgment about the wisdom of individual
consumers, about the struggles they face or about an American culture that
overemphasises consumption and encourages excessive spending. We are making a
structural argument that the economy can sustain far higher levels of consumer
debt than in the past. Even if more individuals face a credit squeeze, the
system overall is in no jeopardy.
In addition, many consumers may be using debt more wisely than commentators
give them credit for. The increasing array of financial instruments means that
people can take on more debt when they are young and their career outlooks are
Stripped of its stigma, debt is a neutral tool. Used prudently, it generates
economic activity; taken on foolishly, it is a recipe for problems. The question
is: what is the tipping point? Prudence, say the sceptics, dictates cutting back
now. But is that prudence, or fear? ...
In a world of low rates and less structural risk, the definition of
moderation – and risk – must change. The fear debt arouses once protected people
from stupid decisions, but today it impedes a rational assessment of costs and
Recent evidence indicates:
"On average, debt burdens appear to be at manageable
levels, and delinquency rates on consumer loans and home mortgages have
been low," Mr. Bernanke said...
While consumers are managing their finances fairly
well so far, I am not as willing as the authors to declare household debt a
worry free zone, particularly in the event of a sudden downturn in the economy.
Posted by Mark Thoma on Monday, June 19, 2006 at 02:05 PM in Economics, Saving |
This is the first of three excerpts appearing in the Washington Times from
the book America's Promise Restored: Preventing Culture, Crusade and
Partisanship from Wrecking Our Nation, by Harlan Ullman:
Restoring our future,
by Harlan Ullman, Washington Times: ...The United States is in trouble,
and for two major reasons. First, our federal government is currently unable to
deal with the plethora of problems facing it. Second, Americans do not fully
understand the nature or the depth of the dangers that confront us or the
consequences of deferring action until it may be too late.
Iraq and the Global War on Terror are the most visible and immediate dangers.
But even if Iraq magically turns into an oasis of stability and global terror
miraculously fades away (and neither will), America still faces a spate of very
tough ... challenges that place its future safety, well-being, and
security in great jeopardy.
Put simply, America's national government is foundering. The botched responses
to Hurricane Katrina and the Dubai Port World deal are illustrative. Correcting
this condition extends beyond the responsibility of the executive and
legislative branches and ultimately rests with the American public. If the
public does not become engaged and demand action, then it will get the
government it deserves. The same, however, cannot be said for future
generations, who will inherit a broken republic if we do not act quickly and
The answer to the question of why the United States is in trouble is clear and
stark... Government, and the people elected to
populate it -- no matter how noble or gifted -- have been stymied in finding
workable, effective, and -- in a few crucial instances -- even legal solutions
to this array of tough issues. Our government is not working. It has become
The indictment of the House of Representatives majority leader Tom DeLay, the
criminal activities and plea-bargain of disgraced former super-lobbyist Jack
Abramoff, and the investigation of possibly improper financial transactions of
other members of Congress are symptomatic of the state of politics and
At the same time, our principal adversaries, misnomered as terrorists, target
the 'fault lines' of society, meaning our major political, psychological,
social, and economic vulnerabilities that, if successfully attacked, will do
great damage to the nation and to our citizens. Terror, ideas, and ideologies
are these adversaries' main weapons, not armies and navies, and therefore cannot
be defeated by conventional military means alone.
The reasons why government is not working are also clear and stark. ...
Some of the dysfunctional performance of government stems from the Constitution
and a system of divided government and checks and balances that purposely
contain inherent contradictions to limit power among the three branches.
More of this dysfunctionality comes from the strength and growing influence of
special-interest groups and lobbies that often represent political extremes and
narrow constituencies that exist outside the mainstream of America.
To make matters worse, the excessively "adversarial" nature of government has
driven political discourse beyond the bounds of civility and reason, devolving
into a nearly continuous cycle of attack campaigns and negative advertising that
produce dangerous levels of hostility and acrimony.
And an increasingly large measure of dysfunctionality arises from a destructive
alchemy catalyzed by ingredients combining the best and worst of America's
unique culture, its preference for crusade and the emergence of highly
The causes of this condition will not be corrected quickly. But the destructive
aspects of culture, crusade, and partisanship can be remedied if we put our
minds and our will to that task as a first step in restoring our government's
ability to function. Subsequent excerpts will explain how this can be done.
previous post "Paul Krugman: Class War Politics" examines why partisanship
has been growing in recent decades.
I'll add an additional concern that as the problems with government are
diagnosed, a "dysfunctional" administration will be spun as the failure of
government more generally and used as a reason to advocate small government and
privatization ideology. As government dysfunction is examined, it will be important to separate the failings of individual administrations from the failings of government in general.
Posted by Mark Thoma on Monday, June 19, 2006 at 01:28 AM in Economics, Politics |
Paul Krugman explains how increasing income inequality has driven increased political polarization in recent decades, and he has warnings for pundits who "flock eagerly" to politicians claiming to represent the non-existent political center:
Class War Politics, by Paul Krugman, Commentary, NY Times: In case you
haven't noticed, modern American politics is marked by vicious partisanship,
with the great bulk of the viciousness coming from the right. It's clear that
the Republican plan for the 2006 election is, once again, to question Democrats'
patriotism. ... So what's our bitter partisan divide really about? In two words:
class warfare. That's the lesson of an important new book, "Polarized America:
The Dance of Ideology and Unequal Riches," by Nolan McCarty ..., Keith Poole...,
and Howard Rosenthal...
What the book shows ... is that for the past century, political polarization
and economic inequality have moved hand in hand. Politics during the Gilded Age,
an era of huge income gaps, was a nasty business — as nasty as it is today. The
era of bipartisanship, which lasted for roughly a generation after World War II,
corresponded to the high tide of America's middle class. That high tide began
receding in the late 1970's, ... and as income gaps widened, a deep partisan
Both the decline of partisanship after World War II and its return in recent
decades mainly reflected the changing position of the Republican Party on
Before the 1940's, the Republican Party relied financially on the support of
a wealthy elite, and most Republican politicians firmly defended that elite's
privileges. But the rich became a lot poorer during and after World War II,
while the middle class prospered. And many Republicans accommodated themselves
to the new situation, accepting the legitimacy and desirability of institutions
that helped limit economic inequality, such as a strongly progressive tax
system. (The top rate during the Eisenhower years was 91 percent.)
When the elite once again pulled away from the middle class, however,
Republicans ... returned to a focus on the interests of the wealthy. Tax cuts at
the top — including repeal of the estate tax — became the party's highest
But if the real source of today's bitter partisanship is ... economic issues,
why have the last three elections been dominated by talk of terrorism, with a
bit of religion on the side? Because a party whose economic policies favor a
narrow elite needs to focus the public's attention elsewhere. And there's no
better way to do that than accusing the other party of being unpatriotic and
Pre-New Deal G.O.P. operatives followed the same strategy. Republican
politicians won elections by "waving the bloody shirt" — invoking the memory of
the Civil War — long after the G.O.P. had ceased to be the party of Lincoln and
become the party of robber barons instead. Al Smith, the 1928 Democratic
presidential candidate, was defeated in part by a smear campaign — burning
crosses and all — that exploited the heartland's prejudice against Catholics.
So what should we do about all this? I won't offer the Democrats advice right
now, except to say that tough talk on national security and affirmations of
personal faith won't help: the other side will smear you anyway.
But I would like to offer some advice to my fellow pundits: face reality.
There are some commentators who long for the bipartisan days of yore, and flock
eagerly to any politician who looks "centrist." But there isn't any center in
modern American politics. And the center won't return until we have a new New
Deal, and rebuild our middle class.
[Previous (6/16) column:
Paul Krugman: The Phantom Menace
Next (7/7) column: Paul Krugman: The Treason Card]
Posted by Mark Thoma on Monday, June 19, 2006 at 12:15 AM in Economics, Income Distribution, Politics |
Once again, here is an article complaining about using core inflation as the
target for monetary policy. I've said this before, but it's worth repeating.
There are both theoretical and empirical ways to define the price index to use
in monetary policy. However, most of the discussion about policy involves only
the empirical definition.
The empirical definition searches for the the price index that best predicts
future inflation or best represents the inflation rate faced by a typical consumer. Almost always, the discussion revolves around whether core
inflation properly measures the underlying inflation rate faced by consumers, and its usefulness
for predicting future inflation rates, an essential component of policy.1 But the
reason why we look to inflation at all comes from theory, so it is useful to ask
what theory says about which price index is the most useful to policymakers.
What is the theoretical definition? In models with price and
wage sluggishness, it is the failure of prices to move quickly to clear markets
that causes output to deviate from target. Thus, monetary policy makers need not
be concerned with highly flexible prices, it is the sluggish prices that are the
problem. The solution is to keep the problem (sluggish) prices as predictable as
possible so that even if prices are set far in advance, they will remain
To do this, the sluggish prices must be stabilized - the flexible
prices can take care of themselves. For policymakers, this implies that
highly flexible prices such as food and energy can be removed from the index to
isolate and highlight the problematic sluggish prices. The goal is not to find the
index that best represents the cost of living, rather, the goal is to learn about current and expected future values of the
index most useful for stabilization. All of the criticism about the index
misrepresenting the actual cost of living misses this point entirely.
Here is an example of commentary that only talks about the empirical
Strawberries out of the basket, by Wolfgang Munchau, Commentary, Financial Times:
A former central banker once told the story of a French prime minister during
the fourth republic who had asked why inflation always rose in late spring. His
statisticians told him that this was due to the price of strawberries, a
seasonal food. The prime minister then instructed his officials to take the
strawberries out of the index and to include them in the winter months instead –
when you could not buy strawberries anywhere in France.
I am not sure how true this story is, but it seems plausible. Taking
inconvenient items out of the inflation index has a long tradition. Today, many
central banks still take the strawberries out of the inflation index, along with
all other food items and energy. The index you end up with is known as core
There is a prima facie case for a central bank to target core inflation. Core
inflation is a far less noisy indicator than monthly headline inflation. ...
There are several ways of constructing core indicators. The traditional way is
to strip out the most volatile categories of the index permanently; for example,
food and energy. There are alternative methods, such as the trimmed-mean method,
used by the Federal Reserve Bank of Dallas among others, which strips only the
most volatile items off the index each month.
In the US, core-inflation indicators have turned out to be reasonable
measures of underlying inflation – but not always and probably not now. Core
inflation was a particularly bad indicator in the 1970s when inflation rose
sharply in response to the first and second oil crises...
Generally speaking, core inflation is a misleading indicator in times of
protracted increases in energy prices. In such times, core inflation lags behind
headline inflation. A monetary policy that follows a lagging indicator risks
being too slow – “behind the curve”, as they say in the financial markets. ...
One reason why core inflation may be a lagging indicator are the so-called
second-round effects of energy prices – the pass-through to non-energy prices or
to higher wages. ...
Another problem with core inflation is the impact of the unsuspected
volatility of some of its components. In the US, the biggest single component of
core inflation is owners’ equivalent rent (OER) – an imputed number that
measures the cost of house ownership. ... As the housing boom has subsided, OER
inflation has risen back to more normal levels. Last week’s sudden increase in
US core inflation was due largely to the jump in the OER component in the core
Some private sector economists made the preposterous suggestion that housing
should also be excluded from the core index. If you go down this route, you end
up with a core inflation index that no longer bears any relationship to reality.
... A forward-looking central bank ignores headline inflation at its peril. ...
The test of whether it is permissible to use core inflation is not only
whether the two indicators converge within a reasonable period of time, but
whether they converge in the right direction. In both the US and the eurozone we
are seeing core inflation catching up with headline inflation and not the other
It seemed outrageous that the aforementioned French prime minister took the
strawberries out of the inflation basket. But compared with what some central
banks are doing today, those strawberries are peanuts.
By the theoretical argument, it is not "prepostorous" to take asset prices
out if the index or "outrageous" to remove food prices as these are highly
flexible, and within this theoretical structure, non-problematic prices. That
the "core inflation index ... no longer bears any relationship to reality" is
beside the point. The point of targeting an index is stabilization, it has
little to do with accurately measuring the price of some market basket of goods.
It would be nice, agree or not, if people writing on this topic would at least
recognize the theoretical side of the problem. For anyone who wants to follow
up, there is nice
NBER research summary of Woodford's work on these issues.
1In general, the empirical approach would search for the price index
most highly correlated with future economic activity (or someother variable of interest) so I'm not sure
the term "empirical approach" is the best label to use here, but it
will do for now.
Posted by Mark Thoma on Sunday, June 18, 2006 at 12:33 PM in Economics, Inflation, Monetary Policy |
Jonathan Chait brings up anti-estate tax Democrats and criticizes them because unlike Republicans, they "don't even have the charade of fake spending cuts to
The lie of the anti-estate tax Democrat, by Jonathan Chait, Commentary, LA Times:
A week and a half ago, Democratic Sen. Blanche Lincoln of Arkansas took to the
Senate floor to decry the estate tax as unfair... It was all very moving.
Especially if you stand to inherit an enormous fortune.
That same day, Lincoln again appeared on the Senate floor, this time to decry
the lack of funding for federal anti-hunger programs. This too was unfair.
Lincoln was particularly nonplused by the counter-argument that there was
insufficient money for such programs. "I understand our current budget
constraints. I know we all do," she said, "Yet I didn't create this mess."
Oh, you didn't? Let's look at the main causes of the budget mess. There's the
2001 tax cuts. Lincoln voted for those. There's the war in Iraq. Lincoln voted
for that too. There's the Medicare prescription drug benefit, which she likewise
supported. Other than that, how did you like the budget, Mrs. Lincoln?
Lord knows I'm no fan of Republican fiscal policy. But at least Republicans
pretend they have some vague future intention of slashing the hundreds of
billions of dollars from the budget it would take to balance out their tax cuts,
even if everybody knows it will never happen. Anti-estate tax Democrats such as
Lincoln, on the other hand, don't even have the charade of fake spending cuts to
They want to spend money on the poor because they're compassionate. They want
to spend money on the military because they're hawkish. They want to cut taxes
for the middle and working class because they're populist... And they also want
to cut taxes for the super-rich because they're … um, help me out here. Oh,
right — they want to help the poor family farms and small businesses that are
ruined by the estate tax.
In reality, any sentient person could tell you that the populist arguments
against the estate tax are hokum.... Even among the tiny percentage of estates
that pay inheritance tax, the effective rate is under 20%. Lincoln and other
estate tax opponents, who are trying to abolish the levy even on the super-rich,
like to repeat sob stories about families that have to sell their small business
or farm to pay Uncle Sam. In fact, those families can spread out the pain in
installments over 14 years, which is plenty of time to come up with the money.
But critics never talk about the handful of massively wealthy families who
have bankrolled the anti-estate tax campaign. Those families stand to save
billions... One such family is the Waltons, who own Wal-Mart. They live in
Lincoln's home state of Arkansas. I'm sure any connection between that fact and
Lincoln's support for repeal is purely coincidental.
So Lincoln doesn't want rich heirs to pay any inheritance tax on their
windfall. She wants middle- and lower-income workers to pay lower taxes as well.
And she doesn't want to slash the federal budget. So, who does she want to pay
more in taxes? This is the question estate tax foes who aren't rabid
conservatives never answer... They don't answer because their vision of
government is incoherent...
Is this supposed to characterize some large group of Democrats who are for
the 2001 tax cuts, against the estate tax, pro war, and so on? Unfortunately, the "they"
in the following statement are not identified.:
Anti-estate tax Democrats such as Lincoln, ... They want to spend money on
the poor... They want to spend money on the military because they're hawkish.
They want to cut taxes...
indication of the size of the Democratic coalition on this set of issue, who "they" are. If
we separate Democrats on a single dimension, voting to end debate on the estate
tax, the group is very small already:
Earlier this week, Mr. Kyl circulated a [compromise] proposal... But that
proposal failed to win over more than two or three Democrats.
Besides Mr. Baucus, three other Democrats voted to end debate and clear the
way for a vote on repeal. They were Senator Ben E. Nelson .., Senator Bill
Nelson... and Senator Blanche L. Lincoln of Arkansas. Two Republicans, Senator
George V. Voinovich ... and Senator Lincoln Chafee ..., voted to block the bill.
What is the point of this column and why is creating "the charade of fake spending cuts" a virtue? Is this some attempt at balance by finding
a way to criticize Democrats? If so, it doesn't work. As a characterization of a
single individual or a group of three or four people, it is coherent, but this is not a set of mainstream
Democratic views. Thus, drawing or implying any conclusions about Democrats more
generally from the characterization of these few individuals, as the use of "they"
attempts to do, is not valid.
Posted by Mark Thoma on Sunday, June 18, 2006 at 03:33 AM in Economics, Policy, Politics, Taxes |
Have tobacco companies changed?:
If It's Good for Philip Morris, Can It Also Be Good for Public Health?, by Joe
Nocera, NY Times Magazine: "We don't make widgets," Steve Parrish likes to
say... Parrish, whose title is senior vice president for corporate affairs, is a
highly paid executive at Altria Group, ... the 10th-most-profitable corporation
in America. ... It used to be called Philip Morris... So, yes, let's stipulate
right up front: Steve Parrish represents the country's leading tobacco company,
whose best-known brand, Marlboro, is so dominant it accounts for 4 out of every
10 cigarettes smoked in the United States. ...
Let's stipulate a few other things. First, despite ... the universal
knowledge about the dangers of tobacco ... lots of people still smoke... some 20
percent of the adult population smokes — that's about 48 million people...
You'll no doubt recall that in the mid-1990's, there was a huge public outcry
about the behavior of the tobacco industry... State attorneys general sued the
big tobacco companies, and private class-action suits were mounted; Congress
held hearings excoriating Big Tobacco, while Dr. David Kessler, the commissioner
of the Food and Drug Administration at the time, tried to claim regulatory
authority over the industry...
It was a moment when the cigarette companies were exceedingly vulnerable, and
serious reform could have been imposed by the federal government. But that
didn't happen. A reform effort failed in Congress, and 46 states and the
industry wound up settling their litigation with something called the M.S.A. —
the Master Settlement Agreement — which imposed marketing and advertising
restrictions on cigarettes, financed an antismoking ad campaign and transferred
a staggering sum of money ($206 billion over 25 years) from the big tobacco
companies to the state governments. (Four states settled separately for an
additional $40 billion.)
And then the body politic moved on. So, a final stipulation: Cigarettes
aren't going away. Nobody is about to ban tobacco, nor is anybody about to put
the cigarette companies out of business, much as they might like to. These days,
although Philip Morris USA loses the occasional lawsuit, the litigation threat
that once seemed so onerous has become quite manageable.
And though the M.S.A. has done some very good things — it's the reason you no
longer see cigarette billboards — it has both limits and unintended
consequences. For one, it has resulted in the rise of about 100 small cigarette
companies — with names like Liberty Brands and Virginia Brands — that now
undercut the big boys on price. And it has given the states a rooting interest
in the continued prosperity of the tobacco companies, because they now depend on
M.S.A. money to balance their budgets...
When you talk to Steve Parrish about all of this, though, he doesn't use the
language tobacco executives once used. ... nor does he pretend that cigarettes
aren't addictive. On the contrary: "Cigarettes are addictive and cause the
disease and death of hundreds of thousands of people every year," he said in one
of our conversations. ... In another conversation, he said, "If fewer people
died from smoking, that would be good for Altria's shareholders." He says that
it is important to keep kids from starting to smoke and freely concedes that
tobacco can never be viewed as just another product because it is so deadly. It
can be quite startling the first time you hear him say these things.
Most amazing of all, Parrish says that tobacco needs to be regulated by the
Food and Drug Administration.
Continue reading "Turning Over a New Tobacco Leaf?" »
Posted by Mark Thoma on Sunday, June 18, 2006 at 01:54 AM in Economics, Health Care, Policy, Regulation |
For the immigrant population in the U.S., how well do subsequent generations fare
relative to their parents and relative to the native born population? According to recent research, immigrants
move to American norms over time, but it is a relatively slow process:
Immigration Math: It's a Long Story, by Daniel Altman, Economic View: Much
of today's debate about immigration revolves around the same old questions: How
much do immigrants contribute to production? Do they take jobs away from people
born in the United States? And what kinds of social services do they use? ... To understand fully how immigration will shape the economy, you can't
just look at one generation - you have to look into the future.
Sociologists and economists are just beginning to study the performance of
second- and third-generation members of immigrant families. ...[I]t's not easy
to generalize. But recent research has already uncovered some pertinent facts.
Education is a good place to start, because it's strongly correlated with future
earnings. Children of immigrants complete more years of education than their
native-born counterparts of similar socioeconomic backgrounds. ... David
Card, a professor of economics at the University of California, Berkeley [said
a child of immigrants ... sort of boosts your drive." ...
Still, it can take several generations for poor immigrant families to catch
up to American norms. "For the largest immigrant group - that is Mexicans and
Mexican-Americans - the picture is progress, but still lagging behind other
Americans," said Hans P. Johnson...
Second generations of immigrant families are managing to climb the skills
ladder, too. A recent survey by the Census Bureau reveals that 40 percent of the
female workers and 37 percent of the male workers in the second generation took
professional or management positions, up from 30 and 24 percent, respectively,
in the first generation. The survey, taken in 2004, included many adults whose
parents came to the United States decades ago, noted William H. Frey ... With
more recent immigrants, he said, it's possible that lower education rates may
eventually lead to worse outcomes.
Other factors could ... make success more difficult for today's children of
immigrants, compared with those of the past. One is increased competition. The
children of Italians and Poles who came to the United States around the turn of
the 20th century didn't face much of it, because the government imposed quotas
on immigration after their parents arrived, said Roger Waldinger, a professor of
sociology at the University of California, Los Angeles. By contrast, the children of recent arrivals face
competition from successive waves of immigrants from numerous regions.
Inequality of income and wealth is another factor that could affect
opportunities. "The second generation of Italians and Poles came of age in an
era of historically low inequality," Professor Waldinger said. "The second
generation of Mexican immigrants is coming of age in an era of historically high
inequality, and that has to work to the disadvantage of those with low levels of
But there are also forces working in the opposite direction. For one thing,
the children of today's immigrants will have much better access to education and
the labor market than those of a century ago. ... Mr. Johnson said. "The conditions today are better in terms
of educational opportunities." ... One reason, he added, is that society is
"much more open to outsiders" in top jobs and at elite colleges than it ever was
Even if successive generations of immigrants manage to become as economically
successful as native-born Americans, a big question will remain: How many people
do we really want in the United States? From the standpoint of government fiscal
policy, Professor Card said, you could argue that the only immigrants you'd want
in the United States were those "whose children are going to get Ph.D.'s" and
would therefore be economically productive.
Some people might argue that a larger population raises housing prices and
causes more pollution, he said. But there can be advantages to size, too. "If
you have population growth, you can finance intergenerational transfer systems"
like Social Security and Medicare, he said. And lest we forget, he said, "big
countries have more power." ...
There is also work by George Borjas on this topic that ought to be mentioned.
Making it in America: Social Mobility in the Immigrant Population. The post
includes graphs from the paper showing outcomes across countries for second and
third generations in the immigrant population. Borjas says:
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.
Update: More on Immigration. This is about the results of imposing tougher penalties for those caught trying to enter the U.S. illegally:
Along Part of the Border, A Zero-Tolerance Zone Tough Program Is Discouraging
Illegal Crossings, by Sylvia Moreno, Washington Post: On June 1, the three
Ordaz-Valtierra brothers from Mexico illegally crossed the Rio Grande with the
same dream that so many other Latin American immigrants have: head north from
the border, get jobs and start sending money home.
Their journey, instead, ended in a federal courthouse here, where, dressed in
orange prison jumpsuits, each was charged with the federal misdemeanor crime of
entry without inspection. Each pleaded guilty and was sentenced by a U.S.
magistrate judge to 15 days. Under guard of U.S. marshals, they were put in
shackles and bused to a West Texas jail to serve their time and await
deportation home. ...
Continue reading "Social Mobility in the Immigrant Population" »
Posted by Mark Thoma on Saturday, June 17, 2006 at 08:41 PM in Economics, Immigration, Policy, Politics |
We need PAYGO. We need super-PAYGO with standby tax increases and spending
sequesters. We need it now.
The NY Times agrees:
Phony Deficit Hawks, editorial, NY Times: The Republican base is angry
about deficits, and suddenly administration officials and tax-axing lawmakers
cannot stop talking about fiscal discipline. If they were sincere, they would
reinstate the pay-as-you-go budget rules that were enforced from 1990 through
2000 and were instrumental in creating budget surpluses from 1998 to 2001.
Lawmakers had to pay for new tax cuts and new entitlement spending by raising
other taxes or cutting programs.
But the foxhole fiscal conservatives do not really mean what they are saying.
An audacious administration talking point ... is that the original pay-go rules
are biased against tax cuts and in favor of spending.
The complaint is ridiculous, but easy for the administration to make given
the complexity of the details. Suffice it to say that pay-go would treat nearly
all of the tax and spending laws passed by Congress in exactly the same way. ...
Unwilling to submit to the fiscal discipline of pay-go, House Republicans are
instead hashing out a line-item veto that would give President Bush the ability
to delete specific items from budget bills. In the Senate, Judd Gregg, chairman
of the Budget Committee, has proposed a kitchen sink of moldy ideas from the bad
old days of budget deficits in the 1980's and early 1990's — none of which have
ever shown much promise as a means of thwarting big budget deficits.
It's all a pathetic attempt to look tough while avoiding the tried-and-true —
and truly tough — deficit fix: reinstating the original pay-as-you-go rules.
Brad DeLong has more on PAYGO
and here, and for a video, see here.
supports PAYGO as well. Something needs to change, and reinstating PAYGO
would be a strong signal of commitment to fiscal restraint.
Posted by Mark Thoma on Saturday, June 17, 2006 at 04:48 PM in Budget Deficit, Economics, Politics |
And it's a good one:
Tim Duy, who does Fed Watch here, giving Paul his diploma at the ceremony today:
Congratulations Paul, you earned it! Paul will be starting the graduate program at UCLA next fall.
Posted by Mark Thoma on Saturday, June 17, 2006 at 02:25 PM in Economics, Miscellaneous, University of Oregon |
News on the technology front:
Trapping Carbon, Freeing Coal, SciAm blog: There is a lot of carbon in
the ground. For eons, life forms ranging from microbes to Homo sapiens have
trapped the element as part of their fundamental molecular makeup... Some of
that carbon has been recycled into descendant organisms and soil, and some has
been transformed by temperature, pressure and time into coal, natural gas and
oil--the fuels of our modern economy. Keeping that carbon safely underground to
fend off climate change is one of the current goals of modern industry and has
given rise to a seeming oxymoron: clean coal. The idea is to burn the coal but
capture the carbon that the burning produces and pump it back underground.
It sounds simple. But millions of dollars have been spent--with the promise
of billions more--in the thus far vain pursuit of a technology that can capture
a diffuse gas (carbon dioxide), concentrate it and render it suitable for
transport. Now the R.E. Burger Plant in Shadyside, Ohio, stands on the threshold
of becoming the first coal-fired power plant to test both the capture and
storage of the leading greenhouse gas...
[T]his would be the first time the CO2 was pumped underground simply to store
it--as much as 7,000 feet beneath the surface and safely away from the
atmosphere and oceans. Powerspan plans to have its capture and compression
technology in place by next year; Batelle will drill a test well shortly
thereafter if all goes well. Then, if the geology and technology work, pumping
could begin by the end of the decade. Because there is no cheap, reliable and
easy to build alternative to coal-fired power plants--particularly in the U.S.,
China and India, where it is most needed--such carbon capture and storage
represents a critical technology fix for the pollution that is warming our
Posted by Mark Thoma on Saturday, June 17, 2006 at 09:06 AM in Economics, Environment, Oil |
The House Democrats have "A New Direction for America" in the
platform they've proposed for this fall's election:
A New Direction For America: The American people are facing difficult times.
Rising gas and health care costs are taking a toll on family budgets. Wages have
not kept pace with inflation. Bright and eager high school graduates can no
longer afford to go to college. And record deficits threaten to bury future
generations in debt. America needs a New Direction. House Democrats will lead
Democrats in Congress offer a New Direction, putting the common
good of all Americans first for a change, and will:
MAKE HEALTH CARE MORE AFFORDABLE
Fix the prescription drug program by putting people ahead of drug
companies and HMOs, eliminating wasteful subsidies, negotiating lower drug
prices and ensuring the program works for all seniors; invest in stem cell and
other medical research.
LOWER GAS PRICES AND ACHIEVE ENERGY INDEPENDENCE
Crack down on price gouging; eliminate billions in subsidies for oil and
gas companies and use the savings to provide consumer relief and develop
American alternatives, including biofuels; promote energy efficient technology.
HELP WORKING FAMILIES
Raise the minimum wage; repeal tax giveaways that encourage companies to
move jobs overseas.
CUT COLLEGE COSTS
Make college tuition deductible from taxes; expand Pell grants and cut
student loan costs.
ENSURE DIGNIFIED RETIREMENT Prevent the privatization of Social
Security; expand savings incentives; ensure pension fairness.
REQUIRE FISCAL RESPONSIBILITY Restore the budget discipline of
the 1990s that helped eliminate deficits and spur record economic growth.
Learn more at
Here's more detail from the NY Times:.
Outline a Platform for the Fall, by Kate Zernike, NY Times: Declaring their
party "ready for this election," Democratic leaders in Congress on Friday
announced the platform they hope to use to regain the majority in November.
Their plan, presented at a news conference, included promises to raise the
minimum wage, make college tuition tax deductible, eliminate subsidies for oil
and gas companies, negotiate lower drug prices for the prescription plan passed
last year, increase stem cell research and restore a pay-as-you-go policy for
They noted that Congress had not increased the minimum wage, now at $5.15,
since 1997, a fact that Representative Nancy Pelosi of California ... declared
"immoral." Their proposal to raise it to $7.25, they said, would benefit seven
million workers. They rejected the argument that such a raise would shrink the
economy, noting that jobs increased after the last raise.
The Democratic leaders also pledged a 25 percent reduction in oil use by
2020, largely by developing fuel alternatives in the United States...
Does this platform grab you and scream vote Democrat? It doesn't quite get there for me.
For example, the health care proposal does not give the sense that there is a well thought out plan to reign in growing health care costs. The plan
appears to be (a) fix prescription drugs and negotiate lower prices, (b)
eliminate subsidies, and (c) invest in medical research. That's it. Issues such as health insurance are not
even mentioned. I would also make other changes such as taking the price-gouging statement out, but I'm curious to hear how others react to this. Also, these are all economic issues. Should social issues, security, terrorism, etc. be on the list?
Update: Jim Hamilton at econbrowser says:
The Democrats call it a New Direction for America. But to me, it looks like
the same old same old. ... Let me focus today just on the Democrats' plan to address our energy
Umm, so that's it? That's the Democrats' energy plan? Well, I'm all for
brevity, but a few more details might be welcome... This surely is no energy plan, but is instead a collection of empty slogans.
Once again America's leaders display their complete contempt for the
intelligence of American voters.
More at econbrowser...
Posted by Mark Thoma on Saturday, June 17, 2006 at 02:43 AM in Economics, Policy, Politics |
Should real estate brokerage markets be regulated by the government to make
them more competitive?
Accomplished, by Robert E. Litan, Commentary, NY Times: As the housing
market cools, buyers and sellers should be more sensitive than ever to the real
estate brokerage fees they pay. Although average commissions have fallen over
the last decade, the typical seller pays more than 5 percent of the sales price
in broker fees...
The industry is doing its to best to hang onto its revenues ... in the face
of growing competition from discount and online brokers. At the urging of
traditional local brokers, states have passed statutes preventing the use of
customer rebates and outlawing cut-rate, limited-service packages, which many
home sellers would rather have.
Now such protectionist tactics are beginning to attract the government's
attention. In late 2005, the Justice Department sued the National Association of
Realtors for ... enabling brokers to withhold their
listings from other brokers' Web sites. And next month, hearings on the changing
real estate market will be held by the House Financial Services Committee, whose
chairman ... has criticized anticompetitive practices.
But if Congress wants a more competitive real estate market, it should start
by rectifying the industry's fundamental problem: brokers themselves set the
market's rules, with no effective oversight to protect home buyers and sellers.
[I]f you want to sell or buy a house, you generally need to go through
multiple listing services ... The ... services nationwide are typically operated
by the dominant local brokers in a given city under rules set by the National
Association of Realtors. Each is run separately. If you don't go through a
licensed Realtor in that city, you don't get access to the listings. ... [E]ven more important
... is how the ... "markets" are supervised. ... there is no state or federal oversight of the listing services —
the industry association runs the show. ...
[T]he National Association of Realtors... operates one of the most powerful
political action committees in the country. ... At the same time, the
association sets the industry rules that govern — or impair — other brokers'
online activities. Congress should fix this clear structural conflict of
interest by empowering the Federal Trade Commission ... to oversee the National Association of Realtors. The
enabling legislation also should instruct the commission to ensure that real
estate markets are competitive.
For starters, this legislation should make clear that multiple listing
services must provide all properly licensed brokers access to the marketplace on
equal terms. Moreover, ... this legislation should enable the Federal Trade Commission
to monitor and pre-empt [state] laws that are intended more to protect Realtors from new
competition than to protect consumers from possible abuses by discount real
Like a stock exchange, multiple listing services make markets more efficient,
but only if they don't discourage entry by new competitors. ...
I think these markets could be made more competitive. If so, then the question is
if government intervention is needed, or if the market will take care of the problem
itself. This August 2005 GAO report helps on this question. This is from the summary of the
That May Affect Price Competition, GAO: Why GAO Did This Study
...Because commission rates have remained relatively uniform—regardless of
market conditions, home prices, or the effort required to sell a home— some
economists have questioned the extent of price competition in the residential
real estate brokerage industry. Further, while the Internet offers time and cost
savings to the process of searching for homes, Internet-oriented brokerage firms
account for only a small share of the brokerage market. Finally, there has been
ongoing debate about the potential competitive effects of bank involvement in
real estate brokerage. GAO was asked to discuss (1) factors affecting price
competition in the residential real estate brokerage industry, [and] (2) the
status of the use of the Internet in residential real estate brokerage and
potential barriers to its increased use...
What GAO Found The
residential real estate brokerage industry has competitive attributes, but its
competition appears to be based more on nonprice variables—such as quality,
reputation, or level of service—than on brokerage fees, according to a review of
the academic literature and interviews with industry analysts and participants.
One potential cause of the industry’s apparent lack of price variation is the
use of multiple listing services (MLS), which facilitates cooperation among
brokers in a way that can benefit consumers but may also discourage
participating brokers from deviating from conventional commission rates. For
instance, an MLS listing gives brokers information on the commission that will
be paid to the broker who brings the buyer to that property. This practice
potentially creates a disincentive for home sellers or their brokers to offer
less than the prevailing rate, since buyers’ brokers may show high-commission
properties first. Some state laws and regulations may also affect price
competition, such as those prohibiting brokers from giving clients rebates on
The Internet has changed the way consumers look for real estate and has
facilitated the creation and expansion of alternatives to traditional brokers. A
variety of Web sites allows consumers to access property information that once
was available only by contacting brokers directly. The Internet also has
fostered the growth of nontraditional residential real estate brokerage models,
including discount brokers and broker referral services. However, industry
participants and analysts cited several obstacles to more widespread use of the
Internet in real estate transactions, including restrictions on listing
information on Web sites, some traditional brokers’ resistance to cooperating
with nontraditional firms, and certain state laws and regulations. ...
Removing barriers faced by alternatives to traditional brokers and
traditional listing services seems like a good place to begin bringing more
competition into these markets. With that done, I don't think much more would be
Posted by Mark Thoma on Saturday, June 17, 2006 at 02:40 AM in Economics, Housing, Policy, Regulation |
Will service sector workers lead a movement toward re-unionization?:
Face of Solidarity By Steven Greenhouse, NY Times: Manuel Alvarez is the
type of worker that service-sector unions are eager to attract. After 11 years
as a houseman at the Hilton Hotel at Los Angeles International Airport, he earns
$9.95 an hour, about $20,000 a year.
"It's not enough to live on," said Mr. Alvarez, an immigrant from Mexico who
vacuums halls and flips mattresses. "I go to two churches each week to pick up
donated food." On his days off, he collects bottles and cans for the deposit,
adding $200 a month to his income. His hope is to join a union, and soon.
This week, judging by the somber mood at the United Automobile Workers
convention, the state of organized labor would seem dire. ... the U.A.W. is now
in full retreat, ready to make concessions to help save the American auto
Its plight points to a little-understood development: the nation's private
sector is divided into two very different labor movements. The first comprises
manufacturing unions, like the auto workers and machinists, which are ... on the
decline. The second is made up of unions for the expanding service sector, which
Bruce Raynor, president of Unite Here, [said] the service-sector unions hope
to imitate the manufacturing unions of old. "Our goal is to move service-sector
workers into the middle class," he said. "The manufacturing unions did that for
factory workers. It took them 20 years to do that, and we hope to do the same
The manufacturing unions have been devastated by globalization... In
contrast, the service-sector unions are largely immune to globalization — just
try to outsource the job of a hamburger-flipper, hotel housekeeper or [nurse] to
"The service sector presents a tremendous opportunity for the labor
movement," said Paul F. Clark, a professor of labor studies at Pennsylvania
State University. "There are lots of low-paid workers, lots of immigrant
workers, a lot of workers who can benefit from a union. But there are a lot of
hurdles they need to navigate if they are going to form unions."
Some labor experts say the effort to help workers like Mr. Alvarez join a
union may not be easy. Companies have grown more aggressive and sophisticated in
combating unions, often hiring consultants... Even many workers who favor unions
are scared to speak out in favor of them, frightened that their employers will
retaliate against them, perhaps by firing them, perhaps by cutting back their
Nonetheless, many labor leaders voice confidence that unions will grow again.
... The unions that broke off from the A.F.L.-C.I.O., including Unite Here and
the Service Employees International Union, largely represent service sector
workers and have ambitious plans to unionize far more of them. ...
I'm not optimistic. I don't sense much enthusiasm for the return of unions to
solve problems such as health care for workers even from Democrats. Instead, the focus is on government
solutions such as a single payer system, or, in the case of Republicans, privatization.
Posted by Mark Thoma on Saturday, June 17, 2006 at 12:15 AM in Economics, Unemployment |
When you hear, as is commonly claimed, that the estate tax takes half of an
estate here's a response:
New Estate Tax Anecdotes Dredge
Up Old Myth That the Estate Tax Claims Half of an Estate, by Aviva Aron-Dine and Joel Friedman,
CBPP: Opponents of the estate tax often claim that it forces estates to pay half of
their assets in taxes. For example, during the Senate debate on the estate tax..., Senator Jon Kyl told the story of a businessman whose family
allegedly had to pay “half of the value of [his] company to the government.”
Senator Kyl went so far as to compare the estate tax to the feudal system, under
which the family of the deceased had to turn over a portion of his property to
the king in order to retain his land.
Senator Kyl’s example, and his far-fetched analogy, bear little relation to
... reality... At the current $2 million exemption level
($4 million per couple) only one in every 200 people who die in 2006 will owe
any estate tax at all. Among the few estates that do pay the tax, the
“effective” tax rate — that is, the percentage of the estate that is actually
paid in taxes — will be much lower than the top estate tax rate, which is
currently set at 46 percent. According to the Urban Institute-Brookings
Institution Tax Policy Center, the average effective estate tax rate on estates
that owe any estate tax at all will stand at only 19 percent in 2006, which
means that fewer than one fifth of the assets of a taxable estate generally will
be needed to pay the tax. For taxable estates valued at less than $5 million,
the effective rate will be less than 10 percent this year.
These Tax Policy Center estimates are consistent with IRS data on effective
rates for previous years, when the top estate tax rate was even higher. For
instance, according to the IRS, the average effective estate tax rate in 2004
was 20 percent, even though these estates faced a top statutory rate of 49
Effective Rate Lower Than Top Rate
Why is the effective tax rate so much lower than the top tax rate established
in law? First, estate taxes are due only on the portion of an estate’s value
that exceeds the exemption level, not on the entire estate. For example, at
today’s $2 million exemption level, a $2.5 million estate would owe estate taxes
on $500,000 at most. (Couples can generally use both spouses’ exemptions so as
to shield $4 million from tax). Second, a large portion of the estate’s
remaining value can be shielded through available deductions (for charitable
bequests and state estate taxes paid, for instance).
Additional options to mitigate the impact of the estate tax are available to
family-owned businesses and farms, which can take advantage of special
“valuation discounts” and can spread their estate tax payments over 14 years.
Further, many large estates employ planning devices (such as insurance trusts)
to shrink the size of the taxable estate. For these reasons, the Tax Policy
Center and IRS estimates may well overstate the effective tax rates that estates
actually pay. ...
[U]nlike payments made under a feudal system, the estate tax is one
component of a tax system that funds our democratic government and the services
it provides. Revenue raised by the estate tax helps pay for essential programs,
from health care to education to defending the nation. If the estate tax were
repealed or substantially reduced, then other taxpayers — presumably a more
numerous and less well-off group than those paying the estate tax — would have
to foot the bill for these programs, face cuts in government services, or bear
the burden of a higher national debt.
Like other Americans, the very wealthy benefit from public investments in
areas such as defense, education, health care, scientific research, and
infrastructure, and they rely even more than others on the government’s
protection of individual property rights (since they have much more to protect).
... It seems only fair that people who have prospered the most in
this society help to preserve it for future generations through the payment of a
reasonable level of taxes by their estates.
More on the principles of taxation.
Update: Speaking of the estate tax:
New Life for Estate-Tax Issue?, WSJ Washington Wire: Senate Majority
Leader Bill Frist says he will make another run at a permanent change in the
estate tax before the Senate’s July 4th recess. But whether Republicans have a
strategy to reach a compromise or just want a political opportunity to squeeze
Democrats is still not clear.
As outlined by Frist, Republicans would initiate a bill in the House, with
sweeteners attached. The hope is that enough Democrats come on board in the
Senate ... to get the 60 votes needed to invoke cloture and limit debate...
Montana Sen. Max Baucus, the ranking Democrat on the Senate Finance Committee
and one of four Democrats to support cloture last week, said a compromise is
still possible but politically difficult prior to the election.
Talks have revolved around a proposal from Sen. Jon Kyl (R., Ariz.)...
Here's an analysis of the Kyl proposal from the CBPP:
"Compromise" With 15 Percent Rate Is Little Different From Permanent Repeal.
Posted by Mark Thoma on Friday, June 16, 2006 at 02:21 PM in Economics, Policy, Politics, Taxes |
Greg Mankiw and
are discussing crowding out. Paul Krugman, via email, weighs in on the debate. I turned it
into a Q&A and added some graphs to illustrate Paul's points:
Is the IS-LM model still a useful theoretical device?:
Think of a standard IS-LM picture. Does that match current reality? Obviously
not: the Fed doesn't target the money supply, so holding M constant is not a
useful thought experiment, and actually confuses students. In fact, since the
Fed actually targets the Fed funds rate rather than the money supply, you might
think that the LM curve should be replaced with a horizontal FF curve. This
would seem to suggest no crowding out at all.
Is there a better way to represent policy?
Except in the very short run the Fed doesn't set the interest rate passively;
instead, it tries to stabilize output around potential. A reasonable way to
represent a Taylor rule or something like that in a simple diagram is to draw a
*vertical* line, the BB curve (for Ben Bernanke). This gives us 100% crowding
Are you sure? Are there any exceptions?
I think that's right. Except in liquidity-trap conditions or in the very
short run, before the Fed has a chance to catch up, fiscal policy doesn't change
aggregate demand, only the mix. The exceptions are important: we had a
near-liquidity trap experience in 2003, and it was a good thing that we had some
fiscal stimulus (and a bad thing that the stimulus was so poorly designed). But
the normal rule is that fiscal policy is fully crowded out.
For those who like graphs:
Under the standard IS-LM model assumptions, a change in fiscal policy that increases
government spending or cuts taxes would shift the IS out and output would move
from Y* to Y'. It is useful to break the movement into two parts. The movement from Y* to Y'' is the output change predicted by the
simple expenditure multiplier (which holds the interest rae constant) and the change from Y'' back to Y' is crowding
out. It occurs due to rising interest rates causing consumption and investment to fall. When crowing out is 100%, the increase in government spending (or tax cut) is matched dollar for dollar with a decrease in consumption and investment.
Greg Mankiw modeled the Fed as keeping the interest rate fixed at i* in which
case the Fed should increase the money supply as shown in the next graph to keep
the interest rate fixed at i*. Notice that output will rise more than if the
interest rate is allowed to increase to i', and at Y'' there is no crowding out.
Krugman is saying this is not how the Fed operates in the
short-run. Instead, the Fed moves to stabilize output at Y* so that the LM curve shifts back,
not out, and output remains at Y*. In this case, crowding out is 100%:
This is the basis for DeLong's statement that:
The Federal Reserve today does not react to a fiscal expansion
by increasing the money stock. The Federal Reserve today reacts to a
fiscal expansion by raising interest rates...
Update: Greg Mankiw writes to make sure everyone realizes he was talking about policy related to the WWII expansion, not the current situation:
It might be worth pointing out to your readers that the example I was discussing, raised by the question from Bryan Caplan, was the WWII fiscal expansion. It is hard to argue that the Fed was targeting Y at Y* back then.
The only thing I said about the current situation is that the Fed is following something like a Taylor rule. This is hardly a radical idea: it dates back to Taylor himself.
Update: The section that read:
In the very short run the Fed doesn't set the interest rate passively;
instead, it tries to...
Should have been and is now:
Except in the very short run the Fed doesn't set the interest rate passively;
instead, it tries to...
The word 'except' was missing due to poor editing on my part.
Posted by Mark Thoma on Friday, June 16, 2006 at 10:21 AM in Economics, Macroeconomics, Monetary Policy |
Bruno Frey and Dominic Rohner find bi-directional causality between newspaper
reports of terrorism and acts of terrorism:
What's Black and White and Red All Over?, by Richard Morin, Washington Post:
More ink equals more blood, claim two economists who say that newspaper coverage
of terrorist incidents leads directly to more attacks. It's a macabre example of
win-win in what economists call a "common-interest game," say Bruno S. Frey of
the University of Zurich and Dominic Rohner of Cambridge University.
"Both the media and terrorists benefit from terrorist incidents," their study
contends. Terrorists get free publicity... The media, meanwhile, make money "as
reports of terror attacks increase newspaper sales and the number of television
The researchers counted direct references to terrorism between 1998 and 2005
in the New York Times and Neue Zuercher Zeitung, a respected Swiss newspaper.
They also collected data on terrorist attacks around the world during that
period. Using a statistical procedure called the Granger Causality Test, they
attempted to determine whether more coverage directly led to more attacks.
The results, they said, were unequivocal: Coverage caused more attacks, and
attacks caused more coverage -- a mutually beneficial spiral of death that they
say has increased because of a heightened interest in terrorism since Sept. 11,
One partial solution: Deny groups publicity by not publicly naming the
attackers, Frey said. But won't they become known anyway through informal
channels such as the Internet? Not necessarily, Frey said. "Many experiences
show us that in virtually all cases several groups claimed responsibility for a
particular terrorist act..."
The CBS blog Public Eye adds:
Economists: Print The News, Pay The Price, by Brian Montopoli, Public Eye: ...First
off, I'm not sure why one needs a PhD in economics to determine what appears to
be common sense: More people are interested in the news when there's a terror
attack, pushing newspaper sales and television viewership higher, and terrorists
become better known when they commit such attacks.
As for the Granger Causality Test itself, it entails a complicated regression
analysis... I am not qualified to dispute the economists' conclusions. But ...
This, in particular, struck me: "The results, they said, were unequivocal..."
Unequivocal? That's quite a determination for a study with what to me seems a
relatively small sample size... I am skeptical of the notion that that were
enough data to prove an unequivocal correlation, particularly in light of all of
the other variables at play.
Frey suggests a solution to the problem he identifies: Don't publicly
identify terrorists, at least until after their conviction. Of course, as [the
Washington Post story] points out, the Internet would complicate any such an
attempt. And there's also the matter of the value of the self-censorship – would
it be worth it to deny people such information? If the correlation is
unequivocal, as the researchers claim, you could perhaps make the case that it
is a worthwhile trade-off. But I think we should be extremely hesitant to
embrace the idea that refusing to publicly acknowledge the identity of our
attackers will somehow make them go away.
Unequivocal is too strong a word for a statistical outcome, there
is always room for questions when causality tests are conducted, but the intent
is to convey that the results are highly significant.
Like all of us, I've
wondered if the news media causes crime, copycat crime in particular, and
also wondered if it would continue of it weren't reported. But I am not in favor of
restricting what can be published in the news.
Newspapers don't kill people. People kill people.
Posted by Mark Thoma on Friday, June 16, 2006 at 12:57 AM in Economics, Press, Terrorism |
Paul Krugman wonders why the Fed is so concerned with inflation when wage
growth isn't keeping up with productivity:
Phantom Menace, by Paul Krugman, Commentary, NY Times: Over the last few
weeks monetary officials have sounded increasingly worried about rising prices.
On Wednesday, Richard Fisher, the president of the Federal Reserve Bank of
Dallas, declared that inflation "is running at a rate that is just too corrosive
to be accepted by a virtuous central banker."
I'm worried too — but not about recent price increases. What worries me,
instead, is the Fed's overreaction to those increases... Discussions of
inflation can be numbingly arcane — are you a core C.P.I. type or a trimmed-mean
P.C.E. person? But the real issue is whether there's a serious risk that
inflation will become embedded in the economy.
The classic example of embedded inflation is the wage-price spiral — better
described as wage-price leapfrogging — of the 1970's. Back then, whenever wage
contracts came up for renewal, workers demanded big raises, both to catch up
with past inflation and to offset expected future inflation. And whenever
companies changed their prices, they raised them by a lot, both to catch up with
past wage increases and to offset expected future increases.
The result of this leapfrogging process was that inflation became a
self-sustaining process, feeding on itself. And ending that self-sustaining
process proved very difficult. The Fed eventually brought the inflation of the
1970's under control, but only by raising interest rates so high that in the
early 1980's the U.S. economy suffered its worst slump since the Great
Fed officials now seem worried that we may be seeing the start of another
round of self-sustaining inflation. But is that a realistic fear? Only if you
think we can have a wage-price spiral without, you know, the wages part.
The point is that wage increases can be a major driver of inflation only if
workers consistently receive raises that substantially exceed productivity
growth. And that just hasn't been happening. In fact, the distinctive feature of
the current economic expansion — the reason most Americans are unhappy with the
state of the economy... is the disconnect between rising worker productivity and
Nor is there much sign that things are changing on that front. ... But if
wage pressures are so moderate, where's the inflation coming from? The answer is
soaring oil and commodity prices.
It's true that some widely used inflation measures, like so-called core
inflation, strip out the direct "first-round" effects of rising energy prices.
But there are still indirect effects, which usually take some time to show up in
the data. Much of the recent rise in core inflation probably represents the
delayed effect of the big run-up in fuel prices a few months ago. And unless
something else happens to drive up oil prices — like, to give a wild example, a
military strike on Iran — inflation will probably subside in the months ahead.
It would be an exaggeration to say that there's no inflation threat at all. I
can think of ways in which inflation could become a problem. But it's much
easier to think of ways in which the Federal Reserve, wrongly focused on the
phantom menace of a new wage-price spiral, could be slow to respond to bigger
threats, like a rapidly deflating housing bubble.
So I don't fear inflation nearly as much as I fear the fear of inflation. And
I wish the Fed would lighten up on the subject.
For more on this point, see
Fed Watch: Ascendancy of the Hawks
Previous (6/12) column:
Paul Krugman: Some of All Fears
Next (6/18) column: Paul Krugman: Class War Politics
Update: Robert Reich joins the chorus of voices wondering if the Fed is overreacting
to the threat of inflation:
There's No "Inflation Genie.", by Robert Reich: I've spent much of the day
on the phone, talking with financial reporters about inflation and the
"consensus" view on Wall Street that Bernanke and the Fed must raise short-term
rates again in order to stop the inflation genie from getting out of the bottle.
Wall Street is wrong. It's still haunted by the double-digit inflation of the
late 1970s. It forgets the double-digit depression of the 1930s.
The fact is, this economy is not at all like the economy of the 1970s. Labor
unions don't have nearly the power they did then to demand wage increases. Big
companies don't have nearly the power they did then to raise prices.
Globalization and computer software have radically increased wage and price
competition. So the inflation genie won't get out of the bottle. The price rises
we're seeing now are due to energy and raw-material commodity price increases,
which are NOT being driven by excessive demand by American consumers and NOT
being driven by inflationary expectations. ...
In addition, productivity has grown enormously in the US during the last five
years. Wages have not. Wages comprise 70 percent of the costs of business. One
last thing: There's still lots of unemployment in the US. The payroll survey
shows only small increases in hiring. A smaller proportion of adults are
employed now than in 2000. The ranks of people too discouraged to look for work
are very large.
So forget the inflation genie. Worry more about the 1930s. I don't mean to
suggest a full-fledged depression is on the horizon. But I do worry that the
economy is slowing. Consumers are reaching the limit of their capacity to go
deeper into debt. Their one cash cow -- the value of their homes -- is in poor
shape. ... If the Fed keeps raising short-term rates we're heading for a major
Me thinks Bernanke wants to show Wall Street he's a tough guy. But tough guys
often over-estimate the importance of acting tough.
In the end, the people who get clobbered when the Fed raises rates and the
economy slows are those at the end of the job line -- people who need jobs, or
are in low-paying ones. They're the first to be let go. At a time when the
number of working poor in America are already ballooning, and the ranks of the
impoverished are growing, it's not only economically wrong for the Fed to go on
raising rates. It's ethically wrong.
Update: Greg Mankiw links Steven Ceccetti who has a different view on the underlying inflation trend.
Posted by Mark Thoma on Friday, June 16, 2006 at 12:15 AM in Economics, Inflation, Monetary Policy |
The Economist looks at what it will take for "the American model" to become
the envy of the world again:
Inequality and the American Dream, The Economist: More than any other
country, America defines itself by ... the dream of economic opportunity and
upward mobility. ... a chance of the good life to everybody who is willing to
work hard and play by the rules. This ideal has made the United States the
world's strongest magnet for immigrants; it has also reconciled ordinary
Americans to the rough side of a dynamic economy, with all its inequalities and
insecurities. Who cares if the boss earns 300 times more than the average
working stiff, if the stiff knows he can become the boss?
Look around the world and the supremacy of “the American model” might seem
assured. No other rich country has so successfully harnessed the modern
juggernauts of technology and globalisation. The hallmarks of American
capitalism ... have spawned enormous wealth. ... Growth is fast, unemployment is
low and profits are fat. It is hardly surprising that so many other governments
are trying to “Americanise” their economies...
Yet many people feel unhappy about the American model—not least in the United
States. ... While firms' profits have soared, wages for the typical worker have
barely budged. The middle class ... feels squeezed. A college degree is no
longer a passport to ever-higher pay... The debate about the American model
echoes far beyond the nation's shores. Europeans have long held that America
does not look after its poor—a prejudice reinforced by ... Hurricane Katrina.
Americanisation has also become synonymous with globalisation. ... The logic
of many non-Americans is that if globalisation makes their economy more like
America's, and the American model is defective, then free trade and open markets
must be bad. This debate mixes up three arguments—about inequality, meritocracy
and immigration. The word that America should worry about most is the one you
Begin with inequality. The flip-side of America's economic dynamism is that
it has become more unequal... America's rich have been pulling away from the
rest of the population... On the other hand, the current wave of globalisation
may not be widening the gap between the poor and the rest. ... The jobs
threatened by outsourcing—data-processing, accounting and so on—are white-collar
jobs; the jobs done by the poor—cleaning and table-waiting, for example—could
never be done from Bangalore.
Those at the bottom have different fears, immigration high among them. Their
jobs cannot be exported to rival countries perhaps, but rival workers can and
are being imported to America. Yet there is surprisingly little evidence that
the arrival of low-skilled workers has pulled poor Americans' wages down. And it
has certainly provided a far better life for new arrivals...
To many who would discredit American capitalism, this sort of cold-hearted
number-crunching is beside the point. Any system in which the spoils are
distributed so unevenly is morally wrong, they say. This newspaper disagrees.
Inequality is not inherently wrong—as long as three conditions are met: first,
society as a whole is getting richer; second, there is a safety net for the very
poor; and third, everybody, regardless of class, race, creed or sex, has an
opportunity to climb up through the system. A dynamic, fast-growing economy ...
offers far more hope than a stagnant one...
This is not to let the American system off the hook when it comes to social
mobility. ... Some studies have shown that it is easier for poorer children to
rise through society in many European countries than in America. There is a
particular fear about the engine of American meritocracy, its education system.
Only 3% of students at top colleges come from the poorest quarter of the
population. Poor children are trapped in dismal schools, while richer parents
spend ever more cash on tutoring their offspring...
A meritocracy works only if it is seen to be fair. There are some unfair ways
in which rich Americans have rewarded themselves, from backdated share options
to reserved places at universities for the offspring of alumni. And a few of Mr
Bush's fiscal choices are not helping. Why make the tax system less progressive
at a time when the most affluent are doing best?
That said, government should not be looking for ways to haul the rich down.
Rather, it should help others, especially the extremely poor, to climb up—and
that must mean education. Parts of the American system are still magnificent...
But as countless international league tables show, its schools are not...
The other challenge is to create a social-welfare system that matches a
global business world of fast-changing careers. No country has done this well.
But the answer has to be broader than just “trade-adjustment” assistance or tax
breaks for hard-hit areas. Health care, for instance, needs reform. America's
traditional way of providing it through companies is crumbling. The public
pension system, too, needs an overhaul.
These are mightily complicated areas, but the United States has always had a
genius for translating the highfalutin' talk of the American Dream into
practical policies, such as the GI Bill, a scholarship scheme for returning
troops after the second world war. The country needs another burst of practical
idealism. It is still the model the rest of the world is following.
Posted by Mark Thoma on Thursday, June 15, 2006 at 06:29 PM in Economics, Policy, Social Security |
Where are wages headed in the future, up due to a shortage of workers arising
from the retirement of the baby boom generation, or down due to the expansion of
labor markets from globalization and information technology? Unfortunately,
according to Richard Freeman, the prognosis does not favor rising wages:
Face Glut of Pressures, by David Wessel, WSJ: There are two strikingly
different ways of looking at prospects for American workers.
One view, often heard from business organizations, is that the looming
retirement of the huge baby-boom generation will create a great labor shortage.
So don't worry about recent distressing trends in wages and benefits; the market
will cure that. Worry about where America is going to get the workers,
particularly skilled workers...
The counter view is that the emergence of China, India and the former Soviet
bloc as modern capitalist economies changes everything. It ... tilts the global
balance between labor and capital in favor of capital. So worry -- and worry
particularly that China and India are interested not only in low-skilled,
low-wage jobs, but are training platoons of scientists, engineers and
Harvard University labor economist Richard Freeman examines the facts
underlying these contrasting stories in a
paper to be discussed today at
a Federal Reserve Bank of Boston conference. His conclusion, to skip ahead a
bit, is that the second case is stronger. ...
It's true that America's work force is projected to grow more slowly in the
next 50 years (about 36%) than it has in the past 50 years (about 127%) as baby
boomers retire, Mr. Freeman notes. It's true that growth will be concentrated in
minority groups that historically have had less education and fewer skills. But
demography isn't always destiny. When U.S. firms run short of domestic
scientists and engineers, they rely on foreign talent...
A bigger fact, Mr. Freeman argues, is that the doubling of the global work
force ... When labor is abundant and capital relatively scarce, wages tend to
fall and returns on capital tend to rise.
The conventional economist's story was that the clearest losers from this new
competition wouldn't be workers in the U.S., which has already lost factory jobs
to places like Mexico. ... Mexican workers would be displaced by low-cost
Asian labor. But China and India didn't follow that script. They are investing
in educating workers and creating a cadre of scientists and engineers. .. Mr.
Freeman ... predicts that "will undo some of the advanced countries' monopoly in
high-tech innovation and production," threatening U.S. wages.
Such arguments once were dismissed by mainstream academics. But that's
changing. In a recent Foreign Affairs essay, Princeton economist Alan Blinder
... said his peers "are greatly underestimating" both the "importance and
disruptive impact" of offshoring. "The societies of rich countries seem to be
completely unprepared for the coming industrial transformation," he wrote.
Mr. Freeman says all this argues that "the overriding goal of labor-market
policy around the world in the next decade or so should be to assure that the
absorption of China, India and the ex-Soviet bloc into world capitalism goes as
smoothly as possible...
Resisting the rise of China and India is neither possible nor wise. Their
evolution could lift millions of their people from poverty and raise living
standards everywhere by accelerating the advance of technology and reducing
prices Western consumers pay. But recognizing that competing with them could put
downward pressure on wages of some, perhaps many, U.S. workers in the next few
decades is a necessary first step toward equipping American workers for stiffer
competition and cushion the blow on those whose livelihoods are threatened.
The faster China and India develop, the better. Wages won't begin to rise
until worldwide demand for labor increases, and that will require further
economic development in both countries. We can imagine erecting barriers to try
and isolate U.S. labor from these influences, but markets have ways of
overcoming such barriers and they are unlikely to be effective.
In the meantime, as I've said before, much more needs
to be done domestically to cushion those caught up in the transition and it
would be nice to see government policy focused much more intently on this
problem rather than on matters unrelated to the future of American workers. Saying "I feel your pain" even if we don't truly believe they do is much better than denying that any pain exists as is implicit in all the commentary wondering why workers don't report satisfaction with economic conditions.
Update: Vox Baby also discusses this article.
Posted by Mark Thoma on Thursday, June 15, 2006 at 10:42 AM in Economics, International Trade, Unemployment |
Another defection from the conservative collective. Larry Hunter does not believe
the president's policies have enough supply-side-i-ness:
Warning from an economic defector, by Donald Lambro, Commentary, Washington
Times: There were disturbing signs of further erosion in the conservative Republican
base this week when tax-cut crusader Larry Hunter attacked what he called
President Bush's below par economic recovery. Breaking with his supply-side allies, the veteran free market economic
strategist charged in a paper being circulated among conservatives that Mr. Bush's
''economic recovery ain't all it's cracked up to be'' and that it is in
danger of slipping into a slower growth path.
Mr. Hunter said the party's conservative leaders can no longer ''ignore the
spending cancer growing at the core of the Bush domestic-policy legacy which
will lead to tax increases unless it is staunched soon.'' Conservatives simply no longer can afford to give our support to a
political party whose only campaign slogan is 'Vote Republican; we aren't as bad
as the Democrats,' ' he said in a letter to his longtime allies in the war on
taxes who were shocked at the intensity of his attack on Mr. Bush. ...
criticisms are especially stinging because he was a supporter of the Bush tax
rate cuts as far as they went, though he sought deeper reductions to fuel
stronger economic growth. ...[H]e
has been one of the leading supply-side advocates in the tax cut battles of the
last several decades. But in his paper ... Mr. Hunter writes that ''by historic standards,
the current recovery really hasn't been up to snuff...''...
Too much of the Bush tax cuts
''consisted of tax credits and rebates that
increased the deficit but did not reduce the marginal tax rate on work, saving
and investment. Thus, they did little to boost economic growth,'' he said.
''Consequently, the early stages of the economic recovery were sub par when
measured against previous recoveries,'' he wrote ...
Mr. Hunter went far beyond his economic critique to sound a clarion call
for conservatives to withhold their support for Republicans to force sweeping
reforms. ''I believe it's time we rejected the GOP establishment's extortion and fear
tactics and laid down a marker of our own to establish the price of our support
in the upcoming election. This country isn't their private plantation,'' he said.
[W]ith the stock
market in a dangerous tailspin and the polls giving the president failing scores
on the economy, his attacks could find a receptive audience among cranky
conservatives unhappy with the direction of this presidency and their party's
performance in Congress...
Since this is about how faithful the policies have been to core supply-side beliefs, I'm not taking sides on this one. If the choice is between (a) the economic policies of Bush, or (b) those promoted by Hunter, I choose (c) none of the above as the best answer, though I do like his "it's time we rejected the GOP establishment's ... fear
tactics" and "This country isn't their private plantation" statements.
Posted by Mark Thoma on Thursday, June 15, 2006 at 02:27 AM in Economics, Politics, Taxes |
Tyler Cowen discusses the failure of donors to charities to effectively
monitor how the donations are used:
in Good Deeds Without Checking the Prospectus, by Tyler Cowen, Economic Scene,
NY Times: Donors to charities, it seems, do not behave rationally.
Increasing evidence shows that donors often tolerate high administrative costs,
fail to monitor charities and do not insist on measurable results — the opposite
of how they act when they invest in the stock market... But before we can
improve our charity, we must first understand it. John A. List, an economist at
the University of Chicago, is studying fund-raising campaigns...
Professor List's research implies that most donors do not respond when they
have opportunities to be more effective in their giving. For instance, it is
well known that a "matching pledge" ... increases charitable contributions.
Donors are enticed by the idea of "more bang for the buck." Yet Professor List
("Does Price Matter in Charitable Giving?", co-written with Dean Karlan, ... at
Yale University) that the size of the match does not seem to matter. When the
pledge is for $2 or even $3 to match an outside dollar, donors do not, in the
aggregate, give more money.
Professor List's work more generally suggests that people become rational in
their spending only through the repeated experience of trading in markets. This
trial-and-error process, with the accompanying feedback, is absent when people
give money to a distant charity. Once the money is gone, donors do not
personally bear direct costs from bad charitable decisions. Nor is it easy to
learn what went wrong. ... [T]he obvious conclusion is that donors do not behave
But donors often give to charities for reasons of pride. Monitoring a charity
means worrying about the wisdom of contributing to that charity. Many donors
would instead prefer simply to feel good about their generosity and thus they
deceive themselves into thinking that all is going well. Furthermore, many
donors seek a sense of affiliation and wish to be a part of large and successful
organizations — the "winning team," so to speak. Again, these donors do not
focus on how, or if, they actually end up improving the world.
If donors are not looking at results, they may end up choosing charities on
the basis of extraneous qualities. Professor List conducted another
experiment ("Toward an
Understanding of the Economics of Charity" with Craig Landry, Andreas Lange,
Michael K. Price and Nicholas G. Rupp) on charitable giving. He and his research
team ran a door-to-door fund-raising trial, using a variety of methods, across
nearly 5,000 households. The team then measured the difference between the most
effective fund-raising method (selling lottery tickets) and the least effective
method (just asking for money).
For purposes of contrast, Professor List and his team then increased the
attractiveness of the woman who asked for the money. The more attractive women
... had as big a positive impact on giving — in the range of 50 to 100 percent —
as moving from the least successful fund-raising method to the most successful.
The philanthropic sector is showing a growing awareness of these sorts of
institutional failures, so initiatives are under way to improve their
performance. ... It remains to be seen which particular innovations will stick
or spread, but well-informed and self-critical donors are probably a key to
improvement for nonprofit organizations. If donors do not abandon failing
causes, those efforts will continue. ... Rather than taking pride only in their
generosity, donors should also take pride in their willingness to confront
unpleasant news. Many individual donors are reluctant to take such steps, but
the result would be better charities and greater real generosity all around.
There is, perhaps, a way to interpret this behavior rationally that supports
these findings. Suppose donors want the prestige of giving as conferred by their
peers or, in some cases, to impress and win the approval of a nice looking
stranger who happens to show up at their door. According to this view,
donations purchase prestige and the role of the charities is to use the money to
maximize the ability of donors to receive praise and esteem from their peers, something which may require high overhead costs as the charity promotes its good works in various ways.
These two papers on the economics of altruism and charitable giving from one
of my colleagues, Bill Harbaugh, suggest that prestige is a motivation for
charitable giving. If so, then what the charity does with the money is not
important so long as the charity retains its status and continues to publicize
lists of donors, hand out coffee cups, stickers, and so on. The donor can then
use these to advertise their charitable giving and receive a status boost (think
of that PBS coffee cup you or a colleague use, I gave blood stickers, bumper
stickers, glossy brochures with different categories of giving, etc.). This can also answer why donors do not give more when the size
of the match goes up - they get the "coffee cup" in either case. Thus, the
status of the charity is more important that what the charity actually does. The
second paper is about voting rather than charitable giving, but it also
illustrates the taste for prestige since the praise of peers motivates voting or lying about voting
What do donations buy? William T. Harbaugh. Journal of Public Economics,
February 1998, 67(2), pp 269-84.
Charities publicize the donations they receive, generally according to dollar
categories rather than the exact amount. Donors in turn tend to give the minimum
amount necessary to get into a category. These facts suggest that donors have a
taste for having their donations made public. This paper models the effects of
such a taste for “prestige” on the behavior of donors and charities. I show how
a taste for prestige means that charities can increase donations by using
categories. The paper also discusses the effect of a taste for prestige on
competition between charities.
If people vote because they like to, then why do so many of them lie?
William T. Harbaugh. Public Choice, October 1996, 89(1-2), pp 63-76.
Of those eligible, about 40% do not vote in presidential elections. When
asked, about a quarter of those nonvoters will lie to the survey takers and
claim that they did. Increases in education are associated with higher voting
rates and lower rates of lying overall, but with increased rates of lying
conditional on not voting. This paper proposes a model of voter turnout in which
people who claim to vote get praise from other citizens. Those who lie must bear
a cost of lying. The model has a stable equilibrium with positive rates of
voting, honest non-voting, and lying. Reasonable parameter changes produce
changes in these proportions in the same direction as the changes actually
observed across education levels.
Posted by Mark Thoma on Thursday, June 15, 2006 at 01:28 AM in Economics, Market Failure |
Remember this from song by George Harrison from The Beatle's White Album (sample)?:
Have you seen the little piggies
Crawling in the dirt
And for all those little piggies
Life is getting worse
Always having dirt to play around in.
Have you seen the bigger piggies
In their starched white shirts
You will find the bigger piggies
Stirring up the dirt
Always have clean shirts to play around in.
In their styes with all their backing
They don't care what goes on around
In their eyes there's something lacking
What they need's a damn good whacking.
Everywhere there's lots of piggies
Living piggy lives
You can see them out for dinner
With their piggy wives
Clutching forks and knives to eat their bacon.
Here's what made me think of this song:
the Hogs Come First, by Bob Herbert, Commentary, NY Times: ...The pork
capital of the planet is this tiny town ... not far from the South Carolina
border... Tar Heel's ... the employment anchor for much of the region... [T]he
mammoth plant of the Smithfield Packing Company
... is the largest pork processing facility in the world...
Smithfield [is]... a case study in both the butchering
of hogs (some 32,000 are slaughtered there each day) and the systematic
exploitation of vulnerable workers. More than 5,500 men and women work at
Smithfield, most of them Latino or black, and nearly all of them undereducated
and poor. ... Workers are drawn there from all over the region, sometimes traveling in
crowded vans for two hours or more each day, because the starting pay ...[of] $8 and change an hour
... is higher than the pay at most other jobs
available to them.
But the work is often brutal beyond imagining ... [S]erious injuries abound,
and the company has used illegal and ... violent tactics ... to keep the workers from joining a union that would give them
"It was depressing inside there," said Edward Morrison, who spent hour after
hour flipping bloody hog carcasses on the kill floor, until he was injured last
fall after just a few months on the job. "You have to work fast... You can end
up with all this blood dripping down on you, all these feces and stuff just
hanging off of you. It's a terrible environment. ... Mr. Morrison's comments
were echoed by a young man who was ... waiting for a van ... nearly 50 miles from Tar Heel. "The line do move fast
... and people do get hurt. You can hear 'em hollering when they're on their way to
Workers are cut by the ... slashing knives that slice the meat from the
bones. They are hurt sliding and falling on floors and stairs that are slick
with blood, guts and a variety of fluids. They suffer repetitive motion
injuries. The processing line on the kill floor moves hogs past the workers at
the dizzying rate of one every three or four seconds.
Union representation would make a big difference... The United Food and
Commercial Workers Union has been trying to organize the plant since the
mid-1990's. Smithfield has responded with tactics that have ranged from the
sleazy to the reprehensible.
After an exhaustive investigation, a judge found that the company had
threatened to shut down the entire plant if the workers dared to organize, and
had warned Latino workers that immigration authorities would be alerted if they
voted for a union. ... The judge said the company had engaged in myriad
"egregious" violations of federal labor law, including ... beating up a worker
"for engaging in union activities."
Rather than obey the directives of the board and subsequent court decisions,
the company has tied the matter up on appeals that have lasted for years...
Workers at Smithfield and their families are suffering while the government
dithers, refusing to require a mighty corporation like Smithfield to obey the
nation's labor laws in a timely manner...
And for all those little piggies,
Life is getting worse...
Posted by Mark Thoma on Thursday, June 15, 2006 at 01:00 AM in Economics, Policy, Politics, Regulation |
We've heard about the Scandinavian model, the Chinese model, the
European model, even the Australian model
as descriptions of economic systems and models for economic development. Robert
Reich, unwinding once again after another fierce battle with the
opposition, looks at the American model:
American Model, by Robert Reich: Why, tell me, is economic growth so
wonderful if it's being enjoyed by such a small proportion of the people of this
country -- and if the burdens of growth (in terms of growing job insecurity,
loss of corporate health-care benefits, lack of health insurance altogether,
wage declines for the majority of hourly workers, loss of local communities and
local retailers ... look at the devastation created by Wal-Mart) --are being
borne by so many?
Yesterday I found myself in yet another debate with some right-wingers who
claimed (as they always do) that Europeans and the Japanese have it far worse
than us. Growth is slower in these countries, they say over and over again, and
unemployment is higher. The "American system," with our highly-flexible labor
market (meaning anyone can be fired for any or no reason, and can lose large
portion of salary and benefits any time) is far more efficient. Well, these
right-wingers certainly are correct that growth is slower and unemployment is
higher there than here. But people have more job security there. They also have
health care. If they're unemployed, they have far better benefits than
unemployed workers here. And inequality is far less in these countries than it
is in the United States.
In other words, there's something of a tradeoff. The "American system" is at
the extreme end of a set of social choices that other people in many other
post-industrial nations are making differently than we are. ... In the big
tradeoff between, let's call it "social tranquility" on the one hand, and
economic dynamism on the other, what's the great advantage of economic dynamism
if so few people actually enjoy its fruits?
I'm reminded of a debate I used to have with Bob Rubin, who was Clinton's
Treasury Secretary. Bob is a delightful man, but his position in this debate was
indicative of a different way of thinking than the way I normally proceed. The
question I used to pose to him (in various ways) was this: Suppose the economy
could be 25 percent larger, but almost all the gain from this increase would go
only to the people at the top. No one would be worse off than before, in
absolute terms, but only the people at the top would enjoy the fruits of the
growth. Would we choose this nonetheless? He said absolutely. His reasoning was
that whenever some people gain and no one else loses, the change is positive.
That's called, in economic jargon, a Pareto improvement.
But it leaves out the distributional reality. If those at the top gain all
the benefits, then why should everyone else put in the extra effort to make it
happen? Why should they endure the insecurities? And won't most people who don't
enjoy the gains feel comparatively less well off than they were before? Feelings
of well-being are, to some extent, relative. We used to talk about the poor as
"disadvantaged." That is, disadvantaged relative to the rest of society.
If a change in the relative distribution of goods affects utility, if there
is more insecurity, etc. that needs to be part of of the Pareto calculation. But
that minor quibble aside, his point is that part of the increase in growth in
the U.S. relative to other countries has been purchased by decreasing
economic security. When the benefits do not flow to those who pay the security
costs, but instead go to the top of the income distribution, and furthermore
when the redistributive policies in place are reduced through tax cuts at the
same time, it is not surprising that people report dissatisfaction with economic
conditions in polls. It is also not surprising that those enjoying the fruits of
the extra growth may not fully understand the complaints over economic
conditions since a general and growing feeling of economic insecurity is not
something easily measured with a summary statistic.
Update: More from Robert Reich from The American Prospect Online:
The Truth about Detroit, Robert Reich, American Prospect Online: The United Auto Workers union is facing hard
times. A quarter century ago, when the UAW was riding high, it had one
and a half million members. Now there are fewer than 600,000... But just because the UAW is
losing members doesn’t mean American auto workers are losing jobs.
According to government data, more Americans are making cars today than
were making them 25 years ago. Instead of working for the Big Three,
though, lots are now working for Toyota, Honda, and other foreign-based
automakers building cars here in the United States...
The problem is not jobs. It’s
wages and benefits. The real median wages and benefits of American auto
workers have been dropping for several years. A quarter century ago,
America’s auto workers were at the top of the heap. Technically, they
were blue-collar, but their wages and benefits put them near the top of
the middle class. Lately they’ve been descending into the lower middle
Who’s to blame for all of this?
GM, Ford, and Daimler-Chrysler should ... have offered fewer and better cars and not relied so much
on SUVs and light trucks. They shouldn’t have tried so many gimmicks to
move cars out of dealer showrooms, like zero-interest financing.
But the real blame for the
decline in the fortunes of American auto workers falls on you and me.
We’ve wanted the best deals. We’ve demanded inexpensive cars that run
well. We have not been willing to spend our money paying for the old
level of UAW wages and benefits. That’s why some 40 percent of us are
buying Toyotas, Hondas, Mini-Coopers, and the like...
Who wins? We consumers. According
to consumer price index, new cars and light trucks today cost less in
real dollars than they did in 1982, despite all the extras like
anti-lock brakes, air bags, CD players and other features... And they’re more
reliable. You and I have benefited enormously from the new competition. Members of the UAW have taken it on the chin.
Posted by Mark Thoma on Wednesday, June 14, 2006 at 05:21 PM in Economics, Income Distribution, Policy, Politics, Social Security |
Will the market make corporations "ethical" on its own, or are governments
needed to force them into social responsible positions? Jonathan Guthrie argues
that consumers alone cannot discipline corporations. The implicit argument is that individual rationality
leads each person to seek the lowest price since the individual's actions in isolation have little impact
on the firm's bottom line. However, the threat of government intervention to
solve such market failures is enough to regulate corporate behavior:
Jonathan Guthrie: Ethics, enterprise and expediency, by Jonathan Guthrie,
Commentary, Financial Times: Monaco’s main conference centre was the ...
venue for a debate on how business could help the poor and save the planet last
week. ... Debates on corporate social responsibility [CSR] thrill me as little
as talks on diesel locomotives by bobble-hatted trainspotters... The event,
however, was surprisingly compelling. The organisers ... had intelligently
recruited two panellists guaranteed to fight like rats in a sack. Their
scrapping triggered a rare lucid moment in which I realised that CSR has become
so pervasive that opposition to it is ... pointless...
John Hilary of War on Want, a traditional lefty, thundered: “We cannot accept
unbridled free market capitalism.” Richard D. North of the rightwing Institute
of Economic Affairs, countered: “Capitalist firms do well for the world when
they are selfish and honest about it.”...
Like Mr North, I believe the sole social responsibility of companies is to
make profits, some of which governments trouser to pay for schools, hospitals
and welfare. But while pundits such as Mr North may often triumph rhetorically,
they have lost the sale. Businesses increasingly espouse ethical goals as an
adjunct to good old-fashioned moneymaking.
A few years ago CSR was primarily an activity for big US consumer brands,
such as Nike and Gap, whose reputations had been damaged by allegations that
some Asian suppliers ran sweatshops. They needed to ensure goods were sourced
ethically to claw back sales.
Since then, ethics have spread across business like a nasty rash. HSBC, the
world’s third biggest bank, boasts it has achieved carbon neutrality, a goal
rather harder for its manufacturing clients to achieve. The motto of Google ...
is “Don’t be evil” (but don’t stand up for freedom of speech in China either).
Al Gore ... now chairs a fund ... whose investments are “sustainable”, even if
its returns are not. David Cameron, the leader of the once commerce-friendly UK
Conservatives, has told British business to “shed its evil image”...
The entrepreneurs from 32 countries assembled in Monaco last week were as
inclined to talk about their pet social projects as their business empires. ...
But at the same time, CSR is often just a new bottle into which the old wine of
philanthropy is decanted. If you have accumulated more wealth than you can
easily enjoy, it is natural to swap some of it for public gratitude, even if you
do not concur with US steel baron Andrew Carnegie that “a man who dies rich dies
For most companies, renouncing the devil and all his works involves adopting
ethical policies on employment, sourcing and the environment and helping local
charities. ... A CSR vigilante force, consisting of vociferous non-governmental
organisations and fee-hungry consultancies, keeps businesses up to the mark.
The oft-quoted business case for CSR is that customers prefer to buy from
companies exhibiting “good corporate citizenship”. The evidence for this seems
pretty patchy. Low prices continue to lure millions of Americans to Wal-Mart,
despite the opprobrium the store chain’s employment and sourcing policies
provoke in ethical campaigners.
A much better argument ... is that businesses can forestall regulation by
behaving with conspicuous virtue, thereby keeping a lid on costs. ... The beauty
of this “compliance- plus” approach is that it fits seamlessly into the
Friedmanite conception of businesses as entities that should be single-minded in
their pursuit of profit. Being good becomes simply another lever for jacking up
the bottom line...
Posted by Mark Thoma on Wednesday, June 14, 2006 at 01:26 PM in Economics, Environment, Market Failure, Policy, Regulation |
Brad DeLong talks about the myth of the ownership society in his latest from
Project Syndicate. One key player might have to be taken off the president's ownership-society sales team:
The Myth of
the “Ownership Society”, by J. Bradford DeLong, Project Syndicate:
"No," said former Fox News journalist Tony Snow, newly appointed as ... George
W. Bush’s ... Press Secretary, when asked recently about his retirement savings.
“As a matter of fact, I was even too dopey to get in on a 401(k). ... The only
media pension I have is through AFTRA.”
A 401(k) is a heavily tax-favored account in which workers can save money for
their retirement. Typically, employers – including Fox News – match workers’
401(k) contributions, so setting up a 401(k) is an irresistible financial deal,
a true no-brainer. Yet Tony Snow didn’t. Only the union he was forced to join,
the American Federation of Television and Radio Artists, has been doing any
formal saving and earmarking of his retirement assets. ...
To the extent that the Bush administration has a coherent philosophy for
domestic policy, it is the idea of the “ownership society”... In the future,
Snow will have to stand up at the podium in the White House briefing room and
advocate the various components of Bush’s ownership-society proposals. He will
have to praise Health Security Accounts... He will have to praise privatization
of Social Security... And he will have to praise the decline of unions and the
shedding of benefits by firms – and argue that individuals will make better
choices than union experts or firms’ benefit departments.
The assembled reporters will look at him, and they will recall that when he
was offered an unbelievably good financial deal, he was too “dopey” to take
advantage of it. And they might reasonably conclude that his failure to channel
some of his Fox News salary into a 401(k) account is a very powerful argument
against the words coming out of his mouth.
This is not to say that the issues are simple or that there are easy answers.
America has many people who do not set up 401(k) accounts, despite enormous
incentives to do so. It also has people who do set up 401(k) accounts and then
invest them badly – for example, Enron workers whose 401(k) money was
overwhelmingly invested in company stock... There are also well-known examples
of highly corrupt union pension funds, such as the one bilked for years by the
leadership of the Teamsters.
Finally, there is the example of politicians like George W. Bush, who enacted
a government program that promises comprehensive drug benefits to the elderly
and mammoth profits to pharmaceutical companies. His administration may preach
the virtues of individual responsibility, but its program makes no provision for
how and where the government is going to secure the resources needed to finance
In short, there are psychological and moral failures at all levels –
individuals, firms, unions, insurance companies, and governments. Difficult
problems of institutional design compound the difficulty of reforming
social-welfare programs. ... As Americans and others look at this Gordian knot
of public policy problems, we should learn one thing from the example of Tony
Snow: the vision of an “ownership society” espoused by Bush is simply not
plausible. If it were, his new press secretary would not be describing himself
Posted by Mark Thoma on Wednesday, June 14, 2006 at 10:21 AM in Economics, Policy, Press, Social Security |
New Economist, a
blog I should link more often, notes an interview with R. Preston McCafee of
Caltech on finding the best price:
interview: R Preston McAfee, The Guardian: Professor R Preston McAfee made
the headlines a couple of months ago with a report on the US government's
purchase of computer hardware. By going for the best-known label, rather than
the best buy, he said, the American taxpayer had been landed with a bill half a
billion dollars bigger than necessary. The government procurement agency was
that thing McAfee despises most - a "lazy shopper". Prices fascinate McAfee...
He examines price variations ... lovingly..., and it's not just
multi-million-dollar purchases that fascinate him.
Continue reading "Lazy Shoppers Lose Their Shirts" »
Posted by Mark Thoma on Wednesday, June 14, 2006 at 09:06 AM in Economics |
John Berry says markets are misinterpreting the Fed's recent miscommunications:
Fed Doesn't See Any New Inflationary 'Monster', by John M. Berry, Bloomberg:
Like a youngster unable to sleep because he thinks there are horrible monsters
hiding in his closet, financial markets have been spooked by irrational fears of
surging inflation. The result: an imagined need for endless interest rate
increases to bring prices under control.
One eye on inflation the
other eye on ... hey wait!
I don't have another eye.
Every time a Federal Reserve official says that U.S. inflation in recent
months is outside the ''comfort zone,'' investors sell assets on the grounds
rates are headed higher, perhaps much higher.
The investors ignore the fact that the officials also say pointedly that they
expect economic growth to slow and inflation to subside later this year. None of
the officials, from Fed Chairman Ben S. Bernanke on down, have indicated they
believe a new inflationary spiral has begun.
To the contrary, many of them have explicitly said the opposite. The whole fuss started when Bernanke said in congressional testimony ... that
the Federal Open Market Committee might let a meeting go by without raising
rates -- even if inflation remained elevated -- to wait for more data...
That was seen by many analysts and investors as a sign Bernanke and the Fed
had turned soft on inflation. Since then every Fed speaker ... has been careful
to stress the need to keep inflation low.
All those statements have improved the Fed's inflation fighting reputation.
Unfortunately they also seem to have convinced many people that inflation is
worse than anyone thought, and that the Fed is going to have to raise rates a
For example, on June 12, Sandra Pianalto, president of the Cleveland Federal
Reserve Bank, said ... that core consumer prices have increased ''at an
annualized rate of more than 3 percent during the past three months. This
inflation picture, if sustained, exceeds my comfort level.''
That part of Pianalto's remarks was one reason cited for a sharp drop in
stock prices that day. Few paid much attention to other parts of her speech that suggested strongly
that she expects inflation to ease without much more action by the Fed. The
current Fed target of 5 percent for the overnight lending rate is ''near a point
that is consistent with a gradual improvement in the inflation outlook,''
Pianalto said. ...
Certainly such words, which are in the same vein as most other public
comments by Fed officials, wouldn't be uttered by someone who felt the country
faces a deeply embedded inflation that will take a large scale policy response
to root out. Yet that is how markets seem to be interpreting what officials are saying
about inflation and the prospects for interest rates. ...
Now the markets overwhelmingly expect the FOMC to raise its overnight lending
rate target to 5.25 percent on June 29. There also seems to be a growing
expectation that economic growth is going to slow, perhaps a lot. At least that
is the reason being cited for the ongoing plunge in some commodity prices,
particularly for copper, gold and other metals, none of which is consistent with
an inflationary spiral...
Suppose that the markets overwhelmingly expect an increase in the target rate
to 5.25% as they do now, and, though there is disagreement and nobody on the
FOMC believes 5.25% would be a disaster, the majority believe optimal policy is
to leave rates at 5.00%.
In that situation, would the Fed have the will to go against market
expectations, particularly with the credibility of a new chair on the line? I
don't think they would surprise the market, at least not at the next meeting. So
even if the majority believe a pause is best, if market expectations do not
support that move and the Fed does not move expectations in that direction
before the meeting, I don't believe they would go against the market.
So, I think two things work against a pause even if the Fed desires to do so.
First, without very clear evidence of inflation easing, and who knows what the
next price report might bring, I doubt they are willing to whipsaw expectations
once again. Since there is uncertainty over whether 5.00% or 5.25% is optimal
anyway, there's no sense upsetting the markets yet again unless the evidence is very clear. Second, if
expectations are overwhelmingly for 5.25%, I don't think the Fed will be willing to surprise markets and pause anyway.
Posted by Mark Thoma on Wednesday, June 14, 2006 at 01:31 AM in Economics, Monetary Policy |
Who are the hungry? You might be surprised:
Asking for Extra Peanut Butter, by Roger Thurow, WSJ:
...The war on poverty has ebbed, flowed and changed direction in the four
decades since Lyndon Johnson launched it in 1964, and in the decade since Bill
Clinton signed a bill that he said would "end welfare as we know it."...
The fraction of Americans living below the official poverty
line fell significantly during the booming economy of the 1990s. Then it turned
up in the recession of 2001 and an ensuing recovery that lifted the fortunes of
the best-off Americans more than it did those at the bottom. Alternatives to the
official measure show much the same pattern.
The U.S. Department of Agriculture says government surveys show
that 11.9% of U.S. households ... were uncertain they
could afford to feed their families at some point during the year in 2004. About
a third of those, or 4.4 million households in all, said that at least one
household member went hungry at least some time during the year because the
family couldn't afford enough food.
At the same time, the economy has been growing in many regions around the
country. ... "There is a rising tide, but it's not one that lifts all the
boats," says Ray Perryman of the Perryman Group, an economic-analysis firm
.... "Some sink along the way."
A recent survey by America's Second Harvest, a network of more
than 200 food banks across the nation, indicates that those relying on pantries
and emergency kitchens include a large number of working families who aren't
making enough to make ends meet, particularly with high heating and gas prices
and medical bills. Mr. Perryman says the adults in such families generally don't
have the education or skills demanded by high-tech jobs being created.
"Hunger is a hidden issue, particularly ... where
unemployment is low and there's a lot of economic activity," says Robert Bush,
executive director of the East Texas Food Bank. "But every day, we touch people
who have to make hard choices about food: pay medical bills or buy food, repair
car or buy food."
The Second Harvest survey also paints a portrait of the hungry
at odds with common stereotypes: Only 12% of those served by the nation's food
banks are homeless; 93% are American citizens; 40% are white; nearly half live
in rural or suburban areas; and, more than one-third of the hungry households
have at least one working adult. In these households, the survey found, parents
are often working nights and over the weekends, meaning children sometimes must
fend for themselves at mealtimes. And there are a lot of those children. ...
Posted by Mark Thoma on Wednesday, June 14, 2006 at 01:02 AM in Economics, Income Distribution, Unemployment |
Jeremy Siegel talks about "the next wave of investing" as he gives investment
advice based upon new research in finance. People investing in the stock market
face a choice between actively managing the shares in their own portfolio, having professionals actively manage the shares, or following a passive approach
and investing in funds that are based upon broad indexes such as the S&P 500.
Both theory and empirical research support use of broad capitalization-weighted index funds based upon, say, the the S&P 500 as a means of obtaining an
efficient portfolio mix, i.e. one with optimal risk-return characteristics. Over
time, these index funds have performed well relative to actively managed funds
and are a good choice for people who do not have a lot of time to devote to
researching investment opportunities.
However, new research implies this strategy can be beaten. Instead of
capitalization-weighted indexes where the index weight is based upon the firms
stock value (price times quantity) relative to total market value (the sum of price
times quantity across all stocks), value-weighted indexes where the index
weights are based upon sales or dividends may provide a better mix of
Market' Hypothesis, by Jeremy Siegel, Commentary, WSJ:
...Capitalization-weighted indexation has been one of the great innovations in
the last quarter-century. It has allowed millions of investors to capture the
return on the market at a very small cost, and has outperformed most actively
managed mutual funds...
But we are on the verge of a revolution: New research demonstrates that it is
possible to construct broad-based indexes offering investors better returns and
lower volatility than capitalization-weighted indexes. These indexes are
weighted by fundamental measures of firm value, such as sales or dividends,
instead of allowing the market price alone to dictate how much of each firm
should be included in the index.
The vast majority of indexes, with the exception of the Dow Jones Averages,
are capitalization-weighted. This means that the weight of each stock in the
index is proportional to the total market value of its shares. This methodology
has strong appeal since the return on these indexes represents the aggregate or
"average" return to all shareholders.
Strong support for these indexes also emanates from the academic community.
... It can be shown that under standard portfolio models, if stocks are priced
according to the efficient market hypothesis, then capitalization-weighted
indexes offer investors the best risk-return combination. And there is no doubt
that capitalization-weighted portfolios have performed very well for investors.
Research ... has undeniably shown that active mutual fund managers fail, after
fees, to keep pace with the market indexes.
But as indexed investing gained adherents, cracks were found in the efficient
market hypothesis. In the early 1980s, Rolf Banz and Don Keim showed that small
stocks earned an outsized return compared to their risks. And, earlier, Sanjoy
Basu and David Dreman discovered that stocks with low price-to-earnings ratios
had significantly higher returns than stocks with high P/E ratios; small stocks
with low P/E ratios (small value stocks) enjoyed particularly outstanding
returns. The magnitude of these size- and value-based returns could not be
rationalized using the standard asset pricing models of the efficient market
This caused schizophrenia in the financial community. ... Since the 1980s,
the finance profession has searched in vain for the reason why small and value
stocks outperformed the market. Efficient-market diehards maintain these stocks
contain deeply buried risk hidden in the historical data. They predict that one
day, when a crisis hits and investors critically need to liquidate their
portfolios, small and value-based stocks will crumble while large growth stocks
will shine. But if this is true, the data are unfortunately moving in the wrong
[T]here is now a new paradigm for understanding how markets work that can
explain why small stocks and value stocks outperform capitalization-weighted
indexes. This new paradigm claims that the prices of securities are not always
the best estimate of the true underlying value of the firm. It argues that
prices ... of securities are subject to temporary shocks that I call "noise"
that obscures their true value. These temporary shocks may last for days or for
years, and their unpredictability makes it difficult to design a trading
strategy that consistently produces superior returns. To distinguish this
paradigm from the reigning efficient market hypothesis, I call it the "noisy
market hypothesis." The noisy market hypothesis easily explains the size and
value anomalies. ...
New research indicates that there is a simple way that investors can capture
these mispricings and achieve returns superior to capitalization-weighted
indexes. This is through a strategy called "fundamental indexation." Fundamental
indexation means that each stock in a portfolio is weighted not by its market
capitalization, but by some fundamental metric, such as aggregate sales or
Robert Arnott, editor of the Financial Analysts Journal and chairman of
Research Affiliates, LLC, has published research documenting both the
theoretical and historical superiority of fundamentally weighted indexes. It can
be rigorously proved that if stock prices are subject to noise, then
capitalization-weighted indexes will offer investors risk-and-return
characteristics that are inferior to those of fundamentally weighted indexes.
I have long advocated the use of dividends in evaluating stocks. Dividends
are the only fundamental variable that is completely objective, transparent and
unable to be manipulated by managers who tinker with accounting assumptions...
The historical data make an extremely persuasive case for fundamental
indexing. From 1964 through 2005, a total market dividend-weighted index of all
U.S. stocks outperformed a capitalization-weighted total market index by 123
basis points a year and did so with lower volatility. The data indicate that the
outperformance by fundamentally weighted indexes during the same period is even
greater among mid-sized and small stocks...
If you are a fan of indexing, as I and so many other investors are, you are
no longer trapped in capitalization-weighted indexes which overweight overvalued
stocks and underweight undervalued stocks. Devotees of value investing who are
searching for a simple, low-cost indexed portfolio in which to hold their stocks
need wait no longer. Fundamentally weighted indexes are the next wave of
Posted by Mark Thoma on Wednesday, June 14, 2006 at 12:06 AM in Economics, Financial System |
I'm pleased to say that so far, even though there are people from all parts of the political spectrum leaving comments, I have not yet had to worry about a comments policy.
Besides obvious spam, I have only deleted one comment since I started, though I have been strongly tempted on two other occasions. I would be very happy if I never had to delete another, though I will not hesitate to do so if necessary. But I'd rather not be in the uncomfortable position of deciding what does and does not cross some line.
All views are welcome here, those contrary to my own included, and I hope respectful, but hard fought and intelligent discussions over economic and political issues continues. Or, you can always say something nice. Leaving comments is scary for some people so that's appreciated too.
Just wanted to say thanks.
Posted by Mark Thoma on Tuesday, June 13, 2006 at 06:28 PM in Weblogs |
There are two commentaries in the Financial Times calling for more effective
global institutions. First, there's this from Martin Wolf who argues that a U.S.
dominated world will not work, nor will a world where the U.S. is disengaged and
isolationist. Thus, some intermediate ground - a world where power is
effectively subjected to checks and balances at the worldwide level - is needed:
US foreign policy needs ‘liberal realism’, by Martin Wolf, Commentary, Financial
Times: What should a foreign policy for a post-post-9/11 world look like?
For the US it should rest on what has been the heart of its policies since 1941
– the promotion of a global liberal order, with equal emphasis on all three
words: global, because it offers opportunities to all prepared to play by the
rules; liberal in the classical sense, namely, a world of open markets; and,
last but not least, an order, because it aims at peaceful and, wherever
possible, institutionalised relations among states. ...
I think of this approach as “liberal realism”. ... The emphasis on
institutions is central. Many Americans assail the global institutions that the
US itself created. Yet institutional checks and balances are the heart of the US
constitutional system. Why are they unacceptable at the world level? These
institutions are imperfect. But what is the alternative? A global anarchy is
intolerable. A US imperium is unacceptable. The global institutions must be made
The US alone can decide its future role. But Europeans can help, by becoming
both more effective as allies and more united as critics. The world will not
accept the US as master. But it still depends on US leadership, just as the
Europeans remain its natural partners. Both sides must now change if their
future is to be better than their recent past.
Next, here's another call for the creation of global institutions and a new
corporate ethic that gives workers effective representation
beyond national boundaries:
Global corporations, Editorial, Financial Times: The backlash in the US
against the loss of manufacturing and service sector jobs to lower cost
competitors such as China and India has waxed and waned. But if - as a number of
studies predict - the offshoring revolution is still in its early stages then it
is a fair bet there is a lot more backlash to come. How to head it off?
Simply restating the laws of comparative advantage is not necessarily the
most effective route for politicians facing often angry and insecure voters. It
is true that the savings to corporations from offshoring accrue - with interest
- to the US economy and will lead to the creation of new and different kinds of
employment in their stead. But this is of academic comfort to people who have
just been made redundant.
In the latest edition of Foreign Affairs, Samuel Palmisano, chief executive
of IBM, suggests that the emergence of the global corporation should be
accompanied by the creation of clearer global corporate values. ... The
economics of the globalised corporation are straightforward - they produce what
they produce where it is most efficient to produce it. ...[and] new
communications technology has reduced barriers to entry. However, coping with
the political fallout in a world where large global companies have a bargaining
advantage over all but the largest jurisdictions is not so easily addressed. The
tension between an increasingly global economy and the resolutely local nature
of politics is likely to grow more acute over time.
Mr Palmisano's principal suggestion is to develop a global regulatory system
through better co-operation between regulatory agencies (as opposed to creating
a single behemoth). ... It should be the task of politicians everywhere to
encourage greater co-operation between jurisdictions and to improve corporate
governance. But this can only be part of the answer. As the world continues to
integrate, reconciling the tensions between efficient global economics and local
democratic politics will test everyone's imagination.
Are more effective worldwide institutions part of the New-New Deal
labor needs? For example, would free and open trade be more acceptable
politically if a single enforceable standard existed across countries for
working conditions, environmental rules, health care, and other factors with
severe sanctions on trade for violations? I'm not optimistic on this front, but am open to arguments or other ideas on how to give labor a stronger voice in the global economy to offset the "bargaining
advantage" corporations have over local jurisdictions. Even if such institutions could be forged, a big if,
it's hard to even imagine being able to negotiate something like a worldwide
minimum wage or rules for overtime.
Posted by Mark Thoma on Tuesday, June 13, 2006 at 01:20 PM in Economics, International Trade, Policy, Regulation, Unemployment |
Everybody talks about the economic weather, but nobody does anything about
In Search Of a New New Deal How Will the Good Jobs Of the Future Be Created?, by
E. J. Dionne Jr. Tuesday, Commentary, Washington Post: There is no sturdier liberal or Democratic slogan than "Jobs, jobs, jobs."
But liberals have a problem: The old capitalist job-production machine is not
working the way it used to. The venerable promise that new (progressive)
leadership will create masses of well-paying jobs is harder to make and even
harder to keep. ... No one is more aware of this
than those Americans who are losing what had once been secure, well-compensated
In the June 10 issue of National Journal, staff correspondent Bruce Stokes
argues that ... employment growth in the current recovery is much slower than in
earlier upturns -- "the slowest in any recovery since the Kennedy
administration," he writes. Stokes is not making a partisan point about the Bush
administration alone, since he notes a long-term trend toward slower job growth.
But the job numbers help explain why the polls are recording so much economic
discontent in the middle of an expansion.
For the past 15 years, progressive free-market politicians have offered an
appealing mantra about how to save the middle class: What's needed, they've
said, is heavy investment in education and job training to allow people to make
the transition from the "old" economy -- those auto jobs -- to the new. "What
you earn depends upon what you can learn," President Bill Clinton said over and
There's certainly some truth to that still, but in the global economy,
competition is fierce even for high-end jobs requiring great skill and
education. To think otherwise is to deny the obvious ... people of India and
China, to pick just the two obvious examples, are gifted, energetic, ambitious
-- and numerous.
That's why Alan Blinder, a Princeton economist and former vice chairman of
the Federal Reserve, was right to warn us about how many jobs are in danger of
being moved abroad. In an article in Foreign Affairs this year, he wrote that
"we have so far barely seen the tip of the offshoring iceberg, the eventual
dimensions of which may be staggering."
Blinder is no protectionist, but he insisted that "the governments and
societies of the developed world must face up to the massive, complex, and
multifaceted challenges that offshoring will bring."... Stokes and Blinder ...
point to the greatest challenge facing the American center-left ... whether
progressives can, over the long run, keep their core promise to expand
opportunities for the middle class and the poor.
Historically, voters turn away from conservative free-market politicians
after they conclude that capitalism needs help in living up to its commitment to
create widely shared abundance. After World War II, voters in rich countries
entered a social democratic bargain in which capitalism ... was tempered by a
large public sector and a unionized industrial sector that provided social
insurance, education, pensions and health care. ...
The old bargain is breaking down and is in urgent need of renegotiation. The
most promising place to start would be in reforms of the areas where the old
bargain worked best: health, retirement and schooling. Because electorates are
looking for a better economic bargain, the words "New Deal" never sounded more
up to date -- though if the marketing specialists insist, A New and Improved
Deal would do just fine.
Health care reform has to be a top priority and my preference is for a
single-payer system. On the jobs front, there are no magic answers. At the
international level, a falling dollar against the yuan and other currencies
would help, but not immediately, so continued effort there is needed.
Domestically, policy could focus much more on the problems faced by workers
caught in the structural transition brought about by globalization and
information processing technology. Whether you feel let down by Clinton's
message of "What you earn depends upon what you can learn" or not, at least the
administration was focused on trying to find solutions. It would be nice to
see that level of effort devoted to the problems faced by workers at all levels
during these tumultuous times for labor markets. In addition, other policies such
as tax cuts could be used to level opportunities rather than enhance income
inequality, and much more could be done ensure equal opportunity in education.
At the individual level, advice on how to avoid being outsourced or replaced
by a machine some day seems a lot like a doctor giving advice on how to stay
healthy - there are guidelines, but no guarantees that your industry won't be
the one that becomes unhealthy even with the best of practices. For the most
recent example of those guidelines posted here, see
Shiller, and the posts over the last few days on the future of the American worker examine these issues as well.
What would your New and Improved New Deal look like?
Posted by Mark Thoma on Tuesday, June 13, 2006 at 12:36 AM in Economics, Health Care, Income Distribution, Policy, Politics, Social Security, Taxes |
Starter-interrupt devices are beginning to be used in risky car loans. If a consumer falls behind in making payments, the car won't start. In this case, technology is doing two things. First, it is displacing labor. With these machines, "Repo Men" are no longer needed, at least not in the same numbers.
Second, it is reducing the risk of loans in the automobile market which enhances its efficiency:
For Some High-Risk Auto Buyers, Repo Man Is a High-Tech Gadget, LA Times/AP:
Rashida Redd punched in a six-digit code in her Pontiac Grand Prix... The
34-year-old Pottstown, Pa., mother of five had to file for bankruptcy protection
about a year ago in the face of mounting medical bills from her husband's
Despite her poor credit history, Redd was able to lease the 3-year-old car
... on the condition that it have a starter-interrupt device. ... The
cigarette-pack-size device [is] mounted under the dashboard.... If she misses
her $94 weekly payment, it won't let her car start.
Starter-interrupt devices are becoming a popular way for lenders to ensure
that they get paid, and consumers seem willing to accept them to get into nicer
cars, use a smaller down payment and qualify for a lower interest rate...
Consumers with poor credit often face interest rates of more than 20% — nearly
triple the rate that drivers with good credit can get... They also have to make
a down payment equal to 10% to 20% of the car's purchase price, while buyers
with good credit can buy a vehicle with little or no money down. ...
[T]he devices were mainly geared for the "buy here, pay here" market —
consumers with the lowest credit scores. Typically, these buyers have filed for
bankruptcy protection or had a repossession. "Buy here, pay here" customers also
are limited to how expensive a car they can buy, typically no more than
Where else could these be used? Home appliances such as washers, dryers, and
refrigerators that won't function if payments are missed? Something about this
feels intrusive, but I can't think of any reason to oppose it since it would
allow more people to purchase these items on better terms.
Posted by Mark Thoma on Tuesday, June 13, 2006 at 12:33 AM in Economics, Market Failure |
If you like genetics, evolutionary biology, and so on, the NY Times has been running a good series of columns by Olivia Judson (to get a reading on their accuracy, I had one of our molecular biologists read one of the columns on genetic structure and active/passive copying as I had a question anyway and she said in reply: "This is exactly right! Genomes are architectural jumbles -- and we're the better for it! Well, mostly. Cancer is probably an unavoidable by-product of our penchant for sloppiness."). Last week the topic was the building of the genome - to me horizontal
gene transfer through bacteria and other means is particularly intriguing and
solves lots of puzzles involving uneven evolutionary changes - and this week
it's experiments the author would like to see performed. This one proposes a way to find out why birds
don't get pregnant:
Why Don’t Birds Get
Pregnant?, by Olivia Judson, Commentary, NY Times: Welcome back to Mad Scientist Week. Today, I want to look at ... why is it
that birds don’t get pregnant... Or to put it another way, why do all birds lay
Questions like this matter because the answer tells us something important
about the paths evolution can take. Some people suppose that from time to time,
evolution gets stuck — that certain evolutionary directions are impossible (or
at least, very difficult). According to this school of thought, birds can’t
evolve pregnancy: some aspect of their biology stops them. Others argue that
when such a phenomenon fails to evolve, the reason is not that it can’t, but
that it’s not beneficial. This view says birds don’t evolve pregnancy because
there’s presently no advantage in it.
At the moment, we can’t easily tell which view is correct: no one has done
any experiments. Today, I’m going to propose one.
First, I should say what I mean by pregnancy. I mean: giving birth to live
young. The alternative is laying eggs. However, different animals have different
kinds of pregnancies. Humans, mice, dogs and other mammals ... make tiny eggs;
the young draw nourishment from their mothers as they grow. In contrast, pythons
give birth to live young — but rather than nourishing the developing embryos...,
a female python makes large eggs which she keeps inside her body until the young
have finished developing. ... Marsupial mammals — kangaroos, koalas, opossums
and that crowd — do a mix of the two. Marsupial eggs are (relatively) large and
yolky, but the mother also transfers nutrients to the embryo. In short, there’s
a spectrum of ways to be pregnant.
And a lot of organisms have taken up the practice... Birds, however, are
missing. Of the five major groups of animals with backbones, only birds have
never evolved pregnancy. Why not?
When I raised this question in my first column, a number of readers answered
it by observing that birds fly. But ... the answer is not so simple. Bats fly —
yet they have pregnancy. Moreover, many birds do not fly. ... Yet none of these
has switched from eggs. Antarctic penguins, it seems to me, would do especially
well with live birth — they wouldn’t have this silly business of trying to keep
their eggs warm when the temperature is 50 below. And they’ve had plenty of
time: the ancestors of modern penguins abandoned flight at least 100 million
So, is it because they can’t? Or is it that they could but they don’t? Both
schools of thought can make good arguments. ... But although both sides can
point to this and that, neither has proof their argument is right. To tell which
side is right, we need to do an experiment.
The ideal strategy would be to try to evolve a pregnant bird. But this might
take a rather long time. A more practical aim would be to try to discover
whether the imagined constraints are real. Here’s one way we could do that.
When lizards switch from eggs to pregnancy, they don’t do it overnight. They
start gradually, by keeping the eggs inside their bodies for a bit longer and
laying the eggs when the embryos are more advanced. In short, the first step in
evolving pregnancy is becoming egg-retentive.
Interestingly, egg retention is virtually unknown in birds. In almost all
species, the female lays the egg as soon as it’s been fertilized. So I suggest
that we take a bird, such as a cuckoo, which does sometimes keep its eggs inside
for longer than is usual, and see whether we can stretch out its egg-retention
To do this, we’d breed cuckoos as horse breeders breed racehorses — except
that instead of choosing the fastest animals to breed, we’d choose the most
retentive ones. Cuckoos that keep their eggs for longest before laying would be
rewarded by having their chicks go into the next round.
If it turns out to be very difficult to shift the retention time, we’d know
there is little genetic variation for the trait — and the constraint is real.
Then we could start to explore the reasons why ... If shifting egg retention
turns out to be easy — say, after 50 generations we’ve got healthy cuckoos that
can hold an egg for two weeks — then we know that holding an egg doesn’t evolve
because it’s not useful to the animal.
Such an experiment would be massive — you’d need lots of birds and lots of
years. It probably won’t get done. But just in case, here’s my prediction: we
would be able to evolve egg-retentive birds.
Update: More from the molecular biologist:
This is good. I never thought about that particular feature of birds before. It is odd, and I think I'd bet on the prediction. Another odd biological pattern is the complete absence of sexual reproduction in rotifers (small protozoans that whirl around in pond water). Maybe this was in the blogs on why the evolution of sex is reasonable or not. In any case, it's being studied by some high-profile people. By the criteria of ubiquity and diversity of types, rotifers are among the most successful living things. Yet, they've done it all by relying on vegetative reproduction. So much for the advantages of variety-inducing recombination!
Posted by Mark Thoma on Tuesday, June 13, 2006 at 12:30 AM in Science |
The CBPP examines a common argument for Health Savings Accounts, that
they will help to contain health care costs. The CBPP study shows that the expected cost containment from HSAs is very small. Importantly,
to the extent that there are cost savings, they arise largely from "those with lower
incomes ... forgoing cost-effective medical services including primary care,
prescription drugs, and preventive services":
Health Savings Accounts
Unlikely to Significantly Reduce Health Care Spending, by Edwin Park, CBPP:
Proponents of Health Savings Accounts (HSAs) ... have long argued that
widespread adoption of HSAs will contain health care costs substantially over
time. The theory is that the high deductibles required under HSAs (...$2,100 for
family coverage in 2006) will encourage individuals to be more prudent consumers
since they will now be responsible for the cost of health care below the
deductibles... To ... spur enrollment in HSAs, the Administration has proposed
new tax cuts expanding HSAs, ... and the House of Representatives may consider
these proposals on the floor during the House leadership’s “Health Week” later
This brief analysis indicates, however, that HSAs are unlikely to reduce
overall health care expenditures to any significant extent. The analysis also
finds that to the limited extent HSAs may cause some modest reduction in health
care spending, any such reduction is likely to result in no small part from
individuals — particularly those with lower incomes — forgoing cost-effective
medical services including primary care, prescription drugs, and preventive
- The vast majority of the nation’s health care spending would not be
affected by the high deductibles required under HSAs. ...[M]ost of the
nation’s health care costs are for expensive procedures or treatments — often
related to major illnesses or end-of-life costs...
- Because most health care spending occurs well above the high deductibles
required under HSAs, numerous health policy analysts have concluded that HSAs
are unlikely to produce significant reductions in overall health care spending.
For example, the Congressional Research Service states that “it would be
unreasonable to expect [HSAs] to produce a significant reduction in the nation’s
health care costs.” ... Even the Administration’s own actuaries ... believe that
... HSAs ... will have a relatively small net impact on health care cost
- In addition, to some degree, the availability of HSAs may actually
increase health care spending. HSAs provide a new tax subsidy for
out-of-pocket medical costs... As a result, tax-favored HSAs could encourage
some HSA enrollees to obtain additional health care services they would not
otherwise use, and thereby to increase these enrollees’ health care
- Low-users of health care who could be affected by the high deductibles
already incur significant cost-sharing, so HSAs are not likely to produce much
savings among this population. Individuals who do not use much in the way of
health care may have health care spending that could be affected by the high
deductibles required by HSAs. ... But a recent study ... determined that ...
low-users of health care are subject to significant out-of-pocket costs that
already discourage them from using many health care services. As a result, the
high deductibles would ... be likely to have only a limited impact among the
population of low-users.
- To the extent that there are any reductions in health care spending, it
likely is due in significant part to reductions in the use of cost-effective
medical services, such as primary care, prescription drugs and preventive
services, with a disproportionate impact on low-income individuals and families.
Among the medical services whose costs are generally below the minimum HSA
deductibles are services that many experts consider to be the most
cost-effective. Examples include primary care services such as physician visits
that diagnose and provide low-cost treatment of acute conditions... and
maintenance drugs that manage or treat chronic conditions like diabetes. In
addition, while the high-deductible plans attached to HSAs may exempt preventive
care... from the high deductible, there is no requirement that such plans
actually do so... The effect of the high deductibles required under HSAs on the
use of such services is likely to be particularly pronounced among lower-income
individuals and families because they ... are more sensitive to increases in
their out-of-pocket medical costs. Even President Bush’s own Council of Economic
Advisers acknowledges that greater cost-sharing among such households could
result in worse health outcomes for low-income families. If a medical condition
or illness goes untreated because lower-income individuals are unable to pay
out-of-pocket for appropriate primary care or prescription drugs, their health
could decline, forcing them ultimately to make greater use of costly services
like emergency room visits or hospitalization. As a result, to the extent that
low-income individuals and families fail to use preventive care, primary care,
prescription drugs, or other cost-effective, lower-cost services, HSAs could
actually drive up the health-care costs that such people incur.
Not exactly a ringing endorsement. As Marty Feldstein acknowledges in "Balancing the Goals of Health Care Provision," it is not possible to use HSAs to simultaneously achieve the goals of preventing loss of care due a
patient's inability to pay, avoiding wasteful spending, and allowing choice based upon individual tastes.
Posted by Mark Thoma on Monday, June 12, 2006 at 05:08 PM in Economics, Health Care, Policy |
Ed Leamer reacts pessimistically to
Richard Florida's essay on the future of the American worker and Florida's
belief that developing the "Creative Class" is the key to success in the global
Levy's response to Florida):
Wealth and Power in the 21st Century, by Edward E. Leamer, Cato Unbound: For one such as myself, with a critical bent, it is disappointing not to find
more with which to disagree in Richard Florida’s essay. In particular, I agree
with Professor Florida’s first three points, though not the fourth. Here are the
points of agreement:
- Compensation for work in the US is having, and will continue to have, an
increasingly large “creative” component.
- The creative/innovative/talent-based jobs have historically been highly
clustered geographically, and that clustering is not likely to be materially
affected by the communications technologies...: the cell phone,
e-mail, and the Internet.
- Talent is far from equally distributed, and as talent becomes a larger
component of compensation, inequality will inevitably rise, and with that comes
deeper and different schisms in social relations, politics, and culture.
With all that agreement, I think I can still find something useful to say:
The word “creative” as used by Florida is an ambiguous term that I think to some
extent takes us in the wrong direction, since in some ways it overstates the
break from the past, and in other ways it understates the seriousness of the
problems that lie ahead.
I prefer the word “talent” to suggest abilities that some of us have, but
others don’t, and can never acquire. ... But first, we should understand that, in some ways, this isn’t new. The
transfer of tasks from humans to machines is the foundation of the productivity
advances that have turned a subsistence pre-industrial world into the bountiful
reality enjoyed by those lucky enough to live in the developed, industrialized
In the 20th century, it was the mundane repetitive manual tasks that were
transferred to machines. While that process continues today, something new is
happening: mundane repetitive intellectual tasks are being transferred to
personal computers. ... When the transfer of tasks to machines or to computers occurs, what’s left
for humans to do? That’s the critical question. ...
computerization of mundane intellectual work ... is different
from the mechanization of mundane manual work. I pose the problem by asking the
rhetorical question: Is a personal computer like a forklift or a microphone?
Both the forklift and the microphone require operators, which creates work.
But the kinds of operators are very different. ... Think about the forklift
first. You might be a lot stronger than I, but with a little bit of training, I
can operate a forklift, and I can lift just as much as you. Thus the forklift is
a force for income equality because it eliminates the strength advantages some
have over others. That is decidedly not the case for a microphone. We cannot all
operate a microphone with anywhere near the same level of proficiency no matter
what is the amount of training. Indeed, I venture the guess that I would have to
pay you to listen to me sing, not the other way round...
The effect of the microphone and mass media has been to allow a single
talented entertainer to serve a huge customer base and ... command
enormous earnings. Thus, as opposed to the forklift, the microphone creates a
powerful force for inequality. ... What I mean is
that the ... forklift attenuates genetic differences;
the microphone amplifies them.
A personal computer is both a forklift and a microphone. Clerks in McDonald's
no longer have to be able to read or compute—they only have to recognize the
picture of a hamburger... That’s the forklift. ... your intelligence advantage over me is
eliminated by the computer, just as your strength advantage was eliminated by
the forklift. But for many other operations it matters enormously who types on
the computer. One example is computer programming. The vast majority of people
are incapable of producing commercially viable computer code. That’s the
microphone. It amplifies your natural advantages.
Computer technology may be taking us into a future where there are a few very
talented, very well-paid people, and the rest of us are doing the mundane
computer-assisted tasks which don’t require us to read, write, or even think
very much. Just push the right button now and then.
Thus the information revolution may be a powerful force for income inequality
by raising the compensation for natural talents and also the interaction between
talent and training. It is the interaction between talent and training that is
particularly difficult to deal with. If talent and training had additive effects
on earnings, then compensatory education for the disadvantaged could be a
low-cost solution for income inequality problems. But if training is much more
effective for the talented, the talented will naturally receive more of it, and
the amount of compensatory training that is needed to equalize incomes may be
enormous and a great social waste—think of me and Pavarotti.
Thus I disagree with the entirely optimistic tone of Professor Florida’s
essay. I also disagree with his fourth point:
- The geography of wealth globally is being driven by the increasing role of
talent in the production process.
Most of the growth in the developing countries, including China, comes from
old-style manufacturing... The geographic concentration of growth along the
coast of China is not something new at all. It parallels the geographic
concentrations created in the Industrial Age in which a very large fraction of
GDP originated within 100 miles or less of major waterways...
Better, I suggest, to think of there being two distinct forces that are
changing the economic landscape. (1) The economic liberalizations in China,
Mexico, Brazil, Indonesia, Russia, India, and so on have created huge arbitrage
opportunities that allow the transfer of mundane manufacturing from the
high-wage countries of North America and Europe. (2) The United States, Japan,
and Northern Europe can no longer rely on growth in manufacturing and are
stumbling into a post-industrial age. The nature of that age is being
fundamentally altered by the personal computer and the Internet.
Posted by Mark Thoma on Monday, June 12, 2006 at 02:06 PM in Economics, Income Distribution, Unemployment |
There's a new book on Adam Smith:
Adam Smith Bio Recalls Moralist, Hypochondria, by Matthew Lynn, Bloomberg:
Economics has become a big deal in book publishing of late. ... Right on cue
comes James Buchan's ''Adam Smith and the Pursuit of Perfect Liberty''...
Buchan's thesis is that Smith was really a moralist, not an economist. ... It's
an intriguing argument, and one Buchan almost pulls off.
Buchan ... doesn't waste too much time on Smith's life, and rightly so. The
doings of economists are on the dry side of things, and Smith was a dullish fish
even among his own kind. Try as he might, Buchan can't breathe much human warmth
into his subject.
Smith ... rarely traveled, was regularly unwell and had a gloomy
disposition... ''At Oxford, we have the first signs of the depression and
hypochondria that is the ruling principle of Smith's character,'' Buchan writes.
The Scotsman never married, nor has Buchan dug up any serious liaisons. ... No
matter. Smith the man needn't detain us for long. Smith the thinker is what
Most people these days regard Smith as the founder of free-market economics.
He's the hero of the get-the-government-off-our-backs crowd. He's the pin-up boy
of the flat-taxers and the business-knows-best crew.
None of this would have resonated in 18th-century Edinburgh and Glasgow,
however. Smith was essentially a moral philosopher, and he viewed economics as a
branch of that inquiry, as Buchan reminds us. Smith's vision of the ''invisible
hand'' of the market grew out of a wider vision of a moral and just society.
Almost two decades before he published ''The Wealth of Nations,'' the book
for which he is rightly remembered, Smith brought out ''The Theory of Moral
Sentiments,'' to wide acclaim. That volume, which appeared in 1759, went through
six editions in his lifetime and was translated into French and German. ''It was
not eclipsed by 'The Wealth of Nations' till the rise of political economy amid
the battles and factory smoke of the Victorian age,'' Buchan writes. ...
Most people these days accept that a free market is the best way to organize
an economy. Yet many increasingly worry about whether it's a moral system... So
it's good to be reminded that Smith first started to question government
meddling in the economy because he was interested in morality and freedom...
His purpose was to build a just society. When each human is allowed to earn
his own living in his own way, Smith argued, he ultimately benefits the society
around him... Although Smith will still be remembered primarily as an economist,
Buchan is right to try to restore the philosophical Smith to the prominence he
Let me take this a bit further. Smith understands that unbridled self-interest
where, for example, the strong can devour the weak will not lead to an
harmonious, just society.
The Theory of Moral Sentiments discusses how
sympathy, empathy, benevolence, generosity, compassion, etc., which "Nature
has lighted up in the human heart" restrain selfishness in socially
optimal ways, and in The Wealth of Nations competition directs the
restrained self-interest to the social optimum. This process of channeling
self-interest to produce the social optimum through moral sentiments and
competition is the invisible hand at work.
When invoking Adam Smith's name to explain, say, CEO pay and the widening income distribution as free market outcomes, it's important to remember that the social optimum will not occur without the appropriate restraints on the pursuit of self-interest in the surrounding social, political, and economic environment.
Posted by Mark Thoma on Monday, June 12, 2006 at 03:04 AM in Economics, History of Thought |
When I was Department Head, the University had a difficult issue to solve and the
President brought a group of us together to talk about it.
Before we started, he listed a set of rules. One of them, the only one I remember because it's a very good
one, was to speak for yourself. We weren't allowed to say "People tell me that"
or "Some say," we couldn't invoke "There are those," we had to speak for
ourselves. This prevented people from asserting a whole coalition stood behind
them whether or not it was true, and most of the time it isn't - that's why the
"People tell me thats" are conjured up - to try to get others to buy into a weak
or false argument by making it seem like a large group of people are behind it.
Here's Paul Krugman on whether "Some Democrats" hate America:
The Some of
All Fears, by Paul Krugman, Commentary, NY Times: Back in 1971, Russell
Baker, the legendary Times columnist, devoted one of his Op-Ed columns to an
interview with Those Who — as in "Those Who snivel and sneer whenever something
good is said about America." Back then, Those Who played a major role in
Times are different now, of course. ... And we rarely hear about Those Who
these days. But the Republic faces an even more insidious threat: the Some. The
Some take anti-American positions on a variety of issues. For example, they want
to hurt the economy: "Some say, well, maybe the recession should have been
deeper," said President Bush in 2003...
Mainly, however, the Some are weak on national security. "There's Some in
America who say, 'Well, this can't be true there are still people willing to
attack,' " said Mr. Bush during a visit to the National Security Agency.
The Some appear to be an important faction within the Democratic Party — a
faction that has come out in force since the killing of Abu Musab al-Zarqawi.
Last week ... The Washington Times claimed that "Some Democrats" were calling
Zarqawi's killing a "stunt."
Even some Democrats (not to be confused with Some Democrats) warn about the
influence of the Some. "Some Democrats are allergic to the use of force. They
still have a powerful influence on the party," said Michael O'Hanlon of the
Brookings Institution after the 2004 election. Joe Klein, the Time magazine columnist, went further, declaring that the
Democratic Party's "left wing" has a "hate America tendency."...
But here's the strange thing: it's hard to figure out who those Some
For example, none of the Democrats quoted by The Washington Times actually
called the killing of Zarqawi a stunt, or said anything to that effect. Mr.
Klein's examples of people with a "hate America tendency" were "Michael Moore
and many writers at The Nation." That's a grossly unfair characterization, but
in any case, since when do a filmmaker who supported Ralph Nader and a
magazine's opinion writers constitute a wing of the Democratic Party?
And which Democrats are "allergic to the use of force"? Some prominent
Democrats opposed the Iraq war, but few if any of these figures oppose all
military action. Howard Dean supported both the first gulf war and the invasion
of Afghanistan. So did Al Gore ... both men opposed the Iraq war only because
they thought this particular use of force was ill advised and was being sold on
false pretenses. ...
So what's going on here? Some might suggest that the alleged influence of the
Some is no more real than the problem of flag-burning, that right-wing
propagandists are attacking straw men to divert attention from the Bush
Some might also suggest that Democrats who accuse other Democrats of closet
pacifism are motivated in part by careerism — that they're trying to sustain the
peculiar rule, which still prevails in Washington, that you have to have been
wrong about Iraq to be considered credible on national security. And they're
doing this by misrepresenting the views and motives of those who had the good
sense and courage to oppose this war.
But that's just what Some Democrats might say. And everyone knows that Some
Democrats hate America.
Previous (6/9) column:
Paul Krugman: The DeLay Principle
Next (6/16) column: Paul Krugman: The Phantom Menace
Posted by Mark Thoma on Monday, June 12, 2006 at 12:15 AM in Economics, Politics |
Here is Tim Duy's latest Fed Watch:
Ascendancy of the Hawks, by Tim Duy: My time of capitulation has come. After the weak labor report, I would have
thought a pause in at the next meeting a sure thing and played down the comments
of ultra-hawk Chicago Fed President Michael
Moskow. I was even bold enough
to say as much to a reporter:
"I do believe there is a building argument for a pause," Duy said. "The Fed
could take a breather and wait until we see how things play out."
Since then, however, the din of Fedspeak has become deafening, and it speaks
a single message – look for yet another Fed rate hike at the end of the month.
The Fed finally found what it has been lacking, a consistent voice. Or at
least we can only hope that a consistent voice has been found, and that Fed
Chairman Ben Bernanke can stay on message. For a terrific
summary of Bernanke’s flip-flops, see Liz Rappaport at
TheStreet.com (thanks to Barry Ritholtz). Of course, not everyone views recent Fed speak
as flip-flopping. David Altig at macroblog
argues that from his view point, FOMC
members have been true to their word, but the data have been pulling us in
different directions. See also
Jim Hamilton and
Brad DeLong. Their position argues that
the confusion stems from the pundits’ attempt to pigeonhole Bernanke; I
disagree, but will pick up on that issue in a later post.
Continue reading "Fed Watch: Ascendancy of the Hawks" »
Posted by Mark Thoma on Sunday, June 11, 2006 at 03:53 PM in Economics, Fed Watch, Monetary Policy |
Recently, there have been several proposals to encourage
conservation of oil. One
proposal from Robert Frank increases the tax on gasoline, then rebates the
tax revenue to consumers through a payroll tax reduction or some other
means. As he states:
In my Feb. 16 column, I suggested an additional gasoline tax of $2 a gallon.
All revenue would ... be returned on an approximately equal per capita basis
To look at the economics of this proposal, I decided to examine a fairly
standard textbook treatment of the topic where a tax on each gallon of gas
consumed is imposed along with a lump-sum tax rebate to consumers on an equal per capita basis. (I hope the microeconomists won't mind a macro guy stumbling around in their territory. This proposal is discussed in
Pindyck and Rubinfeld 5th ed., pgs. 114-115.)
Here's a graph of what happens before and after the tax, and after both the tax and the
Click on figure to enlarge
The consumer starts out at point A consuming QA gallons of
gasoline and has a utility level of U2. After the tax, which rotates the budget line downward as shown by the
dashed budget constraint, the consumer moves to point B which is on a lower
indifference curve U1, and consumption falls to QB. Finally, after the
rebate which shifts the budget line outward, the consumer moves to point C and
consumption increases to QC (the tangent indifference curve at point C is omitted for clarity).
Overall, the consumption of gasoline has
fallen, as intended, and the consumer is worse off because the level of utility
attainable at point C is below the level U2 at point A. Even though the money comes back to consumers in the form of a rebate,
the reason consumption falls from A to C is because the income elasticity of demand for gasoline is relatively low
(around .3 by some estimates) so that the substitution effect dominates the income
In this example, a low-income household would be made worse off by the tax
and rebate proposal (because indifference curve U2 is no longer
attainable), but it's still possible for some low-income individuals, those who
consume less gas than the value of the lump-sum rebate, to benefit. However, the
substitution effect induced by the tax makes the average household worse off. To aid low income individuals, other proposals such as linking the size of
the rebate to income could be examined as well.
Finally, this highlights the costs to households, but there are also potential benefits. To assess the proposal,
the costs must be compared to the benefits from reduced dependence on foreign oil
and the additional security that brings about, and the environmental and other benefits from lower consumption of gasoline.
Posted by Mark Thoma on Sunday, June 11, 2006 at 01:06 PM in Economics, Environment, Oil, Policy, Regulation, Taxes |