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Sunday, September 17, 2006

Not Quite Ready for Prime-Time

These are things from the last few days I didn't post because I didnt' have time to get to them, they didn't quite fit, I wasn't sure they were interesting, the topic was interesting but my comments were lame and I wanted to think more, I forgot about them, they were too political, they involved the war or religion, they made for too many posts not directly related to economics that day, or there was some other reason. I usually end up deleting these drafts after a few days, but thought I'd try posting them here instead:

What Causes What?

Remember this?


Most likely, a third variable causes both. But what would that be? Or is it as simple as it looks, gas prices cause approval?

Has the News Media Magnified the Housing Decline?

Is the news media responsible, at least in part, for the decline in the housing market?:

Someone’s Spoiling the Party, the Housing Market Says, by Vikas Bajaj, NY Times: To hear some people in the real estate industry tell it, one of the biggest problems with the housing market is what is being said about it in the news media.

Agents and industry executives say reporters, editors and news anchors are making a cooling market sound worse than it is. ... Richard A. Smith, vice chairman and president of the Realogy Corporation, the nation’s largest residential real estate broker, said there was a “constant flood of media that is so negative” that it was discouraging many potential buyers and sellers. ...

But exactly how much the press influences mass consumer behavior is subject to debate. Robert J. Shiller, the Yale economist ..., said the news media played an important role in molding public opinion as markets both rise and fall. But he said he generally approved of the skeptical tone of many news reports about both the real estate boom and subsequent downturn. “The media has been pretty on top of [the possibility] that this might be a psychological event,” he said. ...

Many journalists who cover the real estate market said they expected, and were not worried by, criticism from the industry. They said they were more concerned about whether the news media were skeptical enough about the boom while it was continuing. ...

Some critics say the news media did not include enough contrary viewpoints during the run-up in home prices. “Obviously, people get carried away,” said Dean Baker, co-director of the Center for Economic Policy Research .... “But if there are voices that challenge it, it stops some people.”

But Mr. Shiller said he was not so sure it did. In reviewing historical news clips, he said, he found that the press had frequently questioned the premise of booms, including the 1920’s stock market boom. “Newspaper people do that more than their audience demands,” he said. But it appears, he added, that people “read it blandly and it doesn’t sink in.”

Consumption hasn't responded as much as expected to the downturn in the housing market:

A Fable, Adapted From Aesop, by Eduardo Porter, Economic View, NY Times: ...[T]o the befuddlement of many economists, who had been expecting consumers to rein in their spending when the price of their homes stopped rising, America’s happy consumers have so [continued spending]... “There is no sign of weaker consumer confidence raising the savings rate yet,” wrote Charles Dumas... “People have not yet started to pull in their horns in response to house price horrors.” ...

Prime Movers

Something set the universe in motion, didn't it? But is the force intelligent?

Multiple-Choice God, Commentary, LA Times: ...According to ... a survey ... by the Gallup Organization, 85% to 90% of Americans say "yes" when asked: "Do you, personally, believe in God?"

But the study went further by asking respondents what sort of God they believed in. The results put the perennial debate over the role of religion in public life in a new light.

The survey identifies four conceptions of God, which it labels A, B, C and D.

A is the Authoritarian God, worshiped by 31.4% of respondents. This deity is highly involved, responsible for Earthly events such as tsunamis or economic upturns and "capable of meting out punishment to those who are unfaithful or ungodly."

B is the Benevolent God, the choice of 23% of respondents. He also is involved in human affairs but isn't in the smiting business. This God is "mainly a force of positive influence in the world and is less willing to condemn or punish individuals."

C is the Critical God, who "really does not interact with the world." But believers in this God — 16% of the sample — still watch their Ps and Qs because God C "views the current state of the world unfavorably" and will punish evildoers "in another life."

Last but not least is D, the Distant God. Twenty-four percent of respondents endorsed ... this version of the deity, "a cosmic force which set the laws of nature in motion" but has no interest in human activities.

Finally, there are the atheists, who accounted for 5.2% of respondents. (They aren't dignified with an abbreviation...)

The diversity of beliefs about God ... suggests that all-or-nothing propositions such as "school prayer" or the display of the Ten Commandments on public property might mean very different things to different people. A believer in a Benevolent or Distant God might see school prayer as positive because God is benign or at least unthreatening, while a commandments proponent who believes in an Authoritarian God might see it as a way to strike fear into the hearts of schoolchildren — a prospect that might appall the believer in God B.

If it does nothing else, the Baylor survey should lead to more sophisticated reporting about what sort of God Americans want to welcome back to the public square: A, B, C, D — or none of the above?

Ups and Downs

A follow up to Progress or regress?:

Money Talks, by Paul Krugman: ...Samantha Wolf, Stafford Springs, Conn.: I'm a software engineer. I have been in this field for the past 16 years and definitely fall into the “regress” category. The I.T. industry enjoyed massive growth during the mid- to late-90’s. Employees, contractors and consultants reaped significant personal gain. Employers were outraged at the salaries and contract rates they had to pay to get even minimally qualified people, as demand far exceeded supply at that time. In December 2000, I was billing at $125/hour and was considered a bargain, as most of my colleagues were in the $200-300/hour range. Three weeks later in January of 2001, the best rate I could negotiate was $75/hour or approximately $150,000/year — still very decent money, but a lot less than just a month before. In October of 2003, the best contract rate I could get was $15/hour, or roughly $30,000/year. From 2001 to 2003, my very real income fell from $250,000/year to $30,000 annually. I had gained even more experience, was considered at the top of my field and yet was compensated at rock bottom prices. I.T. jobs were sent in record numbers to India, Ireland and China as employers exacted a kind of revenge and savored extreme profitability against paying the big dollars from five years earlier.

Today, my income has drifted upward to $50/hour, or about $100,000/year and has stabilized there as I.T. schools have closed, many in I.T. still remain out of work and demand is once again beginning to outpace supply. ... My story is the same for everyone I know in I.T., and is also true for other hard-hit industries such as transportation, manufacturing, medical, real-estate, telecom and now, the entertainment industry. All have been impacted, and not necessarily for the same reasons. ...

Multiply my story by millions and this is why people are gloomy about the economy. Productivity is through the roof because decent-paying jobs are scarce despite the published numbers, and there is keen competition for them. Employers have driven workers to produce; if a worker fails to perform, there is always someone else waiting in line to take that job. The end result is that workers today are driven hard, paid less and have fewer benefits than even five years ago. No amount of P.R. is ever going to convince people that they are simply imagining economic hardship.

Water Under the Bridge

Lost and gone forever:

The 'sunk-cost fallacy', by Barry Schwartz, Commentary, LA Times: You've paid $10 to get into the movie and it just plain stinks. The plot is ridiculous, the acting is terrible, the violence is excessive. But you've already watched half of it. Do you sit through the movie to the end or do you leave?

Just a month ago, you spent $2,000 getting your 10-year-old car's transmission rebuilt. Now you find out the car is leaking oil and needs a ring job. Do you spend the next thousand or buy a new car? ...

We've all encountered situations like these. We make a significant investment — of money, time or emotion — in some project, relationship or business deal, and it doesn't seem to be working out. Do we continue to "throw good money after bad" or do we "cut and run" and "stop wasting time"? ...

Psychologists, decision scientists and economists have an answer. They tell us that it's a mistake to continue with a project or an activity because of what you have already invested in it. The time or money you've already spent is gone. You can't reclaim it. Using a past investment to justify a future investment is what they call the "sunk-cost fallacy."

Instead of thinking about the past, what we should be doing is thinking about the future. "Will my life be better if I leave this terrible movie or if I stay to the bitter end?" "Will my car give me 20,000 more trouble-free miles if I just do this one last repair?" ...[I]f the reason for "staying the course" is past commitment — sunk costs — we need to find a better one.

"Cut and run." "Stay the course." Where have we heard these phrases lately? Oh, yes, we've heard them trotted out in defense of continued U.S. involvement in Iraq as death, injury and insurgency mount. President Bush has offered several reasons for staying the course. And one of them is the more than 2,600 Americans who have already died in Iraq. ... And Bush has not cornered the market on this kind of reasoning. Bill Clinton said it too, more than a year ago. Asked about Iraq, he said that "we've all got a stake in its succeeding." Why? "We've got over 600 dead Americans since the conflict was ended."

We heard this argument often enough in the 1960s. As casualties mounted in Vietnam, it became more difficult to withdraw because withdrawal would have "cheapened" the lives of those already sacrificed. We "owed" it to the dead and wounded to "stay the course." What staying the course produced was thousands more dead and wounded. ... The question should never have been, "What have we invested so far?" but "What are our objectives for the future and can we attain them at a reasonable cost?"

The sunk-cost fallacy took many lives in Vietnam. Whether Iraq is or is not another quagmire I leave to others, and to history, to determine. But there is one respect in which we must not allow Iraq to become another Vietnam: Continued involvement must not be justified by appealing to the imperative not to allow the dead to have "died in vain."

How should we honor the sacrifices of those who have died or suffered serious injury in a U.S. military conflict? The best way to show how much we respect and value their lives is by not risking other lives unless future prospects for success fully justify putting more people in harm's way. ...

To change course under such circumstances need not be an admission of foolishness — even if enemies do accuse the decision-maker of "flip-flopping." One can think through a problem in a logical and rigorous way, and formulate a sensible course of action, only to discover that it doesn't work out. Good decisions do not guarantee good results...

Yet people seem willing to waste even more (time, money or lives) to justify what they have already spent and avoid that sick feeling of failure. Think about it. You haven't really lost money on a stock whose share price keeps plummeting until after you sell it. So you keep holding on, in the hope that your judgment as an investor will eventually be vindicated. And troops haven't really "died in vain" as long as you continue to press on in the fight, no matter how disastrous the results.

I am not arguing that we should "declare victory and leave" Iraq. Nor am I suggesting that the only justification being offered for continued U.S. involvement in Iraq is the "sunk cost" in American lives. I am not saying that obligations from the past should never enter into one's consideration about the future. And I certainly don't propose that we should think about death and injury, war and peace in exactly the same way we think about car transmissions and investments in start-ups.

My suggestion here is more modest. You may attempt to justify the continued Iraq occupation in many ways, as the Bush administration has. Perhaps you think it will prevent further terror, democratize the Middle East or restrain Iran. Perhaps you think that leaving Iraq before "the job is done" will undermine the world's confidence in U.S. promises to other nations.

But it is unacceptable to justify continued involvement in Iraq or any other conflict on the grounds that we "owe" it to those who have already fallen. That is a justification that has strong emotional appeal, but it is fallacious, and no one should be allowed to get away with it.

Whatever the differences between Iraq in 2006 and Vietnam in 1968, if we allow policymakers to use our "sunk costs" — our dead military — to justify further conflict, we will have turned Iraq into another Vietnam. ...

A Crony for Everyone!

A comment from Bruce Wilder on another post says:

I can't help, but think of that scene from Monty Python's Life of Brian, where the would-be rebels are trying to come up with inflammatory gripes about the Roman oppressors:

REG: They've bled us white, the bastards. They've taken everything we had, and not just from us, from our fathers, and from our fathers' fathers.
LORETTA: And from our fathers' fathers' fathers.
REG: Yeah.
LORETTA: And from our fathers' fathers' fathers' fathers.
REG: Yeah. All right, Stan. Don't labour the point. And what have they ever given us in return?!
XERXES: The aqueduct?
REG: What?
XERXES: The aqueduct.
REG: Oh. Yeah, yeah. They did give us that. Uh, that's true. Yeah.
COMMANDO #3: And the sanitation.
LORETTA: Oh, yeah, the sanitation, Reg. Remember what the city used to be like?
REG: Yeah. All right. I'll grant you the aqueduct and the sanitation are two things that the Romans have done.
MATTHIAS: And the roads.
REG: Well, yeah. Obviously the roads. I mean, the roads go without saying, don't they? But apart from the sanitation, the aqueduct, and the roads--
COMMANDO: Irrigation.
XERXES: Medicine.
COMMANDOS: Huh? Heh? Huh...
COMMANDO #2: Education.
REG: Yeah, yeah. All right. Fair enough.
COMMANDO #1: And the wine.
COMMANDOS: Oh, yes. Yeah...
FRANCIS: Yeah. Yeah, that's something we'd really miss, Reg, if the Romans left. Huh.
COMMANDO: Public baths.
LORETTA: And it's safe to walk in the streets at night now, Reg.
FRANCIS: Yeah, they certainly know how to keep order. Let's face it. They're the only ones who could in a place like this.
COMMANDOS: Hehh, heh. Heh heh heh heh heh heh heh.
REG: All right, but apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, a fresh water system, and public health, what have the Romans ever done for us?
XERXES: Brought peace.
REG: Oh. Peace? Shut up!
[bam bam bam bam bam bam bam]
[bam bam bam bam bam]

Somehow, that seemed a fitting introduction to this:

Ties to GOP Trumped Know-How Among Staff Sent to Rebuild Iraq Early U.S. Missteps in the Green Zone, by Rajiv Chandrasekaran Washington Post: Adapted from "Imperial Life in the Emerald City," by Rajiv Chandrasekaran...

After the fall of Saddam Hussein's government in April 2003, the opportunity to participate in the U.S.-led effort to reconstruct Iraq attracted all manner of Americans -- restless professionals, Arabic-speaking academics, development specialists and war-zone adventurers. But before they could go to Baghdad, they had to get past Jim O'Beirne's office in the Pentagon.

To pass muster with O'Beirne, ... applicants didn't need to be experts in the Middle East or in post-conflict reconstruction. What seemed most important was loyalty to the Bush administration.

O'Beirne's staff posed blunt questions to some candidates about domestic politics: Did you vote for George W. Bush in 2000? Do you support the way the president is fighting the war on terror? Two people who sought jobs with the U.S. occupation authority said they were even asked their views on Roe v. Wade.

Many of those chosen by O'Beirne's office to work for the Coalition Provisional Authority, which ran Iraq's government from April 2003 to June 2004, lacked vital skills and experience. A 24-year-old who had never worked in finance -- but had applied for a White House job -- was sent to reopen Baghdad's stock exchange. The daughter of a prominent neoconservative commentator and a recent graduate from an evangelical university for home-schooled children were tapped to manage Iraq's $13 billion budget, even though they didn't have a background in accounting.

The decision to send the loyal and the willing instead of the best and the brightest is now regarded by many people involved in the 3 1/2 -year effort to stabilize and rebuild Iraq as one of the Bush administration's gravest errors. Many of those selected because of their political fidelity spent their time trying to impose a conservative agenda on the postwar occupation, which sidetracked more important reconstruction efforts and squandered goodwill among the Iraqi people...

Interviews with scores of former CPA personnel over the past two years depict an organization that was dominated -- and ultimately hobbled -- by administration ideologues. "We didn't tap -- and it should have started from the White House on down -- just didn't tap the right people to do this job," said Frederick Smith, who served as the deputy director of the CPA's Washington office. "It was a tough, tough job. Instead we got people who went out there because of their political leanings."

Endowed with $18 billion in U.S. reconstruction funds and a comparatively quiescent environment in the immediate aftermath of the U.S. invasion, the CPA was the U.S. government's first and best hope to resuscitate Iraq... But many CPA staff members were more interested in other things: in instituting a flat tax, in selling off government assets, in ending food rations...

To recruit the people he wanted, O'Beirne sought résumés from the offices of Republican congressmen, conservative think tanks and GOP activists. He discarded applications from those his staff deemed ideologically suspect, even if the applicants possessed Arabic language skills or postwar rebuilding experience. ... O'Beirne once pointed to a young man's résumé and pronounced him "an ideal candidate." His chief qualification was that he had worked for the Republican Party in Florida during the presidential election recount in 2000.

O'Beirne ... and his staff used an obscure provision in federal law to hire many CPA staffers as temporary political appointees, which exempted the interviewers from employment regulations that prohibit questions about personal political beliefs.

There were a few Democrats who wound up getting jobs with the CPA, but almost all of them were active-duty soldiers or State Department Foreign Service officers. Because they were career government employees, not temporary hires, O'Beirne's office could not query them directly about their political leanings.

One former CPA employee who had an office near O'Beirne's wrote an e-mail to a friend describing the recruitment process: "I watched résumés of immensely talented individuals who had sought out CPA to help the country thrown in the trash because their adherence to 'the President's vision for Iraq' ... was 'uncertain.' I saw senior civil servants from agencies like Treasury, Energy . . . and Commerce denied advisory positions in Baghdad that were instead handed to prominent RNC (Republican National Committee) contributors."

As more and more of O'Beirne's hires arrived in the Green Zone, the CPA's headquarters in Hussein's marble-walled former Republican Palace felt like a campaign war room. Bumper stickers and mouse pads praising President Bush were standard desk decorations. ... "Bush-Cheney 2004" T-shirts were among the most common pieces of clothing.

"I'm not here for the Iraqis," one staffer noted to a reporter over lunch. "I'm here for George Bush." ...

More here.

Liberal Professor Purge

This post from yesterday notes that terrorists are, on average, better educated than a typical peer and that a "surprisingly large share of them have college and even graduate degrees." This post backs it up. Now, since there are liberal professors at universities, and terrorists have university degrees, it must be that liberals cause terrorism. And everything else that's wrong. Okay, that's not quite the argument, but it's close:

Rosa Brooks: Students, Beware Professor Osama, by Rosa Brooks, Commentary, LA Times: With September upon us, it's time to reflect on that perennially popular back-to-school activity, Bash the Professors.  According to David Horowitz's book, ... American universities are dominated by "a shocking and perverse culture of academics who are poisoning the minds of today's college students with … hatred of America … and support for America's terrorist enemies." ...

A typical Horowitz cause celebre: a Colorado student whose professor allegedly gave her an F when she refused to agree that George W. Bush is a war criminal. When critics took a close look, though, it turned out that the student actually got a B, that she had misrepresented the assignment and that the professor was … a Republican.

The real agenda ... has nothing to do with fostering intellectual pluralism and everything to do with marginalizing or eliminating academics who deviate from the right-wing party line.

The right-wing assault on supposedly liberal universities appeared to have run out of steam after the '80s, but it revived after 9/11. Capitalizing on increased anxiety about national security, Horowitz and his ilk were able to start denouncing the academics they disliked as not merely liberal but pro-terrorist "sympathizers … of Osama bin Laden."

Last week, they insisted that universities be purged of liberals and "improved to serve national security," and they urged students to "strongly criticize … the continued presence of liberal and secular professors."

Oh, wait — whoops! Those quotes were from — respectively — Ayatollah Abbasali Amid Zanjani, the hard-line Islamist president of the University of Tehran, and Iranian President Mahmoud Ahmadinejad.

Silly me, getting my militant conservative Islamic extremists mixed up with my militant conservative Judeo-Christian extremists! Though now that I think about it, they seem to have an awful lot in common.

Variable Inflation Targets

This discussion is from The Economist. Should inflation targets be lowered to reflect the increased growth in global supply as more and more markets are opened? The argument is that lowering the target inflation rate avoids a persistent gap between actual and long-run real interest rates, a gap that generates both internal and external imbalances:

Interest rates are too low. Whose fault is that?, The Economist: Globalisation may have helped to hold down inflation, but it has also raised some new dilemmas for central banks. Most notably, should they cut interest rates to stop inflation falling below their usual target in response to a boost to global supply—which is how they would deal with falling inflation caused by a slump in demand—or should they accept a lower rate of inflation? Most central banks aim for an inflation rate of close to 2%, in the belief that too little inflation can be as harmful as too much of it.

Real interest rates in the past few years have remained lower for longer than at any other time during the past half-century. Despite recent tightening by central banks, average real short-term rates and bond yields in the developed economies are still well below normal levels...

In theory, the long-term real equilibrium interest rate should be equal to the marginal return on capital. And the opening up of emerging economies has increased the ratio of global labour to capital, raising the return on capital, so real interest rates should rise, not fall.

Another way to look at this is that real interest rates should be roughly the same as the trend rate of GDP growth (a proxy for the return on capital). If greater global economic and financial integration leads to a more efficient use of labour and capital, economic growth will be faster, which again means that real interest rates should rise. So why have they been so low?

Analysts have put forward two main explanations for the low level of real bond yields in recent years. The first is that high saving (in relation to investment) by Asian economies and Middle East oil exporters has caused a global saving glut, pushing down yields. These economies are running large current-account surpluses, and much of that money has been piled up in official reserves, particularly in American Treasury securities... Nouriel Roubini and Brad Setser ...  reckon that American Treasury bond yields would have been two percentage points higher in recent years if central banks in emerging economies had not bought dollar reserve assets.

A second explanation for low bond yields is ... excess liquidity... Over the past few years, the global money supply has grown at its fastest pace since the 1980s. ... Both developed and emerging economies have contributed to this flood of liquidity. Central banks in rich countries have held interest rates abnormally low to offset disinflationary pressures from emerging economies. At the same time, to prevent their currencies rising, emerging economies have also held interest rates low and engaged in heavy foreign-exchange intervention, which has inflated their money supplies. ... Over the past year, emerging economies have accounted for four-fifths of the growth in the world's monetary base.

Have central banks in developed economies been right to pursue lax monetary policies? For borrowers, low interest rates are an unmitigated blessing, but for economies as a whole the gap between interest rates and the long-run return on capital has created some serious economic and financial imbalances. Thanks to cheap money, American households are saving too little and borrowing and spending too much. At the same time bubbly house prices have soared to record levels in relation to incomes.

Bill White, chief economist at the Bank for International Settlements, suggests that central banks' inflation targets may be too high, given the big boost to global capacity from China's and India's re-emergence. If a negative supply shock (from higher oil prices, say) were to cause inflation to rise, most central banks would do nothing about it as long as it did not increase inflationary expectations and lead to second-round effects on other prices. ... To be consistent, says Mr White, central banks should also have tolerated the inflation-lowering impact of a positive supply shock from the emerging economies, allowing cheaper goods and wages to reduce inflation. Instead, in 2001-03 central banks prevented inflation from falling by pushing interest rates much lower than they would otherwise have been.

Ben Bernanke, the chairman of America's Federal Reserve, would argue that when the Fed slashed interest rates to 1% in 2003, it was trying to prevent harmful deflation. However, deflation need not be what it was in the 1930s, a vicious circle of deficient demand, falling prices and rising real debt. Historically, most deflations have been benign, caused by technological innovation or the opening up of economies (ie, positive supply shocks), and were accompanied by robust growth. During the rapid globalisation of the late 19th century, flat or falling average prices went hand in hand with strong growth in output. Today's world has much more in common with that period than with the 1930s.

With hindsight, the deflation that the Fed was fretting about in 2003 was largely benign, caused by cheaper goods from China and by the IT revolution. But the Fed was so determined to prevent deflation of any kind that it cut interest rates to unusually low levels. This, argues Mr White, could have long-term costs because persistently cheap money encouraged too much borrowing, too little saving and unsustainable asset prices. ...

Mr White argues that if central banks focus solely on price stability, they might allow ever bigger financial imbalances to build up. This is why they need to watch a wider range of indicators beyond inflation, including the growth in credit, money, saving rates and asset prices. They should be prepared to raise interest rates in response to clear evidence of financial imbalance, says Mr White, even if it means they undershoot their inflation targets. ...

Central banks have been slow to grasp the fact that the rapid integration of emerging economies into the global market system requires them to rethink their monetary policy. If they fail to recognise benign deflation created by positive supply shocks, then excessively loose monetary policy will fuel not only financial bubbles but also bigger current-account imbalances...

U.S. Productivity Changes

Percentage change in U.S. productivity since 1987:


    Posted by on Sunday, September 17, 2006 at 03:33 PM in Economics, Miscellaneous | Permalink  TrackBack (0)  Comments (6)


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