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Sunday, July 23, 2006

Taking the Core Out of the Apple

Paul Krugman made similar points about new York:

Cities Shed Middle Class, and Are Richer and Poorer for It, by Janny Scott, NY Times:  Some big American cities are flourishing as at no time in recent memory. Places like New York and San Francisco appear to be richer and more dazzling than ever: crime remains low, new arrivals pour in, neighborhoods have risen from the dead. ... But middle-class city dwellers across the country are being squeezed.

[T]hey are ... a casualty of high housing costs and the thinning out of the country’s once broad economic middle. The percentage of middle-income neighborhoods in metropolitan areas like Los Angeles, Chicago and Washington has dropped since 1970, according to a recent Brookings Institution report. The percentage of higher-income neighborhoods in many places has gone up. ...

Does it matter if there is less room for a middle class? ... Obviously, cities benefit economically from the presence of the rich. Tax revenues go up when the rich pour into what some economists now call “superstar cities,” places like New York, San Francisco, San Diego, Boston and Washington that attract highly skilled people but have limits on the ability to build housing. ...

Edward L. Glaeser, a Harvard economist who studied 300 large cities with a range of levels of income inequality in the 1960’s and 1970’s, says he found little evidence that those levels later affected the growth of housing prices, income or population there.

Of course, cities need police officers, firefighters, teachers. But as long as they can get the labor they need from somewhere nearby, ... middle-class shrinkage may not hurt. In Southern California, developers import construction workers from Las Vegas and put them up in hotels; costs go up but rich clients can pay. ... Pay for essential workers like plumbers and cabdrivers will tend to go up...

Professor Glaeser said: “There’s no obvious smoking gun saying cities will be substantially worse off. There’s a whole lot of America that does a very good job of taking care of the middle class. The great sprawling edge cities of the American hinterland provide remarkably cheap housing, fast commutes, decent public services and incredibly cheap products available in big box stores. As a New Yorker, I understand the view that exile from New York is consignment to hell; but that’s not accurate. The majority of middle-class people that have moved out have presumably found themselves better lives out there.”

But sociologists and many economists believe that there can be non-economic consequences for cities that lose a lot of middle-income residents. The disappearance of middle-income neighborhoods can limit opportunities for upward mobility... It becomes harder for lower-income homeowners to move up the property ladder, buy into safer neighborhoods, send their children to better schools and even make the kinds of personal contacts that can be a route to better jobs. ...

Continue reading "Taking the Core Out of the Apple" »

    Posted by on Sunday, July 23, 2006 at 12:33 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (0) 

    "The Naïve Pay All the Fees"

    Would you like the extended warranty, window VIN etching, undercoating, fabric protection, paint sealant, and rust proofing? And of course, we have to add ADM and advertising fees, dealer prep, carrying costs, destination charges, documentation fees, port prep fees, registration fees, and the drive off deposit:

    What the Naïve Consumers Don’t Know, Can Help You, by Damon Darlin, NY Times: When Xavier Gabaix and David Laibson open a hotel room minibar, they see ... a perpetual battle between companies charging hidden fees and the sophisticated consumer trying to avoid them. The two economics professors ... have looked at how companies hide fees and costs. They found that sophisticated consumers have somehow learned how to game the system by having enough naïve consumers around to subsidize them.

    The smartest strategy, they say, is for the sophisticated consumer to choose the service with the most hidden charges and highest add-on prices, but then avoid paying those added costs. “The sophisticated consumer takes advantage of that,” Mr. Gabaix said. “The naïve pay all the fees.”

    Companies hide add-on costs, of course, because it is lucrative. ... The fastest-growing segment of Wells Fargo's banking business is income from fees, up 14 percent in the latest quarter.

    Consumers see fees everywhere, in their cellphone and credit card bills, mail-order invoices, mutual fund statements, car rental and hotel charges. Actually, most consumers ... do not see them or they spot them too late. And that myopia perplexed the two professors.

    Economic theory says shrouded fees should not happen. A competing company should come along and tell consumers just how bad its competitors are for extracting those fees. ... Marriott should be pointing out Hilton’s parking fees and phone surcharges. But that rarely happens... Mr. Laibson said. “Why doesn’t the market fix the problem?”

    In a paper appearing in The Quarterly Journal of Economics with the academic title of “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets,” the professors say that price-cutting and educational advertising do not always benefit the bargain-seeking consumer. A company would hurt itself if it described how its competitor loads on the fees, they said.

    They argue that drawing attention to the rivals’ fees just alerts the sophisticated consumer that the rival is actually offering a better deal. Transparent Hotel could advertise a no-added-fees $100 room and point out that Nontransparent Hotel really charges $145 for its $70 room. If a consumer goes with Nontransparent and avoids the add-on fees, he ends up paying less... He would advise going to the hotel with the lowest room rate and avoid any fees...

    The result for the well-meaning company is harsh. Its advertising might hurt the rival in the sense that consumers pay fewer fees there, but it is increasing the number of sophisticated consumers and teaching them to choose the other guys. It is unlikely to draw in the sophisticates. “That business won’t make much money once you understand how the world works,” Mr. Laibson said...

    It is a far better business strategy to have the naïve subsidize the sophisticated. The way the market solves this problem, in other words, is not by educating consumers, but by having the sophisticated consumer exploit the opportunities. Sophisticated consumers are not really taking advantage of companies, nor are companies taking advantage of consumers, as much as companies are helping those sophisticated consumers take advantage of the less sophisticated consumer.

    For example, you see an offer for a room at Nontransparent Hotel for $75 (which costs the hotel $100 to provide). The guy checking in behind you also rents a room, but will rack up $70 in fees from the minibar, the phone and garage parking (all of which cost the hotel $20 to provide). You, on the other hand, were not tempted by the minibar, used your cellphone for calls and took public transportation to the hotel. The other guy subsidized your room...

    The sophisticated consumer ... exploits the company by taking the below-cost product and shunning the fees. “It’s a perpetual battle between the firm that fools consumers into paying fees and the smart consumer who can avoid them,” Mr. Laibson said. Getting cheaper goods and services subsidized by the naïve consumers works as long as you know what you could be charged. But it does not pay if too many people know the same thing.

    Shrouding of information rarely goes away because there are new generations of myopic consumers and even the sophisticated consumers are forgetful or distracted and end up paying for add-ons. The professors say that new shrouding techniques constantly evolve as companies find fresh ways to generate additional revenue. ...

    That said, outsmarting companies is hard work. ... You have to hunt for the information .... Hotels in South Florida rarely tell you while you are making reservations or checking-in that you will face a $25 “resort fee,” which is ostensibly imposed to cover your use of the pool and deck chairs. ...

    Even the most sophisticated people find it hard to game the system when it comes to fees. In earlier research, Mr. Laibson and two colleagues, James Choi ... and Brigitte Madrian ..., learned that even the most knowledgeable people make really dumb decisions even when provided all the information.

    Wharton is a top business school and its graduates will be leading companies. The students there should be pretty smart about financial matters, right?

    The academics asked a number of the school’s M.B.A. students how they would allocate $10,000 among five indexed mutual funds. Each student was given the fund prospectuses, where investment strategies and fees are outlined. The academics expected the students would put all of the money in the fund with the lowest fees since index funds invested in identical stocks. But some students went chasing the highest historic returns. Others wanted to spread risk by dividing the money among a number of funds. Only 6 percent did the expected thing.

    Then Mr. Laibson and his colleagues made the test easier. Instead of giving them just the funds’ prospectuses, he gave them a sheet of paper that summarized the fees of the five funds. “We thought that would make it more transparent,” he said. “We were unshrouding the information.” Only 19 percent got the correct result. ...

      Posted by on Sunday, July 23, 2006 at 12:33 AM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (25) 

      Florida's "Biblical Use" Exemption

      This is from the blog A Taxing Matter written by Linda Beale, a "law professor at the University of Illinois College of law who teaches various courses in the area of federal income tax--statutory construction (tax), introduction to federal income tax, corporate taxation, and introduction to international taxation":

      Florida's "Biblical Use" Exemption, by Linda M Beale: A new Florida statute (L. 2006, H 7183 (c. 164)) takes effect on the first of July. It provides an exemption from ad valorem tax for the use of property owned by a 501(c)(3) tax exempt organization to "exhibit, illustrate, and interpret Biblical manuscripts, codices, stone tablets, and other Biblical archives, provide live and recorded demonstrations, explanations, reenactments, and illustrations of Biblical history and worship; and exhibit times, places, and events of Biblical history and significance." Id.

      Now, this is clearly not a federal tax issue (the State is merely using the federal tax-exempt organization category as a part of its definition for the tax expenditure). But is it a constitutional one? Is it really cricket for a state to single out events and exhibits related to the Bible for a tax exemption? Yes, parts of the Bible are sacred to both Jews and Christians, but isn't this providing the imprimatur of the state selectively to the Judeo-Christian heritage over all other religious heritages (Muslim, Hindu, Buddhist, etc.)? Maybe the legislators who passed this law, and Jeb Bush who signed it into law on June 9, would argue that it is merely a form of support for a particular type of historical scholarship/experience that just happens to be closely connected to fundamentalist Christian views.

      But the facts, as always, are telling. This legislation was passed to aid a specific entity--a Christian theme park in Orlando, Florida called the Holy Land Experience. See this discussion in the St. Petersburg Times. The park is quite profitable, and the local county in which it is located tried to tax it (about $300,000 a year). The park argued that the profits financed its Christian ministry and so it was entitled to a property exemption. The park won the first round in court, but the county appealed. Then the legislature decided to step in and make sure that the institution couldn't be taxed. The county has now conceded defeat on the issue and dropped its suit for back taxes. See Holy Land Experience Wins Final Round. The Republican state senator who sponsored the bill said it was intended to cover only the Christian theme park and that it had been "stiffly worded" to ensure that object. Id. But, of course, there are always loopholes that can be exploited. Apparently a creationist group that runs a dinosaur park is trying to become eligible for the exemption now. Id.

      Even conceding arguendo the constitutional concern (i.e., a violation of the First Amendment Establishment Clause because the state is selectively endorsing a particular religion), I wonder about the wisdom of this kind of preferential treatment for activities so closely associated with evangelical Christians today. We are a pluralistic society with people whose roots lie in many different cultural and religious heritages. Where is the state regard for the Koran, the Vedas and the history of religious societies and worship that those documents represent? Our basic notion of respect for individuals depends on respectful treatment of each person's core beliefs and values, even though they may differ from our own. Florida seems to have missed the boat here.

      Continue reading "Florida's "Biblical Use" Exemption" »

        Posted by on Sunday, July 23, 2006 at 12:30 AM in Economics, Politics, Religion, Taxes | Permalink  TrackBack (0)  Comments (1) 

        Saturday, July 22, 2006

        Pool Party at the Stein's!!!

        Ben Stein can feel the social fabric tearing, but he is struggling to understand what is causing it:

        From Harvey Road to Crescent Drive, Something Changed, by Ben Stein, Commentary, NY Times: Thanks to some fine reporting at The Wall Street Journal, we now know that right after 9/11, as the crushed bodies of heroic firemen were still being pulled from the rubble of the World Trade Center, and the nation was in deep, bone-chilling mourning, the smart people who run some of America’s biggest and most powerful corporations may have already figured out An Angle.

        Certain officers and directors at companies including UnitedHealth, Merrill Lynch, Teradyne, Black & Decker and Home Depot knew that their stock was way down because of panic about the attacks and whether more were coming. They also knew that their long-term prospects were excellent and that their stocks were a bargain. And right after the attacks, they quickly awarded themselves options priced to strike at the super-low prices their stocks reached when the fires at the Pentagon were still smoldering. In many cases, they went on to make serious money from those options. ...

        This — as I see it — went beyond war profiteering. This was actual “death profiteering,” as my friend, the writer Marina Malenic, put it. Now, to be sure, such actions are not illegal. ... there is no law that says insiders cannot gather together to make an unseemly profit off a national catastrophe. But it’s sickening in its breach of faith, and its breach of trust with the society at large. (Some of the companies that granted 9/11 options are also part of an investigation into the backdating of options — a practice that in some cases could be illegal.) ...

        As I thought about it all, I picked up Philip Roth’s magnificent “American Pastoral” and began to read it, thinking as I did: “How the hell did everything go so wrong in this country? How did we stop giving a damn about our neighbors and viewing this ... brief wink between eternity and eternity (to paraphrase the great Hart Crane), as mostly a chance to make money off a nameless, faceless Other?” And as I read Roth’s incredibly potent words about America in the 1940’s and 50’s, the America I was born into and grew up into, I thought about the Sculls.

        On Harvey Road, our little dead-end street in Silver Spring, Md., ... there were about 30 homes and families. Every family knew every other family, and every mom would take of care of anyone’s kid sent home sick from school.

        In about 1955, one family in the neighborhood, and one family only, built an in-ground swimming pool. That family was the Sculls... When the Sculls built their pool, they made a schedule and passed it around the neighborhood. There was a set of times so that every family on the street could use the pool every week of the summer.

        That is, in the America that had banded together to win World War II, the America bursting with togetherness, community spirit, and the feeling that anything could happen if we all pulled together, the Sculls shared their pool with every single family in the neighborhood as if we all owned it. It was a small, unheated pool, but how we all loved it, and what splash fights and free-style races and underwater breath-holding contests we had there in the wild cathedral afternoons of summertime youth. ...

        Then something happened. Maybe it was the explosion of individualism. Maybe it was new kinds of people who did not speak the language or who seemed different and threatening coming into our towns. Maybe it was just the life cycle of empires. But now life is different.

        Now, in 2006, on my street in Beverly Hills, every home has a pool, as far as I know. Many of them are spectacular and all are heated. But we all have high walls around our homes. I have lived on my street in my house for eight years and know only one neighbor...

        If our son got sick at school and my wife or I were not home, the school nurse would just have to keep him until we could be found. There is not one neighbor on the street who would take him in, or who even knows him...

        As I said, something happened. It happened not only in neighborhoods, but also in corporate America, where the only meaningful units to management are the manager himself and his wealth. The workers are just the most easily varied input of costs, not people to whom you feel any obligation, or by whom you want to be viewed as a kind and decent person. There is certainly no community between workers and management at most companies. ...

        And the nation as a whole, under siege by terrorists and militants who are very sure of their values? It’s just a mass of strangers you have to be nice to when you want them to invest in your company or when you want them to go off to war to save you while you are making money off of a national tragedy. Otherwise, they’re just strangers and you certainly would not want them inside your walls or in your pool. It’s nothing personal, as they say in “The Godfather,” “It’s just business.” ...

        I’ll say it again. Something happened.

        Some have a very romanticized memory of the 1940s and 1950s, but not everyone shared in the America he remembers and not everyone would want to return to those times. Some hard fought social battles were still to come.

          Posted by on Saturday, July 22, 2006 at 07:29 PM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (15) 

          Nannies, Church Ladies, and Scolds

          Milton Friedman advocates ending the welfare state in this recent post. Here's an argument in the other direction:

          Long Live the Nanny State, by Daniel Akst, NY Times: First the House of Representatives passes a bill restricting Internet gambling. Then the chief executive of a leading offshore Internet gambling company is arrested during a layover in Texas.

          It’s comforting to know that, despite the spread of legal gambling from coast to coast, Uncle Sam is defending the virtue of innocent Americans against evil games of chance in cyberspace. But far more important ... is a question it raises: In a modern free-market economy, how much should the government try to protect us from ourselves?

          I am a believer in markets, but I suspect that the right answer is “a good deal more than it does now.” As a matter of fact, this is as good a time ... for a ... defense of that widely derided institution, the nanny state.

          The issue is so timely because many traditional external restraints on individual behavior have fallen away. Human beings have always had to be self-regulating, of course, but capitalism, technology and social change are making us ever more reliant on self-control while temptation abounds as never before.

          Social structures like close extended families that once constrained behavior have weakened even as widespread affluence has democratized overindulgence. A result is that Americans eat too much, save too little and absolutely guzzle planet-warming fossil fuel, all to our collective detriment. Forget about the national debt. What we have here is a ballooning self-control deficit. ...

          It’s tempting to suggest that government shouldn’t even be in the business of influencing noncriminal behavior, except that it already is and always will be. States advertise their lotteries constantly, for example, although they rarely mention the infinitesimal odds of winning. Internet casinos are usually a better deal.

          The tax code, meanwhile, discourages some things (like saving) and encourages others (like McMansions). In his recent book, “The Conservative Nanny State,” the economist Dean Baker argues that government nannyism, broadly defined, benefits the rich. So there is no point in pretending that government doesn’t influence behavior. ...

          The question is, what would an effective nanny state look like? Long national experience with drugs and alcohol suggests that banning things many people want is a sure road to failure. But indulgence can be made costly and inconvenient by hefty taxes, age limits and other rules.

          Social stigma is always helpful, as in the case of tobacco, and government bans on smoking in restaurants and the like have probably helped condemn cigarettes to broad disrepute. But the potential for positive nannyism is much greater. Imagine the economic and environmental wonders that might be wrought by a broad energy tax, for example.

          The rise of Internet gambling ... illustrates the difficulty of conducting effective government nannyism as well as a need to supplement individual self-restraint. Federal authorities stepped up a fight against offshore Internet gambling last Monday, charging David Carruthers, the chief executive of BetOnSports, a company that is publicly traded in Britain, with racketeering conspiracy related to an illegal gambling enterprise.

          Because proximity to casinos and problem gambling appear correlated, nanny theory suggests that it may be sensible to suppress Internet gambling, but it probably would not work.

          While the government can make it harder for Americans to conduct financial transactions with sites like BetOnSports, people who want to gamble always find a way. Perhaps it would make more sense to bring these operations to our shores and regulate the daylights out of them.

          A good nanny could also help by giving gamblers a forum to commit themselves to abstention before succumbing to the lure of the gambling tables. In Missouri, individuals who are doubtful of their own disciplinary stamina can bar themselves from casinos for life — and be arrested if they show up in one.

          Nannies can easily turn into, quoting John Tierney's description of Republicans, "...the Church Lady, the scold who makes even fellow congregants roll their eyes." Even when scolds get their way and ban activity, as explained in "Schools are trying to ban candy. Good luck!," markets find ways to work despite our best efforts to get in the way and stop activity deemed undesirable.

          I believe there is role for the government to play, not by interfering in markets, but instead by making markets work efficiently (and outside of economics to address equity issues), market failure in health care and social insurance are prime examples. But I have never been an advocate of the government telling me or anyone else what to do. The argument in the essay is that "It’s tempting to suggest that government shouldn’t even be in the business of influencing noncriminal behavior, except that it already is and always will be," but I find the argument that something should exist just because it does exist unpersuasive. Though I'm not ready to concede that there's no way to avoid having the government tell me what makes me happy, if it's true that goverment "always will be" anyway, I would still argue that such interventions should be minimized.

            Posted by on Saturday, July 22, 2006 at 01:46 PM in Economics, Market Failure, Policy, Regulation | Permalink  TrackBack (0)  Comments (5) 

            They Know What They're Doing

            Robert Reich says there are three things you should know:

            China Growth, by Robert Reich: I've been watching the statistics coming out of China about its economic growth. Here are three things you should know. (1) The people managing China's economy (I'm not talking about the politicians but about the financial and economic wizards who are actually making decisions about money supply, capital markets, and the like) are extremely good. They match the best economic minds anywhere in the world. In other words, they know what they're doing. (2) The latest data show China is now growing at a rate faster than 11 percent. That's extraordinary. It's faster than China has been growing for the last five years -- and that was faster than anyone had predicted. China's rate of economic growth is the biggest economic news in the world. (3) That growth is putting huge demands on world energy supplies, and raw materials. Oil prices will continue to rise, as will all other commodities. This is the most important economic fact in the world right now. It is also among the most important political facts in the world.

              Posted by on Saturday, July 22, 2006 at 09:00 AM in China, Economics | Permalink  TrackBack (0)  Comments (54) 

              Friday, July 21, 2006

              'That Devil from the West'!

              This is an interesting interview of Milton Friedman:

              The Romance of Economics, by Tunku Varadarajan, Commentary, WSJ: One doesn't interview a man like Milton Friedman -- the Nobel laureate in economics in 1976 and among the five or six most consequential thinkers of the 20th century -- without doing some assiduous homework.

              So I gathered his books -- reading some, re-reading others -- and made pages and pages of notes. I also emailed several intellectual heavyweights, asking them what they might enquire of Mr. Friedman -- now 94 years of age -- if they had him cornered at a cocktail party. Replies flooded back. "Inflation targeting," wrote a (marginally) younger Nobel economist. "Education," said another Nobel laureate. "Does the recent record of spending with a Republican president and Congress make him reconsider his support for the party?" wrote a man who, until a while ago, worked on economic policy in the White House. "Is there something distinctly difficult for capitalism in the Islamic world?" wondered a Middle East scholar. "What music does he listen to?" a Democratic political economist mused, unpredictably. More predictably, a big-cheese blogger was "dying" to know whether "Milton reads blogs -- and will he ever write one?"

              Everyone had a question -- and many had more than one (an economist in Chicago had 10). For Milton Friedman is everyone's idea of an American oracle, an American sage.

              Sages, of course, have their oddities, and the interview last week -- at Mr. Friedman's surprisingly petite office at the Hoover Institution, on the campus of Stanford University -- got off to a surreal beginning. By his desk hangs a map of Belize -- one of those stylized souvenirs made of cloth, embroidered to catch the eye. Why, I asked him, did he have a map of Belize on his wall? Mr. Friedman turned, looked at the object, and said: "I don't know. I really don't know." Not a good start to the interview, some might say; so I asked, by way of ice-breaker, whether he was keeping well. "Oh, yes!" was the spirited reply...

              [W]e moved to economics, and here I made a reflexive apology for not being an economist myself. "You mean you're not a trained economist," was Mr. Friedman's comeback. "I have found, over a long time, that some people are natural economists. They don't take a course, but they understand -- the principles seem obvious to them. Other people may have Ph.D.s in economics, but they're not economists. They don't think like an economist. Strange, but true."

              Was Keynes a "natural economist"? "Oh, yes, sure! Keynes was a great economist. In every discipline, progress comes from people who make hypotheses, most of which turn out to be wrong, but all of which ultimately point to the right answer. Now Keynes, in 'The General Theory of Employment, Interest and Money,' set forth a hypothesis which was a beautiful one, and it really altered the shape of economics. But it turned out that it was a wrong hypothesis. That doesn't mean that he wasn't a great man!"

              It cannot be said of too many economists that they "altered the shape of economics." Would Mr. Friedman say -- modesty aside -- that he was one of them? A long silence ensued -- modesty, clearly, was hard to put aside -- before he mumbled, as if squeezing words out of himself, "Er . . . very hard to say . . ." And then he was saved by the belle: The door opened, and in walked Rose, his wife, bringing a waft of panache into the drab office...

              Mrs. Friedman settled herself in a chair, her eyes twinkling, and my questioning resumed. If they were to throw a small dinner party ... for Mr. Friedman's favorite economists (dead or alive), who'd be invited? Gone was his tonguetied-ness of a moment ago, as he reeled off this answer: "Dead or alive, it's clear that Adam Smith would be No. 1. Alfred Marshall would be No. 2. John Maynard Keynes would be No. 3. And George Stigler would be No. 4. George was one of our closest friends." ...

              The spark between the Friedmans is clear, and rather touching. So I'm tempted to ask whether there is a romantic side to economics, in the way there is to history, or to philosophy. "Is there a romantic side to economics?" Mr. Friedman repeats after me, sounding incredulous, and then chuckling. "No, I don't think so. There's a romantic side to economics in the same way there's a romantic side to physics. Fundamentally, economics is a science, like physics, like chemistry . . . It's a science about how human beings organize their cooperative activities." Was that his preferred definition of economics? "Well, the standard definition is the study of how a society organizes its resources. In that sense, it's not particularly romantic."

              Is immigration, I asked -- especially illegal immigration -- good for the economy, or bad? "It's neither one nor the other," Mr. Friedman replied. "But it's good for freedom. In principle, you ought to have completely open immigration. But with the welfare state it's really not possible to do that. . . . She's an immigrant," he added, pointing to his wife. "She came in just before World War I." (Rose -- smiling gently: "I was two years old.") "If there were no welfare state," he continued, "you could have open immigration, because everybody would be responsible for himself." Was he suggesting that one can't have immigration reform without welfare reform? "No, you can have immigration reform, but you can't have open immigration without largely the elimination of welfare.

              "At the moment I oppose unlimited immigration. I think much of the opposition to immigration is of that kind -- because it's a fundamental tenet of the American view that immigration is good, that there would be no United States if there had not been immigration. Of course, there are many things that are easier now for immigrants than there used to be. . . ."

              Did he mean there was much less pressure to integrate now than there used to be? Milton: "I'm not sure that's true . . ." Rose (speaking simultaneously): "That's the unfortunate thing . . ." Milton: "But I don't think it's true . . ." Rose: "Oh, I think it is! That's one of the problems, when immigrants come across and want to remain Mexican." Milton: "Oh, but they came in the past and wanted to be Italian, and be Jewish . . ." Rose: "No they didn't. The ones that did went back."

              Mrs. Friedman, I was learning, often had the last word.

              With Mr. Friedman, personal questions are often inextricable from the currents of history. How did he cope, I ask, with the great opposition to his views in and out of the economics profession during much of his active career? And how does it feel to have gone from being a person reviled in certain quarters as Evil, to one revered across the world?

              Milton (suppressing a laugh): "I don't think I was ever regarded as 'evil.'" Rose (alluding to the protests that followed him everywhere, especially after he gave economic advice to the Pinochet regime): "It was very difficult to go to the colleges . . ." Milton: "I remember a fellow who came to see me from Harvard or somewhere . . . he wanted to see 'that devil from the West'!" Rose: "Harvard probably still feels that way!"

              Here, Mr. Friedman explains "the story of the postwar period" in the U.S. "In 1945-46, intellectual opinion was almost entirely collectivist. But practice was free market. Government was spending something like 20%-25% of national income. But the ideas of people were all for more government. And so from 1945 to 1980 you had a period of galloping socialism. Government started expanding and expanding and expanding." Mr. Friedman stopped, as if deciding whether to use the word "expanding" a fourth time, before continuing: "And government spending went from 20% to 40% of national income.

              "But what was happening in the economy was producing a reverse movement in opinion. Now people could see, as government started to regulate more, the bad effects of government involvement. And intellectual opinion began to move away from socialism toward capitalism. That, in my view, was why Ronald Reagan was able to get elected in 1980." I noted, here, that Mr. Friedman, too, had some role to play in this shift in opinion. He was, characteristically, reluctant to take any credit. "I think we have a tendency to attribute much too much importance to our own words. People saw what was happening. They wouldn't have read my Newsweek columns and books if the facts on the ground hadn't been the way they were." (Rose: "Oh, don't be so modest!")

              Does it disappoint Mr. Friedman that the Bush administration hasn't been able to roll back spending? "Yes," he said. "But let's go back a moment. During the 1990s, you had the combination that is best for holding down spending. A Democrat in the White House and Republicans controlling Congress. That's what produced the surpluses at the end of the Clinton era, and during the whole of that era there was a trend for spending to come down. Then the Republicans come in, and they've been in the desert, and so you have a burst of spending in the first Bush term. And he refuses to veto anything, so he doesn't exercise any real influence on cutting down spending. In 2008, you may very well get a Democratic president" -- (Rose, interjecting: "God forbid!") -- "and if you can keep a Republican House and Senate, you'll get back to a combination that will reduce spending."

              Mr. Friedman here shifted focus. "What's really killed the Republican Party isn't spending, it's Iraq. As it happens, I was opposed to going into Iraq from the beginning. I think it was a mistake, for the simple reason that I do not believe the United States of America ought to be involved in aggression." Mrs. Friedman -- listening to her husband with an ear cocked -- was now muttering darkly.

              Milton: "Huh? What?" Rose: "This was not aggression!" Milton (exasperatedly): "It was aggression. Of course it was!" Rose: "You count it as aggression if it's against the people, not against the monster who's ruling them. We don't agree. This is the first thing to come along in our lives, of the deep things, that we don't agree on. We have disagreed on little things, obviously -- such as, I don't want to go out to dinner, he wants to go out -- but big issues, this is the first one!" Milton: "But, having said that, once we went in to Iraq, it seems to me very important that we make a success of it." Rose: "And we will!"

              Mrs. Friedman, you will note, had the last word.

              When I was younger, a little before the time I was going up for tenure, Friedman sent me a long, detailed letter about one of my papers (he liked it and his comments were, of course, insightful and helpful). I'm still amazed that he took the time to do that, he surely had plenty of other things he could have done with his time. But receiving that letter pretty much out of the blue provided a motivational boost just when I needed it and I'm grateful to him to this day for doing that. So, while I may not agree with 'that devil from the West' on every issue, I am going to let somone else argue against his point of view.

              Update: PGL at Angry Bear follows up.

                Posted by on Friday, July 21, 2006 at 08:36 PM in Economics, Macroeconomics | Permalink  TrackBack (2)  Comments (18) 

                A "Splendid Little War"

                Paul Krugman follows up on today's column:

                Here Come "the Crazies", Money Talks: Paul Krugman: Just a further note: the phrase "splendid little war" comes from a note the British ambassador sent to his friend, Teddy Roosevelt, about the Spanish-American war. I wrote about the parallel between the looming Iraq war and the Spanish-American war in my column "White Man's Burden", published in September 2002, and pointed out that "the experience of the Spanish-American War should remind us that quick conventional military victory is not necessarily the end of the story. Thanks to American technological superiority, Adm. George Dewey destroyed a Spanish fleet in Manila Bay without losing a single man. But a clean, high-tech war against Spain somehow turned into an extremely dirty war against the Filipino resistance, one in which hundreds of thousands of civilians died."

                Alas, everything that has happened was sickeningly predictable.

                Here's the column he refers to:

                White Man's Burden, Paul Krugman, Commentary, NY Times: We should listen to Karl Rove when he lauds former presidents. For example, Mr. Rove has lately taken to saying that George W. Bush is another Andrew Jackson. As Congress considers Mr. Bush's demand that the Homeland Security Department be exempt from civil service rules, it should recall that those rules were introduced out of revulsion over the "spoils system," under which federal appointments were reserved for political loyalists — a practice begun under Jackson.

                But Mr. Rove's original model was William McKinley. Until Sept. 11, we thought that Mr. Rove admired McKinley's domestic political strategy. But McKinley was also the president who acquired an overseas empire. And there's a definite whiff of imperial ambition in the air once again.

                Of course the new Bush doctrine, in which the United States will seek "regime change" in nations that we judge might be future threats, is driven by high moral purpose. But McKinley-era imperialists also thought they were morally justified. The war with Spain — which ruled its colonies with great brutality, but posed no threat to us — was justified by an apparent act of terror, the sinking of the battleship Maine, even though no evidence ever linked that attack to Spain. And the purpose of our conquest of the Philippines was, McKinley declared, "to educate the Filipinos, and uplift and civilize and Christianize them."

                Moral clarity aside, the parallel between America's pursuit of manifest destiny a century ago and its new global sense of mission has a lot to teach us.

                First, the experience of the Spanish-American War should remind us that quick conventional military victory is not necessarily the end of the story. Thanks to American technological superiority, Adm. George Dewey destroyed a Spanish fleet in Manila Bay without losing a single man. But a clean, high-tech war against Spain somehow turned into an extremely dirty war against the Filipino resistance, one in which hundreds of thousands of civilians died.

                Second, America's imperial venture should serve as an object warning against taking grand strategic theories too seriously. The doctrines of the day saw colonies as strategic assets. In the end, it's very doubtful whether our control of the Philippines made us stronger. Now we're assured that military action against rogue states will protect us from terrorism. But the rogue state now in our sights doesn't seem to have been involved in Sept. 11; what determines whose regime gets changed?

                Finally, we should remember that the economic doctrines that were used to justify Western empire-building during the late 19th century — that colonies would provide valuable markets and sources of raw materials — turned out to be nonsense. Almost without exception, the cost of acquiring and defending a colonial empire greatly exceeded even a generous accounting of its benefits. These days, pundits tell us that a war with Iraq will drive down oil prices, and maybe even yield a financial windfall. But the effect on oil prices is anything but certain, while the heavy costs of war, occupation and rebuilding — for we won't bomb Iraq, then wash our hands of responsibility, will we? — are not in doubt. And no, the United States cannot defray the costs of war out of Iraqi oil revenue — not unless we are willing to confirm to the world that we're just old-fashioned imperialists, after all.

                In the end, 19th-century imperialism was a diversion. It's hard not to suspect that the Bush doctrine is also a diversion — a diversion from the real issues of dysfunctional security agencies, a sinking economy, a devastated budget and a tattered relationship with our allies.

                  Posted by on Friday, July 21, 2006 at 04:50 PM in Economics, Iraq and Afghanistan, Politics | Permalink  TrackBack (0)  Comments (20) 

                  Why Oh Why is Income Inequality Increasing?

                  That increasing income inequality is a reality is widely acknowledged by economists, the debate has shifted to the source of the inequality, e.g. see Brad DeLong, Greg Mankiw, Paul Krugman, and Alex Tabarrok for openers. Is it due to a skill premium, non-linearities in returns to education, a rising oligarchy, a winner take all economy, luck, or some other factor?:

                  Brad DeLong: Optimal Tax Policy: An old New York Times column by Hal Varian:

                  Hal Varian: In the debate over tax policy, the power of luck shouldn't be overlooked: Those who argue for a more progressive income tax emphasize equity: a tax dollar paid by a rich person causes less pain than a tax dollar paid by a poor person. Those who argue for a less progressive system emphasize efficiency: the most productive people should face lower tax rates to give them strong incentives to work harder and produce more.... This formulation of the optimal income tax problem was first examined by the economist James Mirrlees of Cambridge University, who received a Nobel in economic science for his analysis. In the simplest version of the Mirrlees model... those at the very top of the income scale should face low marginal rates....

                  Of course, the fact that it pays to reduce the marginal tax rate for billionaires doesn't say much about what tax rates should be like for mere millionaires.... But the intuitive argument presented above is pretty compelling: if income depends only on ability, those at the very top of the income-ability distribution should face low marginal tax rates.

                  But perhaps this model is too simple.... So let's consider a different model: one in which differences in income are a result only of luck.... In this case, the optimal income tax may well involve taxing billionaires at very high marginal rates. True, aspiring billionaires won't work quite as hard.... But the chances of becoming a billionaire are pretty low anyway, so taxing billionaires at a high rate won't really discourage much effort by those hoping to become one.... This is about as far as theory can take us, but it highlights the critical question: How much income results from ability and how much from luck?...

                  Christopher Jencks, and his collaborators pointed out many years ago that income inequality among brothers, who share similar genetic and environmental characteristics, is almost as great as for the population as a whole....

                  If luck plays a substantial role... it makes sense to have a progressive income tax, creating a form of social insurance in which the lucky subsidize the unlucky. Perhaps the folk singer Phil Ochs had the best answer for why the upper half of the income distribution should pay so much more in taxes than the lower half: ''And there but for fortune, may go you or I.''

                    Posted by on Friday, July 21, 2006 at 12:33 PM in Economics, Income Distribution, Universities | Permalink  TrackBack (1)  Comments (47) 

                    Locally Sustainable Currencies?

                    Here's what happens when you write about things you don't understand. When the writer says "I admit that thinking clearly about money can be difficult," that should have been a signal to pick another topic:

                    A new kind of money, by Julian Darley, Alternet: The decline in the availability of cheap energy is likely to be accompanied by an equally ominous possibility of world financial meltdown. That we are facing both of these threats now is not an accident: energy and financial stability are intimately linked. I believe the solutions for dealing with these twinned threats are equally linked. To build an environmentally sustainable, monetarily stable world, we need to create an economy in which locally produced energy provides the backing for local currencies. ...

                    After years of oil-industry financed obfuscation, there is a broad scientific consensus that our profligate use of fossil fuels is producing global warming. And despite similar oil industry denials, there is a growing consensus that we are rapidly approaching Peak Oil, after which world oil output will go into permanent decline... After global Peak Oil, oil will still be available, but at ever increasing prices. ...

                    And here's the link to money: we have made the same limitless assumption about money, that the world monetary supply could grow without end as well. In both cases, we assumed that the growth in energy-use and in money supply was an unmitigated good.

                    There have been a growing number of voices warning us that both of these assumptions were wrong, that the notion of unchecked growth was leading us toward environmental and financial meltdowns. And while we have been making some progress in understanding the energy problem, there is virtually no mention of the role of money.

                    I admit that thinking clearly about money can be difficult. ... But though we may take money for granted, it is neither simple nor solid nor reliable -- far from it. Money is a complex and fragile construction, and as history has shown over and over again, money can become worthless almost overnight. In the long run, money has proven very difficult to manage -- it's a tricky and strange invention. ...

                    Today's global monetary system is based on currencies controlled by national banks, and the global trading system is mainly based on one of those currencies: the US dollar. This system leaves communities and individuals vulnerable to the fluctuations of the global market. The level of trade in a locale is heavily dependent on money that flows in from external sources. Any disruption to that flow can restrict trading activities locally. This potential shortage leads people to try and obtain more and more money, a quest which is ultimately unsustainable.

                    Money can be "backed" by all kinds of physical substances, like precious metals. Or money can be "fiat" ("let it be made") like most national currencies today, backed by nothing except faith and confidence -- or sometimes just confidence tricks.

                    Unlike a backed currency, a fiat currency can at least in theory quite literally expand for ever. There is no direct link to material reality to impose limits, only economic theory, which is devoted to eternal growth and doesn't like to deal with limits -- or reality -- at all. An unlimited currency along with unlimited growth and (so far) unlimited energy has allowed us to do almost unlimited damage to the planet. However, as the availability of cheap, abundant energy declines, energy will soon become the dominant partner in the relationship with money...

                    As energy becomes increasingly expensive and scarce, the colossal size and scale of our infrastructure, which has characterized the rise of industrialism, will selectively crumble and become unserviceable. It is only the energy subsidy from hitherto ever-increasing use of cheap fossil fuels that has allowed our current grandiosity. If this argument is correct, national currency reform will become an oxymoron. It will become apparent that local currencies must be created, currencies based on the resources of the locale -- be they abundant or austere.

                    Communities can further insulate themselves by de-monetizing as many goods and services as possible and try to produce as much of their vital needs as locally as possible, especially food (from local farms and processors) and renewable energy. Demonetizing means taking a product or service out of the market so that it does not need a monetary value. Hence the need either to stop using a product or to produce it yourself.

                    When you take a potato from your garden, if you are fortunate enough to have one, you don't pay yourself a dollar for the privilege -- you just clean it, cook it, and eat it. Demonetizing can also be done via barter, and this is in fact quite common in business, including in the industrialized world. But demonetizing flies in the face of globalization and the Industrial Revolution.

                    Communities that create such local or regional currencies will have a much better chance both of riding out the coming energy decline and of being buffered from any monetary or economic collapse that may happen for whatever reason. The sooner such systems are created, the more ready that region will be to withstand shocks and to avoid the terrible unemployment which severe monetary instability invariably brings.

                    Backing money with local renewable energy would cause the material economy to be constrained by the amount of energy available from the sun -- just like all other living things, which have been around far longer than we have. This limitation would undoubtedly mean that some places would be more suitable for human habitation than others. But since nature is now starting to teach us this lesson anyway, it would surely be a much better idea to plan for constraint than to wait for the energy and climate avalanches to hit us broadside, especially as we can now hear increasingly ominous economic and environmental rumbling.

                    I don't even know where to start. Even if this made sense, how would you back a currency with locally renewable energy? Would you be able to go to the local government and exchange money for wheat straw? Sunbeams in a jar? Batteries made with solar and river power? Firewood? There's a recipe for environmental disaster - make firewood money and see how fast the forests fall as people chop down trees to pay their bills. Who would price the conversion from money to energy and how can we ensure they would never devalue? If we make money wheat straw, what stops every farmer in the area from growing their own money rather than food and other goods, that is, who would control the supply to stabilize the currencies value? Variations in the supply of wheat straw would affect the currencies local value year to year.

                    As much as the writer wishes it to be otherwise, local currencies won't solve the problem he's worried about. The demonetization discussed is really about turning back the clock on specialization and trade, not about money itself which facilitates, but does not cause this to happen. Without a national currency, he believes, communities could not specialize to the same degree and would have to produce goods locally. The fall in production that results would be good for the environment.

                    But all that's needed is to price, say, New York dollars in terms of Los Angeles dollars, a trivial exercise if they are backed by the same thing (if one currency gives one bale of wheat straw per dollar, the other two, then the currencies will trade two for one), and it's not so hard even if they aren't backed by the same thing. While it may not be as efficient due to the problem of converting between currencies, and it would be difficult to spend your small town dollars in another state that has never heard of your town or currency, large volume traders would solve this quickly and innovations like electronic money with predetermined conversions between regions would make your local debit card work outside your local area (like using a debit or credit card in another country now - conversion is automatic).

                    He says "Backing money with local renewable energy would cause the material economy to be constrained by the amount of energy available from the sun." When money was backed by gold, the material economy was in no way restricted to the value of gold available in the world. Money can, after all, be respent again and again in a given time period so this does not constrain the economy as he believes. If one gold coin, or wheat straw coin, is spent at a store, paid out in wages, and spent again in a given time period, GDP will be twice the value of the gold or wheat straw backing it.

                    I want to solve these problems too, but I don't find proposals like this that can be  dismissed so easily by those opposed to tackling global warming and other issues helpful in getting us there.

                      Posted by on Friday, July 21, 2006 at 09:00 AM in Economics, Environment, Monetary Policy | Permalink  TrackBack (0)  Comments (10) 

                      Econoblog: Has China's Yuan Tinkering Changed the Global Economy?

                      David Altig and Nouriel Roubini discuss where China is headed next with it's exchange rate and other policies in this Econoblog in the Wall Street Journal (free content):

                      Econoblog: Has China's Yuan Tinkering Changed the Global Economy?

                        Posted by on Friday, July 21, 2006 at 12:33 AM in China, Economics | Permalink  TrackBack (0)  Comments (1) 

                        Paul Krugman: The Price of Fantasy

                        Paul Krugman reports on how The Decider decides:

                        The Price of Fantasy, by Paul Krugman, Neoconservatives, Commentary, NY Times: Today we call them neoconservatives, but when the first George Bush was president, those who believed that America could remake the world to its liking with a series of splendid little wars — people like Dick Cheney and Donald Rumsfeld — were known within the administration as “the crazies.” Grown-ups in both parties rejected their vision as a dangerous fantasy.

                        But in 2000 the Supreme Court delivered the White House to a man who, although he may be 60, doesn’t act like a grown-up. The second President Bush obviously confuses swagger with strength, and prefers tough talkers like the crazies to people who actually think things through. He got the chance to implement the crazies’ vision after 9/11, ... And the result is the bloody mess we’re now in. ...

                        As I wrote back in January 2003, ... the “Bush doctrine” of preventive war was, in practice, a plan to “talk trash and carry a small stick.” It was obvious ... that the administration was preparing to invade Iraq not because it posed a real threat, but because it looked like a soft target.

                        The message to North Korea, which really did have an active nuclear program, was clear: “The Bush administration,” I wrote, ... “says you’re evil. It won’t offer you aid, even if you cancel your nuclear program.... But for all its belligerence, the Bush administration seems willing to confront only regimes that are militarily weak.” So “the best self-preservation strategy ... is to be dangerous.”

                        With a few modifications, the same logic applies to Iran. And it’s easier than ever for Iran to be dangerous, now that U.S. forces are bogged down in Iraq.

                        Would the current crisis on the Israel-Lebanon border have happened even if the Bush administration had actually concentrated on fighting terrorism, rather than using 9/11 as an excuse to pursue the crazies’ agenda? Nobody knows. But it’s clear that the United States would have more options, more ability to influence the situation, if Mr. Bush hadn’t squandered both the nation’s credibility and its military might on his war of choice.

                        So what happens next? Few if any of the crazies have the moral courage to admit that they were wrong. Vice President Cheney continues to insist that ... his declaration ... that we would be “greeted as liberators” and his assertion a year ago that the insurgency was in its “last throes” — were “basically accurate.” But if the premise of the Bush doctrine was right, why are things going so badly?

                        The crazies respond by retreating even further into their fantasies of omnipotence. The only problem, they assert, is a lack of will.

                        Thus William Kristol, the editor of The Weekly Standard, has called for a military strike — an airstrike, since we don’t have any spare ground troops — against Iran. ... Mr. Kristol is, of course, a pundit rather than a policymaker. But there’s every reason to suspect that what Mr. Kristol says in public is what Mr. Cheney says in private.

                        And what about The Decider himself? For years the self-proclaimed “war president” basked in the adulation of the crazies. Now they’re accusing him of being a wimp. “We have been too weak,” writes Mr. Kristol, “and have allowed ourselves to be perceived as weak.”

                        Does Mr. Bush have the maturity to stand up to this kind of pressure? I report, you decide.

                        Previous (7/17) column: Paul Krugman: March of Folly
                        Next (7/24) column: Paul Krugman: Black and Blue

                          Posted by on Friday, July 21, 2006 at 12:21 AM in Economics, Iraq and Afghanistan, Politics | Permalink  TrackBack (0)  Comments (28) 

                          Thursday, July 20, 2006

                          The Savings Glut

                          Was there and is there still a savings glut? Ben Bernanke thinks so. This is from David Altig at macroblog:

                          macroblog: The Chairman Speaks: The Savings Glut Persists: More from Chairman Bernanke's exchange with Senator Bennett during yesterday's testimony:

                          BENNETT: Do you still believe there's a global savings glut and that we can expect people to continue to want to put their money here?

                          BERNANKE: I think there still is a global savings glut. It may have moderated somewhat because of increased growth in some of our trading partners. But on the other hand, there's also been, of course, these large revenues that the oil producers are accumulating because of the high price of oil. They are not able to absorb - - use those revenues at home very quickly. So they are taking that money and putting it back into the global financial system. And so that's contributing to this overall global savings glut...

                          So I think there has been some change, but the broad idea that the global savings glut is out there I think is still valid.

                          Of what Mr. Bernanke speaks, in pictures:




                          Still looking pretty gluttish.  The data, if you are interested:

                          Download savings_glut.ppt

                          UPDATE: Shame on me.  I should have added this part of the discussion:

                          BENNETT: So you're suggesting that foreign investment in the United States is not about to dry up at any point soon?

                          BERNANKE: I don't think it's going to dry up. I do think that over a period of time we should become more reliant on our own saving and reduce the current account deficit.

                          Emphasis added.

                          Like the word bubble, glut has a new meaning. To me, the term glut conveys a disequilibrium condition -- a time when aggregate demand is deficient, there is involuntary unemployment, goods are piling up on store shelves (that's the glut, lots of goods, nobody to buy them), and for some reason prices aren't moving to clear the market (e.g. the Malthus-Say debate where Malthus said, essentially, that gluts are caused by high profits leading to excessive capital accumulation and a mismatch between saving and investment; Say responded by saying that gluts were impossible because supply creates its own demand, i.e. with Say's law).

                          So every time I hear savings glut I have to remind myself of how the term is being used. I don't think Bernanke means that the supply of savings exceeds the demand for savings at the current interest rate even though I'm certain he is well aware of this interpretation of a glut. He means increases in supply are holding interest rates down as they move to clear the market. Thus, a glut simply means a large supply driving down equilibrium prices, not a disequilibrium condition where supply exceeds demand.

                            Posted by on Thursday, July 20, 2006 at 07:14 PM in Economics, Monetary Policy, Saving | Permalink  TrackBack (0)  Comments (14) 

                            More Fed Volatility

                            Tim Duy interprets the latest signals from the Fed:

                            More Fed Volatility, by Tim Duy: The truth is, I am finding tracking the Fed to be maddening. And Fed Chairman Ben Bernanke’s testimony and comments yesterday – or at least the market reaction – is no exception to that rule. There is so much in his testimony that reminds of stories I told back in April. For instance, according to the Wall Street Journal:

                            He [Bernanke] told the panel the Fed "can't do anything about" the current month's inflation rate: "we have to be looking at the forecast."

                            On April 28, I wrote:

                            For example, recent inflation data and rising energy prices appear to be having less of an impact on policy than I might have guessed. In retrospect, the lack of response is not such a mystery: There is simply nothing that the Fed can do about last month’s inflation. The point of inflation targeting is not to shift policy for every move in a lagging indicator. The point is to shift policy in response to changes in the central bank’s forecast of inflation. For the FOMC, the forecast for future inflation hinges more on the forecast for demand growth than on the lagged impacts of past inflation.

                            At the time, I was preparing for a pause in tightening in June. Then, like now, it looked as if Bernanke was dismissing a worrisome reading on inflation. But I was slapped down hard on that call in the wake of hawkish language that signaled the FOMC’s intention to hike rates in June. Do I want to go down that road again? Or did I get the motivation right, but the timing wrong? Like I said, maddening.

                            Getting back to square one, I found Bernanke’s testimony yesterday to be remarkably consistent with the last FOMC statement and my interpretation of how the Fed likely views the data. I suspect he put great effort in creating a statement that lacked the appearance of flip-flopping. The economy is slowing, especially when compared to the heated pace of the first quarter. The slowing is mostly concentrated in consumer spending, while investment spending holds strong. With regard to the slowing, the full impact of previous rate hikes has yet to be felt. With the economy anticipated to slow to potential, inflation pressures are expected to ease as well. The balance of risks remains titled toward inflationary conditions, but the timing of any additional moves is dependent upon incoming data.

                            If the testimony was indeed consistent with last FOMC statement, why did markets surge yesterday? My interpretation of events is that market participants, like myself, were mentally geared for a more hawkish Ben, and instead the Gentle Ben of the last FOMC statement sauntered up to the stage. The higher than expected reading on core CPI released earlier in the day only enhanced this fear that Bernake would turn hawkish.

                            My concern is that, although the Bernanke sounded soothing relative to expectations, the incoming data argue for another rate hike in August. Indeed, while Bernanke was sanguine about the growth outlook, he explicitly warned of the risk of inflation:

                            More generally, if the pattern of elevated readings on inflation is more protracted or more intense than is currently expected, this higher level of inflation could become embedded in the public's inflation expectations and in price-setting behavior. Persistently higher inflation would erode the performance of the real economy and would be costly to reverse. The Federal Reserve must take account of these risks in making its policy decisions.

                            Note the term “persistently higher inflation.” And then note four consecutive months of 0.3% gains in core CPI. And note that inflation was broad based in May; as David Altig notes, you can’t blame it all on owner’s equivalent rent. Could Bernanke really be so dismissive of such a report as to want to signal a pause?

                            My opinion is that he was not trying to signal a pause – he is clearly not using his speeches like his predecessor Alan Greenspan as a signal of the Fed’s intentions. As Greg Ip described in the Wall Street Journal:

                            In a significant break from Fed commentary of the past few years, he gave no explicit signal about how the Fed would move interest rates to achieve that forecast, forcing markets to decide for themselves.

                            Bernanke’s approach appears to be that he lays down the facts as he sees them, and leaves it to us to interpret the data accordingly. And the fact is that the economy is slowing. But the fact also is that inflation readings remain elevated. Moreover, I can easily imagine a scenario where growth is slowing, at least as measured by domestic demand, but inflationary pressures remain a concern because headline GDP is holding near trend. There are encouraging signs that exports are accelerating, while the domestic slowdown will likely temper import growth. If this story holds (essentially the global rebalancing story), then the external sector will add positively to GDP. In other words, in order to reduce the trade deficit, we will likely have to accept a period of relatively weak domestic demand growth. Graphically:


                            Note the period in the latter half of the 1980s, when the trade deficit was shrinking back to balance. Presumably, the preference is for domestic consumption to be compressed rather than domestic investment. Such an outcome is feasible; firms will need to maintain production to provide for external demand and import substitution, but households will feel miserable due to low rates of consumption growth. The Fed will see the issue of who bears that pain, high or low income groups, as a fiscal problem (Presumably, fiscal authorities could raise taxes on high income groups to lessen the need of monetary policy to pull all the weight. Yes, I managed to say that with a straight face. Barely.)

                            Given the push and the pull between readings on inflation and growth, I think the market is getting the story basically right, although participants may have been too dismissive of the CPI report in the wage of Bernanke’s testimony. The odds stand in favor of another rate hike in August, or, if a pause, then another hike in future months. Considering low unit labor costs and slowing growth, the Fed will likely not want to go much further without evidence of faster than expected growth or persistent inflation. Plenty of data to watch between now and August 8.

                            Note: The FOMC minutes from the last meeting were released today. Tim is giving a final right now for a summer class, but plans to do an update later if there is anything in the minutes that changes the outlook given above.

                            Here's the update:

                            Update: The FOMC minutes are a reminder that although evidence of economic slowing is evident, inflation concerns leave FOMC members uneasy. This suggests that yesterday’s CPI report will not be met with complacency on Constitution Ave. Some key points:

                            Nonetheless, participants noted a risk that the drop-back in inflation could be slower or more limited than the Committee would find desirable since resource utilization was currently tight and the pickup in price increases had been broadly based rather than being limited to a few specific sectors that could be linked to energy costs.

                            And, although economic slowing is expected to ease inflation pressures,

                            …several factors were cited as potentially sustaining upward pressure on inflation, and the range of participants' forecasts for core inflation in 2007 rose by 1/4 percentage point relative to the range of forecasts made in February. Some participants noted that businesses in their Districts were experiencing difficulty hiring certain types of skilled workers, suggesting that increased wage pressures might emerge. In addition, some business contacts indicated a greater ability to pass higher costs on to customers, although other businesses continued to report that their pricing power remained limited. The relatively taut resource markets and the lagged effects of the increase in energy prices raised the possibility that inflation could continue at somewhat elevated levels for some time. Higher levels of inflation, should they persist, could become embedded in inflation expectations.

                            Remember, four consecutive 0.3% readings on core CPI will sound to some FOMC members as pretty persistent. Moreover, oil prices remain uncooperative at a minimum. Also see Greg Ip’s “Fed Reality Check,” where he notes:

                            That said, the fact there has been no break in the tightening cycle in spite of all the hints to the contrary serves as a useful reminder that no matter what the Fed says, or what we think it says, circumstances change, and the Fed must act accordingly.

                            Bottom line: Bernanke’s testimony should not be viewed as a guarantee of a pause; the data remain the focus at the FOMC. A pause doesn’t mean done.

                              Posted by on Thursday, July 20, 2006 at 11:50 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (1)  Comments (8) 

                              Recovering from War

                              Austan Goolsbee of the University of Chicago Graduate School of Business on the long-run economic consequences of war and ethnic division:

                              Count Ethnic Divisions, Not Bombs, to Tell if a Nation Will Recover From War, by Austan Goolsbee, Economic Scene, NY Times: ...[P]erhaps it is worth looking at the long-run prospects for ... nations once ... wars actually end... The good news is that history suggests that the destruction of war has no lasting impact on economic prospects. The bad news is that most of these countries, especially Iraq, are filled with ethnic divisions and civil discord. The evidence shows that these problems, unlike bombs, cause lasting damage to the prospects for a nation’s economy, even if they do not boil over into civil war.

                              The negligible long-term impact of war itself is rather startling but has been noted in numerous studies. The recent work of ... Edward Miguel and Gérard Roland — for example, “The Long Run Impact of Bombing Vietnam,” starts from the fact that some 10 percent of the 584 districts in Vietnam received nearly three-quarters of the total bomb tonnage. No matter how they sliced the data, they did not find that heavier bombing during the war corresponded with any major differences in poverty rates, access to electricity, literacy, population density or consumption in the 1990’s and 2000’s.

                              Similar studies have documented that the long-run population of Japanese cities was not affected by whether they were destroyed in World War II (including Hiroshima and Nagasaki, whose destruction was radioactive, to boot) and likewise for cities in Europe. After suffering the enormous immediate costs of war, it seems that people rather quickly return to where they left off. In the long run, things return to normal...

                              But for the optimists hoping that war in the Middle East will soon end so the rebuilding can commence, there is a serious problem. The political boundaries of these countries, especially Iraq, make the long-term prospects bleak. The existence of ethnic division in the countries will probably mar them permanently in a way that bombs never could.

                              Boundaries between many countries of the Middle East, like those in Africa, were haphazardly put together in negotiations by European colonizers who had little regard for ethnic realities. Indeed, they sometimes even lumped enemies together on purpose, hoping that ethnic hatreds might reduce anticolonial feelings. In a new study, three economists — Alberto F. Alesina and Janina Matuszeski of Harvard University and William Easterly of New York University — document how important internal cohesion is for the health of a society.

                              Their study, “Artificial States,” creates two measures of how “artificial” a nation’s boundaries are. The first measures whether the country’s political borders partition ethnic groups into separate countries...

                              The second measures how squiggly the borders of a country are. Straight lines are usually the sign of an arbitrary colonial mapmaker. Natural barriers like rivers and mountains seldom look tidy. ...[T]heir study compares the performance of countries with natural borders to those with artificial ones and finds, overwhelmingly, that artificial nations suffer terribly — lower income, horribly ineffective and corrupt governments, less respect for the law, low literacy, limited access to clean water, poor health care, you name it. ...

                              Viewed from this perspective, the long-term economic prospects for Afghanistan and Iraq do not look good. It is not the destruction of war. That will end and the countries can be rebuilt. It is the fragmentation and ethnic hatred. That, typically, never goes away. Iraq, especially, is a straight-edged, ethnically partitioned nation wracked with internal strife. And having oil wealth is unlikely to save the day. Fragmented countries with natural resources often do worse because civil war rages over who gets to keep the money. ...

                              After Katrina, it was noted that the long-run economic impact of destructive natural disasters such as hurricanes is minimal in most cases (see "Rebuilding After Natural Disasters"). Just want to add the obvious that, even if there is a full economic recovery for a country, some costs of war or natural disasters will persist. For example, there will be people who will never fully recover from the terrible losses they suffered during the war housed and working in those brand new buildings. It's not so clear that "In the long run, things return to normal" for them.

                                Posted by on Thursday, July 20, 2006 at 02:16 AM in Economics, Iraq and Afghanistan | Permalink  TrackBack (1)  Comments (40) 

                                Swift Boating the Planet

                                That's a title from a Paul Krugman column. Here's what he was talking about. This is "Senator Inhofe's Pet Weasel" from Scientific American's blog:

                                Senator Inhofe's Pet Weasel, by John Rennie, SciAm Blog: Here's a follow-up to my previous post about the misleading press release from Senator James Inhofe and the Environment and Public Works Committee. While writing the post, I was tempted to use the term "swift-boating" to describe the release's attempts to slime the reputation of climatologist James Hansen. I refrained, because why drag even more political baggage into the discussion unnecessarily?

                                Turns out that my impulse may have had more foundation than I'd realized. Darren Samuelsohn, writing for Greenwire, reports the following...:

                                A 71-year old former insurance executive, Inhofe has never been shy about confronting climate scientists, environmentalists, Hollywood producers and fellow senators. But in setting his sights on the press, Inhofe appears to be incorporating a strategy hatched by the committee's new communications director, Marc Morano.

                                As a reporter for the conservative Cybercast News Service from 2001 until earlier this year, Morano peppered his climate reporting with skeptics' views that have surfaced as themes in Inhofe's recent press attacks. Earlier this year, for example, Morano wrote about NASA scientist James Hansen's contributions to the 2004 Democratic presidential nominee, Sen. John Kerry (Mass.). Inhofe's press release questions why Brokaw failed to mention the political ties of Hansen and other scientists interviewed for the Discovery report.

                                Morano, who worked as a producer in the mid-90s for radio commentator Rush Limbaugh, was also among the first reporters to write about the Swift Boat Veterans for Truth campaign scrutinizing Kerry's Vietnam War record. And earlier this year, Morano penned an article questioning the Purple Heart medals of Rep. John Murtha (D-Pa.), a leading critic of Bush's Iraq policy.

                                Kudos to Inhofe for hiring someone who knows how to conduct important political discourse with the highest respect for facts, honesty and integrity.

                                By the way, if you wonder how this Greenwire story came to my attention, it was apparently e-mailed to me by Marc Morano's own office. I guess at EPW they believe there really is no such thing as bad publicity.

                                  Posted by on Thursday, July 20, 2006 at 12:33 AM in Economics, Environment, Politics, Science | Permalink  TrackBack (0)  Comments (6) 

                                  Yet Another Robert Samuelson Edition...

                                  Robert Samuelson repeats a familiar refrain on the budget deficit:

                                  No Shame, No Sense and a $296 Billion Bill, by Robert J. Samuelson, Commentary, Washington Post: For those who believe our leading politicians are utterly shameless, there was dreary confirmation last week. President Bush publicly bragged about the federal budget. Here's the objective situation that inspired the president's self-congratulation: With the unemployment rate at 4.6 percent (close to "full employment" by anyone's definition), the White House and Congress still can't balance the budget. For fiscal 2006, which ends in September, the administration projects a $296 billion deficit; for fiscal 2007, the estimate is $339 billion. How could anyone boast about that?

                                  Easy. In February the administration projected a $423 billion deficit for 2006, so the latest figure is a huge drop. A skeptic might say that the first estimate was inept; some cynics argue that it was deliberately exaggerated to magnify any subsequent improvement. Naturally the president had a different story. The shrinking deficits, he said, proved that his tax cuts are working. ... All around Washington, Republicans staged media events to hug themselves for their good work.

                                  The tendency for politicians to claim credit for favorable news is as natural as flatulence in cows. Still, the Republicans' orgy of self-approval amounts to a campaign of public disinformation. It obscures our true budget predicament. Let's go back to basics. Here are two essential points.

                                  First, budget deficits are not automatically an economic calamity. Their effects depend on their timing, their size and other economic conditions. During recessions, deficits may prop up the economy. In a boom, they may drain money from productive investments. Similarly, deficits are only one influence on interest rates; others include inflation, the demand to borrow, the supply of savings and Federal Reserve policy. At present the effect of deficits is modest; otherwise, rates would be higher than they are (about 5 percent on 10-year Treasury bonds).

                                  What truly matters is government spending. If it rises, then future taxes or deficits must follow. There's no escaping that logic. The spending that dominates the budget is for retirees. Social Security, Medicare (health insurance for those 65 and over) and Medicaid (partial insurance for nursing homes) already exceed 40 percent of federal spending. As baby boomers retire, these costs will explode. ...

                                  Second, the budget should be balanced -- or run a surplus -- when the economy is close to "full employment," as it is now. Balancing the budget forces politicians to make uncomfortable choices. Which programs are sufficiently needed or popular to justify unpleasant taxes? Balancing the budget also lightens the debt burden. One figure Bush doesn't praise is the annual interest payment on the growing federal debt. Even by White House estimates, it will rise from $184 billion in 2005 to $302 billion in 2011.

                                  Some conservatives rationalize their indifference to deficits as "starving the beast." If you cut taxes and create deficits, government will spend less because it has less -- much like a teenager whose allowance is cut. But the theory doesn't fit the facts. ...

                                  I have reserved my harshest scorn for Republicans, who are (after all) in power. But Democrats aren't much better. The nub of the matter is spending. When Republicans passed the Medicare drug benefit -- the biggest new program in decades -- Democrats actually advocated a more costly version. Whenever anyone suggests curbing spending, Democrats screech: Spare Social Security and Medicare. But Social Security and Medicare are the problem.

                                  Just as Republicans now say their policies have cut deficits, Democrats contend their policies produced budget surpluses from 1998 to 2001. Nonsense. Those surpluses resulted mainly from the end of the Cold War (which lowered defense spending) and the economic boom (which created an unpredicted surge of taxes). In a $13 trillion economy, much of what happens has little to do with the White House's economic policies. The bipartisan reflex is to claim credit where little is due. ...

                                  Nothing significant will happen because it's in no one's interest for anything significant to happen. Republicans don't want to raise taxes or restrain their spendthrift habits. Democrats love big deficits as rhetorical grenades to lob at the Republicans. The present paralysis is perfectly understandable. But to brag about it is disgraceful.

                                  He contradicts himself in his misguided attempt to try and be 'fair' and make sure to criticize both parties. He says first that Republicans are to blame because with an economy near full employment, we should be running surpluses, not deficits. That we aren't is a policy mistake. But when it comes to Democrats who did just that in 1998 to 2001, ran a surplus during a boom, he says it's nonsense that they had anything to do with it and they deserve no credit, only scorn.

                                  Second, time to roll the tape. Here's Brad DeLong on quite similar claims made by Samuelson in the past:

                                  Why Oh Why Can't We Have a Better Press Corps? (Yet Another Robert Samuelson Edition): Mark Thoma directs us to Robert Samuelson in Newsweek on Washington's apparent lack of concern about the budget deficit:

                                  MSNBC - A Deficit of Seriousness : There's no one in Washington--no one with any power--trying to balance the budget. President George W. Bush's budget did not ever envision reaching a balance. The Republican Congress's new budget resolution purports to halve the budget deficit by 2010 but does so only on the basis of optimistic assumptions. Balancing the budget is simply too much trouble. It requires asking unpopular questions about who deserves help, which government programs actually work--and how to pay for the rest. Plenty of programs could disappear without serious ill effects....

                                  In this debate, there is no high moral ground. To critics, the Republican budget strategy is 'starve the beast'--cut taxes and use the resulting deficits as an excuse to squeeze spending. Agree or disagree, that's principled; it's a means to an end (smaller government). In practice, the real Republican strategy is more cynical--cut taxes and feed the beast. ... In 2003, Bush proposed and Congress approved the biggest new spending program since Lyndon Johnson, the Medicare drug benefit. It was all deficit financing; there was no new tax for any of it. Gone is any sense of shame about overspending and undertaxing. For 2006, the... estimated deficit close to $400 billion. Bridging that gap would require Republicans and Democrats to do what neither want--scrub government of less useful spending and then raise taxes. Democrats prefer to deplore Republican 'irresponsibility.' Republicans prefer to tax less and spend more...

                                  My first reaction was, "Huh?" I thought that the Democrats in the House of Representatives had offered a plan to balance the budget--by 2012, in fact.

                                  But Samuelson explains this away:

                                  In floor debate, the Democrats never offered a realistic balanced budget. The closest they came was in the House, where they promised balance by 2012. But that happens only by assuming that all of Bush's tax cuts expire in 2011--a position that even many Democrats reject...

                                  Ah. Now I see. The Democratic leadership's plan was not "realistic." The only "realistic" plan, in Samuelson's eyes, is one that (a) keeps the Bush tax cuts for the rich, and (b) balances the budget by cutting spending.

                                  But then shouldn't somebody make his lead be different, and accurate? It's not "There's no one in Washington... trying to balance the budget," it's "The Republicans are cynical feckless cowards who aren't trying to balance the budget, and the Democratic leadership is trying to balance the budget in a way that I don't like." Truth in packaging would be a good thing, after all.

                                  Not convinced yet? For more on this point, see Brad DeLong once again. Update: Brad DeLong follows up.

                                    Posted by on Thursday, July 20, 2006 at 12:15 AM in Budget Deficit, Economics, Policy, Politics, Press, Taxes | Permalink  TrackBack (0)  Comments (29) 

                                    Wednesday, July 19, 2006

                                    I Could Have Had a G-8!

                                    Ken Rogoff is worried the G8 meetings will be dull and ineffective. Thanks to a certain president, there were some noteworthy moments to shake the boredom, though actual accomplishments were hard to find. In an attempt to change that, Rogoff had offered a suggestion prior to the summit to to liven things up in the hopes that informality might lead to progress on tough issues, though he does worry about "off-color remarks" and whether Angela Merkel can keep things under control. In light of that, perhaps he should have offered "Rogue-Off" instead:

                                    G-8 Movie Night, by Kenneth Rogoff, Project Syndicate: Many people rightly regard the annual G-8 (Group of Eight) presidential summit as the closest thing we have to a functioning world government. So it is a shame that these meetings tend to be so scripted and dull, with so little room for the informality needed to make genuine progress on tough issues involving world peace and prosperity. ...

                                    [I]f these meetings are ever to be really effective, we need a change in format to spice things up. I have a suggestion. Why not have George W. Bush, Putin, and the other leaders share a G-8 movie night, and then discuss their reactions over drinks afterwards? That should get a conversation going!

                                    Of course, there is the question of which movie to pick. This year, the clear first choice has to be the 1963 James Bond spy thriller “From Russia with Love.” The name itself makes it a winner, and the presidents can enjoy watching the fireworks between suave British spy Bond (Sean Connery) and his fetching Russian KGB counterpart Tatiana (Daniela Bianchi). In case you are worried that the Bond-Tatiana affair would spark too many off-color remarks from the collective eminences, the presence of German Chancellor Angela Merkel should keep things under control.

                                    Perhaps after a couple drinks, Putin might spill the beans on whether, as a real-world KGB agent, he ever directed any remotely similar operation. And Bush, while of course having no such experience of his own, could retell some of his father’s stories when he was the head of the CIA in the 1970’s. ...

                                    There are countless other possibilities. It would be a bit awkward, but the esteemed guests could also view “An Inconvenient Truth,” narrated by Al Gore... Gore’s film would give the Europeans, always in danger of being marginalized at these meetings, the chance to boast about how they, unlike the Americans and Russians, are already doing their part by heavily taxing gas consumption. ...

                                    One could go on forever with possible films, but clearly G-8 movie night might rekindle life in the organization’s moribund framework, and keep it going for many years to come. ... I say let’s give G-8 movie night a chance. It would certainly be more entertaining that the current framework....

                                      Posted by on Wednesday, July 19, 2006 at 03:35 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (4) 

                                      Crisis? What Demographic Crisis? I Don't See Any Stinking Crisis...

                                      When I was younger, we used to celebrate declining population growth as good for the planet instead of worrying about not having enough kids to take care of the elderly. Dean Baker says that shouldn't have changed:

                                      Stagnation Celebration, by Dean Baker, American Prospect: Even the most casual consumer of elite American commentary knows about the looming demographic crisis. The drumbeat of warnings that the United States and (more acutely) Europe face some sort of catastrophe due to stagnating or even declining populations has been steady and loud for years. Here in the United States, the ... pundit consensus [is]... that our aging population will exert a crushing burden on the American work force in the future, through seniors’ demands for entitlements and services.

                                      Happily, we have nothing to fear but the fear mongers themselves. A simple look at the data shows that the much-feared specter of the baby boomers’ retirement doesn’t in fact portend any kind of fiscal or economic crisis. Indeed, one can go further: the prospect of declining populations ... is actually great news.

                                      Here in America, the story is that the retirement of the baby boomers will lower the ratio of workers to retirees from close to 3 to 1 at present down to just 2 to 1 in 30 years. While this fact is supposed to scare people, a bit of simple economics shows there is no real basis for concern.

                                      Starting with the basic ratios, the ... Social Security trustees project that the share of the population that is under age 20 will fall from roughly 30 percent in 2005 to less than 25 percent in 2035... This means that to some extent, we will be ... shifting some of the resources from the young to the old.

                                      But this shift is the less important part of the story. The more important part is productivity growth. We know that, barring an economic catastrophe, workers will be far more productive in 2035 than they are today. Technology will continue to improve, computers will get better, workers will be more educated. Even if productivity growth were to fall back to its slowest pace on record (1.5 percent annually), workers in 2035 would still be producing 50 percent more on average than workers do today. This means that two workers in 2035 would be as able to support a retiree as three workers are today. If productivity grows at the same rate as it has over the last decade (and during the period from 1945 to 1973), then workers will be almost twice as productive in 2035 as they are presently. In this scenario, two workers would be far better able to support a retiree in 2035 than three workers are today.

                                      Even setting aside the productivity factor, the basic scare story of a labor shortage never made any sense to begin with. In Econ 101 we teach that when there is more demand than supply, the price (in this case wages) goes up. Rising wages will not frighten most people. (In fact, rising wages will pull many older workers back into the labor force.)

                                      Of course, if wages rise, then some jobs will disappear. Workers will leave the least productive forms of employment and move to jobs where their labor will be more productively employed. Currently, 15 million people work in the retail sector -- just over 11 percent of the work force. If labor becomes relatively scarce, then stores will have fewer retail clerks on the floor. Convenience stores might keep shorter hours. Are you scared yet?

                                      More than 11 million people are employed in hotels and restaurants -- approximately 9 percent of the work force. If labor becomes scarce, ... Hotels might clean rooms less frequently and thoroughly. Are you running for the tranquilizers yet?

                                      For anyone who bothered to think it through, this is what a labor shortage means -- fewer people working at low-wage jobs... The looming nanny shortage may terrify policy elites in Washington, but a future where most workers won’t take those jobs because they can find higher-paying employment probably looks pretty good to most people.

                                      All told, there is simply no real problem here. In fact, in many ways the country and world will benefit from slower -- or even negative -- population growth.

                                      Fewer people means less pollution and less crowding. Think of global warming. The basic problem is that we are spewing too much carbon dioxide into the atmosphere each year. ... If the population is smaller, or doesn’t increase as much as is projected, we can achieve the same reductions in greenhouse gas emissions with less conservation.

                                      It is not just global warming that will be affected by the size of the U.S. and world populations. All forms of pollution increase or decrease roughly in proportion to the size of the population. Similarly, the drain on natural resources is also proportionate to the population. For example, the water shortages that are afflicting many western states will worsen if their populations continue to grow rapidly. ...

                                      Fewer people doesn’t just mean shorter commuting times, it also opens up access to desirable land for recreation and vacation purposes. ... If you’ve been overwhelmed recently by the crowds at a national park, museum, or national landmark, it should be easy to understand some of the benefits of a declining population.

                                      In short, pundits may spell doom, but we can rejoice in the knowledge that they're spellbound by a delusion. There is Santa Claus, there is the tooth fairy -- and there is our looming demographic crisis.

                                      For more on the productivity issue, see Paul Krugman's "America's Senior Moment":

                                      One way to describe the truth is to say that there is no program called Socialsecuritymedicareandmedicaid: these are separate programs with separate problems. Look at the accompanying chart which shows the ... CBO projection..., but breaks it down by program. Yes, the total rises drastically—but Social Security, although it is the biggest of the programs now and the only one of the three programs whose costs are driven mainly by demography, accounts for only a small part of that rise. That tells us that demography is not the main driver of these long-run projections. ... Pundits who want to sound serious love to contrast Social Security as it was in 1950, when sixteen workers were paying in for every retiree drawing benefits, with Social Security as it will be once the baby boomers have retired, with only two workers per retiree. But most of the transition from sixteen to two happened a long time ago. Since the mid-1970s there have been about three workers per retiree —and Social Security has been running a surplus. ...

                                        Posted by on Wednesday, July 19, 2006 at 10:11 AM in Economics, Policy, Social Security | Permalink  TrackBack (0)  Comments (49) 

                                        When to Hit the Pause Button?

                                        The Wall Street Journal has a summary of Ben Bernanke's written remarks from his testimony before the Senate Banking Committee. The message is the same, growth is moderating but inflation remains a concern:

                                        Link to video of hearing (CSPAN - expires in 15 days).

                                        Bernanke Sees Inflation Pressures Declining as Growth Moderates, by Brian Blackstone and Campion Walsh, WSJ: Federal Reserve Chairman Ben Bernanke said Wednesday a moderation in U.S. growth "now seems to be under way," which "should help to limit inflation pressures over time."

                                        While noting that some of the recent rise in underlying inflation is due to technical factors and that inflation expectations "remain contained," inflation remains "of concern" to policy makers, Mr. Bernanke said in semiannual monetary policy testimony prepared for delivery to the Senate Banking Committee. ...

                                        Also, CPI figures were released today and core inflation was up a bit more than anticipated adding to inflation worries:

                                        Earlier Wednesday, the Labor Department reported that the June consumer price index increased 0.2%. Excluding food and energy, consumer prices advanced 0.3%, the fourth-straight rise of that size. Fed chairmen receive major economic reports, including consumer prices, the evening before they're released to the public. ...

                                        The Wall Street Journal also reports market reactions:

                                        Markets reacted immediately to the numbers. Stock futures gave up early gains, on the expectation the Fed will be more likely to raise interest rates again in August. The federal-funds futures contract at the Chicago Board of Trade, where traders bet on future Fed policy, priced in a 90% chance of a quarter-point August increase, compared with 68% before the consumer-price release....

                                        Those of us who would like to see the Fed take a breather in its rate hike campaign to avoid overshooting aren't getting a lot of help from the inflation reports.

                                        Update: The markets have changed their mind after hearing Bernanke's comments:

                                        After struggling amid concerns about the Mideast conflict and rising oil prices, stocks surged Wednesday after Federal Reserve Chairman Ben Bernanke indicated in Congressional testimony that the central bank may stop raising interest rates soon.

                                        The comments, delivered before the Senate Banking Committee, reversed earlier concerns about further rate increases inspired by a report that showed a measure of retail price inflation is rising at a faster pace than expected.

                                        I'll update this later when summaries of Bernanke's remarks in response to questions are available.

                                        Note: If you don't have a WSJ subscription, here are links to Bloomberg reports:

                                        Update: Tim Duy is working an a new Fed Watch for tomorrow, so I will let him put the remarks into perspective. For now, here's Greg Ip and Mark Whitehouse of the WSJ with a summary of Bernanke's remarks:

                                        Bernanke Sees Inflation Pressures Declining as Growth Moderates, by Greg Ip and Mark Whitehouse: Federal Reserve Chairman Ben Bernanke called rising inflation a "concern" but predicted an economic slowdown would reverse that rise. Markets took those words to mean that, for now, the Fed will worry more about slowing growth and stop raising interest rates soon. Bond yields fell and the Dow Jones Industrial Average soared Wednesday.

                                        Mr. Bernanke spoke the same day as the government reported inflation rose and home construction fell last month, underlining the opposing risks confronting the central bank.

                                        "The recent rise in inflation is of concern," Mr. Bernanke told the Senate Banking Committee. "Possible increases in [energy] and other commodity prices remain a risk to the inflation outlook."

                                        But Fed policy makers "project that growth … should moderate" to its long-term potential rate "both this year and next. Should that moderation occur as anticipated, it should help to limit inflation pressures over time."

                                        Part of Mr. Bernanke's job Wednesday was to blunt accusations of sending inconsistent messages since taking the post on Feb. 1. ... Wednesday, he appeared to seek ... balance by acknowledging that inflation was too high but laying out a forecast of slowing growth and stable energy prices that would allow inflation to fall back. And, in an important break from the past few years, he gave no explicit signal about how the Fed would move interest rates to achieve that forecast, forcing markets to decide for themselves...

                                        Update: See David Altig at macroblog for an analysis of today's price report.

                                          Posted by on Wednesday, July 19, 2006 at 08:39 AM in Economics, Fed Speeches, Monetary Policy, Video | Permalink  TrackBack (0)  Comments (15) 

                                          Inequality Links

                                          These links are from "The Rise of the Super-Rich" in the NY Times Select:

                                            Posted by on Wednesday, July 19, 2006 at 12:33 AM in Economics, Income Distribution | Permalink  TrackBack (1)  Comments (11) 

                                            Should Democrats Return to Their Clinton Era "Market-Based Global Engagement Roots"?

                                            How should Democrats respond to increasing inequality? This writer recommends a return to the centrist approach pursued under Clinton:

                                            The Mother of All Electoral Issues, by Steve Rattner, Commentary, WSJ:  ...Democrats are moving -- haltingly, disjointedly, belatedly -- toward embracing the mother of all electoral issues: the failure of robust top-line growth in the U.S. economy to filter into the wallets of Americans below the top of the pyramid.

                                            It's about time. ... No amount of chaff can hide the failure of our remarkable productivity surge ... to meaningfully boost average wages, which have barely grown with inflation. Separated by income level, the picture is ... dismal. From 2000 to 2005, for example, average weekly wages for the bottom 10% dropped by 2.7% (after adjustment for inflation), while those of the top 10% rose by 5.3%.

                                            Hardly a day goes by without further reminders. Not long ago, for example, the Journal reported on its front page that tax revenues from the top 10% of Americans were growing dramatically... That's good news for the Treasury but not good news for those further down, whose taxes are not rising because their incomes are not growing.

                                            To be sure, income inequality is not a new challenge. Over the past 25 years, the average hourly wages of high school dropouts fell by nearly 20% (after adjustment for inflation) while those of holders of advanced degrees rose by nearly 30%, according to the Economic Policy Institute.

                                            Happily, the Bush administration has occasionally acknowledged the trend. In a little-noticed first speech as head of the president's Council of Economic Advisers, Edward Lazear said: "The general picture cannot be disputed. The difference between the earnings of individuals at the top and earnings of individuals at the bottom has grown." ...

                                            What Democrats now need to do is to reconcile an armada of alternatives. More extreme factions argue that the centrism of the Clinton administration doesn't adequately address 21st-century fears and offer in its place ... visions of ... fiscal responsibility, while trumpeting unionization and protectionism.

                                            That's terrible policy, although it's not hard to imagine why Democrats would be tempted by a retreat from the world marketplace. Collateral damage from globalization has ... helped widen the income gap. Meanwhile, the ability to source labor worldwide has allowed companies to turn the thumbscrew on costs, swelling profits but eating into labor's share of the pie.

                                            Moreover, two grating issues -- immigration and gas prices -- have strong links to the widening wage gap. At the least, immigration certainly puts further pressure on wages of lower-income workers... And the storm over gas prices ... has been exacerbated by the thin wallets of workers facing them at the pump.

                                            But giving in to politically expedient demands, such as barricading our borders, would be a mistake. Trade agreements have brought American consumers better, cheaper goods and allowed the economy to grow quickly without inflation.

                                            Nor is waxing nostalgic about the Clinton years enough; we need to recognize that there's no easy way out and belly up to the real work, like improving education and training. That may sound like motherhood-and-apple pie talk but it is, in fact, one kind of supply-side economics that actually works.

                                            While the drumbeat of offshoring remains undeniable, almost any CEO can confirm that U.S. companies are clamoring for skilled workers -- and are willing to pay up for them. At the same time, shrinking the pool of unskilled Americans will add upward pressure to the wages of those remaining.

                                            Thoughtful elements of the Democratic caravan are carefully crafting solutions, anchored in the market-based global engagement roots of the Clinton years. For example, the Hamilton Project (on whose advisory council I serve) has fired an opening volley of specific new ideas ... focused on achieving broad-based and sustainable growth while bringing along Americans who have been left behind. ...

                                            [W]e need progress on ideas like wage insurance for displaced workers and a higher minimum wage. Of course, any sensible Democratic agenda must also include getting a grip on runaway federal spending, budget deficits and unfunded entitlement programs, all of which would be aided by rolling back President Bush's outlandish tax cuts. We shouldn't try to redistribute our way out of the widening gap, but federal tax policy should not add to the problem.

                                            No one can promise that centrist Democratic policies will insulate us from the effects of globalization. But with the country unhappy with the Bush administration's laissez-faire indifference, the alternative to turning government in a more promising direction may be retrogressing to an era of protectionism and heavy-handed government that we rightly left behind with the stagflation of the 1970s.

                                              Posted by on Wednesday, July 19, 2006 at 12:15 AM in Economics, Income Distribution, Policy, Politics | Permalink  TrackBack (0)  Comments (8) 

                                              Tuesday, July 18, 2006

                                              Correcting Market Failure in Timber Markets

                                              This is from Tim Haab at Environmental Economics:

                                              How to lengthen timber rotations, by Tim Haab: Since the mid-1800's economists have understood that a private owner of a stand of trees will harvest the trees when the future returns to leaving the trees in the ground (to grow) dip below the returns that could be earned by cutting the trees. But, if the trees provide external--social--benefits beyond those captured in the private market, like for example storing carbon, then the private owner of the trees must be given the monetary incentive to incorporate these benefits. Otherwise, the private benefits and the social benefits will not be the same and the trees will be cut too soon. That's exactly the premise behind Forest Protocols program of the California Climate Action Registry. As the AP explains it (via ENN.com):

                                              The nonprofit California Climate Action Registry was set up by the state six years ago to encourage corporations and government agencies to track, and ultimately reduce, their emissions. The Forest Protocols program will allow environmentally minded citizens to pay to preserve enough trees to offset their personal carbon emissions.

                                              The registry has calculated how much the timber industry loses by allowing trees to grow longer and bigger -- past the time they are normally harvested. The industry would then be compensated by other companies that buy carbon credits -- or shares of the trees -- to offset their carbon emissions.

                                              Foresters will be paid to lengthen the rotation period.

                                              I'm starting to become a big fan of these offset programs. One of the major problems with markets is that it is difficult to for multiple individuals to convey social costs (or benefits) imposed by the actors in a market without government organization. But private, nonprofit groups provide just such a means without the government bureaucracy.

                                              While these groups help to solve the coordination problem, participation is voluntary so they don't solve the free-riding problem. I have no incentive to participate in carbon emissions reduction-- either through contributing to an offset program or through changing my behavior. But if the government did decide to mandate my carbon reductions, I would much rather have the choice to pay someone else to do it for me rather than just be forced to change my own behavior. I'm not saying I wouldn't change my behavior, I'm just saying I want the choice. I like more choices...most of the time.

                                                Posted by on Tuesday, July 18, 2006 at 04:03 PM in Economics, Environment, Market Failure | Permalink  TrackBack (0)  Comments (18) 

                                                Globalization Lessons from the World Cup

                                                Branko Milanovic, an economist at the Carnegie Endowment for International Peace, looks for lessons about globalization from the World Cup. Does globalization lead to a concentration of wealth and power?:

                                                The Lessons of the World Cup, by Branko Milanovic, Project Syndicate: This year’s World Cup has proven ... that football is probably the world’s most globalized profession. It is inconceivable that Brazilian, Cameroonian, or Japanese doctors, computer scientists, blue-collar workers, or bank tellers could move from one country to another as easily as Brazilian, Cameroonian, or Japanese football players do.

                                                Indeed, London’s Arsenal football club is composed entirely of foreigners, including a French coach. Even the captain roles are no longer reserved for domestic players... Football thus provides a glimpse of how true globalization of labor would work. In football, as in other occupations, restrictions on labor mobility came entirely from the demand side. No limits were ever imposed on players’ movements, except by Communist countries. But the demand side was heavily regulated, owing to a rule that clubs could field no more than two foreign players in any single game.

                                                The Bosman ruling, named after a Belgian player who successfully challenged the rule’s application to players from other European Union countries, eroded the limit, which collapsed altogether under the onslaught of the richest European clubs’ demand for a free hand in hiring the best players, wherever they might be found. ...

                                                [W]herever globalization and full commercialization reign supreme, there is an unmistakable concentration of quality and success. Consider the number of clubs that have qualified for the European Champions’ League top eight slots. If we look at five-year periods between 1967 and 1986, the number of different teams that qualified for the quarterfinals varied between 28 and 30. In the next two five-year periods, however, the number fell to 26, and in the most recent period (2000-2004), there were only 21. The bottom line is simple: fewer and fewer clubs are making it into the European elite.

                                                National leagues are similar. Since the English Premier League was started in 1992, only one championship was not won by Manchester United, Arsenal, or Chelsea. In Italy, all but two Serie A championships since 1991 have been won by either Juventus or AC Milan. In Spain, all but three championships since 1985 have been won by either Real Madrid or Barcelona.

                                                The reason for this concentration at the top is obvious: the richest clubs are now able to attract the best players in the world. Yet this has arguably been accompanied by improved quality in the game itself... When the best players play together, the quality of each, and of the team as a whole, increases exponentially. When Ronaldinho and Messi, or Kaka and Shevchenko, play together, their combined “output” (number of goals) is greater than the sum of goals that each would score if he played in a different club with less talented co-players.

                                                Free mobility of labor in other areas would probably produce the same effect. If doctors, computer specialists, or engineers (let alone the proverbial Polish plumbers!) were allowed to move freely, the concentration of talent in the richest countries would most likely increase. Inequality in the distribution of talent across countries would rise, even if total world output of goods and services, and their average quality, improved, as with football today. Poorer or smaller countries can hardly dream of winning a European championship, as Steaua (Romania), Red Star (Serbia), or Nottingham Forest ... once did.

                                                But, while we see inequality and exclusion in club-level football, the opposite is true for competitions between national teams. The average winning margin among the top eight World Cup national teams has steadily decreased, from more than two goals in the 1950’s, to about 1.5 goals in the 1960’s, 1970’s and 1980’s, and only 0.88 goals in the 2002 World Cup.

                                                The same is true of all games played at the final tournament, not only those among the top eight national teams. The decrease in winning margins is all the more impressive because the World Cup has grown from 16 to 32 national teams – many of them new and rather inexperienced. ...[T]he elite eight teams of the last four World Cups have included two “newcomers ” that had never been quarterfinalists, such as Turkey and South Korea in 2002.

                                                There are again two reasons for this. First, free movement has meant that good players from small leagues improve much more than they would had they stayed home. A good Danish or Bulgarian player improves much faster if he joins Manchester United or Barcelona.

                                                Second, that improvement in quality was “captured” by national teams playing in the World Cup thanks to FIFA’s rule requiring players to play only for their national team. Eto’o can play for any ... club, but in the national competitions, he can play only for Cameroon. In other words, FIFA has introduced an institutional rule that allows small countries (in the football sense) to capture some of the benefits of today’s higher-quality game, thereby partly reversing the “leg drain.”

                                                The same rule could be applied to other activities. Free movement of skilled labor could be accompanied by binding international requirements that migrants from poor countries spend, say, one year in five working in their countries of origin. They would bring home skills, technology, and connections that are as valuable as the skills that Eto’o, Essien, or Messi bring back to Cameroon, Ghana, or Argentina. Job placement would remain a problem, but the principle is sound: the world should learn from the World Cup.

                                                Interesting idea, thinking about ways to transfer skills back to the country of origin is worth pursuing, but uprooting people and their families every five years with an international move seems impractical. Financial incentives to move back to their home country might be better than a rule forcing people to do so, especialy if they stayed permanently rather than just returning for one year in five.

                                                  Posted by on Tuesday, July 18, 2006 at 10:15 AM in Economics, International Trade, Policy | Permalink  TrackBack (1)  Comments (14) 

                                                  Fed Watch: Living on a Knife Edge

                                                  Tim Duy with his latest Fed Watch:

                                                  Living on a Knife Edge, by Tim Duy: Big, big week for monetary policy. Today, we get the PPI figures. Tomorrow, Fed Chairman Ben Bernanke marches up to Capitol Hill for his Congressional testimony after getting a fresh reading on inflation earlier that morning. Unless the inflation numbers surprise on the downside, I am not confident that with oil staring at $80 a barrel, Bernanke can stick with a message that suggests inflation is under control. At the same time, with clear evidence of a slowdown evolving in consumer spending and a housing sector that is clearly on the rocks, Senators will want to hear that Bernanke is pulling his foot off the pedal. Financial markets are split pretty evenly between expectations of another hike or a pause next month; tomorrow’s events could shift the tide decisively in one direction or the other.

                                                  This, of course, is the proverbial rock and the hard place. Instinct tells me that the risk is that unless the inflation figures come in below expectations, Bernanke will come down sounding hawkish. He, like virtually all central bankers these days, will tend to fear inflation more than slow growth – and that would set the stage to push expectations toward another rate hike in August.

                                                  The US consumer is on the ropes. The stress was obvious in the May personal income report, which again showed households struggling to maintain spending by continuing to deplete their savings. And we have little reason to believe the situation is improving; retail sales were below expectations in July. Note that these are nominal figures – a paltry gain in prices will effectively wipe out any potential real gains. Moreover, as Calculated Risk notes, industry insiders are not expecting their customers back anytime soon, if retail sector job growth is any indicator. Notice too that Target just warned on their July same store sales; the stock slipped 3.2% in after hours trading. The future isn’t looking much brighter, with the expectations of large ARM resets looming heavily in our collective inner-bear.

                                                  But, do recessions originate in consumer spending? Or is investment spending the culprit? The Fed will side with the latter interpretation, and in looking for evidence of a recession inducing investment reversal, I suspect they will come across the following charts:




                                                  The first two are familiar indicators of core investment intentions. Orders for capital goods excluding aircraft and defense are maintaining their upward trend. Backlogs continue to grow as well, a sign that firms are struggling to keep up with demand, suggesting the need for capacity expansion via, you guessed it additional investment. In this light, yesterday’s strong industrial production report is also supportive of another rate hike.

                                                  The last chart is the ratio of corporate cash flow to nonresidential investment. Firms can satisfy all of their current investment spending, and them some, without resorting to financial markets. Under such circumstances, additional rates hikes, or market gyrations, will likely have a smaller effect on firms’ investment behavior.

                                                  But will investment hold steady if the consumer starts to fade? Plenty of cash just means firms can invest, it doesn’t mean they will. And isn’t the consumer spending slowdown enough to pull growth down to potential, thereby lessening the inflationary pressures? This was, in a nutshell, the story from the last FOMC statement, as well as the argument for a pause in August. Not a bad argument, at that, one that John Berry makes in this piece, concluding with:

                                                  Fed officials have been focused on making sure that the energy price shock doesn't spill over into core inflation, and so far they have been successful. That means that if oil prices do stabilize then headline inflation will decline. And the risk of that spill over will be gone.

                                                  Given the steady upward trend in oil prices over the past few years, one would think that we would have to sit through more than one FOMC meeting to conclusively say that oil prices are stabilizing. Not to mention that since the June FOMC meeting, oil prices have climbed higher, hitting fresh records. That may be just a knee-jerk reaction to the Middle East conflict, but I can’t help but think back to Richmond Fed President Jeffery Lacker’s comments:

                                                  “Moreover, focusing on real interest rates draws attention to how and why policy must respond; real interest rates must fluctuate to accommodate changes in the relative pressure on current versus future resources. Widespread understanding of this would have aided the market response to Katrina; the storm impaired the supply of current resources relative to the future, and so, if anything real interest rates had to rise, not fall.”

                                                  Does it matter if oil prices are higher due to a hurricane in the Gulf of Mexico or the Middle East conflict? Of course, the US economy looked healthier when the hurricanes struck last summer, and the resulting damage also knocked back refinery capacity. But this latest jump in oil prices comes at a time with elevated inflation numbers, and the expected weakening of inflationary pressures has yet to fully emerge. If the Fed holds back from another rate hike now, isn’t it the same as accommodating a fresh rise in oil prices? Will the more hawkish members of the FOMC be willing to accept that? And note that although financial markets have been agonizing over the state of the economy, Minneapolis Fed President Gary Stern is sounding rather complacent. Not surprising, considering that the economy has weathered a number of crises over the past few years.

                                                  The core of the debate continues to be the race between inflationary pressures and growth moderation. I buy the story that many FOMC members want to pause, but I think such a decision will depend more on soft inflation readings over the next three weeks rather than soft growth readings. Bernanke’s testimony will be a key is setting expectations of the next FOMC meeting. Also the Fed is likely less concerned about the health of the economy than financial market participants, suggesting that Bernanke will surprise on the hawkish side.

                                                    Posted by on Tuesday, July 18, 2006 at 01:00 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (0)  Comments (13) 

                                                    Monday, July 17, 2006

                                                    The Director for Lessons Learned

                                                    Paul Krugman follows up on his column "March of Folly":

                                                    Money Talks: A footnote to "March of Folly": William Kristol, editor of The Weekly Standard, and one of the principal proponents of the view that invading Iraq would transform the Middle East in a favorable way, now has this to say:

                                                    "For while Syria and Iran are enemies of Israel, they are also enemies of the United States. We have done a poor job of standing up to them and weakening them. They are now testing us more boldly than one would have thought possible a few years ago. Weakness is provocative. We have been too weak, and have allowed ourselves to be perceived as weak.

                                                    "The right response is renewed strength — in supporting the governments of Iraq and Afghanistan, in standing with Israel, and in pursuing regime change in Syria and Iran. For that matter, we might consider countering this act of Iranian aggression with a military strike against Iranian nuclear facilities. Why wait? Does anyone think a nuclear Iran can be contained? That the current regime will negotiate in good faith? It would be easier to act sooner rather than later. Yes, there would be repercussions — and they would be healthy ones, showing a strong America that has rejected further appeasement." [The full article can be read here, at the Weekly Standard web site.]

                                                    It apparently doesn't occur to Mr. Kristol that the inability of the United States to impose its will on Iraq, and the fact that a large part of our military force is now bogged down there, has anything to do with the willingness of Iran to test us "more boldly than one would have thought possible a few years ago." The only problem, he thinks, is that we haven't been tough enough.

                                                    I'd suggest that Mr. Kristol and those who share his views — still a highly influential group — have a conversation with Stuart Baker, the Bush administration's "Director for Lessons Learned."

                                                    If you click through, Stuart Baker, who is probably as busy as the Maytag repairman teaching the lessons that have been learned by the administration, is at the $106,641 salary level. Conservative columnist George Will also blasts Condi Rice, William Kristol, and the Weekly Standard in his Washington Post column. The column is excerpted and discussed here.

                                                      Posted by on Monday, July 17, 2006 at 09:09 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (43) 

                                                      Do Economists Have Any Answers?

                                                      I am asked repeatedly what the solutions are to the problems that occur with globalization and increasing inequality, but the answers I give are not the answers people are looking for. Economists have done a good job documenting and highlighting the problems, but have had far less to say on how to overcome them. As I noted in comments where I first posted the remarks below, the remarks were a bit rushed. But I decided to post them anyway as a challenge to my colleagues to start answering this question. We are asked repeatedly what the answers are to the problems we've identified, growing inequality, wage stagnation, outsourcing of jobs, the changing social contract, you know the list, but we have not given satisfactory policy responses, at least not according to the comments I get.

                                                      So, this copy of the comment I threw together is intended to get the conversation started and encourage others to contribute thoughts, not be the final word on the topic:

                                                      What should we do about globalization and growing inequality? Making a comparison to the medical profession, it may be that while we can diagnose some conditions clearly, we have no effective cure for them (though there are economists hard at work daily hoping to change that, just as medical researchers are trying to find cures for their set of ills), it requires waiting for the system to "heal" itself over time.

                                                      Economists can suggest healthy diets (e.g. monetary and fiscal policy), but that is no guarantee that the economy will not get sick anyway and when it does, we don't always have the cure at hand, though I do think we have, for the most parts, prescriptions to help the economy heal faster. But people want instant cures, a pill to take that makes it better now, not a long difficult road to recovery.

                                                      Education, worker retraining, those sorts of things aren't cures, they simply (hopefully) speed the healing process along, and sometimes that can be a much longer process than any of us like.

                                                      I know a lot of you like to beat us up because we don't have the answers, and it's useful to motivate us to look all that much harder, but I'm not any more embarrassed for our profession because we can't solve every problem than doctors are who can't cure the common cold. And (this will make some of you mad) they, like us, have to listen to a lot of folk remedies that supposedly work, be told they are idiots, etc. And though every once in awhile the folk remedy is valid, generally the suggestions come from people who really don't understand all facets of the problem. You can't argue with them, they really believe their folk remedies work, so it's best to listen to them attentively, smile and nod, and not engage.

                                                      But that's pessimistic. My economics tells me that there will be winners and losers from things like free trade and that the winners will [generally] have enough to compensate the losers and still be better off themselves. So my solution would recognize this reality and, along with all the things we need to do to help the economy heal, it would also redistribute income in a way that produces far more winners and far fewer losers. But I don't think we have the political will to do that yet, the understanding that everyone will still be better off after the redistribution, though the the GOP's change of heart to allow consideration of a vote on the minimum wage is one sign that this is being recognized.

                                                      Policies can protect people from losing jobs, but I think that's a recipe for stagnation in the long-run. Policy can help people get new jobs faster, that's where education, retraining, etc. come in, but that hasn't worked as well as we would like (but that's not an excuse to stop trying and my solution involves these things even though so many of you object to such policies). Policy can raise income for lower income groups, that's where minimum wages, negative income taxes, redistribution policy, etc. come in. These help ease the globalization transition by transferring income to affected groups and hence make it easier to accept politically, but it's not clear they make the transition occur any faster.

                                                      Finally, we can hope the electoral process results in a change in the use of political power to bring about transfers of income toward higher levels. We have enough trouble dealing with the economics driving such changes, we don't need legislation that makes it even worse.

                                                      I think part of the silence is that economists have no instant cure for problems that occur with globalization. We think it's necessary for our long-run health, and we can recommend policies that aid the recovery process, but perhaps our silence is because we've been waiting for some economist working hard to have a "Eureka" moment and announce to all of us a cure is at hand. Until that happens, we will be stuck with less satisfying rehabilitative solutions.

                                                      So, smart economists everywhere, what do we tell people when they look to us for answers to the problems that come with globalization and rising inequality? Do we say we can help some, but not all that much and it's a long, hard road to recovery, or do we have a more positive message to deliver? If so, how do we get the message out? Some of you will deny a problem exists and assert this is just a matter of public perception and the workings of a free market rewarding the most productive among us, and you can argue that position, but I think there is evidence of justfiable discord.

                                                      One final question, it would also help if we pointed to our policy successes. Where would you tell people to look in the microeconomic and macroeconomic arenas for examples of successful policies recommended by economists? I'll cite a couple that come to mind. Since my main interest is Fed policy, those policies come to mind first. For a recent example, I think our monetary policy response to oil price increases is far superior to our response thirty years ago to the shocks that hit in the 1970s. That's not to say the response has been perfect, but we've learned since the 1970s and policy has improved considerably.

                                                      Second, and related to the poor performance of the 1970s, an example of necessary painful policy (though it had an unusually fast healing period) was the monetary policy induced recession of the early 1980s needed to establish the Fed's commitment to fighting inflation. This led the way to the lower inflation rates that we saw in subsequent years and perhaps has a direct relationship to the increased stability of GDP after the mid 1980s.

                                                      Third, policies such as Federal Deposit Insurance on bank deposits, bank examination, the implementation of increased capital requirements after the S&L failures, and other measures have stabilized the financial system. There are those who would prefer an unregulated financial sector, but they are in the minority. When I compare the banking system now to, say, the banking system before the Great Depression I count these regulations as a clear successes in terms of stabilizing this important sector.

                                                      There are other places to point to as well, and the microeconomic literature may provide an even more extensive set of examples since the set of policies and markets to apply them to is so much larger, but I'll leave those for others to talk about should they choose to respond. And I expect there will be some who disagree that the cases I cited constitute success stories, and that perspective should be heard as well.

                                                        Posted by on Monday, July 17, 2006 at 02:59 PM in Economics, Income Distribution, International Trade, Policy, Politics | Permalink  TrackBack (0)  Comments (64) 


                                                        It's probably time to move on to something else for awhile since there have been quite a few posts on income inequality recently and I don't want to overdo the topic. But it's an important topic and underdoing it would be an even bigger mistake, so here's one more. This describes how inequality drives political polarization and shuts down the legislative process:

                                                        Why We Fight, by Brendan Mackie, American Prospect: ...In their new book, Polarized America: The Dance of Ideology and Unequal Riches, political scientists Nolan McCarty, Keith T. Poole, and Howard Rosenthal identify a chief culprit behind the decades-long increase in political polarization: rising economic inequality. TAP spoke with McCarty from his office ... at Princeton University.

                                                        You argue that economic inequality and illegal immigration feed America’s increased political polarization. How does this “dance,” as you call it, work?

                                                        What’s happened in the past 25 to 40 years or so is that as economic inequality has increased, there’s been a polarization of the parties on economic issues... T]here’s a direct relationship between the polarization of the parties on economic issues and the increased economic inequality that took place, primarily because these new, wealthier voters gave an impetus to a set of policy priorities -- lower taxes, a more libertarian set of economic prescriptions -- that reinforced inequality.

                                                        The question is, why hasn’t this increased economic inequality produced more redistribution?

                                                        Typically economists, political economists, and political scientists think that economic inequality is self-correcting: If inequality increases there will be a mobilization of lower-income voters in a push toward greater redistribution of wealth to offset that inequality. Here’s where immigration is a big part of the story, ... at the same time as economic inequality in America was increasing, immigration was increasing, too. There were increasing numbers of low-wage workers, but an increasing proportion of those were immigrants who were not yet naturalized and therefore not able to vote for redistributionist policies. ...

                                                        Do you think American politics would become more or less polarized if more illegal immigrants were given citizenship?

                                                        It’s really not so much a question of legal vs. illegal immigration  ... it’s simply a question of the levels of immigration and the class or skill composition of immigrants. We argue ... that if, in fact, immigrants could vote, or if there hadn’t been this sort of compositional change in lower-income voters so that increasing numbers of them can’t vote, then there might have been more support for redistributionist policy (like an increase in the minimum wage, or an extension of the earned-income tax credit, or improvements to education)... Giving immigrants citizenship might not end polarization -- there would still presumably be big differences in the economic interests of high-income voters and low-income voters -- but it might lead to a stronger policy response toward economic inequality.

                                                        The current administration puts a lot of polarizing cultural issues out into the national debate. Are these just red herrings that distract from more salient economic issues?

                                                        I don’t buy into the Thomas Frank view that these cultural issues are red herrings, fake populism by economic royalists of the Republican Party. Lower-income religious Americans are only slightly more Republican than lower-income Americans in general. What’s very dramatic is that we find a coalitional structure that’s emerged in which the base of the Republican Party isn’t religious conservatives or economic conservatives, but religious high-income voters who have no conflict between voting their values and voting their pocketbook. ...[I]f you look at what Republicans have done in office, they really have pushed on the economic issues -- the tax cuts, the privatization of social security, the deregulatory agenda and so on -- more than the cultural issues. And while some have interpreted this to mean that the Republicans aren’t serious about conservative religious issues, I just think it’s more that they have this coalition of high-income Americans. The religious issues are important to certain parts of this coalition, but it’s not the dominant part...

                                                        What’s the big problem with political polarization? It’s just people disagreeing, right?

                                                        Some level of polarization and disagreement is undoubtedly good. Good policy-making has to be some combination of debate and resolution. In the ideal political system, people ... iron out their differences in principled ways. We’ve gone past that point. Polarization has become debilitating. Congress has been unable to fulfill its legislative functions in an effective way. By way of an anecdote, Congress is on pace to set the modern record for the fewest days in session. Why be in session if nothing’s going to be accomplished? ...

                                                        It won’t surprise anyone who’s thought about the nature of American political institutions to note that in America it’s very easy to block things from getting done. We have a federal system that requires some degree of coordination between the federal government and state governments; we have a bicameral system that requires coordination across the branches; in each of these systems we have committee systems which require the coordination of committee chairs; and we obviously require cooperation between the President and the Congress. Because of this, without exception every single major piece of legislation in the post-war period has had to have some sort of bipartisan consensus in order to get passed. Our institutions are pretty prone to gridlock ... because we have all these hurdles. ...

                                                        Talk a bit more about when and how political polarization began increasing.

                                                        Polarization started to increase right after the Great Society. There had been a real consensus on economic and social policy: that Keynesian macroeconomics and the welfare state social policies were the way to go. The breakdown of this consensus caused by the economic changes in the 1970s created today’s increased political polarization. Keynesian economics unraveled, and so the consensus about the government’s role in the macro-economy changed; the urban crisis of the 1970s undermined faith in New Deal/Great Society-type liberalism.

                                                        At the same time there was a real skills premium in the economy so the value of education started to rise relative to unskilled labor, and thus you had an increase in economic inequality. The beneficiaries of this change, ... because they were doing quite well under the new consensus, began to support Reaganomics and other conservative economic policies.

                                                        The polarization we see today is the Democratic Party supporting the remnants of the old consensus and the Republicans representing this alternative libertarian, small-government consensus. Other issues started getting drawn into this split, creating the polarization we see on non-economic issues. Although we argue that for the most part the polarization on social issues has been overstated, you can’t deny that there are other religious and cultural issues coming out of the 1970s -- Roe v. Wade and so forth -- that have reinforced these divisions. ...

                                                        If America continues to become less equal, do you see American politics becoming more and more polarized?

                                                        We talk about some of the proposals people have made to try to ameliorate polarization. A lot of them are small, like reforming reapportionment and gerrymandering or changing the ways electoral primaries are conducted. But since we think polarization is more a fundamental reflection of a divergence of interests across different economic groups, those sorts of things aren’t going to be solutions.

                                                        This leads us to something of a pessimistic conclusion: if we can’t change the system by reforming the way politics works, then you’re left with two options. First, voters simply have to change their mind about what their interests are or you have to have political leaders stand up and convince them that their interests are different than what they think they are -- both of which seem like unlikely scenarios. Or, alternatively, you have to have something really bad happen. Nobody wants anything really bad to happen, but the Great Depression and the Second World War had huge effects on political polarization and economic inequality. They gave people a sense of shared fate. It’s hard to see a way out of polarization, without some big event that either changes people’s perceptions of how the world works or what the role of government should be, or increases people’s sense of shared fate.

                                                        A lot of people argued in 2001 that 9-11 was potentially such an event. If you looked right after 9-11 you saw increases in people’s trust in governmental institutions, ..., and you saw a short-term increase in bipartisanship in congress, but both of those were very, very short lived. Within six months the level of congressional bipartisanship and people’s trust in government were back to where they were before 9-11. So even very significant events like 9-11 may not be big enough to change people’s perspectives...

                                                          Posted by on Monday, July 17, 2006 at 10:35 AM in Economics, Income Distribution, Politics | Permalink  TrackBack (0)  Comments (27) 

                                                          It's the New Guy's Fault

                                                          If the economy begins to weaken as the election approaches, Republicans are worried voters will hold them accountable. To shift the focus away from their economic policies, Bernanke and the Fed will be an easy target:

                                                          Bernanke May Deliver Unwelcome Election-Year News to Republican Lawmakers, Bloomberg: Federal Reserve Chairman Ben S. Bernanke may deliver his fellow Republicans a message they'd rather not hear when he gives Congress his monetary-policy report this week: The economy is slowing and inflation remains a risk.

                                                          President George W. Bush and his Republican colleagues, trailing in the opinion polls, are counting on the strength of the economy to help them retain control of Congress in the November elections. A slowing economy -- in response to repeated Fed interest-rate increases -- will undercut that campaign theme.

                                                          ''They're certainly going to be blamed if the economy slows down,'' says Karlyn Bowman, a polling expert at the Republican- leaning American Enterprise Institute in Washington. ''That's something they need to worry about.''

                                                          There are signs they do. ''The Fed should take a break from any further rate increases,'' says Representative Don Manzullo, an Illinois Republican and a member of the House Financial Services Committee. ''Manufacturing is just starting to recover.''

                                                          Kevin Hassett, who works with Bowman at AEI ..., says some Republican lawmakers are ''nervous'' about Bernanke's handling of the economy. ''They're worried about whether he's up to the job,'' said Hassett...

                                                          Republican Representative Spencer Bachus..., a member of the House Financial Services Committee, says he gives Bernanke and the Fed high marks for dealing with a challenging economy.

                                                          Others aren't so kind. Republican Senator Jim Bunning, a long-time Fed critic, says he intends to confront Bernanke at this week's hearing about the problems he's causing the economy by continuing to raise rates.

                                                          The Kentucky senator has called Bernanke an ''amateur'' and blasted the former Princeton University professor for unnerving markets with his anti-inflation rhetoric. ''He's been in a cocoon of academia and is not ready for prime time,'' says Bunning.

                                                          The unease is shared by some Democrats. ''I think this has been overly aggressive,'' Connecticut Senator Chris Dodd told reporters on July 11. ''Because he's new and probably less sure of himself in these matters, he's leading the Fed to be a bit more over-reactive.'' ...

                                                          From the Fed's perspective, the slowdown is welcome because it will help ease pressure on inflation. Others worry it might go too far. ...

                                                          ''We're very worried about the consumer getting hit,'' says David Lereah, chief economist at the NAR. So too are lawmakers, especially Republicans, who would take the blame if the economy nosedives in response to tighter credit from the Fed.

                                                          Representative Barney Frank, a Democrat from Massachusetts, says many workers have seen little, if any, increase in wages. Add on top of that a softening jobs market, and it's a problem for Republicans in November, he says. ''If the Fed slows things down, they're increasing that problem,'' Frank says.

                                                          I'm also worried about overshooting and believe the Fed should take a breather to assess how much tightening is already in the system, but I am not concerned at all about whether the Fed, Bernanke included, is up to the job. No matter what the Fed does, the economy will cycle through good times and bad, so they are always an easy target even when they do their job well. If there's a good part to the Fed being used as a political scapegoat around elections, it's that it gives lawmakers a good reason to keep the Fed independent - someone to blame when things go wrong.

                                                            Posted by on Monday, July 17, 2006 at 04:02 AM in Economics, Monetary Policy, Politics | Permalink  TrackBack (0)  Comments (11) 

                                                            Paul Krugman: March of Folly

                                                            Paul Krugman wonders why the views of some commentators on Middle East policy are given credence given how far off their analysis has been in the past:

                                                            March of Folly, by Paul Krugman, Neocons Commentary, NY Times: Since those who fail to learn from history are doomed to repeat it — and since the cast of characters making pronouncements on the crisis in the Middle East is very much the same as it was three or four years ago — it seems like a good idea to travel down memory lane. Here’s what they said and when they said it:

                                                            “The greatest thing to come out of [invading Iraq] for the world economy .... would be $20 a barrel for oil.” Rupert Murdoch, chairman of News Corporation (which owns Fox News), February 2003

                                                            “Oil Touches Record $78 on Mideast Conflict.” Headline on www.foxnews.com, July 14, 2006 ...

                                                            “Peacekeeping requirements in Iraq might be much lower than historical experience in the Balkans suggests. There’s been none of the ... ethnic militias fighting one another that produced so much bloodshed ... in Bosnia.” Paul Wolfowitz, deputy secretary of defense and now president of the World Bank, Feb. 27, 2003

                                                            “West Baghdad is no stranger to bombings and killings, but in the past few days all restraint has vanished in an orgy of ‘ethnic cleansing.’ .... Mosques are being attacked. Scores of innocent civilians have been killed, their bodies left lying in the streets.” The Times of London, July 14, 2006

                                                            “Earlier this week, I traveled to Baghdad to visit the capital of a free and democratic Iraq.” President Bush, June 17, 2006.

                                                            “People are doing the same as [in] Saddam’s time and worse. ... These were the precise reasons that we fought Saddam and now we are seeing the same things.” Ayad Allawi, Mr. Bush’s choice as Iraq’s first post-Saddam prime minister, November 2005

                                                            “Iraq’s new government has another able leader in Speaker Mashhadani. ... He rejects the use of violence for political ends. And by agreeing to serve in a prominent role in this new unity government, he’s demonstrating leadership and courage.” President Bush, May 22, 2006

                                                            “Some people say ‘we saw you beheading, kidnappings and killing. In the end we even started kidnapping women who are our honor.’ These acts are not the work of Iraqis. I am sure that he who does this is a Jew and the son of a Jew.” Mahmoud Mashhadani, speaker of the Iraqi Parliament, July 13, 2006 ...

                                                            “Regime change in Iraq would bring about a number of benefits for the region. ...Extremists in the region would have to rethink their strategy of jihad. Moderates ... would take heart, and our ability to advance the Israeli-Palestinian peace process would be enhanced.” Vice President Cheney, Aug. 26, 2002

                                                            “Bush — The world is coming unglued before his eyes. His naïve dreams are a Wilsonian disaster.” Newsweek Conventional Wisdom Watch, July 24, 2006 edition

                                                            “It’s time for Democrats who distrust President Bush to acknowledge that he will be the commander in chief for three more critical years, and that in matters of war, we undermine presidential credibility at our nation’s peril.” Senator Joseph Lieberman, Democrat of Connecticut, Dec. 6, 2005

                                                            “I cannot support a failed foreign policy. History teaches us that it is often easier to make war than peace. This administration is just learning that lesson right now.” Representative Tom DeLay, Republican of Texas, on the campaign against Slobodan Milosevic, April 28, 1999

                                                            Previous (7/14) column: Paul Krugman: Left Behind Economics
                                                            Next (7/21) column: Paul Krugman: The Price of Fantasy

                                                              Posted by on Monday, July 17, 2006 at 12:15 AM in Economics, Iraq and Afghanistan, Politics, Terrorism | Permalink  TrackBack (0)  Comments (17) 

                                                              Krugman: Gilded Age II, Here We Come

                                                              Greg Mankiw asks Paul Krugman to explain his comments in his recent column. He does so in an email:

                                                              OK, ... here's some explanation.

                                                              First, the question of which dates to look at depends on the question you're trying to answer. If you're asking why the public doesn't feel good about the economic growth since 2003 - which was, after all, what my "Left Behind" column was about - pointing out that inequality fell between 2000 and 2003 is irrelevant; everyone felt lousy about the economy during those years. The point is to explain why most people don't feel better about performance since 2003 - and rising inequality since then is the explanation.

                                                              Second, the data aren't encouraging about the long-term trend. The slump in top income shares after 2000 gave us reason to hope that the extreme income concentration at the end of the 90s was an artifact of the bubble, and would not return. But 2004 data already show a return almost to 2000 levels of inequality, and other indicators suggest that the trend has continued since then. Gilded Age II, here we come.

                                                              Third, both Greg and Eddie Lazear have asserted not just that rising inequality is partly due to an increased skill premium, which is true, but that it's mainly due to skill, which is false. I don't see why this distinction is so hard to understand. The median income of college grads is up since 1980, but only modestly, around 1 percent per year; the big gains are for people at the 99th percentile and beyond.

                                                              Update: Brad DeLong adds:

                                                              Incomplete and Partial Thoughts on Greg Mankiw's Updated "Lazear vs Krugman": Greg Mankiw quotes my claim that the Piketty-Saez data are hard to interpret as the result of a general rise in the economy's skill and education premium driven by skill-favoring technological change:

                                                              Greg Mankiw's Blog: Lazear vs Krugman: Update 2: Brad DeLong tries to explain what Paul might have been thinking:

                                                              DeLong: The big rise in inequality in the U.S. since 1980 has been overwhelmingly concentrated among the top 1% of income earners.... It's hard to attribute this pattern to a rise in the premium salary earned by the well-educated by virtue of the skills their formal education taught them. Such a rise in the education premium would produce a much smoother rise in relative incomes among the whole top tenth of the income distribution...

                                                              Continue reading "Krugman: Gilded Age II, Here We Come" »

                                                                Posted by on Monday, July 17, 2006 at 12:06 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (55) 

                                                                Income Redistribution and Tax Revenue

                                                                If Dooh Nibor, the reverse Robin Hood of the Second Gilded Age, uses his political and economic powers to take a dollar from the poor and give it to the rich, what happens to tax revenue in a progressive tax system? Greg Ip and Deborah Solomon look at the recent increase in tax revenues and note that while tax revenues and output both exceeded projections, the amount that output growth exceeded projections was small. This implies the unexpected increase in tax revenue is largely a compositional effect rather than a consequence of higher than expected economic growth:

                                                                As Bigger Piece of Economic Pie Shifts To Wealthiest, U.S. Deficit Heads Downward, by Greg Ip and Deborah Solomon: In announcing a big drop in its estimate of this year's federal budget deficit, the Bush administration was quick to credit itself. "Tax cuts worked to generate economic growth, and economic growth is now working to raise revenues," White House budget director Rob Portman said...

                                                                But this explanation falls short. While tax revenue is growing far faster than the Bush administration forecast in its budget projections in February, the nation's economy isn't. What has changed isn't the size of the economy, but how the economic pie is divided. The share of national income going to corporations and the wealthiest individuals, already large, has expanded, while the share going to typical wage earners has shrunk. Because corporations and the wealthy generally pay income tax at higher rates than does the typical wage earner, that shift benefits the federal Treasury.

                                                                U.S. tax revenue for fiscal 2006 ...  is expected to be 5% -- or $115 billion -- higher, than the administration projected in February. Largely as a result, the budget deficit is expected to be $296 billion this year, instead of $423 billion.

                                                                But total economic output is expected to be just 1% larger, before adjusting for inflation, than the White House predicted. After adjusting for inflation, it is projected to be just 0.1% larger. ...

                                                                So, the tax windfall is another piece of evidence that income inequality in the U.S. continues to grow, which in turn may explain why the average American still gives President Bush low marks on the economy despite its overall strength. ...

                                                                On the other hand, it also may be evidence that Mr. Bush's tax cuts are working as advertised. Lower tax rates were meant to encourage people to work more, and because their taxes were cut the most, ... the wealthiest may have the biggest incentive to work and earn more.

                                                                In addition, cuts in taxes on capital gains and dividends were meant to reduce the cost of capital and encourage companies to invest more, which should lead to higher profits. This is called the supply-side effect...

                                                                Rudolph Penner, a senior fellow at the Urban Institute, a Washington think tank, and a CBO director picked by Republicans in the 1980s, says a supply-side effect "doesn't come close to explaining the revenue surge." ... He notes the administration itself puts the tax cuts' maximum supply-side boost at just 0.7% of GDP, stretched over many years.

                                                                Mr. Penner says the revenue surge reflects not a supply-side effect but a replay of the late 1990s, when the 1% of richest taxpayers prospered most and "paid a huge amount of taxes," eventually driving the budget into surplus. Indeed, the CBO and the White House repeatedly raised revenue forecasts then, much as they have now. But the recession and the stock-market bust in 2001 caused revenue to fall far more rapidly than budgeted.

                                                                That experience suggests the current revenue surge could also be transient. ... Even if the wealthy and corporations maintain their larger share of national income, budgeting could become more treacherous. That's because corporate profits and the performance-based pay that makes up so much of the affluent's income are inherently more volatile than wages... Thus, the difficulty of projecting the Treasury's tax take could be long-lasting.

                                                                Update: Gene Sperling has more on the lack of evidence for supply-side claims:

                                                                Inconvenient Facts and Bush's Supply-Side Boast, by Gene Sperling, Bloomberg: ... Judging from the White House's recent economic bragging, when it comes to their tax cuts, only positive news can be allowed into evidence. They are like the student who wants to throw out all of his bad tests scores and be graded only on occasional shows of improvement. ... [I]t is hard to swallow the Bush White House's assertions of direct causation between their tax cuts and any improvement in economic projection.

                                                                You just can't ignore the fact that this recovery shows the worst job creation on record and that when you look at the complete recovery -- as opposed to its best couple of years -- growth and investment have been weak. It is also hard to ignore that since the 2001 tax cuts were passed, median family income declined every single year, and since the 2003 tax cuts were passed, typical hourly and weekly wages fell in real terms.

                                                                Finally, there is the 2006 deficit, which the administration initially projected at a $500 billion surplus. It now will be a $300 billion deficit. In other words, the Bush White House is celebrating an $800 billion deterioration. (Even in 2002 -- after factoring in the tax cut, the aftermath of recession and Sept. 11 -- the administration still projected a $127 billion surplus for 2006.)

                                                                But we are instructed to ignore all these disappointing facts and focus only on how much revenues have improved over recent projections.

                                                                Yet,  ... Revenues over the last several years have been dramatically lower than what the Bush administration projected when it took office in 2001. ... In total, revenues between 2003 and 2006 fell short of the 2001 forecast by $1.8 trillion.

                                                                So is this proof-positive that the Bush tax cuts are the sole cause of a nearly $2 trillion revenue loss over just four years? If I drew that conclusion based only on those facts I would be guilty of the same selective causation as the Bush White House. ...

                                                                  Posted by on Monday, July 17, 2006 at 12:03 AM in Budget Deficit, Economics, Policy, Taxes | Permalink  TrackBack (0)  Comments (2) 

                                                                  Sunday, July 16, 2006

                                                                  Bad Economics

                                                                  The U.S. isn't the only place where people argue against action on reducing CO2 emissions because it will hurt business. The author of this commentary, a supply-side advocate and "former Conservative adviser at the Treasury" in the UK, needs to learn about externalities, value theories, and public goods. First, there's this:

                                                                  Saving the planet is bad economics, stupid, by Rupert Darwall, Commentary, Financial Times: ...To the extent that they work, green policies – whether taxes, regulation, carbon quotas and the like – do so by distorting the market. The economy can no longer use the most efficient mix of inputs such as energy, labour and investment to produce what is desired by consumers. As a result, output will be lower, with an inferior product mix.

                                                                  It could be argued that part of the bundle of goods desired by consumers is less CO2. But man-made CO2 is a “garbage good”: it is produced not because it is wanted, but as a by­product of producing the goods and services people buy. Because of this, the less you want of it, the less you can have of everything else. ...

                                                                  That's not right. If the taxes, etc. internalize the externalities, then the output mix and level of output will be more, not less efficient.

                                                                  I can't figure this next statement out at all - it seems to accuse people of using an "energy theory of value" to do economic analysis:

                                                                  Conservative economic thinking appears to be based on a theory that assumes energy is the only item of value going into the production process. If energy is replaced by other things, economic efficiency can thereby be improved. This is a similar fallacy to one embraced by communist economies, which were run on the basis of Karl Marx’s idea that labour was the only measure of value, with economic consequences that were plain for all to see.

                                                                  Huh? He also says, in arguing against action on reducing CO2 emissions, that:

                                                                  [T]he UK contributes about 2 per cent of global CO2 emissions. A second world war-style dig-for-victory approach, with every kilogram less of CO2 contributing to salvation, would yield eggcupfuls of CO2 reductions... It would hurt, but ... not work.

                                                                  But that simply points out the public good aspect of the problem and that there is a need for collective, coordinated approaches to solve it. His argument is that doing anything, collectively or unilaterally, will reduce GDP, and lower GDP must be less efficient. Since lower GDP is inefficient and makes people worse off, nothing should be done.

                                                                  His arguments about the internal politics may be right - that green policies won't attract the voters Conservatives need to win the next election - but the economic arguments used to justify inaction on CO2 reduction are, to quote the title of the commentary, "bad economics."

                                                                    Posted by on Sunday, July 16, 2006 at 12:24 PM in Economics, Environment, Policy, Regulation | Permalink  TrackBack (0)  Comments (9) 

                                                                    The Consequences of Growing Inequality

                                                                    This commentary on the consequences of growing inequality in the U.S. is from Jacques Mistral "professor of economics, Conseil d’Analyse Economique, Paris, and senior fellow at Harvard’s Kennedy School of Government":

                                                                    Growing inequality is turning America inward, by Jacques Mistral, Commentary, Financial Times: The backlash against globalisation is becoming more pronounced every day in the US. We see it in rising nationalism and protectionism, which are feeding anti-immigrant sentiments. ... Economic openness – which served America and the free world so well for years – is today too frequently perceived as a threat to national security. But populism’s deeper roots are domestic and its causes should be examined, discussed and defused.

                                                                    Recent events in the US reflect increasing inequalities that endanger the fundamental aspiration of this country – a land of opportunity for all. ...[It's] clear that prosperity does not necessarily go hand in hand with fairness.

                                                                    Recent research provides mounting evidence that the American dream could, in the early 21st century, remain just a dream. Although Americans have rarely sought full equality, they believe strongly in equality of opportunity. But meticulous studies of inter-generational mobility reveal that the situation of a son is now more than ever likely to be dictated by his father’s social position than by his own merits. According to a recent study by the US Federal Reserve, if your parents are rich, the likelihood of your being rich is as high as the probability of your being tall if your parents are tall. Comparing American and European social policies, it is now recognised that social mobility is not higher in the US than in Canada, Germany or Finland and the American poor are more likely to be trapped into poverty than the European poor.

                                                                    Education is often said to be the most practicable way to increase social mobility. America gave the world an incomparable example with the GI Bill, signed into law by President Franklin Roosevelt in 1944. The bill opened the door to higher education to 8m veterans who would use it to build assets for themselves and their country.

                                                                    Today, US universities are increasingly expensive and access to the best of them is difficult even for middle-class students. A primary and secondary educational system based on local taxes tends to reproduce the economic inequalities of surrounding neighbourhoods. In the past two decades, this situation has worsened immeasurably. If recent increases in inequalities of income are solidified, they would be a recipe for the dynastic inequalities that America in its early days was so determined to eliminate.

                                                                    The accepted view in social science is that inequalities are an inevitable condition of economic success. But that generally goes with a moral argument that inequality is justified only when increasing efficiency and improving the situation of the worst off. Rapid growth in recent decades did not deliver those results; the best-off have done so well in the past decade only because they succeeded in capturing a huge part of the increase in national income. ... It should come as no surprise that the number of those without health insurance is increasing and poverty rates in the US are the highest among all Organisation for Economic Co- operation and Development countries, in particular for children and seniors.

                                                                    Many present the main threats to the security of Americans as coming from the outside. But more pervasive ones begin at home. Economic insecurity has become a feature of life for many Americans. History reminds us that the “Gilded Age” of the late 19th century gave birth to a strong populist reaction. Similar ones are simmering today.

                                                                    These are not the reactions one would expect from the world’s dominant economic power, one that bears a special responsibility for promoting the agenda of globalisation. Americans are certainly not protectionist by nature. What they probably want looks like a fair distribution of the burdens of a market economy across the populace. After years of indifference, questions of equality could well be on the table again in the future. That could be good news for the future of globalisation.

                                                                    The trend towards increasing inequality in recent decades is undeniable. I hope those who apologize for or deny the existence of growing inequality will reevaluate their positions. Their reluctance to do so may undermine the very principles such as free trade and open markets they hold so dear.

                                                                      Posted by on Sunday, July 16, 2006 at 11:10 AM in Economics, Income Distribution, Policy | Permalink  TrackBack (0)  Comments (20) 

                                                                      Unable to Vouch for Vouchers

                                                                      Once the proper controls are put into place, differences in standardized test outcomes between private and public school students disappear:

                                                                      Long-Delayed Education Study Casts Doubt on Value of Vouchers, by Zachary M. Seward, Wall Street Journal: Students in public schools perform just as well as their private-school peers when test scores are adjusted for race, socioeconomics and other factors, according to a long-delayed study released Friday by the U.S. Department of Education.

                                                                      The report, which examined test scores in reading and mathematics among fourth and eighth graders, casts doubt on the value of voucher programs that give students public money to attend private schools. Although voucher proponents contend that private education is often superior to public schooling, the federally commissioned study found that better test scores by private-school students can largely be attributed to differences in the students themselves, not their teachers and institutions.

                                                                      The findings confirm a study of the same data, released earlier this year, by researchers at the University of Illinois...

                                                                      The study's three authors, all researchers at the Educational Testing Service..., employed statistical models that accounted for a range of student characteristics... The study analyzed 2003 results from the National Assessment of Educational Progress...For example, fourth-graders in private schools scored 14.7 points, or about one-and-a-half grade levels, better on the reading test, but scored the same as public-school students when the scores were adjusted. On math tests at that level, public-school students actually scored 4.5 points better than private schoolers after the adjustment.

                                                                      Release of the much-anticipated report was delayed for more than a year. It was scheduled to be released in spring 2005, but was held up so that outside reviewers could assess the methodology, said Arnold Goldstein, a statistician in charge of disseminating reports at the National Center for Education Statistics. "It was delayed because of ... the necessity to give it a different kind of review than is usual...," Mr. Goldstein said.

                                                                        Posted by on Sunday, July 16, 2006 at 03:35 AM in Economics, Policy | Permalink  TrackBack (0)  Comments (16) 

                                                                        Since You Brought the Subject Up...

                                                                        In response to the post Krugman vs Mankiw below this one about Greg Mankiw's response to comments in Paul Krugman's latest column about CEA chair Ed Lazear, I received an email reminding me of a recent speech given by Lazear. The email ends with a good question:

                                                                        Mark, I don't know if you saw the following article. Lazear is saying wage growth "seems to be taking off" ... but real wages have declined over the last year!

                                                                        And Lazear is also quoted: "... wage growth is starting to catch up with productivity growth." Doesn't real wage [growth] have to be positive to be catching up with productivity growth?

                                                                        The full speech is here. Here's one more quote:

                                                                        Nominal wage growth is strong and has been able to compensate for large and unanticipated increases in energy prices that raised inflation rates.

                                                                        Why assess consumer well-being by comparing wage inflation to energy inflation only rather than to the entire market basket? Actually, it's not even energy inflation that he's referring to, it's only the part of the rise in energy costs that has passed through to core inflation so far. That's misleading. Nominal wage growth has not kept up with inflation and real wages have fallen. This makes it hard to find the basis for calling wage growth "strong."

                                                                        It's understandable why Krugman had questions about other comments Lazear has made about wage growth and inequality.

                                                                        Update: Calculated Risk has more on this topic.

                                                                          Posted by on Sunday, July 16, 2006 at 12:15 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (7) 

                                                                          Saturday, July 15, 2006

                                                                          Krugman vs Mankiw: The 80-20 Fallacy

                                                                          Greg Mankiw says:

                                                                          Lazear vs Krugman: CEA Chair Eddie Lazear in May 2006:

                                                                          While there is no doubt that some people have been left behind, and that those left behind are certainly a major concern for all of us, there is some good news in this picture. The good new is that most of the inequality reflects an increase in returns to “investing in skills” – workers completing more school, getting more training, and acquiring new capabilities.

                                                                          NY Times columnist Paul Krugman yesterday:

                                                                          There's a persistent myth, perpetuated by economists who should know better -- like Edward Lazear, the chairman of the president's Council of Economic Advisers -- that rising inequality in the United States is mainly a matter of a rising gap between those with a lot of education and those without.

                                                                          I am not sure what other "economists who should know better" Krugman is referring to. ... My understanding is that there is a widespread consensus that the returns to education have risen substantially over the past few decades...

                                                                          I'll let Krugman speak for himself (this is familiar to many of you, so apologies for the rerun). Here's Paul Krugman on the 80-20 fallacy:

                                                                          Graduates Versus Oligarchs, Rising Oligarchy, by Paul Krugman, Commentary, NY Times: Ben Bernanke's maiden Congressional testimony as chairman of the Federal Reserve was, everyone agrees, superb. ... But Mr. Bernanke did stumble at one point. Responding to a question ... about income inequality, he declared that "the most important factor" in rising inequality "is the rising skill premium, the increased return to education."

                                                                          That's a fundamental misreading of what's happening.... What we're seeing isn't the rise of a fairly broad class of knowledge workers. Instead, we're seeing the rise of a narrow oligarchy: income and wealth are becoming increasingly concentrated in the hands of a small, privileged elite. I think of Mr. Bernanke's position ... as the 80-20 fallacy. It's the notion that the winners in our increasingly unequal society are a fairly large group ... the 20 percent or so of American workers who have the skills to take advantage of new technology and globalization...

                                                                          The truth is quite different. Highly educated workers have done better than those with less education, but ... real earnings of college graduates actually fell more than 5 percent between 2000 and 2004. Over the longer stretch from 1975 to 2004 the average earnings of college graduates rose, but by less than 1 percent per year.

                                                                          So who are the winners from rising inequality? ... A new research paper by Ian Dew-Becker and Robert Gordon ... gives the details. Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only ... about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn't a ticket to big income gains.

                                                                          But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent. No, that's not a misprint. Just to give you a sense of who we're talking about: ... the 99th percentile will correspond to an income of $402,306, and the 99.9th percentile to an income of $1,672,726. The ... 99.99th percentile [is] probably well over $6 million a year. ...

                                                                          The notion that it's all about returns to education suggests that nobody is to blame for rising inequality, that it's just a case of supply and demand at work. And it also suggests that the way to mitigate inequality is to improve our educational system — and better education is a value to which just about every politician in America pays at least lip service.

                                                                          The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of inequality may have as much to do with power relations as it does with market forces. Unfortunately, that's the real story.

                                                                          Should we be worried about the increasingly oligarchic nature of American society? Yes ... Both history and modern experience tell us that highly unequal societies also tend to be highly corrupt. ...

                                                                          And I'm with Alan Greenspan, who ... has repeatedly warned that growing inequality poses a threat to "democratic society." It may take some time before we muster the political will to counter that threat. But the first step toward doing something about inequality is to abandon the 80-20 fallacy. It's time to face up to the fact that rising inequality is driven by the giant income gains of a tiny elite, not the modest gains of college graduates. [Link to Dew-Becker and Gordon paper]

                                                                          Update: Krugman explains further, DeLong comments on Mankiw.

                                                                            Posted by on Saturday, July 15, 2006 at 07:55 PM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (15) 

                                                                            Bigger Budget Surprises

                                                                            The federal budget deficit has become increasingly volatile in recent years making it difficult to determine if changes in the deficit in a particular time period represent anything more than random period by period fluctuations:

                                                                            Those Wild Budget Swings, by Edmund L. Andrews, NY Times: It was enough to make a supply-side, tax-cutting Republican beam with pride. Striding into the East Room on Tuesday morning, President Bush announced that tax revenues had been pouring in so fast this year that the federal deficit was likely to shrink for the second year in a row — even though spending continued to balloon.

                                                                            Tax revenue hasn’t climbed this quickly since President Bill Clinton was in office. ... But the real news is not that tax revenues are particularly high; they are not. The big change is that tax revenues have become more of a crapshoot — more volatile, more unpredictable and more buffeted by swings in the stock market than they were 10 years ago.


                                                                            Why? Because tax revenues are increasingly dependent on the fortunes of the very rich. And it turns out that ... more of their income is tied, not to wages and salaries, but to the stock market and to executive bonuses, which can swing widely from year to year.

                                                                            Relying on these gyrating tax revenues makes it harder to gauge the government’s true fiscal health. ... At first blush, the recent jump in tax revenue would seem to validate Mr. Bush and those who believe that tax cuts ultimately generate higher tax revenues because they prompt people to work harder, invest more and take more entrepreneurial risk. ...

                                                                            But revenues are only up in comparison with how low they had plunged in recent years. Individual income taxes, the biggest component of federal revenue, are barely back to the level that was reached in 2000, $1 trillion. Adjusting for inflation, income tax revenue is still lower than six years ago.

                                                                            “The idea that tax cuts have led to higher revenues is pernicious,” said Robert L. Bixby, executive director of the Concord Coalition, a bipartisan research group that lobbies for fiscal discipline. “Tax revenues may be higher, but they are not higher than they would have been if the tax cuts hadn’t occurred.” ...

                                                                            The unpredictable tax revenues first surfaced almost 10 years ago, as booming economic growth and the dot-com frenzy propelled the stock market to spectacular highs. ...

                                                                            For the most part, the Congressional forecasts missed the mark by less than 4 percent from 1982 until 1995. But starting in 1996, when the dot-com frenzy erupted in earnest, the agency began undershooting by as much as 9.5 percent. In 1996, tax revenues came in $93 billion higher than expected; in 1997, they were $163 billion higher; in 1999, they were $152 billion higher.

                                                                            When the dot-com bubble popped in 2001, and the economy slid into a brief recession, tax revenues plunged $308 billion below what the Congressional Budget Office had predicted and remained depressed for the next three years.

                                                                            Now the pendulum is swinging once again. ... Few budget analysts would say the jump in revenues is bad news. But if the last decade is any indication, it would be foolish to count on more of the same.

                                                                            The Bush administration has quietly acknowledged the point. Its latest estimate anticipates that tax revenues will be almost flat in 2007 and that the deficit will widen to $339 billion. ...

                                                                              Posted by on Saturday, July 15, 2006 at 06:41 PM in Budget Deficit, Economics, Taxes | Permalink  TrackBack (0)  Comments (7) 

                                                                              The War on Poverty

                                                                              The war on how to fight the war on poverty is evident in this "Grudge Match" in the Los Angeles Times between Jeffrey Sachs and William Easterly and in this recent review of Sach' book The End of Poverty: Economic Possibilities for Our Time by Easterly appearing in the March 2006 volume of The Journal of Economic Literature.

                                                                              Here's Daniel Gross with a description of Easterly's "incremental reform" approach emphasizing solutions based in the private sector. Easterly's approach is seen by many as an alternative to Sach's "Big Push" which has been criticized by Easterly and others as being based upon "utopian social engineering":

                                                                              Fighting Poverty With $2-a-Day Jobs, by Daniel Gross, Economic View, NY Times: Jacqueline Novogratz, a veteran of the Rockefeller Foundation and a former consultant to the World Bank, talks enthusiastically about the development of a company in Africa where some 2,000 women earn, on average, $1.80 a day producing antimalarial bed netting. With the assistance of a $350,000 loan from an American investor, the business started making the nets nearly three years ago and is likely to add 1,000 more jobs within the next year.

                                                                              “They’re in the process of building a real company town there,” Ms. Novogratz said. Ms. Novogratz ... is the chief executive of the Acumen Fund, a philanthropic start-up based in New York that uses donations to make equity investments and loans in both for-profit and nonprofit companies in impoverished countries. One of the stars ... is the bed-netting maker, A to Z Manufacturing, a family-owned company in Tanzania ... where 80 percent of the population makes less than $2 a day.

                                                                              Social activists have typically railed against large multinationals that have sought the lowest-priced labor... But for some members of a new generation of philanthropists, schooled in the techniques of venture capital and Wall Street, fighting poverty effectively relies on the creation of low-wage factories, as well as the establishment of lending institutions that charge rates that many Americans would deem usurious. Rather than work through global aid bureaucracies, they believe that affluent Westerners should become more directly involved ... and invest in and support businesses that are self-sustaining and replicable.

                                                                              “To put it in the baldest possible terms, the more sweatshops the better,” said William Easterly, professor ... at New York University... Professor Easterly is not advocating the deliberate creation of workplaces with miserable conditions. “As you increase the number of factories demanding labor, wages will be driven up,” he said, and eventually such factories will not be sweatshops.

                                                                              Ms. Novogratz says it can be difficult to tell well-off, philanthropy-minded Westerners that what Africa really needs is more $2-a-day jobs. But when they understand the alternatives, she said, such concerns tend to melt away. Before they found work at the netting factory in Tanzania, for example, many of the women were street vendors or domestic workers and earned less than $1 a day. A to Z’s wages place the women in Tanzania’s top quartile of earners...

                                                                              Similar issues hold for the granting of very small loans, often called microlending. “Microfinance boosts the very best parts of capitalism, because it boosts people’s ability to make their own choices and to work their way out of poverty,” said Roy Jacobowitz ... at Acción International, a Boston-based group that has established and supported the creation of a network of microlending banks, mostly in Latin America.

                                                                              The banks, many of which are for-profit companies, lend cash to poor people at annual rates that are higher than 20 percent. But in the markets where Acción’s affiliates operate, Mr. Jacobowitz said, borrowers have few options except for money lenders who charge 10 to 20 percent interest per day.

                                                                              Many of the new venture philanthropists do not simply accept systems as they are. Abraham M. George, who immigrated to the United States from India in the late 1960’s and built a successful software company, started the George Foundation in 1995 to fight poverty in India. Among the foundation’s projects is a commercial banana farm, which employs largely unskilled women from untouchable castes in the rural area near Bangalore, one of India’s showpiece technology centers.

                                                                              Mr. George set wages on the farm at about $40 a month, about what the Indian government says is the minimum needed to support a family of four. But he also provides free medical care and sets aside a portion of the farm’s profits to allow the women to acquire their own plots of land. “The total of these benefits is probably three or four times the going wage income they would receive elsewhere.” Mr. George said. ...

                                                                              [T]he best thing venture philanthropy can do is to create competition for the labor and business of the poor. ... Today, Mr. Jacobowitz says, six regulated finance companies compete for the business of the poor in Bolivia, providing everything from housing loans to consumer credit. ... Thanks to the fierce competition, interest rates paid by poor Bolivians have fallen to 22 percent from 80 percent in the 1980’s.

                                                                              Some experts are not fully convinced that small-scale private-sector efforts can make a significant difference. “When you look at the extent to which microfinance reaches people, it’s a small drop compared to what is needed,” said Anjini Kochar, senior research scholar and coordinator of the India Program at the Stanford Center for International Development.

                                                                              But there is a great deal of ferment in the field... “The sort of top-down comprehensive attempt to fix everything in society has been a dismal failure as implemented by the big bureaucracies like the World Bank,” Professor Easterly said. “And I think it’s time to start thinking much more about bottom-up approaches that try to give new opportunities.”

                                                                              I don't know enough about this area or the evidence to know if "dismal failure" is a fair characterization or not, but I do get the impression that the tide has turned against Sach's approach. But please fill us in if you can add more...

                                                                                Posted by on Saturday, July 15, 2006 at 04:25 PM in Economics | Permalink  TrackBack (0)  Comments (44) 

                                                                                Income Inequality

                                                                                Greg Mankiw and Brad DeLong are debating the income inequality data from the Piketty and Saez study. Paul Krugman talked about rising income inequality in his last column. In response, Greg Mankiw says:

                                                                                New Data on Income Inequality: In today's NY Times, Paul Krugman calls attention to the update of the Piketty-Saez data on income inequality, although Paul describes the data differently than I would.
                                                                                Here is what I see: After rising substantially from 1986 to 2000, income inequality is essentially the same in 2004 (the most recent year of data) as it was in 2000.  Click on the data and see for yourself.

                                                                                In response to Greg, Brad DeLong says:

                                                                                New Data on Income Inequality: Greg Mankiw sees a little bit of good news in the latest income distribution data: after rising astonishingly rapidly from 1986 to 2000, income inequality in 2004 was no worse than in 2000...

                                                                                I hope he's right, and that the trend of rising inequality has stopped--it is a very disturbing phenomenon, and further rises would be very worrisome indeed. But I can't be as optimistic as he is. He sees an essentially flat trend from 2000-2004. I see numbers for 1999 and 2000 that may have been transitorily boosted by high salaries paid during the dot-com bubble, and then a decreased in inequality from 2000-2002--a decrease that is then reversed in 2003-2004, which carries us up to bubble levels.

                                                                                So my hope that we might not see 1999 and 2000 levels of income inequality again appears to have been vain.

                                                                                We can debate what has happened the last few years and whether this year or that year had special circumstances such as the problems Brad notes with using 2000 as a base year. But in doing so, we shouldn't lose sight of the overall upward trend in inequality. Here's a few graphs from the study:

                                                                                The Top Decile Income Share, 1917-2004

                                                                                The Top 0.01% Income Share, 1913-2004

                                                                                Average Real Income of bottom 99% and top 1% in the United States, 1917-2004

                                                                                The little dip at the end is what the fuss is all about. But even if Greg's claim holds up to the types of qualifications Brad talks about, and there are good reasons to worry about using 2000 as a base year, the upward trend in income inequality since the 1970s is undeniable. And in any case, as the last graph shows, real income for the bottom 99% of the distribution has been flat since the early 1970s despite large gains in productivity.

                                                                                  Posted by on Saturday, July 15, 2006 at 10:08 AM in Economics, Income Distribution | Permalink  TrackBack (1)  Comments (36) 

                                                                                  Stiglitz and Rashid: Free Trade Hypocrisy

                                                                                  Joseph Stiglitz and Haidir Rashid see hypocrisy in the policies of the U.S. and other developed countries toward trade liberalization:

                                                                                  America's new trade hypocrisy, by Joseph Stiglitz and Hamidur Rashid, Project Syndicate: As the current "development round" of trade talks moves into its final stages, it is becoming increasingly clear that the goal of promoting development will not be served, and that the multilateral trade system will be undermined. Nowhere is this clearer than in a provision that is supposed to give the least developed countries almost duty-free access to developed countries' markets.

                                                                                  A year ago, the leaders of the world's richest countries committed themselves to alleviating the plight of the poorest. At Doha in November 2001, they pledged to give something more valuable than money: the opportunity for poor countries to sell their goods and earn their way out of poverty. With great fanfare, developed countries seemed for a while to be making good on their promise, as Europe extended the "Everything but Arms" initiative, under which it was unilaterally to open its markets to the poorest countries of the world.

                                                                                  The opening was less than it seemed. The devil is in the details, as many less developed countries discovered that EBA's complicated rules of origin, together with supply-side constraints, meant that there was little chance for poor countries to export their newly liberalized products.

                                                                                  But the coup de grace was delivered by the world's richest country, the United States, which once again decided to demonstrate its hypocrisy. The United States ostensibly agreed to a 97 percent opening of its markets to the poorest countries. ...

                                                                                  America's intention was ... to seem to be opening up its markets, while doing nothing of the sort, for it appears to allow the United States to select a different 3 percent for each country. The result is what is mockingly coming to be called the EBP initiative: developing countries will be allowed freely to export everything but what they produce. They can export jet engines, supercomputers, airplanes, computer chips of all kinds - just not textiles, agricultural products, or processed foods, the goods they can and do produce. ...

                                                                                  The official argument for the 3 percent exclusion is that it affects "sensitive products." In other words, while the United States lectures developing countries on the need to face the pain of rapid adjustment to liberalization, it refuses to do the same. (Indeed, it has already had more than 11 years to adjust to liberalization of textiles.)

                                                                                  But the real problem is far worse because the 3 percent exclusion raises the specter of an odious policy of divide and conquer, as developing countries are invited to vie with each other to make sure that America does not exclude their vital products under the 3 percent. The whole exclusion simply undermines the multilateral trading system.

                                                                                  Indeed, there may be a further hidden agenda behind the 97 percent proposal. At the World Trade Organization's meeting in Cancun in 2003, the developing countries stood together and blocked efforts to forge a trade agreement that was almost as unfair as the previous Uruguay round, under which the poorest countries actually became worse off. It was imperative that such unity be destroyed. America's strategy of bilateral trade agreements was aimed at precisely that, but it enlisted only a few countries, representing a fraction of global trade. The 97 percent formula holds open the possibility of extending that fragmentation into the WTO itself.

                                                                                  The United States has already had some success in pitting the poor against each other. ... Even if America succeeds in dividing the developing countries, however, it may inspire a degree of unity elsewhere. Both those committed to trade liberalization within a multilateral system and those committed to helping developing countries will look at America's new strategy with abhorrence.

                                                                                    Posted by on Saturday, July 15, 2006 at 03:33 AM in Economics, International Trade, Policy | Permalink  TrackBack (1)  Comments (5) 

                                                                                    Veblen's Theory of the Leisure Class: The Musical

                                                                                    Veblen as musical theater:

                                                                                    Up to Date in Kansas City: Seven New Musicals Get Readings in Festival July 15 & 22, by Kenneth Jones: Could the next great American musical surface in Kansas City? Theatre League, Inc., is investing in that idea with the first annual Kansas City Crossroads Musical Theater Festival, starting July 15. ... Works were solicited in recent months in an open submission process. The July 15 presentations are Frog Kiss, An Unlikely Romance, Too Good To Be True, Maccabeat and Thorstein Veblen's Theory of the Leisure Class... Here are the titles, creative teams and casts for the 2006 Crossroads Musical Theater Festival:

                                                                                    Thorstein Veblen's Theory of the Leisure Class, book and lyrics by Charles Leipart, music by Richard B. Evans. Directed by Ernest Williams, music directed by Tony Bernal. 2 & 8 PM July 15 at Kansas City Ballet, 16th and Broadway.

                                                                                    It's New York City, 1900, and out-of-work economics professor Thorstein Veblen takes his 'Theory of the Leisure Class' to the Fifth Avenue Vaudeville Theatre stage. He announces that to facilitate the promotion and sale of his recently published economic treatise, he has engaged several unemployed actors to present a musical demonstration of his socio-economic theory. He introduces the heroine of his story, Ellen Potts, a soon-to-be-heiress, with an overdeveloped social conscience. Veblen's demonstration takes Ellen through courtship, marriage, and the pursuit of her dream of social justice for the poor of New York — and ultimately into conflict with Veblen's vision of a Conspicuously Consuming and Status Driven American Society.

                                                                                    Cast: Jim Korinke, Heidi Stubblefield, James Wright, Elaine Fox, Lyndsey Agron, Chris Cobbett, Mark Snethen, Dean Vivian and Cindy Baker.

                                                                                    For relevance to today, there are other choices as well such as Veblen's The Theory of Business Enterprise (1904), though I have a hard time imagining anything of his as a musical, play, etc. Here's a small part of chapter 10:

                                                                                    The largest and most promising factor of cultural discipline - most promising as a corrective of iconoclastic vagaries - over which business principles rule is national politics. ... Business interests urge an aggressive national policy and business men direct it. Such a policy is warlike as well as patriotic. The direct cultural value of a warlike business policy is unequivocal. It makes for a conservative animus on the part of the populace. During war time, ... under martial law, civil rights are in abeyance; and the more warfare and armament the more abeyance. Military training is a training in ceremonial precedence, arbitrary command, and unquestioning obedience. A military organization is essentially a servile organization. Insubordination is the deadly sin. The more consistent and the more comprehensive this military training, the more effectually will the members of the community be trained into habits of subordination and away from that growing propensity to make light of personal authority that is the chief infirmity of democracy. This applies first and most decidedly, of course, to the soldiery, but it applies only in a less degree to the rest of the population. They learn to think in warlike terms of rank, authority, and subordination, and so grow progressively more patient of encroachments upon their civil rights. ...

                                                                                    [T]he pomp and circumstance of war and armaments, and the sensational appeals to patriotic pride ... direct the popular interest to other, nobler, institutionally less hazardous matters than the unequal distribution of wealth or of creature comforts. Warlike and patriotic preoccupations fortify the barbarian virtues of subordination and prescriptive authority. Habituation to a warlike, predatory scheme of life is the strongest disciplinary factor that can be brought to counteract the vulgarization of modern life wrought by peaceful industry and the machine process, and to rehabilitate the decaying sense of status and differential dignity. ...

                                                                                    In this direction, evidently, lies the hope of a corrective for "social unrest" and similar disorders of civilized life. There can, indeed, be no serious question but that a consistent return to the ancient virtues of allegiance, piety, servility, graded dignity, class prerogative, and prescriptive authority would greatly conduce to popular content and to the facie management of affairs. Such is the promise held out by a strenuous national policy.

                                                                                      Posted by on Saturday, July 15, 2006 at 12:15 AM in Economics, History of Thought | Permalink  TrackBack (0)  Comments (3) 

                                                                                      Friday, July 14, 2006

                                                                                      Politics, Economic Reform, and Social Unrest in China

                                                                                      Why has the leadership in China been willing to provide statistics on the number of protests when the statistics point to growing social unrest? Here's one answer:

                                                                                      China: Hu's power play, by Ian Bremmer, International Herald Tribune: Last August, China's security minister ... announced that 3.7 million citizens had participated in some 74,000 public protests in 2004. Chinese officials say the number of demonstrations rose to 87,000 in 2005. What do these statistics tell us?

                                                                                      Considering the source, many analysts conclude that China has a substantial and growing problem with social unrest, and that the Communist party takes that problem very seriously. But why would Chinese officials invent a number that suggests the country is plagued with so much popular anger? The answer reveals the more immediate challenges facing President Hu Jintao's political and economic agenda.

                                                                                      Over the past year, a battle has begun within the Chinese leadership, pitting Hu and his allies against a growing range of critics. Hu's predecessor, Jiang Zemin, aggressively promoted the view that China's government must feed rapid economic development ... Jiang's supporters, many of them based in Shanghai, have profited mightily from this strategy. But Hu warns that the social costs have now become unacceptably high.

                                                                                      Gaps are widening between rich and poor, and between residents of the eastern boomtowns and the slower-to-develop interior provinces. Rapid industrial development has resulted in enormous levels of environmental damage. The ... ambitious restructuring of the economy has put millions of Chinese out of work and forced millions more to abandon rural villages for the cities.

                                                                                      Hu has built his base of domestic support on promises to solve these problems. To ensure that China's future growth is "balanced" and "harmonious," he has ordered that some of China's newfound wealth be redirected toward the provinces that Jiang's policies overlooked.

                                                                                      Jiang himself has largely retreated from the political stage, but many of his loyalists remain within the government. Some have criticized (even obstructed) Hu's reforms. To consolidate his authority, Hu believes he must win the reform argument and purge the party of ... his predecessor's allies.

                                                                                      That's where the statistics come in. Jiang's government didn't publicize data on social unrest. When Hu assumed the presidency, protest statistics began to appear. To force policy changes through China's labyrinthine bureaucracy, senior officials are often forced to generate a crisis atmosphere that lends urgency to the implementation of their plans.

                                                                                      Data suggesting that unrest is growing ... bolsters Hu's case for reforms. If successfully implemented, these reforms might consolidate the strength of Hu's political position, inspire loyalty from excluded segments of the population, and dismantle the growth-at-all-costs model. ...

                                                                                      But the president's inability to end the year-long debate suggests that he's increasingly vulnerable. After four years in power, Hu still has not managed to monopolize control of core positions in the party hierarchy. ... Up to this point, Hu has moved cautiously. But if he is to assume full control before the 2007 party congress, he must move against some still-powerful senior officials. ...

                                                                                      Though the numbers that document domestic unrest may not be reliable, the problem of domestic unrest is real - and Chinese officials know it. Last August, the central government assigned special police units to 36 Chinese cities. In December, police fired on angry farmers and fishermen in the southern village of Dongzhou, killing as many as 20. The incident was probably the worst example of such bloodshed since the assault on Tiananmen Square. Reports of demonstrations appear each week.

                                                                                      Social unrest clearly threatens China's long-term stability. But it's the unrest within the leadership that now has Hu Jintao's attention.

                                                                                        Posted by on Friday, July 14, 2006 at 08:46 PM in China, Economics | Permalink  TrackBack (1)  Comments (1) 

                                                                                        Who Gets the Cookies?

                                                                                        Paul Krugman answers questions about his call to raise the minimum wage in his latest column and discusses some of the evidence underlying his concerns about rising inequality:

                                                                                        American Economy Suffers From Government Short-Sightedness, Paul Krugman, Money Talks: Paul Krugman responds to readers' comments on his July 14 column, "Left Behind Economics"

                                                                                        Bill Kruse, Orinda, Calif.: You've written quite a lot in recent years about rising income inequality in the U.S., yet you haven't said too much about what should be done about it. Now, in today's column, you advocate an increase in the minimum wage as a good start. Nothing else is mentioned.

                                                                                        What makes you think that an increase in the minimum wage would make a significant contribution to reducing income inequality? You've downplayed the significance of the minimum wage in past writings. Moreover, recent empirical research by David Neumark points to serious long-term negative effects of minimum wage increases, particularly for young people. These include decreased labor market experience and accumulation of tenure and diminished training and skill acquisition. So, many young people who are exposed to increases in the minimum wage end up several years later with substantially less earning power, which probably contributes to more, not less, inequality.

                                                                                        What other ideas do you have to reduce income inequality?

                                                                                        Paul Krugman: More to come in future columns. I've been looking at some length ... into how the New Deal managed to create a more equal society, and will have more to say soon....

                                                                                        Michael Chapnick, Oakland, Calif., via Singapore: From my microeconomics courses in grad school, professors said that a minimum wage is bad for the labor market and leaves workers behind.

                                                                                        While I agree that the minimum wage should be increased, I think it would be helpful if you could explain in economic terms, the affects on overall employment as a result of an increase in the minimum wage and why the minimum wage increase would not be harmful. ...

                                                                                        Paul Krugman: The available research suggests that the U.S. minimum wage right now is low enough that increasing it has very little effect on employment, but raises incomes at the bottom. Also, a falling real minimum wage seems to act as a sort of undertow, dragging down wages some ways up the scale. Obviously the minimum wage by itself isn't enough to serve as the centerpiece of an equalizing policy, which would have to involve a whole range of actions...

                                                                                        Julie Tighe: As usual, your commentary is on the money. ... Its too bad this administration is more concerned with reclassifying workers to distort this problem and make it appear that low-wage jobs, like those at McDonald's, are a part of the middle class, when their buying power simply doesn't support the Labor Department's definition.

                                                                                        I wish more people who actually understand economics would talk about it instead of simply letting politicians, who often know even less, paint a picture they only want you to see through rose colored glasses. Thanks for giving America a chance to see the other side of the Bush administration's spin.

                                                                                        Paul Krugman: The original Piketty and Saez paper is at http://elsa.berkeley.edu/~saez/pikettyqje.pdf (warning: PDF). The updated data are at http://elsa.berkeley.edu/~saez/TabFig2004prel.xls (Excel file).

                                                                                        Look first at Figure 1, for a quick snapshot of the rise and fall of middle-class society in America. Then check out Figure A2 for the experience of the top one percent versus the rest. Table A4 shows that even at the 90th or 95th percentile, things haven't been all that great, that the big gains were only at the very top.

                                                                                        Median family income is at http://www.census.gov/hhes/www/income/histinc/f06ar.html. Income by education is at http://www.census.gov/hhes/www/income/histinc/p24.html. I've been kind of surprised at the lack of media attention to the decline in incomes for the highly educated over the last few years.

                                                                                        Edward Lazear's remarkably misleading take on inequality is at http://www.whitehouse.gov/cea/lazear20060502.html.

                                                                                        Also, last month the Congressional Budget Office suggested that increasing inequality may be helping push up tax receipts, declaring that "growth in incomes in 2005 may have been concentrated more than expected among higher-income taxpayers, who face the highest tax rates. Additional data from tax returns for 2005, which will start to become available later this year, will help CBO identify more clearly the sources of growth in taxable income." See the whole report at http://www.cbo.gov/showdoc.cfm?index=7184&sequence=0.

                                                                                          Posted by on Friday, July 14, 2006 at 01:01 PM in Economics, Income Distribution, Policy, Politics | Permalink  TrackBack (0)  Comments (39) 

                                                                                          Why Oh Why Can't We Have a Better Press Corps?

                                                                                          Brad DeLong, writing in Project Syndicate, says if we demand better coverage of economics by journalists, we will get it:

                                                                                          The Tabloid Syndrome, by J. Bradford DeLong, Project Syndicate: The world is a complex and intricate place. So how are we to understand even just a piece of it, say, the United States government and its economic policies? It is a big problem, for the standard sources that I was taught as a child to rely upon – newspapers and television news – are breaking down.

                                                                                          For example, in early February 2004, the then Chairman of the President’s Council of Economic Advisers, N. Gregory Mankiw, spent some time trying to explain the issues surrounding “outsourcing” to America’s elite political news reporters. Mankiw’s standard description of outsourcing is very much like mine – indeed, like that of all neoclassical and neoliberal economists – and goes something like this:

                                                                                          As with any change in technology that increases the volume of international trade in goods and services, the outsourcing of service-sector jobs creates winners and losers – but almost surely more and bigger winners than losers. Big winners are workers in poor countries who get better jobs working for firms that can now export services to rich countries. The major losers are those who previously held the now-outsourced service-sector jobs; they must now find new and different jobs and almost surely find that their skills are worth less.

                                                                                          But even in the US, losers’ losses are outweighed by winners’ gains. Workers in certain industries find their skills in higher demand as foreigners spend their increased dollar earnings, consumers benefit from lower prices, and shareholders and managers see their companies’ profits increase. However much we may worry about the distributional consequences of outsourcing, we should never overlook the fact that it increases the total size of the economic pie.

                                                                                          Mankiw made that argument, but he failed to be understood. Indeed, on February 10, 2004, he woke up to an unpleasant news story in the Washington Post: ”President Bush’s top economist yesterday said the outsourcing of US service jobs to workers overseas is good for the nation’s economy.... Mankiw’s comments come as the president struggles to shore up support in manufacturing states that have lost millions of jobs....Mankiw’s conclusions may prove discordant during an election year...”

                                                                                          It happened again on February 11: “Democrats...lit into President Bush’s chief economist yesterday for his laudatory statements on the movement of U.S. jobs abroad.... Rep. Donald Manzullo (R-Ill.) called for the resignation of N. Gregory Mankiw...”

                                                                                          Of course, the Washington Post’s journalists know, on some level, that they were being unfair to Mankiw. They didn’t claim that what he said was inaccurate, or shortsighted, or analytically unsound. The descriptive terms they used – “discordant,” “embarrassing,” “political liability” – suggest that they knew they were giving Mankiw a raw deal.

                                                                                          But was there any sign of the standard economic analysis of outsourcing in their stories? Not one. ... The problem is that conveying accurate information about the economy is far down the list of priorities for normal news reporters. Making a splash matters. So does keeping track of who is up politically and who is down. So does pleasing your editors so that they’ll give your stories better placement, and pleasing your sources so that they’ll keep talking to you. Compared to these imperatives, there is little to be gained from informing the public about how the economy really functions and about the dilemmas of economic policy.

                                                                                          Indeed, the economy is vastly inferior to Hollywood as a source of glitterati gossip, but much economic reporting makes the coverage of the birth of Brad Pitt’s and Angelina Jolie’s baby look profoundly serious. ... What can we do about this? The answer is simple, and it is a matter of demand, not supply. After all, few people go into journalism to deliberately mislead the public. If we demand better economic and political journalism the way we demand excellent coverage of the World Cup, we’ll get it.

                                                                                          To me, this a pessimistic conclusion. I'm don't know enough about soccer to evaluate World Cup coverage, but my impression of the coverage of many other sports is that it suffers from the same problem. The Olympics is one example where analysis is crowded out by more popular human interest stories, and even in sports like baseball and football you don't get a lot of coverage of the technical aspects of the game much beyond the surface. Like economics, good analysis is out there, but it's not always found in the mainstream media.

                                                                                          When constructing demand curves, information is important. You can't demand something you don't know about. And if you do know about it, but only have partial information on quality and other aspects of the good or service, demand will be suboptimal relative to the full information outcome. I think journalism in economics is like this. In many cases, the journalists themselves don't know enough economics to differentiate good analysis from other types of reporting, and the public can't demand better coverage because they aren't sure what it ought to be like.

                                                                                          That's where economists writing in blogs, Op-Eds, Project Syndicate, and a host of other places can help. Our job is, in part, to help people differentiate the good from the bad, to let people know that the news page of the Wall Street Journal is trustworthy, but its editorial page is not. That some reporters at the Washington Post and the New York Times are better than others, that the National Review Online is often more interested in selling an ideology than doing good economic analysis. People turn to experts when they can't evaluate quality, we have diamonds assayed, we have inspectors examine houses, we take used cars to mechanics, there are lots of cases where it is up to the experts to help the public determine quality and other aspects of transacting in the marketplace.

                                                                                          So I am not going to lay the problem solely on the doorstep of the public and ask that they demand better coverage as the answer. The public has a role to play here, but economists have an important role to play too, and in the past we have not done enough. We have been far too reluctant to answer questions when reporters call, or to take the time to write Op-Eds, etc. for local and national papers explaining economic policy, explaining how the economy works (so bring your laptop and write posts at the beach - we need all the help we can get). Blogs and other means of electronic communication are helpful and people have place to turn for analysis of the news that didn't exist before, recent claims about tax cuts paying for themselves is one example, but we need to do more. This is our problem too.

                                                                                            Posted by on Friday, July 14, 2006 at 09:43 AM in Economics, Press | Permalink  TrackBack (0)  Comments (10) 

                                                                                            Paul Krugman: Left Behind Economics

                                                                                            Paul Krugman reviews the implications of data from 2004 on the distribution of income that have just become available. As he notes, and as noted here in a post discussing the Piketty and Saez study referenced below, the data show that recent trends towards more concentrated income continued between 2003 and 2004 and there is reason to believe the trend towards more concentration will persist into the future unless there are changes in policy

                                                                                            Left Behind Economics, by Paul Krugman, U.S. Economy Commentary, NY Times: I’d like to say that there’s a real dialogue taking place about the state of the U.S. economy, but the discussion leaves a lot to be desired. In general, the conversation sounds like this:

                                                                                            Bush supporter: “Why doesn’t President Bush get credit for a great economy? I blame liberal media bias.”

                                                                                            Informed economist: “But it’s not a great economy for most Americans. Many families are actually losing ground, and only a very few affluent people are doing really well.”

                                                                                            Bush supporter: “Why doesn’t President Bush get credit for a great economy? I blame liberal media bias.” ...

                                                                                            Many observers, even if they acknowledge the growing concentration of income..., find it hard to believe that this concentration could be proceeding so rapidly as to deny most Americans any gains from economic growth. Yet newly available data show that that’s exactly what happened in 2004 ...

                                                                                            Here’s what happened... The U.S. economy grew 4.2 percent, a very good number. Yet ... real median family income — the purchasing power of the typical family — actually fell. Meanwhile, poverty increased, as did the number of Americans without health insurance. So where did the growth go?

                                                                                            The answer comes from the economists Thomas Piketty and Emmanuel Saez, whose long-term estimates of income equality have become the gold standard for research on this topic... They show that even if you exclude capital gains from a rising stock market, in 2004 the real income of the richest 1 percent of Americans surged by almost 12.5 percent. Meanwhile, the average real income of the bottom 99 percent of the population rose only 1.5 percent. In other words, a relative handful of people received most of the benefits of growth.

                                                                                            There are a couple of additional revelations in the 2004 data. One is that growth didn’t just bypass the poor and the lower middle class, it bypassed the upper middle class too. Even people at the 95th percentile of the income distribution — that is, people richer than 19 out of 20 Americans — gained only modestly. ...

                                                                                            The other revelation is that being highly educated was no guarantee of sharing in the benefits of economic growth. There’s a persistent myth, perpetuated by economists who should know better ... that rising inequality ... is mainly a matter of a rising gap between those with a lot of education and those without. But census data show that the real earnings of the typical college graduate actually fell in 2004.

                                                                                            In short, it’s a great economy if you’re a high-level corporate executive or someone who owns a lot of stock. For most other Americans, economic growth is a spectator sport.

                                                                                            Can anything be done to spread the benefits of a growing economy more widely? Of course. A good start would be to increase the minimum wage, which in real terms is at its lowest level in half a century.

                                                                                            But don’t expect this administration or this Congress to do anything to limit the growing concentration of income. Sometimes I even feel sorry for these people and their apologists, who are prevented from acknowledging that inequality is a problem by both their political philosophy and their dependence on financial support from the wealthy. That leaves them no choice but to keep insisting that ordinary Americans — who have, in fact, been bypassed by economic growth — just don’t understand how well they’re doing.

                                                                                            Previous (7/10) column: Paul Krugman: The New York Paradox
                                                                                            Next (7/17) column: Paul Krugman: March of Folly

                                                                                              Posted by on Friday, July 14, 2006 at 12:15 AM in Economics, Income Distribution, Policy | Permalink  TrackBack (0)  Comments (63) 

                                                                                              John Dean: Authoritarianism Rules Republicans

                                                                                              Former Nixon White House counsel John Dean of Watergate fame (or better, infamy) isn't very happy with the direction the Republican Party is headed under its current leadership. After studying "decades of empirical research," he thinks he understands why, authoritarianism, and says that "I hope that social scientists will begin to write about this issue for general readers. It is long past time to bring ...[this] work into the public square and to the attention of American voters. No less than the health of our democracy may depend on this being done." Here's a start:

                                                                                              Triumph of the authoritarians, by John W. Dean, Commentary, Boston Globe: Contemporary conservatism and its influence on the Republican Party was, until recently, a mystery to me. The practitioners' bludgeoning style of politics, their self-serving manipulation of the political processes, and their policies that focus narrowly on perceived self-interest -- none of this struck me as based on anything related to traditional conservatism. Rather, truth be told, today's so-called conservatives are quite radical.

                                                                                              For more than 40 years I have considered myself a "Goldwater conservative," and am thoroughly familiar with the movement's canon. But I can find nothing conservative about the Bush/Cheney White House, which has created a Nixon "imperial presidency" on steroids, while acting as if being tutored by the best and brightest of the Cosa Nostra.

                                                                                              What true conservative calls for packing the courts to politicize the federal judiciary to the degree that it is now possible to determine the outcome of cases by looking at the prior politics of judges? Where is the conservative precedent for the monocratic leadership style that conservative Republicans imposed on the US House when they took control in 1994, a style that seeks primarily to perfect fund-raising skills while outsourcing the writing of legislation to special interests and freezing Democrats out of the legislative process?

                                                                                              How can those who claim themselves conservatives seek to destroy the deliberative nature of the US Senate by eliminating its extended-debate tradition, which has been the institution's distinctive contribution to our democracy? Yet that is precisely what Republican Senate leaders want to do by eliminating the filibuster when dealing with executive business (namely judicial appointments).

                                                                                              Today's Republican policies are antithetical to bedrock conservative fundamentals. There is nothing conservative about preemptive wars or disregarding international law by condoning torture. Abandoning fiscal responsibility is now standard operating procedure. Bible-thumping, finger-pointing, tongue-lashing attacks on homosexuals are not found in Russell Krik's classic conservative canons, nor in James Burham's guides to conservative governing. Conservatives in the tradition of former senator Barry Goldwater and President Ronald Reagan believed in "conserving" this planet, not relaxing environmental laws to make life easier for big business. And neither man would have considered employing Christian evangelical criteria in federal programs, ranging from restricting stem cell research to fighting AIDs through abstinence.

                                                                                              Candid and knowledgeable Republicans on the far right concede -- usually only when not speaking for attribution -- that they are not truly conservative. They do not like to talk about why they behave as they do, or even to reflect on it. Nonetheless, their leaders admit they like being in charge, and their followers grant they find comfort in strong leaders who make them feel safe. This is what I gleaned from discussions with countless conservative leaders and followers, over a decade of questioning.

                                                                                              I started my inquiry in the mid-1990s, after a series of conversations with Goldwater... Goldwater was also mystified (when not miffed) by the direction of today's professed conservatives -- their growing incivility, pugnacious attitudes, and arrogant and antagonistic style, along with a narrow outlook intolerant of those who challenge their thinking. He worried that the Republican Party had sold its soul to Christian fundamentalists, whose divisive social values would polarize the nation. From those conversations, Goldwater and I planned to study why these people behave as they do... Sadly, the senator's declining health soon precluded his continuing...

                                                                                              For almost half a century, social scientists have been exploring authoritarianism. We do not typically associate authoritarianism with our democracy, but as I discovered while examining decades of empirical research, we ignore some findings at our risk. Unfortunately, the social scientists who have studied these issues report their findings in monographs and professional journals written for their peers, not for general readers. With the help of a leading researcher and others, I waded into this massive body of work.

                                                                                              What I found provided a personal epiphany. Authoritarian conservatives are, as a researcher told me, "enemies of freedom, antidemocratic, antiequality, highly prejudiced, mean-spirited, power hungry, Machiavellian and amoral." And that's not just his view. To the contrary, this is how these people have consistently described themselves when being anonymously tested, by the tens of thousands over the past several decades.

                                                                                              Authoritarianism's impact on contemporary conservatism is beyond question. Because this impact is still growing and has troubling (if not actually evil) implications, I hope that social scientists will begin to write about this issue for general readers. It is long past time to bring the telling results of their empirical work into the public square and to the attention of American voters. No less than the health of our democracy may depend on this being done. We need to stop thinking we are dealing with traditional conservatives on the modern stage, and instead recognize that they've often been supplanted by authoritarians.

                                                                                              Given his background and role in Watergate, a description of this White House as "a Nixon "imperial presidency" on steroids, while acting as if being tutored by the best and brightest of the Cosa Nostra," and other such statements catches your attention.

                                                                                                Posted by on Friday, July 14, 2006 at 12:09 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (17) 

                                                                                                Thursday, July 13, 2006

                                                                                                Information Technology and the Location of Corporate Headquarters

                                                                                                Note: I just saw this posted at Brad DeLong's and realized it was lost in the TypePad crash, so I'm reposting it.

                                                                                                This is an example of what Paul Krugman discussed in his column "The New York Paradox" where agglomeration economies, the benefits from the clustering of related firms, create an incentive for firms to locate in New York's financial center. However, up until recently, the high cost of locating an entire headquarters operation in New York city was prohibitive. That changed with innovations in information technology that lowered the cost of moving corporate headquarters to New York by allowing many of the support personnel to work in lower cost areas in other parts of the world and communicate electronically with upper management.

                                                                                                This article on the movement of biotech headquarters to the U.S. to be located near sources of financing, particularly to gain access to listing on NASDAQ, gives more examples of the growing practice of using information technology to separate upper management from core operations in order to take advantage of economic opportunities in other geographic locations. It also shows that the phenomena is general - New York is not the only destination - there are agglomerations of biotech firms in places like Cambridge, Massachusetts and Carlsbad, California that are attracting headquarters in search of access to financing, and there is evidence of this beginning in the UK as well:

                                                                                                Europe's biotech 'immigrants' to America, by Andrew Pollack, Commentary The New York Times/IHT: When the Scottish government injected $9 million into the biotechnology company Cyclacel last October, the country's enterprise minister explained that "there could not be a more important company for Scotland's future." So how did Cyclacel show its gratitude just two months later? By moving its headquarters to Short Hills, New Jersey, and merging with a publicly traded American company.

                                                                                                Cyclacel executives say there was no slight intended to the government and the company's 65 research scientists, who continue to work in Dundee, Scotland, and Cambridge, England. "The issue was one of access to the capital markets of the United States," said Spiro Rombotis, Cyclacel's chief executive. Only American investors, he said, could provide the tens of millions of dollars needed to carry the company's cancer drugs through clinical trials.

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                                                                                                  Posted by on Thursday, July 13, 2006 at 08:47 PM in Economics, Technology | Permalink  TrackBack (0)  Comments (2) 

                                                                                                  Rubinomics 2.0: Getting the Bugs Out

                                                                                                  Robert Rubin, architect of what has come to be known as Rubinomics, defined below as a policy of balanced budgets and trade liberalization, has changed his view of the success of these policies many of which were promoted and implemented during the Clinton administration. He is concerned that rising inequality will undermine the global trading system if it is not reversed. In response, he has created the Hamilton Project to find policies to address inequality without abandoning the push to open global markets. This is from The Nation:

                                                                                                  Born-Again Rubinomics, by William Greider, The Nation, July 31, 2006 issue: ..Robert Rubin ..., former Treasury Secretary, now executive co-chair of Citigroup, captured the party's allegiance in the 1990s as principal architect of Bill Clinton's ... conservative approach known as "Rubinomics" (or less often "Clintonomics"). Balancing the budget and aggressively pushing trade liberalization went hard against liberal intentions and the party's working-class base. But when Clinton's second term ended in booming prosperity, full employment and rising wages, most Democrats told themselves, Listen to Bob Rubin and good things happen.

                                                                                                  So it's a big deal when Robert Rubin changes the subject and begins to talk about income inequality as "a deeply troubling fact of American economic life" that threatens the trading system, even the stability of "capitalist, democratic society." More startling, Rubin now freely acknowledges what the American establishment for many years denied or dismissed as inconsequential--globalization's role in generating the thirty-year stagnation of US wages, squeezing middle-class families and below, while directing income growth mainly to the upper brackets. A lot of Americans already knew this. Critics of "free trade" have been saying as much for years. But when Bob Rubin says it, his words can move politicians, if not financial markets.

                                                                                                  Rubin has launched the Hamilton Project, a policy group ... developing ameliorative measures to aid the threatened workforce and, he hopes, to create a broader political constituency that will defend the trading system against popular backlash. ...

                                                                                                  A storm is coming, Rubin fears. He ... explains ...: "Where there's a great deal of insecurity, where median real wages are, roughly speaking, stagnant...where a recent Pew poll showed 55 percent of the American people think their kids will be worse off than they are, I think there is a real danger of heightened difficulty around issues that are already difficult, like trade.... Look at the difficulty around immigration."

                                                                                                  Princeton economist Alan Blinder, a Hamilton participant and Federal Reserve vice chair in the Clinton years, describes the "difficulty" in more ominous terms: "I think the prospects for the liberal trade order are not great," he says. "There's a whole class of people who are smart, well educated and articulate, and politically involved who will not just sit there and take it" when their jobs are moved offshore. He thinks CNN commentator Lou Dobbs, who has built a populist following by attacking globalization and immigration, "is just the beginning--nothing compared to what's going to happen in the future." ...

                                                                                                  Many view the Hamilton Project as just more talk-talk. I regard it as an important event--a "course correction" in elite thinking that, given Rubin's influence, may reshape the familiar trade debate, at least among Democrats. Rubin's central objective, however, is to control the terms of debate ... without disturbing anything fundamental in the global system itself.

                                                                                                  His program consists mostly of familiar ideas that might soften the pain for displaced workers. But I doubt the Hamilton proposals will do much, if anything, to reduce the global forces that are depressing incomes for half or more of the American workforce. Even Rubin is uncertain. When I ask if his agenda will have any effect at all on the global convergence of wages--the top falling gradually toward the rising bottom--he says: "Well, I think that's a question to which nobody knows the answer. I think the proposals and approach we are proposing are the way to get the best possible outcome for the United States in a complicated world.... But whether that's going to stop the global convergence of wages, I don't know the answer to that. I would guess the answer is no."

                                                                                                  Despite my skepticism about his policy ideas, I think Rubin is providing a significant opening for the opposition--a new chance for labor-liberal reformers to make themselves heard with a more fundamental critique of globalization. Up to now, the standard trade debate has been utterly simple-minded--"free trade good, no trade bad"--and anyone who opposes trade agreements or WTO rules is dismissed as a backward "protectionist." The enlightened position, as major media always explain, is to support the "win-win" promise of globalization.

                                                                                                  Only Rubin is departing a bit from that script, effectively accepting the opposition's central complaint that "win-win" is a cruel distortion of what's happening. If so many Americans are actually losing ground, Rubin asks, shouldn't government do something about that? ... Several times, I was taken aback when his comments made tentative concessions to the opposition's argument. He even endorsed, though only in broad principle, some objectives for reforming global trade that his critics have long advocated. ...

                                                                                                  Continue reading "Rubinomics 2.0: Getting the Bugs Out" »

                                                                                                    Posted by on Thursday, July 13, 2006 at 03:06 PM in Economics, Income Distribution, International Trade, Policy, Politics | Permalink  TrackBack (0)  Comments (17) 

                                                                                                    Difficulties at the Doha Round and Globalization

                                                                                                    This article says the U.S. is shutting down globalization "because it can no longer get its own way":

                                                                                                    The death of Doha signals the demise of globalisation, by Martin Jacques, Guardian Unlimited: The freer movement of trade and capital has been a fundamental characteristic of the past 25 years of globalisation. The Doha round, initiated in 2001, was the latest attempt to keep the process rolling. It now looks doomed. The deadlock between the US, the EU, Japan and the developing countries seems final. And with the fast-track powers of the US president - which enable trade agreements to bypass Congress - scheduled to come to an end in 2007, any agreement later than this year will be subject to the unpredictability and delay of Capitol Hill. In other words, it is now or never, and it looks more and more like never.

                                                                                                    The implications are profound. It was the Uruguay round in the 80s and 90s that underpinned much of the process of globalisation... The failure to reach agreement on its successor, the Doha round, suggests the era of multilateral trade agreements is coming to an end. The US some time ago switched its attention from multilateral to bilateral deals and has, over the past decade, concluded a battery of them. The reason is not difficult to fathom. When negotiating bilaterally, the US can use its economic power to impose far more unfavourable terms on its negotiating partner...

                                                                                                    The American turn from multilateralism is linked to developments at the World Trade Organisation. Over the past decade, the political character of the WTO has changed markedly. During the Uruguay round it was relatively easy for the developed countries to get their way with the developing world by a combination of bullying, cajoling, dividing, bribing and threatening. But the admission of China as a full member in 2001, the growing power of India, the election of Lula as president of Brazil, and the willingness of South Africa to join forces with them has meant that the developing countries have begun to acquire a powerful voice... The developing countries torpedoed the meeting in Cancun in 2003, insisting on far greater concessions from the developed world than were being offered. The emergence of the G20 - as their loose negotiating group is known - has transformed the politics of trade negotiations.

                                                                                                    Whatever the grand principles and the pontificating, the US only favours multilateralism when that suits its interests. ... The WTO ... has come to resemble, at least in a small way, the UN; and the US has long been inimical towards that body because it is frequently unable to get its own way. ... [T]he growing US proclivity for bilateral deals and its unwillingness to make the necessary concessions to keep the Doha round alive suggest the contrary: Washington has become disaffected with multilateralism.

                                                                                                    The implications of the collapse of Doha are profound. Symbolically, its death is likely to mark the end of the process of globalisation ... Nothing particularly dramatic is likely to happen, though it might if the dollar begins to go through the floorboards. Much more likely, for the time being, is stagnation in the global economic regime, combined with a slow but steady process of fragmentation and regionalism. ... The WTO, having failed in its first great mission, will be quietly relegated to the backburner, to join a host of other international bodies...

                                                                                                    The death of Doha may be the first and most dramatic casualty suffered by the modern era of globalisation, but it is unlikely to be the last. ... Until now, China's rise has been seen in largely virtuous terms: it has led to falling consumer prices in North America and Europe, while providing an enormous investment opportunities for western and Japanese firms. The voices of the losers - those in the west who have suffered from Chinese competition - have mostly been drowned out. But as that competition grows, the demand for protection is likely to grow louder and, ultimately, prove irresistible...

                                                                                                    The irony of Doha is that it is being killed by western disinterest in the face of the growing power of the developing world. The rise of China and, to a lesser extent India, is likely to be accompanied by a parallel irony. The west, which has been the traditional defender of free trade - because free trade always favours the most powerful and advanced economies - is likely to run for cover and put up protectionist barriers, unable to cope with the political, social and economic implications of the rise of China. In a sense, the death of Doha is a dress rehearsal, albeit an early one, for the end of globalisation. And those who bury it will be those who designed it and proselytised for it - the US and Europe.

                                                                                                      Posted by on Thursday, July 13, 2006 at 01:46 PM in Economics, International Trade, Policy, Politics | Permalink  TrackBack (0)  Comments (12)