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Wednesday, January 31, 2007

Brad DeLong: What Kinds of Inequality Should We Worry About?

Brad DeLong from Project Syndicate writing about inequality:

What Kinds of Inequality Should We Worry About?, by Brad DeLong: What kinds of inequality and how much we should worry about it depends on the counterfactual:

How much should we worry about inequality--on the global level, on the societal level, on the personal level? Answering that question requires that we first answer another question: "Compared to what?" What is the counterfactual, what is the alternative situation against which we are going to judge the degree of inequality that we see? Florida is a much more materially unequal society than Cuba. But the right way to look at the situation--if Florida and Cuba are our alternatives--is not to say that Florida has too much inequality, but that Cuba has much much too much poverty.

On the global level, it is hard for me to make the argument that inequality as one of the world's major political-economic problems. It is hard for me at least to envision changes in economic policies or in political arrangements over the past fifty years which would have transferred any significant portion of the wealth of today's rich nations of the global North to today's poor nations of the global South. I can easily envision changes that would have impoverished nations now in the rich North: Communist victories in the post-World War II elections in Italy and France would have done the job for those countries. I can easily envision changes that would have enriched nations now in the poorer South: the promotion of Deng Xiaoping to the post of China's paramount leader in 1956 rather than 1976 would certainly have done the job for China. But alternatives that would have made the South richer at the price of reducing the wealth of the North? I find those much harder to imagine, without a wholesale revolution in human psychology

On the personal level, it is also hard for me at least to make the argument that a great deal of political-economic worry should be spent on the problem that some people are richer than others. Some have worked harder; some have applied their intelligence more skillfully; some have been better people; some have been worse people; many more have just been lucky enough to be in the right place at the right time. But are there alternative political-economic arrangements that could make individuals' relative wealth closely correspond to their relative moral or other merit? I don't see what they might be. The addressable problems are those of poverty and social insurance, of safety net, not of inequality.

But on the level of individual societies, on the level of nations, I believe that inequality does loom as a serious political-economic problem. In the United States, the average earnings premium received by those with four-year college degrees over those with no college has gone from 30% to 90% over the past three decades. This is a matter of supply and demand: the skill requirements of the American economy have outstripped the educational system's ability to educate and train, skills acquired through formal education have become more relatively scarce as a factor of production, the education earnings premium has risen, and the income and wealth distribution has pulled apart. Ceci Rouse and Orley Ashenfelter of Princeton University report that they find no signs that those who receive little education do so because education does not pay off for them: if anything, the returns to an extra year of schooling appear greater for those who get little education than for those who get a lot. Odds are that a greater effort to raise the average level of education in America would have both made the country richer and produced a much more even distribution of income and wealth by making educated workers more abundant and less-skilled workers harder to find and thus worth more on the market.

Again in the United States, corporate CEOs and their peers and near-peers make ten times as much today relative to the patterns of a generation ago. They do not do this because a CEO's work effort level and negotiation and management skills are in relative terms ten times as valuable to a corporation today as they were to a corporation of a generation ago. They have risen because of a reduction in the ability of other corporate stakeholders to constrain the freedom of top managers and high financiers to direct the value added in their direction.

Similar patterns are found in other countries across the globe. Within each country, odds are that the increase in inequality that we have seen in the past generation is predominantly a result of failures of social investment and changes in regulations and expectations, and has not been accompanied by any acceleration in the overall rate of economic growth. For the most part, it looks like these changes in economy and society have not resulted in more wealth but in an upward redistribution of wealth: a successful right-wing class war. The easiest counterfactuals to imagine are those in which greater public investments in education and greater moral, legal, and cultural constraints on the freedom of action of those at the top produce an equal or greater amount of total wealth and income with a lower degree of inequality.

This kind of inequality should be a source of concern. Bill Gates, Paul Allen, Steve Ballmer, and the other hundred-millionaires of Microsoft are brilliant, hard-working, entrepreneurial, and justly wealthy. But only the first 5% of their wealth can have any justification as part of an economic reward system to enourage entrepreneurship and enterprise. And the last 95% of their wealth? It would create much more happiness and opportunity if divided evenly among the citizens of the United States or the world than if they were to consume any portion of it.

Moreover, an unequal society cannot help but be an unjust society. The very first thing that any society's wealthy try to buy with their wealth is a head start for their children. And the wealthier they are, the bigger the head start. Any society that justifies itself on a hope of equality of opportunity cannot help but be undermined by too great a degree of inequality of result.

In the United States, the problem of inequality has two dimensions: insufficient effort to educate, and insufficient control by other stakeholders' of the ability of the top 50,000 or so earners' discretion. In other countries the problem of inequality has these two but also other dimensions as well. In all it is something we should worry about, because we can see in our minds' eyes alternatives that would make for better, healthier, happier, and equally well-off societies.

Update: More at Marginal Revolution

    Posted by on Wednesday, January 31, 2007 at 07:02 PM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (21) 

    "Lucas vs. Lucas: On Inequality and Growth"

    This is from Marshall Jevons at The Bayesian Heresy. It's an IMF paper by Juan-Carlos Cordoba and Genevieve Verdier looking at the impact of inequality on social welfare. Let me start with the abstract:

    Summary: Lucas (2004) asserts that "Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution... The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production." In this paper we evaluate this claim using an extended version of Lucas' (1987) welfare-evaluation framework. Surprisingly, we find that the welfare costs of inequality outweigh the benefits of growth in most cases. These calculations support the case for a research agenda that treats not only growth but also inequality as a priority.

    And here's the conclusion to the paper from Marshall Jevons:

    Lucas vs. Lucas: On Inequality and Growth By Marshall Jevons: The conclusion from the working paper Lucas vs. Lucas: On Inequality and Growth:

    "Children who are otherwise identical will start their lives with vast differences in resources and opportunities, depending on which country and which family they are born in. How much consumption and economic growth would a newborn child be willing to give up in order to avoid these birth lotteries? Lucas (2004) suggests that this child would give up very little, because even if the child is born poor, economic growth would help him or her overcome poverty.

    Our findings in this paper show that, on the contrary, the child may be willing to give up all growth, in order to avoid birthplace risk, and a large fraction of growth, if not all, in order to avoid family risk. The critical elements for our results are time discounting and risk aversion. Both factors downplay the role of growth for welfare, while risk aversion enhances the benefits of more equal outcomes. A third key factor is the size of the risk involved at birth, which is enormous.

    The contribution of this paper is to quantify the social cost of inequality under the most standard assumptions made in macroeconomic theory. Our results suggest that societies could greatly benefit from reducing inequality. They also suggest the existence of a “big tradeoff” between inequality and efficiency, as described by Okun (1975), and help to explain why societies may not always find it best to adopt growth-enhancing institutions, particularly when inequality is large and those institutions may foster further inequality.

    Societies commonly face major choices between equality on one hand and efficiency and growth on the other. The degree of progressivity of the tax system, for example, reveals a society’s willingness to trade equality for efficiency. Other examples are trade liberalization and labor market reforms, which are often regarded as beneficial for economic efficiency but detrimental to equality. Similarly, the extent of law enforcement, illustrated for example in efforts to crack down on tax evasion or informal markets, is influenced by distributional concerns at the expense of efficiency and growth. Migration policies are also strongly influenced by this tradeoff. Any correct evaluation of the institutional and policy choices made by different societies requires a proper assessment of the welfare implications of these choices, and in particular, a careful weighing of the welfare gains from efficiency and growth against the welfare costs of more inequality. Our results suggest that inequality concerns are of the utmost importance and should be explicitly considered in any aggregate evaluation of institutions.

    Public discussions of the costs of inequality and the value of redistributive policies are often framed in political rather than academic terms and can lead to mistaken impressions of their effects on social welfare.16 We believe that our work provides an important first step in objectively evaluating the costs of inequality in a well-understood welfare framework.

    A necessary caveat in interpreting our results is that we have not fully specified the microfoundations of the technological restrictions for inequality, growth, and consumption levels.

    We postulate a reduced-form technology, and calibrate it using natural experiments rather than cross-country regressions. Some estimates of the inequality-growth tradeoff appear in the empirical literature on inequality and growth, but there is still no consensus on this relationship. Since most countries seem to share the same long-run growth rate, we suspect that the main tradeoff is not between inequality and growth, but between inequality and consumption levels. In future research, we hope to improve our measurement of these technological constraints using panel data for inequality and consumption levels.

    Finally, our exercise suggests that the following is the proper ranking of issues in macroeconomics from the point of view of their potential social welfare impact: cross-country inequality, within-country inequality, economic growth, and business cycles."

      Posted by on Wednesday, January 31, 2007 at 05:06 PM in Academic Papers, Economics, Income Distribution | Permalink  TrackBack (0)  Comments (12) 

      The FOMC Holds Target Rate at 5.25%

      No surprise, the Fed left the target rate at 5.25%. But the accompanying statement is a bit of a departure from the Fed's last few statements issued after FOMC target rate decisions. The statement says:

      Continue reading "The FOMC Holds Target Rate at 5.25%" »

        Posted by on Wednesday, January 31, 2007 at 12:22 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (10) 

        Labor Law Reform

        Can the labor movement be revived by trading labor law reform for repeal of elements of Sarbanes Oxley? I'm doubtful, but the author sees a glimmer of hope:

        Fair Trade: What the left should offer business in order to revive the labor movement, by Thomas Geoghegan, American Prospect: What can the left "trade off" to get labor law reform? Organized labor's down to 7.4 percent of private sector workers. The big split, between the AFL-CIO and Change to Win, failed to bring on a new golden age of organizing. It seems the only hope is a new labor law.

        And labor has a dream bill: the George Miller-authored "Employee Free Choice Act." It has more than a dozen Senate sponsors -- Kennedy, Clinton, Obama, all the party's big guns. It might really work. ... It would let employees get unions just by signing cards -- without having to run what can be a four- to five-year gauntlet of lawsuits, firings, intimidation, and all the bells and whistles of union-busting campaigns.

        How big would it be for the left? How about, it's the last chance to rein in the plutocracy and curb inequality. How about, nothing else but this bill will help out working families -- not more college loans, not more college B.A.'s, nothing but a change in the way we set wages. (In Working Under Different Rules, two Harvard economists showed a correlation between union wage setting and income equality in a study of twenty developed countries.) If it's all true, wouldn't it be worth a lot to get?

        I know, it seems hopeless. In the Senate, Democrats are far short of a "60-vote" majority. ... Even if it passed, Bush would veto any bill.

        So there is no way to cut a deal -- unless business itself wants one. Of course, at first glance that seems even more impossible. What could business ever want so badly in return?  ... [I]t turns out that, by wild good luck, there is now something that every CEO, every CFO, every global high-flyer ... really, really wants. It's to call off Sarbanes Oxley. Not necessarily repeal the whole thing; just the part of it that might throw these guys in jail. ...

        Now, it's true it's also about money. Treasury Secretary Hank Paulsen is worried that with Sarbanes Oxley in place, Wall Street (New York) is losing to its evil twin The City (London). It turns out the Russians and others who are flush with oil money don't want to pay for the audits of the books that Sarbanes Oxley now requires. Even more, they don't want to sign the financial forms that say, under penalty of perjury, that they swear everything is true..., and if they're wrong they agree to go directly to jail. Under Sarbanes Oxley, ... CEOs have to take an oath that all their numbers are honest...

        The law is so onerous that even the Democrats will cut it back, at least to some degree. And while the changes being proposed are moderate and even sensible, they will of course end up much more sweeping when the doors close and they draft the final bill...

        So this bargain would really be a new social contract: we let you do what you did in the 1990s, and we get to do what we did in the 1950s.

        Barney Frank in the House has actually indicated he might be interested in a potential grand bargain along these lines -- so it's not completely crazy. Still, I can hear the chorus on the left: "Oh, but Sarbanes Oxley is a great reform." ... It would be a tragedy to gut Sarbanes Oxley, as I propose. But I'd do it gladly to get a labor movement back.

        There are other objections...

        Sarbanes Oxley does have excesses, and a good argument can be made (even from the left) for getting rid of that oath requirement. But that barely even matters given what this bargain might offer for labor and the left. ...

        Do they really want to go on signing those statements every year under penalty of perjury? I think I'm an honest guy, but I'd hate to swear an oath.

        "But they'll never agree to a swap; they'll just walk away." Maybe they will. But ask Skilling and the rest. There are worse things in life than dealing with a union.

        I've never been a zealous supporter of unions, but I'm not convinced the balance of power in labor markets between workers and firms approximates a competitive outcome, so something is needed to rectify the market power imbalance. The situation is surely different for a single parent struggling to maintain health benefits, support a family, etc. as compared to workers at the top end of the income scale, e.g. CEOs who, at least from what we are told, have unique talents that result in limited supply and very high levels of compensation.

          Posted by on Wednesday, January 31, 2007 at 10:19 AM in Economics, Market Failure, Unemployment | Permalink  TrackBack (0)  Comments (5) 

          David Warsh: Friedman and the Draft

          David Warsh on Milton Friedman and the draft:

          Unintended Consequences , by David Warsh, Economic Principles: ...What’s left to say about Milton Friedman? ... As good as he was at making the libertarian argument, there were some important aspects of economic policy about which he had nothing to say, others about which he was simply mistaken. ...

          [I]t seems clear today that Friedman’s enthusiasm for an all-volunteer armed forces overlooked a serious flaw in the way the proposal has worked in practice.

          It was in the late 1950s that Friedman had first advocated the abolition of the draft... It wasn’t until December 1966, with the Vietnam War heating up, that the proposal to replace the draft with a paid all-volunteer army actually took flight. That was when University of Chicago anthropologist Sol Tax and his colleagues organized a four-day conference in Hyde Park to examine the theory and practice of the Selective Service System...

          The star of the conference turned out to be Walter Oi, a Friedman student and 1961 University of Chicago Ph.D. who had been gradually blinded by a degenerative eye disease. Oi had become a passionate libertarian. In Chicago, he argued that conscription was ethically offensive and politically risky.

          Friedman recalled, “Here was a blind man, enormously impressive for his capacity to prepare and deliver a cogent, closely-argued and fully documented, paper. He conveyed a clear sense of moral outrage on an issue about which he had no conceivable personal ax to grind.” The impact on the conference-goers, in those early days of the anti-war movement, was profound. A straw poll indicated that two-thirds of the participants had favored the draft when the meetings began; two-thirds opposed it when they ended.

          Continue reading "David Warsh: Friedman and the Draft" »

            Posted by on Wednesday, January 31, 2007 at 01:31 AM in Economics, Iraq and Afghanistan | Permalink  TrackBack (0)  Comments (40) 

            The "Davos Dilemma"

            Can the divide between the world's political and economic forces be bridged? Martin Wolf has some possibilities:

            A divided world of economic success and political turmoil, by Martin Wolf, Commentary, Financial Times: The world's economy is in excellent shape, but its politics is disturbing. ..-. The question is whether and how this divergence might end. ...

            One possible outcome might be the exact opposite of conventional wisdom: economic disappointment and political stability. ... Today, the underpricing of risk and the combination of low interest rates with fast growth almost invite economic blunders. Meanwhile, the world's political leaders, aware of the risks of conflict and reliant on their people's prosperity for retaining power, may well continue to muddle through. This surprising outcome is quite possible.

            A second alternative is that the economic and political tracks would continue in their separate directions. The reason for this would be that, far from being distinct, the contrasting economics and politics are two faces of just one globalising world. ...

            The fact that economics is making our world more interdependent and connected, while politics remains national or local, makes the contrast between economics and politics inevitable. ...

            It is plausible, therefore, that political disarray and economic success will continue in tandem, the challenge being to avoid the emergence of too wide a gap between the two. For, as we learned in the first half of the 20th century, a big enough backlash is capable of causing devastation. In a nuclear age, that devastation would be greater still. ...

            A third possibility is that the politics overwhelms the economics, as it did between 1914 and 1945 and in the communist "second world" and much of the so-called "third world" for much longer. An attack on Iran - a much-discussed possibility in Davos - would bring far closer the clash of civilisations... feared by so many... In that case, the economic optimism of today would prove unfounded - possibly destroyed by a world of $150-a-barrel oil in the aftermath of the closing of the straits of Hormuz through which so much of the world's oil flows.

            Yet there is also a far more comforting possibility: the economics overwhelms the politics. One of the stories of our era is the way in which vast countries such as China and India are orienting their politics around the goal of prosperity. This forces them to seek domestic and global stability and accept international openness and mutual dependence. They see no benefit in international conflict. It is surely possible that this view of national priorities will take hold in more of the world, including the Middle East. ...

            In such a world, the issues discussed in Davos - climate change, the Doha round and African development - might be handled successfully. The difficulties of collective action are profound. But ..., the less credible are unilateral approaches to a resolution, the more likely are co-operative ones.

            This year's "Davos dilemma" - the contrast between the world's favourable economics and troublesome politics - is clear enough. But its resolution is not. A range of possible outcomes, from the perverse and catastrophic to the uncomfortable and even benign, is conceivable. The outcome is not inevitable. We can choose. ...

              Posted by on Wednesday, January 31, 2007 at 01:21 AM in Economics, International Trade, Politics | Permalink  TrackBack (1)  Comments (4) 

              Tuesday, January 30, 2007

              FRB Dallas: Does Foreign Direct Investment Help Emerging Economies?

              This Economic Letter from Anil Kumar of the Dallas Fed asks whether FDI helps developing countries grow. With a bit of qualification, the author finds the answer is yes:

              Does Foreign Direct Investment Help Emerging Economies?, by Anil Kumar, Economic Letter, FRB Dallas: The gap between the world’s rich and poor countries largely comes down to the financial and physical assets that create wealth. Developed economies possess more of this capital than developing ones, and what they have usually incorporates more advanced technologies. The implication is clear: A key aspect of economic advancement lies in poorer nations’ capacity to acquire more capital and scale the technological ladder. Emerging economies undertake some capital formation on their own, but in this era of globalization, they increasingly rely on foreign capital.

              Indeed, total capital flows to developing economies have skyrocketed from $104 billion in 1980 to $472 billion in 2005.[1] The foreign capital has the potential to deliver enormous benefits to developing nations. Besides helping bridge the gap between savings and investment in capital-scarce economies, capital often brings with it modern technology and encourages development of more mature financial sectors. Capital flows have proven effective in promoting growth and productivity in countries that have enough skilled workers and infrastructure. Some economists believe capital flows also help discipline governments’ macroeconomic policies (see box titled “Does Financial Globalization Shape Fiscal Policy?”).

              Capital flows come in three primary forms:

              Continue reading "FRB Dallas: Does Foreign Direct Investment Help Emerging Economies?" »

                Posted by on Tuesday, January 30, 2007 at 09:42 PM in Economics, International Finance, International Trade | Permalink  TrackBack (0)  Comments (3) 

                Will the Euro Replace the Dollar?

                Perhaps. The authors of this research "argue that the euro's rise to major international currency status may no longer be as implausible as many believe":

                The Impact of the Euro and Prospects for the Dollar, by Matt Nesvisky, NBER Digest: Will the euro replace the dollar as the leading international currency? With two-thirds of all international reserves still held in U.S. currency, the challenge of the euro appears remote. Indeed, this was the widely held view when the euro was introduced less than a decade ago. But in Optimal Currency Shares in International Reserves: The Impact of the Euro and the Prospects for the Dollar (NBER Working Paper No. 12333), authors Elias Papaioannou, Richard Portes, and Gregorios Siourounis argue that the euro's rise to major international currency status may no longer be as implausible as many believe.

                Continue reading "Will the Euro Replace the Dollar?" »

                  Posted by on Tuesday, January 30, 2007 at 12:33 PM in Academic Papers, Economics, Financial System, International Finance | Permalink  TrackBack (0)  Comments (26) 

                  Hal Varian's Answer to Larry Summers

                  Hal Varian, in response to Larry Summers' column on the steps that must be taken "If America is to maintain its leadership in life sciences," emails:

                  My answer to Larry Summers: What Goes Abroad Usually Comes Back, With Benefits

                  Econ 1 trade theory says: invest in those areas in which you have a comparative advantage. I think that you can make the case that we have a comparative advantage in this area [biotech], but of course, the argument should be made.

                  Here’s the column:

                  What Goes Abroad Usually Comes Back, With Benefits, by Hal Varian, Commentary, NY Times, March 11, 2004: The Jan. 31 issue of The Economist described the consequences of high-tech jobs moving overseas.

                  According to the story, "with the trans-Atlantic shift in R&D goes many high-value jobs, as well as a greater share of the industry's profits." This trend has led to an "increasing concern" in the industry, with some executives speaking out against the outsourcing trend.

                  Old news, you might say. The press is filled with articles about high-tech jobs being outsourced to India.

                  The twist here is that the article is about biotech research jobs being outsourced to the United States from Europe. But the language is eerily familiar: replace "biotech" with "infotech" and switch the roles of Europe and America and this story could pass for yet another Silicon Valley requiem.

                  Articles like this should remind us that trade is a two-way street.

                  The money paid to foreign producers, whether businesses or workers, typically comes back home to buy domestic goods and services, thereby generating domestic employment. That is true whether it is European companies paying American biotech researchers, or American companies paying Indian programmers.

                  Think about it. If Oracle sends $10,000 abroad to pay an Indian programmer, then that money either finds its way back to the United States or it doesn't. If it comes back, it can be used to buy American goods and services, employing American workers. If it doesn't come back then it's even better from the viewpoint of the country: we've sent them paper, while they've sent us valuable goods and services.

                  Yes, these days it's more likely bits than paper, and maybe they are sending us more services than goods. And perhaps the way the money comes back is via a purchase of Treasury bonds or other financial securities.

                  But the same principle applies. If the income from the Treasury bonds is used to buy something produced in the United States, it creates jobs. If the money is never spent in the United States, we've gotten something for nothing.

                  The political problem with trade is simply this: when the dollars flow offshore, it is easy to identify those who are hurt. But when the dollars flow back, it is much more difficult to discern the beneficiaries.

                  Continue reading "Hal Varian's Answer to Larry Summers" »

                    Posted by on Tuesday, January 30, 2007 at 12:49 AM in Economics, International Trade | Permalink  TrackBack (1)  Comments (62) 

                    Coordinated Capitalism

                    From Brad DeLong:

                    Europe's Post-WWII Coordinated Capitalism in Retrospect, by Brad DeLong: The Economist reviews Barry Eichengreen's new book:

                    Economist.com: A new economic history argues that Europe's institutions must adapt if the continent is to thrive in future: Barry Eichengreen (2007), The European Economy Since 1945: Co-ordinated Capitalism and Beyond (Princeton: Princeton University Press: 0691127107):

                    There are, writes Barry Eichengreen, two popular views of the European economy: it is either a “phoenix” or a “basket case”.... You can perhaps reconcile these two extremes, suggests Mr Eichengreen, if you choose your periods carefully. Compare the end of the last century with the middle of it, “and there is no disputing the phoenix view.” More recently, however, Europe has tended to lag behind America. And that, concludes this sympathetic American observer (a professor at the University of California, Berkeley), gives rise to doubts about the old continent's future economic prowess.

                    The key to these two facets of the economy lies in Europe's institutions.... Western Europe's rapid post-war growth, he says, stemmed from more than the free play of market forces: cohesive trade unions and employers' associations, often inherited from pre-war times, and growth-minded governments were needed too. Hence the “co-ordinated capitalism” of his subtitle.... Co-ordinated capitalism worked well in those countries that had it. Britain, with its fragmented unions and employers' groups, was a conspicuous exception, and its attempt to mimic French indicative planning in the 1960s was a conspicuous failure. Co-ordination crossed borders too, in the shape of what eventually became the European Union....

                    Europe's institutions served it less well once it had more or less caught up with America. They were much less good at fostering “intensive growth”—-pushing back the bounds of economic possibility as opposed to merely catching up with them. Even in the 1950s and 1960s, while America put its research and development dollars into aerospace and electronics, Europe went for marginal improvements in chemicals, textiles and machinery—-in Italy, for example, adding numerical controls to existing textile looms....

                    Mr Eichengreen does his best to sound optimistic.... He sees reform efforts such as the Lisbon agenda, intended to make Europe the world's “most competitive” economy by 2010, as an attempt to overcome institutional inertia....

                    [N]o single story will fit such a varied continent. Mr Eichengreen has made a decent job of weaving different national shades into his book, while keeping the whole within reasonable bounds. In particular, he does justice to central and eastern Europe in communist times, helped by vivid examples of planning failures and partial reforms—for example, a quarter of all shoes sold in Hungary in 1951 were officially classed as substandard. And he has much to say about communism's collapse and its aftermath, as well as the reintegration of those countries with the west of the continent.... For both Americans who want to understand Europe's successes and failures, and for Europeans who want to know where their continent was right and where it has gone wrong, Mr Eichengreen has provided an excellent summary.

                      Posted by on Tuesday, January 30, 2007 at 12:33 AM in Economics | Permalink  TrackBack (0)  Comments (9) 

                      Rules about Rules from the Ruler

                      The president makes a rule making it harder to make rules:

                      Bush Directive Increases Sway on Regulation, by Robert pear, NY Times: President Bush has signed a directive that gives the White House much greater control over the rules and policy statements that the government develops to protect public health, safety, the environment, civil rights and privacy.

                      In an executive order..., Mr. Bush said that each agency must have a regulatory policy office run by a political appointee, to supervise the development of rules and documents providing guidance to regulated industries. The White House will thus have a gatekeeper in each agency to analyze the costs and the benefits of new rules and to make sure the agencies carry out the president’s priorities.

                      This strengthens the hand of the White House in shaping rules that have, in the past, often been generated by civil servants and scientific experts. ...

                      The White House said the executive order was not meant to rein in any one agency. But business executives and consumer advocates said the administration was particularly concerned about rules and guidance issued by the Environmental Protection Agency and the Occupational Safety and Health Administration...

                      Typically, agencies issue regulations under authority granted to them in laws enacted by Congress. In many cases, the statute does not say precisely what agencies should do, giving them considerable latitude in interpreting the law and developing regulations.

                      The directive issued by Mr. Bush says that, in deciding whether to issue regulations, federal agencies must identify “the specific market failure” or problem that justifies government intervention.

                      Besides placing political appointees in charge of rule making, Mr. Bush said agencies must give the White House an opportunity to review “any significant guidance documents” before they are issued. ...

                      Peter L. Strauss, a professor at Columbia Law School, said the executive order “achieves a major increase in White House control over domestic government.” “Having lost control of Congress,” Mr. Strauss said, “the president is doing what he can to increase his control of the executive branch.” ...

                        Posted by on Tuesday, January 30, 2007 at 12:15 AM in Economics, Regulation | Permalink  TrackBack (0)  Comments (34) 

                        Monday, January 29, 2007

                        The Price of Gas and Fuel Consumption

                        Paul Krugman saw the "Five Myths?" about gas consumption and conservation and sends along this graph. It's from his favorite textbook. He says:


                        Saw your "five myths" post. The thing is that the big issue isn't how much you drive, but mileage. And there's a strong effect of prices on consumption, mainly through that channel.

                        Oh, you do have to be careful, though: Europe uses a lot more diesel, so you don't want to just look at gasoline.

                        Here's the figure for use in the 2nd edition of the Krugman/Wells text showing that higher fuel prices are associated with lower fuel consumption:


                          Posted by on Monday, January 29, 2007 at 03:53 PM in Economics, Environment, Oil | Permalink  TrackBack (0)  Comments (83) 

                          Is the High Vacancy Rate for Housing Worrisome?

                          There are different views on how to interpret the rising vacancy rate for housing. First, Dean Baker says we should pay attention to recent data:

                          Housing Vacancy Rate Hits New Record, by Dean Baker: This is another one of my preemptive strikes. Perhaps the most under-reported release of economic data is the quarterly data on housing vacancy rates... The Census Bureau just released the data for fourth quarter of 2006. This showed the vacancy rate for owner occupied housing hitting 2.7 percent. This is up 50 percent from the 1.8 percent rate of two years ago.

                          This is big news. The vacancy rate for ownership units has hovered near 1.5 percent for 50 years. It had never previously crossed 2.0 percent. ... In most cases, this means that an owner is paying a mortgage on a home for which they are collecting no rent. Few homeowners can afford to pay a mortgage on a house in which they don't live for very long.

                          This record vacancy rate is likely to mean considerably more downward pressure on house sale prices in the months ahead. It will likely mean downward pressure on rents as well, as some vacant units will eventually be put up for rent. In any case, this release from the Census Bureau is a big deal…

                          However, Felix Salmon at economomitor says "yes, the vacancy rate is going up, but it's going up less than you might expect":

                          Should we be worried by the housing vacancy rate?, by Felix Salmon: Dean Baker is alarmed at the housing vacancy rate ...

                          I'm not at all convinced that "in most cases" vacant housing means owners paying mortgages for which they are collecting no rent. For one thing, the numerator of the housing vacancy rate is the number of housing units "for sale only". If the units are for rent, then they go into the national vacancy rate, which is 9.8%, and which actually fell in the fourth quarter...

                          And for another thing, the owners of the vacant houses aren't particularly likely to be homeowners with mortgages, because a large number of the vacant houses are newly built by developers. ...

                          Let's look at the numbers. Between 4Q05 and 4Q06, when the housing vacancy rate increased from 2.0% to 2.7%, the number of housing units increased by 2,142,000. At the same time, the number of vacant units increased by 1,098,000. And the number of vacant units "for sale only" – which is the number used to calculate the homeowner housing vacancy rate – increased by 534,000. So yes, the vacancy rate is going up, but it's going up less than you might expect, given the huge number of new housing units which came onto the market.

                          Here’s Calculated Risk from December with another possible explanation for the rising vacancy rate:

                          NAR: Concerned Over Foreclosures, Calculated Risk: ...From NAR:

                          The National Association of Realtors said it is concerned over the rising rate of defaults and foreclosures …, and many Realtors believe that some families don't understand the risks of taking out "exotic" mortgages...

                          Foreclosures are not only a disaster for families but also for communities. Problematic loans are often made in concentrated areas, and high foreclosure rates of single-family homes can seriously threaten a neighborhood's stability and a community's well being. "Foreclosures can lead to high vacancy rates, which in turn, can cause all homes in the neighborhood to lose value," said Combs.

                          I don’t know these data very well, so I can’t add much. Anyone?

                            Posted by on Monday, January 29, 2007 at 01:22 PM in Economics, Housing | Permalink  TrackBack (0)  Comments (19) 

                            Paul Krugman: The Sum of All Ears

                            Paul Krugman discusses the president's plans to use ethanol to replace gasoline, something he describes as "a really bad idea":

                            The Sum of All Ears, by Paul Krugman, Corn Cop-Out, Commentary, NY Times: For those hoping for real action on global warming and energy policy, the State of the Union address was a downer. There had been hints and hopes that the speech would be a Nixon-goes-to-China moment, with President Bush turning conservationist. But it ended up being more of a Nixon-bombs-Cambodia moment.

                            Too bad... The only real substance was Mr. Bush’s call for ... ethanol to replace gasoline. Unfortunately, that’s a really bad idea. There is a place for ethanol in the world’s energy future — but that place is in the tropics. Brazil has managed to replace a lot of its gasoline consumption with ethanol. But Brazil’s ethanol comes from sugar cane.

                            In the United States, ethanol comes overwhelmingly from corn, a much less suitable raw material. In fact, ... researchers ... estimate that converting the entire U.S. corn crop — the sum of all our ears — into ethanol would replace only 12 percent of our gasoline consumption.

                            Still, doesn’t every little bit help? Well, this little bit would come at a very high price compared with ... conservation. The Congressional Budget Office estimates that reducing gasoline consumption 10 percent through ... fuel economy standards would cost ... about $3.6 billion a year. Achieving the same result by expanding ethanol production would cost taxpayers at least $10 billion a year...

                            What’s more, ethanol production has hidden costs. ...[T]he Department of Energy ... says that the net energy savings from replacing a gallon of gasoline with ethanol are only ... about a quarter of a gallon, because of the energy used to grow corn, transport it, run ethanol plants, and so on. And these energy inputs come almost entirely from fossil fuels, so it’s not clear ... ethanol does anything to reduce carbon dioxide emissions.

                            So why is ethanol, not conservation, the centerpiece of the administration’s energy policy? Actually, it’s not entirely Mr. Bush’s fault.

                            To be sure, ... Mr. Bush’s people seem less concerned with devising good policy than with finding something, anything, for the president to talk about that doesn’t end with the letter “q.” And the malign influence of Dick “Sign of Personal Virtue” Cheney, who no doubt still sneers at conservation, continues to hang over everything.

                            But even after the Bushies are gone, bad energy policy ideas will have powerful constituencies... Subsidizing ethanol benefits two well-organized groups: corn growers and ethanol producers (especially the corporate giant Archer Daniels Midland). As a result, it’s bad policy with bipartisan support. For example, earlier this month legislation calling for a huge increase in ethanol use was introduced by five senators, of whom four, including ... Barack Obama and Joseph Biden, were Democrats. In a recent town meeting in Iowa, Hillary Clinton managed to mention ethanol twice...

                            Meanwhile, conservation doesn’t have anything like the same natural political mojo. Where’s the organized, powerful constituency for tougher fuel economy standards, a higher gasoline tax, or a cap-and-trade system on carbon dioxide emissions?

                            Can anything be done to promote good energy policy? Public education is a necessary first step, which is why Al Gore deserves all the praise he’s getting. It would also help to have a president who gets scientific advice from scientists, not oil company executives and novelists.

                            But there’s still a huge gap between what obviously should be done and what seems politically possible. And I don’t know how to close that gap.

                            Previous (1/26) column: Paul Krugman: On Being Partisan
                            Next (2/2) column: Paul Krugman: Missing Molly Ivins

                              Posted by on Monday, January 29, 2007 at 12:15 AM in Economics, Environment, Policy | Permalink  TrackBack (0)  Comments (42) 

                              Jeffrey Sachs: Economic Development is the Key to "Winning the Peace"

                              Jeff Sachs explains the steps that must be taken to promote economic development and end conflict in impoverished, war-torn countries:

                              Winning the Peace, by Jeffrey D. Sachs, Commentary, Project Syndicate: Afghanistan’s future hangs in the balance as its weak national government struggles ... in the face of a widening insurgency … and a disappointed populace. ...[V]iolence now also surges in Iraq, Lebanon, Somalia, and ... Sudan’s Darfur region. ... Stability will come only when economic opportunities exist, when ... young men can find jobs and support families, rather than seeking their fortune in violence.

                              We are seeing again and again that a foreign army ... may win a battle, or even a war, but never the peace. Peace is about dignity and hope for the future. Military occupation saps dignity, and grinding poverty and economic disarray sap hope. Peace can be achieved only with a withdrawal of foreign troops, and the arrival of jobs, productive farms and factories, ... health care, and schools. Without these, military victory and occupation quickly turn to ashes. ...

                              The scenario has become painfully familiar. A war ends. An international donors’ conference is called. Pledges of billions of dollars are announced. A smiling new head of state graciously thanks the international community, including the occupying power. Months pass. World Bank teams from Washington start to arrive.

                              But ... Crony businesses from the US and Europe, which are utterly unfamiliar with local conditions, squander time, aid funds, and opportunities. Two or three years pass. The grand pronouncements become a pile of out-of-date World Bank studies. Recriminations fly, the occupying army remains, and a new insurgency spreads.

                              Many factors contribute to this disarray, beginning with the shocking inability of the US, Europe, and the international organizations to understand things from the perspective of poor and displaced people. ... The international agencies ... have ... failed to understand how to start or restart economic development in a low-income setting.

                              It’s important to distinguish four distinct phases of outside help to end a conflict. In the first phase, during the war itself, aid is for humanitarian relief... In the second phase, at the war’s end, aid remains mainly humanitarian relief, but now directed towards displaced people returning home, and to decommissioned soldiers. In the third phase, lasting three to five years, aid supports the first phase of post-war economic development, including restoration of schools, clinics, farms, factories, and ports. In the fourth phase, which can last a generation or more, assistance is directed to long-term investments and the strengthening of institutions such as courts.

                              The international community, and the US in particular, is dreadful at the third stage. ... There is often a lag of years before moving from humanitarian relief to real economic development. By the time such help actually arrives, it is often too late: war has been re-ignited.

                              In fact, it is possible to restart economic development through targeted “quick-impact” initiatives. Since the economies of most impoverished post-conflict countries are based on agriculture, restarting farm output is vital. Impoverished farmers should receive a free package of seeds, fertilizers, and low-cost equipment (such as pumps for irrigation). When such aid is made available quickly, former soldiers will return to their farms...

                              Similar quick-impact measures should be undertaken to control disease. Small rural clinics can be built ... very quickly... Wells and cisterns can be put in place to ensure safe drinking water. These and similar efforts can mean the difference...

                              Quick-impact economic development is exactly what is needed now to help end the horrific violence and suffering in Darfur. ... The same applies in Somalia. But the window of opportunity closes quickly in these and other post-conflict regions. Only by taking quick, meaningful action to fight hunger, poverty, and disease can there be a chance of creating conditions for long-term peace.

                                Posted by on Monday, January 29, 2007 at 12:01 AM in Economics, Iraq and Afghanistan | Permalink  TrackBack (0)  Comments (16) 

                                Sunday, January 28, 2007

                                Larry Summers Issues an SOS

                                As in "Save Our Sciences":

                                America must not surrender its lead in life sciences, by Lawrence Summers, Commentary, Financial Times [free here]: The 20th century was shaped by developments in the physical sciences. ...[S]olid state physics ... allowed mankind to take flight and split the atom. Advances in … physics also led to the development of the transistor, the semiconductor and ultimately to the information technology explosion that transformed economic life. The 20th century was an American century in no small part because of American leadership in the application of the physical sciences...

                                [T]he 21st century will be defined by developments in the life sciences. Lifespans will rise sharply as cures are found for chronic diseases and healthcare will come to be a larger share of the economy than manufacturing. Life science approaches will lead to everything from further agricultural revolutions to profound changes in energy technology and the development of new materials. ...

                                It is natural to ask whether the US will lead in the life sciences ... as it did in the physical sciences... It is a profoundly important economic question, but one whose implications go far beyond... At present, ... the US is clearly leading in the life sciences. But past performance is no guarantee of future success. ... If America is to maintain its leadership in life sciences..., important steps must be taken.

                                Most abstract but most important, there needs to be respect for the scientific method and its results. In sharp distinction to … other industrial countries, there is an increasing move away from respecting the scientific method in US schools. Polls demonstrate that up to one-third of high school biology teachers have as much faith in intelligent design as in evolution …[and] that as many as 70 per cent of the American people agree with them. Matters are not helped when the president advocates the teaching of intelligent design alongside evolution as a “different school of thought”.

                                Second, funding has to be a priority. During the past three years, when there has been more possible in the life sciences than there has ever been, when we are on the cusp of achieving important breakthroughs in everything from stem cells to the treatment of cancer, government funding for science research has been cut in real terms. This has been particularly hard on young researchers...

                                Funding, however, is ... also a matter of … compensation levels… In today’s economy a … graduate of a leading business school earns a substantially higher salary than a ... graduating ... PhD in biology. Several years after graduation the differences are even more pronounced. It should not be a surprise that ... more of our talented young people are not headed towards careers in … the life sciences.

                                Third, we need to control the role of politics in allocating science dollars, which are currently tossed around like so many political footballs. The fact that diseases that afflict the relatives of key congressional appropriators receive a disproportionate share of research dollars is not a step towards scientific progress. And it is not a step towards a healthier 21st century to allow the views of a vocal minority in effect to cut off funding for embryonic stem cell research – which is likely to lead to revolutions in the treatment of Parkinson’s disease, diabetes and cancer within the next generation.

                                Finally, we need to support clusters of extraordinary performance. If competition is individualistic, the US is going to have a very difficult time because salary levels … are going to be much lower in other parts of the world. Rather than focus on each individual …, the US needs to focus on fostering clusters of innovation – such as Silicon Valley in information technology, Boston in the life sciences, New York in finance – where each talented individual derives his or her strength from all that is around. Competing with that on price is much more difficult.

                                These are not issues that can be addressed in a year or even a presidential term. Nor are they issues that will have a large predictable impact over a period of several years. But over the long run, few issues are as important...

                                Update: In comments, dale says:

                                Save US superiority in the life sciences. Save US superiority in financial services. Why didn't we act to save US superiority in manufacturing? Why aren't ordinary Americans deserving of such centralized industrial planning projects?

                                Why would foreign dominance in the more intellectual and ethereal pursuits be worse for the US than the Chinese ascendancy in manufacturing (for example)? We are told by some economists that outsourcing and other aspects of economic globalization are good for Americans. But Summers and others now say we must save certain industries.

                                I suspect class bias is in play.

                                Is dale right, or is there some fundamental difference in the two industries that justifies a different level of government response (e.g. a market failure in research that is not present in manufacturing)?

                                  Posted by on Sunday, January 28, 2007 at 02:10 PM in Economics, Science | Permalink  TrackBack (0)  Comments (51) 

                                  Five Myths?

                                  The authors say these are myths:

                                  5 Myths About Suburbia and Our Car-Happy Culture, by Ted Balaker and Sam Staley, Commentary, Washington Post: They don't rate up there with cancer and al-Qaeda … but suburban sprawl and automobiles are rapidly acquiring a reputation as scourges of modern American society. Sprawl, goes the typical indictment, devours open space, exacerbates global warming and causes pollution, social alienation and even obesity. And cars are the evil co-conspirator -- the driving force, so to speak, behind sprawl. Yet the anti-suburbs culture has also fostered many myths about sprawl and driving…:

                                  1. Americans are addicted to driving.

                                  ...Some claim that Europeans have developed an enlightened alternative. ... Europeans may enjoy top-notch transit and endure gasoline that costs $5 per gallon, but in fact they don't drive much less than we do. In the United States, automobiles account for about 88 percent of travel. In Europe, the figure is about 78 percent. And Europeans are gaining on us.

                                  The key factor that affects driving habits isn't population density, public transit availability, gasoline taxes or even different attitudes. It's wealth. Europe and the United States are relatively wealthy, but American incomes are 15 to 40 percent higher than those in Western Europe. And as nations such as China and India become wealthier, the portion of their populations that drive cars will grow.

                                  2. Public transit can reduce traffic congestion.

                                  …Even though spending on public transportation has ballooned to more than seven times its 1960s levels, the percentage of people who use it to get to work fell 63 percent from 1960 to 2000 and now stands at just under 5 percent nationwide. Transit is also decreasing in Europe, down to 16 percent in 2000. ...

                                  We have to be realistic about what transit can accomplish. Suppose we could not only reverse transit's long slide but also triple the size of the nation's transit system and fill it with riders. Transportation guru Anthony Downs of the Brookings Institution notes that this enormous feat would be "extremely costly" and, even if it could be done, would not "notably reduce" rush-hour congestion, primarily because transit would continue to account for only a small percentage of commuting trips.

                                  But public transit still has an important role. Millions of Americans rely on it as a primary means of transportation. Transit agencies should focus on serving those who need transit the most: the poor and the handicapped...

                                  3. We can cut air pollution only if we stop driving.

                                  Polls often show that Americans think that air quality is deteriorating. Yet air is getting much cleaner. … Air quality has been improving for a long time. More stringent regulations and better technology have allowed us to achieve what was previously unthinkable: driving more and getting cleaner. Since 1970, driving -- total vehicle miles traveled -- has increased 155 percent, and yet the EPA reports a dramatic decrease in every major pollutant it measures. Although driving is increasing by 1 to 3 percent each year, average vehicle emissions are dropping about 10 percent annually. Pollution will wane even more as motorists continue to replace older, dirtier cars with newer, cleaner models.

                                  4. We're paving over America.

                                  How much of the United States is developed? Twenty-five percent? Fifty? Seventy-five? How about 5.4 percent? That's the Census Bureau's figure. And even much of that is not exactly crowded: The bureau says that an area is "developed" when it has 30 or more people per square mile. ... One need only take a cross-country flight and look down, however, to realize that our nation is mostly open space. ... The United States is not coming anywhere close to becoming an "Asphalt Nation," to use the title of a book by Jane Holtz Kay.

                                  5. We can't deal with global warming unless we stop driving.

                                  What should be done about global warming? The Kyoto Protocol seeks to get the world to agree to burn less fossil fuel and emit less carbon dioxide, and much of that involves driving less. But even disregarding the treaty's economic costs, Kyoto's environmental impact would be slight. ... Nations such as China and India were excluded from the Kyoto Protocol; yet if we're serious about reversing global warming by driving less, the developing world will have to be included.

                                  The United Nations' Intergovernmental Panel on Climate Change … expects the temperature to rise 1.4 to 5.8 degrees by 2100. What does the IPCC think the effects of global warming may be? Flooding may increase. Infectious diseases may spread. Heat-related illness and death may increase. Yet as the IPCC notes repeatedly, the severity of such outcomes is enormously uncertain.

                                  On the other hand, there's great certainty regarding who would be hurt the most: poor people in developing nations, especially those who lack clean, piped water and are thus vulnerable to waterborne disease. The IPCC points out that … simple measures such as adding screens to windows can help prevent diseases (including malaria, dengue and yellow fever) from entering homes. …

                                  Two ways of dealing with global warming emerge. A more stringent version of Kyoto could be crafted to chase the unprecedented goal of trying to cool the atmosphere of the entire planet. Yet if such efforts resulted in lower economic growth, low-income populations in the United States and developing countries would be less able to protect themselves from the ill effects of extreme heat or other kinds of severe weather.

                                  Alternatively, the focus could be on preventing the negative effects -- the disease and death -- that global warming might bring. Each year malaria kills 1 million to 3 million people, and one-third of the world's population is infected with water- or soil-borne parasitic diseases. It may well be that dealing with global warming by building resilience against its possible effects is more productive -- and more realistic -- than trying to solve the problem by driving our automobiles less.

                                  On (1), how does saying that Europe will soon drive as much as we do, that public transportation doesn't change driving habits much, and that if we get wealthier we'll drive more show that "Americans are addicted to driving" is a myth? Arguing that everyone in the world is addicted to driving doesn't prove Americans are not.

                                  Point (3) seems hard to swallow too. The argument is that pollution levels have been declining even as the number of cars have increased, therefore there's no need to do anything to reduce driving. But that doesn't mean that cutting the number of cars wouldn't cut pollution even more. It's also notable that all the arguments are about particulate levels at the ground level, not about about green house gases.

                                  All in all, a pretty lame defense of doing nothing to try and prevent global warming. Basically the proposal in the last paragraph is to forget about driving less to try and combat global warming. Instead, we should fight malaria and other diseases as a means of "building resilience against its possible effects." Let's fight those diseases with all our might anyway, but really, what a dumb idea for fighting global warming.

                                  Update: Paul Krugman sends along this graph on the price of gas and fuel consumption.

                                    Posted by on Sunday, January 28, 2007 at 03:10 AM in Economics, Environment, Regulation | Permalink  TrackBack (0)  Comments (67) 

                                    Along Came a Spider

                                    Data mining for tax cheats:

                                    Tax Takers Send in the Spiders, by Quinn Norton, Wired: Websites around the world are getting a new computerized visitor among the Googlebots and Yahoo web spiders: The taxman. A five-nation tax enforcement cartel has been quietly cracking down on suspected internet tax cheats, using a sophisticated web crawling program to monitor transactions on auction sites, and track operators of online shops...

                                    The "Xenon" program ... was started in The Netherlands in 2004 by the Dutch equivalent of the IRS, Belastingdienst. It has since been expanded and enhanced by … Austria, Denmark, Britain and Canada, with the assistance of Amsterdam-based data mining firm Sentient Machine Research. ...

                                    Xenon, explained Marten den Uyl of Sentient, is in some ways the opposite of something like Google's web crawler, which traverses a tree of links and grabs a copy of everything it sees. Xenon is smart about link selection and context, and uses a "slow search paradigm," he said.

                                    Whereas a spider like the Googlebot might hit thousands of websites in a second, "With Xenon it may take minutes, hours or even days to do a slow search." The slow search prevents the crawler from creating excessive traffic on a website, or drawing attention in the sites' server logs. ...

                                    The spider can also be configured and trained to look at particular economic niches -- a useful feature for compiling lists of business in industries that traditionally have high rates of non-filing. ...

                                    Once the web pages are screen-scraped, Xenon's Identity Information Extraction Module interfaces with national databases containing information like street and city names. It uses that data to automatically identify mailing addresses and other identity information…, which it puts into a database that can be matched in bulk with national tax records.

                                    As illuminating as Xenon is for the tax man, the data-mining effort poses dangers to citizen privacy, said Par Strom, a noted privacy advocate... "Of course it's not illegal," said Strom. "I don't feel quite comfortable having a tax office sending out those kind of spiders."

                                    One issue has to do with how the information Xenon captures is protected. ... [T]he Swedish government ... is currently keeping a copy of everything it spiders. That means that someone's long-expired actions have the potential to come back and haunt them. "We can scan and store all actions for every e-marketplace in Sweden, it's about 55,000 per day," said Hardyson. ...

                                    In the United States, the IRS is not a part of the Xenon project, but would neither confirm nor deny that it uses spidering software in its investigations.

                                    Strom said now that the cat is out of the bag, there's no way to get governments or corporations to forgo technologies like spiders and data mining. "The information is public of course, because it's posted on the internet," Strom says. "It wasn't meant to be used this way ... (this is) using the naivete of people. It's on the limit of what is ethical."

                                      Posted by on Sunday, January 28, 2007 at 12:09 AM in Economics, Technology | Permalink  Comments (10) 

                                      Saturday, January 27, 2007

                                      A Smaller Share of Larger World Markets

                                      Daniel Gross says that as the rest of the world develops we shouldn't be surprised - or alarmed - that the U.S. is losing market share in financial services and other industries. Because it's a natural consequence of global development, there is no need to relax the regulation of financial markets to preserve competitiveness as some are advocating:

                                      The U.S. Is Losing Market Share. So What?, by Daniel Gross, Economic View, NY Times: Last week, Mayor Michael R. Bloomberg and Senator Charles E. Schumer released a report that warned of New York’s decline as a global financial capital. ...[T]he report, by the consulting firm McKinsey & Company, suggested solutions as diverse as easing regulation on publicly held companies and changing visa requirements so investment banks can more easily recruit foreign math whizzes.

                                      But the report, which focused on domestic issues like securities regulation, overlooked a major economic trend. The United States is losing market share in the global economy, and that is not necessarily a bad thing. ...

                                      For much of the 20th century, China, India and Russia did not participate in the global economic system. As they modernize..., they will grow more rapidly than established economies. ...

                                      Economists note that the United States continues to play an anchoring, even dominant, role in global financial services... In this sphere, the United States is losing out more to European capitals than to Shanghai — and for reasons that have less to do with regulation and more to do with geography and geopolitics.

                                      The euro zone has expanded in recent years to include more countries, thus increasing the appeal of the currency. ... Meanwhile, the capital that the United States exports to China, Russia, India and the Persian Gulf is increasingly being used to develop local financial markets. “It’s not entirely surprising that a certain share of financial activity is migrating to foreign geographical locations where savings growth is taking place,” Mr. Setser said.

                                      Add it up, and the United States, while still the world’s largest single economic power, is clearly no longer the sole superpower. ... Ultimately, the decline of economic pre-eminence may be more damaging psychologically than economically. ...

                                      More broadly, the fact that economies that were closed to outside investment a generation ago are now creating systems of market capitalism should be seen as a victory for the United States, not a defeat. “Many of the countries that are doing well are mimicking the best of what America has stood for — globalization and the export of the American capital markets culture,” said Mr. O’Neill at Goldman Sachs. “There’s nothing that New York and U.S. policies can do about it unless they want to roll back globalization.”

                                        Posted by on Saturday, January 27, 2007 at 08:55 PM in Economics, International Finance, International Trade, Regulation | Permalink  TrackBack (1)  Comments (7) 

                                        Kinsley: In Defense of Partisan Bickering

                                        Michael Kinsley defends partisanship:

                                        In Defense of Partisan Bickering, by Michael Kinsley, Time: So we did liberalism for about a half-century, and then we tried conservatism for a while, about three decades in fact ..., but now we're tired of that too. So what's next? ... Americans want something new. But what?

                                        Actually, it's pretty clear what Americans want. They want an end to partisan bickering. They want pragmatic solutions, not ideological posturing. They want leaders who reject politics as usual and put the country's interests ahead of the party's. They want a government that will do the right thing, regardless of whether it is "liberal" or "conservative." They don't like labels. And, oh yes, they are tired of spin. ...

                                        This postpartisan era everybody wants is not going to happen, and the great longing for it is childish. What Americans say they want--or even what they think they want--needs to be taken with a grain of salt. ... Do they want our health-care system fixed? Yes. Do they want Social Security and Medicare on a more solid footing? Absolutely. Will they pay for these things? Not a chance. There are no pragmatic, nonideological solutions to the big question of what the government should do and what it shouldn't. You can have your government programs and pay for them, like a good liberal, or you can have your tax cuts and forgo the programs, like a good conservative. Asking for both is the opposite of pragmatic.

                                        Another name for the much derided "politics as usual" is democracy. Things get disagreeable because people disagree. Ideology is a good thing, not a bad one--and partisanship is at its worst when it is not about ideology. That's when it descends into trivia and slime. Ideology doesn't have to mean mindless intransigence or a refusal to accommodate new evidence or changing circumstances. It is just a framework of basic principles. A framework is more than just a list: all the pieces should fit together.

                                        A politician ought to have an ideology. For that matter, so should a voter. Although ideology is sometimes dismissed as a substitute for thinking, it more likely is evidence that you've thought things through. Why is there a huge farm bill and no bill for struggling autoworkers? Why did we invade Iraq in search of nuclear weapons, but not North Korea? ...

                                        Many or most of the decisions that an elected official must make on your behalf aren't even known when you must decide whether to vote for him or her. An ideology functions like a pledge or a promise, and it allows you, the voter, to judge the politicians seeking your vote in two different ways: their politics and their character. Do you share his or her political principles? And does he or she stick to them as new issues arise? Without some kind of ideology, the politician is asking voters to buy a pig in a poke.

                                        See also: Paul Krugman: On Being Partisan.

                                          Posted by on Saturday, January 27, 2007 at 02:43 PM in Politics | Permalink  TrackBack (0)  Comments (22) 

                                          Friday, January 26, 2007

                                          Asymmetric Loss Functions

                                          This neuroscience research provides evidence that we react to potential losses more strongly than we react to equal sized potential gains. This provides evidence for prospect theory and has implications for how economists model loss functions. Often, for mathematical convenience, loss functions are assumed to be symmetric (usually quadratic), but this research implies that symmetry may not reflect how we actually evaluate potential gains and losses:

                                          How does your brain respond when you think about gambling or taking risks?, EurakAlert: ...In the Jan. 26 issue of the journal Science, UCLA psychologists present the first neuroscience research comparing how our brains evaluate the possibility of gaining versus losing when making risky decisions.

                                          Participants in the study, mostly UCLA students in their 20s, were given $30 and then asked whether they would agree to ... gambles... Would they, for example, agree to a coin toss in which they could win $30 but lose $20? While the 16 participants were considering the possible wagers, they were in a functional magnetic resonance imaging (fMRI) scanner...

                                          On average, participants needed to be offered a 50 percent chance of winning about $19 to risk losing $10, but that amount varied widely among the subjects. ... The researchers could predict people's tolerance to risk by analyzing their brain patterns.

                                          "Looking at how your brain responds to potential gains versus potential losses, we can predict how risk-averse you are going to be in your choices," said study co-author Russell Poldrack, UCLA associate professor of psychology... "Brain activity predicts behavior."

                                          "Individual differences in brain activity correspond very closely to individual differences in participants' actual choices," said co-author Craig Fox... "The people who show much more neural sensitivity to losses relative to gains are the same people who are very reluctant to gamble..."

                                          Thinking about the possibility of winning money turns on some of the same areas of the brain that are activated when people take cocaine, eat chocolate or look at a beautiful face, Poldrack said.

                                          The researchers studied which parts of the brain became more active or less active as the amount of money participants could win or lose increased. Regions that become more active as the amount increases are considered "reward centers" in the brain...

                                          The researchers also found that reward centers in the brain respond not only when we actually receive rewards but also when we make decisions about potential rewards, and that when we make decisions, the reward circuitry in the brain is more sensitive to possible losses than to possible gains. ...

                                          What happens in our brain when we think about potentially losing money? Some of the same areas that get turned on when we think about winning money get turned off when we think about losing money.

                                          A surprising finding is that as the amount of a potential loss increases, the parts of the brain that process fear or anxiety, such as the amygdala or the insula, are not activated.

                                          "What we found instead," Poldrack said, "is you don't turn anything up. You turn down the reward areas of the brain, and you turn them down more strongly for losses than you turn them up for gains. Just as people respond more strongly to a $100 potential loss than a $100 potential gain, the brain responds more strongly to a $100 potential loss versus a $100 potential gain." Fox, a behavioral decision theorist, said the study ... provides, for the first time, neural evidence to support this pattern.

                                          When Fox was an undergraduate at the University of California, Berkeley, his faculty mentor was Daniel Kahneman, who later won the 2002 Nobel Memorial Prize in Economic Sciences. A key principle from Kahneman's seminal prospect theory, which describes how individuals evaluate losses and gains, is loss aversion: When people consider future actions, they are more sensitive to potential losses than to potential gains. Most people are about twice as sensitive to potential losses as to potential gains, which leads to risk aversion.

                                          "In this new study, we found for the first time neurophysiological evidence for prospect theory, the most important behavioral model of decision-making to emerge in the past 50 years, whose components include the asymmetry between how losses and gains are valued," Fox said. ...

                                            Posted by on Friday, January 26, 2007 at 10:57 PM in Economics, Science | Permalink  TrackBack (0)  Comments (18) 

                                            Monetary Policy Inertia

                                            Here's an interesting Economic Letter on monetary policy inertia from Glenn Rudebusch of the San Francisco Fed:

                                            Monetary Policy Inertia and Recent Fed Actions, by Glenn D. Rudebusch, Economic Letter, FRBSF: In the latest episode of monetary tightening in the United States, the Federal Open Market Committee (FOMC), which sets U.S. monetary policy, raised the target level of its key policy interest rate, the federal funds rate, from 1% in June 2004 to 5-1/4% in June 2006. This gradual increase was accomplished via a sequence of 17 consecutive 25-basis-point increases at successive FOMC meetings. This slow, steady two-year adjustment of the policy rate can be given two different interpretations. One of these is that the gradual nature of the policy adjustment reflected a slow internal response by the FOMC, which knew where it was going and how fast it wanted to get there and simply took its time in raising the funds rate to the desired level. The other interpretation is that the final level and the speed of adjustment to that level were not known for sure in advance, so the gradual nature of the policy rate adjustment importantly reflected economic developments and data released during the tightening. Based on the research summarized in Rudebusch (2006), this Economic Letter describes these two interpretations and assesses their relative importance in accounting for recent monetary policy actions.

                                            Continue reading "Monetary Policy Inertia" »

                                              Posted by on Friday, January 26, 2007 at 01:56 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (2) 

                                              Does Getting Old Cost Society Too Much?

                                              Paul Krugman emails, in reference to this post at Brad DeLong's:

                                              Brad, Mark - saw the dismal post on Brad's blog. I wrote about that way back in 96!

                                              Here's what he wrote:

                                              Does Getting Old Cost Society Too Much?, by Paul Krugman, Commentary, NY Times: Back in the early 1980's, before most of us had ever heard of the Internet, science-fiction writers like Bruce Sterling invented a genre that came to be known as cyberpunk. Its protagonists were usually outlaw computer hackers, battling sinister multinational corporations for control of cyberspace (a term coined by another sci-fi novelist, William Gibson). But in his 1996 novel, ''Holy Fire,'' Sterling imagines a rather different future: a world ruled by an all-powerful gerontocracy, which appropriates most of the world's wealth to pay for ever more costly life-extension techniques. And his heroine is, believe it or not, a 94-year-old medical economist.

                                              When the novel first came out, it seemed that Sterling was behind the curve. Public concern over medical costs peaked about four years ago, then dropped off sharply. Not only did the Clinton health care plan crash and burn, but the long-term upward trend in private medical costs also flattened, as corporations shifted many of their employees into cost-conscious H.M.O.'s. Even as debates over how to save Social Security make headlines, few question budget plans by both Congress and the Administration, which assume, while being systematically vague about the details, that the growth of Medicare can be sharply slowed with few ill effects. With remarkable speed, in other words, we have gone from a sense of crisis to a general belief that the problem of health costs will more or less take care of itself.

                                              But in recent months, there has been a flurry of stories with the ominous news that medical costs are on the rise again. Suddenly, our recent complacency about health care costs looks as unjustified as our previous panic. In fact, both the panic and the complacency seem to stem from -- what else? -- a misdiagnosis of the nature of the problem.

                                              Continue reading "Does Getting Old Cost Society Too Much?" »

                                                Posted by on Friday, January 26, 2007 at 12:16 PM in Economics, Health Care, Market Failure | Permalink  TrackBack (0)  Comments (20) 

                                                Market Failure in Everything: The Recycling Edition

                                                A former student suggests this article from Salon on the economics of recycling:

                                                The final word on recycling , by Andrew Leonard, Salon: ...From time to time, a reader will ask me: so, recycling, good or bad? I have to hem and haw, and go, well, that's a complicated question. That being the case, economist Tyler Cowen's pointer to a roundup of economist views on recycling in Econ Journal Watch was sure to be followed here.

                                                Though not without some trepidation. Tyler Cowen makes no secret of his libertarian sympathies. He is an economics professor at George Mason university, which is something of a libertarian bastion. The editor of Econ Journal Watch is also a George Mason economics professor and the author of the roundup on recycling recently received a Master's degree from GMU. Econ Journal Watch also bills itself as the "sole project" of something that is called "The Institute of Spontaneous Order Economics"... "Spontaneous order" is the kind of phrase libertarian hero Friedrich Hayek was fond of flinging about. It expresses a deep antipathy to anything governmentally planned or induced. Like municipal recycling programs.

                                                But even though author Matthew Gunter's own take on recycling is that the free market is best, the roundup is still useful and interesting... There is no consensus. And yet, Gunter observes, "a majority of economists favor a guided-market approach to recycling policy using the appropriate tax or subsidy to correct for market imperfections."

                                                Which seems sensible enough. Poor libertarians, always doomed to be in the minority. That must be what gives them so much spunk!

                                                Gunter divides economists into four groups. The first is the command-and-control contingent, some of whom can be described as believing that, goshdarnit, recycling is good for your soul and the planet, and we're going to make you do it ... no matter what the spreadsheet analysis says. Then there is the category of the majority, who go to great lengths to differentiate between the cost-effectiveness of various pro-recycling subsidies, incentives, taxes and other schemes, and generally conclude that, although there is no one-size-fits-all solution..., markets do not work perfectly when it comes to waste disposal and thus need some help from government to achieve socially-desirable goals.

                                                Then there's a section for those who don't fit clearly into any category. And finally, bringing up the caboose, are the free marketers, thundering like God to Moses that "Thou shalt worship no other diety than the free market." Only the free market, left to its own devices, will find the most efficient and wealth-generating means of dealing with waste.

                                                If there was such a thing as the free market, one might be inclined to pay these mighty orators ... some heed.

                                                But there isn't, so we don't have to. Instead we have a very complex situation where in many cases the so-called "externalities" -- such as, say, the health hazards of mercury or lead that might be contained in a consumer electronic product -- are not assumed by the manufacturer of that product. ... We have, perhaps most importantly, a wide variety of potentially recyclable products, some of which make economic sense to recycle without much help from government, and some of which may need a little bit of goosing. For my part, I'm much more inclined to trust an economist who makes judgments based on the particulars of a specific case than one who declaims from on high that in every situation, there can be only one answer.

                                                Which is why it is encouraging to see that the majority of economists favor some form of guided-market approach. ... We live in a country where the majority rules, and increasingly, the majority of citizens in the U.S. support recycling.

                                                For economists like Gunter, who notes at the outset that "When it comes to a specific public policy, expert economists and the public often arrive at different conclusions," this democratic belief in recycling must be frustrating. ...

                                                And let's not deny it -- there is a spiritual aspect to recycling that goes part of the way towards trumping any cost-benefit analyses... Whether you're a thrifty Benjamin Franklin "waste not -- want not" type, or a Gaia-worshiping, make-your-tents-out-of-buffalo-hide-and-your-forks-from-buffalo-horn, leave-the-earth-(or campground)-as-you-found-it type, there is a satisfaction that comes from engaging in reuse and recycling. The sight of a great big stinking landfill just doesn't pump you up the same way.

                                                I have little doubt that there is a market failure here - the social benefits of recycling exceed the private benefits - so the question for me is how best to structure incentives so as to induce people to recycle at level that fully reflects the societal benefits from doing so.

                                                  Posted by on Friday, January 26, 2007 at 12:12 PM in Economics, Environment, Market Failure | Permalink  TrackBack (0)  Comments (23) 

                                                  Paul Krugman: On Being Partisan

                                                  Paul Krugman on partisanship and what it will take for it to end:

                                                  On Being Partisan, by Paul Krugman, Commentary, NY Times: American politics is ugly these days, and many people wish things were different. ... If all goes well, we’ll eventually have a new era of bipartisanship — but that will be the end of the story, not the beginning. ...

                                                  You see, the nastiness of modern American politics isn’t the result of a random outbreak of bad manners. It’s a symptom of deeper factors — mainly the growing polarization of our economy. And history says that we’ll see a return to bipartisanship only if and when that economic polarization is reversed.

                                                  After all, American politics has been nasty in the past. Before the New Deal, America was a nation with a vast gap between the rich and everyone else, and this gap was reflected in a sharp political divide. The Republican Party, in effect, represented the interests of the economic elite, and the Democratic Party, in an often confused way, represented the populist alternative. ...

                                                  [T]he G.O.P.’s advantage in money, and the superior organization that money bought, usually allowed it to dominate national politics. ... Then came the New Deal. I urge ... everyone ... who thinks that good will alone is enough to change the tone of our politics — to read the speeches of Franklin Delano Roosevelt...

                                                  F.D.R. faced fierce opposition as he created ... Social Security, unemployment insurance, more progressive taxation and beyond ... that helped alleviate inequality. And he didn’t shy away from confrontation.

                                                  “We had to struggle,” he declared in 1936, “with the old enemies of peace — business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. ... Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me — and I welcome their hatred.”

                                                  It was only after F.D.R. had created a more equal society, and the old class warriors of the G.O.P. were replaced by “modern Republicans” who accepted the New Deal, that bipartisanship began to prevail.

                                                  The history of the last few decades has basically been the story of the New Deal in reverse. Income inequality has returned to levels not seen since the pre-New Deal era, and so have political divisions in Congress as the Republicans have moved right, once again becoming the party of the economic elite. The signature domestic policy initiatives of the Bush administration have been attempts to undo F.D.R.’s legacy... And a bitter partisan gap has opened up between the G.O.P. and Democrats, who have tried to defend that legacy.

                                                  What about the smear campaigns, like Karl Rove’s...? Well, they’re reminiscent of the vicious anti-Catholic propaganda used to defeat Al Smith in 1928: smear tactics are what a well-organized, well-financed party with a fundamentally unpopular domestic agenda uses to change the subject.

                                                  So am I calling for partisanship for its own sake? Certainly not. By all means pass legislation, if you can, with plenty of votes from the other party: the Social Security Act of 1935 received 77 Republican votes in the House, about the same as the number of Republicans who recently voted for a minimum wage increase.

                                                  But politicians who try to push forward the elements of a new New Deal, especially universal health care, are sure to face the hatred of a large bloc on the right — and they should welcome that hatred, not fear it.

                                                  Previous (1/22) column: Paul Krugman: Gold-Plated Indifference
                                                  Next (1/29) column: Paul Krugman: The Sum of All Ears

                                                  Update: This came up in comments. If you go to "Political Polarization and Economic Policy," and follow the link at the bottom "Immigration and Political Polarization" you'll find the following graphs [the graphs are a follow-up to "Class War Politics"]:

                                                  Click on graphs to enlarge

                                                    Posted by on Friday, January 26, 2007 at 12:15 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (91) 

                                                    Robert Reich: One, Small, Minor Cheer for the President

                                                    Robert Reich says George Bush deserves some credit, but not full credit, for his health care proposal:

                                                    The President Deserves One Small, Minor Cheer on Health Care, by Robert Reich [Also here]: The only halfway interesting thing about the President's underwhelmingly platitudinous State of the Union speech was his health care proposal. It deserves one cheer for the following reason: It potentially de-couples health care from employment. ...

                                                    With this plan, you can just about kiss employer-provided health insurance good-bye. And good riddance. It’s the biggest tax break in the whole federal tax system, costing the Treasury some $130 billion a year. But you’re not eligible for it when you and your family are most likely to need it – when you lose your job, for example. And the biggest beneficiaries are upper-income employees. The lower your pay, the less likely you are to get any employer coverage at all.

                                                    The current employer-based system doesn’t cover the self-employed – the largest and fastest-growing category of worker. And it creates perverse incentives. It encourages employers to seek out young, healthy employees who are unlikely to have health problems; reject older ones; and push married employees onto their spouse’s employer’s plans.

                                                    The President’s plan to de-couple health insurance from employment merits only one cheer, though, because it’s only the first step. Two cheers for a president or any politician who comes up with a way to get health insurance to lower-income people who can’t afford it on their own even with a tax deduction. It’s called universal health care. Every advanced nation has it except the United States. ...

                                                    [S]tate government budgets are already sagging under the weight of paying half the costs of Medicaid. The only way lower-income families will get the preventive care they need is through federally-subsidized health insurance. ... Preventive care will lower the nation’s overall health care tab because it will mean fewer expensive trips to emergency rooms by people with health crises that could have been caught and averted earlier.

                                                    Finally, three cheers for the politician who bypasses America’s inefficient private insurance market and establishes a single payer that provides all Americans with health insurance... Note I said single payer, not single provider. Americans want to keep their choice of doctor and hospital. But a single payer – either through Medicare or the federal employee’s health insurance program – would avoid the current insanity by which private insurers spend hundreds of millions of dollars a year advertising and marketing to younger and healthier beneficiaries, and seeking to discourage older and riskier ones, or people with pre-existing medical conditions. America now has the only health-insurance system in the world designed to avoid sick people.

                                                    President Bush isn’t running again but the one cheer he deserves marks the start of the 2008 presidential race. Affordable health care will be the biggest domestic issue in the upcoming election. The candidate who gets three cheers on this will be our next President.

                                                      Posted by on Friday, January 26, 2007 at 12:06 AM in Economics, Health Care, Politics | Permalink  TrackBack (0)  Comments (7) 

                                                      Why Oh Why Can't We Have a Better Press Corps? (The Press Corps Says We're Trying Edition)

                                                      Peter Coy at BusinessWeek Online sends along the following:

                                                      Why We Ignore the Margin of Error--And Everyone Else Does, Too, by Peter Coy, BusinessWeek Online, Hot Property: A reader named Dave makes an important point in a comment on my item last week about the supposed 4.5% rise in housing starts in December.

                                                      Dave says--accurately--that we don't really know whether housing starts rose at all, because the margin of error in the Census Bureau's survey was so large. He thinks we should have admitted our ignorance. In Dave's words: "Such statistically negligent reporting continues to amaze me!"

                                                      He's right. I didn't mention the margin of error at all in my blog item, instead treating the "increase" like a settled fact. In my defense, I was hardly alone: just about every journalist and financial analyst and economist who wrote about the Census Bureau report stated that housing starts rose and made no mention of the margin of error.

                                                      If we had been scrupulous, we would have written something like this:

                                                      Census Bureau Doesn't Know if Housing Starts Rose or Fell in December

                                                      Confusion over the state of the housing industry continued today as the Census Bureau once again said that it doesn't know whether the rate of construction of homes rose or fell in the most recent month. The bureau estimated that starts rose 4.5%, but the margin of error was plus or minus 8.8 percentage points. The same thing happened for October, where the estimated increase was 6.7% but the margin of error was plus or minus 10.1 percentage points. On the bright side, we're pretty sure that starts really did increase in September, because the estimated increase then (14.6%) was bigger than the margin of error (plus or minus 7.6 percentage points).

                                                      As this exercise goes to show, the strictly scrupulous approach can be tedious. On the other hand, it has the important advantage of sticking to what's actually known. So I agree with Dave. I'm going to make more of an effort in the future to point out when numbers are particularly squishy because of sampling error. ...

                                                      By the way, Census uses 90% confidence intervals. If the bureau used a 95% confidence interval, as many social scientists do, the margins of error would be even greater. ...

                                                      Overlooking the everyone else does it too defense, there is another alternative within the "scrupulous" approach - not reporting statistics with zero or almost no information content and using the valuable space to report statistics that are actually informative. It's also possible to give readers a strong sense of the information content of the statistics without talking about confidence intervals and standard errors (I realize the write-up was intentionally tedious). For example, just saying something like "monthly home construction statistics should be interpreted cautiously because they are known to exhibit large random jumps from month to month" helps, I think, without resorting to formal statistical language. The phrase "particularly squishy" works too.

                                                        Posted by on Friday, January 26, 2007 at 12:03 AM in Economics, Housing, Press | Permalink  TrackBack (0)  Comments (4) 

                                                        Thursday, January 25, 2007

                                                        Ezra Klein: Defining the Boundaries of Health Care Reform

                                                        Ezra Klein attempts to define acceptable and unacceptable directions for health care reform:

                                                        Healthy Bottom Lines, by Ezra Klein, The American Prospect: For the first time since 1993, the murmurings of a national conversation on health care reform can be heard, and the chorus is composed of voices with the political power and public profiles to make something real out of their musings. ...

                                                        To actually solve [the health care crisis], however, will require a progressive reform movement both clear and unified about its goals. Even now, the insurance industry is proposing and pushing "universal" plans that would expand coverage while amplifying the most grotesque and unfair elements of the current system. ...

                                                        Legislating the multi-billion dollar insurance industry out of existence may be the right policy, both to hope for and to fight for. But it is not a terribly likely outcome. So even as progressives discuss what they want, they should also be clear on what they will accept, and which elements are non-negotiable. It's always worth fighting for the perfect, but you must also define the good.

                                                        I'll take a stab at naming and defining some of these elements below. But this is the start of a conversation, not an attempt to end it. I've also asked a number of smart progressive thinkers to weigh in over the next week or so, and hopefully the array of ideas offered will help illuminate what the deal-breakers and bottom-line conditions of progressive health reform really are. Off we go:

                                                        Continue reading "Ezra Klein: Defining the Boundaries of Health Care Reform" »

                                                          Posted by on Thursday, January 25, 2007 at 06:03 PM in Economics, Health Care, Regulation | Permalink  TrackBack (0)  Comments (21) 

                                                          Who Was Milton Friedman?

                                                          The New York Review of Books has:

                                                          Who Was Milton Friedman? by Paul Krugman

                                                          If I can find time later, I'll pull some excerpts. For now, here's how Krugman concludes the much longer essay on Friedman's economics and politics:

                                                          ...In his 1965 review of Friedman and Schwartz's Monetary History, the late Yale economist and Nobel laureate James Tobin gently chided the authors for going too far. "Consider the following three propositions," he wrote. "Money does not matter. It does too matter. Money is all that matters. It is all too easy to slip from the second proposition to the third." And he added that "in their zeal and exuberance" Friedman and his followers had too often done just that.

                                                          A similar sequence seems to have happened in Milton Friedman's advocacy of laissez-faire. In the aftermath of the Great Depression, there were many people saying that markets can never work. Friedman had the intellectual courage to say that markets can too work, and his showman's flair combined with his ability to marshal evidence made him the best spokesman for the virtues of free markets since Adam Smith. But he slipped all too easily into claiming both that markets always work and that only markets work. It's extremely hard to find cases in which Friedman acknowledged the possibility that markets could go wrong, or that government intervention could serve a useful purpose.

                                                          Friedman's laissez-faire absolutism contributed to an intellectual climate in which faith in markets and disdain for government often trumps the evidence. Developing countries rushed to open up their capital markets, despite warnings that this might expose them to financial crises; then, when the crises duly arrived, many observers blamed the countries' governments, not the instability of international capital flows. Electricity deregulation proceeded despite clear warnings that monopoly power might be a problem; in fact, even as the California electricity crisis was happening, most commentators dismissed concerns about price-rigging as wild conspiracy theories. Conservatives continue to insist that the free market is the answer to the health care crisis, in the teeth of overwhelming evidence to the contrary.

                                                          What's odd about Friedman's absolutism on the virtues of markets and the vices of government is that in his work as an economist's economist he was actually a model of restraint. As I pointed out earlier, he made great contributions to economic theory by emphasizing the role of individual rationality—but unlike some of his colleagues, he knew where to stop. Why didn't he exhibit the same restraint in his role as a public intellectual?

                                                          The answer, I suspect, is that he got caught up in an essentially political role. Milton Friedman the great economist could and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm of his early career hardened into a rigid defense of what had become the new orthodoxy.

                                                          In the long run, great men are remembered for their strengths, not their weaknesses, and Milton Friedman was a very great man indeed—a man of intellectual courage who was one of the most important economic thinkers of all time, and possibly the most brilliant communicator of economic ideas to the general public that ever lived. But there's a good case for arguing that Friedmanism, in the end, went too far, both as a doctrine and in its practical applications. When Friedman was beginning his career as a public intellectual, the times were ripe for a counterreformation against Keynesianism and all that went with it. But what the world needs now, I'd argue, is a counter-counterreformation.

                                                          Update: From email, more on Milton Friedman:

                                                          Hi Mark,

                                                          I am writing to you because I thought you and your blog readers and students might appreciate hearing about this. “Milton Friedman Day” will be celebrated next Monday, January 29 and The Economist will pay tribute to the famous and highly influential economist by hosting an online discussion with prominent economists and officials such as Leo Melamed, Ben Stein and Governor Arnold Schwarzenegger.

                                                          Beginning today, members of the public are invited to engage in the spirited discussion by submitting their their questions to Free Exchange, The Economist’s economics blog, moderated by Megan McArdle. To join please visit: http://www.economist.com/debate/freeexchange/.

                                                          And, while I'm at it, here's another email:

                                                          Dear Mark,

                                                          In my efforts to keep you updated, I’m happy to tell you that Governor Schwarzenegger and Mayor Newsome have declared Milton Friedman Day in California and San Francisco.  I’ve included the press release below.

                                                          Also, your readers might like to know about the activities going on at Economist.com and the video contest on YouTube, both outlined in the press release...

                                                          Continue reading "Who Was Milton Friedman?" »

                                                            Posted by on Thursday, January 25, 2007 at 10:50 AM in Economics | Permalink  TrackBack (0)  Comments (23) 

                                                            Bruce Bartlett and Tyler Cowen on Inequality

                                                            Bruce Bartlett writes about income inequality:

                                                            Is Income Inequality Really a Problem? by Bruce Bartlett, Commentary, NY Times: With Democrats back in charge of Congress, it is not surprising that we are seeing a revival of interest in the issue of income inequality. In his response to President Bush’s State of the Union address on Tuesday, Senator James Webb, Democrat of Virginia, complained that corporate C.E.O. compensation has risen from 20 times that of the average worker 40 years ago to 400 times today. Such obscenely large payouts may result from nothing more than the operation of Adam’s Smith’s invisible hand, but even many conservatives are wary of defending it that way.

                                                            One free marketer who is not afraid to do so is Alan Reynolds of the Cato Institute, whose new book, “Income and Wealth,” is a thoroughgoing attack on those who would redress income inequality through higher taxes. The cure, he says, would be far worse than the disease.

                                                            This is not new territory for Reynolds, one of the original “supply-side” economists who convinced Ronald Reagan and the Republican Party to support large tax rate reductions in the 1970s. ...

                                                            While Reynolds covers the waterfront of issues related to income distribution, he has lately been enmeshed in a debate about whether income inequality has or has not risen as much as most people believe it has. ...

                                                            Reynolds has been criticized for making too much of inherent limitations in the data that have been known for many years and for ignoring evidence that conflicts with his thesis. Most economists would probably agree with Gary Burtless of the Brookings Institution... Even accounting for the factors Reynolds cites, there are too many different sources all showing a rise in income inequality, from Census Bureau and Federal Reserve data based on surveys to Securities and Exchange Commission figures on executive compensation, which come straight from corporate filings. No matter how you slice it, the distribution of income has become more unequal over the last 20 years or so...

                                                            Personally, I am willing to concede the point, but I would prefer to come at the income distribution question in a different way. I have long sought a study showing exactly what the cost of inequality is. If my real income does not fall, how am I hurt when Bill Gates makes another billion dollars? After all, the economic pie is not fixed. What he gets doesn’t come at my expense, so why should I or anyone else care? ...

                                                            In every debate on the subject I have ever engaged in, those advocating redistribution were not concerned about inequality per se. They were bothered by poverty and an infinite list of unmet social needs that they believe could be cured if we just spent more money on them. Since people like Gates clearly don’t need all their wealth in any meaningful sense — he would be just as well off materially with only 10 percent of what he has — redistribution appears to be a costless way of making many people better off while not really hurting anyone. In other words, the argument for redistribution is, at its core, not moral but purely utilitarian — the greatest good for the greatest number.

                                                            If it were costless to play Robin Hood and take from the rich and give to the poor, it would be hard to oppose. But there are costs. We really don’t want the Gateses of the world sitting around clipping coupons. We want them out there thinking of new products and businesses to make themselves richer, because in the process they will improve the quality and lower the prices of goods and services we use, employ workers ..., and so on. Nor do we want the poor sitting around waiting for handouts. We want a balance in which incentives are preserved both at the top and the bottom of the income distribution. ...

                                                            Perhaps ... redistribution measures would be justified if there were evidence of income stratification. But all the evidence we have tells us that there is considerable movement up and down the income scale... Karl Marx’s 1865 observation remains valid: “The position of a wages laborer is for a very large part of the American people but a probational state, which they are sure to leave within a longer or shorter term.”

                                                            Perhaps a better way of addressing the issue might be to ridicule the excesses of those with great wealth the way gossip columns and Web sites make fun of “celebrities” like Paris Hilton. It could be a better way of encouraging the wealthy to engage in socially beneficial activities, such as donating funds to poverty relief, instead of buying yachts and jewels.

                                                            The topic of inequality has been discussed here in some depth, so just a couple of things. Many of the statements presume that compensation at all income levels is determined in competitive markets. If it isn't, and I don't think it's hard to make the case that many of these markets (e.g. CEOs) are not competitive, then compensation at the margin is greater than it would be under an efficient outcome.

                                                            As for the claim about stratification and income mobility, that's been covered before as well:

                                                            The American Dream gains a harder edge, By David R. Francis, CSMonitor.com: The American dream, at least on the economic side, is fading. … Today … the odds of a son or daughter rising above their parents in such a financial predicament have shrunk. "Income mobility has declined in the last 20 years," says Bhashkar Mazumder, an economist at the Federal Reserve Bank of Chicago. What that means is that the US is becoming less of a meritocracy, where skill and intelligence determine success, and becoming more of a class-bound society, where economic background, including the better education money can provide, matters more. … Most Americans don't believe that to be true, surveys show. But academic studies suggest that income mobility in the US is no better than that in France or Britain. It's actually lower than in Canada and is approaching the rigidity of Brazil. That marks a change from the past… From 1950 to 1980, Americans were more and more likely to see their offspring move up - or down - the income ladder. … Today, it could take five or six generations to close the gap between poverty and middle-class status, calculates Mr. Mazumder. … [Income Mobility Papers by Bhashkar Mazumder.]

                                                            Next, Tyler Cowen also takes up the topic of inequality:

                                                            Economic Scene Incomes and Inequality: What the Numbers Don’t Tell Us, by Tyler Cowen, Economic Scene, NY Times: The growing inequality in wealth and income has led many people to question whether the contemporary American economy is rigged in favor of the rich. While there is little doubt that the gap between the wealthy and everybody else has widened in recent years, the situation is not as unfair as some of the numbers seem to imply.

                                                            Much of the measured growth in income inequality has resulted from natural demographic trends. In general, there is more income inequality among older populations than among younger populations, if only because older people have had more time to experience rising or falling fortunes.

                                                            Furthermore, more-educated groups show greater income inequality than less-educated groups. Uneducated people are more likely to be clustered in a tight range of relatively low incomes. But the educated will include a greater range of highly motivated breadwinners and relaxed bohemians, and a greater range of winning and losing investors. A result is a greater variety of incomes. Since the United States is growing older and also more educated, income inequality will naturally rise.

                                                            Thomas Lemieux, professor of economics at the University of British Columbia, estimates that these demographic effects account for about three-quarters of the observed rise in income inequality for men and 69 to 95 percent of the observed rise in income inequality for women (The American Economic Review, June 2006). ...

                                                            Alan Reynolds ... goes further... Mr. Reynolds ... describes the observed rise in income inequality as a statistical illusion. The consensus of professional economists is that Mr. Reynolds goes too far. The long-term trend of rising income inequality is evident in many different studies, including those of executive compensation, even if some estimates are exaggerated.

                                                            In any case..., income is not the only — or even the most — important measure of inequality. For instance, inequality of consumption ... does not show a significant upward trend (Dirk Krueger and Fabrizio Perri, “Does Income Inequality Lead to Consumption Inequality?” January 2006). Consumption, of course, is not an ideal indicator of well-being; a high or steady level of purchases may reflect growing debt, and the ease of buying a big-screen TV does not reflect a comparable ease in buying good health care.

                                                            Happiness, possibly the most relevant variable for a study of inequality, is also the hardest to measure. Nonetheless, inequality of happiness is usually less marked than inequality of income, at least in wealthy societies. ... Even if more money makes people happier, it appears to do so at a declining rate, which places a natural check on the inequality of happiness.

                                                            Studies of personal happiness, based on questionnaires and self-reporting, indicate that the inequality of happiness is not growing over time in the United States. Furthermore, the United States has an inequality of happiness roughly comparable to that of Sweden or Denmark, two nations with strongly egalitarian reputations. (See the symposium in Journal of Happiness Studies, December 2005.) ...

                                                            If we look at leisure, from 1965 to 2003, less-educated groups experienced a bigger boost in free time than more-educated groups (Mark Aguiar and Erik Hurst, Federal Reserve Bank of Boston Working Paper). In other words, the high earners are working hard for their money and perhaps they are having less fun.

                                                            So matters are not as bad as the critics have suggested. ... Income and wealth inequality measures, taken alone, provide a misleadingly pessimistic picture.

                                                            The broader philosophical question is why we should worry about inequality — of any kind — much at all. Life is not a race against fellow human beings, and we should discourage people from treating it as such. Many of the rich have made the mistake of viewing their lives as a game of relative status. So why should economists promote this same zero-sum worldview? Yes, there are corporate scandals, but it remains the case that most American wealth today is produced rather than taken from other people.

                                                            What matters most is how well people are doing in absolute terms. We should continue to improve opportunities for lower-income people, but inequality as a major and chronic American problem has been overstated.

                                                            I don't see why "Happiness [is] possibly the most relevant variable for a study of inequality." As Tyler notes, "Even if more money makes people happier, it appears to do so at a declining rate, which places a natural check on the inequality of happiness." So, we shouldn't expect that making the wealthy even wealthier will affect the distribution of happiness.

                                                            That is, if we start with one wealth distribution that is unequal, and then give even more wealth to the people at the very top (as has happened), they won't get any happier and happiness inequality will be unchanged.

                                                            But if the same wealth were given to the lower end of the distribution, would the happiness gap still remain unchanged? I don't see how a static happiness gap when wealth is flowing to the top of the distribution implies that inequality has not increased. It only means that those receiving the additional wealth don't appreciate it since it makes little material difference in their lives.

                                                            Update: Steve Kyle at Angry Bear also comments on Tyler's article.
                                                            Update: Felix at economonitor follows-up, and adds more from Robert Shiller and others on the topic.

                                                              Posted by on Thursday, January 25, 2007 at 12:42 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (79) 

                                                              Capital Markets Regulation

                                                              Greg Ip, Kara Scannell, and Deborah Solomon of the Wall Street Journal look into claims that regulations such as Sarbanes-Oxley are reducing the competitiveness of U.S. financial markets. They find reasons to be skeptical:

                                                              In Call to Deregulate Business, a Global Twist, by Greg Ip, Kara Scannell, and Deborah Solomon, Wall Street Journal: Prominent figures in the U.S. are warning that the nation's financial markets have been handicapped by post-Enron regulatory overreach. Treasury Secretary Henry Paulson has made addressing the problem a signature political issue. A blue-ribbon committee chaired by former Bush economist Glenn Hubbard has echoed this sentiment, as does a report commissioned by Sen. Charles Schumer of New York and New York City Mayor Michael Bloomberg.

                                                              Their key evidence is data suggesting that U.S. stock markets are increasingly unattractive places for companies to list shares. ... Their solution: a lighter touch in regulating corporate behavior.

                                                              Yet this position, which has gone largely unchallenged, downplays a different explanation for why U.S. exchanges are under pressure -- the changing nature of global finance. Stock markets around the world have become better and deeper, encouraging companies to seek IPOs in their home market. Trading across borders has become simpler, cutting the prestige and usefulness of a big-country listing everywhere. ... Meanwhile, other countries are stiffening their own rules, bringing them closer to the U.S. model.

                                                              Andrew Karolyi, an Ohio State University economist who specializes in international stock-exchange listings, ... is skeptical of the stock-exchange evidence, which he links instead to transitory global trends. Regulations "should be judged on their own merits and not on any evidence of a supposed decline in the attractiveness for prospective listings from overseas," Mr. Karolyi says. ...

                                                              But ... Mr. Hubbard's Committee on Capital Markets Regulation, consisting of academics and finance executives and endorsed by Mr. Paulson, spent 148 pages discussing the harm done by U.S. regulatory and legal risks. Among the charges: Suing corporations for fraud is too easy... Civil and criminal prosecutors are overzealous, producing civil enforcement penalties more than 100 times higher in the U.S. than the U.K. in 2004. Auditing standards are unreasonably onerous for small companies. ...

                                                              In an interview, Mr. Hubbard concedes there's "no smoking gun" that proves whether global or U.S.-specific forces are behind the smaller number of foreign companies listing in the U.S. "Both factors are important," he says. ...

                                                              There's little doubt U.S. exchanges are facing increasing competition. They're losing out to overseas exchanges for initial public offerings. Many overseas companies are deciding they don't need an American listing. And in the U.S. itself, many companies have decided they're better off private.

                                                              Taken alone, the cost of regulation can't explain what's happening to U.S. financial markets, and paring regulations might not alter the outcome, except to give a helping hand to Wall Street.

                                                              "Well-functioning capital markets are central to the success of the economy," says former Treasury Secretary Lawrence Summers, now a Harvard University economist and managing director at a hedge fund. "What fraction of capital markets transactions runs through New York is of much less broad-based significance."...

                                                                Posted by on Thursday, January 25, 2007 at 12:34 AM in Economics, Financial System, Regulation | Permalink  TrackBack (0)  Comments (11) 

                                                                Wednesday, January 24, 2007

                                                                Why Globalization is Opposed

                                                                Deepak Lal of UCLA gives his theory of why globalization is opposed by the cultural nationalists in the third world and the New Dirigistes in the West:

                                                                Why globalising capitalism is hated, by Deepak Lal, Commentary, Financial Times (free): Globalising capitalism is opposed by two major groups - the cultural nationalists in the third world, who fear the westernisation it may bring and the New Dirigistes, proponents of the “third way’” in the West who bear the ancient hatred of capitalism on their sleeves. Why this continuing hatred of, and guilt about, a system which promises unprecedented global prosperity? ...

                                                                Whilst ... maverick capitalists existed in all the ancient agrarian Eurasian civilisations, it was only in one that they came to be given their head, ... eventually becoming socially and politically acceptable. This marked the emergence of capitalism as an economic institution which led to the great divergence between the West and the Rest.

                                                                My contention ... is that the Great Divergence resulted from a legal revolution in the 11th century instigated by Pope Gregory VII who, in 1075, put the Church above the State and, through the resulting Church-State, created the whole legal and administrative infrastructure required by a full-fledged market economy. ... The 11th century Papal revolution, by creating the church-state, provided a legal bulwark and administrative system whose reach, unlike most of the political states, covered the whole of Western Christendom. It allowed the novelty seeking and risk-taking capitalists to pursue securely their enterprise over a larger space and with myriads of strangers, thus initiating the economic system which has changed the world.

                                                                This Papal revolution which changed the West’s ‘material’ beliefs was preceded and precipitated by an earlier 6th century revolution of Pope Gregory the Great which changed the West’s ‘cosmological’ beliefs ( on ‘how one should live’) from the communalism common throughout Eurasia to individualism, particularly in the domestic domain concerning sex and marriage. By promoting marriages based on the universal but ephemeral emotion of love, it went against the common Eurasian pattern of arranged marriages, which eschewed a fickle emotion’s threat to the families needed for settled agriculture. To counter the threat unleashed by individualism..., the Christian Church created a fierce guilt culture which provided its moral moorings, until the Darwinian and Freudian revolutions destroyed its bases of God and Guilt.

                                                                These twin Papal revolutions have cast a long shadow. Though temporally conjoined, the change in ‘cosmological’ beliefs promoting individualism is not necessary for the change in ‘material’ beliefs promoting capitalism. It is the latter that globalisation is spreading through the world...

                                                                The capitalism thereby promoted has been under attack since the romantic revolt against the enlightenment and its ‘disenchantment of the world’. The arguments have been mainly moral and aesthetic. For both the cultural nationalists and the New Dirigistes, globalisation is seen as a Faustian pact where prosperity is bought at the cost of losing one’s soul. However, unlike their 19th century predecessors, the New Dirigistes can no longer appeal to a socialist utopia to provide a middle way between the creative destruction of capitalism and the settled unchanging way of life in attune with Nature of their agrarian past. They now seek to humanise capitalism through regulation and social and moral paternalism. The demoralisation of societies perceived as accompanying the rise of globalising capitalism has been wrongly attributed to the instrument of their prosperity, capitalism, rather than the growing moral vacuum in the West, which they themselves have promoted, and which has destroyed the West’s traditional and conventional moral moorings.

                                                                The moral cement of non-monotheistic Eurasian societies was provided by conventions and traditions transmitted to the young through the moral emotions of shame and guilt. ... The West’s current ‘cosmological’ beliefs ... are incoherent - a mish mash of Enlightenment ideals of individual self-realisation, standards of competitive success in an acquisitive society, and a residual of Christian belief in transcendental salvation.

                                                                It is the global transfer of this demoralisation of the West, particularly in the domestic domain, that the cultural nationalists most fear. Eurasia’s wounded civilisations had three responses to the Western imperial impact. The first, like the Japanese, was to accept the material beliefs of the West, whilst keeping their cosmological beliefs. The second, embodied by Gandhi and the current Islamists, was to eschew modernisation as it would lead to westernisation. The third, and most common, was to find a middle way between tradition and modernity though some form of socialism - the extreme Enlightenment version followed by Stalinist Russia and Maoist China, or the gentler Fabian version...

                                                                The failure of this path has at last led the two largest Eurasian civilisations, India and China, to follow the Japanese path by recognising that globalising capitalism offers them the means for prosperity without losing their souls. So, it is in the lands where Islamists hold sway and among the New Dirigistes of the West, that hatred of globalising capitalism still remains for essentially atavistic reasons.

                                                                Comments so far are not favorable:

                                                                tom s.: He lost me at the first two sentences. ...Why would I give any time to someone who starts off saying that the issue is my fear and hate? ... If he was interested in addressing me he would not start off in such an insulting manner; therefore he is not addressing me; therefore I will not read the rest of what he has to say.

                                                                nanni: I beg to differ. Among my people, globalisation has negative connotations because it takes away power from the individuals. As a consequences, the communality of daily life has become more and more frustrating and aggressive. ...

                                                                dissent: I've noticed that rightwing ideologues often argue against their ideological opponents by ... imagin[ing] the feeling their opponents must, in their view, have, then deride them for it. Often no one has that feeling, it is a strawman argument...

                                                                save_the_rustbelt: This guy is really impressed with himself, and gee whiz, he can use a lot of big words. In non-academic terms, he is a pompous windbag.

                                                                dale: this is a level of analysis surpassed over 150 years ago. are there still folks who do not see that modernity, in both its cultural form and its economic form is highly ambivalent?

                                                                String Quintet in C major: What a load of pretentious, loaded bollocks. The whole thing is ripe for fisking, but one can´t be bothered. ...

                                                                Ninjaplease: "Why this continuing hatred of, and guilt about, a system which promises unprecedented global prosperity? ..." Hahahahahhaha! Ah yes, please parade out some more promises. Do you remember the promises, promises... I Doooooo ...

                                                                evagrius: I'm curious about the Papal references. While I think the changes resulting from Gregory VII actions resulted in a more "unified" Western Europe by establishing better distinctions between Church and State, I'm not so sure Gregory the Great, who was a monk, had any role in establishing what is now known as "romantic love". From what I remember, "romantic love" came about much later, around the 11-1200's with the troubadors, influenced by Moslem love poetry and music originating from the Indian/Persian area. As for Gregory VII, he might have strenghtened the Church in its struggle against the numerous number of nobility who wanted more power and domination but I don't think that he was the main reason for the establishment of a more universal "market". I would rather put that to the growing influence of cities and the establishment of universities which created a cosmopolitan class of wandering scholars, poets, etc; who, speaking a universal tongue, Latin, were able to travel and communicate over great distances. In any case, neither action by the Popes in question, destroyed the "cosmological beliefs" of the societies they lived in. Those beliefs were destroyed quite a while later. Given all that, the gist of his argument is rather weak. He does not show why material prosperity, ( which as recent events are showing comes at the great price of environmental destruction, pollution, etc; as well as social disruption and loss of human cultures and societies), is any great boon to those who are still, more or less, living in what could be called traditional societies. I'm curious as to his own relation with the culture he seems to be from. Given his name, I take it that he is from India. I wonder what his relations are with the cultures, traditions and beliefs of India.

                                                                yan: Another attempt to revive European exceptionalism as explanation for the Industrial Revolution, this time in the form of some rather tangential papal reforms and their impacts on the mentalities in the West. I'm more inclined to give credence to Weber's Protestant ethic than to this fanciful fabrication, although neither is really a historically rigorous explanation.

                                                                It is particularly interesting that "Great Divergence" is capitalized in an attempt to engage with the ongoing academic dialogue on the subject. While I don't agree with the full explanations that Pomeranz advances for the Great Divergence, he is extremely convincing on two fronts. First, every major theory of European exceptionalism that has been proposed in the course of the last 150 years is refuted by a presentation of very detailed comparative evidence. Second, he demonstrates that access to coal was simply a matter of good fortune and coal was a sine qua non for industrialization.

                                                                (For those not up to date on the latest in economic history the book I am referring to and the one the above author is obliquely criticizing is Kenneth Pomeranz's The Great Divergence: China, Europe and the Making of the Modern World Economy.)

                                                                  Posted by on Wednesday, January 24, 2007 at 04:55 PM in Economics, International Trade | Permalink  TrackBack (1)  Comments (35) 

                                                                  What Pecuniary Externalities?

                                                                  Andrew Samwick says:

                                                                  Pecuniary Externalities, by Andrew Samwick: For what it's worth, I think Paul Krugman makes some good points about the problems inherent in using the tax code to encourage or discourage the purchase of health insurance in his column today (original here, reposted here). ...

                                                                  However, I found this statement (highlighted in bold) in Krugman's column to be odd:

                                                                  While proposing this high-end tax break, Mr. Bush is also proposing a tax increase — not on the wealthy, but on workers who, he thinks, have too much health insurance. The tax code, he said, “unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need.”

                                                                  Again, wow. No economic analysis I’m aware of says that when Peter chooses a good health plan, he raises Paul’s premiums. And look at the condescension. Will all those who think they have “gold plated” health coverage please raise their hands?

                                                                  Is he kidding me? That is almost the definition of a pecuniary externality. Wikipedia describes it as follows:

                                                                  A pecuniary externality is an externality which operates through prices rather than through real resource effects. For example, an influx of city-dwellers buying second homes in a rural area can drive up house prices, making it difficult for young people in the area to get onto the property ladder.

                                                                  This is in contrast with real externalities which have a direct resource effect on a third party. For example, pollution from a factory directly harms the environment...

                                                                  So in the President's defense, there's a very simple argument to be made here. When one person feels inclined, for whatever reason, to purchase more health care services, that puts upward pressure on the price of health care services (if the supply curve is not flat) and thus the cost to everyone else in the market. Normally, we don't pay any attention to this, because that is precisely the mechanism by which a competitive market achieves economic efficiency.

                                                                  The President is referring to the pecuniary externality generated by a tax distortion in the treatment of health insurance, which interferes with a market achieving economic efficiency and thus should concern us. It goes as follows. Premiums are fully excludable from income tax, but out-of-pocket expenses are not tax advantaged. That favors health insurance arrangements in which there are low deductibles and high premiums. Such arrangements can lead to higher utilization of health services, since the insured faces no financial cost at the margin once the low deductible has been met. (This is just a standard moral hazard argument.) Krugman may not believe that the relevant behavioral effects are large here, but he's on shaky ground with his "Wow ... no economic analysis ..." comment.

                                                                  For more on pecuniary externalities, I came across this source.

                                                                  There have also been several comments here on this point.

                                                                  Andrew says the pecuniary externalities only occur "if the supply curve is not flat." Paul Krugman, via email, says the long-run supply curve for medical services is flat so Andrew's exception applies:

                                                                  Paul Krugman: Aha - I was wondering if anyone would raise that. I was taking it as true to a pretty good approximation that the long-run supply curve for medical services is horizontal. Unless you think that there's permanently limited supply of medical education, or something, why should we think otherwise?

                                                                  And I would guess that very few people would read Bush's statement to mean that it's bad if other people have extensive insurance, because it drives up doctors' paychecks.

                                                                  In comments, Andrew responds with:

                                                                  Andrew Samwick: Based on Krugman's response ..., we're now in the much more comfortable environment in which this is a few economists talking about the magnitude of various key parameters.

                                                                  One could point out that if he was "wondering whether anyone would raise this point," then he seems to realize that he was going a bit overboard in claiming that "no economic analysis I'm aware of says that when Peter chooses a good health plan, he raises Paul’s premiums."

                                                                  On the substantive point, one could assert that almost any market has a long-run supply curve that is flat. Exceptions would be made for markets like diamonds--there is a finite quantity available to be mined. At this juncture, it becomes quite relevant how long we think it will be before we are in the long run.

                                                                  As evidence against this happening any time soon, I don't think the AMA is going to give up its near-monopoly on certifying medical practitioners. Licensed practitioners will be in short supply for a long time even if wholesale medical prices rise. In order to get more services when prices change over this long run, we have to build a lot of buildings--medical schools and hospitals--and fill them with really expensive equipment. I'm guessing that long run will take a while to get here.

                                                                  I'd be interested in hearing about academic research on this topic. Anybody know about research on the shape of the long-run supply curve and the speed of the adjustment process?

                                                                  Update: Alex Tabarrok implies that the long-run supply curve is relatively steep.

                                                                    Posted by on Wednesday, January 24, 2007 at 08:46 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (53) 

                                                                    Robert Samuelson: Biofuels

                                                                    Robert Samuelson is wary of the strong push toward biofuels because it might divert us from taking other, more effective paths to reducing our dependence on foreign energy sources:

                                                                    Blindness on Biofuels, by Robert J. Samuelson, Commentary, Washington Post: President Bush joined the biofuels enthusiasm in his State of the Union address, and no one can doubt the powerful allure. Farmers, scientists and venture capitalists will liberate us from insecure foreign oil by converting corn, prairie grass and much more into gasoline substitutes. Biofuels will even curb greenhouse gases. Already, production of ethanol from corn has surged from 1.6 billion gallons in 2000 to 5 billion in 2006. Bush set an interim target of 35 billion gallons in 2017 on the way to the administration's ultimate goal of 60 billion in 2030. Sounds great, but be wary. ...

                                                                    The great danger of the biofuels craze is that it will divert us from stronger steps to limit dependence on foreign oil: higher fuel taxes ... and tougher federal fuel economy standards to force auto companies to produce them. ...

                                                                    Until now, most ethanol has been made from corn. ... Ethanol receives heavy federal subsidies. ... Naturally, corn farmers love this. They've been the program's main beneficiaries. Although ethanol displaces only tiny amounts of oil (slightly more than 1 percent), it's had a big effect on corn prices. ... They could go higher. ... Higher prices for corn (which is fed to poultry, hogs and cattle) raise retail meat prices. Ironically, fuel subsidies may boost food costs.

                                                                    But corn harvests won't be large enough to meet either the 35 billion- or 60 billion-gallon targets. Large amounts of "cellulosic" ethanol would also be needed... Prime candidates are farm wastes, including wheat straw and cornstalks. Unfortunately, the chemistry for doing this is far more costly than it is for corn kernels. Without technological advances, cellulosic ethanol won't be economically viable. It could be supported only with massive federal subsidies or direct requirements forcing refiners to use the fuel, regardless of cost. Then the high costs would be passed on to consumers. ...

                                                                    Biofuels are certainly worth pursuing. Up to some point, they're even worth subsidizing. Government can nurture new technologies, and breakthroughs for cellulosic ethanol -- hardly inconceivable -- would make a meaningful difference in the U.S. fuel balance. But there's also a real threat that the infatuation with biofuels is a political expediency that will turn into a classic government boondoggle, benefiting selected constituencies and providing few genuine public benefits. That has already happened with corn.

                                                                    Our primary need is to curb reliance on foreign oil. If imports were dependable, they would not be dangerous, but they come from unstable or hostile suppliers. Although our dependence can't be eliminated, it can be reduced. The most obvious way is to improve the efficiency of vehicles by 30 to 50 percent over the next few decades. Americans need more hybrids and more small vehicles. Biofuels might be a complement, but if they blind us to this larger reality, they will be a step backward.

                                                                      Posted by on Wednesday, January 24, 2007 at 03:13 AM in Economics, Oil | Permalink  TrackBack (0)  Comments (35) 

                                                                      Denying Medical Care to Smokers

                                                                      Since Health care is in the news, here's something from a few weeks ago I never got around to posting, partly because the write-up at the end never seemed quite right (oh well, here it is anyway). In Britain, there's a debate over whether smokers should be denied medical care [yes, no] on the grounds that it's more efficient to treat non-smokers. The primary care trusts mentioned in the article are responsible for delivering health care and health improvements to their local areas. They are part of the National Health Service but have their own budgets and set their own priorities within within broad guidelines:

                                                                      Should smokers be refused surgery?, EurekAlert: Last year a primary care trust announced it would take smokers off waiting lists for surgery in an attempt to contain costs. In this week's BMJ, two experts go head to head over whether smokers should be refused surgery.

                                                                      Denying operations is justified for specific conditions, argues Professor Matthew Peters from the Concord Repatriation General Hospital in Australia. Professor Peters says that smoking up to the time of any surgery increases cardiac and pulmonary complications, impairs tissue healing, and is associated with more infections.

                                                                      These effects increase the costs of care and also mean less opportunity to treat other patients, he writes. In healthcare systems with finite resources, preferring non-smokers over smokers for a limited number of procedures will therefore deliver greater clinical benefit to individuals and the community.

                                                                      He believes that, as long as everything is done to help patients to stop smoking, it is both responsible and ethical to implement a policy that those unwilling or unable to stop should have low priority for, or be excluded from, certain elective procedures.

                                                                      But Professor Leonard Glantz from Boston University School of Public Health believes it is unacceptable discrimination. "It is astounding that doctors would question whether they should treat smokers," he says.

                                                                      "Doctors should certainly inform patients that they might reduce their risks of post-surgical complications if they stop smoking before the procedure. But should the price of not following the doctor's advice be the denial of beneficial surgery?"

                                                                      Cost arguments are made to support the discriminatory non-treatment of smokers. But why focus our cost saving concerns on smokers? Patients are not required to visit fitness clubs, lose 25 pounds, or take drugs to lower blood pressure before surgery. And many non-smokers cost society large sums of money in health care because of activities they choose to take part in.

                                                                      Discriminating against smokers has become an acceptable norm, he writes. It is shameful for doctors to be willing to treat everybody but smokers in a society that is supposed to be pluralistic and tolerant. Depriving smokers of surgery that would clearly enhance their wellbeing is not just wrong – it is mean, he concludes.

                                                                      It's possible to predict the success of particular treatments according to a broad array of voluntary behaviors, and also according to genetic factors.

                                                                      What I'm curious about is how illnesses from factors an individual has no control over ought to be treated. Under a system of private insurance, do you think insurers should be able to exclude people from coverage due to genetic predisposition to high-cost illnesses which, unlike smoking, do not come from behaviors individuals choose (or effectively exclude them through high premiums)? I don't - denying or limiting coverage for conditions people can't prevent seems cruel. I think the health risks that come with the genetic make up we are born with are risks that ought to be pooled across the entire population. Thus, my choice would be to not allow screening on this basis. After all, there but for a mistake of the Intelligent Designer go I.

                                                                        Posted by on Wednesday, January 24, 2007 at 03:13 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (24) 

                                                                        "The Ins and Outs of Cyclical Unemployment"

                                                                        From the NBER, new evidence on flows into and out of the pool of unemployed over the business cycle:

                                                                        The Ins and Outs of Cyclical Unemployment, by Michael W. Elsby, Ryan Michaels, and Gary Solon, NBER WP 12853, January: Abstract One of the strongest trends in recent macroeconomic modeling of labor market fluctuations is to treat unemployment inflows as acyclical. This trend stems in large part from an influential paper by Shimer on "Reassessing the Ins and Outs of Unemployment," i.e., the extent to which increased unemployment during a recession arises from an increase in the number of unemployment spells versus an increase in their duration. After broadly reviewing the previous literature, we replicate and extend Shimer's main analysis. Like Shimer, we find an important role for increased duration. But contrary to Shimer's conclusions, we find that even his own methods and data, when viewed in an appropriate metric, reveal an important role for increased inflows to unemployment as well. This finding is further strengthened by our refinements of Shimer's methods of correcting for data problems and by our detailed examination of particular components of the inflow to unemployment. We conclude that a complete understanding of cyclical unemployment requires an explanation of countercyclical inflow rates as well as procyclical outflow rates.

                                                                          Posted by on Wednesday, January 24, 2007 at 03:01 AM in Academic Papers, Economics, Unemployment | Permalink  TrackBack (0)  Comments (5) 

                                                                          Tuesday, January 23, 2007

                                                                          New CBO Data Show Income Inequality Continues to Widen

                                                                          The CBPP reports on inequality using new data from the CBO:

                                                                          New CBO Data Show Income Inequality Continues to Widen: After-Tax-Income for Top 1 Percent Rose by $146,000 in 2004, By Arloc Sherman and Aviva Aron-Dine: The Congressional Budget Office recently released extensive data on household incomes for 2004.[1] CBO issues the most comprehensive and authoritative data available on the levels of and changes in incomes and taxes for different income groups, capturing trends at the very top of the income scale that are not shown in Census data.

                                                                          The new CBO data document that income inequality continued to widen in 2004.  The average after-tax income of the richest one percent of households rose from $722,000 in 2003 to $868,000 in 2004, after adjusting for inflation, a one-year increase of nearly $146,000, or 20 percent.  This  increase was the largest increase in 15 years, measured both in percentage terms and in real dollars.[2]

                                                                          In contrast, the income of the middle fifth of the population rose $1,700, or 3.6 percent, to $48,400 in 2004.  The income of the bottom fifth rose a scant $200 (or 1.4 percent) to $14,700.

                                                                          The new data also highlight the degree to which income gains over the past quarter-century have become increasingly concentrated at the top of the income scale.  Since 1979 — the first year for which the CBO date are available — income gains among high-income households have dwarfed those of middle- and low-income households.  Over this 25-year period:

                                                                          • The average after-tax income of the top one percent of the population nearly tripled, rising from $314,000 to nearly $868,000 — for a total increase of $554,000, or 176 percent.  (Figures throughout this paper were adjusted by CBO for inflation and are presented in 2004 dollars.)
                                                                          • By contrast, the average after-tax income of the middle fifth of the population rose a relatively modest 21 percent, or $8,500, reaching $48,400 in 2004.
                                                                          • The average after-tax income of the poorest fifth of the population rose just 6 percent, or $800, over the past 25 years, reaching $14,700 in 2004.[3]

                                                                          Because incomes grew much faster among the most affluent, this group’s share of the total national income also increased.

                                                                          • The top one percent of the population received 14.0 percent of the national after-tax income in 2004, nearly double its 7.5 percent share in 1979.  (Each percentage point of after-tax income is equivalent to $71 billion in 2004 dollars.)
                                                                          • In contrast, the middle fifth of the population, which has 20 times more people in it, received 15.0 percent of the national after-tax income in 2004, down from 16.5 percent in 1979.  The bottom fifth received 4.9 percent of the income in 2004, down from 6.8 percent in 1979.

                                                                          Income is now more concentrated at the top of the income spectrum than in all but two years since the mid-1930s. This conclusion is reached by examining the CBO data in conjunction with data from a ground-breaking historical analysis of pre-tax income distribution trends published in a leading economics journal.[4] When viewed together, the studies indicate that the top one percent of households now receive a larger share of the national pre-tax income than at any time since 1937, except for the years 1999 and 2000.

                                                                          Average After-Tax Income by Income Group
                                                                          (in 2004 dollars)

                                                                          Income Category



                                                                          Percent Change

                                                                          Dollar Change

                                                                          Lowest fifth





                                                                          Second fifth





                                                                          Middle fifth





                                                                          Fourth fifth





                                                                          Top fifth





                                                                          Top 1 Percent





                                                                          Source: Congressional Budget Office, Effective Federal Tax Rates:  1979-2004, December 2006.

                                                                          Income Gaps Widened in 2004

                                                                          The CBO data show that gaps in income inequality widened significantly between 2003 and 2004.  The share of after-tax income going to the top one percent rose from 12.2 percent in 2003 to 14.0 percent in 2004, an increase of 1.8 percentage points.  As noted above, this amounts to $146,000  per household in the top one percent, equivalent to an additional $128 billion in income for the top one percent as a whole.  This is the largest one-year increase in the share of income going to the top one percent in 15 years.  The CBO data go back to 1979.[5], [6]

                                                                          Change in Real Average After-Tax Income, 2003 to 2004
                                                                          (in 2004 dollars)

                                                                          Income Category

                                                                          Dollar Change

                                                                          Percent Change

                                                                          Lowest fifth



                                                                          Second fifth



                                                                          Middle fifth



                                                                          Fourth fifth



                                                                          Top fifth



                                                                          Top 1 Percent



                                                                          Source: Congressional Budget Office, Effective Federal Tax Rates:  1979-2004, December 2006.

                                                                          The growing concentration of income at the top continues a long-term trend.  Income concentration grew steadily during the latter half of the 1990s, and peaked in 2000, a year that the stock market hit a record high.  From 2000 to 2002, income became less concentrated at the very top, partially due to the drop in the stock market; after-tax incomes fell from 2000 to 2002 for most income groups, but declined the most for the top one percent.  In 2003 and 2004, however, the long-term trend toward growing income inequality returned. ...

                                                                            Posted by on Tuesday, January 23, 2007 at 09:48 PM in Economics, Income Distribution | Permalink  TrackBack (1)  Comments (26) 

                                                                            Bush Drops the "ic" from "Democratic" During Speech

                                                                            I wasn't able to see the speech. If you did, what did you think? The Wall Street Journal's Washington Wire reports:

                                                                            From the President, a Two-Letter Jab at the Democrats, Washington Wire: President Bush departed from the prepared text of his State of the Union ... to take a jab at Pelosi and the rest of the new Democratic majority of Congress.

                                                                            In the prepared text of the speech, ... the president was to say, “Some in this Chamber are new to the House and Senate – and I congratulate the Democratic majority.” When Bush delivered the line, however, he paid tribute to the “Democrat majority.”

                                                                            Dropping the “ic” from the word “Democratic” may seem insignificant, but it was almost certainly a deliberate move by Bush, who has used the phrase “the Democrat Party” for months as a way of needling his opponents.

                                                                            Republicans have periodically referred to their opponents as belonging to the “Democrat Party” for many decades, and the phrase was a particular favorite of former Wisconsin Sen. Joseph McCarthy. A recent Washington Post column filled in the backstory: according to the Columbia Guide to Standard American English, McCarthy “sought by repeatedly calling it the Democrat party to deny it any possible benefit of the suggestion that it might also be democratic.”

                                                                            The phrase lay largely dormant for years, however, until President Bush resuscitated it during last fall’s midterm election season and made it a mainstay of his public remarks about the opposition party. It has since been widely adopted by many Republican lawmakers, conservative political activists, and conservative commentators and pundits at media outlets like Fox News.

                                                                            For all of Bush’s talk tonight about crossing party lines to work with the new Democratic Congress, it is the missing two letters that may offer the clearest indication of whether partisan tensions are really like to fade in the waning years of Bush’s presidency.

                                                                              Posted by on Tuesday, January 23, 2007 at 07:45 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (34) 

                                                                              Varian: Competition and Incentives May Help Control Health Care Costs

                                                                              I thought I'd check in with Hal Varian and see what he has to say about health care reform. This is from 2004:

                                                                              Competition and Incentives May Help Control Health Care Costs, by Hal Varian, Economic Scene, NY Times, November 18, 2004: Health care just keeps getting more expensive. According to the Stanford economist Victor R. Fuchs, health care expenditures by the elderly are growing 2 to 3 percent more rapidly than their spending on other goods. If this trend continues, by 2020 health spending by or on behalf of the elderly will exceed their spending on all other goods and services.

                                                                              As the economist Herbert Stein cogently put it, "If something cannot go on forever, it will stop." What can be done to stop, or at least slow, the rapid growth in health care spending?

                                                                              It has been argued, with considerable justification, that a significant part of the increase in health care expense is a result of improved quality. The real issue is not simply reducing spending on health care, but reducing it while still maintaining an appropriate quality.

                                                                              Economists have two magic potions to control prices and improve quality: competition and incentives. How can these elixirs be best administered to the health care industry?

                                                                              This question has preoccupied the Stanford economist Alain C. Enthoven for decades. In a recent book that he edited with Laura A. Tollen, "Toward a 21st Century Health System" (Jossey-Bass, 2004), he provides an outline of an answer.

                                                                              Continue reading "Varian: Competition and Incentives May Help Control Health Care Costs" »

                                                                                Posted by on Tuesday, January 23, 2007 at 06:48 PM in Economics, Health Care | Permalink  TrackBack (0)  Comments (12) 

                                                                                Targeting Academics in Iraq

                                                                                An Iraqi economist devoted to helping others is gunned down in Iraq:

                                                                                Professor and economist who helped the poor is shot dead in Baghdad, The Associated Press: Gunmen on Tuesday shot dead a Shiite professor and economist well-known among Iraqis for helping poor people secure loans to start small businesses, police and his university dean said.

                                                                                Diya al-Meqoter was shot several times in the head and chest during the attack in Baghdad's dangerous and predominantly Sunni Azamiyah neighborhood.

                                                                                The slain academic, who was in his late 40s, was widely known through his program on the Sharqiya television channel during which he interviewed a group of poor people who presented their ideas for starting a small business.

                                                                                The person judged to have the best idea on each program was then granted a loan by the station. The recipients repaid the advances out of income from their new businesses. ...

                                                                                Al-Meqoter taught economics at the Al-Mustansiriya University, which was hit by a twin car bombing last week that killed 70, mostly students waiting for bus rides home at the end of classes.

                                                                                The professor also headed the Consumer Association, a non-governmental agency that fought price gouging throughout Iraq.

                                                                                "He was a very active professor, and his loss will have a great effect on his students and fellow professors," Taqi al-Moussawi, the al-Mustansiriya dean said in a telephone interview. "The poor will miss him as well because he worked to protect them from exploitation."

                                                                                Al-Moussawi called on the government to give protection to professors and students "because the bloody violence is targeting them every day to empty the country from its scientific minds."

                                                                                Dozens of professors have been killed in the past few years forcing many of them to flee the country and teach at universities abroad. ...

                                                                                  Posted by on Tuesday, January 23, 2007 at 05:54 PM in Economics, Iraq and Afghanistan | Permalink  TrackBack (0)  Comments (18) 

                                                                                  Bush Health Care Proposal Round-Up: Klein, Mankiw, Tax Foundation, and Cowen

                                                                                  Some reactions to the president's new health care plan. First, Ezra Klein says he was wrong to lend support to the initiative:

                                                                                  I Was Wrong, by Ezra Klein: Alright, unpleasant post to write, but I was wrong: The Bush administration's health plan is a trap. ... And this comes, I hasten to underscore, from someone who was willing, eager even, to give the Bush administration a chance, to believe the Democratic majority had spurred them towards more pragmatic, constructive policy-making. Fool me once...

                                                                                  What the early reports ... didn't make clear ... was that the plan's changes to health care deductibility don't set limits, they're creating, instead, a standard deduction of $7,500 for individuals and $15,000 for families. My initial understanding was that those were caps: Above them, you couldn't deduct anything further. Below them, you simply deducted what you spent. That was incorrect. Instead, everyone will get precisely those deductions no matter what they spend. If you're 23 and your health care costs $2,000 a year, you still deduct $7,500, pocketing the difference. It would, in that situation, be economically foolish of you to purchase high quality, comprehensive coverage. And that goes all the way up the line. The intent here is clear: To incentivize the purchase of low-quality, high-deductible care, particularly among the healthy, young, and/or rich. To degrade the risk pool, and encourage HSAs. To reduce coverage, costs, and health security.

                                                                                  It's almost laughably wrongheaded... As for me, I made the mistake of extending good-faith to an administration that, time and again, has proven it deserves none. The optimist in me has been grounded for a week, and won't get dessert for two.

                                                                                  But Greg Mankiw likes the proposal, particularly if the tax deduction is turned into a refundable tax credit:

                                                                                  Post on the Bush Health Plan, by Greg Mankiw: An editorial in today's Washington Post, normally no fan of the Bush administration, gives a favorable review to President Bush's health care proposal. ... The editorial includes an amendment to the proposal that the Congress should take seriously:

                                                                                  Rather than embracing tax deductions, which are most valuable to people in high tax brackets, Mr. Bush could have made his proposal even more progressive by recommending a refundable tax credit that would be worth the same to everyone.

                                                                                  If this plan (as revised to turn the deduction into a credit) does not command bipartisan support, nothing will.

                                                                                  The non-partisan [Update from comments ???] Tax Foundation is not so favorable towards refundable tax-credits. The Foundation concludes "Ultimately, this may be a death blow for serious tax reform":

                                                                                  Health Care Tax Deductions Would Reach Less Than Half Of Uninsured, by Brian Phillips, Tax Foundation: President Bush is expected to announce tonight a new health care deduction aimed at enticing Americans to purchase their own health insurance. Tax Foundation economist Gerald Prante released a new study that reveals less than half of the uninsured would be able to claim such a deduction:

                                                                                  Over 50 percent of uninsured Americans owed no income taxes in 2004 after taking all credits and deductions. Therefore, if a healthcare tax incentive were passed in the form of either a deduction or a nonrefundable credit, over half of the uninsured would not even be able to claim any of it. The only way in which such an initiative would entice them to purchase any health insurance at all would be if the credit were made refundable.

                                                                                  But refundable credits have their own problems. We have already seen the number of non-payers explode during the Bush Administration and another refundable credit would continue that trend. Already, a third of all taxpayers who made enough money to file a tax return (43 million) paid nothing or received money back as a result of credits. In addition, another 15 million did not make enough to file. ...

                                                                                  Further, odds are not good that the deduction would stimulate Americans to purchase their own insurance or drive prices down:

                                                                                  The President has likened his new plan to the mortgage interest deduction. While often referred to as the most popular tax deduction, the home mortgage interest deduction is considered ineffective by most economists. It may raise the level of home ownership slightly, but the massive subsidy mostly succeeds in pushing up home prices by the amount of the deduction, enriching home builders and real estate agents but doing little for individuals.

                                                                                  Ultimately, this may be a death blow for serious tax reform. The pressure to fix an insanely complicated and unfair tax code will continue to dwindle as fewer and fewer Americans have to pay into the system. More non-payers mean a higher tax burden for those who already pay the vast majority of federal taxes. Major challenges ahead, such as reforming entitlement spending, are made increasingly difficult as politicians continue to use the tax code to "solve" social problems.

                                                                                  Tyler Cowen weighs in as well:

                                                                                  The new Bush health care plan, by Tyler Cowen: Jonathan Zasloff writes:

                                                                                  Bush plans to pay for it not by efficiencies, but rather by restricting the benefit packages of the already insured, through the deductibility cap. I'm sure that there are some extraordinarily lavish plans out there, but is there any serious policy justification for this way to go? If anything, this seems to be a recipe for business to delete coverage, and throwing more people into the individual market.

                                                                                  Paul Krugman is very negative. Arnold Kling loves the plan. Greg Mankiw isn't complaining. Ezra Klein says it is better than nothing.

                                                                                  My feelings are mixed, but my view is closest to Zasloff...

                                                                                    Posted by on Tuesday, January 23, 2007 at 10:11 AM in Economics, Health Care, Policy | Permalink  TrackBack (1)  Comments (36) 

                                                                                    Paul Krugman: Additional Notes on Gold-Plated Indifference

                                                                                    Paul Krugman emails more background on his column today. This appears in his Money Talks column and explains some of the economics behind his opposition to the Bush proposal:

                                                                                    Additional Notes on 1/22 Column, "Gold-Plated Indifference": As is often the case, I couldn't fully explain my views in the space available. So I'd like to explain at a bit more length why I'm so opposed to the direction Bush is going.

                                                                                    Basically, everyone agrees that health care is a messed-up sector. But there are two opposing doctrines about what the problem is.

                                                                                    I believe - and the evidence, I think, supports this belief - that the big problem is "adverse selection." An insurance plan offered to everyone at the same rate would be a great deal for relatively sick people, a poor deal for the healthy. So one of two things happens to private insurance. Either plans go into the "adverse selection death spiral," as sick people flock in, driving up rates, driving out more healthy people, and so on. Or insurance companies spend a lot of the money they receive in premiums screening out "high-risk" clients, so that the system has huge overhead and the neediest cases are excluded.

                                                                                    The clean solution to this problem is for the government to provide insurance to everyone. Other rich countries do that. So do we, for older Americans, veterans, and others. Actually, government health insurance is already bigger in America, in dollar terms, than private insurance - it covers fewer people, but that's because the elderly, who cost more, are handled by the government.

                                                                                    Employment-based insurance is a distant second-best, but better than nothing. Large employers, in particular, can spread risk widely, creating the kind of risk pool that dies from adverse selection in the individual market. And the tax preference for employer-based care, more or less by accident, has helped sustain this imperfect fix - which is why I'm highly skeptical of anything that might erode that preference.

                                                                                    What conservatives in the "consumer-directed" health movement believe, however, is that the big problem is "moral hazard" - people consume too much medical care, because someone else pays for it.

                                                                                    Now, this isn't entirely wrong. People probably do undergo expensive surgery with questionable effectiveness, and so on, because it's not out of pocket. Curbing that was supposed to be the point of managed care. But managed care didn't deliver, because people - rightly - don't trust private HMOs to make life and death decisions on their behalf. Successful managed care only takes place in institutions like the VA where there's more trust in the institution's motives.

                                                                                    The whole consumer-directed thing is, in my view, just an attempt to avoid facing up to that failure. Rather than admit that private-sector institutions aren't any good at rationing, conservatives now say that patients should be induced to ration their own care by being forced to pay more out of pocket. And that's where Bush's attack on gold-plating comes from: reduce the tax advantage of employer-based care, and deductibles and co-pays might go up.

                                                                                    The trouble is that the big money is in stuff like heart operations - areas where (a) people can't pay out of pocket in any case - they must have insurance or go untreated - and (b) people really aren't sufficiently well-informed to make the decisions. Yet the whole focus of consumer-directed doctrine is on things like routine visits to doctors' offices and annual dental checkups. It's going where the money isn't - because the advocates just can't believe that markets aren't always the answer.

                                                                                    Now here's the thing: in the name of consumer-directed health care theory, Bush is proposing changes that would essentially encourage people to move into the individual market - which wastes a lot of money, and doesn't and can't work for those most in need - while undermining the employer-based system, which isn't wonderful but is still essential. In particular, healthy high-income people would be encouraged to drop out of employment-based plans, leaving behind a sicker risk pool, driving up rates, and pushing employer-based care in the direction of an adverse selection death spiral. The plan we're supposed to learn about tomorrow doesn't sound big enough to have catastrophic effects, but it's a step in the wrong direction.

                                                                                    Update: Tyler Cowen comments on Krugman's follow-up.

                                                                                      Posted by on Tuesday, January 23, 2007 at 03:33 AM in Economics, Health Care, Policy | Permalink  TrackBack (0)  Comments (48) 

                                                                                      Declining U.S. Labor Productivity

                                                                                      I hear this, or variations of the tax-cuts increase labor productivity and fuel economic growth claim, a lot:

                                                                                      The Bush ... June 2003 tax cuts ... are functioning precisely as promised... It’s one of the marvels of supply-side fiscal policy. ...[M]arginal tax-rate reductions augment the ratio of financial capital to labor capital, thus raising labor productivity and, in turn, accelerating growth.

                                                                                      But labor productivity over the last three years is estimated to be half of what is was in 2002 and 2003:

                                                                                      US productivity growth lowest for decade, by Chris Giles, Financial Times: The US economy last year recorded its lowest rate of labour productivity growth in more than a decade, with growth in output per hour worked falling behind the EU and Japan. The fall casts further doubt on the ability of the Federal Reserve to cut interest rates as the US economy slows.

                                                                                      Research to be published on Tuesday by the Conference Board ... shows that US labour productivity in the whole economy grew by 1.4 per cent in 2006 as slower economic growth was combined with a rapid rise in employment.

                                                                                      Gail Fosler, the chief economist of the Conference Board, told the Financial Times that the fall in productivity growth was unlikely to be cyclical... If weak productivity growth continues, she said, “even in a slow growth environment, the US economy will be performing close to its potential”, restricting the Fed’s ability to cut interest rates. ...

                                                                                      The US [experienced a] slowdown in whole economy productivity growth over the past three years - to a rate half that in 2002 and 2003...

                                                                                      Dean Baker also comments on the productivity slowdown.

                                                                                        Posted by on Tuesday, January 23, 2007 at 12:08 AM in Economics, Technology | Permalink  TrackBack (0)  Comments (44) 

                                                                                        Why We're Inconsistent

                                                                                        This isn't economics related, and it's not about politics either, just something I thought was interesting about why we're hard-wired to be inconsistent in the execution of physical tasks:

                                                                                        On the golf tee or the pitcher’s mound, brain dooms motion to inconsistency, by David Orenstein, Stanford Report: If you've ever wondered why your golf swings, fastballs or free throws don't quite turn out the same way each time, even after years of practice, there is now an answer: It's mostly in your head. That's the finding of new research published in the ... journal Neuron by electrical engineers at Stanford University.

                                                                                        Continue reading "Why We're Inconsistent" »

                                                                                          Posted by on Tuesday, January 23, 2007 at 12:07 AM in Science | Permalink  TrackBack (0)  Comments (1) 

                                                                                          Are Inheritances Booming?

                                                                                          How much do baby-boomers stand to inherit from their parents and is it enough to make a material difference during their retirement years? Growth in the value of intergenerational asset transfer would, of course, provide additional assets that could be used in retirement, but unfortunately it looks like bequests won't provide much help to the typical household:

                                                                                          Boomers' big inheritance: Is it enough?, by Mark Trumbull, The Christian Science Monitor: The coming cycle of inheritances is billed as the greatest wealth transfer in US history. But don't expect it to finance the retirement of baby boomers or their children.

                                                                                          The reality, according to one new survey, is that when people do receive an inheritance, it's typically well under $100,000. And most people will receive no inheritance at all.

                                                                                          It's true that US households are richer than ever. ... But even as the pool of wealth has risen, the cost of retirement has been rising. Longer life spans, coupled with the rising cost of medical care, mean that many older Americans will use their wealth rather than pass it on to children.

                                                                                          "In many cases, because of increasing longevity ... it goes the other way. Instead of inheriting wealth the children wind up having to spend considerable wealth taking care of their parents," says Zvi Bodie, an expert on personal finance at Boston University. ...

                                                                                          Among the survey's findings:

                                                                                          •Only 24 percent of adult Americans expect to get an inheritance. And of those adults who have received an inheritance, the median amount received is $37,700.

                                                                                          •For working Americans over age 45 who have living parents, half are providing some assistance to their parents. Often it's nonfinancial – helping with chores and the like. But just as often these boomer kids are spending money on their parents.

                                                                                          •For workers over 45 who have grown children (over 25), one-fourth have a child living at home with them, and even more are providing financial support to those children – something most of them didn't expect to do.

                                                                                          The consequence: Less money is piling up in retirement funds than many workers wish. ...

                                                                                          This savings shortfall has gotten a good bit of media attention in recent years. But other news articles have drawn attention to a large pool of wealth that is expected to pass from older Americans – especially the World War II generation, to their offspring.

                                                                                          As far back as 1990, Fortune magazine talked about "the biggest intergenerational transfer of wealth in US history," in which middle-class Americans will "for the first time, inherit significant assets en masse." ...

                                                                                          Such reports have never promised that everyone will get an inheritance, let alone a large amount. ... America's wealth is concentrated heavily among the richest families.

                                                                                          "Only about 20 percent of households receive inheritances of any note," says Edward Wolff, a New York University economist who studies the distribution of wealth. "It may rise over time," he says, but "it's still going to be a minority of households." ...

                                                                                          Last year, an analysis done for AARP confirmed that, so far at least, boomers haven't reaped a mass windfall. Of those who have already received inheritances, the median amount as of 2004 totaled $64,000...

                                                                                            Posted by on Tuesday, January 23, 2007 at 12:06 AM in Economics, Saving | Permalink  TrackBack (0)  Comments (6) 

                                                                                            Monday, January 22, 2007

                                                                                            "Copy-Friendly" Businesses

                                                                                            Interesting. Can having free downloads available on the internet increase sales of books and other media? Apparently it can in some cases, at least that's the preliminary indication:

                                                                                            Text is free, we make our money on volume(s), by James Boyle, Commentary, Financial times (free): The internet makes copying cheap. Businesses that see their livelihood as dependent on the restriction of copying – concentrated in the recording, film, publishing and software industries – are understandably upset. Their goal is to have the same ability to control their content as they had in an analog world but to keep all the benefits of pervasiveness, cost saving, and viral marketing that a global digital network brings. To that end, they have moved aggressively to change laws worldwide, to introduce stiffer penalties, expand rights, mandate technological locks, forbid reverse engineering, and increase enforcement. ...

                                                                                            Yet there are hints in each of these industries of a different business model, one that aims to encourage, rather than to forbid copying. At the moment, the hints are only that – a scattering of anecdotes... It is not clear if they will thrive or even survive, still less whether they can “scale” to a broader audience. Still, if the alternative plan is to make the internet illegal or sue grandmothers for downloading, it might be worth taking a look at them. In my next few columns, that is what I will do – study “copy-friendly” businesses, beginning today with publishing.

                                                                                            Continue reading ""Copy-Friendly" Businesses" »

                                                                                              Posted by on Monday, January 22, 2007 at 01:03 PM in Economics, Regulation, Technology | Permalink  TrackBack (0)  Comments (10) 


                                                                                              A nice tribute to Richard Musgrave's work on rival and nonrival goods from David Warsh. Here's a shortened version - there's quite a bit more in the original:

                                                                                              A Week, Long Ago, in Biarritz, by David Warsh, EconomicPrinciples.com: ...Every introductory economics text now explains the difference between rival and nonrival goods, based on their degree of excludability. A rival good can be possessed by only one person at a time: a hamburger, a bank account, a college degree. A nonrival good is one whose consumption by one person doesn’t diminish its availability for others: a movie, say, or computer software or the formula for a wonder drug. ...

                                                                                              There was, however, a time when this terminology was unknown. Until fairly recently, economists spoke only of public goods and private goods and, sometimes, goods that were “impure” or “mixed” or “ambiguous.” 

                                                                                              The rival/nonrival distinction apparently was introduced by Harvard University economist Richard Musgrave in the course of a wonderful conference in Biarritz, on the Basque coast of France, in 1966. The story of how this distinction emerged, and then became central to economics, in two distinct steps over 25 years, is highly interesting. ...

                                                                                              Continue reading "Unrivaled" »

                                                                                                Posted by on Monday, January 22, 2007 at 12:59 PM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (1) 

                                                                                                Paul Krugman: Gold-Plated Indifference

                                                                                                Paul Krugman takes a look at president Bush's latest plan for health care:

                                                                                                Gold-Plated Indifference, by Paul Krugman, Bush and Health, Commentary, NY Times: President Bush’s Saturday radio address was devoted to health care, and officials have put out the word that the subject will be a major theme in tomorrow’s State of the Union address. Mr. Bush’s proposal won’t go anywhere. But it’s still worth looking at his remarks, because of what they say about him and his advisers.

                                                                                                On the radio, Mr. Bush suggested that we should “treat health insurance more like home ownership.” He went on to say that “the current tax code encourages home ownership by allowing you to deduct the interest on your mortgage... We can reform the tax code, so that it provides a similar incentive for you to buy health insurance.”

                                                                                                Wow. ... Going without health insurance isn’t like deciding to rent an apartment instead of buying a house. It’s a terrifying experience... The uninsured don’t need an “incentive” to buy insurance; they need something that makes getting insurance possible.

                                                                                                Most people without health insurance have low incomes, and just can’t afford the premiums. And making premiums tax-deductible is almost worthless to workers whose income puts them in a low tax bracket.

                                                                                                Of those uninsured who aren’t low-income, many can’t get coverage because of pre-existing conditions... Again, tax deductions won’t solve their problem.

                                                                                                The only people the Bush plan might ...[help] are the people we’re least concerned about — affluent, healthy Americans who choose voluntarily not to be insured ... while in the process — whaddya know — giving many other high-income individuals yet another tax break. ...

                                                                                                Mr. Bush is also proposing a tax increase ... on workers who, he thinks, have too much health insurance. The tax code, he said, “unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need.”

                                                                                                Again, wow. No economic analysis I’m aware of says that when Peter chooses a good health plan, he raises Paul’s premiums. And look at the condescension. Will all those who think they have “gold plated” health coverage please raise their hands?

                                                                                                According to press reports, the actual plan is to penalize workers with relatively generous insurance coverage..., we’re ... talking about ordinary workers who have managed to negotiate better-than-average health plans.

                                                                                                What’s driving all this is the theory, popular in conservative circles but utterly at odds with the evidence, that the big problem ... is that people have too much insurance — that there would be large cost savings if people were forced to pay more of their medical expenses out of pocket. ...

                                                                                                I’m somewhat skeptical about health care plans, like that proposed by Gov. Arnold Schwarzenegger, that propose covering gaps in the health insurance market with a series of patches... But at least the authors of these plans are trying to help those most in need, and recognize that the market needs fixing.

                                                                                                Mr. Bush, on the other hand, is still peddling the fantasy that the free market, with a little help from tax cuts, solves all problems.

                                                                                                What’s really striking about Mr. Bush’s remarks, however, is the tone. The stuff about providing “incentives” to buy insurance, the sneering description of good coverage as “gold plated,” is right-wing think-tank jargon. In the past Mr. Bush’s speechwriters might have found less offensive language; now, they’re not even trying to hide his fundamental indifference to the plight of less-fortunate Americans.

                                                                                                Update: Please see Krugman's "Additional Notes on Gold-Plated Indifference" explaining some of the economics behind the points he makes in this column.

                                                                                                Previous (1/19) column: Paul Krugman: Surging and Purging
                                                                                                Next (1/26) column: Paul Krugman: On Being Partisan

                                                                                                  Posted by on Monday, January 22, 2007 at 12:15 AM in Economics, Health Care | Permalink  TrackBack (2)  Comments (108) 

                                                                                                  Has the World Decoupled from the U.S.?

                                                                                                  Is the rest of  the world heavily dependent on the fate of the U.S. economy, or can other countries, for the most part, withstand a housing led slowdown in the U.S.?:

                                                                                                  The Global Question: Who Needs the U.S.?, by Peter Gumbel, Time: ...Nicole Leibinger-Kammüller ..., chief executive of Trumpf, a family-owned machine-tool firm in Germany, has watched orders from the critical U.S. market slow significantly in the past few months. But while the housing-bled U.S. economy has been sluggish, and the dollar weak, it's all proving quite manageable. "We can feel the U.S. slowdown, but it's not unsettling. There's no crash," Leibinger-Kammüller says. Trumpf's sales of its metal-cutting machines elsewhere--to Saudi Arabia, to Singapore and especially in Germany--continue to rack up double-digit growth rates. ...

                                                                                                  Economists and policymakers ... have been furiously debating whether the world has "decoupled" from the U.S. economy. The U.S. constitutes about 28% of global gross domestic product (GDP) as measured in dollars, and it accounted for one-fifth of worldwide growth from 2000 to 2006. When the U.S. faltered in the past, the rest of the world staggered. And certainly there are signs of fatigue. A cooling housing market slowed U.S. GDP growth to 2% in the third quarter...

                                                                                                  Jim O'Neill, London-based head of global economic research for Goldman Sachs, says that even if the U.S. economy remains soft for much of the year, "we're pretty confident that the rest of the world will withstand it." ... At the German Engineering Federation in Frankfurt, chief economist Ralph Wiechers concurs. "It used to be that the U.S. economy supported the world economy," he says. "Now it's the other way around." ...

                                                                                                  Still, even the biggest optimists concede that nobody would escape unscathed if the U.S. economy were to hit a wall. Its big local trading partners, Mexico and Canada, would probably be hurt the most, but the reverberations would be felt worldwide. The key bone of contention is the extent of the suffering.

                                                                                                  Those who dispute the decoupling theory point to the seemingly insatiable appetite of American consumers for imported goods, which has been a critical driver of the world's economic expansion. ...

                                                                                                  Stephen Roach ... has long warned about the dangers of flagging U.S. demand. Now he's concerned too about signs he sees of a possible Chinese slowdown--one reason why he thinks global growth this year will be "significantly below what most are expecting."

                                                                                                  So will it be a "happy slowdown," as Goldman's O'Neill predicts, or a meltdown? You can have your own debate; in the meantime, here are some of the key issues:

                                                                                                  THE U.S.: GO YANKEES What economists are struggling to predict is how pervasive the impact of this housing slowdown will be on the rest of the U.S. economy, and abroad. Perhaps most surprising, American consumers are continuing to spend...

                                                                                                  ASIA: SPENDERS WANTED Purchases by Asia's rising middle class have made the region far less dependent on exports to the U.S. to power the economy. Today only 16.5% of Asia's exports are sold in the U.S., down from 25.5% in 1993. Yet there are significant regional differences. ...

                                                                                                  EUROPE: HOLD ON It's the euro that has so far borne the brunt of the dollar's decline: it rose about 10% last year against the greenback. A stronger currency makes European exports more expensive for foreign buyers. But that hasn't prevented Germany from notching up its biggest trade surplus since the fall of the Berlin Wall 16 years ago. The good news is that buoyant exports have boosted business confidence in Europe's biggest economy and led to an unexpectedly strong increase in domestic demand...

                                                                                                  Can Germany take the load off the U.S. and the rest of Europe? Growth in the 13 nations that have adopted the euro is expected to be 2.6% in 2006, unusually strong for the growth-challenged Continent... "Europe is going to have a great year," reckons Harvard professor Kenneth Rogoff, former chief economist at the International Monetary Fund...

                                                                                                    Posted by on Monday, January 22, 2007 at 12:09 AM in Economics, International Finance, International Trade | Permalink  TrackBack (0)  Comments (8) 

                                                                                                    Party Politics and the Response to Katrina

                                                                                                    If I'm caught in a disaster, I want the government to do what's best for me and the other people in need of help, not what's best politically:

                                                                                                    Ex-FEMA Chief Cites Politics in Katrina Response, Time: Party politics played a role in decisions over whether to take federal control of Louisiana and other areas affected by Hurricane Katrina, former FEMA director Michael Brown said Friday.

                                                                                                    Some in the White House suggested only Louisiana should be federalized because it was run by a Democrat, Gov. Kathleen Blanco, Brown told a group of graduate students at a lecture ... at Metropolitan College of New York.

                                                                                                    Brown said he had recommended to President Bush that all 90,000 square miles along the Gulf Coast affected by the hurricane be federalized, making the federal government in charge of all agencies responding to the disaster.

                                                                                                    "Unbeknownst to me, certain people in the White House were thinking we had to federalize Louisiana because she's a white, female Democratic governor and we have a chance to rub her nose in it," he said.

                                                                                                    Brown declined to say who in the White House had argued for only taking control of Louisiana, but said that he'd later learned of the situation through Blanco's office and from other officials on the federal level.

                                                                                                    Blanco reacted sharply on hearing what Brown had said.

                                                                                                    "This is exactly what we were living but could not bring ourselves to believe. Karl Rove was playing politics while our people were dying," Blanco said through a spokeswoman, referring to President Bush's top political strategist. "The federal effort was delayed, and now the public knows why. It's disgusting."

                                                                                                    Eryn Witcher, a White House spokeswoman, denied Brown's claims. ...

                                                                                                      Posted by on Monday, January 22, 2007 at 12:06 AM in Politics | Permalink  TrackBack (0)  Comments (20)