« May 2006 | Main | July 2006 »

Wednesday, June 21, 2006

Economic Unfreedom

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:

India's new 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 says:

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 without it.

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 on Wednesday, June 21, 2006 at 12:15 PM in Economics, Income Distribution, Policy, Politics | Permalink  TrackBack (0)  Comments (46) 


    The Threat to the Planet

    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 planet.

    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 conservatives.

    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 ones. ...

    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:

    The 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 carbon dioxide

    Here's 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 Constitution."

      Posted by on Wednesday, June 21, 2006 at 03:06 AM in Economics, Environment, Policy, Politics, Regulation | Permalink  TrackBack (0)  Comments (31) 


      Obtaining the Consent of the Governed

      Here's the third part of the series of excerpts from Harlan Ullman's book (part 1, 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 atmosphere:

      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 nation's course.

      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 constitutional guarantees...

      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 on Wednesday, June 21, 2006 at 01:27 AM in Economics, Politics | Permalink  TrackBack (1)  Comments (13) 


        Radically Economic Immigration Policy

        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 community...

        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 immigration?

        Continue reading "Radically Economic Immigration Policy" »

          Posted by on Wednesday, June 21, 2006 at 12:21 AM in Economics, Immigration, Policy, Politics | Permalink  TrackBack (0)  Comments (14) 


          Tuesday, June 20, 2006

          But Words Will Never Hurt Me?

          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 liberal media.

          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 decay.

          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 of politics.

          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 ideological camps."

          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 happened.

          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 on Tuesday, June 20, 2006 at 12:15 PM in Economics, Politics, Press | Permalink  TrackBack (0)  Comments (35) 


            Problems with the Value-Added Tax in Europe

            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 switch...

            In supporting the VAT, Bartlett argues:

            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 complexity:

            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 reductions. ...

            And Germany is pressing hard for action. From a June 8 Financial Times report:

            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 on Tuesday, June 20, 2006 at 09:54 AM in Economics, Policy, Politics, Taxes | Permalink  TrackBack (0)  Comments (15) 


              John McCain Interview

              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 direction?

              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 Pentagon?

              JMC: No.

              FT: Do you think it is time for him to step down?

              Continue reading "John McCain Interview" »

                Posted by on Tuesday, June 20, 2006 at 01:51 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (7) 


                Government Gone Bad

                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 one another.

                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 margins.

                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 on Tuesday, June 20, 2006 at 12:33 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (24) 


                  SmartEconomist: Open Source and Patents

                  From SmartEconomist:

                  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. Ask Your Question

                  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.
                  Read Q&A

                    Posted by on Tuesday, June 20, 2006 at 12:24 AM in Economics, Miscellaneous | Permalink  TrackBack (0)  Comments (0) 


                    Monday, June 19, 2006

                    Immigration and Political Polarization

                    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
                    http://voteview.com/Polarized_America.htm

                    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 above.

                    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 net.

                    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:

                    Polar261906_1

                    Polar361906

                    Polar161906
                    Click on graphs to enlarge

                      Posted by on Monday, June 19, 2006 at 03:42 PM in Economics, Immigration, Income Distribution, Politics | Permalink  TrackBack (0)  Comments (29) 


                      Consumer Debt

                      These writers from Fred Alger Management argue that the current level of consumer debt is not a problem:

                      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 improving. ...

                      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 benefits. ...

                      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 on Monday, June 19, 2006 at 02:05 PM in Economics, Saving | Permalink  TrackBack (1)  Comments (55) 


                        Dysfunctional Government

                        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 effectively.

                        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 dysfunctional.

                        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 government today.

                        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 destructive partisanship.

                        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.

                        The 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 on Monday, June 19, 2006 at 01:28 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (16) 


                          Paul Krugman: Class War 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 divide re-emerged.

                          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 economic issues.

                          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 priority.

                          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 godless. ...

                          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 on Monday, June 19, 2006 at 12:15 AM in Economics, Income Distribution, Politics | Permalink  TrackBack (0)  Comments (63) 


                            Sunday, June 18, 2006

                            Which Measure of Inflation is Best for Monetary Policy?

                            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 optimal.

                            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 approach:

                            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 inflation.

                            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 index...

                            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 way round.

                            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 on Sunday, June 18, 2006 at 12:33 PM in Economics, Inflation, Monetary Policy | Permalink  TrackBack (1)  Comments (22) 


                              Anti-Estate Tax Democrats

                              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 hide behind":

                              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 hide behind.

                              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...

                              Here's an 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 on Sunday, June 18, 2006 at 03:33 AM in Economics, Policy, Politics, Taxes | Permalink  TrackBack (0)  Comments (18) 


                                Turning Over a New Tobacco Leaf?

                                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 on Sunday, June 18, 2006 at 01:54 AM in Economics, Health Care, Policy, Regulation | Permalink  TrackBack (0)  Comments (2) 


                                  Saturday, June 17, 2006

                                  Social Mobility in the Immigrant Population

                                  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 being] 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 schooling."

                                  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 before.

                                  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. See 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.

                                  [2nd generation graph, 3rd generation graph]

                                  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 on Saturday, June 17, 2006 at 08:41 PM in Economics, Immigration, Policy, Politics | Permalink  TrackBack (1)  Comments (1) 


                                    PAYGO

                                    Brad DeLong says:

                                    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 here and here, and for a video, see here. Greenspan supports PAYGO as well. Something needs to change, and reinstating PAYGO would be a strong signal of commitment to fiscal restraint.

                                      Posted by on Saturday, June 17, 2006 at 04:48 PM in Budget Deficit, Economics, Politics | Permalink  TrackBack (0)  Comments (8) 


                                      My Father's Day Gift

                                      And it's a good one:

                                      Paulgrad

                                      Tim Duy, who does Fed Watch here, giving Paul his diploma at the ceremony today:

                                      Paulgrad2

                                      Congratulations Paul, you earned it! Paul will be starting the graduate program at UCLA next fall.

                                        Posted by on Saturday, June 17, 2006 at 02:25 PM in Economics, Miscellaneous, University of Oregon | Permalink  TrackBack (0)  Comments (6) 


                                        Trapping Carbon from Coal-Fire Plants

                                        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 world. ...

                                          Posted by on Saturday, June 17, 2006 at 09:06 AM in Economics, Environment, Oil | Permalink  TrackBack (1)  Comments (4) 


                                          A New Direction for America?

                                          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 the way.

                                          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 www.HouseDemocrats.gov.

                                          Here's more detail from the NY Times:.

                                          Democrats 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 federal budgets.

                                          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 challenges...

                                          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 on Saturday, June 17, 2006 at 02:43 AM in Economics, Policy, Politics | Permalink  TrackBack (0)  Comments (44) 


                                            Real Estate Brokerage Markets

                                            Should real estate brokerage markets be regulated by the government to make them more competitive?

                                            Commission 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 estate agents.

                                            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 report:

                                            Factors 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 commissions...

                                            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 necessary.

                                              Posted by on Saturday, June 17, 2006 at 02:40 AM in Economics, Housing, Policy, Regulation | Permalink  TrackBack (0)  Comments (12) 


                                              Service Worker Solidarity

                                              Will service sector workers lead a movement toward re-unionization?:

                                              The New 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 industry.

                                              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 are upbeat...

                                              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 thing."

                                              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 China. ...

                                              "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 hours. ...

                                              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 on Saturday, June 17, 2006 at 12:15 AM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (7) 


                                                Friday, June 16, 2006

                                                The Effective Estate Tax Rate

                                                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 percent.

                                                Cbpp61606
                                                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: Estate Tax "Compromise" With 15 Percent Rate Is Little Different From Permanent Repeal.

                                                  Posted by on Friday, June 16, 2006 at 02:21 PM in Economics, Policy, Politics, Taxes | Permalink  TrackBack (0)  Comments (21) 


                                                  Crowding Out

                                                  Greg Mankiw and Brad DeLong 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 out.   

                                                  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:

                                                  Islm161606

                                                  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.

                                                  Islm261606

                                                  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%:

                                                  Islm361606

                                                  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 on Friday, June 16, 2006 at 10:21 AM in Economics, Macroeconomics, Monetary Policy | Permalink  TrackBack (0)  Comments (23) 


                                                    News Coverage Granger Causes Terrorism

                                                    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 viewers."

                                                    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, 2001.

                                                    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 on Friday, June 16, 2006 at 12:57 AM in Economics, Press, Terrorism | Permalink  TrackBack (1)  Comments (11) 


                                                      Paul Krugman: The Phantom Menace

                                                      Paul Krugman wonders why the Fed is so concerned with inflation when wage growth isn't keeping up with productivity:

                                                      The 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 Depression.

                                                      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 stagnant wages...

                                                      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 downturn.

                                                      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 on Friday, June 16, 2006 at 12:15 AM in Economics, Inflation, Monetary Policy | Permalink  TrackBack (0)  Comments (26) 


                                                        Thursday, June 15, 2006

                                                        The American Dream Needs a Wake-Up Call

                                                        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 hear least—meritocracy.

                                                        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 on Thursday, June 15, 2006 at 06:29 PM in Economics, Policy, Social Security | Permalink  TrackBack (1)  Comments (23) 


                                                          Will Wages Continue to Fall in the Future?

                                                          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:

                                                          U.S. 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 researchers.

                                                          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 on Thursday, June 15, 2006 at 10:42 AM in Economics, International Trade, Unemployment | Permalink  TrackBack (2)  Comments (35) 


                                                            Snipe Hunting

                                                            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. ...

                                                            Mr. Hunter's 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 on Thursday, June 15, 2006 at 02:27 AM in Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (28) 


                                                              Do I Get a T-Shirt?

                                                              Tyler Cowen discusses the failure of donors to charities to effectively monitor how the donations are used:

                                                              Investing 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 finds ("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 like customers...

                                                              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 behavior:

                                                              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 on Thursday, June 15, 2006 at 01:28 AM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (2) 


                                                                "What They Need's a Damn Good Whacking"

                                                                Remember this from song by George Harrison from The Beatle's White Album (sample)?:

                                                                Piggies

                                                                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:

                                                                Where 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 ... protection...

                                                                "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 the clinic."

                                                                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 on Thursday, June 15, 2006 at 01:00 AM in Economics, Policy, Politics, Regulation | Permalink  TrackBack (0)  Comments (2) 


                                                                  Wednesday, June 14, 2006

                                                                  Who Gets the Benefits from Increased Economic Insecurity?

                                                                  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:

                                                                  The 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 class...

                                                                  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 on Wednesday, June 14, 2006 at 05:21 PM in Economics, Income Distribution, Policy, Politics, Social Security | Permalink  TrackBack (0)  Comments (40) 


                                                                    Motivating Socially Responsible Corporate Behavior

                                                                    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 disgraced”.

                                                                    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 on Wednesday, June 14, 2006 at 01:26 PM in Economics, Environment, Market Failure, Policy, Regulation | Permalink  TrackBack (1)  Comments (18) 


                                                                      A Piece of the Crock

                                                                      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 its promises.

                                                                      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 as “dopey.”

                                                                        Posted by on Wednesday, June 14, 2006 at 10:21 AM in Economics, Policy, Press, Social Security | Permalink  TrackBack (0)  Comments (8) 


                                                                        Lazy Shoppers Lose Their Shirts

                                                                        New Economist, a blog I should link more often, notes an interview with R. Preston McCafee of Caltech on finding the best price:

                                                                        The ideas 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 on Wednesday, June 14, 2006 at 09:06 AM in Economics | Permalink  TrackBack (0)  Comments (13) 


                                                                          Can You Hear Me Now? What?

                                                                          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.

                                                                          Yikes! Inflation!

                                                                          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 lot.

                                                                          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 on Wednesday, June 14, 2006 at 01:31 AM in Economics, Monetary Policy | Permalink  TrackBack (1)  Comments (2) 


                                                                            There But for the Grace of the Global Dice Go I

                                                                            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 on Wednesday, June 14, 2006 at 01:02 AM in Economics, Income Distribution, Unemployment | Permalink  TrackBack (0)  Comments (1) 


                                                                              Optimal Value-Weighted Portfolios

                                                                              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 assets:

                                                                              The 'Noisy 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 hypothesis.

                                                                              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 direction...

                                                                              [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 aggregate dividends...

                                                                              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 investing.

                                                                                Posted by on Wednesday, June 14, 2006 at 12:06 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (23) 


                                                                                Tuesday, June 13, 2006

                                                                                A Comment on Weblog Policy

                                                                                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 on Tuesday, June 13, 2006 at 06:28 PM in Weblogs | Permalink  TrackBack (0)  Comments (17) 


                                                                                  Are Global Institutions the Answer?

                                                                                  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 to work.

                                                                                  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 on Tuesday, June 13, 2006 at 01:20 PM in Economics, International Trade, Policy, Regulation, Unemployment | Permalink  TrackBack (0)  Comments (29) 


                                                                                    Wanted: A New and Improved New Deal

                                                                                    Everybody talks about the economic weather, but nobody does anything about it:

                                                                                    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 jobs. ...

                                                                                    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 over.

                                                                                    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 on Tuesday, June 13, 2006 at 12:36 AM in Economics, Health Care, Income Distribution, Policy, Politics, Social Security, Taxes | Permalink  TrackBack (0)  Comments (75) 


                                                                                      High Risk, High Tech Loans

                                                                                      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 open-heart surgery.

                                                                                      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 $5,000...

                                                                                      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 on Tuesday, June 13, 2006 at 12:33 AM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (12) 


                                                                                        Why Don't Birds Do It?

                                                                                        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 eggs?

                                                                                        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 years ago.

                                                                                        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 time.

                                                                                        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 on Tuesday, June 13, 2006 at 12:30 AM in Science | Permalink  TrackBack (0)  Comments (25) 


                                                                                          Monday, June 12, 2006

                                                                                          Health Savings Accounts Unlikely to Reduce Health Costs

                                                                                          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 month.

                                                                                          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 services.

                                                                                          • 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 containment.
                                                                                          • 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 expenditures.
                                                                                          • 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 on Monday, June 12, 2006 at 05:08 PM in Economics, Health Care, Policy | Permalink  TrackBack (0)  Comments (7) 


                                                                                            The 'Creative Economy' and the Future of the American Worker Continued...

                                                                                            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 economy (Frank 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:

                                                                                            1. Compensation for work in the US is having, and will continue to have, an increasingly large “creative” component.
                                                                                            2. 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.
                                                                                            3. 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 world today.

                                                                                            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. ...

                                                                                            The 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:

                                                                                            1. 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 on Monday, June 12, 2006 at 02:06 PM in Economics, Income Distribution, Unemployment | Permalink  TrackBack (0)  Comments (11) 


                                                                                              Adam Smith's Harmony of Interests

                                                                                              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 matters...

                                                                                              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 deserves.

                                                                                              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 on Monday, June 12, 2006 at 03:04 AM in Economics, History of Thought | Permalink  TrackBack (1)  Comments (12) 


                                                                                                Paul Krugman: Some of All Fears

                                                                                                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 politicians' speeches.

                                                                                                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 Democrats are.

                                                                                                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 administration's failures...

                                                                                                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 on Monday, June 12, 2006 at 12:15 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (6) 


                                                                                                  Sunday, June 11, 2006

                                                                                                  Fed Watch: Ascendancy of the Hawks

                                                                                                  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 on Sunday, June 11, 2006 at 03:53 PM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (0)  Comments (41) 


                                                                                                    A Gas Tax with a Rebate

                                                                                                    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 rebate.

                                                                                                    Gastax61106
                                                                                                    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 effect.

                                                                                                    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 on Sunday, June 11, 2006 at 01:06 PM in Economics, Environment, Oil, Policy, Regulation, Taxes | Permalink  TrackBack (0)  Comments (46)