« October 2006 |
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James Surowiecki of The New Yorker explains why tariffs, quotas, price
guarantees, and subsidies in the sugar and ethanol markets are "bad economic
policy, bad energy policy, and bad foreign policy":
Deal Sweetners, by James Surowiecki, New Yorker: America ... consume[s] ...
close to ten million tons of sugar every year. But American sugar producers
aren’t satisfied with supplying the most sweet-hungry population in the world.
They’ve relentlessly sought—and received—special favors... The government
guarantees producers a fixed price for domestic sugar and sets strict quotas and
tariffs for foreign sugar.
Economically..., this has many obvious bad results. It keeps sugar
prices in the U.S. at least twice as high as the world average. It makes it
harder for companies that use lots of sugar to do business here—in the past
decade, an exodus of candy manufacturers from the U.S. has eliminated thousands
of jobs. And import restrictions make Third World countries poorer than they’d
otherwise be. But protecting sugar also has a surprising consequence: it’s
hurting America’s efforts to become more energy-efficient. ...
In recent years, as politicians have tried to deal with high gas prices,
concerns about global warming, and America’s dependence on OPEC, a new savior
has been found: ethanol. Ethanol has all sorts of virtues. ... So Congress has
mandated that four billion gallons of ethanol annually be blended with gasoline,
and it also subsidizes ethanol production with a fifty-one-cent-per-gallon tax
credit. These policies have stimulated an ethanol boom...
Unfortunately, the ethanol produced in the U.S. comes from ... corn. Corn
ethanol’s “net energy balance” ... is significantly lower than that of other
alternatives, and modern corn farming isn’t easy on the land. By contrast,
ethanol distilled from sugarcane is much cheaper to produce and generates far
more energy per unit of input—eight times more... In the nineteen-seventies,
Brazil embarked on a program to substitute sugar ethanol for oil. Today, every
gallon of gas in Brazil is blended with at least twenty per cent of ethanol, and
many cars run on ethanol alone, at half the price of gasoline.
What’s stopping the U.S. from doing the same? In a word, politics. The favors
granted to the sugar industry keep the price of domestic sugar so high that it’s
not cost-effective to use it for ethanol. And the tariffs and quotas for
imported sugar mean that no one can afford to import foreign sugar and turn it
into ethanol, the way that oil refiners import crude from the Middle East to
make gasoline. Americans now import eighty per cent less sugar than they did
thirty years ago. ...
We could, of course, simply import sugar ethanol. But here, too, politics has
intervened: Congress has imposed a tariff of fifty-four cents per gallon on
sugar-based ethanol in order to protect corn producers from competition. ... [T]he
Bush Administration proposed eliminating the ethanol tariff this past spring,
but Congress quickly quashed the idea ... [T]he sugar quotas appear to be as
sacrosanct as ever. ...
Our current policy is absurd even by Washington standards: Congress is paying
billions in subsidies to get us to use more ethanol, while keeping in place
tariffs and quotas that guarantee that we’ll use less. ... Because of the
ethanol tariffs, we’re imposing taxes on fuel from countries that are friendly
to the U.S., but no tax at all on fuel from countries that are among our most
vehement opponents. Congressmen justify the barriers to foreign ethanol with
talk of “energy security.” But how is the U.S. more secure when it has to import
oil from Venezuela rather than ethanol from Brazil? These tariffs are bad
economic policy, bad energy policy, and bad foreign policy. ...
Posted by Mark Thoma on Monday, November 20, 2006 at 12:33 AM in Economics, International Trade, Policy, Politics, Regulation |
David Altig on Monetarism:
Is Monetarism Dead?,
by David Altig:
Courtesy of Mark Thoma, I am sent to the Scientific American blog, where
JR Minkel ruminates on the contributions of Milton Friedman, asking the
question "Is economics a science?" Minkel offers up the question in the spirit
of open debate, so fair enough. I did, however, find this passage somewhat
Well, Friedman's most famous prediction was a pretty good one: he foresaw the
possibility that high unemployment could accompany high inflation, a phenomenon
better known as stagflation. That foretelling earned him the Nobel Memorial
Prize, although Friedman's monetary theory is currently out of favor.
A similar sentiment is expressed by the eminent historian Niall
Ferguson, in an article titled "Friedman
is dead, monetarism is dead, but what about inflation?":
[I]t will be for monetarism — the principle that inflation could
be defeated only by targeting the growth of the money supply and thereby
changing expectations — that Friedman will be best remembered.
Why then has this, his most important idea, ceased to be
honoured, even in the breach? Friedman outlived Keynes by half a century. But
the same cannot be said for their respective theories. Keynesianism survived its
inventor for at least three decades. Monetarism, by contrast, predeceased Milton
Friedman by nearly two.
The claim that "Friedman's monetary theory is currently out of favor" is, I
think, wildly overstated -- at best.
Continue reading "Has Monetarism Been Abandoned?" »
Posted by Mark Thoma on Monday, November 20, 2006 at 12:24 AM in Economics, Monetary Policy |
Should we refuse to trade with countries with low environmental and labor
standards, or countries that have very low taxes or subsidize exporting
industries because this gives them an unfair advantage? Here are arguments
against insisting on "fair trade" standards as a condition for trade
What Should Trade
Negotiators Negotiate About? A Review Essay, by Paul Krugman, March 1997: ...The economist's case for free trade is essentially a unilateral case -
that is, it says that a country serves its own interests by pursuing free trade
regardless of what other countries may do. Or as Frederic Bastiat put it, it
makes no more sense to be protectionist because other countries have tariffs
than it would to block up our harbors because other countries have rocky coasts.
So if our theories really held sway, there would be no need for trade treaties:
global free trade would emerge spontaneously from the unrestricted pursuit of
national interest. ...
Fortunately or unfortunately, however, the world is not ruled by economists.
The compelling economic case for unilateral free trade carries hardly any weight
among people who really matter. If we nonetheless have a fairly liberal world
trading system, it is only because countries have been persuaded to open their
markets in return for comparable market-opening on the part of their trading
partners. Never mind that the "concessions" trade negotiators are so proud of
wresting from other nations are almost always actions these nations should have
taken in their own interest anyway; in practice countries seem willing to do
themselves good only if others promise to do the same.
But in that case why should ... we demand ... only of trade liberalization?
... In particular, environmental advocates and supporters of the labor movement
have sought with growing intensity to expand the obligations of WTO members ...,
making adherence to international environmental and labor standards part of the
required package; meanwhile, business groups have sought to require a "level
playing field" in terms of competition policy and domestic taxation. ...
In 1992 Columbia's Jagdish Bhagwati ... and Robert E. Hudec ... brought
together an impressive group of legal and economic experts in a three-year
research project intended to address the new demands for an enlarged scope of
trade negotiations. Fair Trade and Harmonization: Prerequisites for Free
Trade? ... is the result of that project. ...
In this essay I will not try to offer a comprehensive review of the papers;
in particular I will give short shrift to those on competition and tax policy.
... Instead, I will try to sort through what seem to be the main issues raised
by new demands for international labor and environmental standards.
Continue reading "Should Environmental and Labor Standards Be Part of Trade Negotiations?" »
Posted by Mark Thoma on Monday, November 20, 2006 at 12:15 AM in Economics, International Trade, Policy, Regulation |
Jonathan Chait has a challenge for Republicans who have been complaining that
increased government spending in recent years is a betrayal of core conservative
principles. Will they "recommit to smaller government" and propose "rolling back
the Bush spending hikes"?:
The Republicans' curse -- they're always right, by Jonathan Chait, Commentary,
LA Times: ...No sooner had this year's election ended than nearly every
conservative emerged to declare that Republicans had been defeated for betraying
the One True Faith. Republicans, George Will wrote, "were punished not for
pursuing but for forgetting conservatism." John McCain ... [said] they "lost
their way" by supporting big government. ...
When conservatives try to get ... specific about why voters turned against
them, their explanations make ...[little] sense. Jeff Flake of Arizona, a leader
among conservatives in the House, suggested that his party apologize to voters
like this: "We've overspent, badly, and it was offensive to you as well as our
But exactly how have Republicans overspent? The largest spending increases
under Bush, by far, have come in defense and homeland security, which
conservatives support. The next biggest item is the Medicare bill. Horribly
designed though it was, you can't say it was unpopular. ...
If Republicans really want to recommit to smaller government, they can run on
a simple platform of rolling back the Bush spending hikes. Go ahead,
Republicans, I dare you: Promise to slash the Pentagon, eliminate homeland
security and take away everybody's Medicare drug coverage.
Of course, they won't really do that. ... They'll never reduce government to
the size they'd like, but they're too fanatical to admit that they can't.
Instead of more cut taxes and spend policies supported by wishful thinking like
we've seen recently, I'd settle, as a start, for a rational political
conversation first about our policy objectives, and then about the alternatives
and tradeoffs we face in achieving them. [I'll save you the trouble: Rational political conversation? Yeah right.]
Posted by Mark Thoma on Sunday, November 19, 2006 at 04:50 PM in Budget Deficit, Economics, Politics |
What are the characteristics of firms involved in international trade? Are
these firms more productive? Do they pay higher wages? What are the effects of trade
liberalization on employment, labor skill levels, and survival?
International Trade, by Andrew B. Bernard, NBER Reporter, Fall 2006: For
most of its lengthy history the field of international trade largely ignored the
role of the firm... Traditional trade theory explained the flow of goods between
countries in terms of comparative advantage... Even the research focusing on
differentiated varieties and increasing returns to scale that followed Helpman
and Krugman continued to retain the characterization of the representative firm.¹
However, the assumption of a representative firm, while greatly enhancing the
tractability of general equilibrium analysis, is emphatically rejected in the
data. My research ... has been an attempt to ... understand the decisions of heterogeneous
firms in shaping international trade and their effects on productivity growth
Continue reading "NBER Reporter: Firms in International Trade" »
Posted by Mark Thoma on Saturday, November 18, 2006 at 08:39 PM in Academic Papers, Economics, International Trade |
Robert Reich says the U.S. should normalize trade
relations with Vietnam. I agree:
The New Domino Theory, by Robert B. Reich, American Prospect: President Bush
arrives in Hanoi today for discussions about regional economic issues. He would
do well to discuss frankly America’s fears about the "dominoes" of Asian
You may remember the old domino theory of Asian communism. Four decades ago,
American policy makers clung to the idea that the big domino of Soviet Communism
had toppled China, and the domino of Chinese communism had then toppled North
Vietnam. Unless the United States propped up South Vietnam, it was assumed, all
of Indo-China would become communist.
Tens of thousands of Americans died in that war before America got out and
let the dominoes fall where they may. But then a strange thing happened. Soviet
Communism disappeared. China became the fastest-growing big capitalist nation in
the world. And Vietnam became one of the hottest markets in Southeast Asia.
The real domino turned out not to be communism, but capitalism.
Yet the capitalist domino seems almost as threatening to America today as the
communist one was forty years ago. This week, Republican leaders in the House
called off a vote on a measure that would have given Vietnam permanent normal
trade relations with the United States. They didn’t think they could get the
votes needed to pass it.
Talk about shooting ourselves in the feet. Early next year, as part of its
entry into the World Trade Organization, Vietnam will reduce tariffs on foreign
goods and open its telecom and financial services sectors to foreign investment.
But as things now stand, America won’t benefit from these measures because
Congress won’t normalize trade relations with Vietnam.
Continue reading "Is the "Capitalist Domino" About to Fall?" »
Posted by Mark Thoma on Saturday, November 18, 2006 at 06:57 PM in Economics, International Trade, Politics |
High income households are surprisingly dependent upon Social Security to maintain their living standards during their retirement years:
Americans' Dependency on Social
Security, by Laurence J. Kotlikoff, Ben Marx, and Pietro Rizza, NBER WP 12696,
November 2006 [open
link]: Abstract This paper determines the standard of living
reductions that young, middle aged, and older households would experience were
the U.S. government to cut Social Security benefits (but not taxes) to deal with
its ... long-term fiscal crisis. ... The analysis considers both stylized single
and married households of different ages and resource levels as well as actual
households sampled from the 2004 Federal Reserve Survey of Consumer Finances (SCF).
The extent of current and future living standard reductions in response to
announcements of future Social Security benefit cuts depends critically on the
age of the household, when the cuts are announced, the size of the cuts, the
income of the household, and the degree to which the household is liquidity
For our stylized households on the brink of retirement the complete
elimination of Social Security benefits would entail retirement living standards
reductions ranging from roughly one third to one hundred percent depending on
the household's income. Our SCF findings also point to a strong dependency on
Social Security. Indeed, 41 percent of older SCF couples and 33 percent of SCF
singles would experience a living standard reduction of 90 percent or more were
Social Security benefits eliminated.
A surprising finding is the major dependency of very high-income households
on Social Security.
Continue reading "Who Needs Social Security?" »
Posted by Mark Thoma on Saturday, November 18, 2006 at 10:55 AM in Economics, Policy, Social Security |
Here's the intro:
At just twenty-six, economist Emily Oster may have the highest
controversies-generated-to-years-in-academia ratio of anyone in her field.
That's because, as a Ph.D. student at Harvard, she chose to hop the fence and
explore a topic already claimed by doctors, social scientists, and policy wonks:
the AIDS epidemic in Africa. Her studies suggest some uncomfortable
possibilities—not least that the so-called experts have gotten their approach to
the crisis dead wrong.
Now a Becker Fellow at the University of Chicago, Oster continues to blur
academic boundaries with further work on AIDS and a volatile new interest: the
reported wave of female infanticide in Asia.
And, the article:
Three Things You Don't Know About Aids In Africa, by Emily Oster, Esquire: When I began studying the HIV epidemic in Africa a few years ago, there were
few other economists working on the topic... [T]he questions I wanted to answer
... were being asked by anthropologists, sociologists,
and public-health officials. ...
These disciplines believe that cultural
differences—differences in how entire groups of people think and act—account for
broader social and regional trends. AIDS became a disaster in Africa, the
thinking goes, because Africans didn't know how to deal with it.
Economists like me don't trust that argument. We assume everyone is
fundamentally alike; we believe circumstances, not culture, drive people's
decisions, including decisions about sex and disease.
I've studied the epidemic from that perspective. I'm one of the few people
who have done so. And I've learned that a lot of what we've been told about it
is wrong. Below are three things the world needs to know about AIDS in Africa.
Continue reading "What You May Not Know About AIDS in Africa" »
Posted by Mark Thoma on Friday, November 17, 2006 at 08:28 PM in Economics, Health Care, Policy |
Hal Varian responds to some of the
comments on his NY Times article "Beyond
Insurance: Weighing the Benefits of Driving vs. the Total Costs of Driving,"
External costs are costs on uninvolved third parties. The costs people in a
crowd impose on each other are not external, because each member of the crowd
"pays" the price whether in time lost in traffic jams or standing lines, or
It is true that the members of the crowd pay the average cost of congestion,
but they don't pay the marginal cost (which is higher). This is the classic
problem of the commons.
Check out pay-as-you-drive-insurance:
Yes, this is the right idea.
Where is the detailed statistical analysis that supports this claim?
It obviously isn't in the 850 word Times column. But if you take the time to
read the paper at http://works.bepress.com/aaron_edlin/21 you will find detailed
And the call for a car accident tax is nonsensical. Car insurance premiums
are supposed to be calculated to cover the real cost of accidents.
The premiums cover the average cost of accidents (obviously) but the marginal
cost (i.e., the cost imposed on other drivers by an additional driver) is much
higher than the average cost, at least in congested areas.
The number of accidents likely do increase with the number of cars but only
to the point where increased congestion lowers speeds and that is far sooner
The evidence presented in the paper says otherwise.
The arrogance on display is simply breathtaking, though. After 100 years of
auto insurance, these economists assume that they have found a flaw in the
system, which mere mortals, supposedly, have never noticed.
The original point was first made by Nobel laureate William Vickrey in 1968.
So it only took 60 years to notice the problem, not 100. 8-)
I sure do not see what the basis for the assertion, "drivers only face their
own cost of accidents in their insurance premiums" is. The whole point of
liability insurance is to pay for the costs to the other guy, of my hitting him.
The argument is independent of whether insurance is liability or no-fault, or
whether or not there is insurance at all. Here is a more detailed example.
Suppose that Adam values driving at $150 and Eve at $70. Adam is currently
driving and Eve is contemplating doing so. If only Adam drives there are no
accident costs; if both drive the expected accident costs are $50 per car.
With these numbers, Eve rationally decides to drive since her value exceeds
her costs: 70 > 50. Net social value from both driving is: (150 + 70) - 100 =
120. If Eve faced the full cost of her decision (the total accident costs) she
would rationally decide not to drive yielding net social value of $150 (Adam's
value of driving).
Now suppose that Adam and Eve both value driving at $150 but each has to face
the $100 *marginal* cost of their decision. Net social value of both driving
would be $300 - $100 = $200 which is higher than the net value of keeping one or
both of them off the road. [It's true that there is an extra $100 of driving tax
collected in this solution, but that can be used to reduce other taxes --- it is
not a social cost.]
Suppose that each values driving at $70. The optimal solution here is for one
to drive and the other not, yielding a net value of $70. This can be supported
by charging 0 for the first driver on the road and $100 for the 2nd driver
(i.e., the $50 marginal cost they face + the $50 marginal cost the would impose
on the other driver.)
So the Vickrey tax gives the right solution when one should drive and the
other not, or when both should drive. It is simply marginal cost pricing,
Posted by Mark Thoma on Friday, November 17, 2006 at 04:24 PM
What is the carry trade and does it affect exchange rates? Economic theory says carry trade strategies won't be profitable, so why does the trade even exist? This Economic
Letter from the San Francisco Fed examines these issues:
Interest Rates, Carry Trades, and Exchange Rate Movements, by Michele Cavallo,
FRBSF Economic Letter: The U.S. dollar has seen some remarkable swings against major currencies
recently. ... Many observers have related these swings to what is known as the
carry trade. This is a strategy widely used by investors in international
financial markets that is based on exploiting the existence of interest rate
differentials across countries.
The use of this strategy by investors is puzzling, as the theory of interest
parity conditions implies that it should not generate predictable profits. This
Economic Letter explores this puzzle...
Continue reading "FRBSF: Interest Rates, Carry Trades, and Exchange Rate Movements" »
Posted by Mark Thoma on Friday, November 17, 2006 at 12:13 PM in Economics, International Finance |
Eat This (or: Subjectio Ergo Sum), by cornhuskerblogger, CardCarryingMember:
Set down the victory champagne. He's still in charge -- ...there's still so much
compassionate conservatism to ladle out.
Turns out the best way to fight hunger in Bush 43's administration isn't to
get food to the famished but to simply stop calling the foodless ''hungry.''
Every year, the Agriculture Department issues a report that measures
Americans' access to food, and it has consistently used the word "hunger" to
describe those who can least afford to put food on the table. But not this year.
Mark Nord, the lead author of the report, said "hungry" is "not a
scientifically accurate term for the specific phenomenon being measured in the
food security survey." Nord, a USDA sociologist, said, "We don't have a measure
of that condition."
The USDA said that 12 percent of Americans -- 35 million people -- could not
put food on the table at least part of last year. Eleven million of them
reported going hungry at times. Beginning this year, the USDA has determined
"very low food security" to be a more scientifically palatable description for
that group. (Washington
Brilliant. (Aside from that whole ''more scientifically palatable"
mumbo-jumbo -- which is starkly out of place with the rest of this
administration's revelational M.O.) If we stop acknowledging the problem itself,
it will go away. How Zen! ...
I wonder if this had anything to do with it. From the same article:
In 1999, Texas Gov. George W. Bush, then running for president, said he
thought the annual USDA report -- which consistently finds his home state one of
the hungriest in the nation -- was fabricated. ... Bush said he believed that
the statistics were aimed at his candidacy.
Those who are thinking "Oh-well" might consider "Or-well" instead.
Posted by Mark Thoma on Friday, November 17, 2006 at 09:54 AM in Economics, Politics |
Will globalization bring about a single world currency? Paul Krugman, from
1999, uses Milton Friedman's "brilliant analogy" to argue against the idea that
"the fewer currencies there are, the better":
Monomoney Mania, by Paul
Krugman, Slate: A couple of days ago my CW alarm starting buzzing furiously.
For something like the sixth time in a month, a businessman I was talking to had
just declared, in the tones of someone stating a profound insight, that the
modern world economy no longer has room for scores of different national
currencies--that the inexorable logic of globalization will soon force most
countries to adopt the dollar, the euro, or the yen as their means of exchange.
This particular speaker was Latin American, and was clearly influenced by the
recent discussion of "dollarization" as a solution to his region's woes, but I
have heard pretty much the same line from Asians and Europeans. No doubt about
it: A new conventional wisdom has emerged. And you know what that means: It's
time to start debunking.
At first sight, it might seem obvious that the fewer currencies there are,
the better. After all, a proliferation of national moneys means more hassle and
expense, because you keep on having to change money and to pay the associated
commissions. It also means more uncertainty, because you are never quite sure
what foreign goods are going to cost or what foreign customers will be willing
to pay. And as globalization proceeds--as the volume of international
transactions rises, both absolutely and relative to world output--the cost of
having many currencies also rises. So why not have fewer--maybe only one?
There's also the matter of speculation. The financial crises that have shaken
much of the world all started, at least in the first instance, with investors
betting that the currency of the afflicted nation would fall in value against
harder currencies such as the dollar. Why not spoil the speculators' game by
giving them nothing to speculate about--by replacing pesos and reis with
portraits of George Washington (or, if you happen to be European, with generic
pictures of bridges and gates--for more on European currency design, see
this 1997 Slate piece)?
But not so fast. There are still some very good arguments for maintaining
separate national currencies. Not only that, while globalization and
technological change in some ways are pushing the world toward fewer currencies,
in other ways they actually reinforce the advantages of monetary pluralism.
The classic argument in favor of separate national currencies, with
fluctuating relative values, was made by none other than Milton Friedman. (One
appealing aspect of this particular debate is that it cuts across the usual
ideological lines. European socialists like unified currencies, so does the Cato
Institute. American liberals like floating exchange rates, so do Thatcherites.)
Continue reading "Will Globalization Cause Currency Unification?" »
Posted by Mark Thoma on Friday, November 17, 2006 at 12:15 AM in Economics, Financial System, International Finance |
Robert Reich has a challenge. Can you come up with a better theory?:
Why Are They Gunning for Howard Dean?, by Robert Reich: What can possibly
account for the post-election victory party pummeling of Howard Dean by
inside-the-beltway Democrats? Prominent Democratic consultants (James Carville,
Stan Greenberg) go on the record (“you can quote me”) with complaints barely two
weeks from a Democratic sweep. Leading congressional Democrats (Rahm Emmanuel)
vent their anger vociferously (“on background”). Why? Dems now control both
Houses and have twenty-eight governorships. Dean ought to be congratulated. So
what’s the underlying agenda here? Three theories:
1. The only way a Dem gets on television after such a sweet victory isn’t by
criticizing Republicans – it’s by criticizing fellow Dems. Stirring up clear
waters grabs attention. Attention draws crowds. Crowds create power. Power is
the name of the game in Washington, especially when formal control of Congress
2. Dean’s strategy of putting money into state party infrastructure takes
money out of the pockets of Washington insiders – away form Democratic
consultants and key congressional party activists. That makes insiders angry.
3. Dean is an independent DNC chair, not under the sway of the Clintons.
Unlike Ron Brown, who guided the DNC toward a Clinton victory in 1992, Dean
doesn’t play the usual power games. Hence, the Clintons would like him out, and
the sooner the better. Carville, Greenberg, and Emmanuel, among others, are
doing their bidding.
Which is it? I’m not so cynical or conspiratorial as to believe any one of
them. But you come up with a more credible theory.
Posted by Mark Thoma on Friday, November 17, 2006 at 12:12 AM in Economics, Politics |
The publication date, November 17, 2006, on this commentary from Milton Friedman
appearing in the Wall Street Journal is correct. Here's part of the accompanying editorial:
and Friedman, Editorial, WSJ: There are some public figures whose obituaries
can be written years in advance. Milton Friedman was not one of them. ... He died
yesterday at the age of 94, but as the op-ed running nearby attests, he was
active in writing about, thinking about and explaining how economics affects our
world until the end.
In today's feature, he updates and re-examines conclusions he reached about
the Great Depression in "A Monetary History of the United States, 1867-1960," a
book published with Anna Schwartz 43 years ago. ...
Here's Milton Friedman's commentary. He concludes that "The results
strongly support Anna Schwartz's and my 1963 conjecture about the role of
monetary policy in the Great Contraction":
Why Money Matters, by
Milton Friedman, Commentary, WSJ: The third of three episodes in a major natural experiment in monetary policy
that started more than 80 years ago is just now coming to an end. The experiment
consists in observing the effect on the economy and the stock market of the
monetary policies followed during, and after, three very similar periods of
rapid economic growth in response to rapid technological change: to wit, the
booms of the 1920s in the U.S., the '80s in Japan, and the '90s in the U.S.
The prosperous '20s in the U.S. were followed by the most severe economic
contraction in its history. In our "Monetary History" (1963), Anna Schwartz and
I attributed the severity of the contraction to a monetary policy that permitted
the quantity of money to decline by one-third from 1929 to 1933. Since 1963, two
episodes have occurred that are almost mirror images of the U.S. economy in the
'20s: the '80s in Japan, and the '90s in the U.S. All three episodes were marked
by a long period of rapid economic growth, sparked by rapid technological change
and the emergence of new industries, and accompanied by a stock market boom that
terminated in a crash. Monetary policy played a role in these booms, but only a
supporting role. Technological change appears to have been the major player.
These three episodes provide the equivalent of a controlled experiment to
test our hypothesis about what we termed the Great Contraction. In this
experiment, the quantity of money is the counterpart of the experimenter's
input. The performance of the economy and the level of the stock market are the
counterpart of the experimenter's output... The three boom episodes all
occurred in developed private enterprise market economies, involved in
international finance and trade, and with similar monetary systems, including a
central bank with power to control the quantity of money. This is the
counterpart of the controlled conditions of the experimenter's laboratory.
The Money Supply: In addition, history has provided a close counterpart to
the kind of variation in input that our hypothetical experimenter might have
deliberately chosen. As
1 shows, monetary policy ... was very similar in the three boom periods,
and very different in the three post boom periods, with settings that might be
described as low, medium, high.
To measure the quantity of money, I use M2 in the U.S. and the conceptually
equivalent M2 plus certificates of deposit in Japan. To express the data for the
two countries and the widely separated periods in comparable units, I use as an
index of the money stock the ratio of the quantity of money to its average value
for the six years prior to the cycle peak... Finally, the data are plotted to
align the dates at the cycle peak.
Fig. 1 shows a striking contrast between the period before the cycle peak and
the period after the cycle peak. There are some differences before the peak --
money growth is slowest on the average for the earlier U.S. episode, fastest for
Japan -- but the differences are small and there is reasonably steady money
growth in all three episodes. The contrast with the period after the cycle peak
could hardly be greater. Money supply declines sharply after the cycle peak in
the first episode, goes from stable to rising mildly in the second, and rises
steadily and sharply in the third. Our hypothetical experimenter planned his
The GDP: The results of the third episode of this natural experiment are now
Fig. 2 shows how GDP in nominal terms (dollars or yen in current prices)
behaved during the boom and post boom periods. I use nominal GDP rather than
real GDP because M2 is also a nominal magnitude. How changes in nominal GDP are
divided between prices and output is an important question but one that is not
directly relevant to this experiment...
As in Fig. 1, there is a striking contrast between the boom and the post-boom
periods: roughly similar growth during the booms, widely variable growth during
the post-boom. Both before and after the cycle peak, nominal GDP growth
paralleled monetary growth. During the boom, money and nominal GDP grew most
rapidly in Japan, most slowly in the first U.S. episode, and at an intermediate
rate in the second U.S. episode...
After the cycle peak, money fell sharply in the first episode and so did
nominal GDP; money growth stagnated in the second episode and so did GDP; money
grew at a rapid rate in the third episode and, after a brief lag (corresponding
to the mild 2001 recession) so did GDP. ...
The Stock Market: The peak of the stock market, as measured by S&P's index,
coincided with the cycle peak in the first episode, both occurring in the third
quarter of 1929... However, that was not the case in the later episodes. ... Accordingly, Fig. 3 plots the data to
align the series at the stock market peak.
The near identity of the three stock market series during the boom is truly
remarkable. ... Of more interest for our purpose is what happened after the
peak. For a year after, the three stock-price series fell in tandem, responding
to the inner dynamics of a collapsing bubble. Then, the differences in monetary
policy began to have an effect. Beginning in late 1930, the S&P index started
falling away from the others under the influence of a collapsing money stock.
For another year and a half, the other two indexes move in tandem. Then the much
more expansive policy of the Fed in the '90s than of the Bank of Japan in the
'80s takes effect and pulls the S&P 500 away from the Nikkei, which stabilizes
in response to the passive monetary policy of the Bank of Japan...
The results of this natural experiment are clear, at least for major ups and
downs: What happens to the quantity of money has a determinative effect on what
happens to national income and to stock prices. The results strongly support
Anna Schwartz's and my 1963 conjecture about the role of monetary policy in the
Great Contraction. They also support the view that monetary policy deserves much
credit for the mildness of the recession that followed the collapse of the U.S.
boom in late 2000.
Posted by Mark Thoma on Friday, November 17, 2006 at 12:06 AM in Economics, Macroeconomics, Monetary Policy |
William Poole on what the Fed should do when financial
instability strikes: "In most cases, nothing":
Responding to Financial Crises: What Role for the Fed?, by William Poole, St
Louis Fed President: I am delighted to return to Cato, an organization with
which I feel a natural affinity, especially through Bill Niskanen with whom I
served as a member of the Council of Economic Advisers a quarter century ago.
... The key issue then, as today, is time inconsistency. It seems to make sense
in the middle of a financial crisis for someone to bail out a failing firm or
firms. However, the inconsistency is that, however sensible a bailout seems in
the heat of crisis, bailouts rarely make sense as a standard element of policy.
The reason is simple: Firms, expecting aid if they end up in trouble, hold too
little capital and take too many risks. As every economist understands, a policy
of bailing out failing firms will increase the number of financial crises and
the number of bailouts. Along the way, the policy also encourages inefficient
risk-management decisions by firms. ...
Federal disaster relief policy is exhibit A, but every company, financial or
otherwise, knows that if it gets into trouble it is at least worth a major
effort to attempt to secure a bailout because there is always a significant
probability of success. ...
Now for the topic of the panel. What should the Fed do when financial
In most cases, nothing. The important principle here is support for the
market mechanism rather than support for individual firms. The Fed has,
appropriately, permitted many highly visible firms to fail without any attempt
to provide support, or even any particular comment except to say that it does
not intend to intervene.
Of course, the Fed has intervened from time to time. One important case was
the provision of additional liquidity and moral support to the markets when the
stock market crashed in 1987. The Fed also provided support to the market at the
time of the near failure of Long Term Capital Management in 1998. In both cases
the Fed cut the federal funds rate, which provided evidence to the markets that
the Fed was on the job and prepared to provide extra liquidity as needed. I
realize that the Fed’s presence in the negotiations for additional financial
support for LTCM from other firms is controversial; I would simply emphasize
that the Fed itself did not provide any financial support and, in my opinion,
would not have done so if the effort to encourage support from other firms had
Some observers have viewed the large expansion of hedge funds as a rising
danger to financial stability, requiring additional regulation and Fed readiness
to intervene. I myself believe the dangers of systemic problems from hedge fund
failures are vastly overrated. The hedge fund industry is indeed large but it is
also highly diverse and competitive. Many and perhaps most of the large
positions taken by individual firms have other hedge funds on the opposite side
of the transactions. I trust normal market mechanisms to handle any problems
that might arise. ...
A very interesting case arose with the terrorist attacks on 9/11. Thinking
back to my academic years before coming to St. Louis, I recall no discussion or
journal articles analyzing the possibility that the payments system might crash
because of physical destruction. But that is what nearly happened, because the
Bank of New York, a major clearing bank, was disabled when the twin towers came
down. Moreover, trading closed in the U.S. Treasury and equity markets, and
banks were unable to transfer funds because the Bank of New York was not
functioning. With normal sources of liquidity shut down, many banks faced the
prospect of being unable to meet their obligations. The Fed’s provision of funds
through the discount window and in other ways prevented a cascading of defaults
around the world. No private entity would have been able to provide liquidity on
such a massive scale.
I do not know what a totally unanticipated future systemic shock might be but
am sure that the Fed needs to be ready to respond, and to some extent, invent
the appropriate response on the fly to a currently unimaginable shock. That is
surely what a central bank is for, among other things. At the same time, a great
reluctance to intervene will serve the economy well in the long run.
I can summarize my position very succinctly. The Fed has a responsibility
above all to maintain price stability and general macroeconomic stability to
reduce the likelihood of economic conditions that would be conducive to
financial instability. Included in this responsibility is provision of advice to
Congress on needed legislative action to deal with possible risks. The largest
of these risks on my radar screen arises from the thin capital positions
maintained by government-sponsored enterprises and the ambiguity of whether
Congress would or would not act to bail out a troubled firm. The time to deal
with potential financial instability caused by structural weaknesses of the GSEs
and their regulatory regime is before instability strikes. ...
Although prevention is the most important of the Fed’s responsibilities,
without question the Fed needs to be prepared to provide liquidity support
should markets be in danger of ceasing to function. We know a lot about this
subject and have in place deep contingency arrangements to assure that the Fed
itself will remain operational at all times. I do not see any way that these
functions could be privatized; I believe the markets do have confidence that the
Fed has necessary legal authority and the internal strength to act as necessary.
That said, the Fed’s reluctance to act is also an important element of strength.
Posted by Mark Thoma on Thursday, November 16, 2006 at 06:03 PM in Economics, Fed Speeches, Monetary Policy |
This is very sad news:
Economist Friedman Dies at 94, by Greg Ip, WSJ: Nobel prize winner Milton
Friedman, one of the most influential economists of the last century, died
today. He was 94.
Mr. Friedman died of heart failure after being taken to hospital near his
home in San Francisco, his daughter, Janet Martell, said today. His wife Rose
Friedman, who co-authored many of his books, survives him.
Mr. Friedman's death was also announced at a conference of the libertarian
Cato Institute in Washington by the institute's vice president of academic
affairs, James A. Dorn. The audience of academics and policy makers observed
several moments of silence in observance.
Mr. Friedman was awarded the Nobel prize in 1976. He has long championed the
cause of political and economic freedom and the links between the two. He has
originated, or been associated with, many breakthroughs in economics since the
1950s. He is best known for explaining the role of the money supply in economic
and inflation fluctuations. He also, with this year's Nobel prize winner Edmund
Phelps, developed the theory in the 1960s that policy makers couldn't achieve a
permanent tradeoff between lower unemployment and higher inflation, and that
efforts to do so would simply result in the same unemployment rate and higher
inflation, a view that holds sway at major central banks today, including the
Mr. Friedman also exercised extraordinary influence not just through his
academic work but through his advice to politicians and his many popular books,
such as Capitalism and Freedom in 1962 and Free to Choose, with Rose Friedman,
in 1990, which was made into a television series.
Mr. Friedman had enormous impact on economic policy though he never had a
formal job in a government administration after World War Two. His opposition
helped lead to the end of the draft. He was an adviser to President Ronald
Reagan. He has been closely associated with school vouchers and other
applications of free market principles to policy issues.
This is my small tribute to Milton Friedman. It is based on an earlier
post. This happened many years ago, a few years before I went up for tenure. I had been to a San Francisco Fed
conference and, while there, I saw Friedman present his "Plucking model." A few
months later, I sent him a paper I had done on the topic. Friedman, with all
his fame and all the demands on his time, showed he still had time to help a young
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 surprised
that he took the time to write such a long letter, he surely had
plenty of other things he could have done with his time. But receiving the
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.
Here's a post explaining his
Romance of Economics.
Also, from last month:
The End of the Hong Kong Experiment.
Update: The Financial Times looks back (free) at his major accomplishments.
Posted by Mark Thoma on Thursday, November 16, 2006 at 10:20 AM in Economics |
Hal Varian says those of you who live in high density areas don't pay nearly
enough for your auto insurance:
Insurance: Weighing the Benefits of Driving vs. the Total Costs of Driving, by
Hal R. Varian, Economic Scene, NY Times: ...[G]enerally, the more people on
the road, the more accidents will occur, at least up to the point of total
gridlock. Even adding an obsessively safe driver to the road could increase
total accident costs, since reckless drivers ... would now have one more car to
run into. ...
If the number of accidents increases as the number of cars per mile of road
increases, then adding a new car to the road will increase the expected accident
costs for existing drivers. The new driver has to pay for the expected accident
costs she may incur (via her insurance premium) but not for the increase in
accident costs that her presence creates for other drivers on the road.
Economists say that the new driver imposes an “external cost” on the other
drivers. Since drivers only face their own cost of accidents in their insurance
premiums, they don’t face the full cost of their driving, which should include
the costs they impose on others.
How big is this external cost? This is the question investigated by Aaron S.
Edlin ... at the University of California, Berkeley, and Pinar Karaca-Mandic ...
at the RAND Corporation, in a recent
paper, “The Accident Cost
From Driving,” published in the Journal of Political Economy.
Continue reading "Accidental Externalities" »
Posted by Mark Thoma on Thursday, November 16, 2006 at 02:34 AM in Economics, Market Failure |
Bruce Bartlett explains why so many conservatives were so surprised at the
outcome of the election:
Post-election autopsy, Commentary, Washington Times: ...The Republicans
still seem shell-shocked by the results [of the election] and have no clue why
they lost or what to do about it. One reason for this, I believe, is that many
were genuinely surprised by the depth of their defeat, though it had been
forecast by the polls for months.
This was because there is now a fully developed alternative media where
conservatives can get all their news and never hear an unfriendly voice. For
months, this media -- Rush Limbaugh, Fox News, conservative Web sites -- have
taken the line that Republicans not only should win, not only could win, but in
fact would win. Over and over again, we heard about Karl Rove's secret polls
showing a certain Republican victory, and Fred Barnes told us night after night
on Fox News that the mainstream media's polls were wrong.
In fact, the polls were dead-on accurate. And they told anyone who read them
that blind recitation of the daily White House talking points was a one-way
ticket to oblivion. Yet time and again, all I heard on conservative talk radio
or read on conservative blogs was that the economy is the best it ever was, that
the war in Iraq is being won, that anyone who says otherwise is a liar and so
The one thing I know with certainty about sports and elections is that you
have to be a realist to win. Living in a dream world is an absolute guarantee of
defeat. I believe if Republicans had been forced to confront reality earlier,
they might have been able to turn things around. Their friends in the
conservative media did them no favors by feeding them a false sense of optimism.
Now that Democrats actually have a chance to influence policy, if we are going to call ourselves the reality-based community, we need to avoid making the same mistake. When it's evident that the Democratic leadership "has no clothes," we should say so.
On that note, here's a hope. It would be nice if the mainstream media didn't always go back to the same people every time they need a quote or an interview from a Democrat. I get tired of hearing the same voices again and again, particularity when they don't speak to my concerns as well as I would hope. There are more than two or three Democrats with something to say.
Update: In comments, Bruce Bartlett adds:
I think it is revealing that both Talent and Burns were even or slightly ahead in the polls BEFORE Bush came to campaign for them in the final days--uninvited, by the way. Basically, his campaigning for them is what cost them their elections and gave the Senate to the Democrats. Yet there are still people out there who think Rove is a genius. I think he is the Bob Shrum of the Republican Party--a genius at turning victory into defeat.
Posted by Mark Thoma on Wednesday, November 15, 2006 at 04:32 PM in Economics, Politics, Press |
Getting ready for class tomorrow and was reminded of this graph from Mishkin's
The graph shows two things. First, it shows the long lag between changes in the
money supply and changes in the inflation rate. There is a close
association between inflation and the growth rate in M1 two years earlier. When
the supply shocks of the 1970s are accounted for, the association is even closer.
Second, the association breaks down around 1980, most likely due to the onset of rapid financial
innovation around that time (e.g., see the
by Chairman Bernanke on monetary aggregates and monetary policy). This break
down in the relationship is also evident in other measures of the money supply
such as M2, particularly after the early 1990s.
Whether the break down is transitory or permanent is an open question and part of the recent debate between Bernanke and Trichet. Some believe the change in the relationship between money and inflation is because rapid financial innovation has made the money supply difficult to measure. They argue the link between measurements of inflation and money growth will stabilize once again when financial innovation levels off. Others argue the measurement difficulties pose more permanent difficulties.
But whether the break down persists or not, for now it is evident and, along with the
corresponding theoretical support for interest rate rules, it helps to explain why
the Fed has turned to interest rate targeting and why it pays little attention
to (such imperfect) measures of the money supply.
Posted by Mark Thoma on Wednesday, November 15, 2006 at 04:23 PM in Economics, Inflation, Monetary Policy |
Charles Engel says there has
been progress on exchange rate models since Meese and Rogoff's famous finding
that the models are no better than a random walk at predicting the out-of-sample
evolution of exchange rates:
by Charles Engel, NBER Reporter, Fall 2006: Recent research that my co-authors and I have undertaken, as well as related
research by other NBER researchers, suggests that theoretical models of foreign
exchange rates are "not as bad as you think." ...
Should Exchange Rate Models Out-predict the Random Walk Model? For many years, the standard criterion for judging exchange rate models has
been, do they beat the random-walk model for forecasting changes in exchange
rates? This criterion was popularized by the seminal work of Meese and Rogoff.
They found that the empirical exchange rate models of the 1970s that seemed to
fit very well in-sample tended to have a very poor out-of-sample fit. ...[S]ubsequent work has evaluated exchange rate models by the criterion of whether
they produce forecasts with a lower mean-squared error than the simple random
walk forecast of no change. Mark's (1995) paper was important in reviving
interest in empirical exchange rate models. He found that the models were
helpful in predicting exchange rates at long horizons. Subsequent work has cast
doubt on whether exchange rates can be forecast at long horizons, so there is a
weak consensus that the models are not very helpful in forecasting...
West and I
question the standard criterion for judging exchange rate models.
Continue reading "Exchange Rate Models "Not as Bad as You Think"" »
Posted by Mark Thoma on Wednesday, November 15, 2006 at 01:50 PM in Academic Papers, Economics, International Finance, International Trade |
William Easterly responds to Jeff Sachs
Von Hayek was wrong. In strong and vibrant democracies, a generous
social-welfare state is not a road to serfdom but rather to fairness, economic
equality and international competitiveness.
Here's Easterly's response which makes many of the points made by Tim Duy in
defense of Hayek:
Science, by William Easterly, Commentary, WSJ: Scientific American, in its
November 2006 issue, reaches a "scientific judgment" that the great Nobel
Prize-winning economist Friedrich Hayek "was wrong" about free markets and
prosperity in his classic, "The Road to Serfdom." ... Prof. Jeffrey Sachs of
Columbia University ... announces this new scientific breakthrough in a column,
saying "the evidence is now in." To dispel any remaining doubts, Mr. Sachs
clarifies that anyone who disagrees with him "is clouded by vested interests and
by ideology." ...
First, Mr. Sachs disses the great Hayek by repeating the old canard that
Hayek thought any attempt at taxpayer-funded social insurance would put us all
on the "Road to Serfdom." This is an especially strange charge, since Hayek ...
himself calls for some form of taxpayer-funded social insurance against severe
physical deprivation on pages 133-134 of "The Road to Serfdom." ...
Second, if he had studied (Friedrich) Hayek, Mr. Sachs would realize what
"The Road to Serfdom" is really about, and how it is of great relevance to Mr.
Sachs's own current work... Hayek's great book is all about the dangers of
large-scale state economic planning, courageously written in 1944 when Soviet
central planning, technocratic socialism and administrative control of the
wartime economy appealed as a peacetime model to many New Dealers, celebrity
economists and policy wonks of all stripes.
The countries that are now rich subsequently listened enough to Hayek and to
common sense to avoid the road to serfdom. Yet today, Mr. Sachs (in his book
"The End of Poverty") is peddling his own administrative central plan ... to end
world poverty. ... Mr. Sachs is not in favor of central planning as an economic
system, but he offers it as a solution, anyway, to the multifold problems of the
world's poorest people. If you want the best analysis of why the approach of Mr.
Sachs ... will fail to end world poverty this time (as similar efforts failed
over the past six decades), you can find it in Hayek.
Third, Mr. Sachs's attempt to make the case for ... the Scandinavian welfare
state ... is a little shaky. If this is what passes for the scientific method in
Scientific American, American science is in even worse shape than we thought.
Mr. Sachs's empirical analysis purports to show that Nordic welfare states
are outperforming those states that follow the "English-speaking" tradition of
laissez-faire, like the U.K. or the U.S. Poverty rates are indeed lower in the
Nordic countries, although the skeptical reader ... might wonder if the poverty
outcome in, say, the U.S., with its tortured history of a black underclass and
its de facto openness to impoverished but upwardly mobile immigrants, is really
comparable to that of Nordic countries.
Then there is the big picture, where those laissez-faire Anglophones in,
first, the U.K. and, then, the U.S., just happened to have been the leaders of
the ongoing global industrial revolution that abolished far more poverty over
the past two centuries than a few modest Scandinavian redistribution schemes.
... Lastly, let's hear from the Nordics themselves, who have been busily moving
away from the social welfare state back toward laissez-faire. ...
Mr. Sachs is wrong that Hayek was wrong. In his own global antipoverty work,
he is unintentionally demonstrating why more scientists, Hollywood actors and
the rest of us should go back and read "The Road to Serfdom" if we want to know
what will not work to achieve "The End of Poverty."...
Given what has transpired on the WSJ's editorial pages with respect to global
dispute Sachs was involved in, Easterly has not chosen the best platform from which to
talk about what "passes for the scientific method."
My view? Sachs advocates too much intervention, Easterly doesn't advocate
enough. Yes, in the long-run
industrial revolutions are the best solution to poverty. But, famously, "In
the long-run we're all dead."
One last note. Sachs is given credit in a part of the article that was cut
because "he does successfully raise the profile of genuinely tragic problems."
Here's his latest example from Scientific American:
The Challenge of Sustainable Water, by Jeffrey D. Sachs, Scientific American:
While oil shortages grab the headlines, water scarcity is creating at least as
many headaches around the world. The most dramatic conditions are in Asia, where
... China and India, are grappling with deepening and unsolved water challenges.
Continue reading "On the Road Again" »
Posted by Mark Thoma on Tuesday, November 14, 2006 at 11:40 PM in Economics, Policy |
In a comment to a Larry Summer's article
on the "repudiation election" posted at his Forum, Martin Wolf urges economists to add their "mite" to foreign policy discussions:
Martin Wolf: This is a forum for economists. But I think we should agree that foreign
policy is too important to be left to the "experts". As citizens, if not as
economists, we should be willing to add our mite, which is why I have
occasionally dared to write on foreign policy questions. Larry has himself shown
what is possible, by providing an excellent analysis of the mood behind what he
describes as a "repudiation election".
The point I would make is that the way in which the post 9/11 world was
framed by this administration has been a catastrophe. There is no "war on
terror". Military might cannot deliver durable security against an idea. Even in
the case of the cold war, the victory was ultimately won because communism was
seen as unsuccessful in delivering the good life. What we are engaged in is, in
essence, a complex global policing operation, combined with a war of ideas.
We should have the confidence to believe that, given time, our ideas will
triumph, provided we do not betray them ourselves and do enough to give them the
time they need. By rejecting core features of the rule of law, employing
torture, vilifying those who disagree with them, demolishing old alliances,
indulging in overweening confidence in military power and, not least, promising
to remake societies at the point of a gun, the Bush administration did betray
core western values. It also showed grotesque incompetence in execution. How can
we win a war of ideas like that? The US and, I hope, the wider world - western
and non-western - must now start all over again.
I think that among FDR's greatest contributions in the dark days of the 1930s
was his statement that "we have nothing to fear but fear itself". His was the
politics of hope. In his very different way, Ronald Reagan also offered hope.
This administration's politics have, however, been those of fear. It is this
that I find unforgiveable: fear makes us small; fear makes us weak; and fear
makes us detestable. We cannot win this conflict of ideas if all we have to
offer is our fear.
The American people have shown that fear need not paralyse. This is a triumph
of the core democratic idea that a majority of ordinary people will reach the
right conclusion in the end. Let us now all hope for an America that is true to
its better self.
Posted by Mark Thoma on Tuesday, November 14, 2006 at 05:34 PM in Economics, Politics |
St. Louis Fed president William Poole gives his outlook for the federal funds
Fed's Poole Says Interest-Rate Stance 'About Right', by Scott Lanman and Craig
Torres, Bloomberg: Federal Reserve Bank of St. Louis President William Poole
said the central bank's interest-rate stance is ''about right,'' though higher
borrowing costs will be needed should the Fed fail to bring inflation down.
''We need a policy that is disciplined enough to get the job done, but not
more so,'' Poole told reporters after a speech in Wilmington, Delaware. ''If all
the information taken together suggests that we are not making progress, then I
will be among those who will push for a tighter policy.''
Poole said inflation expectations are ''well controlled''... ''The market
does believe we're serious'' about containing inflation,'' Poole said.
He reiterated that he sees the outlook for the fed funds rate as ''roughly
symmetrical,'' meaning the chances of an interest-rate cut and an increase are
about equal. ... ''I can imagine data coming in that would make me want to
tighten policy, and I could imagine data coming in that would make me want to
ease policy,'' Poole said. ''I don't think we are way behind.'' ...
Continue reading "Poole: The Federal Funds Outlook is "Roughly Symmetrical"" »
Posted by Mark Thoma on Tuesday, November 14, 2006 at 05:07 PM in Academic Papers, Economics, Monetary Policy |
CardCarryingMember can't resist one more poke at Senator un-elect Allen:
Allen's Vault, by cornhuskerblogger: We've spent considerable time in recent
days wringing all possible droplets of guilty joy from Sen. George Allen's
troubled re-election campaign and comeuppance.
I'd like to indulge for at least one more post. ... Turns out Allen vaulted
everything he ever wrote, for posterity's sake. He so fancied himself a man of
history that he thought he'd do all future scholars a favor by preserving every
scrap of his writing -- from official correspondence to bar napkins featuring
just a chicken scratch. According to a former Allen staffer I spoke to this
weekend, Allen's habit annoyed everyone in his office.
"He actually has a real vault, like they have in a bank," said the staffer, a
Republican. ([cornhuskerblogger] is a redstate Democrat after all -- giving him an all-access
pass to reasonable people on both sides of the aisle.) "He's ridiculous."
Where is this vault? When do we get a peek at Allen's greatness...? Sounds
like a job for Geraldo Rivera.
Posted by Mark Thoma on Tuesday, November 14, 2006 at 04:51 PM in Politics |
There has been a lot of support lately for the ideas that Arthur Cecil Pigou
(1877-1959) set forth in his book The Economics of Welfare. Pigou held the
chair of political economy at Cambridge (succeeding Alfred Marshall) and was the
leading neoclassical economist of his day. The book is an attempt to provide a
theoretical basis for government intervention to improve social conditions. His
introduction of Pigouvian taxes is part of that effort.
I wonder if the
who have been so enthusiastic about Pigouvian taxes will also endorse other ideas from his book. For example, here's part of his argument for
redistributing income from the rich to the poor. It could, perhaps, serve as the
Pigouvian Redistribution Club's
[I]t is evident that any transference of income from a relatively rich man to
a relatively poor man of similar temperament, since it enables more intense
wants, to be satisfied at the expense of less intense wants, must increase the
aggregate sum of satisfaction. The old "law of diminishing utility" thus leads
securely to the proposition: Any cause which increases the absolute share of
real income in the hands of the poor, provided that it does not lead to a
contraction in the size of the national dividend from any point of view, will,
in general, increase economic welfare.
This conclusion is further fortified by another consideration. Mill wrote:
"Men do not desire to be rich, but to be richer than other men. The avaricious
or covetous man would find little or no satisfaction in the possesion of any
amount of wealth, if he were the poorest amongst all his neighbours or
fellow-countrymen." More elaborately, Signor Rignano writes: "As for the needs
which vanity creates, they can be satisfied equally well by a small as by a
large expenditure of energy. ... In reality a man's desire to appear 'worth'
double what another man is worth, that is to say, to possess goods (jewels,
clothes, horses, parks, luxuries, houses, etc.) twice as valuable as those
possessed by another man, is satisfied just as fully, if the first has ten
things and the second five, as it would be if the first had a hundred and the
Now the part played by comparative, as distinguished from absolute, income is
likely to be small for incomes that only suffice to provide the necesaries and
primary comforts of life, but to be large with large incomes. In other words, a
larger proportion of the satisfaction yielded by the incomes of rich people
comes from their relative, rather than from their absolute, amount. This part of
it will not be destroyed if the incomes of all rich people are diminished
together. The loss of economic welfare suffered by the rich when command over
resources is transferred from them to the poor will, therefore, be substantially
smaller relatively to the gain of economic welfare to the poor than a
consideration of the law of diminishing utility taken by itself suggests.
Posted by Mark Thoma on Tuesday, November 14, 2006 at 01:59 AM in Economics, Income Distribution, Taxes |
Guess where Perot "giant hypocrite sound" Systems is
setting up operations?:
Company Ross Perot Built Is Now Hiring, in Mexico, by Elisabeth Malkin, NY Times:
Remember Ross Perot’s “giant sucking sound”? The Texas billionaire and onetime
presidential candidate railed against the North American Free Trade Agreement in
the early 1990s, arguing that it would create a “giant sucking sound” of good
American jobs pulled to low-wage Mexico.
But things change. Last week, Mr. Perot’s Texas company announced that it was
hiring — in Mexico. The Perot Systems Corporation, which manages information
technology for companies, is setting up a technology center in Guadalajara where
it expects to employ 270 engineers by the middle of next year. ...
Perot Systems, based in Plano, Tex., had sales of $2 billion last year and
employs 20,000 people in more than 20 countries, 6,000 of them in India alone.
Back in 1992 and 1993, Mr. Perot’s anti-Nafta harangues made him highly
unpopular in Mexico... But a dozen years into Nafta, Mexicans are willing to let
bygones be bygones. And so, it seems, is Mr. Perot...
Posted by Mark Thoma on Tuesday, November 14, 2006 at 12:30 AM in Economics, International Trade, Politics |
One of the foundations of modern macroeconomic models is the assumption of
wage and price stickiness. Is this a reasonable assumption? How sticky are
prices on average?:
Sticky situations, Economics Focus, The Economist: ...How often individual
prices move is an important question. Shifts in prices are like the traffic
lights of an economy, signalling to people to buy more of this and less of that,
to spend or to save, or to find new jobs. If the lights change readily,
resources can be redirected smoothly; if they get stuck, so does the economy...
Although of great macroeconomic significance, the evidence on price
stickiness lies in the microeconomic detail of thousands upon thousands of
prices. Until recently, economists have known remarkably little about how often
and by how much prices change, because the information needed is vast and often
secret... Lately, however, several researchers have got their hands on useful
Most of the early work was done in America, and much of it looked at the
prices of only a few things, such as magazines on news-stands or mail-order
goods. It concluded that these prices changed only about once a year. However, a
paper published in 2004 by Mark Bils ... and Peter Klenow ... found that
most prices change more often. Messrs Bils and Klenow used data on 350 goods and
services collected ... for calculating the consumer-price index. They reckoned
that in 1995-97 half of these prices changed at least every four or five months.
research by Emi Nakamura and Jon Steinsson, both graduate students at
Harvard, points out the importance of sales and special promotions in the
frequency of American price changes. Sales are much more common in some markets
than in others, accounting for 87% of price changes for clothes (think of
clearance sales), 67% in furniture (all those half-price sofas) and 58% in
processed food (baked beans are on special offer again), but none in vehicle
fuel or utilities and scarcely any in services (when did your lawyer last offer
you a discount?). After the effects of sales and special offers were stripped
out, the median duration of retail prices lay between eight and 11 months in
1998-2005. Including sales cuts the duration by half, bringing the results
roughly into line with those of Messrs Bils and Klenow. It also matters, but
only a bit, that Ms Nakamura and Mr Steinsson studied a later period, when
inflation was slightly lower: they note that high inflation leads shops to raise
prices more often.
The evidence from the euro area, fruit of a three-year project coordinated by
the European Central Bank and completed this year, suggests that prices there
change less often than in the United States. The European economists found that
retail prices change every four or five quarters. Removing the effects of
cut-price sales, where data were available, made little difference: sales, it
seems, matter much less than in America. ... Price changes in Europe, when they
happened, tended to be big, whether up or down: the average increase was 8% and
the average cut 10%, against inflation of 2% or so. Changes in American prices,
in both directions, are also much larger than the overall inflation rate.
On both sides of the Atlantic the frequency of price changes varies
enormously. Generally speaking, the greater the share of raw materials in a
product, the more often its price moves: petrol prices change, on average, in
five months out of six...; the prices of fresh food are altered far more
frequently than those of processed food. The prices of services are stickier
than those of goods. This may be because services tend to be more labour-intensive
than goods, and because wages are stickier ... than other prices...
Posted by Mark Thoma on Tuesday, November 14, 2006 at 12:27 AM in Economics, Macroeconomics |
In this "season of non-economists opining about what economics is all
about," David Altig comes to the defense, yet again, of economists thinking like economists. Having just
posted a "Military
Production Function" here earlier today, David's defense is timely:
More Things Economists Don't Say, by David Altig, macroblog: From The Weekly
Standard (via Instapundit) comes an article by Harvard law professor William
Stuntz, "explaining" how thinking like an economist is the wrong way to go about
weighing the options in Iraq. I hesitate to wade into these waters... But it
seems to be the season of non-economists opining about what economics is all
about, and I seem to be in the mood to object.
So object I will. But before I do, let me make this ... clear: Nothing I'm
about to say should construed as support, one way or another, for any particular
position on whether the war was a good idea or bad idea, ... or whatever. ... I
am not interested Professor Stuntz's position on the war per se, but rather his
characterization of what it means to think like an economist.
With that disclaimer, we begin:
Continue reading "Economists Thinking Like Economists" »
Posted by Mark Thoma on Monday, November 13, 2006 at 04:20 PM in Economics, Iraq and Afghanistan |
Here's a bit more on the
controversy over using money in monetary policy. For those who are
interested, I've included a few pages from Michael Woodford's book on this topic
at the end (he's mentioned in the article). It's a section in the first chapter called
"General Criticisms of Interest-Rate Rules." It doesn't directly address the Trichet-Bernanke controversy, but it does give the major objections to the use of interest-rate targeting, and it does relate to the issue:
Central bankers need money in monetary policy, by Wolfgang Munchau, Commentary,
Financial Times: If there is one area where Europeans are from Mars and
Americans from Venus, it is monetary policy and the role of monetary aggregates.
Last week, the world’s two most prominent central bankers publicly disagreed.
Jean-Claude Trichet, European Central Bank president, argued in the Financial
Times why monetary analysis would remain an essential part of the ECB’s tool
kit. Ben Bernanke, US Federal Reserve chairman, said a central bank would be
unwise to rely too heavily on money since financial innovation had been causing
disturbances to monetary statistics.
Continue reading "Money and Monetary Policy" »
Posted by Mark Thoma on Monday, November 13, 2006 at 01:05 PM in Economics, Monetary Policy |
Paul Krugman takes a look at the populist wave evident in the recent
election and wonders if the Democratic victory will translate into real reform and a new direction for economic policy:
Blue Populists, by Paul Krugman, Commentary, NY Times: Senator George Allen
of Virginia is understandably shocked and despondent. Just a year ago, a
National Review cover story declared that his “down-home persona” made him
“quite possibly the next president of the United States.” Instead, his political
career seems over.
And it wasn’t just macaca, or even the war, that brought him down. Mr. Allen,
a reliable defender of the interests of the economic elite, found himself facing
an opponent who made a point of talking about ... rising inequality. And the
tobacco-chewing, football-throwing, tax-cutting, Social Security-privatizing
senator was only one of many faux populists defeated by real populists last
Ever since movement conservatives took over, the Republican Party has pushed
for policies that benefit a small minority of wealthy Americans at the expense
of the great majority of voters. To hide this reality, conservatives have relied
on wagging the dog and wedge issues, but they’ve also relied on a brilliant
marketing campaign that portrays Democrats as elitists and Republicans as
representatives of the average American.
This sleight of hand depends on shifting the focus from policy to personal
style: John Kerry speaks French and windsurfs, so pay no attention to his plan
to roll back tax cuts for the wealthy and use the proceeds to make health care
This year, however, the American people wised up. True.., some reporters
still seem to be falling for the conservative spin. “If it walks, talks like a
conservative, can it be a Dem?” asked the headline on a CNN.com story featuring
... Senator-elect Jon Tester of Montana. ...
But as ... The New York Times pointed out..., what actually characterizes the
new wave of Democrats is a “strong streak of economic populism.”
Look at Mr. Tester’s actual policy positions: yes to an increase in the
minimum wage; no to Social Security privatization; we need to “stand up to big
drug companies” and have Medicare negotiate for lower prices; we should “stand
up to big insurance companies and support a health care plan that makes health
care affordable for all Montanans.”
So what, aside from his flattop haircut, makes Mr. Tester a conservative?
O.K., he supports gun rights. But on economic issues he’s clearly left of
center, not just compared with the current Senate, but compared with current
Democratic senators. The same can be said of many other victorious Democrats...
But will this wave be reflected in the actual direction of the Democratic
Not necessarily. Quite a few sitting Democrats have shown themselves nearly
as willing as Republicans to bow to corporate interests. Consider ... last
year’s draconian bankruptcy bill. Mr. Lieberman voted for cloture, cutting off
debate and ensuring the bill’s passage... Thirteen other Democratic senators
also voted for cloture, including Joe Biden, who has just announced his
candidacy for president.
The first big test of the new Democratic populism will come over reform of
the 2003 prescription drug law. Democrats have pledged to repeal the clause ... preventing Medicare from negotiating lower drug prices. But the fine
print of how they do that is crucial: Medicare reform could be a mere symbolic
gesture, or it could be a real reform that eliminates the huge implicit
subsidies the program currently gives drug and insurance companies.
Are the newly invigorated Democrats ready to offer a real change in this
country’s direction? We’ll know in a few months.
Previous (11/10) column:
Paul Krugman: The Great Revulsion
Next (11/24) column: Paul Krugman: When Votes Disappear
Posted by Mark Thoma on Monday, November 13, 2006 at 12:15 AM in Economics, Politics |
With the discussions about what went wrong in Iraq heating up, this Economic
Scene by Alan Kruger from before the war might be of interest. It develops a military production function, V=F(L,M,T,I), where V=victory,
L=leadership, M=morale, T=troop levels, and I=intelligence.
Surprisingly, once these factors are accounted for, technological
advantage makes little difference. For reference,
according to the
"currently [we have] about 144,000 U.S. troops in Iraq, down from a peak of about
160-thousand in January."
It's evident we had the technological advantage. I will let you judge leadership, troop levels, morale, and intelligence:
manpower and leadership are pluses, but battles are hard to predict, by Alan
Kruger, Economic Scene, NY Times, February 2003: Donald H. Rumsfeld, the defense secretary,
and his top generals are vigorously debating the number of troops to deploy in
the event of a second Persian Gulf war. Coalition forces numbered 795,000 in the
1991 war. Mr. Rumsfeld has argued that far fewer American troops -- no more than
100,000 -- are needed to defeat Saddam Hussein's armies this time around because
of the revolution in military technology and Iraq's weakened state, while the
military brass is not so sure, and prefers at least 250,000.
News reports say they have agreed to split the difference and put around
175,000 troops in the region, with 100,000 or more reinforcements available if
What does it take to produce a military victory?
Continue reading "The Military Production Function: V=F(L,M,T,I)" »
Posted by Mark Thoma on Sunday, November 12, 2006 at 03:42 PM in Economics, Iraq and Afghanistan |
I need to read this:
Testing Models of Low-Frequency
Variability, by Ulrich Mueller and Mark W. Watson, NBER WP 12671, November
Abstract We develop a framework to assess how successfully standard times
series models explain low-frequency variability of a data series. The
low-frequency information is extracted by computing a finite number of weighted
averages of the original data, where the weights are low-frequency trigonometric
series. The properties of these weighted averages are then compared to the
asymptotic implications of a number of common time series models. We apply the
framework to twenty U.S. macroeconomic and financial time series using
frequencies lower than the business cycle. ... Conclusions ... Three main
findings stand out. First, despite the narrow focus, very few of the series are
compatible with the I(0) model. ... Most macroeconomic series and relationships
thus exhibit pronounced non-trivial dynamics below business cycle frequencies.
In contrast, the unit root model is often consistent with the observed
low-frequency variability. Second, our theoretical results on the similarity of
the low-frequency implications of alternative models imply that it is
essentially impossible to discriminate between these models based on
low-frequency information using sample sizes typically encountered in empirical
work. ... Third, maybe the most important empirical conclusion is that for many
series there seems to be too much low-frequency variability in the second moment
to provide good fits for any of the models. From an economic perspective, this
underlines the importance of understanding the sources and implications of such
low-frequency volatility changes. From a statistical perspective, this finding
motivates further research into methods that allow for substantial time
variation in second moments. [Open
Optimal Policy Problems, by Pierpaolo Benigno and Michael Woodford , NBER WP
12672, November 2006: Abstract We consider a general class of
nonlinear optimal policy problems involving forward-looking constraints (such as
the Euler equations that are typically present as structural equations in DSGE
models), and show that it is possible, under regularity conditions that are
straightforward to check, to derive a problem with linear constraints and a
quadratic objective that approximates the exact problem. The LQ approximate
problem is computationally simple to solve, even in the case of moderately large
state spaces and flexibly parameterized disturbance processes, and its solution
represents a local linear approximation to the optimal policy for the exact
model in the case that stochastic disturbances are small enough. We derive the
second-order conditions that must be satisfied in order for the LQ problem to
have a solution, and show that these are stronger, in general, than those
required for LQ problems without forward-looking constraints. We also show how
the same linear approximations to the model structural equations and quadratic
approximation to the exact welfare measure can be used to correctly rank
alternative simple policy rules, again in the case of small enough shocks. [Open
I don't expect much if any interest in these papers (though open links are included for the curious), just putting them in the archive for easy access later.
Posted by Mark Thoma on Sunday, November 12, 2006 at 11:12 AM in Academic Papers, Economics |
This is a review of the history leading up to the creation of the Federal Reserve system followed by an idea to overcome the political stalemate preventing reform of health care and pension policy. The idea is to follow the Fed model and put the reform decisions in the hands of politically independent policy experts. Here's the the Fed history and the proposal followed by extensive comments on each:
How last century's money wars may lead to healthcare, pension reform, by H.W.
Brands, Commentary, LA Times: Pity Ben Bernanke. As chairman of the Federal
Reserve, his every utterance (or cough or sneeze) is analyzed for clues as to
the future direction of interest rates. The weight of the American economy is
laid on his shoulders...
But matters could be worse. Trying as Bernanke's job ... might sometimes be,
it is nothing like the task his more distant predecessors faced. The modern Fed
was born nearly a century ago of a grand compromise that terminated one of the
longest-running and most bitter struggles in American political history: the
fight over the money question.
From the 1780s until 1913, the money question roiled American public life —
spawning political parties and candidates, sparking legislative fisticuffs and
convention brawls, prompting boardroom conspiracies and White House scandals. It
fell into two parts. What constituted money? And who controlled it? Was money
gold, silver, paper currency or bank notes? Should the private sector control
the money supply, the way it controlled the supply of wheat, corn and steel? Or
should the public sector, which typically controlled water supplies and police
The money question ... provided the first battleground between Alexander
Hamilton's Federalists and Thomas Jefferson's Republicans, with Hamilton urging
creation of a federally chartered but privately controlled bank to oversee and
manage the American money supply, and Jefferson opposing Hamilton's bank as
unconstitutional and elitist.
Continue reading "Do We Need Independent Fed-Like Committees to Reform Health Care and Retirement Policy?" »
Posted by Mark Thoma on Sunday, November 12, 2006 at 02:43 AM in Economics, Health Care, Monetary Policy |
The last few years have done nothing that I can see to restore people's faith
in government. Instead, if anything, people have become more and more doubtful
about the ability of government to function at even the most basic levels.
The election was a start - it seems to have restored people's faith that the
process still works, that people eventually see through even the most carefully
constructed political cover, and that they are able to speak clearly and
forcefully to politicians through the ballot box. And this is despite concerted
attempts to thwart such political will through gerrymandering and other such
But it is only a start.
Continue reading "Restoring Faith in Government" »
Posted by Mark Thoma on Saturday, November 11, 2006 at 06:21 PM in Economics, Politics |
What happened to the surplus?, by Greg Mankiw: Remember 2001, when the
federal government was projecting huge surpluses, and people were worrying what
we would do when the government debt was completely paid off? Well, it looks
like we solved that problem!*
How did we do it? The table above, from economist J. Edward Carter based on
CBO data, shows the causes of the change from a ten-year surplus of $5.6
trillion to a ten-year deficit of $2.9 trillion -- a swing of $8.5 trillion. The biggest factor was
increased spending, of which increased defense spending was the largest piece.
The second biggest factor was changed economic and technical assumptions (that
is, the forecasters were wrong).
The tax cuts amounted to $1.8 trillion of the $8.5 trillion--about a fifth.
And even that amount is an overestimate, because it most likely relies on static
assumptions. A dynamic analysis that allows for a feedback of lower taxes to
more rapid growth would reduce the share of the budget swing attributed to tax
Reasonable people can disagree about whether the Bush tax cuts were
advisable, but don't let anyone tell you that the tax cuts were the main reason
the surplus of 2001 disappeared.
* Before some commenter flames me: yes, this sentence is tongue-in-cheek.
I'm confused what we are supposed to take away from this. If the message is
that the tax cuts did not do much to contribute to deficit the problem, then I
certainly disagree - 1.8 trillion, assuming that's an accurate figure, is no small bump in
the budget over the 10 year period examined (2002-2011, so part of this is a
forecast and thus subject to questions about the underlying assumptions - these
are not actual numbers - note: see the update below).
The claim is that the 1.8 trillion is only 20% of the total change in
the budget, but the
NRO article Greg refers to denies that the baseline figure used in the
calculation of a 20% share is even relevant:
Clue #1: The $5.6 trillion surplus was a mirage. It never existed. The CBO
based its surplus estimate on the existing tax and spending laws and on an
economic forecast that simply did not stand the test of time.
Clue #2: Even if the CBO’s economic and technical assumptions had been
accurate, and even if President Bush had not championed tax relief, and even if
the country had not been dragged into a global war on terrorism, the projected
surplus never would have materialized.
Why is it being used as a baseline to calculate the impact of tax cuts if, as
the article says:
So, what do the clues reveal about the missing $5.6 trillion surplus? 1) It
never existed. 2) It never would have existed. 3) Policymakers never intended
for it to exist.
So, a non-existent figure is used to make the point that 1.8 trillion is just
a drop in the bucket? Why is the 20% figure relevant - shouldn't it reflect actual instead of projected numbers? What am I missing?
Suppose you take out the part that forecasters missed, the 2.5 trillion from "technical adjustments and revised economic assumptions," from the 8.1 trillion surplus. That leaves 8.5-2.5=6.0 trillion swing in the budget given the assumptions underlying the forecasts through 2011. The tax cuts are then 1.8/6.0 = 30% of the total. That's a pretty good chunk of the swing in the budget. That spending was increased by a bit over twice that amount doesn't reduce its magnitude.
Update: This notice appears with the article:
BELATED FULL DISCLOSURE
It has been pointed out elsewhere
on the web
of our pieces
today was written by someone described as “an economist in
Washington, D.C.” He, in fact, works for the Department of Labor. He signed the
piece with a byline he’s been using for years. Not for the first time, we —
wrongly — assumed the author had left government when we were approached with
unsolicited pieces. We were wrong to assume. His piece now makes note of this
explanation/disclosure/apology. As a practice, we don’t publish pieces from
people who work in government without disclosing it. We were remiss here and
apologize to our readers.
Posted by Mark Thoma on Saturday, November 11, 2006 at 11:52 AM in Budget Deficit, Economics, Politics, Taxes |
I keep reading variations of this type of analysis on the editorial pages:
It reminds me of this [YouTube]:
ARTHUR draws his sword and approaches the BLACK KNIGHT. A furious fight now
starts lasting about fifteen seconds at which point ARTHUR delivers a mighty
steps back triumphantly.
ARTHUR: Now stand aside worthy adversary.
BLACK KNIGHT: (Glancing at his shoulder) 'Tis but a scratch.
ARTHUR: A scratch? Your arm's off.
BLACK KNIGHT: No, it isn't.
ARTHUR: You are indeed brave Sir knight, but the fight is mine. ... You
haven't got any arms left.
BLACK KNIGHT: Course I have.
BLACK KNIGHT: What! Just a flesh wound. (kicks ARTHUR)
ARTHUR Stop that.
BLACK KNIGHT (kicking him) Had enough ...? ... Chicken! [kick] Chickennn!
ARTHUR: What are you going to do...?
BLACK KNIGHT: I'm invincible!
ARTHUR: You're a looney.
BLACK KNIGHT: The Black Knight always triumphs. Have at you!
ARTHUR: takes his last leg off. The BLACK KNIGHT's body lands upright.
BLACK KNIGHT: All right, we'll call it a draw. ...
Posted by Mark Thoma on Saturday, November 11, 2006 at 10:13 AM in Economics, Politics |
The view of the economy from the San Francisco Fed:
Glenn Rudebusch, senior vice president and associate director of research at
the Federal Reserve Bank of San Francisco, states his views on the current
economy and the outlook:
- The initial estimate of real GDP growth during the
third quarter was 1.6 percent at an annual rate—about half the average pace
during the previous two years. Strong gains in consumption and business
investment were partially offset by a drop in homebuilding. Looking ahead, the
economy seems likely to grow at a 2-1/2 to 2-3/4 percent pace in each of the
next few quarters. This projection balances the effects of a cooling in housing
markets with solid growth in the remaining 95 percent of the economy outside of
- Real residential investment has declined almost 10
percent over the past year, which is not as large as the declines posted during
earlier periods when housing booms and busts were exacerbated, in part, by
financial restrictions, such as Regulation Q. Also note that, unlike in past
episodes, the current drop in housing does not coincide with a recession.
Although housing permits and starts are down about 25 percent from the beginning
of this year, there is no clear indication that the housing downturn is ending
or that it is intensifying.
- Despite the housing slowdown, the rest of the economy
remains healthy. Real consumer spending in the third quarter increased 3.1
percent at an annual rate, and auto sales are holding up well.
- On balance, any spillover from the housing slowdown
to the rest of the economy appears to have been offset by four important factors
that are supporting growth. The first of these factors is the solid growth in
employment, with associated increases in labor income. The solid pace of hiring
this year raises questions about whether recent flagging GDP growth reflects a
transitory lull rather than a substantial slowdown. The second factor supporting
growth is the recent drop in energy prices. The third factor is the recent
increases in equity markets, which bolster household wealth. And, finally, as
the fourth factor, borrowing costs—especially conventional fixed mortgage
rates—continue to be relatively low.
- A crucial question facing policymakers is how soon
will core inflation return to a more comfortable level. One reason for cautious
optimism is that inflation expectations appear to remain contained, as various
indicators of these expectations are in the same range that has prevailed over
the past two years. Therefore, this year's surge in price inflation has not
changed the market's view about where inflation will eventually be returned to
by the Fed.
- In contrast, the upside risk to the inflation outlook
from labor market pressures appears to have been growing. As the FOMC noted in
its October 25 statement: "the high level of resource utilization has the
potential to sustain inflation pressures." Since then, the labor market
continues to tighten, and the unemployment rate fell to 4.4 percent in October,
the lowest level since May 2001.
- With labor markets fairly tight, labor costs appear
to have begun to accelerate. The broadest measure of compensation in the nonfarm
business sector increased 6.7 percent over the past year. In contrast, the
employment cost index (ECI), which excludes stock option realizations and a few
other forms of compensation that are included in the broader measure, increased
only 3.3 percent over the past year. (The ECI is also based on a fixed
employment structure, which would not capture any shift in the mix of jobs to
higher compensation occupations.) The true underlying marginal cost pressures
that firms face probably lie somewhere in between these two measures.
- Still, core inflation will likely moderate gradually
over time as labor cost pressures are absorbed by reduced markups of prices over
costs and restrained by a below-trend growth. However, the upside risk to this
inflation projection is an important concern for policymakers.
Posted by Mark Thoma on Saturday, November 11, 2006 at 01:50 AM in Economics, Monetary Policy |
Central bank heads Bernanke and Trichet are battling over the use of monetary
aggregates to guide monetary policy decisions. I posted Trichet's argument for
the use of monetary aggregates
here along with links to many previous posts on this topic (including a
discussion of an academic paper by Bernanke that helped to do away with
aggregates - it's first on the list at the end of the post). Here's a discussion of Bernanke's response
to Trichet from the Financial Times:
Trichet and Bernanke differ on strategy, by Ralph Atkins, Financial Times:
Transatlantic differences over monetary strategy erupted into the open on Friday
as the European Central Bank sought to modernise its policy of relying on money
supply measures as an inflation early-warning system. Jean-Claude Trichet, ECB president, used a Frankfurt conference to stress the
importance of indicators such as M3, the broad money supply measure.
But in contrast, Ben Bernanke, US Federal Reserve chairman, said a heavy
reliance on money supply measures “would seem to be unwise in the US context,”
although money growth data might still offer important signals about future
economic developments. ...
Mr Bernanke pointed to larger methodological problems in the US. “The rapid
pace of financial innovation in the US has been an important reason for the
instability of the relationships between monetary aggregates and other
macroeconomic variables.” Changes in payment technologies and individuals’ behaviour had meant usage of
different kinds of accounts “have at times shifted rapidly and unpredictably”.
The problems Bernanke discusses, rapid financial innovation and rapid
movement of funds between asset classes, led to a breakdown of the relationship
between monetary aggregates and macroeconomic variables in the early 1990s.
Since then, researchers have not been able to find a collection of financial
assets (e.g. M1, M2, and many, many variations including weighted averages of
various asset collections) that exhibits the stable relationship needed to make
the variable useful for predicting the future evolution of macroeconomic
variables and hence useful for policy. Because of that, the Fed has embraced
interest rate targeting - the federal funds rate in particular - a move
also supported by theoretical work since that time (though as Trichet notes,
when substantial financial frictions are present in these models, money retains
a role; thus, there are theoretical bases for looking at aggregates as well as
Also, from the
comments to the
first post on this issue, this is Krzysztof
Rybiński, deputy governor of the National Bank of Poland:
The role of money in monetary policy is an open issue indeed. Benati (2006)
shows that for low frequencies (8-30 years) the correlation between money and
inflation is surprisingly strong. But does it offer any guidance, if central
banks want assess the future inflation risks in 2-3 year horizon. Many papers
show that money affects inflation over the shorter-horizons only on a global
scale. I discuss these issues on my blog www.rybinski.eu (probably first ever
central banker's blog)
Update: From Cassandra in comments:
I listened to the speeches and subsequent Q&A on taped feed and here are my two cents:
Bernanke (TeamFRB) - He always seems rather nervous and lacking the authority, confidence (and probably arrogance) one should have if one is going to assert that money is really not so important in regards to inflation. HUH??!? So interest rates are low because there's a "savings glut," and money doesn't matter to inflation as long villagers as in Timbuktu are using it for whatever. Oh, yea, [whispering now] and that the PBoc & BoJ continue to give us back the ones they've accumlated for us to hold temporarily. Huh??!?! He reminds me of the "Alternative School Headmaster" in my hometown when they first set up idea. You know: Kids responsible for themselves. No attendance taken. No grades. Surprise!! Guess what happen? Hardly anyone came to school, and the kids just sat around and smoked dope all day. OK it was the 60s, but some experiments are best left unrepeated.
Trichet (TeamECB) - Considering the high incidence of intellectual arrogance amongst the typical Grande Ecole French Technocrats (not that it isn't deserved), Mr Trichet was by comparison, profoundly thoughtful, measured, open-minded, yet disciplined, and probably the most able to "wear and consider others' positions" before asserting the superiority of the ECBs approach in theory and practice. Oh yea, in case anyone was wondering, just because Issing retired doesn't mean he's laying down early-morning towels on beach chairs in Grand Canary.
Iwata (TeamBoJ)- Whizzbang!! Wonderful command of the material and thoughtful evaluation of quantitative easing (not that it mattered). Brought some typically nifty Japanese visual aids. Probably the best fun of the lot to go out drinking with. A real shame though that he could not (unsurprisingly) conjure a remotely sensible answer answer the question when posed [paraphrased] "Dude!!...did it ever ever ever cross your mind that ZIRP might.. like.... just have no impact on the demand for money IN Japan, but just might have every Tom Dick & Harry hedge fund manager and Foreign Bank lining OUTSIDE of Japan to up take your magnanimous offer of FREE MONEY? WHAT WERE YOU THINKING ???!??!
Xiaochuan (TeamPBoC) - Nice, deferential, new kid on the block. So new, that he let no opportunity pass to let everyone know that, before his experience with asset prices is limited since before 1991, there was no stock market!! And before 1995, there was no difference between fiscal and monetary policy China. That their historical experience monitoring real estate markets is rather patchy too since real estate markets didn't exist before 1998. Everything is a learning experience. "We have a lot to learn." As for inflation, he said something like "Money growth is probably too high, but we keep watching for inflation, but, hey golly no inflation!! [smiles, scratches head like my Zen teacher used to do when quoting Suzuki about What's at the Center of An Onion]. He went on to hypothesize that probably because there was so much capex and new capacity that overcapacity in many industries has not only kept the lid on inflation, but may actually be causing certain prices to fall!!
One just hopes that Xiaochuan doesn't start talking to Iwata and Bernanke in private and decide that selectively falling prices for certain things (the D-word which must not be named), that in China directly resulted from over-investment that itself resulted from liquidity spillover from ZIRP in Japan + prolonged negative real US rates, now requires some effective rear-guard or preventative action like ZIRP, quantitative easing, more negative real interest rates, or heaven forbid, Ben's Helicopter. I guess what goes around comes around and keeps going and coming around.
Posted by Mark Thoma on Friday, November 10, 2006 at 07:29 PM in Economics, Monetary Policy |
After several days of rain here in Oregon, and with the certainty of many, many
more cold and rainy days yet to come, words like greenhouse and warming start to
sound pretty good. Forget about a Pigovian tax, it's time for a Pigovian subsidy. Joseph Stiglitz brings me back to my senses:
Snowballing costs, by Joseph Stiglitz, Project Syndicate: The British
government recently issued the most comprehensive study to date of the economic
costs and risks of global warming, and of measures that might reduce greenhouse
gas emissions, in the hope of averting some of the direst consequences. Written
under the leadership of Sir Nicholas Stern of the London School of Economics,
... the report makes clear that the question is no longer whether we can afford
to do anything about global warming, but whether we can afford not to.
The report proposes an agenda whose cost would be equivalent to just 1% of
annual consumption, but would save the world risk equivalent costs that are five
times greater. The ... study may actually significantly underestimate the costs:
for instance, climate change may lead to more weather variability, a possible
disappearance or major shift of the Gulf Stream - of particular concern to
Europe - and a flourishing of disease. ...
Still, some suggest that because we are not certain about how bad global
warming will be, we should do little or nothing. To me, uncertainty should make
us act more resolutely today, not less. As one scientist friend puts it: if you
are driving on a mountain road, approaching a cliff, in a car whose brakes may
fail, and a fog bank rolls in, should you drive more or less cautiously? ...
Continue reading "I'll Take a Little of That Global Warming" »
Posted by Mark Thoma on Friday, November 10, 2006 at 06:17 PM in Economics, Environment |
Larry Summers looks to the past for guidance about what to expect from Democrats after
the "repudiation election" that returned them to power:
After repudiation, the way forward, by Lawrence Summers, Commentary, Financial
Times: Tuesday’s mid-term elections ... was a striking but not historically extraordinary
event. Of the 16 mid-term elections since the second world war, Tuesday’s was
the seventh that could be classified as a “repudiation election”... The varied aftermaths of past repudiation, elections show the
difficulty of forecasting what will follow the Democrats’ victory...
[H]istory does not provide an unambiguous verdict on the aftermath of a
repudiation election, [but] it does suggest the political imperatives for the two
parties. For the Republicans, the challenge will be to generate bipartisan
accomplishments while luring Democrats into overreaching and appearing
unreasonable and out of touch. For the Democrats, the challenge will be to
establish credibility as a governing party. Their campaign was about the
incompetence and corruption of the Republicans – it was not a referendum on a
Democratic ideology. Electoral success two years from now will require the
articulation of a broad vision for where the country needs to go and a
comprehensive legislative programme.
What does this suggest about likely policy outcomes?
Continue reading "Summers: Finding a Way to Move Forward" »
Posted by Mark Thoma on Friday, November 10, 2006 at 12:25 PM in Economics, Policy, Politics |
Paul Krugman looks at the end of the "reign of error" as he sees "a vision —
maybe just a hope" realized:
Great Revulsion, by Paul Krugman, Commentary, NY Times [Free Nov. 6-12]: I’m
not feeling giddy as much as greatly relieved. O.K., maybe a little giddy. Give
’em hell, Harry and Nancy!
Here’s what I wrote more than three years ago... “I have a vision — maybe
just a hope — of a great revulsion: a moment in which the American people look
at what is happening, realize how their good will and patriotism have been
abused, and put a stop to this drive to destroy much of what is best in our
At the time, the right was still celebrating the illusion of victory in Iraq,
and the bizarre Bush personality cult was still in full flower. But now the
great revulsion has arrived. Tuesday’s election was a truly stunning victory for
The election wasn’t just the end of the road for Mr. Bush’s reign of error.
It was also the end of the 12-year Republican dominance of Congress. The
Democrats will now hold a majority in the House that is about as big as the
Republicans ever achieved during that era of dominance.
Moreover, the new Democratic majority may well be much more effective than
the majority the party lost in 1994. Thanks to a great regional realignment, ...
Democratic control no longer depends on a bloc of Dixiecrats whose ideological
sympathies were often with the other side of the aisle.
Now, I don’t expect or want a permanent Democratic lock on power. But I do
hope and believe that this election marks the beginning of the end for the
conservative movement that has taken over the Republican Party. In saying that,
I’m not calling for or predicting the end of conservatism... [A] diversity of
views is part of what makes democracy vital.
But we may be seeing the downfall of movement conservatism — the potent
alliance of wealthy individuals, corporate interests and the religious right
that took shape in the 1960s and 1970s. This alliance may once have had
something to do with ideas, but it has become mainly a corrupt political
machine, and America will be a better place if that machine breaks down.
Why do I want to see movement conservatism crushed? Partly because the
movement is fundamentally undemocratic; its leaders don’t accept the legitimacy
of opposition... And the determination ... to hold on to power at any cost has
poisoned our political culture. Just think about the campaign that just ended,
with its coded racism, deceptive robo-calls, personal smears, homeless men bused
in to hand out deceptive fliers, and more. Not to mention the constant
implication that anyone who questions the Bush administration or its policies is
very nearly a traitor.
When movement conservatism took it over, the Republican Party ceased to be
the party of Dwight Eisenhower and became the party of Karl Rove. The good news
is that Karl Rove and the political tendency he represents may both have just
Two years ago, people were talking about permanent right-wing dominance of
American politics. But since then the American people have gotten a clearer
sense of what rule by movement conservatives means. They’ve seen the movement
take us into an unnecessary war, and botch every aspect of that war. They’ve
seen a great American city left to drown; they’ve seen corruption reach deep
into our political process; they’ve seen the hypocrisy of those who lecture us
And they just said no.
Previous (11/6) column:
Paul Krugman: Limiting the Damage
Next (11/13) column: Paul Krugman: True Blue Populists
Posted by Mark Thoma on Friday, November 10, 2006 at 12:15 AM in Economics, Politics |
This story is from a reporter who enrolled in an introductory
economics course at the University of Chicago to learn about "left-wing
indoctrination" in college courses as practiced in economics:
What We Learn When We Learn About Economics, by Christopher Hayes, These Times,
November 2006: There’s a case to be made that the single most intellectually
and politically influential neighborhood in the United States is Chicago’s Hyde
Park. Integrated, affluent and quiet, the 1.6 square mile enclave on the city’s
south side is like a tiny company town, where the company happens to be the
august, gothic, eminently serious University of Chicago. Students at the U. of
C. sell T-shirts that read “Where Fun Goes To Die,” and the same could be said
of the neighborhood, which until very recently had a bookstore-to-bar ratio of
But the university is probably best known for the school of economic thought
it has produced. When the Chicago School first emerged in the ’50s, its zealous
support of free markets and critique of government intervention were considered
reactionary and extreme. ...
Neoclassical economics, as the Chicago School of thought is now called, has
become an international elite consensus, one that provides the foundation for
the entire global political economy. In the United States, young members of the
middle and upper-middle class first learn its precepts in the academy. Polls
routinely show that economists and the general public have widely divergent
views on the economy, but among the well-educated that gap is far narrower. A
2001 study ... showed that those with college degrees are more likely to
subscribe to the views of neoclassical economists than the general public...
Conservatives have long critiqued academia for the ways professors use their
position to indoctrinate students with left-wing ideology, but the left has
largely ignored the political impact of the way people learn economics, though
its influence is likely far more profound. So in order to find out just what
students learn when they learn economics, I headed down to Hyde Park, where the
University generously let me enroll in “Principles of Macroeconomics” for a
Continue reading "Neoclassical Indoctrination" »
Posted by Mark Thoma on Friday, November 10, 2006 at 12:03 AM in Economics, Universities |
Is market exchange
morality in action? The author, "a fellow at
the Gruter Institute and director of Claremont Graduate University's Center for
Neuroeconomics Studies," says it is:
Moral 'bastards' have brain hormone problems, by Paul J. Zak, Project Syndicate:
Recent revelations that many corporate executives have backdated their stock
options ... are the latest examples of bad business behavior. ...[A] cynical
public ... wonder[s] where big business has gone wrong.
The answer may be quite simple: Too many bosses have abandoned basic human
values and embraced the credo famously uttered by Gordon Gekko in the movie
"Wall Street:" "Greed is good." But a growing body of research concludes that
greed is not always good, and that moral values are a necessary element in the
conduct of business. ...
Continue reading "Moral Values and Market Exchange" »
Posted by Mark Thoma on Thursday, November 9, 2006 at 02:56 PM in Economics, Science |
Are 401(k) accounts the best way to save for retirement given the
uncertainties about future government liabilities and tax rates?:
In Retirement Planning, There Is Nothing Certain About Death and Taxes By Austan
Goolsbee, Economic Scene, NY Times: For millions of Americans, November
means open enrollment time — the brief period when employees make their choices
about next year’s benefits, including 401(k) savings.
If you are one of the millions of people trying to decide about 401(k)s, you
have probably heard about the dangers of investing too much into your own
company’s stock and have compared the risks of investing in stocks versus bonds.
You may even have asked co-workers for hints about what to do.
You probably have not given much thought to political tax risk, however, or
perhaps have even heard of it. Yet the purely political question of what will
happen to tax rates over the next 30 years has become one of the most important
factors in thinking about tax-deferred savings accounts...
Future increases in tax rates potentially threaten to significantly reduce
the value of your retirement savings and may even mean that you should not save
in 401(k) accounts at all.
To understand why, think about the traditional advantages of a tax-favored
account like a 401(k). ... You get to put money into the account without paying
income tax on it this year and you do not have to pay taxes as it builds up. You
just pay income tax on the full amount at the very end when you finally pull out
the money in retirement. ...
But the lurking catch is that the tax you will pay on your account will be at
the rate in place when you retire, not the rate now. And that may be very
Budget analysts unanimously agree that the current fiscal situation of the
country is unsustainable. According to the
latest numbers from the Government Accountability Office, the total fiscal
gap facing this country in the future is about $60 trillion, and some budget
experts suggest even that is an underestimate...
While future budget policy seems far removed from your company’s open
enrollment, you had better pay attention. How the government decides,
ultimately, to balance its budget will have a tremendous impact on your
retirement savings. If income tax rates double between now and when you retire,
the value of your 401(k) may be cut in half. ...
Will it be taxes or spending? No one knows. And that is exactly the point for
your 401(k). Political uncertainty is an extremely important type of risk ... If
you think the government will raise income tax rates in the future but will keep
capital gains and dividend tax rates low, you may not want to invest in a 401(k)
at all. Paying your income tax and then investing money in the stock market may
leave you better off in your retirement than investing in the supposedly
tax-advantaged savings accounts.
To be clear, if your employer gives you a generous match for the money you
put into your 401(k), that will tend to outweigh any tax risk and so you may as
well take the free money and invest. Similarly, if you are the kind of person
who invests only in bonds, so you have lots of interest payments, you should
stick with the 401(k). If you need the restrictions of the 401(k) to keep you
from spending your retirement savings, again, just go ahead and ignore the tax
But if you are one of the millions of people who did not answer “yes” to any
of those questions, you should be thinking about the reality of tax risk. One
way to avoid such risk would be to put your retirement savings into a Roth I.R.A.
Unlike the 401(k), you pay the income taxes on the money when you put it into
the Roth rather than when you take it out... The problem is that if your family
income is more than $160,000 a year, you are not eligible. And even if you are
eligible, you cannot put more than about $5,000 a year into a Roth account. ...
So what’s a hard-working American to do? You really do not have the
information you need. You will have to guess...
Markets should incorporate expected future tax liabilities into the price of
the asset along with a risk premium to compensate for any uncertainties about
future tax rates. Perhaps markets aren't pricing the risk correctly, there are
some who make that argument, but so far financial markets in their collective wisdom
appear surprisingly unconcerned about the impact of future government
Posted by Mark Thoma on Thursday, November 9, 2006 at 02:16 AM in Budget Deficit, Economics, Policy, Taxes |
Robert Reich says you shouldn't expect much from Democrats, their power will be limited:
The Democratic Victory: Keep Your Expectations Low, by Robert Reich: Hold
the champagne. Don’t expect anything bold to come out of the new Democratic
First, Dems don’t have enough votes to overcome Bush vetoes. Second, the new
Dems are from marginal districts where they will have to be
moderate-to-conservative in order to be reelected. Third, the Dem leadership has
its eyes on the big prize – the 2008 presidency – and doesn’t want to do
anything to scare off voters.
Barney Frank at the financial services committee will, at most, require more
company disclosure of executive pay... John Dingle at energy and commerce is so
concerned about the auto industry he won’t try to increase auto mileage
standards (he has opposed increasing CAFÉ in the past). George Miller at
education and commerce will at most seek additional money for Pell grants, but
there won’t be additional money unless Dems cut defense discretionary, which
they won’t do.
Dems will demand that Robert Gates, the new defense secretary, keep them in
the loop over Iraq, but Dems won’t push him to set a timetable. Even though Iraq
figured prominently in the election, ... they don’t want to be blamed for chaos
and bloodshed when the 2008 election comes around. So they’ll have lots of
hearings and do very little.
In other words, keep your expectations low.
On the other hand, if Dems take the Senate, there's one huge plus: Bush's
next Supreme Court nominee (should he have the chance to nominate) won't get
Posted by Mark Thoma on Thursday, November 9, 2006 at 02:11 AM in Economics, Policy, Politics |
Jean-Claude Trichet, president of the European Central Bank, argues that
money should play a role in monetary policy:
Money’s vital role in monetary policy, by Jean-Claude Trichet, Commentary,
Financial Times: ...Over the next two days, the European Central Bank will
host a conference to discuss the role of money in monetary policymaking. At
present, the dominant academic view seems to be that monetary aggregates should
have no part in monetary policy decisions. ... I do not share this view. ...
Do not mistake me for a monetary Luddite: I have immense appreciation for the
intellectual elegance and sophistication of modern monetary policy models that
leave no room for money. In many respects, I fully agree with their implications
regarding the benefits of price stability, the crucial importance of central
bank credibility, the advantages of pursuing a clear and predictable policy and
the centrality of private inflation expectations. ... These ... considerations
have ... strongly influenced the design of the ECB’s policy framework. Yet, I
cannot dispel my doubts that a model of monetary policy that includes no role
for money is incomplete in some important respects.
Academic research is starting to address some of these shortcomings. By
introducing financial markets, informational asymmetries and transaction costs
into the benchmark model, money and credit developments are given a role in
determining macroeconomic outcomes. Moreover, empirical literature has emerged
suggesting that monetary developments may be associated with asset price
More fundamentally, the European experience – both before and after the
introduction of the euro – suggests that assigning an important role to money in
monetary policy deliberations and communication has, in practice, helped to
serve precisely those principles that modern monetary policy literature holds
dear. To take just two examples: I am convinced that an important role for money
helps to give the policy discussion an appropriate medium- to longer-term
orientation. ... Equally, in our own recent experience, when the economic
analysis is complex and its conclusions uncertain, cross-checks with the
monetary analysis have proved extremely useful. ...
Monetary policy ... research may offer some lessons for a better
understanding of our own decision-making process. In monetary policy, the fact
that the pooling of experience and diversity of points of view are deemed
essential for reaching the right decision is illustrated by the use of collegial
decision-making in all main central banks. Similarly, a pillar based on monetary
analysis calls for central banks to consider the outcome of their decisions
within a longer-term context; to take due account of past experience and
insights accumulated over time; and not to follow too slavishly the latest
analytical techniques. Monetary analysis was central to the strategies of the
most successful European central banks before the euro ... This legacy cannot be
disregarded lightly. Rather, we should strive to use the new and more
sophisticated techniques that are being developed to enhance and complement the
principles underlying our past successes. ...
This topic has been covered here many times. As I've noted before, my mind is open on this, but even measuring monetary aggregates accurately is problematic so I would not assign them much weight in the decision making process:
Posted by Mark Thoma on Thursday, November 9, 2006 at 02:10 AM in Economics, Monetary Policy |
I think this is a useful distinction:
poll victory for economic nationalism, by Jacob Weisberg, Commentary, Financial
Times: The bums, or at least many of them, have been thrown out. So the
political conversation turns to the question of what the Democrats will do
now... While it may be too soon to answer that question, we have seen enough to
be alarmed about one tendency in particular: economic nationalism...
Most of those who reclaimed Republican seats campaigned against free trade,
globalisation and any sort of moderate immigration policy. That these Democrats
won makes it likely that others will take up their reactionary call...
There is an important distinction to be made between economic populism and
economic nationalism. Many of Tuesday’s Democratic victors stressed familiar
populist themes: corporate misbehaviour and tough times faced by working people.
... Raising the minimum wage (which Republicans foolishly failed to do before
the election) is a classic populist position. Opposing Bush tax cuts for the
wealthy is another. But in places where Democrats made their most impressive
inroads ..., one heard a distinctly different message of economic nationalism.
Nationalism begins from the same premise that working people are not doing so
well. But instead of blaming the rich at home, it focuses its energy on the poor
abroad. The leading economic nationalist today is probably Lou Dobbs, who
natters on against free trade, outsourcing, globalisation and immigration...
The most prominent nationalist candidate this year was Sherrod Brown, who
unseated incumbent Senator Mike DeWine in Ohio, a state that has lost 200,000
manufacturing jobs since George W. Bush became president. Mr Brown is the author
of a book called Myths of Free Trade: Why American Trade Policy Has Failed. Here
is a snippet from one of his television advertisements: “Sherrod Brown stood up
to the president of his own party to protect American jobs, fighting against the
Mexico and China trade deals that sent countless jobs oversees.” For some
reason, economic nationalists never seem to complain about job-killing Dutch or
Irish competition. The targets of their anger are consistently China and Mexico,
with occasional whacks at Dubai, Oman, Peru and Vietnam.
One heard similar themes in the other pivotal Senate races. ... A much
harder-edged nationalism defined many of the critical House races, where
Democrats called for a moratorium on trade agreements, for cancelling existing
ones, or, in some cases, for slapping protective trade tariffs on China. These
candidates also lumped illegal immigrants together with terrorists and demanded
a fence along the Mexican border. In Pennsylvania, Democratic challengers
defeated Republican incumbents by accusing them of destroying good jobs by
voting for the Central American Free Trade Agreement and being soft on illegal
immigration. “Fair trade” candidates also won back formerly Republican seats in
Ohio, Indiana, Iowa, North Carolina and Wisconsin.
Economic nationalism is not unique to Democrats – nor is it a new theme for
them. The protectionist wing of the party first emerged in the 1980s when
America’s manufacturing decline was linked to imports. ... But during his 1992
campaign, ... Mr Clinton espoused a free-trade position and embraced
globalisation through his presidency. This set the direction for his party
despite significant resistance in Congress. Mr Clinton’s argument was always
that government should address the negative consequences of open trade through
worker retraining programmes and by ensuring benefits not tied to employers,
like healthcare and portable pensions. But the human capital part of Mr
Clinton’s globalisation agenda never went anywhere, which partially explains the
current backlash. ...
It would be going too far to say that the 2006 election ushers in a new
protectionist consensus. But free trade has definitely left the building.
The populist, economic nationalists versus the populist, economic globalists.
I think Democrats should leave the globalist-nationalist debate aside and focus on areas of agreement first - implementing
smart populist policies - because once that's done, the nationalist arguments
will be less compelling and hopefully will then fall by the wayside. Here's a similar view:
Thus, ... the best road forward [is] to (a) make the Democratic coalition
politically dominant through aggressive populism, and then (b) to argue for
pragmatic reality-based technocratic rather than idealistic fantasy-based
ideological policies within the Democratic coalition.
Posted by Mark Thoma on Wednesday, November 8, 2006 at 01:27 PM in Economics, International Trade, Policy, Politics |
In case you missed this. Fox news:
Rumsfeld Has No
Plans to Step Down, Despite Democrat Gains, Official Says, Fox News: Defense
Secretary Donald H. Rumsfeld, a key target of Iraq war critics, gave no
indication Wednesday that he planned to step down in the wake of Democratic
midterm election gains, his chief spokesman said. He said he did not know
whether Rumsfeld has talked to President Bush about his future in light of the
Apparently that conversation didn't go so well:
officials: Rumsfeld stepping down, CNN: Defense Secretary Donald H. Rumsfeld,
architect of an unpopular war in Iraq, intends to resign after six stormy years
at the Pentagon, Republican officials said Wednesday. Officials said Robert
Gates, former head of the CIA, would replace Rumsfeld.
Bush quote from news conference: "Rumsfeld and I agreed it was a time for a change."
Posted by Mark Thoma on Wednesday, November 8, 2006 at 10:08 AM in Economics, Iraq and Afghanistan, Politics |
Good news. The Democrats have taken the House. The Senate is still to be determined [Update: The AP has called the Senate for the Democrats]:
Money Talks: Michael Radowitz, Newburgh, N.Y.: If the Democrats take over the
house, Bush's misdeeds can be seriously looked into. If they somehow take over
the Senate, Bush could conceivably be impeached for both abuse and neglect of
authority bestowed on him as president. Also throw in failure to uphold the
Constitution on more than one occasion.
Paul Krugman: Bush has an insurance policy against impeachment: Dick
Posted by Mark Thoma on Wednesday, November 8, 2006 at 12:33 AM in Economics, Politics |
There has been a lot of debate about the relationship between inequality and economic growth.
For example, Brad DeLong
The correlation between economic growth--defined as ten-year growth in GDP
per capita--and income inequality that Greg Mankiw asserts exists? I certainly
cannot see it in the data.
This paper, a study of inequality and growth in rural China, comes to a
different conclusion - that higher inequality is associated with slower growth
Inequality and Growth in Rural China: Does Higher Inequality Impede Growth?, by
Dwayne Benjamin, Loren Brandt, and John Giles, SSRN No. 2344 [alternate]:
Conclusions: Is the trajectory of household income growth adversely
affected by the level of inequality in the village in which it lives? ... Using
a rich household-level data set stratified by village, we estimate the empirical
links between the level of inequality near the beginning of reforms (1986) and
the growth of household incomes in the village through 1999.
Whether we use the sample of households that can be tracked all the way
through the panel, or treat the villages as distinct cross-sections, we find
robust evidence that initial inequality is significantly related to subsequent
growth: Inequality “hurts” growth. Because we can estimate the relationship at
the household level, and given a rich set of instruments that can be used to
address measurement error, we are able to rule out a number of explanations. In
particular, we can rule out the possibility that the relationship is an artifact
of aggregation, measurement error, or other mechanical explanations based on
non-linearities linking initial household income to growth. Furthermore, since
we control for own resources in the household-level specification, we cast doubt
on the imperfect credit-market class of explanations. In short, we find robust
evidence that high village inequality exerts a negative “externality” on
household economic growth. ... [V]illages with higher inequality grow
significantly more slowly.
Posted by Mark Thoma on Wednesday, November 8, 2006 at 12:15 AM in Academic Papers, Economics, Income Distribution |